<PAGE>
As filed with the Securities and Exchange Commission
on December 23, 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. 49 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 51
(Check appropriate box or boxes)
-----------------
NICHOLAS-APPLEGATE MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Address of Principal Executive Offices, including Zip Code)
ARTHUR E. NICHOLAS
C/O NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Name and Address of Agent for Service)
COPY TO: ROBERT E. CARLSON
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 S. FLOWER STREET, TWENTIETH FLOOR
LOS ANGELES, CALIFORNIA 90071
-----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVE DATE.
-----------------
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ______________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on ____________ pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (DATE) pursuant to paragraph (a)(ii), of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has registered an indefinite number of shares by this Registration Statement.
Registrant filed a Notice under such Rule for its fiscal year ended March 31,
1997 on May 30, 1997.
-----------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
- ------------- --------
PART A
Item 1. Cover Page. . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis. . . . . . . . . . . . . . . . Overview; Global Funds; U.S.
Funds; Fixed Income Funds
Item 3. Condensed Financial Information . . . . Global Funds; U.S. Funds;
Fixed Income Funds
Item 4. General Description of Registrant . . . Overview; Global Funds; U.S.
Funds; Fixed Income Funds
Item 5. Management of Fund. . . . . . . . . . . Organization and Management;
Portfolio Teams
Item 6. Capital Stock and Other Securities. . . Your Account
Item 7. Purchase of Securities Being Offered. . Your Account
Item 8. Redemption or Repurchase. . . . . . . . Your Account
Item 9. Pending Legal Proceedings . . . . . . . Not Applicable
PART B
Item 10. Cover Page. . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . . General Information
Item 13. Investment Objectives and Policies. . . Investment Objectives,
Policies and Risks; Investment
Restrictions
Item 14. Management of the Fund. . . . . . . . . Trustees and Officers;
Administrators; Distributor
Item 15. Control Persons and Principal
Holders of Securities . . . . . . . . . Not Applicable
Item 16. Investment Advisory and Other Services. Administrators; Investment
Adviser; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent,
Independent Auditors and Legal
Counsel
Item 17. Brokerage Allocation and
Other Practices . . . . . . . . . . . . Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities. . . Miscellaneous
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered . . . . . . Purchase and Redemption of
Fund Shares; Shareholder
Services
Item 20. Tax Status. . . . . . . . . . . . . . . Dividends, Distributions and
Taxes
Item 21. Underwriters. . . . . . . . . . . . . . Distributor
<PAGE>
Item 22. Calculation of Performance Data . . . . Performance Information
Item 23. Financial Statements. . . . . . . . . . Not Applicable
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration
Statement.
<PAGE>
PRELIMINARY PROSPECTUS
The prospectus contains vital information about the Class A, B and C Shares of
these Funds. For your own benefit and protection, please read it before you
invest, and keep it on hand for future reference.
Please note that these Shares
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their investment objectives
THE HIGH YIELD BOND FUND MAY INVEST WITHOUT LIMITATION IN DEBT SECURITIES RATED
BELOW INVESTMENT GRADE, SOMETIMES REFERRED TO AS "JUNK BONDS." THESE LOWER
RATED SECURITIES ARE SPECULATIVE AND INVOLVE GREATER RISKS, INCLUDING RISK OF
DEFAULT, THAN HIGHER RATED SECURITIES. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
LIKE ALL MUTUAL FUND SHARES, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
GLOBAL FUNDS
- --------------------------------------------------------------------------------
International Core Growth
Worldwide Growth
International Small Cap Growth
Emerging Countries
US FUNDS
- --------------------------------------------------------------------------------
Large Cap Growth
Core Growth
Value
Emerging Growth
Income & Growth
Balanced Growth
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
Fully Discretionary
High Yield Bond
Money Market
, 1998
------------------
SUBJECT TO COMPLETION: ______________, 1998. INFORMATION CONTAINED HEREIN IS
SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO
THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE PROSPECTUS IS DELIVERED IN FINAL FORM. UNDER NO CIRCUMSTANCES
SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAW OF SUCH JURISDICTION.
<PAGE>
TABLE OF CONTENTS
OVERVIEW
A FUND BY FUND LOOK AT GOALS, STRATEGIES, RISKS, AND FINANCIAL HISTORY.
GLOBAL FUNDS
- --------------------------------------------------------------------------------
International Core Growth
Worldwide Growth
International Small Cap Growth
Emerging Countries
US FUNDS
- --------------------------------------------------------------------------------
Large Cap
Core Growth
Value
Emerging Growth
Income & Growth
Balanced Growth
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
Fully Discretionary
High Yield Bond
Money Market
POLICIES AND INSTRUCTIONS FOR OPENING, MAINTAINING AND CLOSING AN ACCOUNT IN ANY
FUND.
SIMPLIFIED ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
Opening an Account
Buying Shares
Signature Guarantees
Exchanging Shares
Selling and Redeeming Shares
YOUR ACCOUNT
- --------------------------------------------------------------------------------
Transaction Policies
Features and Account Policies
ORGANIZATION AND MANAGEMENT
- --------------------------------------------------------------------------------
Investment Adviser Compensation
Administrator Compensation
Distributor
Portfolio Trades
Investment Objectives
Diversification
Portfolio Teams
DETAILS THAT APPLY TO THE FUNDS AS A GROUP.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
- --------------------------------------------------------------------------------
2
<PAGE>
OVERVIEW
FUND INFORMATION
Concise Fund descriptions begin on the next page. Each description provides the
following information:
INVESTMENT OBJECTIVE
The Fund's particular investment goal.
INVESTMENT STRATEGY
The strategy the Fund intends to use in pursuing the investment objective.
PRINCIPAL INVESTMENTS
The primary types of securities in which the Fund invests. Secondary
investments are described in "Risk Factors and Special Considerations" at the
end of the prospectus.
RISK FACTORS
The major risk factors associated with the Fund. Other risk factors are also
described in "Risk Factors and Special Considerations."
INVESTOR EXPENSES
The overall costs borne by an investor in the Class A, B and C Shares, including
sales charges and annual expenses.
FINANCIAL HIGHLIGHTS
A table showing the financial performance for each predecessor Portfolio since
inception.
GOAL OF THE NICHOLAS-APPLEGATE MUTUAL FUNDS
The Nicholas-Applegate Mutual Funds (the "Trust") are designed to provide
investors with a well rounded investment program by offering investors various
portfolios each with different investment objectives and policies (each a
"Fund"). The Class A, B and C Shares of each Fund represent interests in a
diversified, open-end management investment company (a mutual fund).
Each Fund employs its own strategy and has its own risk/reward profile. Because
you could lose money by investing in these Funds, be sure to read all risk
disclosures carefully before investing.
WHO MAY WANT TO INVEST IN THE EQUITY FUNDS
- - those who are investing for long term goals
- - those who want higher potential for gain but who are willing to accept
higher risks associated with investing in foreign companies
- - those who want professional portfolio management
WHO MAY NOT WANT TO INVEST IN THE EQUITY FUNDS
- - those who are investing with a shorter time frame
- - those who are uncomfortable with an investment that will go up and down in
value
- - those who are unable to accept the special risks associated with foreign
investing
WHO MAY WANT TO INVEST IN THE FIXED INCOME FUNDS
- - those who are investing for retirement or other long term goals
- - those who desire current income
- - those who want a high level of liquidity
- - those who want professional portfolio management
WHO MAY NOT WANT TO INVEST IN THE FIXED INCOME FUNDS
- - those who are investing with a shorter time frame
- - those who are uncomfortable with an investment that will go up and down in
value
- - those who are unable to accept the special risks associated with foreign
investing
THE INVESTMENT ADVISER
Nicholas-Applegate Capital Management (the "Investment Adviser") serves as
investment adviser to the Funds. Arthur E. Nicholas and 14 other partners with
a staff of approximately 400 employees currently manage over $30 billion of
discretionary assets for numerous clients, including employee benefit plans of
corporations, public retirement systems and unions, university endowments,
foundations, and other institutional investors and individuals.
3
<PAGE>
INTERNATIONAL CORE GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and systematic disciplines to uncover signs of "change at the margin" - positive
business developments which are not yet fully reflected in a company's stock
price. It gathers financial data on 20,000 companies in over 50 countries, and
searches for successful, growing companies managing change advantageously and
poised to exceed growth expectations.
PRINCIPAL INVESTMENTS
The Fund invests in the larger capitalized companies in each country.
Generally, this means issuers in each country whose market capitalizations are
in the top 75% of publicly traded companies as measured by capitalizations in
that country. Under normal conditions, the Fund invests at least 65% of its
total assets in securities of issuers located in at least three countries
outside the U.S. The Fund may invest up to 35% of its total assets in U.S.
issuers.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It invests
the remainder primarily in investment grade debt securities of any maturity
of foreign companies and foreign governments and their agencies and
instrumentalities. The Fund may also use options and futures contracts as
hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete listing of the portfolio
team, see "Portfolio Teams" on page __.
RISK FACTORS
The value of the Fund's investments varies from day to day in response to the
activities of individual companies and general market and economic
conditions. As with any international fund, performance also depends upon
changing values in foreign currencies, different political and regulatory
environments, and other overall economic factors in the countries where the
Fund invests. For further explanation, see "Risk Factors and Special
Considerations" starting on page __.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------
CLASS A CLASS B CLASS C
--------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales charge on purchases (as a percentage of offering price) 5.25% None None
- ---------------------------------------------------------------------------------------------------------------------
Sales charge on reinvested dividends None None None
- ---------------------------------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) None(1) 5.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------------
Redemption fee None None None
- ---------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 1.00% 1.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- ---------------------------------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.70% 0.85% 0.85%
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses (after expense deferral)(2) 1.95% 2.60% 2.60%
--------------------------------
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in
this prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund Class. For
Portfolios A,B & C, Total operating expenses would have been 1,475%, 4,405%
and 25.55% respectively and Other expenses would have been 16,000%, 4,580%
and 23.80% respectively, absent the deferral. See "Investment Adviser
Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more than
the equivalent of the maximum permitted front-end sales charge.
4
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $71 $111 $152 $268
- ----------------------------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1) $78 $113 $161 $293
Assuming no redemption $26 $81 $138 $293
- ----------------------------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1) $37 $81 $138 $293
Assuming no redemption $26 $81 $138 $293
------------------------------------------
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolios outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997. Please read in conjunction with the Trust's
1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
PORTFOLIO A PORTFOLIO B PORTFOLIO C
---------------------------------------------------------------------------
2/28/97 to 4/1/97 to 2/28/97 to 4/1/97 to 2/28/97 to 4/1/97 to
3/31/97 9/30/97 3/31/97 9/30/97 3/31/97 9/30/97
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.73 $12.50 $12.68 $12.50 $12.68
Income from investment operations:
Net investment income (deficit) -- (0.02) -- (0.04) -- (0.75)
Net realized and unrealized gains (losses)
on securities and foreign currency 0.23 3.40 0.18 3.44 0.18 4.06
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.23 3.38 0.18 3.40 0.18 3.31
Less distributions:
Dividends from net investment income -- -- --
Distributions from capital gains -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.73 $16.11 $12.68 $16.08 $12.68 $15.99
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: 1.76% 26.65% 1.44% 26.22% 1.44% 26.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $1,642 $3,020 $1,027 $4,987 $43,075 $1,128,037
Ratio of expenses to average net assets,
after expense reimbursement++ 1.95%* 1.96%* 2.59%* 2.61%* 2.41%* 2.61%*
Ratio of expenses to average net assets,
before expense reimbursement+ 4,580%* 4.94%* 16,000%* 6.85%* 25.55%* 8.63%*
Ratio of net investment income (deficit) to
average net assets, after expense reimbursement++ -- (0.41%)* -- (1.08%)* (0.7%)* (1.03%)*
Ratio of net investment income (deficit) to average
net assets, before expense reimbursement++ (4,577%)* (3.39%)* (15,998%)* (5.33%)* (291.20%)* (7.05%)*
Portfolio turnover** 75.53% 75.53% 75.53%
Average commission rate paid** $0.0106 $0.016 $0.016
---------------------------------------------------------------------------
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from Master Trust
5
<PAGE>
WORLDWIDE GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and systematic disciplines to uncover signs of "change at the margin" - positive
business developments which are not yet fully reflected in a company's stock
price. It gathers financial data on 20,000 companies in over 50 countries, and
searches for successful, growing companies managing change advantageously and
poised to exceed growth expectations.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in at least three different countries, one of
which may be the U.S. The Fund may invest up to 50% of its total assets in U.S.
issuers.
Under normal conditions the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It invests
the remainder in investment grade debt securities of any maturity issued by
foreign companies and foreign governments and their agencies and
instrumentalities. The Fund may also use options and futures contracts as
hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
The value of the Fund's investments varies from day to day in response to the
activities of individual companies, and general market and economic conditions.
The securities of small, less well-known companies may be more volatile than
those of larger companies. As with any international fund, performance also
depends upon changing currency values, different political and regulatory
environments, and other overall economic factors in the countries where the Fund
invests. The risks are magnified in countries with emerging markets, since
these countries may have unstable governments and less established markets. For
a further explanation, see "Risk Factors and Special Considerations" starting on
page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------
CLASS A CLASS B CLASS C
--------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- ---------------------------------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- ---------------------------------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) None (1) 5.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------------
Redemption fee None None None
- ---------------------------------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE OF
AVERAGE NET ASSETS: (AFTER EXPENSE DEFERRAL)
Management fees 1.00% 1.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- ---------------------------------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.60% 0.75% 0.75%
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses (after expense deferral)2 1.85% 2.50% 2.50%
--------------------------------
</TABLE>
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in
this prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A,B & C,
Total operating expenses would have been 2.17%, 4.81% and 2.61%
respectively and Other expenses would have been .92%, 3.06% and .86%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $70 $108 $147 $258
- ----------------------------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1) $77 $110 $156 $284
Assuming no redemption $25 $78 $133 $284
- ----------------------------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1) $36 $78 $133 $284
Assuming no redemption $25 $78 $133 $284
------------------------------------------
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolio outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997, and by another independent auditor with
respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
PORTFOLIO A PORTFOLIO B
--------------------------------------------------------------------------------------
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97 5/31/95 4/1/96 4/1/97
to to to to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97 3/31/96 3/31/97 9/30/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $14.94 $14.29 $16.57 $16.88 $12.50 $14.34 $16.02
Income from investment operations:
Net investment income (deficit) (0.07) (0.05) (0.07) (0.16) 0.01 (0.05) (0.14) (0.05)
Net realized and unrealized gains
(losses)
on securities and foreign 2.51 (0.09) 2.86 2.20 4.38 1.89 1.82 4.19
currency
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.44 (0.14) 2.79 2.04 4.39 1.84 1.68 4.14
Less distributions:
Dividends from net investment income -- (0.02) (0.12) -- -- -- -- --
Distributions from capital gains -- (0.49) (0.39) (1.73) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.94 $14.29 $16.57 $16.88 $21.27 $14.34 $16.02 $20.16
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: 19.52% (0.90%) 19.79% 12.51% 26.01% 14.72% 11.72% 25.84%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $20,194 $22,208 $23,481 $24,022 $33,337 $1,972 $5,942 $9,160
Ratio of expenses to average net assets,
after expense reimbursement++ 1.85%* 1.85% 1.85% 1.85% 1.86%* 2.50%* 2.50% 2.51%*
Ratio of expenses to average net assets,
before expense reimbursement+ 2.23%* 2.18% 2.17% 2.17% 2.11%* 9.50%* 4.81% 3.70%*
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement++ (0.69%)* (O.42%) (0.35%) (0.93%) (0.35%)* (1.28%)* (1.62%) (1.03%)*
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement++ (1.07%)* (0.75%) (0.61%) (1.18%) (0.60%)* (8.12%)* (3.87%) (2.22%)*
Portfolio turnover** 95.09% 98.54% 132.20% 181.81% 132.20% 181.81%
Average commission rate paid** N/A N/A $0.0187 $0.0078 $0.0187 $0.0078
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
PORTFOLIO C
----------------------------------------------------
4/19/93 4/19/94 4/1/95 4/1/96 4/1/97
to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
NET asset value, beginning of period $12.50 $14.86 $14.44 $16.76 $16.92
Income from investment operations:
Net investment income (deficit) (0.09) (0.15) (0.21) (0.28) (0.10)
Net realized and unrealized gains
(losses)
on securities and foreign currency 2.45 (0.08) 2.92 2.23 4.43
- -------------------------------------------------------------------------------------------------
Total from investment operations 2.36 (0.23) 2.71 1.95 4.33
Less distributions:
Dividends from net investment income -- -- (0.01) -- --
Distributions from capital gains -- (0.19) (0.38) (1.79) --
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $14.86 $14.44 $16.76 $16.92 $21.25
- -------------------------------------------------------------------------------------------------
TOTAL RETURN+: 18.88% (1.49%) 18.95% 11.81% 25.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $66,577 $71,201 $71,155 $70,345 $86,109
Ratio of expenses to average net assets,
after expense reimbursement++ 2.44%* 2.50% 2.50% 2.50% 2.51%*
Ratio of expenses to average net assets,
before expense reimbursement+ 2.44%* 2.57% 2.57% 2.61% 2.67%*
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement++ (1.24%)* (1.06%) (0.99%) (1.57%) (1.01%*)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement++ (1.24%)* (1.13%) (1.00%) (1.62%) (1.17%)*
Portfolio turnover** 95.09% 98.54% 132.20% 181.81%
Average commission rate paid** N/A N/A $0.0187 $0.0078
</TABLE>
* Annualized
** for Corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from Master Trust
7
<PAGE>
INTERNATIONAL SMALL CAP GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial conditions and competitiveness of individual companies worldwide.
It uses a blend of both traditional fundamental research, calling on the
expertise of many external analysts in different countries throughout the world,
and systematic disciplines to uncover signs of "change at the margin" - positive
business developments which are not yet fully reflected in a company's stock
price. It gather financial data on 20,000 companies in over 50 countries, and
searches for successful, growing companies managing change advantageously and
poised to exceed growth expectations.
The Fund emphasizes companies in the bottom 75% of publicly traded companies as
measured by market capitalizations in each country ("small cap securities").
The Fund may have less U.S. exposure (up to 35% of its total assets in U.S.
issuers) than the Worldwide Growth Fund.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests 65% of its total assets in small
cap securities of issuers located in at least three different countries
outside the U.S. Under normal conditions, the Fund invests at least 75% of
its total assets in common and preferred stock, warrants and convertible
securities. It invests the remainder primarily in investment grade debt
securities of any maturity issued by foreign companies and foreign
governments and their agencies and instrumentalities. The Fund may also use
options and futures contracts as hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
The value of the Fund's investments varies from day to day in response to the
activities of individual companies, and general market and economic conditions.
As with any international fund, the Fund's performance also depends upon
changing currency values, different political and regulatory environments, and
other overall economic factors in the countries where the Fund invests. In
addition to the risks posed by foreign investing, the securities of smaller,
less well-known companies may be more volatile than larger companies and may
trade less frequently. The information regarding these smaller companies may
also be less available, incomplete or inaccurate. Accordingly, the securities
of the companies in which the Fund invests may be more volatile and speculative
than those of larger companies. The risks are magnified in countries with
emerging markets since these countries may have unstable governments and less
established markets. For further explanation, see "Risk Factors and Special
Considerations" starting on page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown
<TABLE>
<CAPTION>
------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -----------------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -----------------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower) None (1) 5.00% 1.00%
- -----------------------------------------------------------------------------------------------------
Redemption fee None None None
- -----------------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE
OF AVERAGE NET ASSETS: (AFTER EXPENSE DEFERRAL)
Management fees 1.00% 1.00% 1.00%
- -----------------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -----------------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.70% 0.85% 0.85%
- -----------------------------------------------------------------------------------------------------
Total operating expenses (after expense deferral)(2) 1.95% 2.60% 2.60%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A, B &
C, Total operating expenses would have been 3.76%, 4.89% and 3.95%
respectively and Other expenses would have been 2.51%, 3.14% and 2.20%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $71 $111 $152 $268
- ---------------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1) $78 $113 $161 $293
Assuming no redemption $26 $81 $138 $293
- ---------------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1) $37 $81 $183 $293
Assuming no redemption $26 $81 $183 $293
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolios outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997, and by another independent auditor with
respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1997 Annual Report and 1997-98 Semi-Annual Report
<TABLE>
<CAPTION>
PORTFOLIO A PORTFOLIO B
-------------------------------------------------------------------------------------------------
8/31/94 4/1/95 4/1/96 4/1/97 5/31/95 4/1/96 4/1/97
to to to to to to to
3/31/95 3/31/96 3/31/97 9/30/97 3/31/96 3/31/97 9/30/97
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value,
beginning of period $12.50 $11.51 $13.15 $14.92 $12.50 $13.96 $15.89
Income from investment
operations:
Net investment
income (deficit) -- (0.02) 0.04 (0.01) (0.02) (0.15) (0.06)
Net realized and
unrealized gains
(losses) on
securities and
foreign currency (0.98) 1.79 1.88 3.09 1.48 2.09 3.31
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (0.98) 1.77 1.92 3.08 1.46 1.94 3.25
Less distributions:
Dividends from net
investment income (0.01) (0.13) (0.01) -- -- (0.01) --
Distributions from
capital gains -- -- (0.14) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.51 $13.15 $14.92 $18.00 $13.96 $15.89 $19.14
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: (7.85%) 15.46% 14.67% 20.64% 11.68% 13.96% 20.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $610 $1,056 $5,569 $11,212 $1,487 $5,080 $8,780
Ratio of expenses to
average net assets,
after expense
reimbursement++ 1.95%* 1.95% 1.95% 1.96%* 2.60%* 2.60% 2.61%*
Ratio of expenses to
average net assets,
before expense
reimbursement+ 9.77%* 10.06% 3.76% 2.85%* 16.15%* 4.89% 3.56%*
Ratio of net investment
income (deficit) to
average net assets, after
expense reimbursement++ (0.07%)* (0.27%) (1.05%) (0.81%)* (0.64%) (1.66%) (1.94%)*
Ratio of net investment
income (deficit) to
average net assets, before
expense reimbursement++ (7.89%)* (7.75%) (2.82%) (1.70%)* (13.26%)* (3.91%) (2.42%)*
Portfolio turnover** 74.85% 141.02% 206.07% 141.02% 206.07%
Average commission rate
paid** N/A $0.128 $0.0098 $0.0128 $0.0098
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
PORTFOLIO C
----------------------------------------------------
8/31/94 4/1/95 4/1/96 4/1/97
to to to to
3/31/95 3/31/96 3/31/97 9/30/97
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $11.32 $13.05 $14.87
Income from investment operations:
Net investment income (deficit) (0.04) 0.01 (0.16) (0.13)
Net realized and unrealized gains
(losses) on securities and foreign
currency (1.12) 1.72 1.98 3.15
- ------------------------------------------------------------------------------------------------
Total from investment operations (1.16) 1.73 1.82 3.02
Less distributions:
Dividends from net investment income (0.02) -- -- --
Distributions from capital gains -- -- -- --
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $11.32 $13.05 $14.87 $17.89
- ------------------------------------------------------------------------------------------------
TOTAL RETURN+: (9.25%) 15.30% 13.98% 20.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $24 $933 $3,592 $5,135
Ratio of expenses to average net assets,
after expense reimbursement++ 2.61%* 2.60% 2.60% 2.61%*
Ratio of expenses to average net assets,
before Expense reimbursement+ 75.37%* 16.15% 3.95% 3.29%*
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement++ (0.76%)* (1.02%) (1.67%) (1.46%)*
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement++ (73.52%)* (13.95%) (2.99%) (2.15%)*
Portfolio turnover** 74.85% 141.02% 206.07%
Average commission rate paid** N/A $0.128 $0.0098
</TABLE>
* Annualized
** for corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from Master Trust
9
<PAGE>
EMERGING COUNTRIES FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund invests primarily in equity securities of issuers located in countries
with emerging securities markets - that is, countries with securities markets
which are, in the opinion of the Investment Adviser, emerging as investment
markets but have yet to reach a level of maturity associated with developed
foreign stock markets, especially in terms of participation by foreign
investors. The Investment Adviser seeks issuers in the early stages of
development, growth companies, cyclical companies, or companies believed to be
undergoing a basic change in operations. The Investment Adviser currently
selects portfolio securities from an investment universe of approximately 6,000
foreign issuers in over 20 emerging markets.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in at least three different countries. These
countries include but are not limited to: Argentina, Brazil, Chile, China,
Colombia, the Czech Republic, Greece, Hungary, India, Indonesia, Israel, Jordan,
Malaysia, South Africa, South Korea, Taiwan, Thailand, Italy and Venezuela.
Under normal market conditions, the Fund invests at least 75% of its total
assets in corporate stock (common and preferred), warrants and convertible
securities. It invests the remainder primarily in investment grade bonds of
foreign companies and foreign governments and their agencies and
instrumentalities. The Fund may also use options and futures contracts as
hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
The value of the Fund's investments varies from day to day in response to the
activities of individual companies and general market and economic conditions.
As with any fund investing in foreign securities, the Fund's performance also
depends upon changing currency values, different political and regulatory
environments, and other overall economic factors in the countries where the Fund
invests. Emerging countries markets may present greater opportunity for gain,
but also involve greater risk than more developed markets. These countries tend
to have less stable governments and less established markets. The markets tend
to be less liquid and more volatile, and offer less regulatory protection for
investors. The economies of emerging countries may be predominantly based on
only a few industries or dependent on revenue from particular commodities,
international aid or other assistance. For further explanation, see "Risk
Factors and Special Considerations" starting on page __.
INVESTOR EXPENSES - CLASS A, B AND C SHARES Investors pay various expenses,
either directly or indirectly. Actual expenses may be more or less than those
shown.
<TABLE>
<CAPTION>
--------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
--------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) None (1) 5.00% 1.00%
- -------------------------------------------------------------------------------------------
Redemption fee None None None
- -------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 1.25% 1.25% 1.25%
- -------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.75% 0.90% 0.90%
- -------------------------------------------------------------------------------------------
Total operating expenses (after expense
deferral)(2) 2.25% 2.90% 2.90%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A,B & C,
Total operating expenses would have been 3.08%, 3.66% and 3.12%
respectively and Other expenses would have been 1.58%, 1.66% and 1.12%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $74 $119 $167 $297
- ----------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period1 $80 $122 $75 $322
Assuming no redemption $29 $90 $153 $322
- ----------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period1
Assuming no redemption $40 $90 $153 $322
$29 $90 $153 $322
- ----------------------------------------------------------------------------------------------------
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolios outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997, and by another independent auditor with
respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
PORTFOLIO A PORTFOLIO B
--------------------------------------------------------------------------------------------------
11/28/94 4/1/95 4/1/96 4/1/97 5/31/95 4/1/96 4/1/97
to to to to to to to
3/31/95 3/31/96 3/31/97 9/30/97 3/31/96 3/31/97 9/30/97
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value,
beginning of period $12.50 $11.00 $14.03 $17.20 $12.50 $14.02 $17.29
Income from investment
operations:
Net investment
income (deficit) 0.04 (0.04) (0.06) 0.02 (0.04) (0.11) (0.01)
Net realized and
unrealized gains
(losses) on securities
and foreign currency (1.54) 3.15 3.51 3.23 1.56 3.47 3.23
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (1.50) 3.11 3.45 3.25 1.52 3.36 3.22
Less distributions:
Dividends from net
investment income -- (0.02) -- -- -- -- --
Distributions from
capital gains -- (0.06) (0.28) -- -- (0.09) --
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.00 $14.03 $17.20 $20.45 $14.02 $17.29 $20.51
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: (11.98%) 28.43% 24.79% 18.90% 12.16% 24.00% 18.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $1,197 $4,718 $38,688 $61,710 $3,557 $24,558 $41,847
Ratio of expenses to
average net assets,
after expense
reimbursement++ 2.25%* 2.25% 2.25% 2.26%* 2.90%* 2.90% 2.91%*
Ratio of Expenses to
average net assets,
before expense
reimbursement+ 6.15%* 6.72% 3.08% 2.33%* 7.58%* 3.66% 3.18%*
Ratio of net investment
income (deficit) to
average net assets, after
expense reimbursement++ 1.09%* (0.35%) (1.14%) (0.05%)* (1.05%)* (1.77%) (0.71%)*
Ratio of net investment
income (deficit) to
average net assets,
before expense
reimbursement++ (4.99%)* (3.61%) (2.00%) (0.12%)* (5.44%)* (2.55%) (0.98%)*
Portfolio turnover** 60.79% 118.21% 176.20% 118.21% 176.20%
Average commission
rate paid** N/A $0.0022 $0.0021 $0.0022 $0.0021
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
PORTFOLIO C
------------------------------------------------------
11/28/94 4/1/95 4/1/96 4/1/97
to to to to
3/31/95 3/31/96 3/31/97 9/30/97
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning
of period $12.50 $10.79 $13.71 $16.81
Income from investment operations:
Net investment income (deficit) -- (0.05) (0.10) (0.08)
Net realized and unrealized gains
(losses) on securities and foreign
currency (1.70) 2.97 3.37 3.22
- ------------------------------------------------------------------------------------------------
Total from investment operations (1.70) 2.92 2.27 3.14
Less distributions:
Dividends from net investment income (0.01) -- -- --
Distributions from capital gains -- -- (0.17) --
Net asset value, end of period $10.79 $13.71 $16.81 $19.95
TOTAL RETURN+: (13.64%) 27.30% 23.94% 18.68%
RATIOS/SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------
Net assets, end of period $59 $4,345 $29,376 $47,051
- ------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets,
after expense reimbursement++ 2.90%* 2.90% 2.90% 2.91%*
Ratio of Expenses to average net assets,
before expense reimbursement+ 242.59% 6.23% 3.12% 2.99%*
Ratio of net investment income
(deficit) to average net assets,
after expense reimbursement++ (0.04%)* (1.06%) (1.75%) (0.70%)*
Ratio of net investment income
(deficit) to average net assets,
before expense reimbursement++ (239.73%)* (4.15%) (1.99%) (0.78%)*
Portfolio turnover** 60.79% 118.21% 176.20%
Average commission rate paid** N/A $0.0022 $0.0021
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from Master Trust
11
<PAGE>
LARGE CAP GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial condition and competitiveness of individual companies. It uses a
blend of both traditional fundamental research and computer intensive systematic
disciplines to uncover signs of "change at the margin" - positive business
developments which are not yet fully reflected in a company's stock price. It
searches for successful, growing companies that are managing change
advantageously and poised to exceed growth expectations.
The Fund emphasizes equity securities of U.S. companies with market
capitalizations generally above $3 billion and whose earnings and stock prices
are expected to grow faster than the S&P 500 ("large cap securities").
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
large cap securities, including common and preferred stocks, warrants, and
convertible securities of U.S. companies. It invests the remainder of its
assets primarily in investment grade corporate debt securities of any
maturity, U.S. Government securities, and equity securities of foreign
issuers. The Fund may also use options and futures contracts as hedging
techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
As with any growth fund, the value of your investment will fluctuate from day to
day with movements in the stock markets as well as in response to the activities
of individual companies. To the extent the Fund is overweighted in certain
market sectors compared to the S&P 500, the Fund may be more volatile than the
S&P 500. Additionally, to the extent the Fund invests in foreign issuers, the
risks and volatility are magnified since the performance of foreign stocks also
depends on changes in foreign currency values, different regulatory and
political environments, and overall political and economic conditions in
countries where the Fund invests. For further explanation, see "Risk Factors
and Special Considerations" starting on page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
--------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) None (1) 5.00% 1.00%
- -------------------------------------------------------------------------------------------
Redemption fee None None None
- -------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.75% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.60% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Total operating expenses (after expense
deferral)(2) 0.60% 2.25% 2.25%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A,B & C,
Total operating expenses would have been 2.31%, 2.96% and 2.96%
respectively and Other expenses would have been 1.31%, 1.46% and 1.46%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $68 $100 $135 $233
- ----------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1) $74 $103 $143 $258
Assuming no redemption $23 $70 $120 $258
- ----------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1) $33 $70 $116 $250
Assuming no redemption $23 $70 $116 $250
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
1. Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolios outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997. Please read in conjunction with the Trust's
1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
PORTFOLIO A PORTFOLIO B PORTFOLIO C
-----------------------------------------------------------------------------------
7/21/97 4/1/97 7/21/97 4/1/97 7/21/97 4/1/97
to to to to to to
9/30/97 9/30/97 9/30/97 9/30/97 9/30/97 9/30/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.50 $12.50
Income from investment operations:
Net investment income (deficit) (0.01) (0.02) 0.00
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.92 0.90 0.90
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $13.41 $13.38 $13.40
Less distributions:
Dividends from net investment income -- -- --
Distributions from capital gains -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.41 $13.38 $13.40
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: (38.11%) 37.51% 37.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $331,199 $1,134,885 $160,692
Ratio of expenses to average
net assets, after expense
reimbursement++ 1.60%* 2.24%* 2.24%*
Ratio of expenses to average
net assets, before expense
reimbursement+ 4.89%* 5.09%* 6.26%*
Ratio of net investment income
(deficit) to average net assets,
after expense reimbursement++ (0.63%)* (1.25%)* (1.27%)*
Ratio of net investment income
(deficit) to average net assets,
before expense reimbursement++ (3.92%)* (4.10%)* (5.29%)*
Portfolio turnover** 269.87% 269.87% 269.87%
Average commission rate paid** $0.0599 $0.0599 $0.0599
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Includes expenses allocated from Master Trust
13
<PAGE>
CORE GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial condition and competitiveness of individual companies. It uses a
blend of both traditional fundamental research and computer intensive systematic
disciplines to uncover what it calls "change at the margin" - positive business
developments which are not yet fully reflected in the company's stock price. It
searches for successful, growing companies that are managing change
advantageously and poised to exceed growth expectations.
