<PAGE>
As filed with the Securities and Exchange Commission
on August 14, 1998
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. 66 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 68
(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
Title of Securities Being Registered: Shares of Beneficial Interest
------------------
<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>
N I C H O L A S-A P P L E G A T E-Registered
Trademark-
M U T U A L F U N D S P R O S P E C T U S
[PHOTO]
INSTITUTIONAL PORTFOLIOS
<PAGE>
[PHOTO]
Art Nicholas
Managing Partner
We live in an era of constant, dramatic change. The world's marketplaces are
transforming into a single interconnected community with the integration of the
European Union, economic deregulation and privatization in Latin America, the
technological coming of age in the Pacific Rim and the new entrepreneurial boom
in the United States.
At Nicholas-Applegate, we see these changes creating a wealth of investment
opportunities, which we seek out company by company. By expanding our global
reach, we believe we can help you find promising investments throughout the
world.
I hope you will join Nicholas-Applegate in our quest for opportunities
worldwide.
/s/ Art Nicholas
Art Nicholas
Managing Partner
<PAGE>
1
NICHOLAS APPLEGATE-Registered Trademark-
MUTUAL FUNDS
PROSPECTUS
The prospectus contains vital information about the Class I 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 EMERGING MARKETS BOND FUND, LATIN AMERICA FUND, STRATEGIC
INCOME FUND AND 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 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
GLOBAL BLUE CHIP
INTERNATIONAL CORE GROWTH
WORLDWIDE GROWTH
INTERNATIONAL SMALL CAP GROWTH
GLOBAL GROWTH & INCOME
EMERGING COUNTRIES
GLOBAL TECHNOLOGY
EMERGING MARKETS BOND
PACIFIC RIM
GREATER CHINA
LATIN AMERICA
US FUNDS
LARGE CAP GROWTH
MID CAP GROWTH
LARGE CAP VALUE
VALUE
SMALL CAP GROWTH
MINI CAP GROWTH
CONVERTIBLE
BALANCED GROWTH
FIXED INCOME FUNDS
SHORT INTERMEDIATE
HIGH QUALITY BOND
STRATEGIC INCOME
HIGH YIELD BOND
OCTOBER 30, 1998
<PAGE>
2
TABLE OF CONTENTS
OVERVIEW 3
A FUND BY FUND LOOK AT GOALS,
STRATEGIES, RISKS, AND
FINANCIAL HISTORY.
GLOBAL FUNDS
Global Blue Chip 4
International Core Growth 6
Worldwide Growth 8
International Small Cap Growth 10
Global Growth & Income 12
Emerging Countries 14
Global Technology 16
Emerging Markets Bond 18
Pacific Rim 20
Greater China 22
Latin America 24
US FUNDS
Large Cap Growth 26
Mid Cap Growth 28
Large Cap Value 30
Value 32
Small Cap Growth 34
Mini Cap Growth 36
Convertible 38
Balanced Growth 40
FIXED INCOME FUNDS
Short Intermediate 42
High Quality Bond 44
Strategic Income 46
High Yield Bond 48
POLICIES AND INSTRUCTIONS FOR
OPENING, MAINTAINING AND
CLOSING AN ACCOUNT IN ANY
FUND.
SIMPLIFIED ACCOUNT INFORMATION
Opening an Account 50
Buying Shares 50
Selling and Redeeming Shares 51
Signature Guarantees 52
Exchanging Shares 52
YOUR ACCOUNT
Transaction Policies 53
Features and Account Policies 53
DETAILS THAT APPLY TO THE
FUNDS AS A GROUP.
ORGANIZATION AND MANAGEMENT
Investment Adviser Compensation 55
Administrator Compensation 55
Distributor 55
Portfolio Trades 55
Investment Objective 56
Diversification 56
Prior Master-Feeder Structure 56
Portfolio Teams 57
RISK FACTORS AND SPECIAL CONSIDERATIONS 61
PRIOR PERFORMANCE OF CERTAIN FUNDS 68
<PAGE>
3
OVERVIEW
FUND INFORMATION
CONCISE FUND DESCRIPTIONS BEGIN ON THE NEXT PAGE. EACH DESCRIPTION PROVIDES THE
FOLLOWING INFORMATION:
[GRAPHIC]
INVESTMENT OBJECTIVE
The Fund's particular investment goal.
[GRAPHIC]
INVESTMENT STRATEGY
The strategy the Fund intends to use in pursuing the investment objective.
[GRAPHIC]
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.
[GRAPHIC]
PORTFOLIO MANAGEMENT
The individuals who manage the Fund.
[GRAPHIC]
RISK FACTORS
The major risk factors associated with the Fund. Other risk factors are also
described in "Risk Factors and Special Considerations."
[GRAPHIC]
INVESTOR EXPENSES
The overall costs borne by an investor in the Class I Shares, including annual
expenses.
[GRAPHIC]
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 I Shares of each Fund represent interests in a portfolio of
an 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 investing for retirement or other long-term goals
/ / those who want higher potential for gain and are willing to accept higher
risks associated with investing in stocks of U.S and 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
THE INVESTMENT ADVISER
Nicholas-Applegate Capital Management (the "Investment Adviser") serves as
investment adviser to the Funds. Arthur E. Nicholas and 22 other partners with a
staff of approximately 480 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.
<PAGE>
4
GLOBAL BLUE CHIP FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser follows a global investment strategy of investing
primarily in securities traded in U.S. and foreign securities markets. The
Investment Adviser focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of both traditional fundamental research, calling on the expertise
of many external analysts in different countries throughout the world, and
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 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.
The Fund invests primarily in companies that have substantial stock market
capitalizations--generally in the top two-thirds of publicly traded companies
worldwide--companies that have an established history of earnings, easy access
to credit, good industry position, and a reputation as a global leader in their
industry.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of issuers located in at least three different countries, one of
which may be the U.S.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It invests the
remainder primarily in debt securities of any maturity issued by foreign
companies and foreign governments and their agencies and instrumentalities. The
Fund may invest up to 10% of its total assets in debt securities rated Baa or
BBB by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("Standard & Poor's"), respectively or, if unrated, of comparable
quality, and up to 5% of its total assets in debt securities rated Ba or BB or
below, or, if unrated, of comparable quality. 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 57.
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 global fund, performance also depends upon changing values in
foreign currencies, different political and regulatory environments, and other
overall economic factors in the countries where the Fund invests. To the extent
the Fund invests in bonds rated Baa or BBB and below, such bonds have
speculative characteristics and changes in economic conditions may affect their
ability to make interest and principal payments. For further explanation, see
"Risk Factors and Special Considerations" starting on page 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. The figures below
show the expected expenses for the Fund for its first full year of operation.
Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.80%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.20%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Other expenses and Total operating expenses are expected to be 0.80%, 1.34%
and 2.14%, respectively, absent the deferral. See "Investment Adviser
Compensation."
<PAGE>
5
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED.
THE EXAMPLE ASSUMES YOU REINVESTED ALL DIVIDENDS AND THAT THE AVERAGE ANNUAL
RETURN IS 5%.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$12 $38 $66 $145
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the Fund
outstanding thoroughout the period indicated. The figures have been audited by
Ernst & Young L.L.P. Please read in conjunction with the Trust's 1998 Annual
Report.
<TABLE>
<CAPTION>
<S> <C>
9/30/97
TO
3/31/98
PER SHARE DATA:
Net asset value, beginning of period $12.50
Income from investment operations:
Net investment income (deficit) --
Net realized and unrealized gains (losses) on
securities and foreign currency 2.31
- -------------------------------------------------------------
Total from investment operations 2.31
Less distributions:
Dividends from net investment income --
Distributions from capital gains --
- -------------------------------------------------------------
Net asset value, end of period $14.81
- -------------------------------------------------------------
TOTAL RETURN: 18.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $7,320
Ratio of expenses to average net assets, after
expense reimbursement 1.20%
Ratio of expenses to average net assets, before
expense reimbursement 2.14%
Ratio of net investment income (deficit) to
average net assets, after expense reimbursement (0.06%)
Ratio of net investment income (deficit) to
average net assets, before expense reimbursement (1.00%)
Portfolio turnover 238.02%
Average commission rate paid $0.0246
</TABLE>
* Annualized
<PAGE>
6
INTERNATIONAL CORE GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Investment Adviser focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of both traditional fundamental research, calling on the expertise
of many external analysts in different countries throughout the world, and
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 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.
The Fund invests in the larger capitalized companies in each country. Generally,
this means issuers in each country whose stock market capitalizations are in the
top 75% of publicly traded companies as measured by capitalizations in that
country.
PRINCIPAL INVESTMENTS
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 debt securities of any maturity issued by foreign
companies and foreign governments and their agencies and instrumentalities which
are rated investment grade by a nationally recognized statistical rating agency,
or of comparable quality if unrated. 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 57.
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. To the extent
the Fund invests in countries with emerging markets, the risks are magnified
since these countries may have unstable governments and less established
markets. For further explanation, see "Risk Factors and Special Considerations"
starting on page 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.00%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.40%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 1.00%, Total operating expenses would have been 1.92% and
Other expenses would have been 0.92% absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
7
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>
$14 $44 $77 $168
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
12/27/96 4/1/97
TO 3/31/97 TO 3/31/98
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $14.13
Income from investment operations:
Net investment income (deficit) -- (0.02)
Net realized and unrealized gains
(losses) on securities and foreign
currency 1.63 5.12
- ----------------------------------------------------------------
Total from investment operations 1.63 5.10
Less distributions:
Dividends from net investment income -- --
Distributions from capital gains -- (0.68)
- ----------------------------------------------------------------
Net asset value, end of period $14.13 $18.55
- ----------------------------------------------------------------
TOTAL RETURN: 13.04% 36.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,593 $32,305
Ratio of expenses to average net assets,
after expense reimbursement+ 1.40%* 1.41%
Ratio of expenses to average net assets,
before expense reimbursement+ 3.14%* 1.92%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 0.43%* (0.12%)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (0.41%)* (0.63%)
Portfolio turnover** 75.53% 274.21%
Average commission rate paid** $0.0106 $0.0128
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
8
WORLDWIDE GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Investment Adviser focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of both traditional fundamental research, calling on the expertise
of many external analysts in different countries throughout the world, and
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 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 debt securities of any maturity issued by foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. 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 57.
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 global 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. To the extent the Fund invests
in countries with emerging markets, the risks are magnified since these
countries may have unstable governments and less established markets. The
securities of small, less well-known companies may be more volatile than those
of larger companies. For a further explanation, see "Risk Factors and Special
Considerations" starting on page 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.00%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.35%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.35%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 1.00%, Total operating expenses would have been 1.87% and
Other expenses would have been 0.87% absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
9
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>
$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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P., with respect to the fiscal
year ended March 31, 1998 and the prior two fiscal years, and by another
independent auditor with respect to commencement of operation through March 31,
1995. Please read in conjunction with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
12/27/93 4/1/94 4/1/95 4/1/96 4/1/97
TO 3/31/94 TO 3/31/95 TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.15 $13.06 $15.42 $14.21
Income from investment operations:
Net investment income (deficit) -- (0.01) 0.06 (0.12) 0.25
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.65 (0.04) 2.58 2.08 4.56
- ----------------------------------------------------------------------------------------------------
Total from investment operations 0.65 (0.05) 2.64 1.96 4.81
Less distributions:
Dividends from net investment income -- (0.04) (0.28) -- --
Distributions from capital gains -- -- -- (3.17) (1.12)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $13.15 $13.06 $15.42 $14.21 $17.90
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN: 5.20% (0.34%) 20.37% 13.18% 35.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $2,982 $4,087 $3,613 $2,656 $11,686
Ratio of expenses to average net assets,
after expense reimbursement+ 1.34%* 1.35% 1.35% 1.35% 1.36%
Ratio of expenses to average net assets,
before expense reimbursement+ 3.58%* 2.50% 2.60% 3.05% 1.87%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 0.05%* 0.05% 0.20% (0.43%) (0.31%)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (2.19%)* (1.10%) (0.99%) (2.06%) (0.83%)
Portfolio turnover** 95.09% 98.54% 132.20% 181.81% 201.70%
Average commission rate paid** N/A N/A $0.0187 $0.0078 $0.0221
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
10
INTERNATIONAL SMALL CAP GROWTH FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Investment Adviser focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of both traditional fundamental research, calling on the expertise
of many external analysts in different countries throughout the world, and
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 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.
The Fund emphasizes companies in the bottom 75% of publicly traded companies as
measured by stock market capitalizations in each country ("small cap
securities").
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
small cap 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 stock, warrants and convertible securities. It invests the
remainder primarily in debt securities of any maturity issued by foreign
companies and foreign governments and their agencies and instrumentalities which
are rated investment grade by a nationally recognized statistical rating agency,
or of comparable quality if unrated. 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 57.
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 information regarding
smaller companies may be less available, incomplete or inaccurate, and their
securities may trade less frequently than those of larger companies.
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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.00%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.40%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 1.00%, Total operating expenses would have been 1.94% and
Other expenses would have been 0.94% absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
11
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>
$14 $44 $77 $168
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. with respect to the fiscal
year ended March 31, 1998 and the prior two fiscal years, and by another
independent auditor with respect to commencement of operation through March 31,
1995. Please read in conjunction with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
12/27/93 4/1/94 4/1/95 4/1/96 4/1/97
TO 3/31/94 TO 3/31/95 TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.47 $13.09 $15.05 $17.02
Income from investment operations:
Net investment income (deficit) 0.01 0.02 0.06 -- (0.13)
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.96 (0.22) 2.02 2.28 5.50
- ----------------------------------------------------------------------------------------------------
Total from investment operations 0.97 (0.20) 2.08 2.28 5.37
Less distributions:
Dividends from net investment income -- (0.06) (0.12) (0.08) --
Distributions from capital gains -- (0.12) -- (0.23) (3.94)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $13.47 $13.09 $15.05 $17.02 $18.45
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN: $7.60% (1.54%) 15.99% 15.25% 37.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $3,668 $16,924 $20,245 $48,505 $42,851
Ratio of expenses to average net assets,
after expense reimbursement+ 1.40%* 1.40% 1.40% 1.40% 1.41%
Ratio of expenses to average net assets,
before expense reimbursement+ 2.35%* 1.92% 2.44% 1.68% 1.94%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 0.36%* 0.19% 0.34% (0.38%) (0.91%)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (0.59%)* (0.33%) (0.07%) (0.63%) (1.44%)
Portfolio turnover** 23.71% 74.88% 141.02% 206.07% 198.37%
Average commission rate paid** N/A N/A $0.128 $0.0098 $0.0086
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
12
GLOBAL GROWTH & INCOME FUND
INVESTMENT OBJECTIVE
Maximum long-term appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser actively manages a blended portfolio of U.S. and
foreign equity and fixed income securities.
For the equity portion, the Investment Adviser focuses on a "bottom-up" analysis
that evaluates the financial conditions and competitiveness of individual
companies worldwide. It uses a blend of both traditional fundamental research,
calling on the expertise of many external analysts in different countries
throughout the world, and 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 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.
The Investment Adviser actively manages the fixed income portion to take
advantage of current interest rates and bond market trends by varying the
structure, duration and allocation of fixed income instruments from all sectors
of the market.