The Fund emphasizes companies with market capitalizations above $500 million.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 75% of its total assets in
common stocks. It invests the remainder of its assets primarily in preferred
and convertible securities, investment grade debt securities of any maturity,
and securities issued by the U.S. Government and its agencies and
instrumentalities. The Fund may invest up to 20% of its total assets in
foreign securities. The Fund may also use options and futures contracts as
hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
As with any growth fund, the value of your investment will fluctuate from day to
day with movements in the stock markets. The companies in which the Fund
invests may be more subject to volatile market movements than securities of
larger, more established companies. To the extent the Fund invests in foreign
securities, the risks and volatility are magnified since the performance of
foreign stocks also depends upon changes in foreign currency values, different
political and regulatory environments, and the overall political and economic
conditions in countries where the Fund invests. For further explanation, see
"Risk Factors and Special Considerations" starting on page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
--------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower) None (1) 5.00% 1.00%
- -------------------------------------------------------------------------------------------
Redemption fee None None None
- -------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.75% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.60% 0.75% 0.64%
- -------------------------------------------------------------------------------------------
Total operating expenses (after expense
deferral)(2) 1.60% 2.25% 2.17%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge
may be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class B, Total
operating expenses would have been 2.66%, and Other expenses would have
been 1.16%, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
14
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $68 $100 $135 $233
- ----------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1)
Assuming no redemption $74 $23 $103 $70
$143 $120 $258 $258
- ----------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1)
Assuming no redemption $32 $23 $70 $70
$120 $120 $258 $258
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B abd C Portfolio outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997. Please read in conjunction with the Trust's
1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PORTFOLIO A PORTFOLIO B
-----------------------------------------------------------------------------------------------
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97 5/31/95 4/1/96 4/1/97
to to to to to to to ` to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97 3/31/96 3/31/97 9/30/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
NEt asset value, beginning
of period $12.50 $13.25 $13.61 $18.37 $16.80 $12.50 $16.25 $16.33
Income from investment
operations:
Net investment income
(deficit) (0.07) (0.10) (0.18) (0.17) (0.10) (0.09) (0.17) (0.11)
Net realized and
unrealized gains (losses)
on securities and foreign
currency 0.86 0.46 4.94 0.57 5.16 3.84 0.25 4.97
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.79 (0.36) 4.76 0.40 5.06 3.75 0.08 4.86
Less distributions:
Dividends from net
investment income -- -- -- -- -- -- -- --
Distributions from
capital gains (0.04) -- -- (1.97) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.25 $13.61 $18.37 $16.80 $21.86 $16.25 $16.33 $21.19
- ------------------------------------------------------------------------------------------------------------------------------
Total return+: 6.27% 2.72% 35.07% 1.09% 30.12% 30.00% (0.49%) 29.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $70,512 $65,292 $77,275 $76,108 $94,794 $11,186 $29,002 $41,071
Ratio of expenses to
average net assets, after
expense reimbursement++ 1.57%* 1.59% 1.58% 1.60% 1.59%* 2.22%* 2.25% 2.24%*
Ratio of Expenses to average
net assets, before expense
reimbursement+ 1.71%* 1.63% 1.56% 1.56% 1.72%* 3.39%* 2.66% 2.28%*
Ratio of net investment
income (deficit) to
average net assets, after
expense reimbursement++ (0.68%)* (0.66%) (0.0.91%) (1.05%) (0.83%)* (1.61%)* (1.69%) (1.48%)*
Ratio of net investment
income (deficit) to
average net assets, before
expense reimbursement++ (0.82%)* (0.70%) (0.89%) (1.01%) (0.95%)* (2.77%)* (2.10%) 1.53%)*
Portfolio turnover** 84.84% 98.09% 114.48% 153.20% 114.48% 153.20%
Average commission rate paid** N/A N/A $0.0593 $0.0582 $0.0593 $0.0582
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
PORTFOLIO C
--------------------------------------------------------------------
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97
to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.18 $13.45 $18.06 $1.48
Income from investment operations:
Net investment income (deficit) (0.11) (0.17) (0.27) (0.32) (0.13)
Net realized and unrealized gains
(losses)
on securities and foreign currency 0.80 0.44 4.88 0.62 5.03
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 0.69 0.27 4.61 0.30 4.90
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from capital gains (0.01) -- -- (1.88) --
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.18 $13.45 $18.06 $16.48 $21.38
- ---------------------------------------------------------------------------------------------------------------
Total return+: 5.54% 2.05% 34.28% 0.56% 29.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $141,489 $143,390 $177,461 $157,501 $183,697
Ratio of expenses to average
net assets, after expense
reimbursement++ 2.17%* 2.24% 2.14% 2.14% 2.26%*
Ratio of Expenses to average
net assets, before expense
reimbursement+ 2.17%* 2.24% 2.14% 2.17% (1.49%)*
Ratio of net investment income
(deficit) to average net assets,
after expense reimbursement++ (1.30%)* (1.30%) (1.47) (1.59%) (1.58%)*
Ratio of net investment income
(deficit) to average net assets,
before expense reimbursement++ (1.30%)* (1.30%) (1.47%) (1.62%)
Portfolio turnover** 84.84% 98.09% 114.48% 153.20%
Average commission rate paid** N/A N/A $0.0593 $0.0582
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's Sales charges
++ Includes expenses allocated from Master Trust
15
<PAGE>
VALUE FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial condition and competitiveness of individual companies. It uses a
blend of traditional fundamental research and computer intensive systematic
disciplines to uncover signs of "change at the margin" - positive business
developments which are not yet fully reflected in a company's stock price. It
searches for successful, growing companies that are managing change
advantageously and poised to exceed growth expectations.
The Fund emphasizes companies with market capitalizations generally above $5
billion.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 80% of its total assets in
equity securities. It invests the remainder primarily in preferred and
convertible securities, investment grade debt securities of any maturity, and
securities issued by the U.S. Government and its agencies and
instrumentalities. The Fund may also use options and futures contracts as
hedging techniques.
The Fund's portfolio is designed to have risk, capitalization and industry
characteristics similar to those of the S&P 500 Index.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
As with any equity fund, the value of your investment will fluctuate from day to
day with movements in the stock markets. To the extent the Fund invests in
foreign securities, the risks and volatility are magnified since the performance
of foreign stocks depends upon changes in foreign currency values, different
political and regulatory environments, and the overall political and economic
conditions in countries where the Fund invests. For further explanation, see
"Risk Factors and Special Considerations" starting on page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly.
Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: Class A Class B Class C
--------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) None (1) 5.00% 1.00%
- -------------------------------------------------------------------------------------------
Redemption fee None None None
- -------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.75% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.60% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Total operating expenses (after expense
deferral)(2) 1.60% 2.25% 2.25%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A, B & C,
Total operating expenses are expected to be 2.25%, 2.85% and 2.85%
resspectively, and Other expenses are expected to be 1.50%, 2.10% and 2.10%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
16
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
---------------------
1 Year 3 Years
---------------------
CLASS A $68 $100
- ---------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1)
Assuming no redemption $74 $103
$23 $70
- ---------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1)
Assuming no redemption $32 $70
$23 $70
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
17
<PAGE>
EMERGING GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial condition and competitiveness of individual companies. It uses a
blend of both traditional fundamental research and computer intensive systematic
disciplines to uncover what it calls "change at the margin" - positive business
developments which are not yet fully reflected in the company's stock price. It
searches for successful, growing companies that are managing change
advantageously and poised to exceed growth expectations.
The Fund emphasizes companies with market capitalizations below $500 million at
the time of purchase.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 75% of its total assets in
common stocks. It invests the remainder primarily in preferred and
convertible securities, investment grade debt securities of any maturity, and
securities issued by the U.S. Government and its agencies and
instrumentalities. The Fund may invest up to 20% of its total assets in
foreign securities. The Fund may also use options and futures contracts as
hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
As with any growth fund, the value of your investment will fluctuate from day to
day with movements in the stock markets. Although small-cap stocks have a
history of long-term growth, they tend to be more volatile and speculative than
stocks of larger, more established companies. To the extent the Fund invests in
foreign issuers, the investment risks and volatility are magnified since the
performance of foreign stocks depends on changes in foreign currency values,
different political and regulatory environments, and the overall political and
economic conditions in the foreign countries where the Fund invests. For
further explanation, see "Risk Factors and Special Considerations" starting on
page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: Class A Class B Class C
--------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) None (1) 5.00% 1.00%
- -------------------------------------------------------------------------------------------
Redemption fee None None None
- -------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 1.00% 1.00% 1.00%
- -------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.47% 0.85% 0.60%
- -------------------------------------------------------------------------------------------
Total operating expenses (after expense
deferral)(2) 1.72% 2.60% 2.35%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class B Total
operating expenses would have been 2.73%, and Other expenses would have
been .98%, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
18
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
---------------------------------------------------
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $69 $104 $142 $247
- ---------------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1)
Assuming no redemption $78 $113 $161 $293
$26 $81 $138 $293
- ---------------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1)
Assuming no redemption $36 $79 $136 $289
$26 $79 $136 $289
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolios outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997, and by another independent auditor with
respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Portfolio A Portfolio B
------------------------------------------------------------------------------------------------
12/27/93 4/1/94 4/1/95 4/1/96 4/1/97 5/31/95 4/1/96 4/1/97
to to to to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97 3/31/96 3/31/97 9/30/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning
of period $12.50 $12.10 $13.06 $17.93 $15.15 $12.50 $16.69 $15.51
Income from Investment
operations:
Net investment income
(deficit) (0.04) (0.16) (0.20) (0.22) (0.02) (0.14) (0.21) (0.11)
Net realized and
unrealized gains (losses)
on securities and
foreign currency (0.36) 1.12 5.09 (0.66) 6.95 4.33 (0.97) 7.14
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (0.40) 0.96 4.89 (0.88) 6.93 4.19 (1.18) 7.03
Less distributions:
Dividends from net
investment income -- -- -- -- -- -- -- --
Distributions from
capital gains -- -- (0.02) (1.90) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.10 $13.06 $17.93 $15.15 $22.08 $16.69 $15.51 $2.54
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: (3.20%) 7.93% 37.48% (6.26%) 45.74% 33.52% (7.07%) 45.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets,
end of period $104,838 $106,725 $138,155 $121,742 $211,071 $13,626 $28,030 $49,917
Ratio of expenses to
average net assets, after
expense reimbursement++ 1.73%* 1.86% 1.74% 1.72% 1.96%* 2.58%* 2.61% 2.60%*
Ratio of Expenses to
average net assets, before
expense reimbursement+ 1.80%* 1.84% 1.74% 1.72% 1.90%* 3.26%* 2.73% 2.58%*
Ratio of net investment
income (deficit) to
average net assets, after
expense reimbursement++ (1.44%)* (1.27%) (1.20%) (1.26%) (1.42%)* (2.09%)* (2.13%) (2.09%)*
Ratio of net investment
income (deficit) to
average net assets, before
expense reimbursement++ (1.51%)* (1.25%) (1.20%) (1.26%) (1.36%)* (2.76%)* (2.25%) (2.06%)*
Portfolio turnover** 50.51% 100.46% 129.59% 112.90% 129.59% 112.90%
Average commission
rate paid** N/A N/A $0.0523 $0.0523 $0.0520 $0.0582
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Portfolio C
---------------------------------------------------------------------
12/27/93 4/1/94 4/1/95 4/1/96 4/1/97
to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.07 $12.96 $17.62 $14.69
Income from investment operations:
Net investment income (deficit) (0.06) (0.22) (0.29) (0.31) (0.17)
Net realized and unrealized gains
(losses) on securities and foreign
currency (0.37) 1.11 5.03 (0.63) 6.83
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations (0.43) 0.89 4.74 (0.94) 6.21
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from capital gains -- -- (0.08) (1.99) (1.99)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.07 $12.96 $17.62 $14.69 $21.35
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: (3.44%) 7.37% 37.18% (6.81%) 45.34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $142,874 $157,292 $207,332 $182,907 $249,108
Ratio of expenses to average net
assets, after expense
reimbursement++ 2.34%* 2.44% 2.35% 2.35% 2.58%*
Ratio of expenses to average net
assets, before expense
reimbursement+ 2.34%* 2.44% 2.35% 2.35% 2.56%*
Ratio of net investment income
(deficit) to average net assets,
after expense reimbursement++ (2.04%)* (1.85%) (1.81%) (1.89%) (2.05%)*
Ratio of net investment income
(deficit) to average net assets,
before expense reimbursement++ (2.04%)* (1.85%) (1.81%) (1.89%) (2.03%)*
Portfolio turnover** 50.51% 100.46% 129.59% 112.90%
Average commission rate paid** N/A N/A $0.0523 $0.0520
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from Master Trust
19
<PAGE>
INCOME & GROWTH FUND
INVESTMENT OBJECTIVE
Maximum total return, consisting of long-term capital appreciation and current
income.
INVESTMENT STRATEGY
The Fund invests primarily in convertible securities. The Investment Adviser
evaluates each security's investment characteristics as a fixed income
instrument as well as its potential for capital appreciation. In evaluating
convertibles, the Investment Adviser searches for what it calls "change at the
margin" -- positive business developments which are not yet fully reflected in
the company's stock price. It searches for successful growing companies that
are managing change advantageously and poised to exceed growth expectations.
The Fund seeks to capture approximately 70-80% of the upside performance of
the underlying equities with 50% or less of the downside exposure.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
convertible securities. It invests the remainder primarily in common and
preferred stocks, debt securities of any maturity, and securities issued by
the U.S. Government and its agencies and instrumentalities. The Fund may
also use options and futures contracts as hedging techniques.
At all times, the Fund invests a minimum of 25% of its total assets in common
and preferred stocks, and 25% in other income producing convertible and debt
securities. The Fund may also invest up to 35% of its net assets in debt
securities rated below investment grade by a nationally recognized statistical
rating agency, or of comparable quality if unrated.
The Fund emphasizes companies with market capitalizations above $500 million.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page __.
RISK FACTORS
Convertible securities have the investment characteristics of both equity and
debt securities. Accordingly, the value of your investment will fluctuate with
movements in the stock and bond markets. The companies in which the Fund
invests may be subject to more volatile market movements than securities of
larger, more established companies. The value of the Fund's debt securities
will change as interest rates fluctuate: if rates go up, the value of debt
securities goes down; if rates go down, the value of debt securities goes up.
In addition, the lower-rated convertible securities in which the Fund may invest
are considered predominately speculative and are subject to greater volatility
and risk of loss than investment grade securities, particularly in deteriorating
economic periods. For further explanation, see "Risk Factors and Special
Considerations" starting on page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: Class A Class B Class C
--------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) None (1) 5.00% 1.00%
- -------------------------------------------------------------------------------------------
Redemption fee None None None
- -------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.75% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.60% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Total operating expenses (after expense
deferral)(2) 1.60% 2.25% 2.25%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A, B & C,
Total operating expenses would have been 1.75%, 3.19% and 2.29%,
respectively, and Other expenses would have been .75%, 1.69% and .79%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
20
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
---------------------------------------------------
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $68 $100 $135 $233
- ---------------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1)
Assuming no redemption $74 $103 $143 $258
$23 $70 $120 $258
- ---------------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1)
Assuming no redemption $33 $70 $120 $258
$23 $70 $120 $258
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1.) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolios outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997, and by another independent auditor with
respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Portfolio A Portfolio B
-----------------------------------------------------------------------------------------------
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97 5/31/95 4/1/96 4/1/97
to to to to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97 3/31/96 3/31/97 9/30/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning
of period $12.50 $14.16 $12.86 $15.68 $16.59 $12.50 $14.96 $16.60
Income from investment
operations:
Net investment income
(deficit) 0.32 0.49 0.48 0.47 0.46 0.24 0.31 0.32
Net realized and
unrealized gains (losses)
on securities and foreign
currency 2.15 (0.89) 2.82 1.64 3.04 2.46 1.64 3.17
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 2.47 (0.40) 3.30 2.11 2.58 2.70 1.95 2.85
Less distributions:
Dividends from net
investment income (0.32) (0.49) (0.48) (0.48) (0.23) (0.24) (0.31) (0.17)
Distributions from
capital gains (0.49) (0.41) -- (0.72) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.16 $12.86 $15.68 $16.59 $19.86 $14.96 $16.60 $19.92
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: 19.65% (2.64%) 26.00% 13.73% 21.18% 21.72% 13.01% 21.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $30,447 $31,150 $31,712 $32,082 $38,880 $2,125 $12,740 $21,147
Ratio of expenses to
average net assets, after
expense reimbursement++ 1.59%* 1.60% 1.60% 1.60% 1.59%* 2.25% 2.25% 2.24%*
Ratio of expenses to
average net assets, before
expense reimbursement+ 1.83%* 1.76% 1.76% 1.75% 1.72%* 7.08%* 3.19% 2.75%*
Ratio of net investment
income (deficit) to
average net assets, after
expense reimbursement++ 2.83%* 3.71% 3.29% 2.83% 2.56%* 2.59%* 2.29% 1.96%*
Ratio of net investment
income (deficit) to
average net assets, before
expense reimbursement++ 2.59%* 3.55% 3.12% 2.66% 2.43%* (2.22%)* 1.32% 1.45%*
Portfolio turnover** 177.52% 125.51% 144.97% 166.84% 144.97% 166.84%
Average commission rate
paid** N/A N/A $0.0597 $0.0523 $0.0520 $0.0582
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Portfolio C
--------------------------------------------------------------------
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97
to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $14.28 $13.03 $15.89 $17.05
Income from investment operations:
Net investment income (deficit) 0.24 0.41 0.40 0.37 0.36
Net realized and unrealized gains
(losses) on securities and foreign
currency 2.11 (0.89) 2.86 1.66 3.19
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 2.35 (0.48) 3.26 2.03 2.83
Less distributions:
Dividends from net investment income (0.24) (0.41) (0.40) (0.37) (0.18)
Distributions from capital gains (0.33) (0.36) -- (0.50) --
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.28 $13.03 $15.89 $17.05 $20.42
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: 18.76% (3.26%) 25.24% 12.91% 20.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $69,265 $61,792 $58,997 $62,143 $73,059
Ratio of expenses to average net assets,
after expense reimbursement++ 2.22%* 2.25% 2.25% 2.25% 2.24%*
Ratio of expenses to average net
assets, before expense reimbursement+ 2.23%* 2.29% 2.28% 2.29% 2.32%*
Ratio of net investment income
(deficit) to average net assets,
after expense reimbursement++ 2.28%* 3.05% 2.64% 2.18% 1.92%*
Ratio of net investment income
(deficit) to average net assets,
before expense reimbursement++ 2.27%* 3.01% 2.61% 2.11% 1.83%*
Portfolio turnover** 177.52% 125.51% 144.97% 166.84%
Average commission rate paid** N/A N/A $0.0523 $0.0520
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from Master Trust
21
<PAGE>
BALANCED GROWTH FUND
INVESTMENT OBJECTIVE
A balance of long-term capital appreciation and current income.
INVESTMENT STRATEGY
The Fund's Investment Adviser actively manages a blended portfolio of equity and
fixed income securities with an emphasis on the overall total return. For the
equity portion, the Investment Adviser focuses on a "bottom-up" analysis that
evaluates the financial condition and competitiveness of individual companies.
It primarily uses computer intensive systematic disciplines to uncover "change
at the margin" -- positive business developments that are not yet fully
reflected in a company's stock price. The fixed income portion is actively
managed to take advantage of current interest rates and bond market trends by
varying the structure, duration and allocation of fixed income investments
from various business sectors.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund allocates about 60% of its total assets
(but no more than 70% and no less than 50%) to equity securities, with an
emphasis on companies with market capitalizations in excess of $500 million,
and about 40% of its total assets to debt securities of any maturity issued
by corporations and the U.S. Government and its agencies and
instrumentalities. A portion of the Fund's net assets (less than 35%) may be
invested in debt securities rated below investment grade by a nationally
recognized statistical rating agency, or of comparable quality if unrated.
The Fund may invest up to 20% of its total assets in securities of foreign
issuers. The Fund may also use options as a hedging technique.
PORTFOLIO MANAGEMENT The Investment Adviser emphasizes a team approach to
portfolio management to maximize its overall effectiveness. For a complete
list of the portfolio team, see "Portfolio Teams" on page __.
RISK FACTORS
As with any fund that invests in common stocks and debt obligations, the
value of your investment will fluctuate with movements in the stock and bond
markets. Equity securities in which the Fund invests may be more volatile
than securities of larger, more established companies. The value of the
Fund's debt securities will change as interest rates fluctuate: if rates go
up, the value of debt securities goes down; if rates go down, the value of
debt securities goes up. Lower-rated securities in which the Fund invests
are considered speculative and are subject to greater volatility and risk of
loss than investment grade securities, particularly in deteriorating economic
periods. For further explanation, see "Risk Factors and Special
Considerations" starting on page __.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
--------------------------------------
SHAREHOLDER TRANSACTION EXPENSES: Class A Class B Class C
--------------------------------------
<S> <C> <C> <C>
Maximum sales charge on purchases
(as a percentage of offering price) 5.25% None None
- -------------------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- -------------------------------------------------------------------------------------------
Deferred sales charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) None(1) 5.00% 1.00%
- -------------------------------------------------------------------------------------------
Redemption fee None None None
- -------------------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES AS A
PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.75% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.60% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Total operating expenses (after expense
deferral)(2) 1.60% 2.25% 2.25%
</TABLE>
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A, B & C,
Total operating expenses would have been 3.30%, 6.44% and 2.83%
respectively, and Other expenses would have been .2.30%, 4.94% and 1.33%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
22
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
---------------------------------------------------
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $68 $100 $135 $233
- ---------------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1)
Assuming no redemption $74 $103 $143 $258
$23 $70 $120 $258
- ---------------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1)
Assuming no redemption $33 $70 $120 $258
$23 $70 $120 $258
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1.) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor A, B and C Portfolios outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997, and by another independent auditor with
respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Portfolio A Portfolio B
-----------------------------------------------------------------------------------------------
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97 5/31/95 4/1/96 4/1/97
to to to to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97 3/31/96 3/31/97 9/30/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning
of period $12.50 $13.52 $13.74 $16.16 $15.54 $12.50 $14.18 $14.88
Income from investment
operations:
Net investment income
(deficit) 0.15 0.21 0.34 0.32 0.23 0.12 0.17 0.10
Net realized and
unrealized gains (losses)
on securities and foreign
currency 1.02 0.22 2.42 0.84 4.27 1.68 0.70 4.20
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.17 0.43 2.76 1.16 4.50 1.80 0.87 4.30
Less distributions:
Dividends from net
investment income (0.15) (0.21) (0.34) (0.32) (0.11) (0.12) (0.17) (0.05)
Distributions from
capital gains -- -- -- (1.46) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.52 $13.74 $16.16 $15.54 $19.92 $14.18 $14.88 $19.13
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: (9.35%) 3.22% 20.16% 6.74% 28.98% 14.45% 6.10% 28.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $6,446 $4,980 $5,902 $4,898 $6,230 $673 $2,133 $3,062
Ratio of expenses to
average net assets, after
expense reimbursement++ 1.59%* 1.60% 1.60% 1.60% 1.61%* 2.25%* 2.25% 2.26%*
Ratio of Expenses to
average net assets, before
expense reimbursement+ 3.28%* 2.78% 3.30% 3.00% 2.64%* 13.05%* 6.44% 4.63%*
Ratio of net investment
income (deficit) to
average net assets, after
expense reimbursement++ 1.30%* 1.44% 2.16% 1.87% 1.26%* 1.38%* 1.25% 0.63%*
Ratio of net investment
income (deficit) to
average net assets, before
expense reimbursement++ (0.39%)* 0.26% 0.88% 0.73% 0.22%* (8.86%)* (2.67%) (1.75%)*
Portfolio turnover** 85.43% 110.40% 197.19% 212.95% 197.19% 212.95%
Average commission rate
paid** N/A N/A $0.0594 $0.0586 $0.0594 $0.0586
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Portfolio C
--------------------------------------------------------------------
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97
to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.54 $13.76 $16.20 $15.59
Income from investment operations:
Net investment income (deficit) 0.08 0.11 0.24 0.21 0.11
Net realized and unrealized gains
(losses) on securities and
foreign currency 1.04 0.22 2.44 0.85 4.34
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 1.12 0.33 2.68 1.06 4.45
Less distributions:
Dividends from net investment income (0.08) (0.11) (0.24) (0.21) (0.60)
Distributions from capital gains -- -- -- (1.46) --
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.54 $13.76 $16.20 $15.59 $19.98
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: 8.91% 2.47% 19.58% 6.05% 28.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $16,248 $16,470 $16,586 $16,990 $20,259
Ratio of expenses to average net assets,
after expense reimbursement++ 2.24%* 2.25% 2.25% 2.25% 2.77%*
Ratio of Expenses to average net
assets, before expense reimbursement+ 2.73% 2.60% 3.01% 2.83% 0.61%*
Ratio of net investment income
(deficit) to average net assets,
after expense reimbursement++ 0.61%* 0.83% 1.53% 1.23% 0.10%*
Ratio of net investment income
(deficit) to average net assets,
before expense reimbursement++ 0.12%* 0.48% 1.19% 0.91%
Portfolio turnover** 85.43% 110.40% 197.19% 212.95%
Average commission rate paid** N/A N/A $0.0594 $0.0586
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Computations do not reflect the Portfolio's sales charges
++ Includes expenses allocated from Master Trust
23
<PAGE>
FULLY DISCRETIONARY FUND
INVESTMENT OBJECTIVE
Seeks maximum total return.
INVESTMENT STRATEGY
The Fund's Investment Adviser seeks to outperform the total return of an
index of either government/corporate investment grade debt or
government/corporate/ mortgage investment grade debt over a full market
cycle through an actively managed diversified portfolio of debt securities.
When evaluating any bond, the Investment Adviser selects bonds based upon a
"top down" analysis of economic trends. Investment philosophy emphasizes
interest rate decisions and shifts among sectors of the bond market. It
also analyzes credit quality, the yield to maturity of the security, and
the effect the security will have on the Fund.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets
in investment grade debt securities issued by U.S. and foreign
corporations, U.S. and foreign governments, and their agencies and
instrumentalities. These securities include bonds, notes, mortgage-backed
and asset-backed securities with rates that are fixed, variable or
floating. The Fund may invest up to 20% of its assets in debt securities
rated below investment grade by a nationally recognized statistical rating
agency, or of comparable quality if unrated. For a description of these
ratings, see "Corporate Bond Ratings" beginning on page _____. The Fund may
also use options, futures contracts and interest rate and currency swaps as
hedging techniques. The average portfolio duration of the Fund will range
from two to eight years. The Fund may invest up to 30% of its total assets
in securities payable in foreign currencies.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management
to maximize its overall effectiveness. For a complete list of the
portfolio team, see "Portfolio Teams" on page _____.
RISK FACTORS
As with any fund that invests in bonds, the value of the Fund's investments
fluctuates in response to movements in interest rates. If interest rates
go up, the value of bonds fall; if rates go down, the value of bonds rise.
However, the Investment Adviser expects the Fund's fluctuations to be more
moderate than those of a fund with a longer average duration. The
lower-rated debt securities in which the Fund invests are considered
speculative and are subject to greater volatility and risk of loss than
investment grade securities, particularly in deteriorating economic periods.
To the extent the Fund invests in foreign securities, performance also
depends upon changing currency values, different political and economic
environments, and other overall economic conditions in countries where the
Fund invests. For further explanation, see "Risk Factors and Special
Considerations" starting on page____.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------------------------------
Maximum sales charge on purchases
(as a percentage of offering price) 4.75% None None
- --------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- --------------------------------------------------------------------------------
Deferred sales charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower) None(1) 5.00% 1.00%
- --------------------------------------------------------------------------------
Redemption fee None None None
- --------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.45% 0.45% 0.45%
- --------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.50% 0.50%
- --------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.25% 0.40% 0.40%
- --------------------------------------------------------------------------------
Total operating expenses (after expense 0.95% 1.35% 1.35%
deferral)(2)
- -------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in
this prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A,B & C,
Total operating expenses are expected to be 7.73%, 8.38% and 5.03%,
respectively, and Other expenses are expected to be 7.38%, 7.93% and 4.58%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more than
the equivalent of the maximum permitted front-end sales charge.
24
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A $57 $77 $98 $155
- --------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1) $66 $77 $98 $162
Assuming no redemption $14 $43 $74 $162
- --------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1) $25 $70 $74 $162
Assuming no redemption $14 $43 $74 $162
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
25
<PAGE>
HIGH YIELD BOND FUND
INVESTMENT OBJECTIVE
High level of current income and capital growth.
INVESTMENT STRATEGY
The Fund invests primarily in lower-rated debt securities commonly referred
to as "junk bonds." When evaluating any bond, the Investment Adviser
selects bonds based upon a combination of both "top-down" analysis of
economic trends and "bottom-up" analysis that evaluates the financial
condition and competitiveness of individual companies. It also analyzes
credit quality, the yield to maturity of the security, and the effect the
security will have on the average yield to maturity of the Fund. The
Investment Adviser believes it can lower the risks of investing in
lower-rated debt through these professional management techniques and
through diversification.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund allocates at least 65% of its total
assets in lower-rated debt securities and convertible securities rated
below investment grade by a nationally recognized statistical rating
agency, or of comparable quality if unrated. There is no limit on
either the portfolio maturity or the acceptable rating of securities
bought by the Fund. For a description of these ratings, see "Corporate
Bond Ratings" beginning on page _____. Securities may bear rates that
are fixed, variable or floating. The Fund may invest up to 35% of its
total assets in equity securities of U.S. and foreign companies. The Fund
is not restricted to investments in companies of any particular size,
but currently intends to invest principally in companies with market
capitalization above $100 million at the time of purchase. The Fund may
also use options, futures contracts and interest rate and currency swaps
as hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management
to maximize its overall effectiveness. For a complete list of the
portfolio team, see "Portfolio Teams" on page _______.
RISK FACTORS
As with any fund that invests primarily in bonds, the value of the Fund's
investments fluctuates in response to movements in interest rates. When
rates go up, debt security prices fall; when rates go down, debt security
prices rise. Lower-rated securities, while usually offering higher yields,
generally have more risk and volatility than higher-rated securities
because of reduced creditworthiness and greater chance of default. Periods
of high interest rates and recession may adversely affect the issuer's
ability to pay interest and principal. To the extent the Fund invests in
stocks, the value of those investments will fluctuate day to day with
movements in the stock market as well as in response to the activities of
individual companies. The companies in which the Fund invests may be more
subject to volatile market movements than securities of larger, more
established companies. To the extent the Fund invests in foreign
securities, performance also depends on changes in foreign currency values,
different political and regulatory environments, and overall economic
factors in the countries where the Fund invests. For further explanation,
see "Risk Factors and Special Considerations" starting on page _____.
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------------------------------
Maximum sales charge on purchases (as a 5.25% None None
percentage of offering price)
- ------------------------------------------------------------------------------
Sales Charge on reinvested dividends None None None
- ------------------------------------------------------------------------------
Deferred sales charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower) None(1) 5.00% 1.00%
- ------------------------------------------------------------------------------
Redemption fee None None None
- ------------------------------------------------------------------------------
Exchange fee None None None
ANNUAL FUND OPERATING EXPENSES AS A
PERCENTAGE OF AVERAGE NET ASSETS: (AFTER
EXPENSE DEFERRAL)
Management fees 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------
12b-1 expenses 0.25% 0.75% 0.75%
- ------------------------------------------------------------------------------
Other expenses (after expense deferral)(2) 0.60% 0.75% 0.75%
- ------------------------------------------------------------------------------
Total operating expenses (after expense 1.60% 2.25% 2.25%
deferral)(2)
- --------------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in
this prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund. For Class A,B & C,
Total operating expenses are expected to be 2.25%, 2.85% and 2.85%,
respectively, and Other expenses are expected to be 1.50%, 2.10% and 2.10%
respectively, absent the deferral. See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more than
the equivalent of the maximum permitted front-end sales charge.
26
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
1 YEAR 3 YEARS
---------------------
CLASS A $68 $100
- -----------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1) $74 $103
Assuming no redemption $23 $70
- -----------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1) $33 $70
Assuming no redemption $23 $70
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge and no exchange of
Class B shares for Class A shares seven or more years after purchase.
27
<PAGE>
MONEY MARKET FUND
INVESTMENT OBJECTIVE
High current income consistent with preservation of capital and maintenance
of liquidity.
INVESTMENT STRATEGY
The Fund's Investment Adviser invests only in securities that mature in 397
days or less, and are rated in one of the two highest short-term rating
categories by one or more nationally recognized statistical rating
organization, or in comparable unrated securities. The Fund maintains a
dollar weighted portfolio average maturity of 90 days or less.
PRINCIPAL INVESTMENTS
The Fund invests in high-quality, short-term U.S. dollar denominated money
market instruments that comply with the credit quality and diversification
requirements of Rule 2a-7 under the Investment Company Act, which regulates
money market funds. These include obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; certificates of
deposit, time deposits and bankers' acceptances of certain domestic and
foreign banks and domestic savings and loan associations; commercial paper
and other short-term corporate obligations; and repurchase agreements.
Certain of the acceptable debt instruments may be credit-enhanced by a
guaranty, letter of credit, or insurance.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio
team, see "Portfolio Teams" on page _____.
RISK FACTORS
Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund. As with
any money market fund, there is the risk that the issuers or guarantors of
securities owned by the Fund will default on the payment of principal or
interest or the obligation to repurchase securities from the Fund. Neither
the Fund nor the Portfolio is insured or guaranteed by the U.S. Government.
For further explanation, see "Risk Factors and Special Considerations"
starting on page _____.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales charge on purchases
(as a percentage of offering price) None
- -----------------------------------------------------------------------------
Sales Charge on reinvested dividends None
- -----------------------------------------------------------------------------
Deferred sales charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) None(1)
- -----------------------------------------------------------------------------
Redemption fee None
- -----------------------------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees(2) 0.00%
- -----------------------------------------------------------------------------
12b-1 expenses 0.15%
- -----------------------------------------------------------------------------
Other expenses (after expense deferral)(3) 0.30%
- -----------------------------------------------------------------------------
Total operating expenses (after expense deferral)(3) 0.45%
- ------------------------
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in
this prospectus.
(2) The management fee has been reduced to reflect waivers of the management
fee. The maximum management fee is .25%.
(3) The Investment Adviser has agreed to waive or defer its management fees
and to absorb other operating expenses payable by the Fund. Total
operating expenses would have been 1.73%, and Other expenses would have
been 1.58% , absent the deferral. See "Investment Adviser Compensation."
28
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------
$3 $10 $17 $39
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of capital stock of
the predecessor Money Market Portfolio outstanding throughout each period
indicated. The figures for the period ended September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997, and by another independent auditor with
respect to commencement of operation through March 31, 1995. Please read in
conjunction with the Trust's 1997 Annual Report and 1997-98 Semi-Annual Report.
<TABLE>
<CAPTION>
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97
to to to to to
3/31/94 3/31/95 3/31/96 3/31/97 9/30/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income (deficit) 0.01 0.05 0.05 0.05 0.06
Net realized and unrealized gains (losses)
on securities and foreign currency -- -- -- -- (0.03)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.01 0.05 0.05 0.05 0.03
Less distributions:
Dividends from net investment income (0.01) (0.05) (0.05) (0.05) (0.03)
Distributions from capital gains -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN+: 1.72% 4.58% 5.47% 5.09% 2.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $48 $2,996 $3,129 $36,259 $39,504
Ratio of expenses to average net assets, after
expense reimbursement(++) 0.54%* 0.31% 0.45% 0.45% 0.45%*
Ratio of expenses to average net assets,before
expense reimbursement(+) 323.54%* 2.49% 5.78% 1.73% 1.18%*
Ratio of net investment income (deficit) to
average net assets, after expense reimbursement(++) 1.85%* 4.60% 5.35% 4.97% 5.15%*
Ratio of net investment income (deficit) to
average net assets, before expense reimbursement(++) (320.85%)* 2.42% 2.77% 4.12% 4.42%*
Portfolio turnover(**) N/A N/A N/A N/A
Average commission rate paid(**) N/A N/A N/A N/A
</TABLE>
(*) Annualized
(**) For corresponding Series of the Master Trust
(+) Computations do not reflect the Portfolio's sales charges
(++) Includes expenses allocated from Master Trust
29
<PAGE>
DISTRIBUTION OF SHARES
CHOOSING A PORTFOLIO
This prospectus offers A, B & C Classes. Each Class has its own cost structure,
allowing you to choose the one that best meets your requirements. Your
financial representative can help you decide. For actual past expenses of A, B
& C Classes, see the Fund Information earlier in this prospectus.
HOW SALES CHARGES ARE CALCULATED
CLASS A SHARES. Sales charges are as follows:
ALL CLASS A SHARES EXCEPT FULLY DISCRETIONARY
- ------------------------------------------------------------------------------
AS A % OF AS A % OF DEALER COMMISSION
YOUR INVESTMENT OFFERING YOUR AS % OF
PRICE INVESTMENT OFFERING PRICE
- ------------------------------------------------------------------------------
Up to $49,999 5.25% 5.54% 4.50%
$50,000 - $99,999 4.50% 4.71% 3.75%
$100,000 - $249,999 3.50% 3.63% 2.75%
$250,000 - $499,999 2.50% 2.56% 2.00%
$500,000 - $999,999 2.00% 2.04% 1.60%
$1,000,000 and over (See below) (See below) (See below)
FULLY DISCRETIONARY
- ------------------------------------------------------------------------------
AS A % OF AS A % OF DEALER COMMISSION
YOUR INVESTMENT OFFERING YOUR AS % OF
PRICE INVESTMENT OFFERING PRICE
- ------------------------------------------------------------------------------
Up to $49,999 4.75% 4.99% 4.00%
$50,000 - $99,999 4.00% 4.17% 3.25%
$100,000 - $249,999 3.50% 3.63% 2.75%
$250,000 - $499,999 2.50% 2.56% 2.00%
$500,000 - $999,999 2.00% 2.04% 1.60%
$1,000,000 and over (See below) (See below) (See below)
Investments of $1 million or more of Class A Shares have no front-end sales
charge. The Distributor pays a commission of 1% to financial institutions that
initiate purchases of $1 million and more.
CLASS B SHARES
Class B shares are offered at their net asset value per share, without any
initial sales charge. The Distributor pays a commission of 4% (3% for the
Fully Discretionary Fund) to financial institutions who initiate purchases.
There is a contingent deferred sales charge (CDSC) on shares you sell within six
years of buying them.
CLASS C SHARES
Class C Shares are offered at their net asset value per share without any
initial sales charge. The Distributor pays a 1% commission to financial
institutions that initiate purchases.
MONEY MARKET FUND
Shares of the Money Market Fund are offered at their net asset value per share
without any initial sales charge.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a CDSC upon redemption of their shares under the
following conditions:
CLASS A SHARES
Shareholders who buy $1 million in shares without a sales charge and redeem
within one full year of purchase may be charged a CDSC of 1% on shares redeemed.
CLASS B SHARES
YEARS AFTER PURCHASE CDSC ON SHARES
BEING SOLD
1st year 5.00%
2nd year 4.00%
3rd or 4th years 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
CLASS C SHARES
Shareholders who redeem Class C shares within one full year of the purchase date
may be charged a CDSC of 1%.
MONEY MARKET FUND
A CDSC may be charged on redemptions of shares purchased through an exchange of
Class B or C shares of an investor who did not own the Class B shares for six
full years or the Class C shares for one full year, whichever is applicable.
There is no CDSC imposed on shares acquired through reinvestment of dividends or
capital gains.
The CDSC will be imposed on the lesser of the original purchase price or the net
asset value of the redeemed shares at the time of redemption. CDSC calculations
are based on the numbers of shares involved, not the value of your account. To
keep your CDSC as low as possible, each time you place a request to sell shares
we will first sell any shares in your account that represent reinvested
dividends/capital gains and then shares that satisfy the holding period. If
there are not enough of these to meet your request, we will sell your shares on
a first-in, first-out basis. Your financial institution may elect to waive some
or all of the payment thereby reducing the otherwise applicable CDSC.
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCING YOUR CLASS A SALES CHARGES.
There are several ways you can combine multiple purchases of shares of Class A
Shares to take advantage of the breakpoints in the sales charge schedule. These
can be combined in any manner:
- - ACCUMULATION PRIVILEGE - lets you add the value of Class A Shares you and
your immediate family already own to the amount of your next investment for
purposes of calculating the sales charge.
- - LETTER OF INTENT - lets you purchase Class A Shares over a 13 month period
and receive the same sales charge as if all shares had been purchased at once.
- - COMBINATION PRIVILEGE - lets you combine Class A Shares for purposes of
reducing the sales charge.
TO UTILIZE: COMPLETE THE APPROPRIATE SECTION ON YOUR APPLICATION, OR CONTACT
YOUR FINANCIAL REPRESENTATIVE OR NICHOLAS-APPLEGATE MUTUAL FUNDS TO ADD THESE
OPTIONS TO AN EXISTING ACCOUNT.
30
<PAGE>
CDSC WAIVERS. In general, the CDSC may be waived on shares you sell for the
following reasons:
- - make payments through certain systematic withdrawal plans
- - qualifying distributions from qualified retirement plans and other employee
benefit plans
- - distributions from custodial accounts under section 403(b)(7) of the Internal
Revenue Code as well as IRAs due to death, disability or attainment of age
59-1/2
TO UTILIZE: CONTACT YOUR FINANCIAL REPRESENTATIVE OR NICHOLAS-APPLEGATE
MUTUAL FUNDS, OR CONSULT THE SAI (SEE THE BACK COVER OF THIS PROSPECTUS).
REINSTATEMENT PRIVILEGE. If you sell Class A Shares, you may invest some or all
of the proceeds in the same Class within 90 days without a sales charge. If you
paid a CDSC when you sold your shares, you will be credited with the amount of
the CDSC. All accounts involved must have the same registration.
TO UTILIZE: CONTACT YOUR FINANCIAL REPRESENTATIVE OR NICHOLAS-APPLEGATE MUTUAL
FUNDS.
NET ASSET VALUE PURCHASES. Class A Shares may be sold at net asset value to:
(1) current or retired directors, trustees, partners, officers and employees of
the Trust, the Distributor, the Investment Adviser and its general partner,
certain family members of the above persons, and trusts or plans primarily for
such persons;
(2) current or retired registered representatives or full-time employees and
their spouses and minor children and plans of such persons;
(3) former limited partners and participants of certain investment partnerships
and pooled trusts previously managed by the Investment Adviser;
(4) investors who exchange their shares from an unaffiliated investment company
which has a sales charge, so long as shares are purchased within 60 days of the
redemption;
(5) trustees or other fiduciaries purchasing shares for certain retirement
plans of organizations with 50 or more eligible employees;
(6) investment advisers and financial planners who place trades for their own
accounts or the accounts of their clients either individually or through a
master account and who charge a management, consulting or other fee for their
services;
(7) employee-sponsored benefit plans in connection with purchases of Class A
Shares made as a result of participant-directed exchanges between options in
such a plan;
(8) "wrap accounts" for the benefit of clients of broker-dealers, financial
institutions or financial planners having sales or service agreements with the
Distributor or another broker-dealer or financial institution with respect to
sales of Class A Shares; and
(9) such other persons as are determined by the Board of Trustees (or by the
Distributor pursuant to guidelines established by the Board) to have acquired
shares under circumstances not involving any sales expense to the Trust or the
Distributor.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Each Fund has adopted a distribution plan in accordance with Rule 12b-1 under
the Investment Company Act. Class B and C Shares may pay a fee to the
Distributor in an amount computed at an annual rate of .75% of the average daily
net assets to finance any activity which is principally intended to result in
the sale of shares. Class A Shares may pay the Distributor a fee equal to .25%
of the average daily net assets, and the Money Market Fund may pay up to .15% of
the average daily net assets. The schedule of such fees and the basis upon which
such fees will be paid will be determined from time to time by the Distributor.
Each of the Funds has entered into a Shareholder Services Agreement with the
Distributor under which each Fund will reimburse the Distributor up to .25% of
the average daily assets of each of the Portfolios to pay financial institutions
for certain personal services for shareholders and for the maintenance of
shareholder accounts.
In addition to the payments described above, the Distributor may also pay
additional compensation to financial institutions in connection with selling
shares of the Funds. Compensation may include financial assistance for
conferences, shareholder services, computer software, training programs or
promotional activities. The Distributor offers additional compensation to
financial institutions that the Distributor expects will sell a significant
amount of shares. Financial institutions may obtain more information by call
(800) 551-8045.
THE DISTRIBUTOR OF THE TRUST'S SHARES
Nicholas-Applegate Securities
600 West Broadway, 30th Floor
San Diego, California 92101
31
<PAGE>
SIMPLIFIED ACCOUNT INFORMATION
<TABLE>
<S><C>
OPENING AN ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
REGULAR INVESTMENT RETIREMENT
FOR THIS TYPE OF ACCOUNT Regular For a Minor Automatic IRA, Rollover,
(UGMA/UTMA) Investment SEP, etc.
- ----------------------------------------------------------------------------------------------------------------------------------
This is the minimum $2,000 $250 $50 $250
initial investment
- ----------------------------------------------------------------------------------------------------------------------------------
Use this type of New Account Form (Non-Retirement) IRA Application
application
- ----------------------------------------------------------------------------------------------------------------------------------
Before completing the Each Fund offers a variety of features, which are described in the "Your Account" section of this
application prospectus. Please read this section before completing the application
- ----------------------------------------------------------------------------------------------------------------------------------
Completing
the application If you need assistance, contact your financial representative, or call us (800) 551-8043.
- ----------------------------------------------------------------------------------------------------------------------------------
If you are sending money Mail application and send check, payable to: NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX 8326, BOSTON, MA
by CHECK 02266-8326. The Trust WILL NOT accept third-party checks.
- ----------------------------------------------------------------------------------------------------------------------------------
Please read the bank wire or ACH section under the "Buying Shares" section below. You will need to
If you are sending money obtain an account number with the Trust by sending a completed application to: NICHOLAS-APPLEGATE
by BANK WIRE OR ACH MUTUAL FUNDS, PO BOX 8326, BOSTON, MA 02266-8326. To receive your account number, call either your
financial representative or us at (800) 551-8043.
BUYING SHARES
- ----------------------------------------------------------------------------------------------------------------------------------
REGULAR INVESTMENT RETIREMENT
Regular For a Minor Automatic IRA, Rollover
(UGMA/UTMA) Investment SEP, etc.
- ----------------------------------------------------------------------------------------------------------------------------------
This is the minimum $100 $100 $50 $100
subsequent investment
- ----------------------------------------------------------------------------------------------------------------------------------
The Trust is open on days that the New York Stock Exchange is open.
The price you will receive All transactions received in good order before the market closes receive that day's price.
- ----------------------------------------------------------------------------------------------------------------------------------
If you are sending money Mail application and send check, payable to: NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX 8326, BOSTON, MA
by CHECK 02266-8326. The Trust WILL NOT accept third-party checks.
- ----------------------------------------------------------------------------------------------------------------------------------
If you are sending money Instruct your bank to wire the amount you wish to invest to:
by BANK WIRE STATE STREET BANK & TRUST CO. -- ABA #011000028
DDA #9904-645-0
STATE STREET BOS, ATTN: MUTUAL FUNDS
CREDIT: NICHOLAS-APPLEGATE [FUND NAME][SHARE CLASS], [YOUR NAME], [ACCOUNT NAME OR NUMBER]
- ----------------------------------------------------------------------------------------------------------------------------------
Call your bank to ensure (1) that your bank supports ACH, and (2) this feature is active on your bank
If you are sending money account. To establish this option, either complete the appropriate sections when opening an account,
by ACH or contact your financial representative, or call us at (800) 551-8043 for further information. To
initiate an ACH purchase, call the Trust at (800) 551-8043.
</TABLE>
32
<PAGE>
<TABLE>
<S><C>
SELLING OR REDEEMING SHARES
- ----------------------------------------------------------------------------------------------------------------------------------
IN WRITING BY PHONE
Selling shares by phone is a service option which
must be established on your account prior to
making a request.. See the "Your Account" section,
Certain requests may require a SIGNATURE or contact your financial representative or call
GUARANTEE. See that section below for further us at (800) 551-8043
information. You may sell up to the full account for further information.
Things you should know value, less any applicable sales charge. The The maximum amount which may be requested by
Trust may have additional requirements for phone, regardless of account size, is $50,000.
redeeming shares. Please call us for more Amounts greater than that must be requested in
information. writing. If you wish to receive your monies by
bank wire, the minimum request is $5,000.
---------------------------------------------------------------------------------------------------
If you purchased shares through a financial representative or plan administrator/sponsor,
you should call them regarding the most efficient way to sell shares.
If you bought shares recently by check, they may not be available to be sold for up to
15 calendar days from the date of purchase.
Sales by a corporation, trust or fiduciary may have special requirements.
Please call your financial representative, a plan administrator/sponsor or us for further information.
- ----------------------------------------------------------------------------------------------------------------------------------
The price you will The Trust is open on days that the New York Stock Exchange is open.
receive All transactions received in good order before the market closes receive that day's price.
- ----------------------------------------------------------------------------------------------------------------------------------
If you want to receive
your monies by CHECK
- ----------------------------------------------------------------------------------------------------------------------------------
If you want to receive Please put your request in writing, including: the
your monies by BANK WIRE name of the account owners, account number and the
Fund and share Class you are redeeming from, the Either contact your financial representative or
share or dollar amount you wish to sell, signed by call us
all account owners. Mail this request to: at (800) 551-8043.
NICHOLAS-APPLEGATE MUTUAL FUNDS, The proceeds will be sent to the existing bank
PO BOX 8326, BOSTON, MA 02266 8326. wire address listed on the account.
The check will be sent to the existing bank wire
address listed on the account.
- ----------------------------------------------------------------------------------------------------------------------------------
Either contact your financial representative or call us
If you want to receive at (800) 551-8043.
your monies by ACH Please call us at (800) 551-8043. The proceeds will be sent to the existing ACH
instructions on the account and will generally be
received at your bank two business days after your
request is received.
SIGNATURE GUARANTEE
- ----------------------------------------------------------------------------------------------------------------------------------
A definition A signature guarantee is required of a financial institution to verify the authenticity of an
individual's signature. It can usually be obtained from a broker, commercial or savings bank, or
credit union.
- ----------------------------------------------------------------------------------------------------------------------------------
A signature guarantee is needed when making a written request for the following reasons:
When you need one 1. When selling more than $50,000 worth of shares;
2. When you want a check or bank wire sent to a name or address that is not currently listed on the
account;
3. To sell shares from an account controlled by a corporation, partnership, trust or fiduciary; or
4. If your address was changed within the last 60 days.
</TABLE>
33
<PAGE>
<TABLE>
<S><C>
EXCHANGING SHARES
- ----------------------------------------------------------------------------------------------------------------------------------
REGULAR INVESTMENT RETIREMENT
FOR THIS TYPE OF ACCOUNT Regular For a Minor Automatic Investment IRA, Rollover, SEP, etc.
(UGMA/UTMA)
This is the minimum $2,000 $250 $50 $250
exchange amount to open a
new account
- ----------------------------------------------------------------------------------------------------------------------------------
The price you will The Trust is generally open on days that the New York Stock Exchange is open. All transactions
receive received in good order before the market closes receive that day's price
- ----------------------------------------------------------------------------------------------------------------------------------
Things you should know The exchange must be to the Class A, B or C Shares of another Fund (depending upon whether the
shares being exchanged are Class A, B or C Shares) or the Money Market Fund and to an account with
the same registration. If opening an account as part of an exchange, you must obtain and read
the prospectus. If you intend to keep money in the Fund you are exchanging from, make sure that
you leave an amount equal to or greater than the Fund's minimum account size (see the "Opening
an Account" section). To protect other investors, the Trust may limit the number of
exchanges you can make.
- ----------------------------------------------------------------------------------------------------------------------------------
How to request an Either contact your financial representative, or call us at (800) 551-8043. The Trust will accept a
exchange by PHONE request by phone if this feature was previously established on your account.
See the "Your Account" section for further information.
- ----------------------------------------------------------------------------------------------------------------------------------
How to request an Put your exchange request in writing, including: the name on the account, the name of the Fund and the
exchange by MAIL account number you are exchanging from, the shares or dollar amount you wish to exchange, and the Fund
you wish to exchange to. Mail this request to: PO BOX 8326, BOSTON, MA 02266-8326.
</TABLE>
34
<PAGE>
YOUR ACCOUNT
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for the Fund is
determined each business day at the close of regular trading on the New
York Stock Exchange (usually 4 p.m. Eastern Time) by dividing the Class'
net assets by the number of its shares outstanding.
BUY AND SELL PRICES. When you buy shares, you pay the NAV, as described
earlier. When you sell shares, you receive the NAV. Your financial
institution may charge you a fee to execute orders on your behalf.
EXECUTION OF REQUESTS. Each Fund is open on the days the New York stock
Exchange is open, usually Monday-Friday. Buy and sell requests are
executed at the NAV next calculated after your request is received in good
order by the transfer agent or another agent designated by the Trust.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing. Each Fund
reserves the right to reject any purchase or to suspend or modify the
continuous offering of its shares. Your financial representative is
responsible for forwarding payment promptly to the transfer agent. The
Trust reserves the right to cancel any buy request if payment is not
received within three days.
In unusual circumstances, any Fund may temporarily suspend the processing
of sell requests, or may postpone payment of proceeds for up to three
business days or longer, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, the Trust will
take measures to verify the identity of the caller, such as asking for
name, account number, Social Security or taxpayer ID number and other
relevant information. If these measures are not taken, your Fund may be
responsible for any losses that may occur in your account due to an
unauthorized telephone call.
EXCHANGES. You may exchange shares of any Class for shares of the same
Class (A, B, or C) of any other Fund, generally without paying any
additional sales charges. You may also exchange shares of any Fund for
shares of the Money Market Portfolio. Class C shares purchased through an
exchange from a like Class will continue to age from the original date and
will retain the same CDSC rate as they had before the exchange. The
holding period of Money Market Fund shares purchased through an exchange
from Class B or C shares is excluded from the calculation of the holding
period on Class B and C shares.
To protect the interests of other investors in a Fund, the Trust may cancel
the exchange privileges of any parties that, in the opinion of the
Investment Adviser, are using market timing strategies that adversely
affect the Fund. Guidelines for exchanges are available from the
Distributor upon request. A Fund may also refuse any exchange order.
CERTIFICATED SHARES. Most shares are electronically recorded. If you wish
to have certificates for your shares, please write to the transfer agent.
Certificated shares can only be sold by returning the certificates to the
transfer agent, along with a letter of instruction or a stock power and a
signature guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS. When you place a request to sell
shares for which the purchase money has not yet been collected, the request
will be executed in a timely fashion, but the Fund will not release the
proceeds to you until your purchase payment clears. This may take up to
fifteen calendar days after the purchase.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be addressed to the
Trust, c/o the Trust's transfer agent,
State Street Bank and Trust Company
Attention: Nicholas-Applegate Mutual Funds
P.O. Box 8326
Boston, MA 02266-8326
Telephone inquiries can be made by calling 1-800-551-8043 or, from outside
the U.S., 1-617-774-5000 (collect).
FEATURES AND ACCOUNT POLICIES
The services referred to in this section may be terminated or modified at
any time upon 60 days' written notice to shareholders. Shareholders
seeking to add to, change or cancel their selection of available services
should contact the transfer agent at the address and telephone number
provided above.
RETIREMENT PLANS. You may invest in each Fund through various retirement
plans, including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans,
457 plans, and all qualified retirement plans. For further information
about any of the plans, agreements, applications and annual fees, contact
the Distributor, your financial representative or plan sponsor. To
determine which retirement plan is appropriate for you, consult your tax
adviser.
ACCOUNT STATEMENTS. In general, you will receive account statements as
follows:
- After every transaction that affects your account balance.
- After any changes of name or address of the registered owner(s).
- In all other circumstances, every quarter.
Every year you will also receive an applicable tax information statement,
mailed by January 31.
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DIVIDENDS. The Funds generally distribute most or all of their net
earnings in the form of dividends. Each Fund pays dividends as follows:
Annually Quarterly Monthly
-------- --------- -------
International Core Growth Balanced Growth Fully Discretionary
Worldwide Growth Income & Growth High Yield Bond
International Small Cap Money Market
Emerging Countries
Large Cap Growth
Core Growth
Value
Emerging Growth
DIVIDEND REINVESTMENTS. If you choose this option, or if you do not
indicate any choice, your dividends will be reinvested on the ex-dividend
date. Alternatively, you can choose to have a check for your dividends
mailed to you. Interest will not accrue or be paid on uncashed dividend
checks.
SHAREHOLDER SERVICES. The Investment Adviser may make payments from its
own resources to brokers, consultants and financial institutions for
performing certain services for shareholders and for the maintenance
of shareholder accounts.
TAXABILITY OF DIVIDENDS. As long as a Fund meets the requirements for
being a tax-qualified regulated investment company, which each Fund has in
the past and intends to in the future, it pays no federal income tax on the
earnings it distributes to shareholders.
Consequently, dividends you receive from a Fund whether reinvested or taken
as cash, are generally considered taxable. Dividends from a Fund's
long-term capital gains are taxable as capital gains; dividends from other
sources are generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a
dividends-received deduction for a portion of certain dividends they
receive.
The tax information statement that is mailed to you details your dividends
and their federal tax category, although you should verify your tax
liability with your tax professional.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and
the sale price of the shares you sell or exchange, you may have a gain or a
loss on the transaction. You are responsible for any tax liabilities
generated by your transactions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY). If you draw down a non-retirement
account so that its total value is less than the Fund minimum, you may be
asked to purchase more shares within 60 days. If you do not take action,
the Fund may close out your account and mail you the proceeds. Your
account will not be closed if its drop in value is due to Fund performance.
AUTOMATIC WITHDRAWALS. You may make automatic withdrawals from a Fund of
$50 or more on a monthly or quarterly basis if you have an account of
$5,000 or more in the Fund. Withdrawal proceeds will normally be received
prior to the end of the month or quarter. See the account application for
further information.
AUTOMATIC INVESTMENT PLAN. You may make regular monthly or quarterly
investments in Class A, B and C Shares of each Fund through automatic
withdrawals of specified amounts from your bank account once an automatic
investment plan is established. See the account application for further
details about this service or call the Transfer Agent at 1-800-551-8043.
CROSS-REINVESTMENT. You may cross-reinvest dividends or dividends and
capital gains distributions paid by one Fund into Class A, B and C
Shares of another Fund, subject to conditions outlined in the Statement
of Additional Information and the applicable provisions of the qualified
retirement plan.
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<PAGE>
ORGANIZATION AND MANAGEMENT
INVESTMENT ADVISER COMPENSATION
Each Fund pays the Investment Adviser a fee pursuant to an investment
advisory agreement. The Emerging Countries Fund pays an advisory fee at
the annual rate of 1.25% of the Fund's net assets. The Worldwide,
International Growth and International Small Cap Funds each pay an
advisory fee at the annual rate of 1.00% on the first $500 million of each
Fund's net assets, .90% on the next 500 million of each Fund's net assets,
and .85% on net assets on each Fund in excess of $1 billion. The Fully
Discretionary Fund pays at the annual rate of 0.45% of the first $500
million of the Fund's average net assets, 0.40% of the next $250 million of
net assets, and 0.35% of net assets in excess of $750 million. The High
Yield Bond Fund pays at the annual rate of 0.60% of the Fund's net assets.
The Emerging Growth Fund pays at the annual rate of 1.00% of the Fund's net
assets. The Large Cap Growth, Core Growth, Value, Income & Growth, and
Balanced Growth Funds each pay at the annual rate of 0.75% of the first
$500 million of the Fund's net assets, 0.675% of the next $500 million of
net assets, and 0.65% of net assets in excess of $1 billion.
The Investment Adviser has agreed to waive or defer its management fees
payable by the Funds, and to absorb other operating expenses of the Funds
and the Portfolios, so that the expenses for the Portfolio will not exceed
the following expense ratios on an annual basis through March 31, 1998:
Worldwide Growth Class A, B & C - 1.85%, 2.50%, and 2.50%; International
Small Cap Growth Class A, B & C - 1.95%, 2.60% and 2.60%; Emerging
Countries - Class A, B & C - 2.25%, 2.90% and 2.90%; International Core
Growth Class A, B & C - 1.95%, 2.60% and 2.60%; Income & Growth, Balanced
Growth, Large Cap, Value and Core Growth Class A, B & C - 1.60%, 2.25% and
2.25%; Emerging Growth Class A, B & C - 1.95%, 2.60% and 2.60%; Fully
Discretionary Class A, B & C - 0.95%, 1.35% and 1.35%; Money Market Fund -
1.10%; Value Fund - _____%; and High Yield Bond Fund - ________%. Each
Portfolio will reimburse the Investment Adviser for fees deferred or other
expenses paid pursuant to this Agreement in later years in which operating
expenses for the Fund are less than the percentage limitation set forth
above for any such year.
ADMINISTRATOR COMPENSATION
The Funds pay administrative fees for administrative personnel and
services (including certain legal and financial reporting services). Each
Fund pays Nicholas-Applegate Capital Management an annual fee of .10% of
net assets. Each Fund pays Investment Company Administration Corporation
(ICAC) an annual fee.
DISTRIBUTOR:
Nicholas-Applegate Securities
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8045
PORTFOLIO TRADES
The Investment Adviser is responsible for the Funds' portfolio
transactions. In placing portfolio trades, the Investment Adviser may use
brokerage firms that sell shares of the Fund or that provide research
services to the Fund, but only when the Investment Adviser believes no
other firm offers a better combination of quality execution (i.e.
timeliness and completeness) and favorable price. The Investment Adviser
expects high annual portfolio turnover up to 200%. This is generally
higher than other funds and will result in the Funds incurring higher
brokerage costs.
INVESTMENT OBJECTIVE
Each Fund's investment objective is fundamental and may only be changed
with shareholder approval.
The fundamental limitations are described in the Statement of Additional
Information. All other changes may be made by the Board of Trustees
without shareholder approval.
DIVERSIFICATION
All the Funds are diversified.
PRIOR MASTER-FEEDER STRUCTURE
Prior to _________, 199_, the various Classes of each of the Funds were
separate Portfolios of the Trust, and invested all of their assets in
corresponding portfolios of Nicholas-Applegate Investment Trust (the
"Master Trust"). In this "master-feeder" structure, the Investment
Adviser served as the adviser to the Master Trust, and the Trust had no
separate adviser. The master-feeder structure was terminated, with the
approval of the shareholders of the Trust, in order to achieve certain
economies for the Trust
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<PAGE>
PORTFOLIO TEAMS
EQUITY MANAGEMENT - INTERNATIONAL/GLOBAL
CATHERINE SOMHEGYI, PARTNER
Chief Investment Officer - Global Equity Management
Joined firm in 1987; prior investment management experience with
Professional Asset Securities, Inc. and Pacific Century Advisers
M.B.A. and B.S. - University of Southern California
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP GROWTH,
EMERGING COUNTRIES, AND EMERGING GROWTH
LARRY SPEIDELL, PARTNER, CFA
Director of Global/Systematic Portfolio Management and Research
Joined firm in 1994; 23 years prior investment management experience with
Batterymarch Financial Management and Putnam Management Company
M.B.A. - Harvard University; B.E. - Yale University
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP GROWTH,
EMERGING COUNTRIES, AND VALUE
JOHN J. KANE, PARTNER
Portfolio Manager - U.S. Systematic
Joined firm in 1994; 25 years prior investment management/economics experience
with ARCO Investment Management Company and General Electric Company
M.A. and B.A. - Columbia University; M.B.A. - University of California, Los
Angeles
WORLDWIDE GROWTH, AND VALUE
AARON HARRIS
Portfolio Manager - Emerging Countries
Joined firm in 1995; 1 year prior investment management experience at Chemical
Bank
B.A. - Princeton University
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP, AND
EMERGING COUNTRIES
PEDRO V. MARCAL
Portfolio Manager - Emerging Countries
Joined firm in 1994; 5 years prior investment management experience with A.B.
Laffer, V.A. Canto & Associates, and A-Mark Precious Metals
B.A. - University of California, San Diego
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP, AND
EMERGING COUNTRIES
ESWAR MENON
Portfolio Manager - Emerging Countries
Joined firm in 1995; 5 years prior investment management experience with
Koeneman Capital Management and Integrated Device Technology
M.B.A., summa cum laude - University of Chicago;
M.S. - University of California, Santa Barbara;
B.S. - Indian Institute of Technology, Madras
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP, AND
EMERGING COUNTRIES
LORETTA J. MORRIS
Portfolio Manager - International
Joined firm in 1990; 10 years prior investment management experience with
Collins Associates
Attended California State University, Long Beach;
CFA Level II candidate
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, AND INTERNATIONAL SMALL CAP GROWTH
ALEX MUROMCEW
Portfolio Manager - International
Joined firm in 1996; 6 years prior investment management experience with Jardine
Fleming Securities (Japan); Emerging Markets Investors Corporation; Teton
Partners LP
M.B.A. - Stanford University; B.A. - Dartmouth College
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, AND INTERNATIONAL SMALL CAP GROWTH
ERNESTO RAMOS, PH.D.
Portfolio Manager - International
Joined firm in 1994; 14 years prior investment management and quantitative
research experience with Batterymarch Financial Management; Bolt Beranek &
Newman Inc.; and Harvard University
Ph.D. - Harvard University; B.S. - Massachusetts Institute of Technology
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP GROWTH, AND
EMERGING COUNTRIES
MELISA A. GRIGOLITE
Portfolio Manager
Joined firm in 1991; prior experience with SGPA Architecture and Planning
M.S. - San Diego State University; B.S. Southwest Missouri State University
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, AND INTERNATIONAL SMALL CAP
JOHN TRIBOLET
Investment Analyst
Joined firm in 1997; 5 years prior experience with Kemper Securities, Inc. and
PaineWebber
M.B.A. - University of Chicago; B.A. - Columbia University
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, AND INTERNATIONAL SMALL CAP
JESSICA HILINSKI
Assistant Portfolio Manager
Joined firm in 1996; 3 years prior experience in Eaton Vance Management and
Union Capital Advisors
Attended University of Pennsylvania
EMERGING COUNTRIES
AYLIN UCKUNKAYA
Investment Analyst
Joined firm in 1997; 4 years investment management experience with Global
Securities
B.A. Istanbul University
EMERGING COUNTRIES
JON BORCHARDT
Portfolio Manager
Joined firm in 1994; 5 years prior investment management experience with Union
Bank
B.S. University of San Francisco
EMERGING COUNTRIES
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EQUITY MANAGEMENT - U.S.
JOHN C. MARSHALL, JR., PARTNER
Chief Investment Officer - Institutional Equity Management
Joined firm in 1989; 8 years prior investment management experience with Pacific
Century Advisers; San Diego Trust & Savings Bank; Howard, Weill, Labouisse,
Fredrichs Inc.
M.B.A. and B.B.A. - Southern Methodist University
CORE GROWTH, AND LARGE CAP GROWTH
CATHERINE SOMHEGYI, PARTNER
Chief Investment Officer - Global Equity Management
Joined firm in 1987; prior investment management experience with Professional
Asset Securities, Inc. and Pacific Century Advisers
M.B.A. and B.S. - University of Southern California
EMERGING GROWTH, BALANCED GROWTH, AND INCOME & GROWTH
THOMAS BLEAKLEY
Portfolio Manager
Joined firm in 1995; 3 years prior investment management experience with
Twentieth Century Investors and Dell Computer Corporation
M.B.A. - University of Texas - Boston University
EMERGING GROWTH
SANDRA DURN
Portfolio Manager
Joined firm in 1994; prior experience at Science Solutions, Inc. and San Diego
State University Economics Department (instructor)
M.A. - San Diego State University; B.A. - University of Maryland
INCOME & GROWTH
ANDREW B. GALLAGHER
Portfolio Manager
Joined firm in 1992; 7 years prior investment management experience with Pacific
Century Advisors and Sentinel Asset Management
M.B.A. - San Diego State University; B.A. - University of California, Irvine
CORE GROWTH, AND LARGE CAP GROWTH
RONALD J. KRYSTYNIAK CFA
Portfolio Manager
Joined firm in 1996; 7 years prior investment management experience with Pilgrim
Baxter & Associates and Peterson Consulting & Company
B.S. - Syracuse University
EMERGING GROWTH
MAREN LINDSTROM
Portfolio Manager
Joined firm in 1994; 5 years prior investment management experience with Societe
Generale; Banque D'Orsay; and Prudential Asset Management
M.B.A. - University of California, Los Angeles;
B.A. - University of Michigan
CORE GROWTH, INCOME & GROWTH
JOHN C. MCCRAW
Portfolio Manager
Joined firm in 1992; prior investment management experience with Nations Bank
M.B.A. - University of California, Irvine;
B.A. - Flagler College
EMERGING GROWTH
STAN ROGERS
Portfolio Manager
Joined firm in 1997; 7 years prior investment management experience with
Tennessee Consolidated Retirement System
B.A. - The University of the South
INCOME & GROWTH
THOMAS J. SULLIVAN
Portfolio Manager
Joined firm in 1994; 2 years prior investment experience with Donaldson, Lufkin
& Jenrette Securities Corp.
B.S. - Rochester Institute of Technology
CORE GROWTH
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<PAGE>
FIXED INCOME
FRED S. ROBERTSON, III, PARTNER
Chief Investment Officer - Fixed Income
Joined firm in 1995; 22 years prior investment management experience with
Criterion Investment Management Company and DuPont Chemical Pension Fund
M.B.A. - College of William and Mary; B.S. - Cornell University
BALANCED GROWTH, AND FULLY DISCRETIONARY
JAMES E. KELLERMAN, PARTNER
Portfolio Manager
Joined firm in 1995; 20 years prior investment management experience with
Criterion Investment Management Company and Brown Brothers Harriman and
Equitable Life Insurance
M.B.A. - St. John's University; B.B.A. - Susquehanna University
BALANCED GROWTH, AND FULLY DISCRETIONARY
CLAUDIA BENGSTON
Portfolio Manager
Joined firm in 1995; 18 years prior investment experience with Criterion
Investment Management Company and Gibralter Savings
B.S. - University of Oklahoma
MONEY MARKET
MALCOM S. DAY, CFA
Portfolio Manager
Joined firm in 1995; 3 years prior investment management experience with Payden
& Rygel
M.B.A. - University of California, Los Angeles;
B.S. - Northern University
BALANCED GROWTH, AND FULLY DISCRETIONARY
DOUGLAS FORSYTH, CFA
Portfolio Manager
Joined firm in 1994; 3 years prior investment management experience with AEGON
USA
B.B.A. - University of Iowa
HIGH YIELD BOND
JAN FRIEDLI
Portfolio Manager
Joined firm in 1997; 7 years prior investment management experience with Stone
Capital Management, PIMCO, and the Vanguard Group, Inc.