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 invests at least 60% of its total assets in
equity securities and warrants. It invests the remainder in debt securities of
any maturity issued by foreign corporations and foreign governments and their
agencies and instrumentalities, a portion of which (less than 35% of its net
assets) may be 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 66.
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 57.
RISK FACTORS
As with any fund that invests in both stocks and bonds, the value of the Fund's
investments varies in response to movements in the stock and bond markets. Stock
values fluctuate in response to the activities of individual companies and
general market and economic conditions. The value of the Fund's debt securities
changes as interest rates fluctuate: if rates rise, the prices of debt
securities fall; if rates fall, the prices of debt securities 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. Accordingly, the lower-rated debt securities in which
the Fund invests are considered speculative and subject to greater volatility
and risk of loss than higher-rated debt securities. As with any global fund, the
Fund's performance also depends upon changing foreign currency values, different
political and regulatory environments, and other overall economic factors in the
countries where the Fund invests. To the extent the Fund invests in emerging
countries, the risks are magnified since these countries may have unstable
governments and less established markets. For further explanation, see "Risk
Factors and Special Considerations" starting on page 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. The figures below
show the expected expenses for the Fund for its first full year of operation.
Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.85%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.50%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.35%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Total operating expenses and Other expenses are expected to be 2.45% and
1.60%, respectively, absent the deferral. See "Investment Adviser
Compensation."
<PAGE>
13
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>
$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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout the period indicated. The figures
have been audited by Ernst & Young LLP.
<TABLE>
<CAPTION>
<S> <C>
6/30/97
TO
3/31/98
PER SHARE DATA:
Net asset value, beginning of period $12.50
Income from investment operations:
Net investment income (deficit) 0.34
Net realized and unrealized gains (losses) on
securities and foreign currency 3.86
- ------------------------------------------------------------
Total from investment operations 4.20
Less distributions:
Dividends from net investment income (0.34)
Distributions from capital gains (2.11)
- ------------------------------------------------------------
Net asset value, end of period $14.25
- ------------------------------------------------------------
TOTAL RETURN: 36.25%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $6,065
Ratio of expenses to average net assets, after
expense reimbursement+ 1.36%*
Ratio of expenses to average net assets, before
expense reimbursement+ 2.45%*
Ratio of net investment income (deficit) to
average net assets, after expense reimbursement+ 7.13%*
Ratio of net investment income (deficit) to
average net assets, before expense reimbursement+ 6.03%*
Portfolio turnover** 413.28%
Average commission rate paid** $0.0128
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
14
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 and Venezuela.
Under normal market 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 debt securities of foreign companies and
foreign governments and their agencies and instrumentalities which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated. 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 57.
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. The securities of small, less well known
companies may be more volatile than those of larger companies. For further
explanation, see "Risk Factors and Special Considerations" starting on page 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.25%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.65%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 1.25%, Total operating expenses would have been 2.02% and
Other expenses would have been 0.77%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
15
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>
$17 $52 $90 $195
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. with respect to the fiscal
year ended March 31, 1998 and the prior two fiscal years, and by another
independent auditor with respect to commencement of operation through March 31,
1995. Please read in conjunction with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
11/28/94 4/1/95 4/1/96 4/1/97
TO 3/31/95 TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $10.91 $14.02 $17.45
Income from investment operations:
Net investment income (deficit) 0.08 -- (0.06) 0.09
Net realized and unrealized gains
(losses) on securities and foreign
currency (1.66) 3.16 3.62 1.23
- ----------------------------------------------------------------------------------------
Total from investment operations (1.58) 3.16 3.56 1.32
Less distributions:
Dividends from net investment income (0.01) (0.05) (0.05) --
Distributions from capital gains -- -- (0.13) (1.62)
- ----------------------------------------------------------------------------------------
Net asset value, end of period $10.91 $14.02 $17.45 $17.15
- ----------------------------------------------------------------------------------------
TOTAL RETURN: (12.64%) 29.06 25.48% 8.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $2,021 $6,878 $56,918 $88,063
Ratio of expenses to average net assets,
after expense reimbursement+ 1.65%* 1.65% 1.65% 1.66%
Ratio of expenses to average net assets,
before expense reimbursement+ 2.14%* 3.59% 1.87% 2.02%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 1.73%* 0.29% (0.52%) 1.15%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ 1.24%* (1.41%) (0.76%) 0.79%
Portfolio turnover** 60.79% 118.21% 176.20% 243.47%
Average commission rate paid** N/A $0.0022 $0.0021 $0.0014
</TABLE>
* Annualized
** For corresponding Fund of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
16
GLOBAL TECHNOLOGY FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in the equity securities of
U.S. and foreign companies with business operations in science, technology and
technology-related industries. 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 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
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 at least 65% of its total assets in securities of issuers
located in at least three different countries, one of which may be the U.S.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It invests the
remainder in debt securities of any maturity issued by foreign companies and
foreign governments, and their agencies and instrumentalities, a portion of
which (less than 35% of its net assets) may be 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 66. 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 57.
RISK FACTORS
The value of the Fund's investments varies from day to day in response to
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
overall economic factors in the countries where the Fund invests. In addition to
the risks posed by foreign investing, information regarding smaller companies
may be less available, incomplete or inaccurate, and their securities may trade
less frequently than those of larger companies. Accordingly, the securities of
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. Lower rated securities in which the Fund invests are
considered speculative and 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. The figures below
show the expected expenses for the Fund for its first year of operation. Actual
expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.00%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.40%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Total operating expenses and Other expenses are expected to be 1.00%, 2.14%
and 1.14%, respectively, absent the deferral. See "Investment Adviser
Compensation."
<PAGE>
17
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
<S> <C>
$14 $44
</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.
FINANCIAL HIGHLIGHTS
The Global Technology Fund is a new Fund for which financial highlights are not
available.
<PAGE>
18
EMERGING MARKETS BOND FUND
INVESTMENT OBJECTIVE
Total return and high current income.
INVESTMENT STRATEGY
The Fund invests primarily in debt securities of issuers located in emerging
countries. Emerging countries are those which, in the opinion of the Investment
Adviser, are emerging as investment markets but have yet to reach a level of
economic development associated with developed industrial nations. When
evaluating any bond, the Investment Adviser selects bonds based upon a "top
down" analysis of economic trends. It also analyzes credit quality, the yield to
maturity of the security, the currency denomination of the security, the
interest rate sensitivity of the security, and the effect the security will have
on the average yield to maturity of the Fund.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 80% of its total assets in
debt securities of issuers located in at least three different countries. These
countries include but are not limited to: Argentina, Brazil, Bulgaria, Chile,
Colombia, the Czech Republic, Ecuador, Greece, Hungary, India, Indonesia,
Israel, Malaysia, Mexico, Morocco, Nigeria, Poland, Russia, South Africa,
Thailand, and Venezuela. The Fund may also invest up to 35% of its net assets in
debt securities of issuers located in the U.S. and other developed markets.
There is no limit on either the portfolio maturity or the acceptable rating of
the securities bought by the Fund. For a description of these ratings, see
"Corporate Bond Ratings" beginning on page 66. 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 57.
RISK FACTORS
As with any fund that invests in bonds, the value of the Fund's investments
varies in response to movements in interest rates: if rates rise, bond prices
fall; if rates fall, bond prices rise. Lower rated securities in which the Fund
invests are considered speculative and subject to greater volatility and risk of
loss than investment growth securities, particularly in deteriorating economic
periods. Emerging markets debt securities, while offering higher yields, tend to
be of lower credit quality and subject to greater risk of default than higher
rated securities. Periods of high interest rates and recession may adversely
affect the issuer's ability to make interest and principal payments.
Additionally, emerging markets tend to be less liquid and more volatile, offer
less regulatory protection for investors, and in countries that have less stable
governments than more established markets. As with any fund investing in foreign
securities, the Fund's performance depends upon changing currency values,
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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. The figures below
show the expected expenses for the Fund for its first full year of operation.
Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSE
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.70%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.25%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 0.95%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Operating expenses and Total operating expenses are expected to be 0.70%,
2.61% and 3.31% respectively, absent the deferral. See "Investment Adviser
Compensation."
<PAGE>
19
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED.
THE EXAMPLE ASSUMES YOU REINVESTED ALL DIVIDENDS AND THE AVERAGE ANNUAL RETURN
WAS 5%.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$10 $30 $53 $117
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the Fund
outstanding throughout the period indicated. The figures have been audited by
Ernst & Young L.L.P. Please read in conjunction with the Trust's 1998 Annual
Report.
<TABLE>
<CAPTION>
<S> <C>
9/30/97
TO
3/31/98
PER SHARE DATA:
Net asset value, beginning of period $12.50
Income from investment operations:
Net investment income (deficit) 0.59
Net realized and unrealized gains (losses) on
securities and foreign currency (0.28)
- -------------------------------------------------------------
Total from investment operations 0.31
Less distributions:
Dividends from net investment income ($0.59)
Distributions from capital gains ($0.03)
- -------------------------------------------------------------
Net asset value, end of period $12.19
- -------------------------------------------------------------
TOTAL RETURN: 2.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $2,244
Ratio of expenses to average net assets, after
expense reimbursement 0.95%*
Ratio of expenses to average net assets, before
expense reimbursement 3.31%*
Ratio of net investment income (deficit) to
average net assets, after expense reimbursement 9.79%*
Ratio of net investment income (deficit) to
average net assets, before expense reimbursement 7.43%*
Portfolio turnover 220.57%
Average commission rate paid --
</TABLE>
* Annualized
<PAGE>
20
PACIFIC RIM FUND
INVESTMENT OBJECTIVE
Long-term growth of capital.
INVESTMENT STRATEGY
The Investment Adviser focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of both traditional fundamental research, calling on the expertise
of many external analysts in different countries throughout Asia and the Pacific
Rim, 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.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
equity and debt securities of any maturity of issuers that satisfy at least one
of the following criteria: (i) they derive 50% or more of their total revenue
from goods produced, sales made or services provided in one or more Pacific Rim
countries; (ii) they are organized under the laws of, or have a principal office
in, a Pacific Rim country; (iii) they maintain 50% or more of their assets in
one or more Pacific Rim countries; or (iv) the principal trading market for a
class of their securities is in a Pacific Rim country. The Fund intends to
invest in securities of issuers located in at least three Pacific Rim countries.
These countries include but are not limited to Australia, China, Hong Kong,
Japan, India, Indonesia, South Korea, Malaysia, New Zealand, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, and Thailand. The Investment Adviser
does not emphasize any particular company size but instead considers investments
which in its opinion offer the potential for capital appreciation. The Fund
invests the remainder primarily in a combination of equity and debt securities
of any maturity of issuers located throughout the world. Under normal
circumstances, the Fund invests no more than 25% of its total assets in issuers
of any one country. The Fund may 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. For a description of these
ratings, see "Corporate Bond Ratings" beginning on page 66. The Fund may also
use options, futures contracts and interest rate and currency swaps as hedging
techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser together with its Hong Kong and Singapore affiliates
emphasize a team approach to portfolio management to maximize their overall
effectiveness. For a complete listing of the portfolio team, see "Portfolio
Teams" on page 57.
RISK FACTORS
The value of the Fund's investments varies day to day in response to the
activities of individual companies and general market and economic conditions.
As with any international fund, performance also depends upon changing values in
foreign currencies, different political and regulatory environments, and other
overall economic factors in the countries where the Fund invests. These risks
are magnified in countries with emerging markets. Certain Asian and Pacific Rim
countries may have relatively unstable governments, economies based on only a
few industries or heavily dependent upon foreign trade, and securities markets
that trade infrequently or in low volumes. The securities of small, less
well-known companies may be more volatile than those of larger companies. Lower
rated securities in which the Fund invests are considered speculative and
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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. The figures below
show the expected expenses for the Fund for its first full year of operation.
Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.00%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.40%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Operating expenses and Total operating expenses are expected to be 1.00%,
3.50% and 4.50% respectively, absent the deferral. See "Investment Adviser
Compensation."
<PAGE>
21
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED.
THE EXAMPLE ASSUMES YOU REINVESTED ALL DIVIDENDS AND THE AVERAGE ANNUAL RETURN
WAS 5%.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$14 $44 $77 $168
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the Fund
outstanding throughout the period indicated. The figures have been audited by
Ernst & Young L.L.P. Please read in conjunction with the Trust's 1998 Annual
Report.
<TABLE>
<CAPTION>
12/31/97
TO
3/31/98
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50
Income from investment operations:
Net investment income (deficit) 0.02
Net realized and unrealized gains (losses) on
securities and foreign currency 0.14
- ---------------------------------------------------------
Total from investment operations 0.16
Less distributions:
Dividends from net investment income --
Distributions from capital gains --
- ---------------------------------------------------------
Net asset value, end of period $12.66
- ---------------------------------------------------------
TOTAL RETURN: 1.28%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $1,197
Ratio of expenses to average net assets, after
expense reimbursement 1.40%*
Ratio of expenses to average net assets, before
expense reimbursement 4.50%*
Ratio of net investment income (deficit) to
average net assets, after expense reimbursement 0.74%*
Ratio of net investment income (deficit) to
average net assets, before expense reimbursement (2.37%)*
Portfolio turnover 86.04%
Average commission rate paid $0.0188
</TABLE>
* Annualized
<PAGE>
22
GREATER CHINA FUND
INVESTMENT OBJECTIVE
Maximum long-term appreciation.
INVESTMENT STRATEGY
The Investment Adviser focuses on a "bottom-up" analysis that evaluates the
financial conditions and competitiveness of individual companies worldwide. It
uses a blend of both traditional research, calling on the expertise of many
external analysts in Asia, 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.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
equity and debt securities of any maturity of issuers that satisfy at least one
of the following criteria: (i) their securities are traded principally on stock
exchanges in China, Hong Kong or Taiwan, (ii) they derive 50% or more of their
total revenue from goods produced, sales made or services performed in China,
Hong Kong or Taiwan, (iii) they maintain 50% or more of their assets in China,
Hong Kong or Taiwan, or (iv) they are organized under the laws of China, Hong
Kong or Taiwan. The Investment Adviser does not emphasize any particular company
size but instead considers investments which in its opinion offer the potential
for capital appreciation. The Fund invests the remainder primarily in a
combination of equity and debt securities of any maturity of issuers located
throughout the world. The Fund may 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. For a description of these
ratings, see "Corporate Bond Ratings" beginning on page 66. The Fund may also
use options, futures contracts, currency swaps and forward currency transactions
as hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser together with its Hong Kong and Singapore affiliates
emphasize a team approach to portfolio management to maximize their overall
effectiveness. For a complete listing of the portfolio teams, see "Portfolio
Teams" on page 57.
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. Because the
Fund invests its assets primarily in securities of issuers operating in the
greater China area, its performance is expected to be closely tied to economic
and political conditions in the area and the Fund's performance will be more
volatile than more geographically diversified funds. The securities of small,
less well known companies may be more volatile than those of larger companies.
Lower rated securities in which the Fund invests are considered speculative and
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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. The figures below
show the expected expenses for the Fund for its first full year of operation.
Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.00%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.40%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Operating expenses and Total operating expenses are expected to be 1.00%,
3.70% and 4.70% respectively, absent the deferral. See "Investment Adviser
Compensation."
<PAGE>
23
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS TIME
FRAMES INDICATED.