M.B.A. - University of Chicago, B.S. - Villanova University
HIGH YIELD BOND
SUSAN MALONE
Portfolio Manager
Joined firm in 1996; 7 years prior investment management experience with BEA
Associates
M.B.A. - New York University; B.S. - Carnegie Mellon University
BALANCED GROWTH
ASHVIN SYAL, CFA
Portfolio Manager
Joined firm in 1996; Six years prior investment management experience with
Payden & Rygel
M.B.A. - University of California, Los Angeles;
M.M.S. and B.S. - University of Bombay
FULLY DISCRETIONARY
40
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RISK FACTORS AND SPECIAL CONSIDERATIONS
MUTUAL FUND CONSIDERATIONS IN GENERAL
Prospective investors should know that any mutual fund investment is subject to
market fluctuations and other risks inherent in investing in securities. There
can be no assurance that your investment will increase in value. The value of
your investment will go up and down depending upon market forces and you may not
recoup your original investment. You should consider an investment in any of
the Funds a long-term investment.
DERIVATIVE CONTRACTS AND SECURITIES CONSIDERATIONS
The term "derivative" traditionally applies to certain contracts that "derive"
their value from changes in the value of underlying securities, currencies,
commodities or indices. Investors refer to certain types of securities that
incorporate the performance characteristics of these contracts as derivatives.
Derivatives are sophisticated instruments that typically involve a small
investment of cash relative to the magnitude of risks assumed. These include
swap agreements, options, futures, and convertible securities. The Trust seeks
to use derivative contracts and securities to reduce a Fund's volatility and
increase its total performance. While the price reaction of certain derivatives
to market changes may differ from traditional investments such as stocks and
bonds, derivatives do not necessarily present greater market risks than
traditional investments. Derivatives are also subject to credit risks related
to the counterparty's ability to perform, and any deterioration in the
counterparty's creditworthiness could adversely affect the instrument. The
Funds will only use derivatives in manner consistent with their investment
objectives, policies and limitations.
GLOBAL INVESTING CONSIDERATIONS
CURRENCY FLUCTUATIONS. Because the assets in each Funds may be invested in
instruments issued by foreign companies, the principal, income and sales
proceeds may be paid to the Funds in local foreign currencies. A reduction in
the value of local currencies relative to the U.S. dollar could mean a
corresponding reduction in the value of the Funds. The value of a foreign
security generally tends to decrease when the value of the U.S. dollar rises
against the foreign currency in which the security is denominated and tends to
increase when the value of the dollar falls against such currency. The Funds
may incur costs in connection with conversions between currencies.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. The economies of many of the countries
where the Funds may invest may be subject to a substantially greater degree of
social, political and economic instability than the United States. Such
instability may result from, among other things, the following: authoritarian
governments; popular unrest associated with demands for improved political,
economic and social conditions; internal insurgencies and terrorist activities;
hostile relations with neighboring countries; and drug trafficking. This
instability might impair the financial conditions of issuers or disrupt the
financial markets in which the Funds invest.
The economies of foreign countries may differ favorably or unfavorably and
significantly from the economy of the United States in such respects as the rate
of growth of gross domestic product, rate of inflation, currency depreciation,
savings rates, fiscal balances, and balance of payments positions. Governments
of many foreign countries continue to exercise substantial control over private
enterprise and own or control many companies. Government actions could have a
significant impact on economic conditions in certain countries which could
affect the value of the securities of the Funds. For example, a foreign country
could nationalize an entire industry. In such a case, the Funds may not be
fairly compensated for their losses and might lose their entire investment in
the country involved.
The economies of certain foreign countries are heavily dependent upon
international trade and accordingly are affected by protective trade barriers
and the economic conditions of their trading partners. The enactment by the
United States or other principal trading partners of protectionist legislation
could have a significant adverse effect on the securities markets of these
countries. Some foreign countries (mostly in Africa and Latin America) are
large debtors of commercial banks, foreign governments, and supranational
organizations. These obligations, as well as future restructurings of debt, may
affect the economic performance and political and social stability of these
countries.
For example, Hong Kong transferred its sovereignty from Great Britain to the
People's Republic of China in 1997. China has espoused policies antagonistic to
free enterprise capitalism and democracy. There can be no assurance that China
will continue to protect property rights in Hong Kong after 1997, although China
has moved toward free enterprise, and has established stock exchanges of its
own.
INFLATION. Certain foreign countries, especially many emerging countries, have
experienced substantial, and in some periods extremely high and volatile, rates
of inflation. Rapid fluctuations in inflation rates and wage and price
controls may continue to have unpredictable effects on the economies, companies
and securities markets of these countries.
MARKET CHARACTERISTICS
DIFFERENCES IN SECURITIES MARKETS. The securities markets in foreign countries
have substantially less trading volume than the markets in the United States and
debt and equity securities of many companies listed on such markets may be less
liquid and more volatile than comparable securities in the United States. Some
of the stock exchanges in foreign countries, to the extent that established
markets exist, are in the earlier stages of their development. The limited
liquidity of certain securities markets may affect the ability of each Fund to
buy and sell securities at the desired price and time. In addition, the
securities markets of some foreign countries are susceptible to being influenced
by large investors trading significant blocks of stocks.
Trading practices in certain foreign countries are also significantly different
from those in the United States. Local commercial, corporation and securities
laws govern the sale and resale of securities, and certain restrictions may
apply. Although brokerage commissions are generally higher than those in the
U.S., the Investment Adviser will seek to achieve the most favorable net
results. In addition, securities settlements and clearance procedures may be
less developed and less reliable than those in the United States. Delays in
settlement could result in temporary periods in which the assets of the Funds
are not fully invested, or could result in a Fund being unable to sell a
security in a falling market.
CUSTODIAL AND REGISTRATION PROCEDURES. Systems for the registration and
transfer of securities in foreign markets can be less developed than similar
systems in the United States. There may be no standardized process for
registration of securities or a central registration system to track share
ownership. The process for transferring shares may be cumbersome, costly,
time-consuming and uncertain. For example, the share registrar may require a
shareholder to travel to that country to present required documentation before
41
<PAGE>
buying or selling securities. In some instances, there may be no
requirements to maintain back-up shareholder records. Failure by the share
registrar to properly maintain shareholder records, protect the same against
fire or computer virus, or carry adequate insurance against such occurrences,
potentially could result in a loss of a Fund's investment in those securities.
GOVERNMENT SUPERVISION OF SECURITIES MARKETS. Disclosure and regulatory
standards in many foreign countries are in many respects less stringent than
those in the United States. There may be less government supervision and
regulation of securities exchanges, listed companies, investors, and brokers in
foreign countries than in the United States, and enforcement of existing
regulations may be extremely limited.
FINANCIAL INFORMATION AND REPORTING STANDARDS. Issuers in foreign countries are
generally subject to accounting, auditing, and financial standards and
requirements that differ, in some cases materially, from those in the United
States. In particular, the assets and profits appearing in financial statements
may not reflect their financial position or results in the way they would be
reflected had the statements been prepared in accordance with U.S. generally
accepted accounting principles. Consequently, financial data may not reflect
the true condition of those issuers and securities markets.
LOWER RATED SECURITIES
CONSIDERATIONS
The Balanced Growth, Income & Growth, Fully Discretionary and High Yield Bond
Funds each invest in debt and convertible securities below investment grade.
These securities usually offer higher yields than higher rated securities but
are also subject to more risk than higher rated securities. Lower-rated or
unrated debt obligations are more likely to react to developments affecting
market and credit risks that are more high-rated securities, which react
primarily to movements in the past level of interest rates. In the past,
economic downturns or increases in interest rates caused a higher incidence of
default by issuers of lower-rated securities.
In some cases, such obligations may be highly speculative, and may have poor
prospects for reaching investment grade. To the extent the issuer defaults, the
Fund may incur additional expenses in order to enforce its rights or to
participate in a restructuring of the obligation. In addition, the prices of
lower-rated securities generally tend to be more volatile and the market less
liquid than those of higher-rated securities. Consequently, the Funds may at
times experience difficulty in liquidating their investments at the desired
times and prices.
The average percentages of assets invested by the Funds listed below in bonds
of each permissible rating, on a monthly dollar-weighted basis, were as follows
for the year ended March 31, 1997: Income & Growth--AA__%; A__%; BBB__%; BB__%;
B__%; CCC__%; nonrated__%; Balanced Growth--AA__%; A__%; BBB__%; BB__%; B__%;
CCC__%; nonrated__%; Fully Discretionary--AA__%; A__%; BBB__%; BB__%; B__%;
CCC__%; nonrated__%; High Yield Bond--AA__%; A__%; BBB__%; BB__%; B__%; CCC__%;
nonrated__%.
THE FUNDS' INVESTMENTS
EQUITY SECURITIES. Equity securities include common stocks, convertible
securities and warrants. The Funds may invest in growth companies, cyclical
companies, companies with smaller market capitalizations, or companies believed
to be undergoing a basic change in operations or markets. Although equity
securities have a history of long-term growth in value, their prices rise and
fall as a result of changes in the company's financial condition as well as
movements in the overall securities markets.
SMALLER ISSUERS. Smaller and medium sized issuers may be less seasoned, have
more limited product lines, markets, financial resources and management depth,
and be more susceptible to adverse market conditions than larger issuers. As a
result, the securities of such smaller issuers may be less actively traded than
those of larger issuers and may also experience greater market volatility.
CONVERTIBLE SECURITIES. A convertible security is a fixed income equity
security that may be converted into a prescribed amount of common stock at a
specified formula. A convertible security entitles the owner to receive
interest until the security matures or is converted. Convertibles have several
unique investment characteristics such as: (a) higher yields than common stocks
but lower yields than straight debt securities; (b) lesser degree of fluctuation
in value than the underlying stock since they have fixed income characteristics;
and (c) potential for capital appreciation if the market price of the underlying
security increases.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
an issuer's inability to meet principal and interest payments on the obligation
(credit risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the credit-worthiness of the
issuer and general market liquidity (market risk). When interest rates decline,
the value of the Funds' debt securities can be expected to rise, and when
interest rates rise, the value of those securities can be expected to decline.
Debt securities with longer maturities tend to be more sensitive to interest
rate movements than those with shorter maturities.
Debt obligations carry a rating of at least BAA from Moody's or BBB from
Standard and Poor's, or a comparable rating from another rating agency or, if
not rated by an agency, determined by the Investment Adviser to be of comparable
quality. Bonds rated BBB or Baa may have speculative characteristics and
changes in economic circumstances are more likely to lead to a weakened
capacity to make interest and principal payments than higher rated bonds. For
a further explanation of these ratings, see the Statement of Additional
Information.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities such as U.S. Treasury bills, notes, bonds, and
certificates issued by the Government National Mortgage Association (GNMA) are
supported by the full faith and credit of the United States. Other U.S.
Government securities, such as securities issued by the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Bank Board, are supported
by the right of the issuer to borrow from the U.S. Treasury. Still others, such
as the Student Loan Marketing Association, are supported only by the credit of
the issuer. U.S. Government securities may include zero coupon securities that
are issued or purchased at a significant discount from face value.
ZERO COUPON SECURITIES. The Income & Growth and Balanced Growth Funds may
invest up to 35% of their net assets in zero coupon securities issued or
guaranteed by the U.S. Government and its agencies and instrumentalities. These
securities are sold at a substantial discount from face value and redeemed at
face value at their maturity date without interim payments of principal and
interest. They may be subject to greater volatility than other securities. In
addition, because income is accrued on a current basis, a Fund may have to sell
other portfolio securities to make necessary income distributions.
MORTGAGE-RELATED SECURITIES. Collateralized Mortgage Obligations (CMO's) are
debt obligations collateralized by a pool of mortgage loans or mortgage
passes-through securities. Typically CMOs are collateralized by certificates
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
such as GNMA. GNMA certificates are mortgaged-backed securities representing
part ownership of a pool of mortgage loans, which are issued by lenders such as
mortgage bankers, commercial banks, and savings
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associations, and are either insured by the Federal Housing Administration or
the Veterans Administration.
ASSET BACKED SECURITIES. The non-mortgage-related asset-backed securities in
which the High Yield Bond and Fully Discretionary Funds invest include, but
are not limited to, interests in pools of receivables, such as credit card
and accounts receivables and motor vehicle and other installment purchase
obligations and leases. Interests in these pools are not backed by the U.S.
Government and may or may not be secured.
The credit characteristic of asset-backed securities differs in a number of
respects from that of traditional debt securities. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to other debt obligations, and there is a possibility that recoveries
on repossessed collateral may not be available to support payment on these
securities
SOVEREIGN DEBT SECURITIES. Certain Funds may invest in sovereign debt
securities issued by governments of foreign countries. The sovereign debt in
which the Funds may invest may be rated below investment grade. These
securities usually offer higher yields than higher rated securities but are
also subject to greater risk than higher rated securities.
BRADY BONDS. Brady bonds represent a type of sovereign debt known as Brady
Bonds. These obligations were created under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady, in which
foreign entities issued these obligations in exchange for their existing
commercial bank loans. Brady Bonds have been issued by Argentina, Brazil, Costa
Rica, Dominican Republic, Mexico, Philippines, Uruguay and Venezuela, and may be
issued by other emerging countries.
INVESTMENT COMPANY SECURITIES. Each Fund may invest up to 10% of its total
assets in the shares of other investment companies. The Funds may invest in
money market mutual funds in connection with the management of their daily cash
positions. The Funds may also make indirect foreign investments through other
investment companies that have comparable investment objectives and policies as
the Funds. In addition to the advisory and operational fees each Fund bears
directly in connection with its own operation, the Funds would also bear their
pro rata portions of each other investment company's advisory and operational
expenses.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
securities that are considered illiquid. An illiquid investment is generally an
investment that is not registered in the under U.S. securities laws, or cannot
be disposed of within seven days in the normal course of business at
approximately the amount at which the Fund values it. Limitations on resale may
adversely affect the marketability of illiquid securities and the Fund may not
be able to dispose of these securities at the desired time and price. A Fund
may bear additional expenses if it has to register these securities under U.S.
securities laws before being resold.
TEMPORARY INVESTMENTS. The Funds may from time to time on a temporary basis to
maintain liquidity or when the Investment Adviser determines that the market
conditions call for a temporary defensive posture, invest all of their assets
in short-term instruments. These temporary investments include: notes issued
or guaranteed by the U.S. government, its agencies or instrumentalities;
commercial paper rated in the highest two rating categories; certificates of
deposit; repurchase agreements and other high grade corporate debt securities.
THE FUNDS' INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements, that is
the purchase by the Fund of a security that seller has agreed to buy back,
usually within one to seven days. The seller's promise to repurchase the
security is fully collateralized by securities equal in value to 102% of the
purchase price, including accrued interest. If the seller defaults and the
collateral value declines, the Fund might incur a loss. If the seller declares
bankruptcy, the Fund may not be able to sell the collateral at the desired time.
The Funds enter into these agreements only with brokers, dealers, or banks that
meet credit quality standards established by the Board of Trustees.
SECURITIES SWAPS. Securities swaps represent a technique primarily used to
indirectly participate in the securities market of a country from which a Fund
would otherwise be precluded for lack of an established securities custody and
safekeeping system. The Fund deposits an amount of cash with its custodian (or
the broker, if legally permitted) in an amount equal to the selling price of the
underlying security. Thereafter, the Fund pays or receives cash from the broker
equal to the change in the value of the underlying security.
SHORT SALES. A "short sale" is the sale by the Fund of a security which has
been borrowed from a third party on the expectation that the market price will
drop. If the price of the security drops, the Fund will make a profit by
purchasing the security in the open market at lower price than at which it sold
the security. If the price of the security rises, the Fund may have to cover
its short position at a higher price than the short sale price, resulting in a
loss. A short sale can be covered or uncovered. In a covered short sale, the
Fund either (1) borrows and sells securities it already owns (also known as a
short sale "against the box"), or (2) deposits in a segregated account cash,
U.S. government securities, or other liquid securities in an amount equal to the
difference between the market value of the securities and the short sale price.
Use of uncovered short sales is a speculative investment technique and has
potentially unlimited risk. Accordingly, a Fund will not make uncovered short
sales in an amount exceeding the lesser of 2% of the Fund's net assets or 2% of
the securities of such class of the issuer. The Board of Trustees has
determined that no Fund will make short sales if to do so would create
liabilities or require collateral deposits of more than 25% of the Fund's total
assets.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Fund may purchase or sell
securities for delivery at a future date, generally 15 to 45 days after the
commitment is made. The other party's failure to complete the transaction may
cause the Fund to miss a price or yield considered to be advantageous. A Fund
may not purchase when-issued securities or enter into firm commitments if, as a
result, more than 15% of the Fund's net assets would be segregated to cover such
securities.
BORROWING. Each Fund may borrow up to 20% of its total assets for temporary,
extraordinary or emergency purposes. Each Fund may also borrow money through
reverse repurchase agreements, uncovered short sales, and other techniques. All
borrowings by a Fund cannot exceed one-third of a Fund's total assets. As a
consequence of borrowing, a Fund will incur obligations to pay interest,
resulting in an increase in expenses.
SECURITIES LENDING. Each Fund may lend securities to financial institutions
such as banks, broker/dealers and other recognized institutional investors in
amounts up to 30% of the Fund's total assets. These loans earn income for the
Fund and are collateralized
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by cash, securities, letters of credit or any combination thereof. The Fund
might experience loss if the financial institution defaults on the loan.
FOREIGN CURRENCY TRANSACTIONS. Each Fund investing in foreign securities may
enter in to foreign currency transactions either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts in
order to have the necessary currencies to settle transactions. Each such
Fund may also enter into foreign currency transactions to protect Fund assets
against adverse changes in foreign currency exchange rates. Such efforts
could limit potential gains that might result from a relative increase in
the value of such currencies, and might, in certain cases, result in losses
to a Fund.
OPTIONS. Certain Funds may deal in options on securities, securities indices
and foreign currencies. The Funds may use options to manage stock prices,
interest rate and currency risks. A Fund may not purchase or sell options if
more than 25% of its net assets would be hedged. The Funds may also write
covered call options and secured put options to seek to generate income or lock
in gains on up to 25% of their net assets.
FUTURES AND OPTIONS ON FUTURES. Certain Funds may enter into futures contracts,
or options thereon, involving foreign currency, interest rates, securities, and
securities indices, for hedging purposes only. A stock index futures contract is
a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the underlying stocks in the index is made. As a
general rule, no Fund will purchase or sell futures if, immediately thereafter,
more than 25% of its net assets would be hedged.
RISKS OF FUTURES AND OPTIONS TRANSACTIONS. When a Fund uses options, futures and
options on futures as hedging devices, there is a risk that the prices of the
hedging vehicles may not correlate perfectly with the prices of the securities
in the portfolio. This may cause the futures contract and any related options
to react differently than the Fund's portfolio securities to market changes. In
addition, the Investment Adviser could be incorrect in its expectations about
the direction or the extent of market movements. In these events, a Fund could
lose money on the futures contracts or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Investment Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market will exist for these instruments.
NON-HEDGING STRATEGIC TRANSACTIONS. 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 Fully Discetionary 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" and "Futures
and Options on Futures."
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 are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A - Bonds Rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade 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.
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
regarding as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modified 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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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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FOR MORE INFORMATION
Two documents are available that offer further information on the
Nicholas-Applegate Mutual Funds:
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management, and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the Funds.
A current SAI has been filed with the Securities and
Exchange Commission and is incorporated by reference into this prospectus.
To request a free copy of the current annual/semi-annual report or SAI , please
call or write:
Nicholas-Applegate Mutual Funds
P.O. Box 82169
San Diego, CA 92138-2169
Telephone: (800) 551-8643
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NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
CLASS A, B AND C SHARES
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
_________, 1998
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 the Class A, B and C shares of these portfolios (each a
"Fund" and collectively the "Funds"): Nicholas-Applegate Large Cap Growth Fund
(the "Large Cap Fund"); Nicholas-Applegate Core Growth Fund (the "Core Growth
Fund"); Nicholas-Applegate Value Fund (the "Value Fund"); Nicholas-Applegate
Emerging Growth Fund (the "Emerging Growth Fund"); Nicholas-Applegate Income &
Growth Fund (the "Income & Growth Fund"); Nicholas-Applegate Balanced Growth
Fund (the "Balanced Fund"); Nicholas-Applegate Worldwide Growth Fund (the
"Worldwide Fund"); Nicholas-Applegate International Core Growth Fund (the
"International Core Growth Fund)"; Nicholas-Applegate International Small Cap
Growth Fund (the "International Small Cap Fund"); Nicholas-Applegate Emerging
Countries Fund (the "Emerging Countries Fund"); Nicholas-Applegate Fully
Discretionary Fixed Income Fund (the "Fully Discretionary Fund");
Nicholas-Applegate High Yield Bond Fund (the "High Yield Bond Fund"); and
Nicholas-Applegate Money Market Fund (the "Money Market Fund").
This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
Funds' Prospectus and should be read in conjunction with such Prospectus. The
Prospectus may be obtained without charge by calling or writing the Trust at the
address and phone number given above.
TABLE OF CONTENTS
Page
General Information B-3
Investment Objectives, Policies and Risks B-3
Investment Restrictions B-32
Principal Holders of Securities B-35
Trustees and Principal Officers B-35
Investment Adviser B-38
Administrators B-40
Distributor B-41
Portfolio Transactions and Brokerage B-45
Purchase and Redemption of Fund Shares B-47
Shareholder Services B-50
Net Asset Value B-52
Dividends, Distributions and Taxes B-54
Performance Information B-58
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel B-70
Miscellaneous B-70
Appendix A - Description of Securities Ratings A-1
SUBJECT TO COMPLETION: ___________________,1998. INFORMATION CONTAINED HEREIN
IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO
THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE
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PROSPECTUS IS DELIVERED IN FINAL FORM. UNDER NO CIRCUMSTANCES SHALL THIS
STATEMENT OF ADDITIONAL INFORMATION CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF SUCH
JURISDICTION.
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GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under
the laws of Delaware. Information regarding 13 Funds of the Trust is included
in this Statement of Additional Information. Each of the Funds, except the
Money Market Fund, consists of one or more classes of shares, including the
Class A, B and C shares which are the subject of this Statement of Additional
Information.
Prior to a reorganization of the Trust which became effective on
______,1998 (the "Reorganization"), the Trust offered shares in a number of
separate diversified portfolios each of which invested all of its assets in a
corresponding master fund of Nicholas-Applegate Investment Trust (the "Master
Trust"). The Reorganization eliminated this two-tiered "master-feeder"
structure.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion describes the various investment policies and
techniques employed by the Funds. There can be no assurance that any of the
Funds will achieve their investment objectives.
EQUITY SECURITIES OF GROWTH COMPANIES
Each Fund (except the Money Market Fund) may invest in equity
securities of domestic and foreign companies, the earnings and stock prices of
which are expected by the Investment Adviser to grow at an above-average rate.
Such investments will be diversified over a cross-section of industries and
individual companies. For Funds other than the Large Cap Fund, some of these
companies will be organizations with market capitalizations of $500 million or
less or companies that have limited product lines, markets and financial
resources and are dependent upon a limited management group. Examples of
possible investments include emerging growth companies employing new technology,
cyclical companies, initial public offerings of companies offering high growth
potential, or other corporations offering good potential for high growth in
market value. The securities of such companies may be subject to more abrupt or
erratic market movements than larger, more established companies both because
the securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.
PREFERRED STOCK
Each Fund (except the Money Market Fund) may invest in preferred
stock. Preferred stock, unlike common stock, offers a stated dividend rate
payable from a corporation's earnings. Such preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest
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
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of preferred stocks on the distribution of a corporation's assets in the event
of a liquidation are generally subordinate to the rights associated with a
corporation's debt securities.
CONVERTIBLE SECURITIES AND WARRANTS
Each Fund (except the Money Market Fund) may invest in convertible
securities and warrants. The value of a convertible security is a function of
its "investment value" (determined by its yield in comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The credit
standing of the issuer and other factors may also affect the investment value of
a convertible security. The conversion value of a convertible security is
determined by the market price of the underlying common stock. If the
conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. To the
extent the market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly
influenced by its conversion value.
The market value of convertible debt securities tends to vary
inversely with the level of interest rates. The value of the security declines
as interest rates increase and increases as interest rates decline. Although
under normal market conditions longer term debt securities have greater yields
than do shorter term debt securities of similar quality, they are subject to
greater price fluctuations. A convertible security may be subject to redemption
at the option of the issuer at a price established in the instrument governing
the convertible security. If a convertible security held by a Fund is called
for redemption, the Fund must permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Rating
requirements do not apply to convertible debt securities purchased by the Funds.
As a matter of operating policy, no Fund will invest more than 5% of
its net assets in warrants. A warrant gives the holder a right to purchase at
any time during a specified period a predetermined number of shares of common
stock at a fixed price. Unlike convertible debt securities or preferred stock,
warrants do not pay a fixed dividend. Investments in warrants involve certain
risks, including the possible lack of a liquid market for resale of the
warrants, potential price fluctuations as a result of speculation or other
factors, and failure of the price of the underlying security to reach or have
reasonable prospects of reaching a level at which the warrant can be prudently
exercised (in which event the warrant may expire without being exercised,
resulting in a loss of the Fund's entire investment therein).
SYNTHETIC CONVERTIBLE SECURITIES.
The Large Cap, Income & Growth, International Core Growth and High
Yield Bond 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
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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 only invests in synthetic
convertibles with respect to companies whose corporate debt securities are rated
"A" or higher by Moody's or "A" or higher by S&P and will not invest more than
15% of its net assets in such synthetic securities and other illiquid
securities.
EURODOLLAR CONVERTIBLE SECURITIES
The Income & Growth, International Core Growth, Worldwide,
International Small Cap, Emerging Countries and High Yield Bond 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 equity securities of the same or a different issuer.
Interest and dividends on Eurodollar securities are payable in U.S. dollars
outside of the United States. The Fund may invest without limitation in
Eurodollar convertible securities that are convertible into foreign equity
securities listed, or represented by ADRs listed, on the New York Stock Exchange
or the American Stock Exchange or convertible into publicly traded common stock
of U.S. companies. The Fund may also invest up to 15% of its total assets
invested in convertible securities, taken at market value, in Eurodollar
convertible securities that are convertible into foreign equity securities which
are not listed, or represented by ADRs listed, on such exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
The Fully Discretionary and High Yield Bond 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."
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred
to as "junk bonds." Such bonds are subject to greater market fluctuations and
risk of loss of income and principal than higher rated bonds for a variety of
reasons, including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their
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principal and interest obligations, to meet projected business goals, and to
obtain additional financing. If the issuer of a bond defaults, a Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high yield bonds and the Funds' asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions,
it may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and this
may impact the Investment Adviser's ability to accurately value high yield
bonds and the Funds' assets and hinder the Funds' ability to dispose of the
bonds. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. The rating of
an issuer is also heavily weighted by past developments and does not necessarily
reflect probable future conditions. There is frequently a lag between the time
a rating is assigned and the time it is updated. Also, since credit rating
agencies may fail to timely change the credit ratings to reflect subsequent
events, the Investment Adviser must monitor the issuers of high yield bonds in
the Funds' portfolios to determine if the issuers will have sufficient cash
flow and profits to meet required principal and interest payments, and to assure
the bonds' liquidity so the Funds can meet redemption requests. The Income &
Growth and Balanced Funds will not retain more than 35% of their respective net
assets in non-investment grade debt securities, and the other Funds will not
retain more than 5% of their respective net assets in such securities.
SHORT-TERM INVESTMENTS
Each Fund may invest in any of the following securities and
instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Funds may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government.
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A Fund holding instruments of foreign banks or financial institutions
may be subject to additional investment risks that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. See "Foreign Investments" below. Domestic banks and
foreign banks are subject to different governmental regulations with respect to
the amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry depends largely
upon the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry. Federal and state laws and regulations require domestic banks
to maintain specified levels of reserves, limited in the amount which they can
loan to a single borrower, and subject to other regulations designed to promote
financial soundness. However, such laws and regulations do not necessarily
apply to foreign bank obligations that a Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under their respective investment
objectives and policies stated above and in their Prospectuses, a Fund may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in
excess of $100 million, based on latest published reports, or less than $100
million if the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Funds may invest a portion of their assets in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Funds may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage
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Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored instrumentalities
if it is not obligated to do so by law.
The International Core Growth, Worldwide, International Small Cap,
Emerging Countries, Fully Discretionary and High Yield Bond Funds may invest in
sovereign debt obligations of foreign countries. A number of factors affect a
sovereign debtor's willingness or ability to repay principal and interest in a
timely manner, including its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the sovereign debtor's policy toward principal international lenders and the
political constraints to which it may be subject. Emerging market governments
could default on their sovereign debt. Such sovereign debtors also may be
dependent on expected disbursements from foreign governments, multilateral
agencies and other entities abroad to reduce principal and interest arrearages
on their debt. The commitments on the part of these governments, agencies and
others to make such disbursements may be conditioned on a sovereign debtor's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to meet such conditions could
result in the cancellation of such third parties' commitments to lend funds to
the sovereign debtor, which may further impair such debtor's ability or
willingness to service its debt in a timely manner.
MUNICIPAL SECURITIES
The Fully Discretionary Fund may invest in debt obligations issued by
state and local governments, territories and possessions of the U.S., regional
government authorities, and their agencies and instrumentalities ("municipal
securities"). Municipal securities include both notes (which have maturities of
less than one year) and bonds (which have maturities of one year or more) that
bear fixed or variable rates of interest.
In general, "municipal securities" debt obligations are issued to
obtain funds for a variety of public purposes, such as the construction, repair,
or improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as well
as to raise funds for general operating expenses and lending to other public
institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Characteristics and methods of
enforcement of general obligation bonds vary according to the law applicable to
a particular issuer, and the taxes that can be levied for the payment of debt
service may be limited or unlimited as to rates or amounts of special
assessments. Revenue securities are payable only from the revenues derived from
a particular facility, a class of facilities or, in some cases, from the
proceeds of a special excise tax. Revenue bonds are issued to finance a wide
variety of capital projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Although the principal security behind these bonds
may vary, many provide additional security in the form of a debt service reserve
fund the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent
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subsidized and collateralized mortgages, and the net revenues from housing or
other public projects. Some authorities are provided further security in the
form of a state's assistance (although without obligation) to make up
deficiencies in the debt service reserve fund.
The Fund may purchase insured municipal debt in which scheduled
payments of interest and principal are guaranteed by a private, non-governmental
or governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of the Fund.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore,
as a result of legislation or other conditions, the power or ability of any
issuer to pay, when due, the principal of and interest on its municipal
obligations may be materially affected.
Moral Obligation Securities. Municipal securities may include "moral
obligation" securities which are usually issued by special purpose public
authorities. If the issuer of moral obligation bonds cannot fulfill its
financial responsibilities from current revenues, it may draw upon a reserve
fund, the restoration of which is moral commitment but not a legal obligation of
the state or municipality which created the issuer.
Industrial Development and Pollution Control Bonds. The Fund may
invest in tax-exempt industrial development bonds and pollution control bonds
which, in most cases, are revenue bonds and generally are not payable from the
unrestricted revenues of an issuer. They are issued by or on behalf of public
authorities to raise money to finance privately operated facilities for
business, manufacturing, housing, sport complexes, and pollution control.
Consequently, the credit quality of these securities is dependent upon the
ability of the user of the facilities financed by the bonds and any guarantor to
meet its financial obligations.
Municipal Lease Obligations. The Fund may invest in lease obligations
or installment purchase contract obligations of municipal authorities or
entities ("municipal lease obligations"). Although lease obligations do not
constitute general obligations of the municipality for which its taxing power is
pledged, a lease obligation is ordinarily backed by the municipality's covenant
to budget for, appropriate and make the payment due under the lease obligation.
A Fund may also purchase "certificates of participation," which are securities
issued by a particular municipality or municipal authority to evidence a
proportionate interest in base rental or lease payments relating to a specific
project to be made by the municipality, agency or authority. However, certain
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
any year unless money is appropriated for such purpose for such year. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of default and foreclosure might prove
difficult. In addition, these securities represent a relatively new type of
financing, and certain lease obligations may therefore be considered to be
illiquid securities.
The Fund will attempt to minimize the special risks inherent in
municipal lease obligations and certificates of participation by purchasing only
lease obligations which
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meet the following criteria: (1) rated A or better by at least one nationally
recognized securities rating organization; (2) secured by payments from a
governmental lessee which has actively traded debt obligations; (3) determined
by the Investment Adviser to be critical to the lessee's ability to deliver
essential services; and (4) contain legal features which the Investment Adviser
deems appropriate, such as covenants to make lease payments without the right of
offset or counterclaim, requirements for insurance policies, and adequate debt
service reserve funds.
Short-Term Obligations. The Fund may invest in short-term municipal
obligations. These securities include the following:
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
Revenue Anticipation Notes are issued in expectation of receipt of
other kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program. They also are usually general obligations of the
issuer.
Bond Anticipation Notes normally are issued to provide interim
financing until long-term financing can be arranged. The long-term bonds then
provide the money for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal National Mortgage Association or
the Government National Mortgage Association.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term
(365 days or less) promissory notes issued by municipalities to supplement their
cash flow.
ZERO COUPON SECURITIES
The Income & Growth, Balanced, Fully Discretionary, High Yield Bond
and Money Market Funds may each invest up to 35% of its net assets in zero
coupon securities issued or guaranteed by the U.S. Government and its agencies
and instrumentalities. Zero coupon securities may be issued by the U.S.
Treasury or by a U.S. Government agency, authority or instrumentality (such as
the Student Loan Marketing Association or the Resolution Funding Corporation).
In addition, the Money Market Fund may invest up to 5% of its net assets in
separately traded interest and principal component parts of U.S. Treasury
securities that are sold as zero coupon securities and are transferable through
the Federal book-entry system known as Separately Traded Registered Interest and
Principal Securities ("STRIPS") and Coupons Under Book Entry Safekeeping
("CUBES"). 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 Funds
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
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Funds may have to sell other portfolio investments to obtain cash needed by the
related Portfolios to make income distributions.
PARTICIPATION INTERESTS
The High Yield Bond Fund may invest in participation interests,
subject to the limitation on investments by the Funds in illiquid investments.