THE EXAMPLE ASSUMES YOU REINVESTED ALL DIVIDENDS AND THE AVERAGE ANNUAL RETURN
WAS 5%.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$14 $44 $77 $168
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the Fund
outstanding throughout the period indicated. The figures have been audited by
Ernst & Young L.L.P. Please read in conjunction with the Trust's 1998 Annual
Report.
<TABLE>
<CAPTION>
<S> <C>
12/31/97
TO 3/31/98
PER SHARE DATA:
Net asset value, beginning of period $12.50
Income from investment operations:
Net investment income (deficit) 0.02
Net realized and unrealized gains
(losses) on securities and foreign
currency 1.62
- ----------------------------------------------------
Total from investment operations 1.64
Less distributions:
Dividends from net investment income --
Distributions from capital gains --
- ----------------------------------------------------
Net asset value, end of period $14.14
- ----------------------------------------------------
TOTAL RETURN: 13.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $1,192
Ratio of expenses to average net assets,
after expense reimbursement 1.40%*
Ratio of expenses to average net assets,
before expense reimbursement 4.70%*
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement 0.57%*
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement (2.73%)*
Portfolio turnover 34.08%
Average commission rate paid $0.0039
</TABLE>
* Annualized
<PAGE>
24
LATIN AMERICA FUND
INVESTMENT OBJECTIVE
Long-term growth of capital.
INVESTMENT STRATEGY
Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates the
financial condition and competitiveness of individual companies worldwide. It
uses a blend of both traditional and fundamental research, calling on the
expertise of many external analysts in different countries throughout Latin
America, 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.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
equity and debt securities of any maturity of issuers that satisfy at least one
of the following criteria: (i) they derive 50% or more of their total revenue
from goods produced, sales made or services performed in one or more Latin
American countries, (ii) they are organized under the laws of, or have a
principal office in, a Latin American country; (iii) they maintain 50% or more
of their assets in one or more Latin American countries, or (iv) the principal
trading market for a class of their securities is in a Latin American country.
These countries may include: Argentina, the Bahamas, Barbados, Belize, Bolivia,
Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador,
French Guiana, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, the
Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and
Tobago, Uruguay and Venezuela. The Investment Adviser does not emphasize any
particular company size but instead considers investments which in its opinion
offer potential for capital appreciation. The Fund invests the remainder
primarily in a combination of equity and debt securities of any maturity of
issuers located throughout the world. The Fund may invest without limitation 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 66.
The Fund may also use options, futures contracts, currency swaps, and forward
currency transactions 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 57.
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 currency
values, different political and regulatory environments, and other overall
economic factors in the countries where the Fund invests. These risks are
magnified in many Latin American countries, since these countries have unstable
governments, less established markets, and volatile currencies. The securities
of small, less well known companies may be more volatile than those of larger
companies. Lower rated securities in which the Fund invests are considered
speculative and 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. The figures below
show the expected expenses for the Fund for its first full year of operation.
Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.25%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.65%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Total operating expenses and Other expenses are expected to be 1.25, 5.20%
and 3.95% respectively, absent the deferral. See "Investment Adviser
Compensation."
<PAGE>
25
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>
$17 $52 $90 $195
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the Fund
outstanding throughout the period indicated. The figures have been audited by
Ernst & Young L.L.P. Please read in conjunction with the Trust's 1998 Annual
Report.
<TABLE>
<CAPTION>
<S> <C>
11/28/97
TO 3/31/98
PER SHARE DATA:
Net asset value, beginning of period $12.50
Income from investment operations:
Net investment income (deficit) 0.15
Net realized and unrealized gains (losses) on
securities and foreign currency 1.27
- ---------------------------------------------------------------
Total from investment operations 1.42
Less distributions:
Dividends from net investment income --
Distributions from capital gains --
- ---------------------------------------------------------------
Net asset value, end of period $13.92
- ---------------------------------------------------------------
TOTAL RETURN: 11.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $1,184
Ratio of expenses to average net assets, after
expense reimbursement 1.65%*
Ratio of expenses to average net assets, before
expense reimbursement 5.20%*
Ratio of net investment income (deficit) to
average net assets, after expense reimbursement 3.33%*
Ratio of net investment income (deficit) to
average net assets, before expense reimbursement (0.21%)*
Portfolio turnover 188.19%
Average commission rate paid $0.0019
</TABLE>
* Annualized
<PAGE>
26
LARGE CAP GROWTH FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation.
INVESTMENT STRATEGY
The 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 invests primarily in stocks from a universe of U.S. companies with
market capitalizations corresponding to the upper 90% of the Russell 1000 Growth
Index at time of purchase. As of June 30, 1998, the bottom 10% of the Index
included companies with capitalizations less than $3.9 billion. Capitalization
of companies in the Index will change with market conditions.
The Fund emphasizes equity securities of U.S. companies with market
capitalizations generally above $3 billion and companies whose earnings and
stock prices are expected to grow faster than Standard and Poor's 500 Stock
Index (the "S&P 500") ("large cap securities").
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
securities of large capitalization U.S. companies, including common and
preferred stocks, warrants, and convertible securities. It invests the remainder
primarily in corporate debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, 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 57.
RISK FACTORS
As with any growth fund, 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. 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.75%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.25%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.00%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.75%, Total operating expenses would have been 3.67% and
Other expenses would have been 2.92%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
27
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>
$10 $32 $55 $122
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
12/27/96 4/1/97
TO 3/31/97 TO 3/31/98
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.00
Income from investment operations:
Net investment income (deficit) -- (0.02)
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.50 7.55
- ----------------------------------------------------------------
Total from investment operations 0.50 7.53
Less distributions:
Dividends from net investment income -- --
Distributions from capital gains -- (4.03)
- ----------------------------------------------------------------
Net asset value, end of period $13.00 $16.50
- ----------------------------------------------------------------
TOTAL RETURN: 4.00% 63.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $1,293 $2,556
Ratio of expenses to average net assets,
after expense reimbursement+ 1.00%* 1.01%
Ratio of expenses to average net assets,
before expense reimbursement+ 4.99%* 3.67%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ (0.06)%* (0.17%)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (1.68)%* (2.82%)
Portfolio turnover** 320.73% 305.78%
Average commission rate paid** $0.0594 $0.0584
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
28
MID CAP GROWTH FUND
(FORMERLY 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 invests at least 65% of its net assets in stocks from a universe of
U.S. companies with market capitalizations corresponding to the middle 90% of
the Russell Midcap Growth Index at time of purchase. As of June 30, 1998, the
middle 90% included companies with capitalizations between $1.6 billion and
$10.7 billion. Capitalization of companies in the Index will change with market
conditions.
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, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, 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 57.
RISK FACTORS
As with any growth fund, the value of the Fund's investments varies day to day
in response to the activities of individual companies and general market and
economic conditions. 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.75%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.25%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.00%
</TABLE>
1. The Investment Advisor has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.75%, Total operating expenses would have been 1.19% and
Other expenses would have been 0.44%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
29
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>
$10 $32 $55 $122
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. with respect to the fiscal
year ended March 31, 1998 and the prior two fiscal years, and by another
independent auditor with respect to commencement of operation through March 31,
1995. Please read in conjunction with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97
TO 3/31/94 TO 3/31/95 TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.68 $12.62 $16.26 $15.39
Income from investment operations:
Net investment income (deficit) (0.01) (0.01) (0.03) (0.08) (0.07)
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.92 0.38 4.47 0.49 6.00
- ----------------------------------------------------------------------------------------------------
Total from investment operations 0.91 0.37 4.44 0.41 5.93
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from capital gains (0.73) (0.43) (0.80) (1.28) (4.16)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $12.68 $12.62 $16.26 $15.39 $17.16
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN: 6.84% 3.30% 35.81% 1.74% 42.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $77,947 $72,826 $149,969 $156,443 $169,412
Ratio of expenses to average net assets,
after expense reimbursement+ 0.97%* 0.99% 0.98% 1.00% 0.97%
Ratio of expenses to average net assets,
before expense reimbursement+ 1.14%* 1.07% 1.06% 1.02% 1.19%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ (0.07%)* (0.06%) (0.32%) (0.45%) (0.72%)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (0.24%)* (0.14%) (0.40%) (0.47%) (0.94%)
Portfolio turnover** 84.84% 98.09% 114.48% 153.20% 199.54%
Average commission rate paid** N/A N/A $0.0593 $0.0582 $0.0552
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
30
LARGE CAP VALUE FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser employs a disciplined, "bottom-up" approach that
evaluates stocks on an individual basis and focuses on company fundamentals.
Using predominantly traditional fundamental research, it uncovers stocks that
meet three investment criteria: attractive valuations, below average risk, and
prospects for business improvement.
The Fund emphasizes equity securities of undervalued, large U.S. 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 of U.S. companies with large capitalizations. Generally, large
capitalization stocks are those with market capitalizations greater than $3
billion. It invests the remainder primarily in preferred and convertible
securities, debt securities of any maturity which are rated investment grade by
a nationally recognized statistical rating agency, or of comparable quality if
unrated, 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.
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 57.
RISK FACTORS
As with any equity fund, 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. 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown. The figures below show the expected
expenses for the Fund for its first year of operation. Actual expenses may be
more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.75%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.25%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.00%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees,
Total operating expenses and Other expenses are expected to be 0.75%, 2.46%
and 1.71% absent the deferral. See "Investment Adviser Compensation."
<PAGE>
31
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
<S> <C>
$10 $32
</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.
FINANCIAL HIGHLIGHTS
The Large Cap Value Fund is a new fund for which financial highlights are not
available.
<PAGE>
32
VALUE FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser employs a disciplined, "bottom-up" approach that
evaluates stocks on an individual basis and focuses on company fundamentals. It
uses a blend of computer-intensive systematic disciplines and traditional
fundamental research to uncover stocks that meet three investment criteria:
attractive valuations, underlying financial strength, and prospects for business
improvement.
The Fund emphasizes equity securities of undervalued, large U.S. 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, debt securities of any maturity which are rated
investment grade by a nationally recognized statistical rating agency, or of
comparable quality if unrated, 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.
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 57.
RISK FACTORS
As with any equity fund, 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. 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.75%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.25%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.00%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.75%, Total operating expenses would have been 2.46% and
Other expenses would have been 1.71%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
33
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>
$10 $32 $55 $122
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
4/30/96 4/1/97
TO 3/31/97 TO 3/31/98
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $15.06
Income from investment operations:
Net investment income (deficit) 1.50 --
Net realized and unrealized gains
(losses) on securities and foreign
currency 3.11 8.42
- ----------------------------------------------------------------
Total from investment operations 4.61 8.42
Less distributions:
Dividends from net investment income (1.44) (0.15)
Distributions from capital gains (0.61) (1.43)
- ----------------------------------------------------------------
Net asset value, end of period $15.06 $21.90
- ----------------------------------------------------------------
TOTAL RETURN: 26.77% 57.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $3,062 $10,260
Ratio of expenses to average net assets,
after expense reimbursement+ 1.00%* 1.01%
Ratio of expenses to average net assets,
before expense reimbursement+ 3.34%* 2.46%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 1.64%* 2.33%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ 0.59%* 0.87%
Portfolio turnover** 139.27% 55.14%
Average commission rate paid** $0.0589 $0.0600
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
34
SMALL CAP GROWTH FUND
(FORMERLY 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 invests at least 65% of its net assets in stocks from a universe of
U.S. companies with market capitalizations corresponding to the middle 90% of
the Russell 2000 Growth Index at time of purchase. As of June 30, 1998, the
middle 90% included companies with capitalizations between $255 million and $1.4
billion. Capitalization of companies in the Index will change with market
conditions.
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, debt securities of any maturity which are rated investment grade by
a nationally recognized statistical rating agency, or of comparable quality if
unrated, 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 57.
RISK FACTORS
As with any growth fund, 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. 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.00%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.17%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.17%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 1.00%, Total operating expenses would have been 1.44% and
Other expenses would have been 0.44%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
35
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>
$12 $37 $64 $142
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. with respect to the fiscal
year ended March 31, 1998 and the prior two fiscal years, and by another
independent auditor with respect to commencement of operation through March 31,
1995. Please read in conjunction with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
10/1/93 4/1/94 4/1/95 4/1/96 4/1/97
TO 3/31/94 TO 3/31/95 TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $11.38 $11.58 $15.10 $11.06
Income from investment operations:
Net investment income (deficit) (0.04) (0.05) (0.11) (0.08) (0.03)
Net realized and unrealized gains
(losses) on securities and foreign
currency (0.69) 0.95 4.45 (0.31) 5.10
- ----------------------------------------------------------------------------------------------------
Total from investment operations (0.73) 0.90 4.34 (0.39) 4.97
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from capital gains (0.39) (0.70) (0.82) (3.65) (1.96)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $11.38 $11.58 $15.10 $11.06 $14.17
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN: (6.06%) 8.69% 38.27% (5.66%) 47.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $165,940 $206,696 $224,077 $167,230 $257,599
Ratio of expenses to average net assets,
after expense reimbursement+ 1.17%* 1.18% 1.16% 1.17% 1.19%
Ratio of expenses to average net assets,
before expense reimbursement+ 1.18%* 1.24% 1.20% 1.26% 1.44%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ (0.83%)* (0.58%) (0.62%) (0.72%) (1.16%)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (0.84%)* (0.64%) (0.66%) (0.81%) (1.41%)
Portfolio turnover** 50.51% 100.46% 129.59% 112.90% 91.66%
Average commission rate paid** N/A N/A $0.0523 $0.0520 $0.0528
</TABLE>
* Annualized
** For corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
36
MINI 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 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 invests at least 65% of its net assets in stocks from a universe of
U.S. companies with market capitalizations corresponding to the bottom 5% of the
Russell 2000 Growth Index at time of purchase. As of June 30, 1998, the bottom
5% of the Index included companies with capitalizations less than $255 million.
Capitalization of companies in the Index will change with market conditions.
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, debt securities of any maturity which are rated investment grade by
a nationally recognized statistical rating agency, or of comparable quality if
unrated, 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 it overall effectiveness. For a complete list of the portfolio team,
see "Portfolio Teams" on page 57.
RISK FACTORS
As with any growth fund, 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 the companies in which the Fund invests
may be more volatile and speculative than those of larger companies. 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 1.25%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.31%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.56%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 1.25%, Total operating expenses would have been 1.83% and
Other expenses would have been 0.58%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
37
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>
$16 $49 $85 $186
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
7/12/95 4/1/96 4/1/97
TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $15.85 $15.94
Income from investment operations:
Net investment income (deficit) (0.05) (0.17) (0.17)
Net realized and unrealized gains
(losses) on securities and foreign
currency 3.40 0.84 10.93
- ----------------------------------------------------------------------------
Total from investment operations 3.35 0.67 10.78
Less distributions:
Dividends from net investment income -- -- --
Distributions from capital gains -- (0.58) (1.65)
- ----------------------------------------------------------------------------
Net asset value, end of period $15.85 $15.94 $25.05
- ----------------------------------------------------------------------------
TOTAL RETURN: 26.80% 3.90% 68.89%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $25,237 $28,712 $82,122
Ratio of expenses to average net assets,
after expense reimbursement+ 1.55%* 1.56% 1.57%
Ratio of expenses to average net assets,
before expense reimbursement+ 2.46%* 1.99% 1.83%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ (0.98%)* (1.08%) (2.51%)
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (1.36%)* (1.30%) (2.77%)
Portfolio turnover** 106.99% 164.01% 113.45%
Average commission rate paid** $0.0529 $0.0455 $0.0501
</TABLE>
* Annualized
** For corresponding Series of the Master Trust
+ Includes expenses allocated from Master Trust
<PAGE>
38
CONVERTIBLE FUND
(FORMERLY INCOME & GROWTH FUND)
INVESTMENT OBJECTIVE
Maximum total return, consisting of 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 emphasizes companies with market capitalizations above $500 million.