The Fund currently does not intend to invest more than 5% of its net assets in
such interests. Participation interests represent an undivided interest in or
assignment of a loan made by an issuing financial institution. No more than 5%
of the Fund's net assets can be invested in participation interests of the same
issuing borrower. Participation interests are primarily dependent upon the
financial strength of the borrowing corporation, which is obligated to make
payments of principal and interest on the loan, and there is a risk that such
borrowers may have difficulty making payments. In the event the borrower fails
to pay scheduled interest or principal payments, the Fund could experience a
reduction in its income and might experience a decline in the net asset value of
its shares. In the event of a failure by the financial institution to perform
its obligation in connection with the participation, the Fund might incur
certain costs and delays in realizing payment or may suffer a loss of principal
and/or interest. The Investment Adviser has set certain creditworthiness
standards for issuers of loan participations and monitors their
creditworthiness.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may acquire variable and floating rate instruments. Credit
rating agencies frequently do not rate such instruments; however, the Investment
Adviser under guidelines established by the Trust's Board of Trustees will
determine what unrated variable and floating rate instruments are of comparable
quality at the time of the purchase to rated instruments eligible for purchase
by the Fund. In making such determinations, the Investment Adviser considers
the earning power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will monitor their financial condition. An active
secondary market may not exist with respect to particular variable or floating
rate instruments purchased by a Fund. The absence of such an active secondary
market could make it difficult for the Fund to dispose of the variable or
floating rate instrument involved in the event of the issuer of the instrument
defaulting on its payment obligation or during periods in which the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
The High Yield Bond Fund may invest in "index-linked" or
"commodity-linked" notes, which are debt securities of companies that call for
interest payments and/or payment at maturity in different terms than the typical
note where the borrower agrees to make fixed interest payments and to pay a
fixed sum at maturity. Principal and/or interest payments on an index-linked
note depend on the performance of one or more market indices, such as the S&P
500 Index or a weighted index of commodity futures such as crude oil, gasoline
and natural gas. The Fund may also invest in "equity linked" and
"currency-linked" debt securities. At maturity, the 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
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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-RELATED SECURITIES
Each Fund (other than the International Core Growth, International
Small Cap, Emerging Countries, Large Cap and Value Funds) may invest in
mortgage-related securities. Mortgage-related securities are derivative
interests in pools of mortgage loans made to U.S. residential home buyers,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations. The Fully Discretionary Fund may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-throughs." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association ("GNMA"). GNMA is a
wholly owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Agency or
guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional
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residential mortgages not insured or guaranteed by any government agency from a
list of approved seller/services which include state and federally chartered
savings and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. FHLMC is a government-sponsored corporation created
to increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the
United States Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment rates
vary widely and may be affected by changes in market interest rates. In periods
of falling interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of the pool certificates. Conversely, when
interest rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is not
possible to predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign
CMO in which the Fully Discretionary Fund may invest is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Like a bond,
interest is paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, FNMA or equivalent
foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
seniority. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related, and private organizations (e.g.,
Canada Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). The mechanics of these mortgage-related
securities are generally the same as those issued in the United States.
However, foreign mortgage markets may differ materially from the U.S. mortgage
market with respect to matters such as the sizes of loan pools, pre-payment
experience, and maturities of loans.
"ROLL" TRANSACTIONS
The Fully Discretionary and High Yield Bond 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.
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During the roll period, the Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Like when-issued securities or
firm commitment agreements, roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is committed to purchase similar securities. Additionally, in the
event the buyer of securities under a roll transaction files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the transactions may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the
securities.
The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered to be the economic equivalent of
borrowings by the Fund. To avoid leverage, the Fund will establish a segregated
account with its Custodian in which it will maintain liquid assets in an amount
sufficient to meet its payment obligations with respect to these transactions.
The Fund will not enter into roll transactions if, as a result, more than 15% of
the Fund's net assets would be segregated to cover such contracts.
FOREIGN INVESTMENTS
Each Fund may invest in securities of foreign issuers that are not
publicly traded in the United States. Each Fund (other than the Money Market
Fund) may also invest in depository receipts.
The United States Government has from time to time imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Funds. If such restrictions should be reinstituted, it
might become necessary for such Funds to invest substantially all of their
assets in United States securities. In such event, the Board of Trustees of the
Trust would consider alternative arrangements, including reevaluation of the
Funds' investment objectives and policies, or investment of all of the Funds'
assets in another investment company with different investment objectives and
policies than the Funds. However, a Fund would adopt any revised investment
objective and fundamental policies only after approval by the shareholders
holding a majority (as defined in the Investment Company Act) of the shares of
the Fund.
DEPOSITORY RECEIPTS. Each of the Funds (other than the Money
Market Fund) may invest in American Depository Receipts ("ADRs"), which are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuers. ADRs, in registered form,
are designed for use in U.S. securities markets. Such depository receipts may
be sponsored by the foreign issuer or may be unsponsored. The Value,
International Core Growth, Fully Discretionary, High Yield Bond, Worldwide,
International Small Cap and Large Cap Funds may also invest in European and
Global Depository Receipts ("EDRs" and "GDRs"), which, in bearer form, are
designed for use in European securities markets, and in other instruments
representing securities of foreign companies. Such depository receipts may be
sponsored by the foreign issuer or may be unsponsored. Unsponsored depository
receipts are organized independently and without the cooperation of the foreign
issuer of the underlying securities; as a result, available information
regarding the issuer may not be as current as for sponsored depository receipts,
and the prices of unsponsored depository receipts may be more volatile than if
they were sponsored by the issuer of the underlying securities. ADRs may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in United
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States dollars; the underlying security may be denominated in a foreign
currency, although the underlying security may be subject to foreign government
taxes which would reduce the yield on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
MARKET CHARACTERISTICS. Settlement practices for transactions in
foreign markets may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of a
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
LEGAL AND REGULATORY MATTERS. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
TAXES. The interest payable on certain of the Funds' foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolios'
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction of U.S. federal income tax purposes for his proportionate share of
such foreign taxes paid by the Funds.
COSTS. The expense ratios of the Funds are likely to be higher than
those of investment companies investing in domestic securities, since the cost
of maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics of
the particular company, differences between economic trends and the performance
of securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund 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.
SECURITIES SWAPS
The International Core Growth, Worldwide, International Small Cap and
Emerging Countries Funds may enter into securities swaps, a technique primarily
used to indirectly
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participate in the securities market of a country from which a Fund would
otherwise be precluded for lack of an established securities custody and
safekeeping system. The Fund deposits an amount of cash with its custodian (or
the broker, if legally permitted) in an amount equal to the selling price of the
underlying security. Thereafter, the Fund pays or receives cash from the broker
equal to the change in the value of the underlying security.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each Fund (other than the Value and
Money Market Funds) is authorized to purchase put and call options with respect
to securities which are otherwise eligible for purchase by the Fund and with
respect to various stock indices subject to certain restrictions. Put and call
options are derivative securities traded on United States and foreign exchanges,
including the American Stock Exchange, Chicago Board Options Exchange,
Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock Exchange.
Except as indicated in "Non-Hedging Strategic Transactions," the Funds will
engage in trading of such derivative securities exclusively for hedging
purposes.
If a Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Adviser perceives significant short-term
risk but substantial long-term appreciation for the underlying security. The
put option acts as an insurance policy, as it protects against significant
downward price movement while it allows full participation in any upward
movement. If the Fund holds a stock which the Investment Adviser believes has
strong fundamentals, but for some reason may be weak in the near term, the Fund
may purchase a put option on such security, thereby giving itself the right to
sell such security at a certain strike price throughout the term of the option.
Consequently, the Fund will exercise the put only if the price of such security
falls below the strike price of the put. The difference between the put's
strike price and the market price of the underlying security on the date the
Fund exercises the put, less transaction costs, is the amount by which the Fund
hedges against a decline in the underlying security. If during the period of
the option the market price for the underlying security remains at or above the
put's strike price, the put will expire worthless, representing a loss of the
price the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the premium paid for the put option less any
amount for which the put may be sold reduces the profit the Fund realizes on the
sale of the securities.
If a Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If a Fund purchases the call
option to hedge a short position in the underlying security and the price of the
underlying security thereafter falls, the premium paid for the call option less
any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option
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of the same series as the option previously purchased. The Funds generally will
purchase only those options for which the Investment Adviser believes there is
an active secondary market to facilitate closing transactions.
WRITING CALL OPTIONS. Each Fund (other than the Balanced, Value and
Money Market Funds) may write covered call options. A call option is "covered"
if a Fund owns the security underlying the call or has an absolute right to
acquire the security without additional cash consideration (or, if additional
cash consideration is required, cash or cash equivalents in such amount as are
held in a segregated account by the Custodian). The writer of a call option
receives a premium and gives the purchaser the right to buy the security
underlying the option at the exercise price. The writer has the obligation upon
exercise of the option to deliver the underlying security against payment of the
exercise price during the option period. If the writer of an exchange-traded
option wishes to terminate his obligation, he may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as
the option previously written. A writer may not effect a closing purchase
transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. A Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option generally reflect increases in the market price of the
underlying security, appreciation of the underlying security owned by the Fund
generally offsets, in whole or in part, any loss to the Fund resulting from the
repurchase of a call option.
STOCK INDEX OPTIONS. Each Fund (other than the Balanced, Value,
Fully Discretionary and Money Market Funds) may also purchase put and call
options with respect to the S&P 500 and other stock indices. The Funds may
purchase such options as a hedge against changes in the values of portfolio
securities or securities which it intends to purchase or sell, or to reduce
risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks not found in stock options generally. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss on the
purchase or sale of an option on an index depends upon movements in the level of
stock prices in the stock market generally rather than movements in the price of
a particular stock. Accordingly, successful use by a Fund of options on a stock
index depends on the Investment Adviser's ability to predict correctly
movements in the direction of the stock market generally. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if circumstances disrupt trading of
certain stocks included in the index, such as if trading were halted in a
substantial number of stocks included in the
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index. If this happens, the Fund could 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. The Funds purchase put or call options only with respect to
an index which the Investment Adviser believes includes a sufficient number of
stocks to minimize the likelihood of a trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated
with transactions in options on securities and indices. Options may be more
volatile than the underlying instruments and, therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. There are also significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective. In addition, a liquid secondary market for particular
options may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of option of underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or clearing corporation may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which a Fund may enter into options transactions may be limited by the
Internal Revenue Code requirements for qualification of the corresponding
Portfolio as a regulated investment company. See "Dividends, Distributions and
Taxes."
In addition, foreign option exchanges do not afford to participants
many of the protections available in United States option exchanges. For
example, there may be no daily price fluctuation limits in such exchanges or
markets, and adverse market movements could therefore continue to an unlimited
extent over a period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction costs, this entire
amount could be lost. Moreover, a Fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements typically associated with such option writing. See
"Dealer Options" below.
DEALER OPTIONS. Each Fund (other than the Income & Growth, Balanced,
Value and Money Market Funds) may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to
dealer options. While the Funds might look to a clearing corporation to
exercise exchange-traded options, if a Fund purchases a dealer option it must
rely on the selling dealer to perform if the Fund exercises the option. Failure
by the dealer to do so would result in the loss of the premium paid by the Fund
as well as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market
while dealer options may not. Consequently, a Fund can realize the value of a
dealer option it has purchased only
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by exercising or reselling the option to the issuing dealer. Similarly, when a
Fund writes a dealer option, the Fund can close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer.
While the Fund seeks to enter into dealer options only with dealers who will
agree to and can enter into closing transactions with the Fund, no assurance
exists that the Fund will at any time be able to liquidate a dealer option at a
favorable price at any time prior to expiration. Unless the Fund, as a covered
dealer call option writer, can effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) used as cover until the
option expires or is exercised. In the event of insolvency of the other party,
the Fund may be unable to liquidate a dealer option. With respect to options
written by the Fund, the inability to enter into a closing transaction may
result in material losses to the Fund. For example, since the Fund must
maintain a secured position with respect to any call option on a security it
writes, the Fund may not sell the assets which it has segregated to secure the
position while it is obligated under the option. This requirement may impair
the Portfolio's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
takes the position that purchased dealer options are illiquid securities. A
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
With that exceptions, however, the Fund will treat dealer options as subject to
the Fund's limitation on illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Fully Discretionary, International Core Growth, Worldwide,
International Small Cap, Emerging Countries, Large Cap and High Yield Bond
Funds may buy or sell put and call options on foreign currencies. A put or call
option on a foreign currency gives the purchaser of the option the right to sell
or purchase a foreign currency at the exercise price until the option expires.
The Funds use foreign currency options separately or in combination to control
currency volatility. Among the strategies employed to control currency
volatility is an option collar. An option collar involves the purchase of a put
option and the simultaneous sale of call option on the same currency with the
same expiration date but with different exercise (or "strike") prices.
Generally, the put option will have an out-of-the-money strike price, while the
call option will have either an at-the-money strike price or an in-the-money
strike price. Foreign currency options are derivative securities. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Funds to reduce foreign currency risk using
such options.
As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movement adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS
The Fully Discretionary, International Core Growth, Worldwide,
International Small Cap, Emerging Countries, Large Cap and High Yield Bond
Funds may enter into forward
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currency contracts in anticipation of changes in currency exchange rates. A
forward currency contract is an obligation to purchase or sell a specific
currency at a future date, which may be any fix number of days from the date of
the contract agreed upon by the parties, at a price set at the time of the
contract. For example, a Fund might purchase a particular currency or enter
into a forward currency contract to preserve the U.S. dollar price of securities
it intends to or has contracted to purchase. Alternatively, it might sell a
particular currency on either a spot or forward basis to hedge against an
anticipated decline in the dollar value of securities it intends to or has
contracted to sell. Although this strategy could minimize the risk of loss due
to a decline in the value of the hedged currency, it could also limit any
potential gain from an increase in the value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds (other than the Balanced and Money Market Funds) may
invest in futures contracts and options on futures contracts as a hedge against
changes in market conditions or interest rates. Such Funds trade in such
derivative securities for bona fide hedging purposes and otherwise in accordance
with the rules of the Commodity Futures Trading Commission ("CFTC"). Each such
Fund segregates liquid assets in a separate account with its Custodian when
required to do so by CFTC guidelines in order to cover its obligation in
connection with futures and options transactions.
A Fund does not pay or receive funds upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
deposits in a segregated account with its Custodian liquid assets equal to
approximately 5% of the contract amount. This amount is known as initial
margin. The margin requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions differs from that
of margin in securities transactions. Futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming it satisfies all contractual obligations. Subsequent
payments (called variation margin) to and from the broker will be made on a
daily basis as the price of the underlying stock index fluctuates, to reflect
movements in the price of the contract making the long and short positions in
the futures contract more or less valuable. For example, when the Fund
purchases a stock index futures contract and the price of the underlying stock
index rises, that position will have increased in value and the Fund will
receive from the broker a variation margin payment equal to that increase in
value. Conversely, when the Fund purchases a stock index futures contract and
the price of the underlying stock index declines, the position will be less
valuable requiring the Fund to make a variation margin payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract. A final
determination of variation margin is made on closing the position. The Fund
either pays or receives cash, thus realizing a loss or a gain.
STOCK INDEX FUTURES CONTRACTS. Each Fund (other than the Balanced
and Money Market Funds) may invest in futures contracts on stock indices. A
stock index futures contracts is a bilateral agreement pursuant to which the
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of the
last trading day of the contract and the price at which the contract is
originally struck. No physical delivery of the underlying stocks in the index
is made. Currently, stock index futures contracts can be purchased or sold with
respect to the S&P 500 Stock Price Index on the Chicago
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Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the
New York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index on the Kansas City Board of Trade. Foreign financial and
stock index futures are traded on foreign exchanges including the London
International Financial Futures Exchange, the Singapore International Monetary
Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. Each Fund (other than
the Core Growth, Emerging Growth, Balanced and Money Market Funds) may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures sale by a Fund
obligates the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. A futures contract purchased by a Fund obligates the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specific
future time at a specific price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at or near that
date. The determination would be in accordance with the rules of the exchange
on which the futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. A Fund closes out a futures contract sale by entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund receives the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the Fund pays the difference and realizes a loss. Similarly, the Fund
closes out a futures contract purchase by entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the Fund realizes a
gain, and if the purchase price exceeds the offsetting sale price, the Fund
realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United States Treasury bills; and 90-day commercial paper. A Fund may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments. International interest rate futures
contracts are traded on the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The International Core Growth,
Fully Discretionary, Worldwide, International Small Cap, Emerging Countries,
High Yield Bond and
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Large Cap Funds may use foreign currency future contracts for hedging purposes.
A foreign currency futures contract provides for the future sale by one party
and purchase by another party of a specified quantity of a foreign currency at a
specified price and time. A public market exists in futures contracts covering
several foreign currencies, including the Australian dollar, the Canadian
dollar, the British pound, the German mark, the Japanese yen, the Swiss franc,
and certain multinational currencies such as the European Currency Unit ("ECU").
Other foreign currency futures contracts are likely to be developed and traded
in the future. The Funds will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, a Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Adviser believes that over
time the value of a diversified portfolio will tend to move in the same
direction as the market indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
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market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Investment Adviser may still not
result in a successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund depends on the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund hedges against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
OPTIONS ON FUTURES CONTRACTS. The Funds may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has
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the right to terminate its position prior to the scheduled expiration of the
option by selling, or purchasing an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss. There
is no guarantee that such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options are more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Funds because the maximum amount
at risk is limited to the premium paid for the options (plus transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS.
Except as described below under "Non-Hedging Strategic Transactions," a Fund
will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. A Fund
also may not purchase or sell futures or purchase related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for such options would exceed 5% of
the market value of the Fund's net assets.
Upon the purchase of futures contracts, a Fund will deposit an amount
of cash and cash equivalents, equal to the market value of the futures
contracts, in a segregated account with the Custodian or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Master Trust may change them
if applicable law permits such a change and the change is consistent with the
overall investment objective and policies of a Fund.
The extent to which a Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment company.
See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
The Fully Discretionary and High Yield Bond Funds may enter into
interest rate swap transactions and purchase or sell interest rate caps and
floors, and may enter into currency swap cap transactions. An interest rate or
currency swap involves an agreement between the Fund and another party to
exchange payments calculated as if they were interest on a specified
("notional") principal amount (e.g., an exchange of floating rate payments by
one party for fixed rate payments by the other). An interest rate cap or floor
entitles the purchaser, in exchange for a premium, to receive payments of
interest on a notional principal
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amount from the seller of the cap or floor, to the extent that a specified
reference rate exceeds or falls below a predetermined level.
The Fund usually enters into such transactions on a "net" basis, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The net amount of the excess, if any, of the 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 Trust's custodian. If the Fund enters into a swap
on other than a net basis, or sells caps or floors, the Fund maintains a
segregated account in the full amount accrued on a daily basis of the Fund's
obligations with respect to the transaction. Such segregated accounts are
maintained in accordance with applicable regulations of the Commission.
The 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 the Fund are considered to be illiquid assets.
INTEREST RATE SWAPS. As indicated above, an interest rate swap is a
contract between two entities ("counterparties") to exchange interest payments
(of the same currency) between the parties. In the most common interest rate
swap structure, one counterparty agrees to make floating rate payments to the
other counterparty, which in turn makes fixed rate payments to the first
counterparty. Interest payments are determined by applying the respective
interest rates to an agreed upon amount, referred to as the "notional principal
amount." In most such transactions, the floating rate payments are tied to the
London Interbank Offered Rate, which is the offered rate for short-term
Eurodollar deposits between major international banks. As there is no exchange
of principal amounts, an interest rate swap is not an investment or a borrowing.
CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future rate for the 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.
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SWAP OPTIONS. The Fully Discretionary and High Yield Bond Funds may
invest in swap options. A swap option is a contract that gives a counterpart
the right (but not the obligation) to enter into a new swap agreement or to
shorten, extend, cancel or otherwise change an existing swap agreement, at some
designated future time on specified terms. It is different from a forward swap,
which is a commitment to enter into a swap that starts at some future date with
specified rates. A swap option may be structured European-style (exercisable on
the pre-specified date) or American-style (exercisable during a designated
period). The right pursuant to a swap option must be exercised by the right
holder. The buyer of the right to receive fixed pursuant to a swap option is
said to own a call.
CAPS AND FLOORS. The Fully Discretionary and High Yield Bond Funds
may invest in interest rate caps and floors and currency swap cap transactions.
An interest rate cap is a right to receive periodic cash payments over the life
of the cap equal to the difference between any higher actual level of interest
rates in the future and a specified strike (or "cap") level. The cap buyer
purchases protection for a floating rate move above the strike. An interest
rate floor is the right to receive periodic cash payments over the life of the
floor equal to the difference between any lower actual level of interest rates
in the future and a specified strike (or "floor") level. The floor buyer
purchases protection for a floating rate move below the strike. The strikes are
typically based on the three-month LIBOR (although other indices are available)
and are measured quarterly. Rights arising pursuant to both caps and floors are
exercised automatically if the strike is in the money. Caps and floors
eliminate the risk that the buyer fails to exercise an-in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate
and currency swaps and interest rate caps and floors are similar to those
described above with respect to dealer options. In connection with such
transactions, the Fund relies on the other party to the transaction to perform
its obligations pursuant to the underlying agreement. If 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 the Fund will seek to enter into such transaction only with
parties which are capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to close out such a
transaction with the other party, or obtain an offsetting position with any
other party, at any time prior to the end of the term of the underlying
agreement. This may impair the Fund's ability to enter into other transactions
at a time when doing so might be advantageous.
NON-HEDGING STRATEGIC TRANSACTIONS
Each Fund'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 value 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 Fully Discretionary 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
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with this limitation. Such transactions are subject to the limitations
described above under "Options," "Futures Contracts," and "Interest Rate and
Currency Swaps."
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Adviser, subject to the seller's agreement to
repurchase and the Fund's agreement to resell such securities at a mutually
agreed upon date and price. The repurchase price generally equals the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by the
Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent
foreign system. The seller under a repurchase agreement will be required to
maintain the value of the underlying securities at not less than 102% of the
repurchase price under the agreement. If the seller defaults on its repurchase
obligation, the Fund holding the repurchase agreement will suffer a loss to the
extent that the proceeds from a sale of the underlying securities is less than
the repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the Fund's rights with respect to such securities
to be delayed or limited. Repurchase agreements are considered to be loans
under the Investment Company Act.
REVERSE REPURCHASE AGREEMENTS
The High Yield Bond Fund may enter into reverse repurchase agreements,
which involve the sale of a security by the Fund and its agreement to repurchase
the security (or, in the case of mortgage-backed securities, substantially
similar but not identical securities) at a specified time and price. The Fund
will maintain in a segregated account with the Custodian cash, U.S. Government
securities or other appropriate liquid securities in an amount sufficient to
cover its obligations under these agreements with broker-dealers (no such
collateral is required on such agreements with banks). Under the 1940 Act,
these agreements are considered borrowings by the Fund, and are subject to the
percentage limitations on borrowings described below. The agreements are
subject to the same types of risks as borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that a Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.
The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of the Investment Adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
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A Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When a Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in a
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
BORROWING
Short sales "not against the box" and roll transactions are considered
borrowings for purposes of the percentage limitations applicable to borrowings.
The use of borrowing by a Fund involves special risk considerations
that may not be associated with other funds having similar objectives and
policies. Since substantially all of a Fund's assets fluctuate in value,
whereas the interest obligation resulting from a borrowing remain fixed by the
terms of the Fund's agreement with its lender, the asset value per share of the
Fund tends to increase more when its portfolio securities increase in value and
to decrease more when its portfolio assets decrease in value than would
otherwise be the case if the Fund did not borrow funds. In addition, interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
The Trust entered into a Credit Agreement on behalf of its various
series, including the Funds, with several banks and The Chase Manhattan Bank,
as administrative agent for the lenders, to borrow up to $75,000,000 from time
to time to satisfy 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 shareholders of
the Funds or other series of the Trust, in order to provide the Funds or such
other series with cash to meet such redemption requests. The Credit Agreement
expires on April 10, 1998, unless renewed by the parties.
Under the Credit Agreement, each Fund may borrow, repay and reborrow
amounts (collectively, the "Revolving Credit Loans") in increments of $50,000,
provided the Revolving Credit Loans outstanding at any time aggregate at least
$350,000 (the "Credit Facility"). The Trust will pay a commitment fee at the
rate of 0.10% per annum of the average daily unused portion of the Credit
Facility, and may at any time terminate the Credit Agreement or reduce the
lenders' commitment thereunder in increments of $2,500,000.
While outstanding, the Revolving Credit Loans bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of the
rates on overnight federal funds transactions with members
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of the Federal Reserve System arranged by federal funds brokers, plus 0.625% per
annum; or (ii) the prime rate of interest of The Chase Manhattan Bank. If, as a
result of changes in applicable laws, regulations or guideline with respect to
the capital adequacy of any lender, the return on such lender's capital is
reduced, the Trust may be required to adjust the rate of interest to compensate
such lender for such reduction. Each Revolving Credit Loan is payable in thirty
days, and may be prepaid at any time in increments of $100,000 without premium
or penalty. No Fund is liable for repayment of a Revolving Credit Loan to any
other Fund.
The Credit Agreement contains, among other things, covenants that
require each Fund to maintain certain minimum ratios of debt to net worth;
limit the ability of the Trust to incur other indebtedness and create liens on
its assets or guarantee obligations of others; merge or consolidate with, or
sell its assets to, others; make material changes in its method of conducting
business; make distributions to shareholders in excess of the requirements of
Subchapter M of the Internal Revenue Code in the event of a default under the
Credit Agreement; or make changes in fundamental investment policies. The
Credit Agreement also contains other terms and conditions customary in such
agreements, including various events of default.
LENDING PORTFOLIO SECURITIES
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 must satisfy the
Fund. Any loan might be secured by any one or more of the three types of
collateral. The terms of the Fund's loans must permit the Fund to reacquire
loaned securities on five days' notice or in time to vote on any serious matter
and must meet certain tests under the Internal Revenue Code.
SHORT SALES
The Core Growth, Emerging Growth, Worldwide, High Yield Bond and
International Small Cap Funds may make short sales of securities they own or
have the right to acquire at no added cost through conversion or exchange of
other securities they own (referred to as short sales "against the box") and
short sales of securities which they do not own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security generally
from the broker through which the short sale is made) in order to make delivery
to the buyer. The Fund must replace the security borrowed by purchasing it at
the market price at the time of replacement. The Fund is said to have a "short
position" in the securities sold until it delivers them to the broker. The
period during which the Fund has a short position can range from one day to more
than a year. Until the Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund must deposit with
the broker additional cash or securities so that it maintains with the broker a
total deposit equal to 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
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Short sales by a Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share tends to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Short sales theoretically involve unlimited
loss potential, as the market price of securities sold short may continually
increase, although a Fund may mitigate such losses by replacing the securities
sold short before the market price has increased significantly. Under adverse
market conditions the Fund might have difficulty purchasing securities to meet
its short sale delivery obligations, and might have to sell portfolio securities
to raise the capital necessary to meet its short sale obligations at a time when
fundamental investment considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, a Fund
will deposit in escrow in a separate account with the Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position. The extent to which such
gains or losses in the long position are reduced will depend upon the amount of
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the 1940 Act, unless the sale is
"against the box" and the securities sold short are placed in a segregated
account (not with the broker), or unless the Fund's obligation to deliver the
securities sold short is "covered" by placing in a segregated account (not with
the broker) cash, U.S. Government securities or other liquid debt or equity
securities in an amount equal to the difference between the market value of the
securities sold short at the time of the short sale and any such collateral
required to be deposited with a broker in connection with the sale (not
including the proceeds from the short sale), which difference is adjusted daily
for changes in the value of the securities sold short. The total value of the
cash, U.S. Government securities or other liquid debt or equity securities
deposited with the broker and otherwise segregated may not at any time be less
than the market value of the securities sold short at the time of the short
sale. Each Fund will comply with these requirements. In addition, as a matter
of policy, the Trust's Board of Trustees has determined that no Fund will make
short sales of securities or maintain a short position if to do so could create
liabilities or require collateral deposits and segregation of assets aggregating
more than 25% of the Fund's total assets, taken at market value.
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The extent to which a Fund may enter into short sales transactions may
be limited by the Internal Revenue Code requirements for qualification of the
corresponding Portfolio as a regulated investment company. See "Taxes."
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and the Fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption within seven days. The Fund might also have to register such
restricted securities in order to dispose of them, resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact
that there are contractual or legal restrictions on resale to the general public
or to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Funds to the extent that qualified institutional buyers
become uninterested in purchasing such securities.
The Emerging Countries Fund may invest in foreign securities that are
restricted against transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions. Unless these securities are
acquired directly from the issuer or its underwriter, the Fund treats foreign
securities whose principal market is abroad as not subject to the investment
limitation on securities subject to legal or contractual restrictions on resale.
INVESTMENT TECHNIQUES AND PROCESSES
The Investment Adviser's investment techniques and processes, which
it has used in managing institutional portfolios for many years, are described
generally in the Prospectus. In making decisions with respect to equity
securities for the Funds, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal. It's how the Investment Adviser built
its reputation. Over the past ten years, the Investment Adviser has built a
record as one of the finest performing investment managers in the United States.
It has successfully delivered growth over time to many
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institutional investors, pension plans, foundations, endowments and high net
worth individuals. The Investment Adviser's methods have proven their ability
to achieve growth over time through a variety of investment vehicles.
The Investment Adviser emphasizes growth over time through investment
in securities of companies with earnings growth potential. The Investment
Adviser's style is a "bottom-up" growth approach that focuses on the growth
prospects of individual companies rather than on economic trends. It builds
portfolios stock by stock. The Investment Adviser's decision-making is guided
by three critical questions: Is there a positive change? Is it sustainable? Is
it timely? The Investment Adviser uses these three factors because it focuses
on discovering positive developments when they first show up in an issuer's
earnings, but before they are fully reflected in the price of the issuer's
securities. The Investment Adviser is always looking for companies that are
driving change and surpassing analysts' expectations. It seeks to identify
companies poised for rapid growth. The Investment Adviser focuses on
recognizing successful companies, regardless of their capitalization or whether
they are domestic or foreign companies.
The Investment Adviser's techniques and processes include
relationships with an extensive network of brokerage research firms located
throughout the world. These analysts are often located in the same geographic
regions as the companies they follow, have followed those companies for a number
of years, and have developed excellent sources of information about them. The
Investment Adviser does not employ in-house analysts other than the personnel
actually engaged in managing investments for the Funds and the Investment
Adviser's other clients. However, information obtained from a brokerage
research firm is confirmed with other research sources or the Investment
Adviser's computer-assisted quantitative analysis (including "real time" pricing
data) of a substantial universe of potential investments.
DIVERSIFICATION
Each Fund is "diversified" within the meaning of the 1940 Act. In
order to qualify as diversified, a Fund must diversify its holdings so that at
all times at least 75% of the value of its total assets is represented by cash
and cash items (including receivables), securities issued or guaranteed as to
principal or interest by the United States or its agencies or instrumentalities,
securities of other investment companies, and other securities (for this purpose
other securities of any one issuer are limited to an amount not greater than 5%
of the value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of the issuer).
The equity securities of each issuer that are included in the
investment portfolio of a Fund are purchased by the Investment Adviser in
approximately equal amounts, and the Investment Adviser attempts to stay fully
invested within the applicable percentage limitations set forth in the
Prospectus. In addition, for each issuer whose securities are added to an
investment portfolio, the Investment Adviser sells the securities of one of the
issuers currently included in the portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of the appropriate Fund (as defined in the
Investment Company Act).
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All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
The investment objective of each Fund is a fundamental policy. In
addition, no Fund:
1. May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer, except that up to 25% of a Fund's total assets may be invested without
regard to this restriction and a Fund will be permitted to invest all or a
portion of its assets in another diversified, open-end management investment
company with substantially the same investment objective, policies and
restrictions as the Fund. This restriction also does not apply to investments
by a Fund in securities of the U.S. Government or any of its agencies and
instrumentalities.
2. May purchase more than 10% of the outstanding voting securities,
or of any class of securities, of any one issuer, or purchase the securities of
any issuer for the purpose of exercising control or management, except that a
Fund will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the same
investment objective, policies and restrictions as the Fund.
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 Fund
will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the same
investment objective, policies and restrictions as the Fund. This restriction
does not apply to investments by a Fund in securities of the U.S. Government or
its agencies and instrumentalities, or to investments by the Money Market Fund
in obligations of domestic branches of U.S. banks and U.S. branches of foreign
banks which are subject to the same regulation as U.S. banks.
4. May purchase or sell real estate. However, a Fund may invest in
securities secured by, or issued by companies that invest in, real estate or
interests in real estate.
5. May make loans of money, except that a Fund may purchase
publicly distributed debt instruments and certificates of deposit and enter into
repurchase agreements. Each Fund reserves the authority to make loans of its
portfolio securities in an aggregate amount not exceeding 30% of the value of
its total assets.
6. May borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the extent
that the value of the Fund's total assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the Fund will
take prompt action to reduce its borrowings as required by applicable law.
7. May pledge or in any way transfer as security for indebtedness
any securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Funds from
engaging in options, futures and foreign currency transactions.
B-33
<PAGE>
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% (10% in the case of the Money Market
Fund) of the value of its net assets in securities that at the time of purchase
have legal or contractual restrictions on resale or are otherwise illiquid.
10. May purchase securities on margin, except for initial and
variation margin on options and futures contracts, and except that a Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of securities.
11. May engage in short sales (other than the Core Growth Fund, the
Emerging Growth Fund, the Worldwide Fund, the High-Yield Bond Fund and the
International Small Cap Fund), except that a Fund may use such short-term
credits as are necessary for the clearance of transactions.
12. May invest in securities of other investment companies, except
(a) that a Fund will be permitted to invest all or a portion of its assets in
another diversified, open-end management investment company with substantially
the same investment objective, policies and restrictions as the Fund; (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 Fund.
13. May issue senior securities, except that a Fund may borrow money
as permitted by restrictions 6 and 7 above. This restriction shall not prohibit
the Funds from engaging in short sales, options, futures and foreign currency
transactions.
14. May enter into transactions for the purpose of arbitrage, or
invest in commodities and commodities contracts, except that a Fund may invest
in stock index, currency and financial futures contracts and related options in
accordance with any rules of the Commodity Futures Trading Commission.
15. May purchase or write options on securities, except for hedging
purposes (except in the case of the Fully Discretionary Fund, which may do so
for non-hedging purposes) and then only if (i) aggregate premiums on call
options purchased by a Fund do not exceed 5% of its net assets, (ii) aggregate
premiums on put options purchased by a Fund do not exceed 5% of its net assets,
(iii) not more than 25% of a Fund's net assets would be hedged, and (iv) not
more than 25% of a Fund's net assets are used as cover for options written by
the Fund.