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. For a description of these
ratings, see "Corporate Bond Ratings" beginning on page 66.
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 57.
RISK FACTORS
Convertible securities have the investment characteristics of both equity and
debt securities. Accordingly, the value of the Fund's investments varies in
response to 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
changes as interest rates fluctuate: if rates rise, the prices of debt
securities fall; if rates fall, the prices of debt securities rise. In addition,
the lower-rated debt securities in which the Fund may invest are considered
predominantly 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.75%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.25%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.00%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.75%, Total operating expenses would have been 1.20% and
Other expenses would have been 0.45%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
39
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>
$10 $32 $55 $122
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. with respect to the fiscal
year ended March 31, 1998 and the prior two fiscal years, and by another
independent auditor with respect to commencement of operation through March 31,
1995. Please read in conjunction with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
4/19/93 4/1/94 4/1/95 4/1/96 4/1/97
TO 3/31/94 TO 3/31/95 TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.39 $11.86 $14.45 $14.97
Income from investment operations:
Net investment income (deficit) 0.42 0.54 0.53 0.51 0.47
Net realized and unrealized gains
(losses) on securities and foreign
currency 2.12 (0.85) 2.59 1.51 4.20
- ----------------------------------------------------------------------------------------------------
Total from investment operations 2.54 (0.31) 3.12 2.02 4.67
Less distributions:
Dividends from net investment income (0.42) (0.54) (0.53) (0.52) (0.47)
Distributions from capital gains (1.23) (0.68) -- (0.98) (0.53)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $13.39 $11.86 $14.45 $14.97 $18.64
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN: 20.18% (2.02%) 26.69% 14.37% 31.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $18,332 $12,506 $17,239 $18,344 $80,084
Ratio of expenses to average net assets,
after expense reimbursement+ 0.99%* 1.00% 1.00% 1.00% 0.97%
Ratio of expenses to average net assets,
before expense reimbursement+ 1.50%* 1.48% 1.53% 1.37% 1.20%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 3.36%* 4.28% 3.88% 3.43% 6.25%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ 2.85%* 3.80% 3.34% 3.03% 6.01%
Portfolio turnover** 177.52% 125.51% 144.97% 166.84% 159.59%
Average commission rate paid** N/A N/A $0.0597 $0.0154 $0.0595
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
40
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. For a description of these ratings, see
"Corporate Bond Ratings" beginning on page 66. 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 57.
RISK FACTORS
As with any fund that invests in common stocks and debt obligations, the value
of the Fund's investments varies in response to 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 changes as interest rates fluctuate: if rates rise, the prices of
debt securities fall; if rates fall, the prices of debt securities rise. In
addition, the 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.75%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.25%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 1.00%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.75%, Total operating expenses would have been 3.44% and
Other expenses would have been 2.69%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
41
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>
$10 $32 $55 $122
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. with respect to the fiscal
year ended March 31, 1998 and the prior two fiscal years, and by another
independent auditor with respect to commencement of operation through March 31,
1995. Please read in conjunction with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
10/1/93 4/1/94 4/1/95 4/1/96 4/1/97
TO 3/31/94 TO 3/31/95 TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $11.71 $12.01 $14.20 $13.94
Income from investment operations:
Net investment income (deficit) 0.08 0.22 0.37 0.36 0.34
Net realized and unrealized gains
(losses) on securities and foreign
currency (0.79) 0.30 2.19 0.75 5.14
- ----------------------------------------------------------------------------------------------------
Total from investment operations (0.71) 0.52 2.56 1.11 5.48
Less distributions:
Dividends from net investment income (0.08) (0.22) (0.37) (0.33) (0.37)
Distributions from capital gains -- -- -- (1.04) (1.39)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $11.71 $12.01 $14.20 $13.94 $17.66
- ----------------------------------------------------------------------------------------------------
TOTAL RETURN: (5.66%) 4.56% 21.45% 7.46% 40.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $143 $284 $625 $710 $992
Ratio of expenses to average net assets,
after expense reimbursement+ 0.99%* 1.00% 1.00% 1.00% 1.01%
Ratio of expenses to average net assets,
before expense reimbursement+ 43.16%* 20.66% 9.90% 7.37% 3.44%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 1.59%* 2.06% 2.74% 2.49% 4.21%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (40.58%*) (17.60%) (5.74%) (3.63%) 1.77%
Portfolio turnover** 85.43% 110.40% 197.19% 212.95% 260.03%
Average commission rate paid** N/A N/A $0.0594 $0.0586 $0.0600
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
42
SHORT INTERMEDIATE FIXED INCOME FUND
INVESTMENT OBJECTIVE
Preserving principal and liquidity while seeking a relatively high level of
current income.
INVESTMENT STRATEGY
The Fund's Investment Adviser invests primarily in a portfolio of
short-to-intermediate-term bonds that it expects to generate a greater return
than the return on one-to three-year U.S. Treasury obligations over a full
market cycle. When evaluating any bond, the Investment Adviser selects bonds
based upon a "top down" analysis of economic trends. Its 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 average yield to maturity of the Fund. The
Investment Adviser seeks to add value by positioning portfolio securities among
various market sectors and maturities along the yield curve.
PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 90% of its total assets in an
actively managed portfolio of debt obligations issued by U.S. and foreign
corporations, U.S. and foreign governments, and their agencies and
instrumentalities which are rated investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. All such
obligations are payable in U.S. dollars or, if not payable in U.S. dollars, are
fully hedged. 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 57.
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. If rates
rise, the prices of debt securities fall; if rates fall, the prices of debt
securities rise. However, the Investment Adviser expects the Fund's fluctuations
to be more moderate than those of a fund with a longer average portfolio
duration. To the extent the Fund invests in foreign securities, different
political, regulatory environments and other overall economic factors in the
countries where the Fund invests may affect performance. For further
explanation, see "Risk Factors and Special Considerations" starting on page 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL PORTFOLIO OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.30%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.05%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 0.35%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.30%, Total operating expenses would have been 1.51% and
Other expenses would have been 1.21%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
43
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>
$4 $11 $20 $44
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
8/31/95 4/1/96 4/1/97
TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.79 $12.66
Income from investment operations:
Net investment income (deficit) 0.37 0.79 0.83
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.29 (0.13) 0.10
- ----------------------------------------------------------------------------
Total from investment operations 0.66 0.66 0.93
Less distributions:
Dividends from net investment income (0.37) (0.79) (0.83)
Distributions from capital gains -- -- --
- ----------------------------------------------------------------------------
Net asset value, end of period $12.79 $12.66 $12.76
- ----------------------------------------------------------------------------
TOTAL RETURN: 5.33% 5.30% 7.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,726 $5,364 $13,535
Ratio of expenses to average net assets,
after expense reimbursement+ 0.35%* 0.35% 0.36%
Ratio of expenses to average net assets,
before expense reimbursement+ 3.17%* 2.86% 1.51%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 5.81%* 6.18% 13.03%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ (4.01%*) 4.95% 11.88%
Portfolio turnover** 114.38% 132.30% 197.10
Average commission rate paid** -- -- --
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
44
HIGH QUALITY BOND FUND
(FORMERLY FULLY DISCRETIONARY FIXED INCOME FUND)
INVESTMENT OBJECTIVE
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 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. Its 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 net assets in debt
securities issued by U.S. and foreign corporations, U.S. and foreign
governments, and their agencies and instrumentalities which are rated in the top
two investment grades by a nationally recognized statistical rating agency, or
of comparable quality if unrated. These securities include bonds, notes,
mortgage-backed and asset-backed securities with rates that are fixed, variable
or floating. 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.
The Fund may invest up to 20% of its total assets in debt securities rated below
investment grade. For a description of these ratings, see "Corporate Bond
Ratings" beginning on page 66. 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 57.
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 rise,
the prices of debt securities fall; if rates fall, the prices of debt securities
rise. However, the Investment Adviser expects the Fund's fluctuations to be more
moderate than those of a fund with a longer average duration. In addition, 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.45%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) --
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 0.45%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.45%, Total operating expenses would have been 1.64% and
Other expenses would have been 1.19%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
45
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>
$5 $14 $25 $57
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
8/31/95 4/1/96 4/1/97
TO 3/31/96 TO 3/31/97 TO 3/31/98
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.72 $12.54
Income from investment operations:
Net investment income (deficit) 0.45 0.79 0.84
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.47 (0.17) 0.70
- ----------------------------------------------------------------------------
Total from investment operations 0.92 0.62 1.54
Less distributions:
Dividends from net investment income (0.44) (0.80) (0.84)
Distributions from capital gains (0.26) -- (0.14)
- ----------------------------------------------------------------------------
Net asset value, end of period $12.72 $12.54 $13.10
- ----------------------------------------------------------------------------
TOTAL RETURN: 5.49% 4.98% 12.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,414 $15,865 $15,759
Ratio of expenses to average net assets,
after expense reimbursement+ 0.45%* 0.45% 0.46%
Ratio of expenses to average net assets,
before expense reimbursement+ 6.45%* 3.74% 1.64%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 6.39%* 6.12% 12.80%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ 2.63%* 4.71% 11.62%
Portfolio turnover** 60.06% 190.41% 406.62%
Average commission rate paid** -- -- --
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
46
STRATEGIC INCOME FUND
INVESTMENT OBJECTIVE
High level of current income.
INVESTMENT STRATEGY
The Fund's Investment Adviser generally invests across three sectors--U.S. and
foreign fixed income securities, lower-rated debt securities, and
mortgage-backed securities--but may invest all of the Fund's assets in one
sector if, in its judgment, an opportunity exists to generate higher income
without undue risk to principal. When evaluating any bond, the Investment
Adviser selects bonds based upon a "top down" analysis of economic trends. It
also analyzes credit quality, the yield to maturity of the security, and the
effect the security will have on 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 invests at least 65% of its total assets in
income producing securities such as international fixed income securities,
lower-rated debt securities, and mortgage-related securities. There is no limit
on the portfolio maturity or the acceptable rating of a security to be bought by
the Fund; however, under normal conditions the average rating of the Fund's
portfolio will be investment grade as rated 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 66.
The Fund may also buy common and preferred stocks and 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 57.
RISK FACTORS
As with any fund that invests primarily in income producing securities, the
value of the Fund's investments fluctuates in response to movements in interest
rates. If interest rates rise, debt security prices fall; if rates fall, 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 or recession may adversely affect the issuer's ability to
pay interest and principal. Mortgage-related securities have yield and maturity
characteristics of the underlying mortgages, and thus have higher prepayments
than other securities during periods of declining interest rates. To the extent
the Fund invests in foreign securities, performance also depends upon changing
currency values, different political and regulatory environments, and other
overall economic factors in countries where the Fund invests. For further
explanation, see "Risk Factors and Special Considerations" starting on page 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL PORTFOLIO OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.60%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.15%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 0.75%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.60%, Total operating expenses would have been 3.62% and
Other expenses would have been 3.02%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
47
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>
$8 $24 $42 $93
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
7/31/96 4/1/97
TO 3/31/97 TO 3/31/98
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.06
Income from investment operations:
Net investment income (deficit) 0.61 0.95
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.76 1.53
- ----------------------------------------------------------------
Total from investment operations 1.37 2.48
Less distributions:
Dividends from net investment income (0.61) (0.95)
Distributions from capital gains (0.20) (1.15)
- ----------------------------------------------------------------
Net asset value, end of period $13.06 $13.44
- ----------------------------------------------------------------
TOTAL RETURN: 11.07% 20.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,206 $4,241
Ratio of expenses to average net assets,
after expense reimbursement+ 0.77%* 0.76%
Ratio of expenses to average net assets,
before expense reimbursement+ 2.33%* 3.62%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 6.97%* 14.04%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ 6.36%* 11.18%
Portfolio turnover** 211.63% 326.07%
Average commission rate paid** $0.0600 $0.0564
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
48
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 invests at least 65% of its total assets in
debt 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 66. 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 capitalizations 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 57.
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
rise, debt security prices fall; when rates fall, 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 61.
INVESTOR EXPENSES - CLASS I SHARES
Investors pay various expenses, either directly or indirectly. Actual expenses
may be more or less than those shown.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C>
Maximum sales charge on purchases None
- ---------------------------------------------------------
Sales charge on reinvested dividends None
- ---------------------------------------------------------
Deferred sales charge None
- ---------------------------------------------------------
Redemption fee None
- ---------------------------------------------------------
Exchange fee None
ANNUAL FUND OPERATING EXPENSES
AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees(1) 0.60%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.15%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 0.75%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures
and extraordinary expenses) otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.60%, Total operating expenses would have been 2.66% and
Other expenses would have been 2.06%, absent the deferral. See "Investment
Adviser Compensation."
<PAGE>
49
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>
$8 $24 $42 $93
</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.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of the predecessor
Institutional Portfolio outstanding throughout each period indicated. The
figures have been audited by Ernst & Young L.L.P. Please read in conjunction
with the Trust's 1998 Annual Report.
<TABLE>
<CAPTION>
7/31/96 4/1/97
TO 3/31/97 TO 3/31/98
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.20
Income from investment operations:
Net investment income (deficit) 0.74 1.11
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.95 2.02
- ----------------------------------------------------------------
Total from investment operations 1.69 3.13
Less distributions:
Dividends from net investment income (0.73) (1.15)
Distributions from capital gains (0.26) (1.72)
- ----------------------------------------------------------------
Net asset value, end of period $13.20 $13.46
- ----------------------------------------------------------------
TOTAL RETURN: 13.90% 25.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,608 $10,771
Ratio of expenses to average net assets,
after expense reimbursement+ 0.75%* 0.76%
Ratio of expenses to average net assets,
before expense reimbursement+ 1.95%* 2.66%
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 8.47%* 8.28%
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ 7.97%* 6.38%
Portfolio turnover** 465.32% 484.39%
Average commission rate paid** -- --
</TABLE>
* Annualized
** For the corresponding Series of the predecessor Master Trust
+ Includes expenses allocated from the predecessor Master Trust
<PAGE>
50
SIMPLIFIED ACCOUNT INFORMATION
<TABLE>
<CAPTION>
OPENING AN ACCOUNT
<S> <C>
This is the minimum
initial investment $250,000
- -----------------------------------------------------------------------------------------------------------
Use this type of
application New Account Form or IRA Application
- -----------------------------------------------------------------------------------------------------------
Each Fund offers a variety of features, which are described in the "Your
Before completing Account" section of this prospectus. Please read this section before completing
the application the application.
- -----------------------------------------------------------------------------------------------------------
Completing the If you need assistance, contact your financial representative, or call us at
application (800) 551-8043.
- -----------------------------------------------------------------------------------------------------------
Mail application and check, payable to: NICHOLAS-APPLEGATE MUTUAL FUNDS,
If you are sending money PO BOX 8326, BOSTON, MA 02266-8326. The Trust will not accept third-party
by CHECK checks.