MONEY MARKET FUND RESTRICTIONS
Investments by the Money Market Fund are subject to limitations
imposed under regulations adopted by the Commission. These regulations
generally require the Money Market Fund to acquire only U.S. dollar denominated
obligations maturing in 397 days or less and to maintain a dollar-weighted
average portfolio maturity of 90 days or less. In addition, the Money Market
Fund may acquire only obligations that present minimal credit risks and that are
"eligible securities" which means they are (i) rated, at the time of investment,
by at least two nationally recognized security rating organizations (one if it
is the only organization rating such obligation) in the highest short-term
rating category or, if unrated, determined to be of comparable quality (a "first
tier security"), or (ii) rated according to the foregoing criteria in the second
highest short-term rating category or, if unrated, determined to be of
comparable quality ("second tier security"). A security
B-34
<PAGE>
is not considered to be unrated if its issuer has outstanding obligations of
comparable priority and security that have a short-term rating. The Investment
Adviser will determine that an obligation presents minimal credit risks or that
unrated instruments are of comparable quality in accordance with guidelines
established by the Board of Trustees of the Trust. In addition, investments
in second tier securities are subject to the further constraints that (i) no
more than 5% of the Money Market Fund's assets may be invested in such
securities in the aggregate, and (ii) any investment in such securities of one
issuer is limited to the greater of 1% of the Fund's total assets or $1
million. In addition, the Fund may only invest up to 25% of its total assets
in the first tier securities of a single issuer for three business days.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the
Board of Trustees of the Trust, no Fund:
1. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships, although
a Fund may invest in the securities of companies which invest in or sponsor such
programs.
2. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not less
than 100% of the value of the loaned securities by marking to market daily.
In addition, the Value Fund may not purchase or write options on
securities.
PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 1997, the following persons held of record more
than 5% of the outstanding shares of the Funds:
As of such date, the Trustees and officers of the Trust, as a group,
owned beneficially and of record less than 1% of the outstanding shares of each
of the Portfolios except for the shares indicated above that are held by
Nicholas-Applegate Capital Management.
TRUSTEES AND PRINCIPAL OFFICERS
TRUST
The names, ages 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. Private investor.
President, Hightower
B-35
<PAGE>
Management Co., a financial management firm (January 1992 to __________);
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 Advisers Incorporated,
economic consultants (since 1981); Director, Nicholas-Applegate Fund, Inc.
(since 1987); Director, U.S. Filter Corporation (since March 1991), MasTec Inc.,
construction (since 1994), and Coinmach Laundry Corporation (since 1996);
Chairman, Calport Asset Management, Inc. (since 1992); formerly Distinguished
University Professor and Director, Pepperdine University (from September 1985 to
May 1988) and Professor of Business Economics, University of Southern California
(1976 to 1984). Mr. Laffer is considered to be an "interested person" of the
Trust because A.B. Laffer, V.A. Canto & Associates or its affiliates received
material compensation from the Investment Adviser for consulting services
provided from time to time to the Investment Adviser, and because during the
last two fiscal years his son was an employee of the Investment Adviser.
CHARLES E. YOUNG (_____), TRUSTEE. UCLA, 2224 Murphy Hall, Los
Angeles, California. Chancellor, UCLA (1968-1997); Director, Nicholas-Applegate
Fund, Inc. (since 1992); Director, Intel Corp. (since 1974), Academy of
Television Arts and Sciences Foundation (since October 1988), Los Angeles World
Affairs Council (since 1977) and Town Hall of California (since 1982).
ARTHUR E. NICHOLAS (_____), TRUSTEE.*/ Managing Partner and Chief
Investment Officer, Nicholas-Applegate Capital Management (since 1984), and
Chairman / President Nicholas-Applegate Securities. Director and Chairman of
the Board of Directors of Nicholas-Applegate Fund, Inc., a registered open-end
investment company, since 1987. Formerly Trustee, Nicholas-Applegate Investment
Trust (________ 1993 to _________ 1998).
DANN V. ANGELOFF (_____), TRUSTEE. 727 West Seventh Street, Los
Angeles, California. President, The Angeloff Company, corporate financial
advisers (since 1976); Director, Nicholas-Applegate Fund, Inc. (since 1987);
Trustee (1979 to 1987) and University Counselor to the President (since 1987),
University of Southern California (since 1987); Director, Public Storage, Inc.,
a real estate investment trust (since 1980), Storage Properties, a real estate
investment trust (since 1989), Datametrics Corporation, a producer of computer
peripherals and communication products (since 1993), SEDA Specialty Packaging,
Inc. (since 1993), and Leslies Poolmart, a distributor of swimming pool services
and products (since 1996). Formerly Trustee, Nicholas-Applegate Investment
Trust (________ 1993 to _________ 1998).
WALTER E. AUCH (_____), TRUSTEE.* 6001 North 62nd Place, Paradise
Valley, Arizona. Director, Geotech Communications, Inc., a mobile radio
communications company (since 1987); Fort Dearborn Fund (since 1987); Brinson
Funds (since 1994), Smith Barney Trak Fund (since 1992), registered investment
companies; Pimco Advisors L.P., an investment manager (since 1994); and Banyan
Realty Fund (since 1987), Banyan Strategic Land Fund (since 1987), Banyan
Strategic Land Fund II (since 1988), and Banyan Mortgage Fund (since 1988), real
estate investment trusts. Formerly Chairman and Chief Executive Officer,
Chicago Board Options Exchange (1979 to 1986); Senior Executive Vice President,
Director and Member of the Executive Committee, PaineWebber, Inc. (until 1979);
and Trustee, Nicholas-Applegate Investment Trust (until _______ 1998). Mr. Auch
is considered to be an
B-36
<PAGE>
"interested person" of the Trust under the 1940 Act because he is on the
board of a company a subsidiary of which is a broker-dealer.
THEODORE J. COBURN (_____), TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co. an investment banking firm (since
1991), and research associate, Harvard Graduate School of Education (since
1996). Director, Nicholas-Applegate Fund, Inc. (since 1987), Emerging Germany
Fund (since 1991), Moovies, Inc. (since 1995). Formerly Managing Director of
Global Equity Transactions Group and Member of Board of Directors, Prudential
Securities (from 1986 to June 1991); and Trustee, Nicholas-Applegate Investment
Trust (________ 1993 to _______ 1998).
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,
PBNG 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 Wood Montessori School (since 1995); Member of Advisory Board, Financial
Women's Association (since 1995); and Formerly Trustee, Nicholas-Applegate
Investment Trust (_______1993 to ______ 1998). Ms. DeRemer is considered to be
an "interested person" of the Master Trust under the 1940 act because DeRemer
Associates received material compensation from the Investment Adviser for
consulting services provided in connection with its institutional business.
GEORGE F. KEANE (_____), TRUSTEE. 450 Post Road East, Westport,
Connecticut. President Emeritus and Senior Investment Adviser, The Common Fund,
a non-profit investment management organization representing educational
institutions (since 1993), after serving as its President (from 1971 to 1992);
Member of Investment Advisory Committee, New York State Common Retirement Fund
(since 1982); Director and Chairman of the Investment Committee, United Negro
College Fund (since 1987); Director, United Educators Risk Retention Group
(since 1989); Director, RCB Trust Company (since 1991); Director, School,
College and University Underwriters Ltd. (since 1986); Trustee, Fairfield
University (since 1993); Director, The Bramwell Funds, Inc. (since 1994);
Chairman of the Board, Trigen Energy Corporation (since 1994); Director
Universal Stainless & Alloy Products Inc. (since 1994). Formerly President,
Endowment Advisers, Inc. (from August 1987 to December 1992); Trustee,
Nicholas-Applegate Investment Trust (from __________ to ____________, 1998).
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.
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).
PETER J. JOHNSON (_____), VICE PRESIDENT. Partner and Director-Client
Services/Marketing, Nicholas-Applegate Capital Management (since January 1992)
and Vice President, Nicholas-Applegate Securities (since December 1995);
formerly, Marketing Director, Pacific Financial
B-37
<PAGE>
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).
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).
Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $14,000 for services rendered as a Trustee of the Trust, and $1,000 for
each meeting attended ($2,000 per Committee meeting for Committee chairmen).
Each Trustee is also reimbursed for out-of-pocket expenses incurred as a
Trustee.
The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1997, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation from
Aggregate Compensation Benefits Accrued as Part Estimated Annual Trust and Trust Complex
Name from Trust of Trust Expenses Benefits Upon Retirement Paid to Trustee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $ 10,635 None N/A $ 36,250 (47*)
Arthur B. Laffer $ 9,558 None N/A $ 31,750 (47*)
Charles E. Young $ 9,827 None N/A $ 31,750 (47*)
Dann V. Angeloff $ 0 None N/A $ 36,750 (16*)
Walter E. Auch $ 0 None N/A $ 18,250 (15*)
Theodore J. Coburn $ 0 None N/A $ 34,250 (16*)
Darlene Deremer $ 0 None N/A $ 17,250 (15*)
George F. Keane $ 0 None N/A $ 18,250 (15*)
* Indicates total number of funds in Trust complex, including the Funds.
</TABLE>
INVESTMENT ADVISER
The Investment Adviser to the Trust is Nicholas-Applegate Capital
Management, a California limited partnership, with offices at 600 West Broadway,
30th Floor, San Diego, California 92101.
B-38
<PAGE>
The Investment Adviser was organized in August 1984 to manage
discretionary accounts investing primarily in publicly traded equity securities
and securities convertible into or exercisable for publicly traded equity
securities, with the goal of capital appreciation. Its general partner is
Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership, the general partner of which is Nicholas-Applegate Capital
Management Holdings, Inc., a California corporation owned by Mr. Nicholas.
Personnel of the Investment Adviser may invest in securities for their
own accounts pursuant to a Code of Ethics that sets forth all partners' and
employees' fiduciary responsibilities regarding the Funds, establishes
procedures for personal investing, and restricts certain transactions. For
example, all personal trades in most securities require pre-clearance, and
participation in initial public offerings is prohibited. In addition,
restrictions on the timing of personal investing in relation to trades by the
Funds and on short-term trading having been adopted.
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Trust and the
Investment Adviser with respect to the Funds, the Trust retains the Investment
Adviser to manage the Funds' investment portfolios, subject to the direction of
the Trust's Board of Trustees. The Investment Adviser is authorized to
determine which securities are to be bought or sold by the Funds and in what
amounts.
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by a Fund
or the Trust in connection with the matters to which the Investment Advisory
Agreement relates, except for liability resulting from willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of the
Investment Adviser's reckless disregard of its duties and obligations under the
Investment Advisory Agreement. The Trust has agreed to indemnify the Investment
Adviser against liabilities, costs and expenses that the Investment Adviser may
incur in connection with any action, suit, investigation or other proceeding
arising out of or otherwise based on any action actually or allegedly taken or
omitted to be taken by the Investment Adviser in connection with the performance
of its duties or obligations under the Investment Advisory Agreement or
otherwise as an investment adviser of the Trust. The Investment Adviser is not
entitled to indemnification with respect to any liability to the Trust or its
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties, or of its reckless disregard of its duties and
obligations under the Investment Advisory Agreement.
Prior to the Reorganization, the Trust had not engaged the services of
an investment adviser for the Trust's A, B and C Portfolios because these
Portfolios invested all of their assets in master funds of the Master Trust.
Consequently the amounts of the advisory fees earned by the Investment Adviser
and reported below were for services provided to the master funds of the Master
Trust. The amounts of the advisory fees earned by the Investment Adviser for
the fiscal year ended March 31, 1997, and the amounts of the reductions in fees
and reimbursement of expenses by the Investment Adviser (or recoupment of fees
previously deferred and expenses previously reimbursed) as a result of the
expense limitations and fee waivers described below under "Expense Limitation"
were as follows:
B-39
<PAGE>
<TABLE>
<CAPTION>
Fee Reductions and
Expense Reimbursements
Fund Advisory Fees (or Recoupments)
---- ------------- ----------------------
<S> <C> <C>
Large Cap Growth Fund $2,359 $ 7,907
Core Growth Fund 3,594,196 0
Value Fund 17,527 30,135
Emerging Growth Fund 5,836,182 0
Income & Growth Fund 902,615 (39,067)
Balanced Growth Fund 196,321 68,056
Fully Discretionary Fund 20,207 83,987
Money Market Fund 44,318 76,932
International Core Growth Fund 5,726 5,696
Worldwide Growth Fund 1,028,250 62,497
International Small Cap Growth Fund 477,212 13,583
Emerging Countries Fund 915,695 (22,429)
High Yield Bond Fund 17,627 19,182
</TABLE>
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
Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Fund, as defined in the Investment Company
Act) or the Investment Adviser upon not more than 60 days' written notice,
without payment of any penalty. The Investment Advisory Agreement provides that
it will continue in effect with respect to each Fund for a period of more than
two years from its execution only so long as such continuance is specifically
approved at least annually in conformity with the Investment Company Act.
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of each Fund (including
administrative fees and distribution expenses for the Fund, but excluding
interest, taxes, brokerage commissions and other costs incurred in connection
with portfolio securities transactions, organizational expenses and other
capitalized expenditures and extraordinary expenses), to ensure that the
operating expenses for the Funds do not exceed the amounts specified in the
Funds' prospectus.
ADMINISTRATORS
The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, ICAC is
responsible for performing all administrative services required for the daily
business operations of the Trust, subject to the supervision of the Board of
Trustees of the Trust. ICAC has no supervisory responsibility over the
investment operations of the Funds. The management or administrative services
of ICAC for the Trust are not exclusive under the terms of the Administration
Agreement and ICAC is free to, and does, render management and administrative
services to others.
B-40
<PAGE>
For its services, ICAC receives under the Administration Agreement
annual fees from each Fund equal to the Fund's pro rata portion (based on its
net assets compared to the Trust's total net assets) of a fee equal to 0.05% of
the first $100 million of the Trust's average net assets, 0.04% of the next $150
million, 0.03% of the next $300 million, 0.02% of the next $300 million and
0.01% thereafter, subject to a $40,000 annual minimum. As a result, ICAC
currently receives aggregate compensation at the rate of $_______ per year for
all of the Funds of the Trust.
In connection with its management of the corporate affairs of the
Trust, the Administrator pays the salaries and expenses of all its personnel and
pays all expenses incurred in connection with managing the ordinary course of
the business of the Trust, other than expenses assumed by the Trust as described
below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with ICAC or the
Investment Adviser, (c) out-of-pocket travel expenses for the officers and
Trustees of the Trust and other expenses of Board of Trustees' meetings, (d)
the fees and certain expenses of the Custodian, (e) the fees and expenses of the
Transfer and Dividend Disbursing Agent that relate to the maintenance of each
shareholder account, (f) the charges and expenses of the Trust's legal counsel
and independent accountants, (g) brokerage commissions and any issue or transfer
taxes chargeable to Trustees and officers of the Trust in connection with
securities transactions, (h) all taxes and corporate fees payable by the Trust
to federal, state and other governmental agencies, (i) the fees of any trade
association of which the Trust may be a member, (j) the cost of maintaining the
Trust's existence, taxes and interest, (k) the cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and maintaining the
registration of the Trust and of its shares with the Commission and registering
the Trust as a broker or dealer and qualifying their shares under state
securities laws, including the preparation and printing of the Trust's
registration statement, prospectuses and statements of additional information,
(m) allocable communication expenses with respect to investor services and all
expenses of shareholders' and Board of Trustees' meetings and of preparing,
printing and mailing prospectuses and reports to shareholders, (n) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the business of the Trust, and (o) expenses assumed by
the Trust pursuant to any plan of distribution adopted in conformity with Rule
12b-1 under the Investment Company Act.
The Administration Agreement provides that ICAC will not be liable for
any error of judgment or for any loss suffered by the Trust in connection with
the matters to which the Administration Agreement relates, except a loss
resulting from ICAC's willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties. The Administration Agreement will terminate
automatically if assigned, and may be terminated without penalty by either ICAC
or the Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Trust, as defined in the Investment Company
Act), upon 60 days' written notice. The Administration Agreement will continue
in effect only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer agents,
accounting agents, independent accountants and legal counsel. These services
are comprised principally of assistance in coordinating with the Trust's
various service providers, providing certain officers of the Trust, responding
to inquiries from shareholders which are directed to the Trust rather than other
service providers, calculating
B-41
<PAGE>
performance data, providing various reports to the Board of Trustees, and
assistance in preparing reports, prospectuses, proxy statements and other
shareholder communications. The Agreement contains provisions regarding
liability and termination similar to those of the Administration Agreement.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for distributing
shares of the Funds. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management Holdings, L.P., the
general partner of the Investment Adviser.
DISTRIBUTION AGREEMENT
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Funds, but
is not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar to
those in the Investment Advisory Agreement discussed above. Pursuant to the
Distribution Agreement, the Trust has agreed to indemnify the Distributor to the
extent permitted by applicable law against certain liabilities under the
Securities Act.
Sales charges on sales of Class A shares of the Funds are payable
only with respect to purchases of less than $1,000,000. However, the Distributor
pays an initial commission to broker-dealers and others on purchases of Class A
shares of the Funds of $1 million or more, and on purchases made at net asset
value by certain retirement plans. See "Purchase and Redemption of Portfolio
Shares -- Dealer Commissions."
The aggregate commissions received by the Distributor in connection
with sales of shares in the Funds for the three fiscal years ended March 31,
1997 were $_________.
DISTRIBUTION PLAN
Under a plan of distribution for the Trust with respect to the Class
A, B and C shares of the Funds (the "Distribution Plan") adopted pursuant to
Rule 12b-1 under the Investment Company Act and distribution agreement (the
"Distribution Agreement"), the Distributor incurs the expense of distributing
such shares of the Funds. The Distribution Plan provides for compensation to
the Distributor for the services it provides, and the costs and expenses it
incurs, related to marketing such shares of the Funds. The Distributor is paid
for: (a) expenses incurred in connection with advertising and marketing such
shares of the Funds, including but not limited to any advertising by radio,
television, newspapers, magazines, brochures, sales literature, telemarketing or
direct mail solicitations; (b) periodic payments of fees or commissions for
distribution assistance made to one or more securities brokers, dealers or other
industry professionals such as investment advisers, accountants, estate planning
firms and the Distributor itself in respect of the average daily value of such
shares owned by clients of such service organizations, and (c) expenses incurred
in preparing, printing and distributing the Funds' prospectuses and statements
of additional information with respect to such shares.
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<PAGE>
The Distribution Plan continues in effect from year to year, provided
that each such continuance is approved at least annually by a vote of the Board
of Trustees of the Trust, including a majority vote of the Trustees of the Trust
who are not interested persons of the Trust and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any
agreements related to the Distribution Plan (the "Rule 12b-1 Trustees"), cast in
person at a meeting called for the purpose of voting on such continuance. The
Distribution Plan may be terminated with respect to any Class of shares of a
Fund at any time, without penalty, by the vote of a majority of the Rule 12b-1
Trustees or by the vote of the holders of a majority of the outstanding shares
of such Fund. The Distribution Plan may not be amended to increase materially
the amounts to be paid by a Class of shares of a Fund for the services
described therein without approval by a majority of such outstanding shares of
the Fund, and all material amendments are required to be approved by the Board
of Trustees in the manner described above. The Distribution Plan will
automatically terminate in the event of its assignment. A Class of shares of a
Fund will not be contractually obligated to pay expenses incurred under the
Distribution Plan if the Plan is terminated or not continued with respect to
such shares.
Under the Distribution Plan, the Distributor is compensated for
distribution-related expenses with respect to the Funds at the following annual
rates, payable monthly, based on the average daily net assets of each class of
each Fund: for the Class A shares of the Funds, 0.25%; for the Money Market
Fund, 0.15%; for the Class B and Class C shares of the Funds, 0.75%. The
Distributor recovers the distribution expenses it incurs through the receipt of
compensation payments from the Trust under the Distribution Plan and the receipt
of that portion of initial sales charges on purchases of shares of the Funds
remaining after the Distributor's reallowance to selected dealers.
If the Distributor incurs expenses greater than the maximum
distribution fees payable under the Distribution Plan, as described above, with
respect to a Class of shares of a Fund, the Class will not reimburse the
Distributor for the excess in the subsequent fiscal year. However, because the
Distribution Plan is a "compensation-type" plan, the distribution fees are
payable even if the Distributor's actual distribution related expenses are less
than the percentages described above.
The aggregate amounts earned by the Distributor pursuant to the
Distribution Plan for the fiscal year ended March 31, 1997, were as follows:
Amounts-Earned under
Fund */ Distribution Plan
- ------- --------------------
Core Growth Fund Class A Shares $ 209,589
Core Growth Fund Class B Shares 170,941
Core Growth Fund Class C Shares 1,367,835
Emerging Growth Fund Class A Shares 382,408
Emerging Growth Fund Class B Shares 179,975
Emerging Growth Fund Class C Shares 1,673,336
Income & Growth Fund Class A Shares 77,395
Income & Growth Fund Class B Shares 51,856
Income & Growth Fund Class C Shares 463,340
Balanced Fund Class A Shares 14,817
Balanced Fund Class B Shares 12,844
Balanced Fund Class C Shares 133,791
Worldwide Fund Class A Shares 60,693
Worldwide Fund Class B Shares 28,354
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<PAGE>
Worldwide Fund Class C Shares 539,559
International Small Cap Fund Class A Shares 7,047
International Small Cap Fund Class B Shares 22,586
International Small Cap Fund Class C Shares 20,268
Emerging Countries Fund Class A Shares 123,152
Emerging Countries Fund Class B Shares 86,600
Emerging Countries Fund Class C Shares 106,711
Money Market Fund 26,500
_________________________
*/ The amounts earned by the Distributor and set forth in this table were
earned prior to the Reorganization, at which time the Class A, B and C
shares of various Funds were separate A, B and C Portfolios.
The Distributor pays broker-dealers and others out of its distribution
fees quarterly trail commissions of up to the following annual percentages of
the average daily net assets attributable to shares of respective classes held
in the accounts of their customers: 0.25% for the Class A and B shares of the
Funds; 0.15% for the Money Market Fund; 0.75% for Class C shares of the Funds.
SHAREHOLDER SERVICE PLAN
The Trust has also adopted a Shareholder Service Plan with respect to
the Funds. Under the Shareholder Service Plan, the Distributor is compensated
at the annual rate of 0.10% of the average daily net assets of each Fund
attributable to the Class A shares of such Fund, 0.10% of the Money Market
Fund's average daily net assets, and 0.25% of the average daily net assets of
each Fund attributable to the Class B and C shares of such Fund, for certain
shareholder service expenses provided by the Distributor and fees paid to
broker-dealers and others for the provision of support services to their clients
who are beneficial owners of shares of the Funds.
Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in Fund
shares; processing dividend and distribution payments from the Funds on behalf
of clients; preparing tax reports; arranging for bank wires; responding to
client inquiries concerning their investments in Fund shares; providing the
information to the Funds necessary for accounting and subaccounting; preparing
tax reports, forms and related documents; forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to clients;
assisting in processing exchange and redemption requests from clients; assisting
clients in changing dividend options, account designations and addresses; and
providing such other similar services.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Trustees of the Trust, including a majority of the Trustees who
have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder Service
Plan (the "Independent Trustees"), cast in person at a meeting called for the
purpose of voting on such continuance. The Shareholder Service Plan may be
amended at any time by the Board, provided that any material amendments of the
terms of the Plan will become effective only upon the approval by a majority of
the Board and a majority of the Independent Trustees pursuant to a vote cast in
person at a
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meeting called for the purpose of voting on the Plan. The Shareholder Service
Plan may be terminated with respect to any Fund or class at any time, without
penalty, by the Board.
Under the Shareholder Service Plan, the Distributor pays broker-dealers
and others an account servicing fee of up to 0.25% annually of the average daily
net assets of each Fund attributable to the Class C shares of such Fund in the
accounts of their customers, as compensation for providing certain
shareholder-related services.
MISCELLANEOUS
Pursuant to the Distribution Plan and Shareholder Service Plan, the
Board of Trustees reviews at least quarterly a written report of the
distribution and service expenses incurred on behalf of shares of the Funds by
the Distributor. The report includes an itemization of the distribution and
service expenses and the purposes of such expenditures. In addition, as long as
the Plans remain in effect, the selection and nomination of Trustees who are not
interested persons of the Trust is committed to the Trustees who are not
interested persons of the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Trust's Board of Trustees, the
Investment Adviser executes the Funds' portfolio transactions and allocates the
brokerage business. In executing such transactions, the Investment Adviser
seeks to obtain the best price and execution for the Funds, taking into account
such factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. Securities in which the Funds
invest may be traded in the over-the-counter markets, and the Funds deal
directly with the dealers who make markets in such securities except in those
circumstances where better prices and execution are available elsewhere. The
Investment Adviser negotiates commission rates with brokers or dealers based on
the quality or quantity of services provided in light of generally prevailing
rates, and while the Investment Adviser generally seeks reasonably competitive
commission rates, the Funds do not necessarily pay the lowest commissions
available. The Board of Trustees of the Trust periodically reviews the
commission rates and allocation of orders.
The Funds have no obligation to deal with any broker or group of brokers
in executing transactions in portfolio securities. Subject to obtaining the
best price and execution, brokers who sell shares of the Funds or provide
supplemental research, market and statistical information and other research
services and products to the Investment Adviser may receive orders for
transactions by the Funds. Such information, services and products are those
which brokerage houses customarily provide to institutional investors, and
include items such as statistical and economic data, research reports on
particular companies and industries, and computer software used for research
with respect to investment decisions. Information, services and products so
received are in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement, and
the expenses of the Investment Adviser are not necessarily reduced as a result
of the receipt of such supplemental information, services and products. Such
information, services and products may be useful to the Investment Adviser in
providing services to clients other than the Trust, and not all such
information, services and products are used by the Investment Adviser in
connection with the Funds. Similarly, such information, services and products
provided to the Investment Adviser by brokers and dealers through whom other
clients of the Investment Adviser effect securities transactions may be useful
to the Investment Adviser in providing services to the Funds. The Investment
Adviser may pay higher commissions on brokerage transactions for the Funds to
brokers in
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<PAGE>
order to secure the information, services and products described above, subject
to review by the Trust's Board of Trustees from time to time as to the extent
and continuation of this practice.
Although the Investment Adviser makes investment decisions for the
Trust independently from those of its other accounts, investments of the kind
made by the Funds may often also be made by such other accounts. When the
Investment Adviser buys or sells the same security at the same time on behalf of
the Funds and one or more other accounts managed by the Investment Adviser, the
Investment Adviser allocates available investments by such means as, in its
judgment, result in fair treatment. The Investment Adviser aggregates orders
for purchases and sales of securities of the same issuer on the same day among
the Funds and its other managed accounts, and the price paid to or received by
the Funds and those accounts is the average obtained in those orders. In some
cases, such aggregation and allocation procedures may affect adversely the price
paid or received by the Funds or the size of the position purchased or sold by
the Funds.
Securities trade in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's commission or discount. On occasion, certain money market
instruments and agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid.
During the fiscal year ended March 31, 1997, the master funds of the
Master Trust (which were predecessors to the corresponding Funds) acquired
securities of their regular brokers or dealers (as defined in Rule 10b-1 under
the Investment Company Act) or their parents: Large Cap Growth Fund --J.P.
Morgan & Co.; Core Growth Fund -- Merrill Lynch & Co., UBS Securities, Inc.,
Household Finance Co., J.P.Morgan & Co., American Express Credit Corp.; Emerging
Growth Fund -- J.P. Morgan & Co., Associates Corp. of North America, Merrill
Lynch & Co., UBS Securities, Inc., Everen Securities, Hambrecht & Quist Group,
Household Finance Co., American Express Credit Corp.; Income & Growth Fund --
Merrill Lynch & Co., Associates Corp. of North America, First Chicago NBD Corp.,
Morgan Stanley Group, Inc., American Express Credit Corp.; Balanced Growth Fund
- -- Bear, Stearns, Inc., Morgan Stanley Group, Inc., Salomon Bros. Inc.,
Associates Corp of North America; Money Market Fund --Associates Corp. of North
America, General Electric Credit Corp., Norwest Corp., J.P. Morgan & Co.,
American Express Capital Corp., Chevron Corp.; International Core Growth Fund --
Associates Corp. of North America, Merrill Lynch & Co.; Worldwide Growth Fund --
Morgan Stanley Group, Inc., Merrill Lynch & Co.; International Small Cap Growth
Fund -- Merrill Lynch & Co.; Emerging Countries Fund --Associates Corp. of
North America, Merrill Lynch & Co., Rashid Hussain Berhad Securities, Peregrine
Brokerage; Fully Discretionary Fixed Income Fund -- J.P. Morgan & Co.; Value
Fund -- Salomon Bros., Goldman Sachs; and High Yield Bond Fund -- J.P. Morgan &
Co., UBS Securities. The holdings of securities of such brokers and dealers
were as follows as of March 31, 1997: Large Cap Growth Fund -- J.P. Morgan & Co.
($176,000); Emerging Growth Fund -- J.P. Morgan & Co. ($22,666,000); Income &
Growth Fund -- Merrill Lynch & Co. ($1,244,500), Associates Corp. Of North
America ($5,742,000); Balanced Growth Fund -- Bear, Stearns, Inc. ($118,650),
Associates Corp of North America ($860,000); Money Market Fund -- Associates
Corp. of North America ($999,706), General Electric Credit Corp. ($999,704);
Norwest Corp., ($998,678), J.P. Morgan & Co. ($12,158,000); International Core
Growth Fund --Associates Corp. of North America ($130,000), Merrill Lynch & Co.
($194,000); Emerging Countries Fund -- Associates Corp. of North America
($3,036,000); Fully Discretionary Fixed Income Fund -- J.P. Morgan & Co.
($78,271); and Value Fund -- Salomon Bros. ($49,875).
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The aggregate dollar amount of brokerage commissions paid by the master
funds predecessors to the corresponding Funds during the last three fiscal years
of the Trust were as follows:
Year Ended
------------------------------------------------------
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
International Core $ 24,643 N/A N/A
Growth Fund
Worldwide Fund 970,564 484,310 344,167
International Small Cap 692,326 116,735 69,187
Growth Fund
Emerging Countries Fund 1,427,861 169,728 20,701
Large Cap Growth Fund 4,620 0 0
Core Growth Fund 1,139,938 862,396 728,347
Value Fund 8,996 N/A N/A
Emerging Growth Fund 987,245 1,038,140 649,053
Income & Growth Fund 114,523 83,459 174,247
Balanced Fund 35,105 51,038 44,386
Fully Discretionary Fund 0 0 N/A
High Yield Bond Fund 200 N/A N/A
Money Market Fund 0 0 0
Of the total commissions paid during the fiscal year ended March 31, 1997,
$1,971,176 (36.52%) were paid to firms which provided research, statistical or
other services to the Investment Adviser.
PURCHASE AND REDEMPTION OF FUND SHARES
Class A, B, and C shares of the Funds may be purchased and redeemed at
their net asset value without any initial or deferred sales charge by former
partners of Whitehall Partners and Coventry Partners, California limited
partnerships, who received shares of the predecessor to the Class I shares of
the Trust's Core Growth Fund and Income & Growth Fund, respectively, in the
reorganization and conversion of such partnerships into such predecessor.
Similarly, Class A, B and C shares of the Funds may be purchased and redeemed
at their net asset value without any initial or deferred sales charge by former
partners and participants of Stratford Partners and Nicholas-Applegate Emerging
Growth Pooled Trust, who received shares of the predecessor to the Class I
Shares of the Trust's Emerging Growth Fund in the reorganization and conversion
of such partnerships and pooled trust into such predecessor.
The price paid for purchase and redemption of shares of the Funds is
based on the net asset value per share, which is calculated once daily at the
close of trading (currently 4:00 P.M. New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Martin Luther King's Birthday,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day. The offering price is effective for orders
received by the Transfer Agent 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 Funds' 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 Funds.
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<PAGE>
Payment for shares redeemed will 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.
REDUCED SALES CHARGES
Sales charges on purchases of Class A shares of the Funds are subject
to a reduction in certain circumstances, as indicated in the Prospectus.
RIGHTS OF ACCUMULATION. Each Fund makes available to its Class A
shareholders the ability to aggregate the value (at the current maximum offering
price on the date of the purchase) of their existing holdings of all Class A
shares to determine the reduced sales charge, provided the shares are held in a
single account. The value of existing holdings for purposes of determining the
reduced sales charge is calculated using the maximum offering price (net asset
value plus sales charge) as of the previous business day. The Transfer Agent
must be notified at the time of purchase that the shareholder is entitled to a
reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings.
CONCURRENT PURCHASES. Purchasers may combine concurrent purchases of
Class A shares of two or more Funds to qualify for a reduced sales charge. If
the shares of the Funds purchased concurrently are subject to different sales
charges, the concurrent purchases are aggregated to determine the reduced sales
charge applicable to each Fund purchased, and each separate reduced sales
charge is imposed on the amount of shares purchased for that Fund.
To illustrate, suppose an investor concurrently purchases $40,000 of the
Class A shares of the Core Growth Fund and $20,000 of the Class A shares of
the Government Income Fund, for an aggregate concurrent purchase of $60,000.
Because the sales charges are reduced for purchases of $50,000 or more and
because concurrent purchases can be combined, the applicable sales charge
imposed on the $40,000 purchase of shares of the Core Growth Fund would be
reduced to 4.50% (from 5.25%), and the sales charge imposed on the concurrent
$20,000 purchase of shares of the Government Income Fund would be reduced to
4.00% (from 4.75%).
LETTER OF INTENT. Reduced sales charges are available to purchasers of
Class A shares of a Fund who enter into a written Letter of Intent providing for
the purchase, within a 13-month period, of Class A shares of the Funds,
provided the shares are held in a single account. All Class A shares of Funds
which were previously purchased and are still owned are also included in
determining the applicable reduction. The Letter of Intent privilege may be
withdrawn by the Distributor or the Transfer Agent for future purchases upon
receipt of information that any shares subject to the Letter of Intent have been
transferred or redeemed during the 13-month Period.
A Letter of Intent permits a purchaser to establish a total investment
goal to be achieved by any number of investments over a 13-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Investors should refer to their Letter of Intent when placing
orders for Class A shares of a Fund. During the 13-month period, an investor
may increase his or her Letter of Intent goal and all subsequent purchases will
be treated as a new Letter of Intent except as to the 13-month period, which
does not change. The sales charge paid on purchases made before the increase to
the Letter of Intent goal will be retroactively reduced at the end of the
period.
The Transfer Agent will hold in escrow Class A shares of the Funds
totaling 5% of the dollar amount of the Letter of Intent in the name of the
purchaser. Any dividends and capital gains distributions on the escrowed shares
will be paid to the investor or as otherwise directed by the
B-48
<PAGE>
investor. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal. Upon completion of the Letter of Intent goal within the 13-month period,
the investor will promptly receive the escrowed shares.
The Letter of Intent does not obligate the investor to purchase, or any
Fund to sell, the indicated amount of Class A shares. In the event the Letter
of Intent goal is not achieved within the 13-month period, the investor must pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Transfer Agent or, if not paid within 20 days after written
request, the Transfer Agent will liquidate sufficient escrowed shares to obtain
such difference. If the redemption or liquidation proceeds are inadequate to
cover the differences, investors will be liable for the extent of the
inadequacy. By executing the Letter of Intent, investors irrevocably appoint
the Transfer Agent as attorney in fact with full power of substitution in the
premises to surrender for redemption any or all escrowed shares. If the goal
Letter of Intent is exceeded in an amount which qualified for a lower sales
charge, a price adjustment is made by refunding to the purchaser the amount of
excess sales charge, if any, paid during the 13-month period.
DEALER COMMISSIONS
The Distributor pays the following commissions to dealers who initiate
and are responsible for purchases of a Class of Fund shares of $1 million or
more and for purchases made at net asset value by certain retirement plans of
organizations with 50 or more eligible employees. Such commissions are paid
twice monthly at the following annual rates:
Current Market Value
of Accounts at
Commission Rate Time of Purchase
---------------- ---------------------
1.00% $1,000,000 up to $2,000,000.
.80% over $2,000,000 up to $5,000,000.
.50% over $5,000,000 up to $25,000,000.
.25% over $25,000,000.
For this purpose, exchanges between Funds are not considered to be purchases.
The Distributor reserves the right to require reimbursement of any such
commissions paid with respect to such purchases if such shares are redeemed
within twelve months after purchase. Dealers requesting further information may
call (800) 551-8045.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of a Fund redeemed, the
Trust reserves the right to make payment wholly or partly in shares of portfolio
securities. In such cases, a shareholder may incur brokerage costs in
converting such securities to cash. However, the Trust has elected to be
governed by the provisions of Rule 18f-1 under the Investment Company Act,
pursuant to which it is obligated to pay in cash all requests for redemptions by
any shareholder of record, limited in amount with respect to each shareholder
during any 90-day period to the lesser of $250,000 or 1% of the net asset value
of the Trust at the beginning of such period.
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<PAGE>
WAIVER OF CDSC
The CDSC is waived for redemptions by: (1) current or retired
directors, trustees, partners, officers and employees of the Trust, the
Distributor, the Investment Adviser and its general partner, certain family
members of the above persons, and trusts or plans primarily for such persons;
(2) former limited partners and participants of certain investment partnerships
and pooled trusts previously managed by the Investment Adviser; and
(3) participants in certain pension, profit-sharing or employee benefit plans
that are sponsored by the Distributor and its affiliates.
The CDSC is also waived for:
(1) exchanges of Class B or C shares of the Funds (however, the shares
acquired by exchange will continue to be subject to a CDSC on the same
basis as the shares exchanged);
(2) redemptions in connection with mergers, acquisitions and exchange
offers involving Class B or C shares of the Funds;
(3) qualifying distributions from qualified retirement plans and other
employee benefit plans;
(4) distributions from custodial accounts under Section 403(b)(7) of the
Internal Revenue Code or IRAs due to death, disability or attainment of age
59 1/2;
(5) tax-free returns of excess contributions to IRAs;
(6) any partial or complete redemptions following the death or disability
of a shareholder, provided the redemption is made within one year of death
or initial determination of disability; and
(7) redemptions when the Distributor did not pay an advance commission to
a broker upon the purchase of the shares being redeemed.
CERTAIN EMPLOYEE BENEFIT PLANS
Class A shares are made available to certain 401(k) plans at net asset
value, with waiver of the CDSC, if (i) the plan is recordkept on a daily
valuation basis by Merrill Lynch and, on the date the plan sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the plan has $3 million or more
in assets invested in broker/dealer funds not advised or managed by Merrill
Lynch Asset Management, L.P. ("MLAM") that are made available pursuant to a
Services Agreement between Merrill Lynch and the Distributor and in funds
advised or managed by MLAM (collectively, the "Applicable Investments"); or (ii)
the plan is recordkept on a daily valuation basis by an independent recordkeeper
whose services are provided through a contract or alliance arrangement with
Merrill Lynch, and on the date the plan sponsor signs the Merrill Lynch
Recordkeeping Service Agreement, the plan has $3 million or more in assets,
excluding money market funds, invested in Applicable Investments; or (iii) the
plan has 500 or more eligible employees, as determined by the Merrill Lynch plan
conversion manager, on the date the plan sponsor signs the Merrill Lynch
Recordkeeping Service Agreement.
Class B shares are made available to certain 401(k) plans at net asset
value, with waiver of the CDSC, if (i) the plan is recordkept on a daily
valuation basis by Merrill Lynch and, on the
B-50
<PAGE>
date the plan sponsor signs the Merrill Lynch Recordkeeping Service Agreement,
the plan has less than $3 million in assets invested in Applicable Investments;
or (ii) the plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the plan sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the plan has less than $3 million
in assets, excluding money market funds, invested in Applicable Investments; or
(iii) the plan has less than 500 eligible employees, as determined by the
Merrill Lynch plan conversion manager, on the date the plan sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares of the Funds will be converted to Class A shares once the plan
has reached $5 million invested in Applicable Investments. The conversion will
be effected at the plan level.
SHAREHOLDER SERVICES
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of a Fund, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. If a share certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Account at any time. There
is no charge to the investor for issuance of a certificate. Whenever a
transaction takes place in the Shareholder Investment Account, the shareholder
will be mailed a statement showing the transaction and the status of the
Account. No certificates will be issued for shares of the Money Market Fund.
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 Class
of shares of a Fund at net asset value. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such distribution at net
asset value by returning the check or the proceeds to the Transfer Agent within
30 days after the payment date. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of a Fund on a monthly or
quarterly basis on any day of the month or quarter by authorizing his or her
bank account to be debited to invest specified dollar amounts in shares of the
Fund. The investor's bank must be a member of the Automatic Clearing House
System. Stock certificates are not issued to participants of the Automatic
Investment Plan. Participation in the Plan will begin within 30 days after
receipt of the account application. If the investor's bank account cannot be
charged due to insufficient funds, a stop-payment order or closing of the
account, the investor's Plan may be terminated and the related investment
reversed. The investor may change the amount of the investment or discontinue
the Plan at any time by writing to the Transfer
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<PAGE>
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 of Class A, B and C shares of one Fund may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
that Fund (the "paying Fund") into Class A, B or C shares of any other Fund
(the "receiving Fund") subject to the following conditions: (i) the aggregate
value of the shareholder's account(s) in the paying Fund(s) must equal or
exceed $5,000 (this condition is waived if the value of the account in the
receiving Fund equals or exceeds that Fund's minimum initial investment
requirement), (ii) as long as the value of the account in the receiving Fund is
below that Fund's minimum initial investment requirement, dividends and capital
gain distributions paid by the receiving Fund must be automatically reinvested
in the receiving Fund, and (iii) if this privilege is discontinued with respect
to a particular receiving Fund, the value of the account in that Fund must
equal or exceed the Fund's minimum initial investment requirement or the Fund
will have the right, if the shareholder fails to increase the value of the
account to such minimum within 90 days after being notified of the deficiency,
automatically to redeem the account and send the proceeds to the shareholder.
These cross-reinvestments of dividends and capital gain distributions will be at
net asset value (without a sales charge).
AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Fund of
sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be made
into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.
NET ASSET VALUE
The net asset value of a share of a Class of a Fund is calculated by
dividing (i) the value of the securities held by the Fund (I.E., the value of
its investments in a Fund), plus any cash or other assets, minus the Class'
proportional interest in the Fund's liabilities (including accrued estimated
expenses on an annual basis) and all liabilities allocable to such Class, by
(ii) the total number of shares of the Class outstanding. The value of the
investments and assets of 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
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<PAGE>
particular day and other over-the-counter securities are valued at the mean
between the closing bid and asked prices.
In the event that the New York Stock Exchange or the national
securities exchange on which stock or stock options are traded adopt different
trading hours on either a permanent or temporary basis, the Board of Trustees
of the Trust will reconsider the time at which they compute net asset value.
In addition, the asset value of a Fund may be computed as of any time permitted
pursuant to any exemption, order or statement of the Commission or its staff.
The Funds value long-term debt obligations at the quoted bid prices
for such securities or, if such prices are not available, at prices for
securities of comparable maturity, quality and type; however, the Investment
Adviser will use, when it deems it appropriate, prices obtained for the day of
valuation from a bond pricing service, as discussed below. The Funds value debt
securities with maturities of 60 days or less at amortized cost if their term to
maturity from date of purchase is less than 60 days, or by amortizing, from the
sixty-first day prior to maturity, their value on the sixty-first day prior to
maturity if their term to maturity from date of purchase by the Fund is more
than 60 days, unless this is determined by the Board of Trustees of the Trust
not to represent fair value. The Funds value repurchase agreements at cost plus
accrued interest.
The Funds value U.S. Government securities which trade in the
over-the-counter market at the last available bid prices, except that securities
with a demand feature exercisable within one to seven days are valued at par.
Such valuations are based on quotations of one or more dealers that make markets
in the securities as obtained from such dealers, or on the evaluation of a
pricing service.
The Funds value options, futures contracts and options thereon which
trade on exchanges at their last sale or settlement price as of the close of
such exchanges or, if no sales are reported, at the mean between the last
reported bid and asked prices. If an options or futures exchange closes later
than 4:00 p.m. New York time, the options or futures traded on it are valued
based on the sale price, or on the mean between the bid and ask prices, as the
case may be, as of 4:00 p.m. New York time.
Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of business
day in New York. In addition, foreign securities trading may not take place on
all business days in New York, and may occur in various foreign markets on days
which are not business days in New York and on which net asset value is not
calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of the New
York Stock Exchange will not be reflected in the calculation of net asset value
unless the Board of Trustees of the Trust deems that the particular event would
materially affect net asset value, in which case an adjustment will be made.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value into U.S.
dollars at the spot exchange rates at 1:00 p.m. New York time or at such other
rates as the Investment Adviser may determine to be appropriate in computing net
asset value.
Securities and assets for which market quotations are not readily
available, or for which the Trust's Board of Trustees or persons designated by
the Board determine that the foregoing methods do not accurately reflect current
market value, are valued at fair value as determined in good faith by or under
the direction of the Trust's Board of Trustees. Such valuations and procedures
will be reviewed periodically by the Board of Trustees.
B-53
<PAGE>
The Trust may use a pricing service approved by its Board of
Trustees. Prices provided by such a service represent evaluations of the mean
between current bid and asked market prices, may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics, indications
of values from dealers and other market data. Such services may use electronic
data processing techniques and/or a matrix system to determine valuations. The
procedures of such services are reviewed periodically by the officers of the
Trust under the general supervision and responsibility of its Board of Trustees,
which may replace a service at any time if it determines that it is in the best
interests of the Funds to do so.
MONEY MARKET FUND
The calculation of the net asset value per share of the Money Market
Fund is based upon the penny-rounding method of pricing pursuant to Rule 2a-7
under the Investment Company Act. The net asset value per share of the Money
Market Fund will normally remain constant at $1.00.
The Money Market Fund determines the value of its portfolio securities by
the amortized cost method. This method involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Fund would receive if it sold
the instrument. During these periods, the yield to an existing shareholder may
differ somewhat from that which could be obtained from a similar fund which
marks its portfolio securities to market each day.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Balanced and Income & Growth Funds declare and pay quarterly
dividends of net investment income. The Fully Discretionary Fund declares and
pays monthly dividends of net investment income. The Money Market Fund
declares daily dividends of net investment income and distributes the accrued
dividends to shareholders each month. All other Funds declare and pay annual
dividends of all investment income. Each Fund makes distributions at least
annually of its net capital gains, if any. In determining amounts of capital
gains to be distributed by a Fund, any capital loss carryovers from prior years
will be offset against its capital gains.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify each Fund as a regulated investment
company under Subchapter M of the Code, and intends that each Portfolio will
remain so qualified.
As a regulated investment company, a Fund will not be liable for
federal income tax on its income and gains provided it distributes all of its
income and gains currently. Qualification as a regulated investment company
under the Code requires, among other things, that each Fund (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) for taxable years beginning on
or before
B-54
<PAGE>
August 5, 1997 derive less than 30% of its gross income from the sale or other
disposition of stock, securities, options, futures, forward contracts, certain
foreign currencies and certain options, futures, and forward contracts on
foreign currencies held less than three months; (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities and
securities of other regulated investment companies, and other securities (for
purposes of this calculation generally limited, in respect of any one issuer, to
an amount not greater than 5% of the market value of the Fund's assets and 10%
of the outstanding voting securities of such issuer) and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), or two or more issuers which the Trust controls and which
are determined to be engaged in the same or similar trades or businesses; and
(d) distribute at least 90% of its investment company taxable income (which
includes dividends, interest, and net short-term capital gains in excess of net
long-term capital losses) each taxable year.
A Fund generally will be subject to a nondeductible excise tax of 4%
to the extent that it does not meet certain minimum distribution requirements as
of the end of each calendar year. To avoid the tax, a Fund must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income and net capital gain (not taking into account any capital gains
or losses as an exception) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (and adjusted for certain ordinary
losses) for the twelve month period ending on October 31 of the calendar year,
and (3) all ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject to
federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid the excise tax, the Funds intend to make timely distributions of their
income in compliance with these requirements and anticipate that they will not
be subject to the excise tax.
Dividends paid by a Fund from ordinary income, and distributions of
the Fund's net realized short-term capital gains, are taxable to its
shareholders as ordinary income. Distributions to corporate shareholders will
be eligible for the 70% dividends received deduction to the extent that the
income of the Funds is derived from dividends on common or preferred stock of
domestic corporations. Dividend income earned by a Fund will be eligible for
the dividends received deduction only if the Fund has satisfied a 46-day
holding period requirement with respect to the underlying portfolio security (91
days in the case of dividends derived from preferred stock). In addition, a
corporate shareholder must have held its shares in the Fund for not less than
46 days (91 days in the case of dividends derived from preferred stock) in order
to claim the dividend received deduction. Not later than 60 days after the end
of its taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during such year which may be
taken into account by its shareholders for purposes of such deduction provisions
of the Code. Net capital gain distributions are not eligible for the dividends
received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to a Fund's shareholders as long-term capital gains,
regardless of the holding period of such shareholders. Such distributions of
net capital gains will be designated by the Fund as a capital gains
distribution in a written notice to its shareholders which accompanies the
distribution payment. Any loss on the sale of shares held for less than six
months will be treated as a long-term capital loss for federal tax purposes to
the extent a shareholder receives net capital gain distributions on such shares.
The maximum federal income tax rate applicable to long-term capital gains is
currently 28% (20% for
B-55
<PAGE>
property sold after July 28, 1997 that was held more than 18 months) for
individual shareholders and 35% for corporate shareholders. Dividends and
distributions are taxable as such whether received in cash or reinvested in
additional shares of a Fund.
Any loss realized on a sale, redemption or exchange of shares of a
Fund by a shareholder will be disallowed to the extent the shares are replaced
within a 61-day period (beginning 30 days before the disposition of shares).
Shares purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of a Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund
if the shareholder acquires shares in a Fund of the Trust pursuant to a
reinvestment right that reduces the sales charges in the subsequent acquisition
of shares.
SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by a
shareholder from a Fund provided that certain conditions are satisfied.
Interest received on repurchase agreements collateralized by U.S. Government
obligations normally is not exempt from state taxation. The Trust will inform
shareholders annually of the percentage of income and distributions derived from
direct U.S. Government obligations. Shareholders should consult their tax
advisers to determine whether any portion of the income dividends received from
the Fund is considered tax exempt in their particular states.
With respect to investments in STRIPS and CUBES made by the Money
Market Fund that are sold at original issue discount and thus do not make
periodic cash interest payments, the Fund will be required to include as part
of its current income the imputed interest on such obligations even though the
Fund has not received any interest payment on such obligations during that
period. Because the Fund may have to sell portfolio securities to distribute
such imputed income, which may occur at a time when the Investment Adviser would
not have chosen to sell such securities and which may result in a taxable gain
or loss.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Funds are "section 1256 contracts. " Any gains or losses
on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Funds at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under
the Code) are "marked to market " with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as ordinary or 60/40 gain or loss, depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Portfolios.
In addition, losses realized by a Fund on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
B-56
<PAGE>
forward contracts to the Funds are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by a Fund which is
taxed as ordinary income when distributed to shareholders.
The Funds may make one or more of the elections available under the
Code which are applicable to straddles. If the Funds make any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application 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 qualifying income and diversification requirements applicable to
the Funds' assets may limit the extent to which the Funds will be able to
engage in transactions in options, futures contracts or forward contracts.
SECTION 988 GAINS AND LOSSES. UNDER THE CODE, GAINS OR LOSSES
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of the Fund's investment company taxable income to be
distributed to the shareholders.
FOREIGN TAX. Foreign countries may impose withholding and other taxes
on income received by a Fund from sources within those countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Investment Adviser intends to manage the Funds with the
intention of minimizing foreign taxation in cases where it is deemed prudent to
do so. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to elect to "pass-through " to the Fund's shareholders the amount
of foreign income and similar taxes paid by the Fund. Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the Fund elects
pass-through treatment, the source of the Fund's income flows through to
shareholders of the Fund. With respect to such election, the Fund treats gains
from the sale of securities as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit applies separately to foreign
source passive income, and to certain other types of income. Shareholders may
be unable to claim a credit for the full amount of their proportion at share of
the foreign taxes paid by the Fund. The foreign tax credit is modified for
purposes of the federal alternative minimum tax and can be used
B-57
<PAGE>
to offset only 90% of the alternative minimum tax imposed on corporations and
individuals and foreign taxes generally are not deductible in computing
alternative minimum taxable income.
SHORT SALES. Generally, capital gain or loss realized by the Fund in
a short sale may be long-term or short-term depending on the holding period of
the short position. Under a special rule, however, the capital gain will be
short-term gain if (1) as of the date of the short sale, the Fund owned property
for the short-term holding period that was substantially identical to that which
the Fund used to close the sale or (2) after the short sale and on or before its
closing, the Fund acquired substantially similar property. Similarly, if the
Fund held property substantially identical to that sold short for the long-term
holding period as of the date of the short sale, any loss on closing the short
position will be long-term capital loss. These special rules do not apply to
substantially similar property to the extent such property exceeds the property
used by the Fund to close its short position.
ORIGINAL ISSUE DISCOUNT. The Funds may treat some of the debt
securities (with a fixed maturity date of more than one year from the date of
issuance) they may acquire as issued originally at a discount. Generally, the
Funds treat the amount of the original issue discount ("OID") as interest income
and include it in income over the term of the debt security, even though they do
not receive payment of that amount until a later time, usually when the debt
security matures. The Funds treat a portion of the OID includable in income
with respect to certain high-yield corporation debt securities as a dividend for
Federal income tax purposes.
The Funds may treat some of the debt securities (with a fixed maturity
date of more than one year from the date of issuance) that they may acquire in
the secondary market as having market discount. Generally, a Fund treats any
gain recognized on the disposition of, and any partial payment of principal on,
a debt security having market discount as ordinary interest income to the extent
the gain, or principal payment, does not exceed the "accrued market discount "
on such debt security. Market discount generally accrues in equal daily
installments. The Funds may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and
timing the recognition of income.
The Funds may treat some of the debt securities (with a fixed maturity
date of one year or less from the date of issuance) that they may acquire as
having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, a Fund must include the acquisition discount, or OID, in
income over the term of the debt security, even though payment of that amount is
not received until a later time, usually when the debt security matures. The
Fund may make one or more of the elections applicable to the debt securities
having acquisition discount, or OID, which could affect the character and timing
of recognition of income.
The Funds generally must distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though the Funds have yet to receive cash representing such income. The
Funds may obtain cash to pay such dividends from sales proceeds of securities
held by the Funds.
OTHER TAX INFORMATION
The Funds may be required to withhold for U.S. federal income taxes
31% of all taxable distributions payable to shareholders who fail to provide the
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.
B-58
<PAGE>
Backup withholding is not an additional tax. Any amounts withheld may be
credited against the shareholder's U.S. federal income tax liability.
The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of shareholders of a
Fund with respect to distributions by the Fund may differ from federal tax
treatment. Distributions to shareholders may be subject to additional state and
local taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
The Trust may from time to time advertise total returns and yields for
the Funds, compare Fund performance to various indices, and publish rankings
of the Funds prepared by various ranking services. Any performance information
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the its portfolio, and the market conditions
during the given time period, and should not be considered to be representative
of what may be achieved in the future. For purposes of calculating the
historical performance of a Fund, the Trust will take into account the
historical performance of the series of the Trust corresponding to the Fund
prior to the Reorganization of the Trust as well as the historical performance
of that series' corresponding master fund for periods, if any, prior to the
date of inception of the series.
TOTAL RETURN
The total return for a Fund is computed by assuming a hypothetical
initial payment of $1,000. It is assumed that all investments are made at net
asset value (as opposed to market price) and that all of the dividends and
distributions by the Fund over the relevant time periods are invested at net
asset value. It is then assumed that, at the end of each period, the entire
amount is redeemed without regard to any redemption fees or costs. The average
annual total return is then determined by calculating the annual rate required
for the initial payment to grow to the amount which would have been received
upon redemption. Total return does not take into account any federal or state
income taxes.
Total return is computed according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or
fractional portion thereof) of a hypothetical $1,000 payment made at the
beginning of the period.
YIELD
The yield for a Fund (other than the Money Market Fund) is
calculated based on a 30-day or one-month period, according to the following
formula:
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<PAGE>
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 predecessors to the corresponding Classes of shares of
the Funds for the thirty-day period ended September 30, 1997 were as follows:
Income & Growth Fund Class A Shares ______%
Income & Growth Fund Class B Shares ______%
Income & Growth Fund Class C Shares ______%
Balanced Growth Fund Class A Shares ______%
Balanced Growth Fund Class B Shares ______%
Balanced Growth Fund Class C Shares ______%
The Money Market Fund will prepare a current quotation of yield
daily. The yield quoted will be the simple annualized yield for an identified
seven-calendar-day period. The yield calculation will be based on a
hypothetical account having a balance of exactly one share at the beginning of
the seven-day period. The base return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the shares, but excluding any capital
changes. The yield will vary as interest rates and market conditions change.
Yield also depends on the quality, length of maturity and type of instruments in
the Money Market Fund, and its operating expenses. The Money Market Fund may
also prepare an effective annual yield computed by compounding the unannualized
seven-day period return as follows: by adding 1 to the unannualized seven-day
period return, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result. The yield for the Money Market Fund for the
seven days ended September 30, 1997 was ____%.
PRIOR PERFORMANCE OF CERTAIN FUNDS AND THEIR PREDECESSORS
The following table sets forth historical performance information for
Class A, B and C shares of the Core Growth, Emerging Growth, Income & Growth and
International Small Cap Funds. It includes historical performance information
for the Portfolios which preceded the Funds prior to the reorganization of the
Trust, and the following predecessor investment partnerships and pooled trust
which were operated by the Investment Adviser prior to the organization of such
Portfolios: Core Growth Portfolio -- includes performance information for
Whitehall Partners, a California limited partnership the assets of which were
transferred to the Core Growth Portfolio on April 19, 1993; Emerging Growth
Portfolio-- includes performance information for Stratford Partners, a
California limited partnership, and Nicholas-Applegate Emerging Growth Pooled
Trust, a tax-exempt trust, the assets of which were transferred to the Emerging
Growth Portfolio on December 27, 1993; Income and Growth Portfolio -- includes
performance information for Coventry Partners, a California limited partnership
the assets of which were transferred to the Income & Growth Portfolio on April
19, 1993; International Small Cap Portfolio -- includes performance information
for Huntington Partners, a California limited partnership the assets of which
were transferred to the International Fund on August 31, 1994.
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<PAGE>
The Investment Adviser has advised the Trust that its net performance
results in the table are calculated as set forth above under "General
Information-Performance Information. " All information set forth in the table
relies on data supplied by the Investment Adviser or from statistical services,
reports or other sources believed by the Investment Adviser to be reliable.
However, such information has not been verified and is unaudited. See
"Performance Information " in the Statement of Additional Information for
further information about calculation of total return.
The Investment Adviser has advised the Trust that such partnerships
and pooled trusts were operated in substantially the same manner as such
Portfolios, and their assets were transferred to the Portfolios prior to the
effective date of the Portfolios' registration statement. It has indicated
that such results for the prior partnerships and pooled trust have been
adjusted to reflect the deduction of the fees and expeI.nses of the
Portfolios (including Rule 12b-1 fees), and for the period preceding the
Reorganization of the Trust, the proportionate shares of the operating
expenses of the corresponding master funds of the Master Trust (including
advisory fees), as stated under "Summary of Expenses " in the Funds'
Prospectus, and give effect to transaction costs (such as sales loads) as
well as reinvestment of income and gains. However, the prior investment
partnerships and pooled trust were not registered under the 1940 act and were
not subject to certain investment restrictions imposed by such Act; if they
had been so registered, their performance might have been adversely affected.
The results presented on the following pages may not necessarily
equate with the return experienced by any particular shareholder, partner or
trust beneficiary as a result of the timing of investments and redemptions. In
addition, the effect of taxes on any shareholder, partner or trust beneficiary
will depend on such person's tax status, and the results have not been reduced
to reflect any income tax which may have been payable.
B-61
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES OF THE FUNDS
-------------------------------------------------------------------------------------------------------------------
Core Growth Emerging Growth Income & Growth International Small Cap
Performance Performance Performance Performance
----------- --------------- --------------- -----------------------
Russell Russell CS First
Core Midcap Emerging 2000 Income & Boston International MSCI Salomon
Growth S&P 500 Growth Growth Growth Growth Convertible Small Cap EAFE EPAC/EMI
Year Fund Index(1) Index(2) Fund Index(3) Fund Index(4) Fund Index(5) Index(6)
- ---- ---- -------- -------- ---- -------- ---- -------- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985(7) 18.02% 17.14% 5.20% 6.97%
1986 25.14 18.64 17.55% 0.07 3.58
1987(7) (2.44) 5.27 2.76 (9.55) (10.48) (8.76%) (0.22%)
1988 6.12 16.55 12.92 19.46 20.37 12.92 13.41
1989 26.15 31.61 31.48 19.98 20.17 20.94 13.76
1990(7) (5.13) (3.04) (5.13) (13.81) (17.41) (4.08) (6.89) (22.07%) (13.67%) (16.96%)
1991 46.51 30.46 47.03 46.92 51.19 30.33 29.11 5.34 12.13 6.66
1992 6.95 7.62 8.71 6.04 7.77 3.45 17.58 (17.42) (12.17) (15.42)
1993 12.82 10.07 (11.19) 9.15 13.36 19.84 18.55 18.77 32.57 30.34
1994 (15.67) 1.32 (2.17) (9.07) (2.43) (13.05) (4.72) 3.10 7.76 9.44
1995 30.41 37.60 33.99 27.79 31.06 15.29 23.72 (0.03) 11.02 4.79
1996 10.36 17.48 22.96 14.48 11.26 10.23 13.84 6.13 6.05 6.47
1997(8)
Last
year(8)
Last 5
years(8)
Last 10
years(8)
Since
inception(8)
</TABLE>
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
(2) The Russell Midcap Growth Index measures the performance of those companies
among the 800 smallest companies in the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. The Russell 1000 Index
contains the top 1,000 securities of the Russell 3000 Index, which
comprises the 3,000 largest U.S. securities as determined by total market
capitalization.
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<PAGE>
The Russell Midcap Growth Index is considered generally representative of
the U.S. market for midcap stocks. The average market capitalization is
approximately $4 billion, the median market capitalization is approximately
$2.5 billion, and the largest company in the Index had an approximate
market capitalization of $8.7 billion. This Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing. The Index was not available until 1986.
(3) The Russell 2000 Growth Stock Index contains those securities in the
Russell 2000 Index with a greater-than-average growth orientation.
Companies in the Growth Stock Index generally have higher price-to-book and
price-to-earnings ratios than the average for all companies in the 2000
Index. The Russell 2000 Index is a widely regarded small-cap index of the
2,000 smallest securities in the Russell 3000 Index, which comprises the
3,000 largest U.S. securities as determined by total market capitalization.
The Index reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage commissions, or
other expenses of investing.
(4) The CS First Boston Convertible Index is an unmanaged market weighted index
representing the universe of convertible securities, whether they are
convertible preferred stocks or convertible bonds. The Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions or markups, or other
expenses of investing.
(5) The Morgan Stanley Capital International World Index consists of more than
1,400 securities listed on exchanges in the U.S., Europe, Canada,
Australia, New Zealand and the Far East. The Index is a market-value
weighted combination of countries and is unmanaged. The Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions or other expenses of
investing.
(6) The Salomon EPAC Extended Market Index ("EMI") is an unmanaged index that
includes shares of about 2,800 companies in 22 countries excluding Canada
and the United States. Companies within the Index are smaller
capitalization companies with available float market capitalizations
greater than U.S. $100 million. Only issues that are legally and
practically available to outside investors are included in the Index.
Index returns reflect the reinvestment of income dividends and capital
gains distributions, if any, but do not reflect fees, brokerage
commissions, or other expenses of investing.
(7) Inception dates are as follows: Core Growth Portfolio A (predecessor to the
Class A shares of the Core Growth Fund) - September 30, 1985 (registration
statement effective April 19, 1993); Emerging Growth Portfolio A
(predecessor to the Class A shares of the Emerging Growth Fund) - September
30, 1985 (registration statement effective December 27, 1993); Income &
Growth Portfolio A - (predecessor series to the Class A shares of the
Income & Growth Fund) December 31, 1986 (registration statement effective
April 19, 1993); International Small Cap Portfolio A (predecessor series to
the Class A shares of the International Small Cap Fund) - June 7, 1990
(registration statement effective August 31, 1994).
(8) Through September 30, 1997.
B-63
<PAGE>
<TABLE>
<CAPTION>
CLASS B SHARES OF THE FUNDS
-------------------------------------------------------------------------------------------------------------------
Core Growth Emerging Growth Income & Growth International Small Cap
Performance Performance Performance Performance
----------- --------------- --------------- -----------------------
Russell Russell CS First Inter-nation
Core Midcap Emerging 2000 Income & Boston al Small Cap MSCI Salomon
Growth S&P 500 Growth Growth Growth Growth Convertible Fund EAFE EPAC/EMI
Year Fund Index(1) Index(2) Fund Index(3) Fund Index(4) ---- Index(5) Index(6)
- ---- ---- -------- -------- ---- -------- ---- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985(7) 18.16% 17.14% 5.20% 6.97%
1986 24.68 18.64 17.55% (0.32) 3.58
1987(7) (2.82) 5.27 2.76 (9.91) (10.46) (9.12%) (0.22%)
1988 5.72 16.55 12.92 19.02 20.37 12.49 13.41
1989 25.68 31.61 31.48 19.53 20.17 20.49 13.76
1990(7) (5.50) (3.04) (5.13) (14.15) (17.41) (4.45) (6.89) (22.17%) (13.67%) (16.96%)
1991 45.97 30.46 47.03 46.39 51.19 29.85 29.11 4.94 12.13 6.66
1992 6.55 7.62 8.71 5.64 7.77 3.06 17.58 (17.75) (12.17) (15.42)
1993 12.44 10.07 11.19 8.74 13.36 19.24 18.55 18.32 32.57 30.34
1994 (16.06) 1.32 (2.17) (9.64) (2.43) (13.31) (4.72) 1.96 7.76 9.44
1995 30.07 37.60 33.99 27.20 31.06 14.87 23.72 (0.49) 11.02 4.79
1996 10.15 17.48 22.96 14.02 11.26 10.10 13.84 5.88 6.05 6.47
1997(8)
Last year(8)
Last 5
years(8)
Last 10
years(8)
Since in
ception(8)
</TABLE>
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
(2) The Russell Midcap Growth Index measures the performance of those companies
among the 800 smallest companies in the Russell 1000 Index with higher than
average price-to-book ratios and forecasted growth. The Russell 1000 Index
contains the top 1,000 securities of the Russell 3000
B-64
<PAGE>
Index, which comprises the 3,000 largest U.S. securities as determined by
total market capitalization. The Russell Midcap Growth Index is considered
generally representative of the U.S. market for midcap stocks. The average
market capitalization is approximately $4 billion, the median market
capitalization is approximately $2.5 billion, and the largest company in
the Index had an approximate market capitalization of $8.7 billion. This
Index reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage commissions, or
other expenses of investing. The Index was not available until 1986.
(3) The Russell 2000 Growth Stock Index contains those securities in the
Russell 2000 Index with a greater-than-average growth orientation.
Companies in the Growth Stock Index generally have higher price-to-book and
price-to-earnings ratios than the average for all companies in the 2000
Index. The Russell 2000 Index is a widely regarded small-cap index of the
2,000 smallest securities in the Russell 3000 Index, which comprises the
3,000 largest U.S. securities as determined by total market capitalization.
The Index reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage commissions, or
other expenses of investing.
(4) The CS First Boston Convertible Index is an unmanaged market weighted index
representing the universe of convertible securities, whether they are
convertible preferred stocks or convertible bonds. The Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions or markups, or other
expenses of investing.
(5) The Morgan Stanley Capital International World Index consists of more than
1,400 securities listed on exchanges in the U.S., Europe, Canada,
Australia, New Zealand and the Far East. The Index is a market-value
weighted combination of countries and is unmanaged. The Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions or other expenses of
investing.
(6) The Salomon EPAC Extended Market Index ("EMI") is an unmanaged index that
includes shares of about 2,800 companies in 22 countries excluding Canada
and the United States. Companies within the Index are smaller
capitalization companies with available float market capitalizations
greater than U.S. $100 million. Only issues that are legally and
practically available to outside investors are included in the Index.
Index returns reflect the reinvestment of income dividends and capital
gains distributions, if any, but do not reflect fees, brokerage
commissions, or other expenses of investing.
(7) Inception dates are as follows: Core Growth Portfolio B (predecessor to the
Class B shares of the Core Growth Fund) - September 30, 1985 (registration
statement effective May 31, 1995); Emerging Growth Portfolio B (predecessor
to the Class B shares of the Emerging Growth Fund) - September 30, 1985
(registration statement effective May 31, 1995); Income & Growth Portfolio
B (predecessor to the Class B shares of the Income & Growth Fund) -
December 31, 1986 (registration statement effective May 31, 1995);
International Small Cap Portfolio B (predecessor to the Class B shares of
the International Small Cap Fund) - June 7, 1990 (registration statement
effective May 31, 1995).