- -----------------------------------------------------------------------------------------------------------
Please read the bank wire or ACH section under the "Buying Shares" section
below.
You will need to obtain an account number with the Trust by sending a completed
If you are sending money application to:
by BANK WIRE or ACH NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX 8326, BOSTON, MA 02266-8326.
To receive your account number, contact your financial representative or call us
at (800) 551-8043.
<CAPTION>
BUYING SHARES
<S> <C>
This is the minimum
subsequent investment $10,000
- -----------------------------------------------------------------------------------------------------------
The Trust is generally open on days that the New York Stock Exchange is open.
The price you will All transactions received in good order before the market closes receive that
receive day's price.
- -----------------------------------------------------------------------------------------------------------
Instruct your bank to wire the amount you wish to invest to:
STATE STREET BANK & TRUST CO.--ABA #011000028
If you are sending money DDA #9904-645-0
by BANK WIRE STATE STREET BOS, ATTN: MUTUAL FUNDS
CREDIT: NICHOLAS-APPLEGATE [FUND NAME] CLASS I SHARES, [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
account. To establish this option, either complete the appropriate sections when
If you are sending money opening an account,
by ACH 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>
<PAGE>
51
<TABLE>
<CAPTION>
SELLING OR REDEEMING SHARES
<S> <C> <C>
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,
or contact your financial representative, or
Certain requests may require a SIGNATURE call the
GUARANTEE. Trust at (800) 551-8043 for further
Things you should know See the next section for further information. information.
You may sell up to the full account value. The maximum amount which may be requested
by phone, regardless of account size, is
$50,000.
Amounts greater than that must be requested
in writing. 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, payment may be delayed until the check clears, which may take up to 15
calendar days from the date of purchase. Sales by a corporation, trust or fiduciary may have
special requirements. Please contact 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.
- -----------------------------------------------------------------------------------------------------------------------
Please put your request in writing,
including:
the name of the account owners, account
number
and Fund and share Class you are redeeming
from, Contact your financial representative,
and the share or dollar amount you wish to or call us at (800) 551-8043.
If you want to receive sell, The proceeds will be sent to the existing
your monies by BANK WIRE signed by all account owners. Mail this bank wire
request to: address listed on the account.
NICHOLAS-APPLEGATE MUTUAL FUNDS,
PO BOX 8326, BOSTON, MA 02266-8326.
The check will be sent to the existing bank
wire
address listed on the account.
- -----------------------------------------------------------------------------------------------------------------------
Contact your financial representative,
or call us at (800) 551-8043.
The proceeds will be sent in accordance with
If you want to receive the existing
your monies by ACH Please call us at (800) 551-8043. ACH instructions on the account and will
generally be
received at your bank two business days
after your request is received.
</TABLE>
<PAGE>
52
SIMPLIFIED ACCOUNT INFORMATION
<TABLE>
<CAPTION>
SIGNATURE GUARANTEES
<S> <C>
A signature guarantee from a financial institution is required to verify the
authenticity of an individual's
A definition 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:
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
When you need one 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.
<CAPTION>
EXCHANGING SHARES
<S> <C>
This is the minimum
exchange
amount to open a new $250,000
account
- -----------------------------------------------------------------------------------------------------------
The Trust is open on days that the New York Stock Exchange is open.
The price you will All transactions received in good order before the market closes receive that
receive day's price.
- -----------------------------------------------------------------------------------------------------------
The exchange must be to the Class I Shares of another Fund or to the Money
Market Fund and to an account with the same registration.
If you intend to keep money in the Fund you are exchanging from, make sure that
you leave an amount
Things you should know 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.
- -----------------------------------------------------------------------------------------------------------
Contact your financial representative, or call us at (800) 551-8043.
How to request an The Trust will accept a request by phone if this feature was previously
exchange by PHONE established on your account.
See the "Your Account" section for further information.
- -----------------------------------------------------------------------------------------------------------
Please put your exchange request in writing, including: the name on the account,
the name of the Fund
How to request an and the account number you are exchanging from, the shares or dollar amount you
exchange by MAIL wish to exchange,
and the Fund you wish to exchange to. Mail this request to: PO BOX 8326, BOSTON,
MA 02266-8326.
</TABLE>
<PAGE>
53
YOUR ACCOUNT
TRANSACTION POLICIES
PURCHASE OF SHARES. Class I Shares are offered at net asset value without a
sales charge to qualified retirement plans, financial and other institutions and
"wrap accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment is $10,000. The Distributor may waive these minimums from
time to time. Certain Funds also offer Class A, B, C and Q Shares, which have
different sales charges and other expenses that may affect their performance.
You can obtain more information about these other share Classes from
Nicholas-Applegate Securities at (800) 551-8643.
VALUATION OF SHARES. The net asset value per share ("NAV") for Class I Shares of
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 value of
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.
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 or telephone number provided above.
RETIREMENT PLANS. You may invest in each Fund through various retirement plans,
including IRAs, Roth 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 month.
Every year you will also receive an applicable tax information statement, mailed
by January 31.
<PAGE>
54
YOUR ACCOUNT
DIVIDENDS. The Funds generally distribute most or all of their net earnings in
the form of dividends. Each Fund pays dividends of net investment income as
follows:
<TABLE>
<CAPTION>
ANNUALLY QUARTERLY MONTHLY
<S> <C> <C>
Global Blue Chip Global Growth & Income Short Intermediate
International Core Balanced Growth High Quality Bond
Growth Convertible Strategic Income
Worldwide Growth High Yield Bond
International Small Cap Emerging Markets Bond
Emerging Countries
Global Technology
Greater China
Pacific Rim
Latin America
Large Cap Growth
Mid Cap Growth
Large Cap Value
Value
Small Cap Growth
Mini Cap Growth
</TABLE>
Any net capital gains are distributed annually.
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.
TAXABILITY OF DIVIDENDS. As long as a Fund meets the requirements for being a
tax-qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Dividends you receive from a Fund, whether reinvested or taken as cash, are
generally taxable. Dividends from a Fund's long-term capital gains are taxable
as capital gains; dividends from other sources are generally taxable as ordinary
income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive.
The tax information statement that is mailed to you details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY). If you draw down a non-retirement account
so that its total value is less than the Fund minimum, you may be asked to
purchase more shares within 60 days. If you do not take action, the Fund may
close out your account and mail you the proceeds. Your account will not be
closed if its drop in value is due to Fund performance.
AUTOMATIC WITHDRAWALS. You may make automatic withdrawals from a Fund of $250 or
more on a monthly or quarterly basis if you have an account of $15,000 or more
in the Fund. Withdrawal proceeds will normally be received prior to the end of
the month or quarter. See the account application for further information.
AUTOMATIC INVESTMENT PLAN. You may make regular monthly or quarterly investments
in Class I 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 I Shares of another Fund,
subject to conditions outlined in the Statement of Additional Information and
the applicable provisions of the qualified retirement plan.
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.
<PAGE>
55
ORGANIZATION AND MANAGEMENT
INVESTMENT ADVISER COMPENSATION
Each Fund pays the Investment Adviser a monthly fee pursuant to an investment
advisory agreement. The Emerging Countries and Latin American Funds each pays an
advisory fee at the annual rate of 1.25% of the Fund's average net assets. The
Large Cap Value Fund and Value Fund each pays a monthly fee at the annual rate
of 0.75% of the Fund's average net assets. The Global Technology Fund pays a
monthly fee at the annual rate of 1.00% of the Fund's average net assets. The
Mini Cap Growth Fund pays a monthly fee at the annual rate of 1.25%. The Pacific
Rim, Greater China and Small Cap Growth Funds each pays at the annual rate of
1.00% of the Fund's average net assets. The Worldwide Growth, International Core
Growth and International Small Cap Growth Funds each pays at the annual rate of
1.00% on the first $500 million of the Fund's average net assets, 0.90% on the
next $500 million of the Fund's average net assets, and 0.85% on average net
assets of the Fund in excess of $1 billion. The Global Growth & Income Fund pays
at the annual rate of 0.85% of the Fund's average net assets. The Short
Intermediate Fund pays at the annual rate of 0.30% of the first $250 million of
the Fund's average net assets and 0.25% of the average net assets in excess of
$250 million. The Emerging Markets Bond Fund pays at the annual rate of 0.70% of
its average net assets. The Global Blue Chip Fund pays at the annual rate of
0.80% of the Fund's average net assets. The High Quality Bond 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 average net assets, and 0.35% of average net
assets in excess of $750 million. The Strategic Income and High Yield Bond Funds
each pays at the annual rate of 0.60% of the Fund's average net assets. The
Large Cap Growth, Mid Cap Growth, Convertible, and Balanced Growth Funds each
pays at the annual rate of 0.75% of the first $500 million of the Fund's average
net assets, 0.675% of the next $500 million of average net assets, and 0.65% of
average net assets in excess of $1 billion.
The Investment Adviser has agreed to defer certain fees payable by the Funds
(excluding interest, taxes, brokerage commissions and other portfolio
transaction expenses, capital expenditures and extraordinary expenses), and to
absorb other operating expenses of the Funds, subject to later reimbursement, so
that the expenses for the Class I Shares of the Funds will not exceed the
following expense ratios on an annual basis through March 31, 1999: Worldwide
Growth and Global Growth & Income Funds--1.35%; International Core Growth,
International Small Cap Growth, Global Technology, Greater China and Pacific Rim
Funds-- 1.40%; Emerging Countries and Latin America Funds-- 1.65%; Short
Intermediate Fund--0.35%; High Quality Bond Fund--0.45%; Strategic Income and
High Yield Bond Funds--0.75%; Convertible, Balanced Growth, Large Cap Growth,
Large Cap Value, Value and Mid Cap Growth Funds--1.00%; Small Cap Growth Fund--
1.17%; Mini-Cap Growth Fund--1.56%; Emerging Markets Bond Fund--0.95%; and
Global Blue Chip Fund-- 1.20%. Each Fund will reimburse the Investment Adviser
for fees deferred or other expenses paid pursuant to this Agreement in later
years in which operating expenses for the Fund are less than the percentage
limitation set forth above for any such year. The Investment Adviser will not
recover any fee waivers or expense reimbursements from a Fund more than five
years after the expenses were incurred (March 31, 2003 in the case of expenses
incurred prior to March 31, 1998).
SUB-ADVISERS. To assist it in the management of the Greater China and Pacific
Rim Funds, the Investment Adviser has entered into sub-advisory agreements with
its investment advisory affiliates, Nicholas-Applegate Capital Management--Hong
Kong, 6th Floor, Three Exchange Square, 8 Connaught Place, Hong Kong, and
Nicholas-Applegate Capital Management--Asia, 65 Chulia Street #3201/04 OCBC
Centre, Singapore (the "Sub-Advisers"). Pursuant to each sub-advisory agreement,
the Investment Adviser pays each of its affiliates a fee ranging from 10% to 40%
of the fee it receives. To the extent the Investment Adviser waives or defers
its management fee under circumstances outlined above, the Sub-Advisers will
also waive or defer their fees.
ADMINISTRATOR COMPENSATION
The Funds pay administrative fees for administrative personnel and services
(including certain legal and financial reporting services). Each Fund pays
Investment Company Administration Corporation a monthly fee at an annual rate
ranging from 0.05% to 0.01% of average net assets, with a minimum of $40,000 per
Fund.
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 and Sub-Advisers may use
brokerage firms that sell shares of the Fund or that provide research services
to the Fund, but only when the Investment Adviser and Sub Advisers believe no
other
<PAGE>
56
ORGANIZATION AND MANAGEMENT
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 other 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, except the Emerging Markets Bond Fund, which is
non-diversified. All Funds are also subject to the diversification limits
imposed by the Internal Revenue Code.
PRIOR MASTER-FEEDER STRUCTURE
Prior to July 24, 1998, the various Classes of most 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.
<PAGE>
57
PORTFOLIO TEAMS
EQUITY MANAGEMENT--INTERNATIONAL/GLOBAL
ARTHUR E. NICHOLAS, MANAGING PARTNER
Chief Investment Officer
Founded firm in 1984; prior investment management experience with Pacific
Century Advisers, Security Pacific Bank and San Diego Trust & Savings Bank
B.S.--San Diego State University
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, GLOBAL GROWTH & INCOME, GLOBAL TECHNOLOGY, GLOBAL BLUE CHIP,
LATIN AMERICA, PACIFIC RIM, AND GREATER CHINA
ANDREW B. GALLAGHER, PARTNER
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
WORLDWIDE GROWTH
JOHN J. KANE, PARTNER
Portfolio Manager
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
GLOBAL TECHNOLOGY
PEDRO V. MARCAL, PARTNER
Portfolio Manager
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
EMERGING COUNTRIES
LORETTA J. MORRIS, PARTNER
Portfolio Manager
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, INTERNATIONAL SMALL CAP GROWTH,
GLOBAL TECHNOLOGY, GLOBAL BLUE CHIP, AND GLOBAL GROWTH & INCOME
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, GLOBAL GROWTH & INCOME,
INTERNATIONAL SMALL CAP GROWTH, EMERGING COUNTRIES, GLOBAL BLUE CHIP, LATIN
AMERICA, PACIFIC RIM AND GREATER CHINA
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 AND LATIN AMERICA
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, INTERNATIONAL SMALL CAP GROWTH,
GLOBAL BLUE CHIP, AND GLOBAL GROWTH & INCOME
JESSICA HILINSKI
Portfolio Manager
Joined firm in 1996; 3 years prior experience with Eaton Vance Management and
Union Capital Advisors
Attended University of Pennsylvania
EMERGING COUNTRIES
ESWAR MENON
Portfolio Manager
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
EMERGING COUNTRIES, GLOBAL TECHNOLOGY, AND PACIFIC RIM
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58
ORGANIZATION AND MANAGEMENT
ALEX MUROMCEW
Portfolio Manager
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, INTERNATIONAL SMALL CAP GROWTH,
GLOBAL BLUE CHIP, GLOBAL TECHNOLOGY, AND GLOBAL GROWTH & INCOME
ERNESTO RAMOS, PH.D.
Senior Portfolio Manager
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,
EMERGING COUNTRIES, AND LATIN AMERICA
JOHN TRIBOLET
Portfolio Manager
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, INTERNATIONAL SMALL CAP GROWTH,
GLOBAL BLUE CHIP, AND GLOBAL GROWTH & INCOME
AYLIN UCKUNKAYA
Investment Analyst
Joined firm in 1997; 4 years investment management experience with Global
Securities
B.A. Istanbul University
EMERGING COUNTRIES
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT-- HONG KONG
ROBERT BREWIS
Portfolio Manager
Joined firm in 1997; 9 years prior investment management experience with Credit
Lyonnais International and Thornton Asset Management
M.A. and B.A.--Cambridge University
PACIFIC RIM
TIMOTHY GREATON
Portfolio Manager
Joined firm in 1997; 5 years prior investment management experience with Credit
Lyonnais International Asset Management
B.A.--Middlebury College; also attended graduate programs at Taiwan University
and Nanjing University
GLOBAL TECHNOLOGY AND GREATER CHINA
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT-- ASIA
YEO BOON HONG
Portfolio Manager
Joined firm in 1997; 8 years prior investment management experience with Credit
Lyonnais International Asset Management and Indosuez Asset Management
M.S.--Wharton School, University of Pennsylvania
PACIFIC RIM
REGINALD TAN
Portfolio Manager
Joined firm in 1997; 6 years prior investment experience with Credit Lyonnais
International Asset Management and Mercury Asset Management
B.S.--Wharton School, University of Pennsylvania
PACIFIC RIM
EQUITY MANAGEMENT--U.S.
ARTHUR E. NICHOLAS, MANAGING PARTNER
Chief Investment Officer
Founded firm in 1984; prior investment management experience with Pacific
Century Advisers, Security Pacific Bank and San Diego Trust & Savings Bank
B.S.--San Diego State University
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
LARGE CAP GROWTH, LARGE CAP VALUE, VALUE, SMALL CAP GROWTH, MINI CAP GROWTH,
BALANCED GROWTH, CONVERTIBLE AND MID CAP GROWTH
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59
THOMAS BLEAKLEY, PARTNER
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
SMALL CAP GROWTH AND MINI CAP GROWTH
WILLIAM H. CHENOWETH, PARTNER, CFA
Portfolio Manager
Joined firm in 1998; 12 years prior investment experience with Turner Investment
Partners, Inc., and Jefferson-Pilot Corporation
M.B.A. and B.B.A.--Emory University
MID CAP GROWTH AND LARGE CAP GROWTH
ANDREW B. GALLAGHER, PARTNER
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
MID CAP GROWTH AND LARGE CAP GROWTH
JOHN J. KANE, PARTNER
Senior 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
VALUE AND BALANCED 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
VALUE AND BALANCED GROWTH
PAUL E. CLUSKEY
Investment Analyst
Joined firm in 1998; 4 years prior investment experience at SEI Investments and
Piper Jaffray, Inc.
B.S.--New York University
MINI CAP GROWTH AND SMALL CAP 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
CONVERTIBLE, HIGH YIELD BOND AND GLOBAL GROWTH & INCOME
AARON HARRIS
Portfolio Manager
Joined firm in 1995; 1 year prior investment management experience at Chemical
Bank
B.A.--Princeton University
SMALL CAP GROWTH, MINI CAP GROWTH AND GLOBAL TECHNOLOGY
EDMUND W. KEELEY, JR., CFA
Portfolio Manager, Traditional Value Equities
Joined firm in 1998; 34 years prior investment experience with Smith Barney
Capital Management and F. Eberstadt & Co.
M.B.A.--Columbia University; B.A.--Cornell University
LARGE CAP VALUE
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
SMALL CAP GROWTH AND MINI CAP GROWTH
PHILIP J. MILLER
Portfolio Manager, Traditional Value Equities
Joined firm in 1998; 25 years prior investment experience with Smith Barney
Capital Management and Dominick and Dominick
B.A.--Wesleyan University
LARGE CAP VALUE
VICTOR J. RASKIN, CFA
Portfolio Manager, Traditional Value Equities
Joined firm in 1998; 29 years prior investment experience with Smith Barney
Capital Management; Schaenen Wood; Tallasi Management; and Dean Witter
M.B.A.--New York University; B.A.--Washington & Jefferson College
LARGE CAP VALUE
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60
ORGANIZATION AND MANAGEMENT
EMMY SOBIESKI, CFA
Portfolio Manager
Joined firm in 1998; 4 years prior investment experience with Farmers Insurance
Investment Division and EEN Business Network
M.B.A.--University of Southern California; B.A.--University of San Diego
MID CAP GROWTH AND LARGE CAP GROWTH
MARK STUCKELMAN
Portfolio Manager, U.S. Systematic
Joined firm in 1995; 5 years experience with Wells Fargo Bank Investment
Management Group; Fidelity Management Trust Co.; and BARRA
M.B.A.--University of Pennsylvania/Wharton School; B.A.--University of
California, Berkeley
VALUE
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
MID CAP GROWTH AND LARGE CAP GROWTH
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, HIGH QUALITY BOND, SHORT-INTERMEDIATE, HIGH YIELD BOND,
STRATEGIC INCOME, AND EMERGING MARKETS BOND
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 Co.
M.B.A.--St. John's University; B.B.A.--Susquehanna University
BALANCED GROWTH, HIGH QUALITY BOND, AND SHORT-INTERMEDIATE
ALAN J. BROCHSTEIN
Portfolio Manager
Joined firm in 1994; 8 years prior investment management experience with CS
First Boston Investment Management Group and Kidder Peabody & Co.
B.A.--Northwestern University
STRATEGIC INCOME
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, STRATEGIC INCOME HIGH QUALITY BOND, SHORT-INTERMEDIATE, AND
EMERGING MARKETS BOND
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 AND STRATEGIC INCOME
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
STRATEGIC INCOME, EMERGING MARKETS BOND AND GLOBAL GROWTH AND INCOME
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 AND HIGH YIELD BOND
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61
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 as 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 Funds seek to
use derivative contracts and securities to reduce volatility and increase 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 counterpart's
ability to perform, and any deterioration in the counterpart's creditworthiness
could adversely affect the instrument. The Funds will only use derivatives in a
manner consistent with their investment objectives, policies and limitations.
INTERNATIONAL INVESTING CONSIDERATIONS
CURRENCY FLUCTUATIONS. Because the assets of certain 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 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.
A number of Asian countries are currently experiencing economic difficulties and
significant declines in values in their financial markets as a result of the
rapid convergence in those countries, beginning in the fourth quarter of 1997,
of a number of the social, political and economic risk factors referred to
above. The unsettled condition of several Asian financial markets has also
affected emerging markets in other countries and regions. These conditions could
continue or deteriorate further in the future.
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62
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 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 Funds may invest in debt and convertible securities rated 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 than are more high-rated securities, which
react primarily to movements in 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
<PAGE>
63
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 (as
rated by Standards & Poor's) for the year ended March 31, 1998: Global Growth &
Income-- AAA-1.73%; AA-0%; A-2.09%; BBB-4.76%; BB-5.94%; B-3.31%; CCC-0%; CC-0%;
C-0%; non-rated-12.64%; Emerging Markets Bond--AAA-0%; AA-0%; A-0%; BBB-17.01%;
BB-45.35%; B-0%; CCC-0%; CC-0%; C-0%; non-rated-24.88%; Convertible--AAA-1.87%;
AA-2.21%; A-9.57%; BBB-12.46%; BB-9.57%; B-8.80%; CCC-0.13%; CC-0%; C-0%;
non-rated-9.05%; Balanced Growth-- AAA-21.02%; AA-1.60%; A-4.31%; BBB-1.94%;
BB-0.26%; B-2.29%; CCC-0.99%; CC-0.01%; C-0%; non-rated-1.55%; High Quality
Bond--AAA-61.28%; AA-5.35%; A-10.57%; BBB-5.29%; BB-1.81%; B-4.87%; CCC-0.67%;
CC-0.15%; C-0%; non-rated-2.94%; Strategic Income--AAA-25.56%; AA-0%; A-1.49%;
BBB-1.81%; BB-16.19%; B-15.21%; CCC-3.60%; CC-0%; C-0%; non-rated-7.09%; and
High Yield Bond--AAA-0%; AA-0%; A-0%; BBB-0%; BB-10.41%; B-47.74%; CCC-11.29%;
CC-0%; C-0%; non-rated-17.16%. A description of the rating categories is
contained in this prospectus.
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
the 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 that are deemed investment grade 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, are determined by the
Investment Adviser to be of comparable quality. Bonds rated Baa or BBB 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
"Corporate Bond Ratings."
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 securities of 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 Funds may invest up to 35% of their net assets in
zero coupon securities
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64
RISK FACTORS AND SPECIAL CONSIDERATIONS
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. The Funds may invest in mortgage-related securities
and collateralized mortgage obligations ("CMOs"). CMOs are debt obligations
collateralized by a pool of mortgage loans or mortgage pass-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 associations, and are either insured by the
Federal Housing Administration or the Veterans Administration. The rate of
prepayment of underlying mortgage loans in a pool rises when interest rates
fall, and falls when interest rates rise. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
ASSET BACKED SECURITIES. The non-mortgage-related asset-backed securities in
which the 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 characteristics of asset-backed securities differ in a number of
respects from those 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. The 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. The Funds may invest in a type of sovereign debt known as Brady
Bonds. These obligations were created under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady, in which foreign
entities issued these obligations in exchange for their existing commercial bank
loans. Brady Bonds have been issued by Argentina, Brazil, Costa Rica, the
Dominican Republic, Mexico, the 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 a Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company's advisory and operational
expenses.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
securities that are considered illiquid. An illiquid investment is generally an
investment that is not registered under U.S. securities laws, 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. The Board of Trustees has determined that Rule 144A
securities are not illiquid securities.
TEMPORARY INVESTMENTS. Each Fund may, from time to time on a temporary basis,
invest all of its assets in short-term instruments to maintain liquidity or when
the Investment Adviser determines that the market conditions call for a
temporary defensive posture. 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
<PAGE>
65
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. The Funds may enter into securities swaps. A securities swap
is 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 a 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 of loss. 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. Interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds (or on the assets
that were retained rather than sold to meet the needs for which funds were
borrowed). Under adverse market conditions, a Fund might have to sell portfolio
securities to meet interest or principal payments at a time when fundamental
investment considerations would not favor such sales.
SECURITIES LENDING. Each Fund may lend securities to financial institutions such
as banks, broker/dealers and other recognized institutional investors in amounts
up to 30% of the Fund's total assets. These loans earn income for the Fund and
are collateralized by cash, securities or letters of credit. The Fund might
experience a loss if the financial institution defaults on the loan.
FOREIGN CURRENCY TRANSACTIONS. Each Fund investing in foreign securities may
enter into foreign currency transactions either on a spot or cash basis at
prevailing rates or through forward foreign currency exchange contracts in order
to have the necessary currencies to settle transactions. Each 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. Each Fund 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. Each Fund may enter into futures contracts, or
options thereon, involving foreign currency, interest rates, securities, and
securities indices, for hedging purposes only. A
<PAGE>
66
RISK FACTORS AND SPECIAL CONSIDERATIONS
futures contract obligates the seller of the contract to deliver and the
purchaser of the contract to take delivery of the type of foreign currency,
financial instrument or security called for in the contract at a specified
future time for a specified price. 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 portfolio
securities being hedged. 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. Although the
Investment Adviser will consider liquidity before entering into these
transactions, there is no assurance that a liquid secondary market will exist
for positions in futures contracts or for options at all times.
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 market, currency,
or interest rate fluctuations, to protect the Fund's unrealized gains in the
values of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchase or sale of particular securities. However, in
addition to the hedging transactions referred to above, the Strategic Income,
High Quality Bond, Short-Intermediate, Global Blue Chip, Emerging Markets Bond,
Pacific Rim, Greater China and Latin America Funds may enter into options,
futures and swap transactions to enhance potential gain in circumstances where
hedging is not involved. A 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."
THE YEAR 2000. The Investment Adviser has taken steps that it believes are
reasonably designed to address the potential failure of computer programs used
by the Investment Adviser and the Trust's service providers to address the Year
2000 issue. There can be no assurance that these steps will be sufficient to
avoid any adverse impact.
In addition, the Year 2000 problem may adversely affect the Funds' investments.
For example, portfolio companies may incur substantial costs to address the
problem. They may also suffer losses caused by corporate and governmental data
processing errors.
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.
<PAGE>
67
Ba - Bonds rated Ba are judged to have speculative elements; their future cannot
be considered well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds, and such issues can be
regarding as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modified 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay 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.
<PAGE>
68
PRIOR PERFORMANCE OF CERTAIN FUNDS AND THEIR PREDECESSORS
The following table sets forth historical performance information for the
Class I shares of the Mid Cap Growth, Convertible and International Small Cap
Growth Funds. It includes historical performance information for the
Institutional Portfolios which preceded the Funds prior to the reorganization of
the Trust in March 1998 and for the following investment partnerships which
preceded such Institutional Portfolios: Mid Cap Growth Fund-- includes
performance information for Whitehall Partners, a California limited partnership
the assets of which were transferred to the predecessor of the Mid Cap Growth
Fund in April 1993; Convertible Fund--includes performance information for
Coventry Partners, a California limited partnership the assets of which were
transferred to the predecessor of the Convertible Fund in April 1993;
International Small Cap Growth Fund-- includes performance information for
Huntington Partners, a California limited partnership the assets of which were
transferred to the predecessor of the International Small Cap Growth Fund in
January 1994.
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 information about calculation of total
return.
The Investment Adviser has advised the Trust that such partnerships were
operated with materially equivalent investment objectives, policies, strategies
and restrictions, as such Institutional Portfolios, and their assets were
transferred to such Portfolios prior to the effective date of the Portfolios'
registration statement. It has indicated that such results for the prior
partnerships have been adjusted to reflect the deduction of the fees and
expenses 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), and give effect to transaction costs (such as sales
loads) as well as reinvestment of income and gains. However, the prior
investment partnerships 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 or partner 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.
<PAGE>
69
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
INTERNATIONAL SMALL
MID CAP GROWTH CONVERTIBLE CAP GROWTH PERFORMANCE
PERFORMANCE PERFORMANCE
RUSSELL CS FIRST INTERNATIONAL SALOMON
MID CAP MID CAP BOSTON SMALL CAP EPAC/
GROWTH GROWTH CONVERTIBLE CONVERTIBLE GROWTH EMI
YEAR FUND INDEX(1) FUND INDEX(2) FUND INDEX(3)
<S> <C> <C> <C> <C> <C> <C>
1985(4) 24.74% n/a n/a n/a n/a n/a
1986(4) 32.85 17.55% n/a n/a n/a n/a
1987 3.59 2.76 (3.12)% (0.22)% n/a n/a
1988 12.67 12.92 19.88 13.41 n/a n/a
1989 33.92 31.48 28.39 13.76 n/a n/a
1990(4) 0.73 (5.13) 1.84 (6.89) (17.48)% (16.96)%
1991 55.52 47.02 38.36 29.11 11.78 6.66
1992 13.55 8.71 9.84 17.58 (12.36) (15.42)
1993(5) 19.77 (11.19) 27.08 18.55 26.03 30.34
1994 (10.52) (2.17) (7.59) (4.72) 8.61 9.44
1995(6) 38.67 33.99 22.26 23.72 6.00 4.79
1996(5) 16.46 17.48 21.02 13.84 18.27 6.47
1997 16.66 22.58 23.30 16.92 14.09 (10.27)
Last year(5) 42.49 42.40 31.78 25.87 37.02 7.75
Last 5 years(5) 16.30 18.42 17.41 13.40 17.29 7.94
Last 10 years(5) 19.48 17.03 17.96 13.11 n/a n/a
Since inception(5) 20.64 16.33 16.09 12.23 9.14 2.99
</TABLE>
1 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.
2 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.
3 The Salomon EPAC Extended Market Index ("EMI") is an unmanaged index that
includes shares of approximately 2,800 companies in 22 countries excluding
Canada and the United States. Companies included in the Index are smaller
capitalization companies with available float market capitalizations
greater than U.S. $100 million. Only issuers 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.
4 Inception dates are as follows: Core Growth Institutional Portfolio
(predecessor to the Class I shares of the Mid Cap Growth Fund)--September
30, 1985 (registration statement effective June 30, 1994); Income & Growth
Institutional Portfolio (predecessor Series to the Class I shares of the
Convertible Fund)--December 31, 1986 (registration statement effective
April 19, 1993); International Small Cap Growth Institutional Portfolio
(predecessor to the Class I shares of the International Small Cap Growth
Fund)--June 7, 1990 (registration statement effective January 3, 1994).