(8) Through September 30, 1997
B-65
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES OF THE FUNDS
-------------------------------------------------------------------------------------------------------------------
Core Growth Emerging Growth Income & Growth International Small
Performance Performance Performance Cap Performance
----------- --------------- --------------- -----------------------
Russell Russell CS First
Core Midcap Emerging 2000 Income & Boston International MSCI Salomon
Growth S&P 500 Growth Growth Growth Growth Convertible Small Cap EAFE EPAC/EMI
Name Fund Index(1) Index(2) Fund Index(3) Fund Index(4) Fund Index(5) Index(6)
- ---- ---- -------- -------- ---- -------- ---- -------- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985(7) 23.13% 17.14% 9.63% 6.97%
1986 31.24 18.64 17.55% 4.93 3.58
1987(7) 2.30 5.27 2.76 (5.17) (10.48) (4.33%) (0.22%)
1988 11.28 16.55 12.92 25.28 20.37 18.41 13.41
1989 32.30 31.61 31.48 25.82 20.17 26.83 13.76
1990(7) (0.52) (3.04) (5.13) (9.63) (17.41) 0.57 (6.89) (18.89%) (13.67%) (16.96%)
1991 53.66 30.46 47.03 54.09 51.19 36.68 29.11 10.46 12.13 6.66
1992 12.15 7.62 8.71 11.20 7.77 8.48 17.58 (13.42) (12.17) (15.42)
1993 18.23 10.07 11.19 14.46 13.36 25.51 18.55 24.55 32.57 30.34
1994 (11.53) 1.32 (2.17) (4.73) (2.43) (8.75) (4.72) 8.77 7.76 9.44
1995 36.80 37.60 33.99 34.22 31.06 20.83 23.72 3.57 11.02 4.79
1996 14.82 17.48 22.96 19.04 11.26 14.66 13.84 10.40 6.05 6.47
1997(8)
Last
year(8)
Last 5
years(8)
Last 10
years(8)
Since
inception(8)
</TABLE>
(1) The S&P 500 Index is an unmanaged index containing common stocks of
500 industrial, transportation, utility and financial companies,
regarded as generally representative of the U.S. stock market. The
Index reflects the reinvestment of income dividends and capital gain
distributions, if any, but does not reflect fees, brokerage
commissions, or other expenses of investing.
B-66
<PAGE>
(2) The Russell Midcap Growth Index measures the performance of those
companies among the 800 smallest companies in the Russell 1000 Index
with higher than average price-to-book ratios and forecasted growth.
The Russell 1000 Index contains the top 1,000 securities of the
Russell 3000 Index, which comprises the 3,000 largest U.S. securities
as determined by total market capitalization. The Russell Midcap
Growth Index is considered generally representative of the U.S. market
for midcap stocks. The average market capitalization is approximately
$4 billion, the median market capitalization is approximately $2.5
billion, and the largest company in the Index had an approximate
market capitalization of $8.7 billion. This Index reflects the
reinvestment of income dividends and capital gains distributions, if
any, but does not reflect fees, brokerage commissions, or other
expenses of investing. The Index was not available until 1986.
(3) The Russell 2000 Growth Stock Index contains those securities in the
Russell 2000 Index with a greater-than-average growth orientation.
Companies in the Growth Stock Index generally have higher
price-to-book and price-to-earnings ratios than the average for all
companies in the 2000 Index. The Russell 2000 Index is a widely
regarded small-cap index of the 2,000 smallest securities in the
Russell 3000 Index, which comprises the 3,000 largest U.S. securities
as determined by total market capitalization. The Index reflects the
reinvestment of income dividends and capital gains distributions, if
any, but does not reflect fees, brokerage commissions, or other
expenses of investing.
(4) The CS First Boston Convertible Index is an unmanaged market weighted
index representing the universe of convertible securities, whether
they are convertible preferred stocks or convertible bonds. The Index
reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage
commissions or markups, or other expenses of investing.
(5) The Morgan Stanley Capital International World Index consists of more
than 1,400 securities listed on exchanges in the U.S., Europe, Canada,
Australia, New Zealand and the Far East. The Index is a market-value
weighted combination of countries and is unmanaged. The Index
reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage
commissions or other expenses of investing.
(6) The Salomon EPAC Extended Market Index ("EMI") is an unmanaged index
that includes shares of about 2,800 companies in 22 countries
excluding Canada and the United States. Companies within the Index
are smaller capitalization companies with available float market
capitalizations greater than U.S. $100 million. Only issues that are
legally and practically available to outside investors are included in
the Index. Index returns reflect the reinvestment of income dividends
and capital gains distributions, if any, but do not reflect fees,
brokerage commissions, or other expenses of investing.
(7) Inception dates are as follows: Core Growth Portfolio C (predecessor
to the Class C shares of the Core Growth Fund) - September 30, 1985
(registration statement effective April 19, 1993); Emerging Growth
Portfolio C (predecessor to the Class C shares of the Emerging Growth
Fund) - September 30, 1985 (registration statement effective December
27, 1993); Income & Growth Portfolio C (predecessor to the Class C
shares of the Income & Growth Fund) - December 31, 1986 (registration
statement effective April 19, 1993); International Small Cap Portfolio
C (predecessor to the Class C shares of the International Small Cap
Fund) - June 7, 1990 (registration statement effective August 31,
1994).
(8) Through March September 30, 1997.
B-67
<PAGE>
The following tables set 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 Large Cap and Balanced Funds. 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 Funds. Investors should
not consider this performance data as an indication of future performance of the
Funds 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 loses. 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 Large Cap and Balanced Funds. 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 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 composite are not subject to the same types of expenses to
which the A, B and C Class of shares of the Large Cap and Balanced Funds are
subject nor to the diversification requirements, specific tax restrictions and
investment limitations imposed on the Funds by the Investment Company Act or
Subchapter M of the Internal Revenue Code. Consequently, the performance
results for the Investment Adviser's composites could have been adversely
affected if the institutional private accounts included in the composites had
been regulated as investment companies under the federal securities laws.
The investment results of the Investment Adviser's composites
presented below are unaudited and are not intended to predict or suggest the
returns that might be experienced by the Large Cap or Balanced Funds or an
individual investor investing in any Class of shares of such Funds. Investors
should also be aware that the uses of a methodology different form that used
below to calculated performance could result in different performance data.
- ---------------------------
1/ 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.
B-68
<PAGE>
<TABLE>
<CAPTION>
Class of Shares
--------------- 60% S&P 500
of Index 40%
Investment -- Lehman Bros. Lehman Bros.
Adviser's Balanced Fund Lehman Bros. Lehman Bros.
Balanced -------------------------------- S&P 500 Govt./Corp. Lehman Bros.
Year Composite A B C Index(1) Index(2) Index
- ---- --------- - - - -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1988(3). . . . . . 4.98% 10.25% 3.80% 7.45%
1989 . . . . . . . 17.61 31.61 14.23 23.94
1990 . . . . . . . (3.13) (3.04) 8.29 1.97
1991 . . . . . . . 39.99 30.46 16.13 24.18
1992 . . . . . . . 9.61 7.62 7.57 7.51
1993 . . . . . . . 20.82 7.37% 12.05% 10.07 11.06 9.61
1994 . . . . . . . (6.25) 3.61 7.91 1.32 (3.51) 0.08
1995 . . . . . . . 30.98 (2.20) 5.66% 2.47 37.60 19.24 28.29
1996 . . . . . . . 11.72 13.85 9.45 19.85 22.96 2.89 15.16
1997(4). . . . . .
Last Year(4) . . .
Last 5 Years(4). .
Since Inception(4)
</TABLE>
- ------------------------
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarding as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
(2) The Lehman Brothers Government/Corporate Bond Index is an unmanaged
market-weighted index consisting of all public obligations of the U.S.
Government, its agencies and instrumentalities, and all corporate issuers
of fixed rate, non-convertible, investment grade U.S. dollar denominated
bonds having maturities of greater than one year. It is generally regarded
as representative of the market for domestic bonds. The Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions or markups, or other
expenses of investing.
(3) Inception dates are as follows: Balanced Growth Portfolios A and C
(predecessor to the Class A and C shares of the Balanced Growth Fund) -
October 1, 1993 and Balanced Growth Portfolio B (predecessor to the Class B
shares of the Balanced Growth Fund) - May 31, 1995.
(4) Through September 30, 1997.
B-69
<PAGE>
Investment Adviser's
Large Cap Growth S&P 500
YEAR Composite(1) Index(1,2)
---- ------------------- ----------
1995(3)........................ 35.36% 25.37%
1996........................... 26.63 13.49
1997(4) .......................
Since inception(4).............
- -----------------------
(1) Annualized.
(2) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarding as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
(3) Commencement of investment operations was April 1, 1995.
(4) Through September 30, 1997.
COMPARISON TO INDICES AND RANKINGS
A Fund may compare the performance of its Classes of shares to
various unmanaged indices such as the Dow Jones Composite Average or its
component averages, Standard and Poor's 500 Stock Index or its component
indices, Standard and Poor's 100 Stock Index, the Russell Midcap Growth Index,
the Russell 2000 Growth Index, the Russell 1000 Index, the CS First Boston
Convertible Index, the Lehman Brothers Government Bond Index, the Morgan Stanley
Capital International World Index, the Morgan Stanley Capital International
Emerging Markets Free Index, the Emerging Markets Investible Index, the Morgan
Stanley Capital International Europe, Australia and Far East Index, the IFC
Emerging Markets Investible Index, The New York Stock Exchange composite or
component indices, the Wilshire 5000 Equity Index, indices prepared by Lipper
Analytical Services and Morningstar, Inc., the CDA Mutual Fund Report published
by CDA Investment Technologies, Inc., performance statistics reported in
financial publications such as The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines, the Consumer Price
Index (or Cost of Living Index) published by the U.S. Bureau of Labor
Statistics, Stocks, Bonds, Bills and Inflation published by Ibbotson Associates,
Savings and Loan Historical Interest Rates published in the U.S. Savings & Loan
League Fact Book, and historical data supplied by the research departments of
First Boston Corporation, The J.P. Morgan companies, Salomon Brothers, Merrill
Lynch, Lehman Brothers, Smith Barney Shearson and Bloomberg L.P. Unmanaged
indices (i.e., other than Lipper) generally do not reflect deductions for
administrative and management costs and expenses.
A number of independent mutual fund ranking entities prepare
performance rankings. These entities categorize and rank funds by various
criteria, including fund type,
B-70
<PAGE>
performance over a given period of years, total return, standardized yield,
variations in sales charges and risk\reward considerations.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT AUDITORS AND LEGAL COUNSEL
PNC Bank, Airport Business Center, International Court 2,200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Funds and in that capacity maintains certain
financial and accounting books and records pursuant to agreements with the
Trust. PFPC Inc., 103 Bellevue Parkway, Wilmington, Delaware, an affiliate of
the Custodian, provides additional accounting services to the Funds.
State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor,
North Quincy, Massachusetts, 02171, serves as the Dividend Disbursing Agent and
as the Transfer Agent for the Funds. The Transfer Agent provides customary
transfer agency services to the Trust, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, and related functions. The Dividend Disbursing
Agent provides customary dividend disbursing services to the Trust, including
payment of dividends and distributions and related functions.
The following act as sub-transfer agents for the Funds: Financial
Data Services, Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville, Florida
32246; and William M. Mercer Plan Participant Services, Inc., 1417 Lake Cook
Road, Deerfield, Illinois 60015.
Ernst & Young, L.L.P., 515 South Flower Street, Los Angeles,
California 90071, serves as the independent auditors for the Trust , and in that
capacity examines the annual financial statements of the Trust .
Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust . It also acts as
legal counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 23 series, each consisting of one
or more classes of shares -- A, B, C, Q or I.
On any matter submitted to a vote of shareholders of the Trust, all
shares then entitled to vote will be voted by the affected Fund(s) unless
otherwise required by the Investment Company Act, in which case all shares of
the Trust will be voted in the aggregate or by Classes, as the case may be. For
example, a change in a Fund's fundamental investment policies would be voted
upon by shareholders of all Classes of that Fund, as would the approval of any
advisory or distribution contract for the Fund. However, all shares of the
Trust may vote together in the election or selection of Trustees, principal
underwriters and accountants for the Trust.
B-71
<PAGE>
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of the series of
the Trust affected by the matter. Under Rule 18f-2, a series is presumed to be
affected by a matter, unless the interests of each series in the matter are
identical or the matter does not affect any interest of such series. Under Rule
18f-2 the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to a
Fund only if approved by a majority of its outstanding shares. However, the
rule also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts and the election of directors may
be effectively acted upon by the shareholders of the Trust voting without regard
to Fund.
As used in the Fund's prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of a Fund, means the vote of the lesser of (i) 67% of the
shares of the Fund represented at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. The term "majority," when
referring to the approvals to be obtained from shareholders of the Trust, means
the vote of the lesser of (i) 67% of the Trust's shares represented at a
meeting if the holders of more than 50% of the Trust's outstanding shares are
present in person or by proxy, or (ii) more than 50% of the Trust's outstanding
shares. Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held. Unless otherwise provided by law
(for example, by Rule 18f-2 discussed above) or by the Trust's Declaration of
Trust or Bylaws, the Trust may take or authorize any action upon the favorable
vote of the holders of more than 50% of the outstanding shares of the Trust.
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment Company
Act. However, the Trust undertakes to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Investment Company Act.
Each share of each Class of a Fund represents an equal proportional
interest in the Fund with each other share of the same Class and is entitled to
such dividends and distributions out of the income earned on the assets
allocable to the Class as are declared in the discretion of the Trustees. In
the event of the liquidation or dissolution of the Trust, shareholders of a
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to a particular Fund that are available for distribution in such
manner and on such basis as the Trustees in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
B-72
<PAGE>
DECLARATION OF TRUST
The Declaration of Trust of the Trust provides that obligations of
the Trust are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the trust or its investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the trust or its investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declaration of Trust also provides that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Fund shall be enforceable against the assets and property of such
Fund only, and not against the assets or property of any other Fund or the
investors therein.
FINANCIAL STATEMENTS
The Trust's 1997 Annual Report and September 30, 1997 Semi-Annual
Report to Shareholders of the Portfolios (predecessors to the Class A, B and C
shares of the Fund) accompany this Statement of Additional Information. The
financial statements in such Annual Report are incorporated in this Statement
of Additional Information by reference. Such financial statements for the
fiscal years ended March 31, 1996 and 1997 have been audited by the Fund's
independent auditors, Ernst & Young L.L.P., whose reports thereon appear in such
Annual Report. Such financial statements have been incorporated herein in
reliance upon such report given upon their authority as experts in accounting
and auditing. Additional copies of the Trust's 1997 Annual Report and
September 30, 1997 Semi-Annual Report to Shareholders may be obtained at no
charge by writing or telephoning the Trust at the address or number on the front
page of this Statement of Additional Information.
REGISTRATION STATEMENT
The Registration Statement of the Trust , including the Funds'
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 Funds' Prospectuses or the Statements of Additional
Information as to the contents of any contract or other document referred to
herein or in the Prospectuses are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to these Registration Statements, each such statement being
qualified in all respects by such reference.
B-73
<PAGE>
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
A-1
<PAGE>
Standard & Poor's from other sources it considers reliable. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to possess
overwhelming safety characteristics are denoted with a "PLUS" (+) designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C: Issues rated "C" are regarded as having a doubtful capacity for
payment.
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.
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DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
DUFF 1- - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2 - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
DUFF 3 - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
DUFF 4 - Debt possesses speculative investment characteristics.
DUFF 5 - Issuer has failed to meet scheduled principal and/or interest
payments.
THOMSON BANKWATCH
Thomson BankWatch commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the ratings used by Thomson BankWatch:
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.
A-3
<PAGE>
A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
CORPORATE BONDS
MOODY'S
Moody's corporate bond ratings are opinions of the relative
investment qualities of bonds. Moody's employs nine designations to indicate
such relative qualities, ranging from "Aaa" for the highest quality obligations
to "C" for the lowest. Issues are further refined with the designation 1,2, and
3 to indicate the relative ranking within designations. Bonds with the
following Moody's ratings have the following investment qualities:
Aaa: Bonds in this category are judged to be of the highest quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge ". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds in this category are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds in this category possess many favorable investment
attributes and are considered to be as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds in this category are considered medium-grade obligations,
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds in this category are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds in this category generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
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Caa: Bonds in this category are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.
C: Bonds in this category are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
Ratings are graded into ten categories, ranging from "AAA" for the highest
quality obligation to "D" for debt in default. Issues are further refined with
a "PLUS" or "MINUS" sign to show relative standing within the categories. Bonds
with the following Standard & Poor's ratings have the following investment
qualities:
AAA: Bonds in this category have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA: Bonds in this category have a very strong capacity to pay
interest and repay principal and differ from the higher rated issues only in
small degree.
A: Bonds in this category have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB: Bonds in this category have an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB: Bonds in this category have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-" rating.
B: Bonds in this category have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating is also used
for debt subordinated to senior debt that is assigned an actual or implied "BB"
or "BB-" rating.
CCC: Bonds in this category have currently identifiable vulnerability
to default, and are dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay
A-5
<PAGE>
principal. The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B-" rating.
C: This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
AAA - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
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"
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<PAGE>
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+. "
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, C, DDD, DD, AND D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings "BB"
to "C" represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
ICBA
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank 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.
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<PAGE>
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.
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.
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<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
FORM N-1A
PART C: OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements
The Schedules of Investments as of March 31, 1997, Statements of
Assets and Liabilities as of March 31, 1997, Statements of Changes in
Net Assets for the period ended March 31, 1997, and related Notes and
Report of Independent Auditors with respect to Registrant's series A,
B and C Portfolios, the predecessors to the Class A, B and C shares of
Registrant's corresponding Funds which are the subject of this
Amendment to Registration Statement, are incorporated by reference in
Part B.
The Schedules of Investments as of September 30, 1997, Statements of
Assets and Liabilities as of September 30, 1997, and related Notes
with respect to Registrant's series A, B and C Portfolios, the
predecessors to the Class A, B and C shares of Registrant's
corresponding Funds which are the subject of this Amendment to
Registration Statement, are incorporated by reference 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).
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<PAGE>
(1.16) Form of Amendment No. 12 to Amended and Restated Declaration
of Trust (i).
(1.17) Amendment No. 13 to Amended and Restated Declaration of
Trust (j).
(1.18) Form of Amendment No. 14 to Amended and Restated Declaration
of Trust (j).
(1.19) Form of Amendment No. 15 to Amended and Restated Declaration
of Trust (m).
(1.20) Form of Amendment No. 16 to Amended and Restated Declaration
of Trust (r).
(1.21) Form of Amendment No. 17 to Amended and Restated Declaration
of Trust (r).
(1.22) Form of Amendment No. 18 to Amended and Restated Declaration
of Trust (r).
(2.1) Amended Bylaws of Registrant (f).
(2.2) Amendment to Section 2.5 of Bylaws of Registrant (f).
(3) None.
(4) None.
(5.1) Form of Investment Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management, with respect to
Global Blue Chip Fund, Emerging Markets Bond Fund, Pacific
Rim Fund, Greater China Fund and Latin America Fund (n).
(5.2) Form of Sub-Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management-Hong Kong, with
respect to the Pacific Rim Fund and Greater China Fund (n).
(5.3) Form of Sub-Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management-Asia, with respect to
the Pacific Rim Fund and Greater China Fund (n).
(5.4) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management adding the Class A, B,
C, Q and I shares of Registrant's additional Funds to the
Investment Advisory Agreement (o).
(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).
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<PAGE>
(6.7) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Fixed Income and Qualified Portfolio
series to Distribution Agreement (f).
(6.8) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding Value Institutional
Portfolio series to Distribution Agreement (a).
(6.9) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding High Yield Bond and
Strategic Income Institutional Portfolio series to
Distribution Agreement (b).
(6.10) Form of letter agreement between Registrant and
Nicholas-Applegate Securities adding Large Cap Growth and
Core Growth International Portfolio series to Distribution
Agreement (i).
(6.11) Form of letter agreement between Registrant and
Nicholas-Applegate Securities adding Core Growth
International Portfolio C series to Distribution Agreement
(i).
(6.12) Form of letter agreement between Registrant and
Nicholas-Applegate Securities adding Large Cap Growth
Portfolio A, B, C and Q series to Distribution Agreement
(j).
(6.13) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding Global Blue Chip Fund,
Emerging Markets Bond Fund, Pacific Rim Fund, Greater China
Fund and Latin America Fund to Distribution Agreement (n).
(6.14) Form of letter agreement between Registrant and
Nicholas-Applegate Securities adding
the Class A, B, C, Q and I shares of Registrant's additional
Funds to the Distribution Agreement (o).
(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).
(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).
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(8.10) Form of letter agreement between Registrant and PNC Bank
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Custodian Services Agreement (b).
(8.11) Form of letter agreement between Registrant and PNC Bank
adding Large Cap Growth and Core Growth International
Portfolio series to Custodian Services Agreement (i).
(8.12) Form of letter agreement between Registrant and PNC Bank
adding Core Growth International Portfolio C series to
Custodian Services Agreement (i).
(8.13) Form of letter agreement between Registrant and PNC Bank
adding Large Cap Growth Portfolio A, B, C and Q series to
Custodian Services Agreement (j).
(8.14) Form of letter agreement between Registrant and PNC Bank,
adding Global Blue Chip Fund and Emerging Markets Bond Fund
to Custodian Services Agreement (l).
(8.15) Form of letter agreement between Registrant and PNC Bank
with respect to custodian services fees related to the
Global Blue Chip Fund and the Emerging Markets Bond Fund
(m).
(8.16) Form of letter agreement between Registrant and PNC Bank,
adding Pacific Rim Fund, Greater China Fund and Latin
America Fund to Custodian Services Agreement (n).
(8.17) Form of letter agreement between Registrant and PNC Bank,
adding the Class A, B, C, Q and I shares of Registrant's
additional Funds to Custodian Services Agreement (o).
(8.18) Form of Sub-Custodian Agreement among Registrant, PNC Bank
and Chase Manhattan Bank, with respect to Global Blue Chip
Fund, Emerging Markets Bond Fund, Greater China Fund,
Pacific Rim Fund and Latin America Fund (o).
(8.19) Form of letter agreement among Registrant, PNC Bank and
Chase Manhattan Bank, adding the Class A, B, C, Q and I
shares of Registrant's additional Funds to Sub-Custodian
Agreement (o).
(9.1) Form of amended Administration Agreement between Registrant
and Investment Company Administration Corporation (o).
(9.2) Administrative Services Agreement between Registrant and
Nicholas-Applegate Capital Management dated as of November
18, 1996 (i).
(9.3) Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1,
1993 (f).
(9.4) Letter agreement between Registrant and State Street Bank
and Trust Company dated July 19, 1993, adding certain
Institutional (formerly Qualified) Portfolio series to
Transfer Agency and Service Agreement (f).
(9.5) Letter agreement between Registrant and State Street Bank
and Trust Company dated August 20, 1993, adding Emerging
Growth Portfolio Series to Transfer Agency and Service
Agreement (f).
(9.6) Letter agreement between Registrant and State Street Bank
and Trust Company dated December 15, 1993, adding
International Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.7) Letter agreement between Registrant and State Street Bank
and Trust Company dated April 22, 1994, adding Core Growth
Qualified Portfolio series to Transfer Agency and Service
Agreement (f).
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(9.8) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Emerging Countries Growth
Portfolio series, Global Growth & Income Portfolio series
and Mini-Cap Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.9) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Series B Portfolios to Transfer
Agency and Service Agreement (f).
(9.10) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Fixed Income Portfolio series
to Transfer Agency and Service Agreement (f).
(9.11) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Value Institutional Portfolio
series to Transfer Agency and Service Agreement (a).
(9.12) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding High Yield Bond and Strategic
Income Institutional Portfolio series to Transfer Agency and
Service Agreement (b).
(9.13) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Large Cap Growth and Core
Growth International Portfolio series to Transfer Agency and
Service Agreement (i).
(9.14) Form of letter agreement between Registrant and State Street
Bank and Trust Company adding Core Growth International
Portfolio C series to Transfer Agency and Service Agreement
(i).
(9.15) Form of letter agreement between Registrant and State Street
Bank and Trust Company adding Large Cap Growth Portfolio A,
B, C and Q series to Transfer Agency and Service Agreement
(j).
(9.16) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Global Blue Chip Fund and
Emerging Markets Bond Fund to Transfer Agency and Service
Agreement (l).
(9.17) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Pacific Rim Fund, Greater
China Fund and Latin America Fund to Transfer Agency and
Service Agreement (n).
(9.18) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding the Class A, B, C, Q and I
shares of Registrant's additional Funds to Transfer Agency
and Service Agreement (o)
(9.19) Form of amended Shareholder Service Plan between Registrant
and Nicholas-Applegate Securities (o).
(9.20) License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (f).
(9.21) Accounting Services Agreement between Registrant and PFPC
Inc. dated as of April 1, 1993 (f).
(9.22) Letter agreement between Registrant and PFPC Inc. dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Accounting Services Agreement (f).
(9.23) Letter agreement between Registrant and PFPC Inc. dated
August 20, 1993, adding Emerging Growth Portfolio series to
Accounting Services Agreement (f).
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<PAGE>
(9.24) Letter agreement between Registrant and PFPC Inc. dated
December 15, 1993, adding International Growth Portfolio
series to Accounting Services Agreement (f).
(9.25) Letter agreement between Registrant and PFPC Inc. dated
April 22, 1994, adding Core Growth Qualified Portfolio
series to Accounting Services Agreement (f).
(9.26) 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).
(9.27) Letter agreement between Registrant and PFPC Inc., adding
Series B Portfolios to Accounting Services Agreement (f).
(9.28) Letter agreement between Registrant and PFPC Inc., adding
Fixed Income Portfolio series to Accounting Services
Agreement (f).
(9.29) Form of letter agreement between Registrant and PFPC Inc.
adding Value Institutional Portfolio series to Accounting
Services Agreement (a).
(9.30) Form of letter agreement between Registrant and PFPC Inc.
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Accounting Services Agreement (b).
(9.31) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth and Core Growth International
Portfolio series to Accounting Services Agreement (i).
(9.32) Form of letter agreement between Registrant and PFPC Inc.
adding Core Growth International Portfolio C series to
Accounting Services Agreement (i).
(9.33) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth Portfolio A, B, C and Q series to
Accounting Services Agreement (j).
(9.34) Form of letter agreement between Registrant and PFPC Inc.,
adding Global Blue Chip Fund and Emerging Markets Bond Fund
to Accounting Services Agreement (l).
(9.35) Form of letter agreement between Registrant and PFPC Inc.
with respect to accounting services fees related to the
Global Blue Chip Fund and the Emerging Markets Bond Fund
(m).
(9.36) Form of letter agreement between Registrant and PFPC Inc.
adding the Pacific Rim Fund, Greater China Fund and Latin
America Fund (n).
(9.37) Form of letter agreement between Registrant and PFPC Inc.
regarding fees for additional Funds under Accounting
Services Agreement (o).
(9.38) Form of letter agreement between Registrant and PFPC Inc.,
adding the Class A, B, C, Q and I shares of Registrant's
additional Funds to Accounting Service Agreement (o).
(9.39) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated September 27, 1993 regarding
expense reimbursements (f).
(9.40) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding Global Blue
Chip Fund, Emerging Markets Bond Fund, Pacific Rim Fund,
Greater China Fund and Latin America Fund to agreement
regarding expense reimbursement (n).
(9.41) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding the Class A,
B, C, Q and I shares of Registrant's additional Funds to
agreement regarding expense reimbursement (o).
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<PAGE>
(9.42) Credit Agreement among Registrant, Chemical Bank and certain
other banks dated April 10, 1996 (f).
(9.43) First Amendment Agreement to Credit Agreement dated as of
April 9, 1997 among Registrant, The Chase Manhattan Bank,
and certain other banks (l).
(9.44) Form of Second Amendment Agreement to Credit Agreement among
Registrant, The Chase Manhattan Bank, and certain other
banks (n).
(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).
(15.1) Amended Distribution Plan of Registrant (f)
(15.2) Form of further Amendment to Distribution Plan of Registrant
(o).
(16) Schedule of Computation of Performance Quotations (c).
(17.1) Financial Data Schedule as of March 31, 1997 (p).
(17.2) Financial Data Schedule as of September 30, 1997 (q).
(18) Not Applicable.
(19.1) Limited Powers of Attorney of Trustees (d).
(19.2) Limited Power of Attorney of Walter E. Auch (e).
(19.3) Limited Power of Attorney of John D. Wylie (h).
(19.4) Certified Resolution of Board of Trustees of Registrant
regarding Limited Power of Attorney of John D. Wylie (h).
(19.5) Limited Power of Attorney of Thomas Pindelski (k).
(19.6) Certified Resolution of Board of Trustees regarding Limited
Power of Attorney of Thomas Pindelski (k).
- ---------------
(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.
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<PAGE>
(d) Filed as an Exhibit to Amendment No. 12 to Registrant's Form N-1A
Registration Statement on August 1, 1994 and incorporated herein by
reference.
(e) Filed as an Exhibit to Amendment No. 14 to Registrant's Form N-1A
Registration Statement on September 26, 1994 and incorporated herein by
reference.
(f) Filed as an Exhibit to Amendment No. 32 to Registrant's Form N-1A
Registration Statement on June 3, 1996 and incorporated herein by
reference.
(g) Filed as an Exhibit to Amendment No. 37 to Registrant's Form N-1A
Registration Statement on October 15, 1996 and incorporated herein by
reference.
(h) Filed as an Exhibit to Amendment No. 38 to Registrant's Form N-1A
Registration Statement on October 25, 1996 and incorporated herein by
reference.
(i) Filed as an Exhibit to Amendment No. 40 to Registrant's Form N-1A
Registration Statement on January 3, 1997 and incorporated herein by
reference.
(j) Filed as an Exhibit to Amendment No. 42 to Registrant's Form N-1A
Registration Statement on May 1, 1997 and incorporated herein by reference.
(k) Filed as an Exhibit to Amendment No. 44 to Registrant's Form N-1A
Registration Statement on May 22, 1997 and incorporated herein by
reference.
(l) Filed as an Exhibit to Amendment No. 45 to Registrant's Form N-1A
Registration Statement on July 14, 1997 and incorporated herein by
reference.
(m) Filed as an Exhibit to Amendment No. 47 to Registrant's Form N-1A
Registration Statement on July 28, 1997 and incorporated herein by
reference.
(n) Filed as an Exhibit to Amendment No. 49 to Registrant's Form N-1A
Registration Statement on September 2, 1997 and incorporated herein by
reference.
(o) Filed as an Exhibit to Registrant's Form N-14 Registration Statement on
December 5, 1997 and incorporated herein by reference.
(p) Filed as an Exhibit to Registrant's Form N-SAR on June 9, 1997 and
incorporated herein by reference.
(q) Filed as an Exhibit to Registrant's Form N-SAR on December 12, 1997 and
incorporated herein by reference.
(r) Filed as an Exhibit to Amendment No. 50 to Registrant's Form N-1A
Registration Statement.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of November 30, 1997, the number of record holders of each series
of Registrant was as follows:
Title of Series Number of Record Holders
--------------- ------------------------
Large Cap Growth Portfolio A 58
Core Growth Portfolio A 6,438
Emerging Growth Portfolio A 10,733
Income & Growth Portfolio A 2,496
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<PAGE>
Balanced Growth Portfolio A 930
Government Income Portfolio A 492
Money Market Portfolio 853
International Core Growth Portfolio A 315
Worldwide Growth Portfolio A 2,044
International Small Cap Growth Portfolio A 799
Emerging Countries Portfolio A 4,598
Large Cap Growth Portfolio B 116
Core Growth Portfolio B 3,351
Emerging Growth Portfolio B 4,273
Income & Growth Portfolio B 1,521
Balanced Growth Portfolio B 347
Government Income Portfolio B 240
International Core Growth Portfolio B 465
Worldwide Growth Portfolio B 810
International Small Cap Growth Portfolio B 688
Emerging Countries Portfolio B 3,713
Large Cap Growth Portfolio C 31
Core Growth Portfolio C 12,653
Emerging Growth Portfolio C 16,227
Income & Growth Portfolio C 5,208
Balanced Growth Portfolio C 1,278
Government Income Portfolio C 475
International Core Growth Portfolio C 186
Worldwide Growth Portfolio C 5,531
International Small Cap Growth Portfolio C 866
Emerging Countries Portfolio C 3,069
Large Cap Growth Institutional Portfolio 39
Core Growth Institutional Portfolio 183
Emerging Growth Institutional Portfolio 185
Income & Growth Institutional Portfolio 121
Balanced Growth Institutional Portfolio 28
International Core Growth Institutional Portfolio 71
Worldwide Growth Institutional Portfolio 79
International Small Cap Growth Institutional Portfolio 81
Emerging Countries Institutional Portfolio 204
Mini Cap Growth Institutional Portfolio 317
Fully Discretionary Institutional Fixed Income Portfolio 13
Short-Intermediate Institutional Fixed Income Portfolio 15
Value Institutional Portfolio 49
High Yield Bond Institutional Portfolio 25
Strategic Income Institutional Portfolio 20
Global Growth & Income Institutional Portfolio 50
Large Cap Growth Qualified Portfolio 12
Core Growth Qualified Portfolio 193
Emerging Growth Qualified Portfolio 75
Income & Growth Qualified Portfolio 10
Balanced Growth Qualified Portfolio 9
Government Income Qualified Portfolio 9
International Core Growth Qualified Portfolio 25
Worldwide Growth Qualified Portfolio 9
International Small Cap Growth Qualified Portfolio 12
Emerging Countries Qualified Portfolio 1,678
Emerging Markets Bond Institutional Portfolio 16
Global Blue Chip Fund 80
Item 27. INDEMNIFICATION.
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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
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<PAGE>
and Nicholas-Applegate Securities. The principal business address of such
persons is 600 West Broadway, 30th Floor, San Diego, California 92101, except as
otherwise indicated below.
Positions and Positions and
Name and Principal Offices with Principal Offices with
Business Address Underwriter Registrant
- ---------------- ----------- ------------
Arthur E. Nicholas Chairman None
John D. Wylie President President
Peter J. Johnson Vice President Vice President
Thomas Pindelski Chief Financial Officer Chief Financial
Officer
E. Blake Moore, Jr. Secretary Secretary
Todd Spillane Director of Compliance None
(c) Not Applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained either at the offices of the Registrant (600 West
Broadway, 30th Floor, San Diego, California 92101); the Investment Adviser to
the Trust and Master Trust, Nicholas-Applegate Capital Management (600 West
Broadway, 30th Floor, San Diego, California 92101); the primary administrator
for the Trust and Master Trust, Investment Company Administration Corporation
(4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018); the Custodian,
PNC Bank (Airport Business Center, International Court 2, 200 Stevens Drive,
Lester, Pennsylvania 19113); or the Transfer and Dividend Disbursing Agent,
State Street Bank & Trust Company (2 Heritage Drive, 7th Floor, North Quincy,
Massachusetts 02171).
Item 31. MANAGEMENT SERVICES.
Not Applicable.
Item 32. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the holders of
at least 10% of its outstanding shares to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee, it will do so and
will assist in communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 19th day
of December, 1997.
NICHOLAS-APPLEGATE MUTUAL FUNDS
By John D. Wylie*
-------------------------
John D. Wylie
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
John D. Wylie* Principal Executive December 19, 1997
- ------------------------ Officer
John D. Wylie
Thomas Pindelski* Principal Financial and December 19, 1997
- ------------------------ Accounting Officer
Thomas Pindelski
Fred C. Applegate* Trustee December 19, 1997
- ------------------------
Fred C. Applegate
Arthur B. Laffer* Trustee December 19, 1997
- ------------------------
Arthur B. Laffer
Charles E. Young* Trustee December 19, 1997
- ------------------------
Charles E. Young
*s/E. Blake Moore, Jr.
- ------------------------
By: E. Blake Moore, Jr.
Attorney In Fact
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