5 Through March 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NEW ACCOUNT FORM (NON-IRA) NICHOLAS APPLEGATE-Registered Trademark- MAIL TO:
- --------------------------------- Nicholas-Applegate Mutual Funds
CLASS I SHARES M U T U A L F U N D S PO Box 8326
Boston, MA 02266-8326
FOR AN IRA ACCOUNT APPLICATION, CALL 800 - 551-8043. 800-551-8043
- ------------------------------------------------------------------------------------------------------------
1. YOUR ACCOUNT REGISTRATION
- ------------------------------------------------------------------------------------------------------------
PLEASE PRINT. COMPLETE ONE SECTION ONLY. Joint account owners will be registered joint tenants with the
right of survivorship unless otherwise indicated. It is the shareholder(s) responsibility to specify
ownership designations which comply with applicable state law.
/ / INDIVIDUAL OR JOINT ACCOUNT
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / - / / / - / / / / /
First Name Middle Initial Last Name Social Security Number
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / - / / / - / / / / /
Joint Tenant (IF ANY) Middle Initial Last Name Social Security Number
/ / GIFT OR TRANSFER TO MINOR (UGMA/UTMA)
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Custodian's First Name (ONLY ONE) Middle Initial Last Name
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Minor's First Name (ONLY ONE) Middle Initial Last Name
/ / / / / / - / / / - / / / / / / / - / / / - / / / / /
Minor's State of Residence Minor's Date of Birth Minor's Social Security Number
/ / TRUST, CORPORATION, PARTNERSHIP OR OTHER ENTITY (CORPORATE RESOLUTION REQUIRED)
_______________________________________________________________________________________
Name of Trust, Corporation or Other Entity
_______________________________________________________ / / / - / / / - / / /
Trustee Name(s) or Type of Entity Date of Trust Agreement
_______________________________________________________ / / - / / / / / / /
Name of Beneficiary (OPTIONAL) Taxpayer Identification Number
- ------------------------------------------------------------------------------------------------------------
2. YOUR ADDRESS
- ------------------------------------------------------------------------------------------------------------
Do you have any other identically registered Nicholas-Applegate accounts? / / Yes / / No
CITIZENSHIP:
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / U.S.
Street Address or PO Box Number Apartment Number / / Resident Alien
/ / Non-resident Alien
_____________________________
/ / / / / / / / / / / / / / / / / / / / / - / / / / / Specify Country (if not U.S.)
City State Zip
/ / / / - / / / / - / / / / / / / / / - / / / / - / / / / /
Area Code Home Phone Area Code Business Phone
- ------------------------------------------------------------------------------------------------------------
3. YOUR INVESTMENT
- ------------------------------------------------------------------------------------------------------------
Please select your fund choices and appropriate share class. See prospectus for investment minimums.
<CAPTION>
CLASS AMOUNT
<S> <C> <C>
- -------------------------------------------------------------
Emerging Countries I(179) / / $
- -------------------------------------------------------------
International Small Cap Growth I(356) / / $
- -------------------------------------------------------------
International Core Growth I(180) / / $
- -------------------------------------------------------------
Worldwide Growth I(374) / / $
- -------------------------------------------------------------
Global Growth & Income I(970) / / $
- -------------------------------------------------------------
Global Blue Chip I(943) / / $
- -------------------------------------------------------------
Emerging Markets Bond I(944) / / $
- -------------------------------------------------------------
Pacific Rim I(789) / / $
- -------------------------------------------------------------
Greater China I(788) / / $
- -------------------------------------------------------------
Latin America I(787) / / $
- -------------------------------------------------------------
<CAPTION>
CLASS AMOUNT
<S> <C> <C>
- -------------------------------------------------------------
Mini Cap Growth I(753) / / $
- -------------------------------------------------------------
Small Cap Growth I(359) / / $
- -------------------------------------------------------------
Mid Cap Growth I(371) / / $
- -------------------------------------------------------------
Large Cap Growth I(181) / / $
- -------------------------------------------------------------
Balanced Growth I(373) / / $
- -------------------------------------------------------------
Convertible I(372) / / $
- -------------------------------------------------------------
Large Cap Value I( ) / / $
- -------------------------------------------------------------
Value I(378) / / $
- -------------------------------------------------------------
Short Intermediate I(182) / / $
- -------------------------------------------------------------
High Quality Bond I(183) / / $
- -------------------------------------------------------------
<CAPTION>
CLASS AMOUNT
<S> <C> <C>
- -------------------------------------------------------------
Strategic Income I(752) / / $
- -------------------------------------------------------------
High Yield Bond I(377) / / $
- -------------------------------------------------------------
Global Technology I(437) / / $
- -------------------------------------------------------------
Other $
- -------------------------------------------------------------
TOTAL $
- -------------------------------------------------------------
4. YOUR METHOD OF PAYMENT
- --------------------------------------------------------------------------------------------------------------------------------
/ / BY CHECK: Payable to NICHOLAS-APPLEGATE MUTUAL FUNDS / / BY EXCHANGE: Portfolio name from which ___________________
(Third party checks will NOT be accepted.) you are exchanging
/ / BY WIRE: Please call 1-800-551-8043 for your account number / / BY CONFIRM TRADE ORDER: Trade Order # ___________________
<PAGE>
- ------------------------------------------------------------------------------------------------------------
5. YOUR DIVIDEND AND CAPITAL GAIN PAYMENT OPTIONS
- ------------------------------------------------------------------------------------------------------------
Distributions will automatically be reinvested in additional shares of your Fund(s) unless you check the
box(es) below.
DIVIDENDS (CHECK ONE) / / Reinvest / / Cash CAPITAL GAINS (CHECK ONE) / / Reinvest / / Cash
/ / CROSS FUND REINVESTMENT(+) (OPTIONAL)--Reinvest all dividends and capital gains into an existing account
in another Nicholas-Applegate Fund.
From _______________________________________ To _______________________________________
Fund Name Fund Name
(1) MUST BE SAME ACCOUNT TYPE AND CLASS OF SHARES. MUST BE A $5,000 MINIMUM ACCOUNT VALUE FOR THIS SERVICE.
SERVICE OPTIONS
- ------------------------------------------------------------------------------------------------------------
6. TELEPHONE REDEMPTIONS AND EXCHANGES
- ------------------------------------------------------------------------------------------------------------
This allows you to use the telephone to redeem or exchange shares, unless you check the box below.
Redemptions will be made payable to the registered owner(s) and mailed to the address of record.
Maximum redemption by telephone is $50,000.
/ / I do not want telephone redemption privilege. / / I do not want telephone exchange privilege.
- ------------------------------------------------------------------------------------------------------------
7. SYSTEMATIC INVESTMENT--TO MY MUTUAL FUND ACCOUNT VIA ACH
- ------------------------------------------------------------------------------------------------------------
/ / Check this box to invest on a regular basis from your bank account. Please complete "Checking
Account Information" (SECTION 10).
_______________________________________ $/ / /,/ / / /./ / / / / / / / / /
Fund Name Amount ($50 MINIMUM) Day* Monthly Quarterly (JAN/APRIL/JULY/OCT)
_______________________________________ $/ / /,/ / / /./ / / / / / / / / /
Fund Name Amount ($50 MINIMUM) Day* Monthly Quarterly (JAN/APRIL/JULY/OCT)
*IF YOU DO NOT PROVIDE A DATE, THEN IT WILL DEFAULT TO THE 15TH OF THE MONTH.
- ------------------------------------------------------------------------------------------------------------
8. SYSTEMATIC EXCHANGES--FROM ONE NICHOLAS-APPLEGATE MUTUAL FUND ACCOUNT TO ANOTHER
- ------------------------------------------------------------------------------------------------------------
/ / Check this box to exchange on a regular basis from one Nicholas-Applegate account to another. (MUST
BE SAME SHARE CLASS AND REGISTRATION.)
FROM:
______________________________ $/ / /,/ / / /./ / / / / / / / / /
Fund Name Amount ($50 MINIMUM, $5,000 MINIMUM ACCOUNT VALUE) Day* Monthly Quarterly (JAN/APRIL/JULY/OCT)
/ / / / / / / / / / / / / / / / /
Account Number (IF KNOWN)
TO:
______________________________ $/ / /,/ / / /./ / / / / / / / / /
Fund Name Amount ($50 MINIMUM, $5,000 MINIMUM ACCOUNT VALUE) Day* Monthly Quarterly (JAN/APRIL/JULY/OCT)
/ / / / / / / / / / / / / / / / /
Account Number (IF KNOWN)
*IF YOU DO NOT PROVIDE A DATE, THEN IT WILL DEFAULT TO THE 15TH OF THE MONTH.
<PAGE>
- ------------------------------------------------------------------------------------------------------------
9. SYSTEMATIC WITHDRAWAL--FROM MY MUTUAL FUND ACCOUNT VIA ACH OR CHECK
- ------------------------------------------------------------------------------------------------------------
/ / Check this box to withdraw on a regular basis from my mutual fund account. Please complete
"Checking Account Information" below (SECTION 10):
BY ACH TO MY BANK ACCOUNT
_________________________________ $/ / /,/ / / /./ / / / / / / / / /
Fund Name Amount ($50 MINIMUM, $5,000 MIN.ACCOUNT VALUE) Day* Monthly Quarterly (JAN/APRIL/JULY/OCT)
BY CHECK (DO NOT NEED TO COMPLETE SECTION 11)
_________________________________ $/ / /,/ / / /./ / / / / / / / / /
Fund Name Amount ($50 MINIMUM, $5,000 MIN.ACCOUNT VALUE) Day* Monthly Quarterly (JAN/APRIL/JULY/OCT)
SEND PROCEEDS TO:
/ / Address of record
/ / Special Payee (LIST BELOW)
INDIVIDUAL OR JOINT ACCOUNT
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
First Name Middle Initial Last Name
_______________________________________ ______________________ / / / / / / / / / - / / / / /
Address City State Zip
*IF YOU DO NOT PROVIDE A DATE, THEN IT WILL DEFAULT TO THE 15TH OF THE MONTH.
- ------------------------------------------------------------------------------------------------------------
10. CHECKING ACCOUNT INFORMATION--FOR ACH OR REDEMPTIONS BY WIRE
- ------------------------------------------------------------------------------------------------------------
Must be completed for Sections 7 and 9. PLEASE ATTACH A VOIDED CHECK OR DEPOSIT SLIP.
_____________________________________________________________________________________________________
Name of Institution
_______________________________________ _______________________ / / / / / / / / / - / / / / /
Address City State Zip
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
Bank ABA Routing Number Bank Account Number
_______________________________________________________________________________________________________________
Any joint owner of your bank account who is NOT a joint owner of your portfolio account(s) must sign above.
- ------------------------------------------------------------------------------------------------------------
11. DUPLICATE STATEMENTS
- ------------------------------------------------------------------------------------------------------------
/ / I wish to have a duplicate statement sent to the interested party listed below.
____________________________________________________________________________________________________________
Name of Interested Party
_______________________________________ ______________________ / / / / / / / / / - / / / / /
Address City State Zip
(SEE REVERSE)
<PAGE>
- ------------------------------------------------------------------------------------------------------------
12. SIGNATURES
- ------------------------------------------------------------------------------------------------------------
BY SIGNING THIS NEW ACCOUNT FORM BELOW, I ASSURE THAT:
/ / I have received and read the prospectus for each of the Funds in which I am investing, and I
believe each investment is suitable for me. I understand that the prospectus terms are incorporated
into this New Account Form by reference.
/ / I authorize the Nicholas-Applegate Funds, their affiliates and agents to act on any instructions
believed to be genuine for any service authorized on this form. I agree they will not be liable for
any resulting loss or expense.
/ / I am of legal age in my state and have the authority and legal capacity to purchase mutual fund
shares.
/ / I understand that neither the fund(s) nor the distributor, Nicholas-Applegate Securities, is a
bank and that fund shares are not obligations of or guaranteed by any bank or insured by the FDIC.
/ / I understand that mutual funds involve risks, including possible loss of principal.
I CERTIFY, UNDER PENALTIES OF PERJURY, THAT:
1. The Social Security or Taxpayer Identification Number shown on this form is correct. (If I fail to
give the correct number or to sign this form, the Nicholas-Applegate Funds may reject or redeem my
investment. I may also be subject to any applicable IRS Backup Withholding for all distributions
and redemptions.)
2. / / I am NOT currently subject to IRS Backup Withholding because (a) I have not been notified of
it or (b) notification has been revoked.
/ / I am currently subject to IRS Backup Withholding.
I agree that neither Nicholas-Applegate Securities, the Funds, nor any of their affiliates will be
responsible for the authenticity of any instructions given and shall be fully indemnified as to and
held harmless from any and all direct and indirect liabilities, losses, or costs resulting from acting
upon such transactions.
__________________________________________________________ / / / - / / / - / / / / /
Shareowner, Custodian, Trustee or Authorized Officer Date
__________________________________________________________ / / / - / / / - / / / / /
Joint Owner, Custodian, Trustee or Authorized Officer Date
</TABLE>
<PAGE>
FOR MORE INFORMATION
Two documents are available that
offer further information on the
Nicholas-Applegate Mutual Funds:
ANNUAL OR SEMI-ANNUAL REPORTS
TO SHAREHOLDERS
Include 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 or semi-annual report or SAI,
please call or write:
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
Telephone: (800) 551-8643
N I C H O L A S-A P P L E G A T E-REGISTERED
TRADEMARK-
600 West Broadway
San Diego, California 92101
800-551-8643
Nicholas-Applegate Securities, Distributor
www.nacm.com
MFIPROI398
<PAGE>
NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
CLASS I SHARES
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
October 30, 1998
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company currently offering a number of separate portfolios. This
Statement of Additional Information contains information regarding the Class I
shares of these portfolios (each a "Fund" and collectively the "Funds"):
Nicholas-Applegate Global Blue Chip Fund (the "Blue Chip Fund");
Nicholas-Applegate International Core Growth Fund (the "International Core
Growth Fund"); Nicholas-Applegate Worldwide Growth Fund (the "Worldwide Growth
Fund"); Nicholas-Applegate International Small Cap Growth Fund (the
"International Small Cap Growth Fund"); Nicholas-Applegate Global Growth &
Income Fund (the "Global Growth & Income Fund"); Nicholas-Applegate Emerging
Countries Fund (the "Emerging Countries Fund"); Nicholas-Applegate Global
Technology Fund (the "Global Technology Fund"); Nicholas-Applegate Emerging
Markets Bond Fund (the "Emerging Markets Fund"); Nicholas-Applegate Pacific Rim
Fund (the "Pacific Rim Fund"); Nicholas-Applegate Greater China Fund (the
"Greater China Fund"); Nicholas-Applegate Latin America Fund (the "Latin America
Fund"); Nicholas-Applegate Large Cap Growth Fund (the "Large Cap Fund");
Nicholas-Applegate Mid Cap Growth Fund (the "Mid Cap Growth Fund");
Nicholas-Applegate Value Fund (the "Value Fund"); Nicholas-Applegate Large Cap
Value Fund (the "Large Cap Value Fund"); Nicholas-Applegate Small Cap Growth
Fund (the "Small Cap Growth Fund"); Nicholas-Applegate Mini Cap Growth Fund (the
"Mini Cap Growth Fund"); Nicholas-Applegate Convertible Fund (the "Convertible
Fund"); Nicholas-Applegate Balanced Growth Fund (the "Balanced Fund");
Nicholas-Applegate Short-Intermediate Fund (the "Short-Intermediate Fund");
Nicholas-Applegate High Quality Bond Fund (the "High Quality Bond Fund");
Nicholas-Applegate Strategic Income Fund (the "Strategic Income Fund"); and
Nicholas-Applegate High Yield Bond Fund (the "High Yield Bond Fund"). All the
Funds are diversified except the Emerging Markets Fund.
This Statement of Additional Information is not a prospectus, but contains
information in addition to and more detailed than that set forth in the Funds'
Prospectus and should be read in conjunction with such Prospectus. The
Prospectus may be obtained without charge by calling or writing the Trust at the
address and phone number written above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
Investment Objectives, Policies and Risks. . . . . . . . . . . . . . . . . . . . B-3
B-1
<PAGE>
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-35
Principal Holders of Securities. . . . . . . . . . . . . . . . . . . . . . . . . B-38
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . . . . . . . B-41
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-44
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-46
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-47
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . B-47
Purchase and Redemption of Fund Shares . . . . . . . . . . . . . . . . . . . . . B-50
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-50
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-53
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . B-54
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-59
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel . . . . . . . . . . . . . . . . . . . . B-68
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-68
Appendix A - Description of Securities Ratings . . . . . . . . . . . . . . . . . A-1
</TABLE>
B-2
<PAGE>
GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under the laws
of Delaware. Information regarding 23 of the Funds of the Trust is included in
this Statement of Additional Information. Each of the Funds consists of one or
more classes of shares, including the Class I shares which are the subject of
this Statement of Additional Information.
Prior to a reorganization of the Trust which became effective on July 24,
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 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. 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 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 of preferred stocks on the distribution of a
corporation's assets in the event of a liquidation are generally subordinate to
the rights associated
B-3
<PAGE>
with a corporation's debt securities.
CONVERTIBLE SECURITIES AND WARRANTS
Each Fund may invest in convertible securities and warrants. The value of
a convertible security is a function of its "investment value" (determined by
its yield in comparison with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying
common stock approaches or exceeds the conversion price, the price of the
convertible security will be increasingly influenced by its conversion value.
The market value of convertible fixed income 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
because the Funds purchase such securities for their equity characteristics.
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
Each Fund may invest in "synthetic" convertible securities, which are
derivative positions composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, 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
B-4
<PAGE>
convertible security, a synthetic convertible comprises two or more separate
securities, each with its own market value. Therefore, the market value of a
synthetic convertible is the sum of the values of its fixed-income component and
its convertible component. For this reason, the values of a synthetic
convertible and a true convertible security may respond differently to market
fluctuations. A Fund 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
Each Fund may invest in Eurodollar convertible securities, which are
fixed-income securities of a U.S. issuer or a foreign issuer that are issued
outside the United States and are convertible into equity securities of the same
or a different issuer. Interest and dividends on Eurodollar securities are
payable in U.S. dollars outside of the United States. Each 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. Each Fund may also invest up to 15% of
its total assets invested in convertible securities, taken at market value, in
Eurodollar convertible securities that are convertible into foreign equity
securities which are not listed, or represented by ADRs listed, on such
exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
Each Fund may invest in Eurodollar and Yankee Dollar instruments.
Eurodollar instruments are bonds that pay interest and principal in U.S. dollars
held in banks outside the United States, primarily in Europe. Eurodollar
instruments are usually issued on behalf of multinational companies and foreign
governments by large underwriting groups composed of banks and issuing houses
from many countries. Yankee Dollar instruments are U.S. dollar denominated
bonds issued in the U.S. by foreign banks and corporations. These investments
involve risks that are different from investments in securities issued by U.S.
issuers. See "Foreign Investment Considerations."
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in debt
securities (including convertible securities). Yields on short, intermediate,
and long-term securities depend on a variety of factors, including the general
condition of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are 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
B-5
<PAGE>
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 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 each Fund's asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions,
it may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and this may
impact the Investment Adviser's ability to accurately value high yield bonds and
the Funds' assets and hinder the Funds' ability to dispose of the bonds.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. The rating of
an issuer is also heavily weighted by past developments and does not necessarily
reflect probable future conditions. There is frequently a lag between the time
a rating is assigned and the time it is updated. Also, since credit rating
agencies may fail to timely change the credit ratings to reflect subsequent
events, the Investment Adviser must monitor the issuers of high yield bonds in
the Funds' portfolios to determine if the issuers will have sufficient cash flow
and profits to meet required principal and interest payments, and to assure the
bonds' liquidity so the Funds can meet redemption requests.
SHORT-TERM INVESTMENTS
Each Fund may invest in 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
B-6
<PAGE>
(including assets of both domestic and foreign branches), based on latest
published reports, or less than $100 million if the principal amount of such
bank obligations are fully insured by the U.S. Government.
A Fund holding instruments of foreign banks or financial institutions may
be subject to additional investment risks that are different in some respects
from those incurred by a fund which invests only in debt obligations of U.S.
domestic issuers. See "Foreign Investments" below. Domestic banks and foreign
banks are subject to different governmental regulations with respect to the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry depends largely
upon the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry. Federal and state laws and regulations require domestic banks
to maintain specified levels of reserves, limited in the amount which they can
loan to a single borrower, and subject to other regulations designed to promote
financial soundness. However, such laws and regulations do not necessarily
apply to foreign bank obligations that a Fund may acquire.
In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under their respective investment objectives and
policies stated above and in their Prospectuses, the Funds may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Funds may invest a portion of their assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Investment Adviser to be of comparable
quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Funds may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
B-7
<PAGE>
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government obligations.
Such obligations include Treasury bills, certificates of indebtedness, notes and
bonds, and issues of such entities as the Government National Mortgage
Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley
Authority, Resolution Funding Corporation, Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Federal Land Banks, Federal Housing Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored instrumentalities
if it is not obligated to do so by law.
Each Fund may invest in sovereign debt obligations of foreign countries. A
number of factors affect a sovereign debtor's willingness or ability to repay
principal and interest in a timely manner, including its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which it may be subject.
Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
meet such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
MUNICIPAL SECURITIES
Each 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
B-8
<PAGE>
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 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.
Each 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 a 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. Each 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. Each 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
B-9
<PAGE>
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.
Each Fund will attempt to minimize the special risks inherent in municipal
lease obligations and certificates of participation by purchasing only lease
obligations which 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. Each 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
Each Fund 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
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(such as the Student Loan Marketing Association or the Resolution Funding
Corporation). Zero coupon securities are sold at a substantial discount from
face value and redeemed at face value at their maturity date without interim
cash payments of interest and principal. This discount is amortized over the
life of the security and such amortization will constitute the income earned on
the security for both accounting and tax purposes. Because of these features,
such securities may be subject to greater volatility as a result of changes in
prevailing interest rates than interest paying investments in which the 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 Funds may
have to sell other portfolio investments to obtain cash needed by the Funds to
make income distributions.
PARTICIPATION INTERESTS
Each Fund may invest in participation interests, subject to the limitation
on investments by the Funds in illiquid investments. No Fund currently intends
to invest more than 5% of its net assets in such interests. Participation
interests represent an undivided interest in or assignment of a loan made by an
issuing financial institution. No more than 5% of a Fund's net assets can be
invested in participation interests of the same issuing borrower. Participation
interests are primarily dependent upon the financial strength of the borrowing
corporation, which is obligated to make payments of principal and interest on
the loan, and there is a risk that such borrowers may have difficulty making
payments. In the event the borrower fails to pay scheduled interest or
principal payments, a Fund could experience a reduction in its income and might
experience a decline in the net asset value of its shares. In the event of a
failure by the financial institution to perform its obligation in connection
with the participation, a 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 and 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
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Each 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 Funds may
also invest in "equity linked" and "currency-linked" debt securities. At
maturity, the principal amount of an equity-linked debt security is exchanged
for common stock of the issuer or is payable in an amount based on the issuer's
common stock price at the time of maturity. Currency-linked debt securities are
short-term or intermediate term instruments having a value at maturity, and/or
an interest rate, determined by reference to one or more foreign currencies.
Payment of principal or periodic interest may be calculated as a multiple of the
movement of one currency against another currency, or against an index.
Index and currency-linked securities are derivative instruments which may
entail substantial risks. Such instruments may be subject to significant price
volatility. The company issuing the instrument may fail to pay the amount due
on maturity. The underlying investment or security may not perform as expected
by the Investment Adviser. Markets, underlying securities and indexes may move
in a direction that was not anticipated by the Investment Adviser. Performance
of the derivatives may be influenced by interest rate and other market changes
in the U.S. and abroad. Certain derivative instruments may be illiquid. See
"Illiquid Securities" below.
MORTGAGE-RELATED SECURITIES
Each Fund may invest in mortgage-related securities. Mortgage-related
securities are derivative interests in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. The High Quality Bond 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
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Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not
insured or guaranteed by any government agency from a list of approved
seller/services which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. FHLMC is a government-sponsored corporation created to
increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the
United States Government.
Although the underlying mortgage loans in a pool may have maturities of up
to 30 years, the actual average life of the pool certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO in
which a 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
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related securities
are interests in pools of mortgage loans made to residential home buyers
domiciled in a foreign country. These include mortgage loans made by trust and
mortgage loan companies, credit unions, chartered
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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
Each Fund may enter into "roll" transactions, which are the sale of GNMA
certificates and other securities together with a commitment to purchase
similar, but not identical, securities at a later date from the same party.
During the roll period, a Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Like when-issued securities or
firm commitment agreements, roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is committed to purchase similar securities. Additionally, in the
event the buyer of securities under a roll transaction files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the 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.
A 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.
A Fund will not enter into roll transactions if, as a result, more than 15% of
the Fund's net assets would be segregated to cover such contracts.
FOREIGN INVESTMENTS
Each Fund may invest in securities of foreign issuers that are not publicly
traded in the United States. Each Fund may also invest in depository receipts.
Although the Global Blue Chip, Emerging Markets, Pacific Rim, Greater China and
Latin America Funds are authorized to invest more than 25% of its total assets
in securities of issuers located in any one country (other than the U.S.), no
Fund, except the Greater China Fund, currently intends to do so.
The United States Government from time to time has imposed restrictions,
through taxation or otherwise, on foreign investments by U.S. entities such as
the Funds. If such restrictions should be reinstituted, it might become
necessary for such Funds to invest substantially all of their assets in United
States securities. In such event, the Board of Trustees of the Trust would
consider alternative arrangements, including reevaluation of the Funds'
investment objectives and policies, investment of all of the Funds' assets in
another investment company with different investment objectives and policies
than the Funds, or hiring an investment adviser to manage the Funds' assets.
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
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shares of the Fund.
DEPOSITORY RECEIPTS. Each of the Funds may invest in American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuers. ADRs, in registered form, are designed for use in U.S. securities
markets. Such depository receipts may be sponsored by the foreign issuer or may
be unsponsored. The 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 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 differ from those in United States markets, and may include delays
beyond periods customary in the United States. Foreign security trading
practices, including those involving securities settlement where Fund assets may
be released prior to receipt of payment or securities, may expose the Funds to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
Transactions in options on securities, futures contracts, futures options
and currency contracts may not be regulated as effectively on foreign exchanges
as similar transactions in the United States, and may not involve clearing
mechanisms and related guarantees. The value of such positions also could be
adversely affected by the imposition of different exercise terms and procedures
and margin requirements than in the United States. The value of a Fund's
positions may also be adversely impacted by delays in its ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States.
LEGAL AND REGULATORY MATTERS. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest, including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
TAXES. The interest payable on certain of the Funds' foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction of U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Funds.
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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.
REGIONAL RISK CONSIDERATIONS. In addition to the risk of investments in
foreign securities and in emerging markets described above and in the
prospectus, Funds investing primarily in issuers of securities in particular
regions may be subject to certain additional regional risks.
GREATER CHINA. The economy of the People's Republic of China ("China")
functioned as a centrally-planned Socialist economic system from 1949 to 1978,
the year economic reforms began. The result has been a move towards a more mixed
economy away from the previously centrally planned economy. Nonetheless,
although the World Bank has forecast that China will have the world's largest
economy by 2003, the risks of investing in China are comparable to those of
investing in other emerging markets. China governmental actions can have a
significant effect on economic conditions in China and adversely affect the
value and liquidity of investments in China. The securities industry and
corporate law, in particular, are not well developed in China and the rights of
shareholders should be considered less certain and more difficult to enforce
than in other markets.
In addition, investors should realize that there are special risks to
investing in China and Hong Kong resulting from the relatively more rapid pace
of economic reform in China in comparison to the rate of political
liberalization, including:
(1) political instability in the event that the political system proves
incapable of adequately addressing pressure for social change or transitions in
political leadership;
(2) that hard line Marxist Leninists might regain the political
initiative;
(3) that social tensions caused by widely differing levels of economic
prosperity within Chinese society might create unrest; and
(4) that the unresolved differences between China and Taiwan might result
in armed conflict.
PACIFIC RIM. Many Asian countries may be subject to a greater degree of
social, political and economic instability than is the case in the United States
and western European countries. Such instability may result from (i)
authoritarian governments or military involvement in political and economic
decision-making; (ii) popular unrest associated with demands for improved
political,
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economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and (v) ethnic, religious and racial
disaffection.
The economies of most of the Asian countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Community. The enactment by the United
States or other significant trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of these Asian countries. Of significant immediate
concern, the current recession in the Japanese economy, which has been
complicated by substantial problems in its banking system, could substantially
worsen the economic difficulties a number of Asian countries are presently
experiencing.
LATIN AMERICA. Investing in securities of Latin American issuers may entail
risks relating to the potential political and economic instability of certain
Latin American countries and a consequent resurgence of the historical risk in
Latin America of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment and on repatriation of capital invested.
In the event of expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country. In
addition, there is risk that certain Latin American countries may restrict the
free conversion of their currencies into other currencies.
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the world's largest debtors to commercial banks and foreign governments.
At times, certain Latin American countries have declared moratoria on the
payment of principal and/or interest on outstanding debt. Investment in
sovereign debt can involve a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt.
Consequently, governmental entities may default on their sovereign debt. Holders
of sovereign debt, including a Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities.
There is no bankruptcy proceeding by which defaulted sovereign debt may be
collected in whole or in part.
SECURITIES SWAPS
Each Fund may enter into securities swaps, a technique primarily used to
indirectly participate in the securities market of a country from which a Fund
would otherwise be precluded for lack of an established securities custody and
safekeeping system. The Fund deposits an amount of cash with its custodian (or
the broker, if legally permitted) in an amount equal to the selling price of the
underlying security. Thereafter, the Fund pays or receives cash from the broker
equal to the change in the value of the underlying security.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each Fund is authorized to purchase put
and call options with respect to securities which are otherwise eligible for
purchase by the Fund and with respect to various stock indices subject to
certain restrictions. Put and call options are derivative
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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 of the same series as the option previously
purchased. The Funds generally will purchase only those options for which the
Investment Adviser believes there is an active secondary market to facilitate
closing transactions.
WRITING CALL OPTIONS. Each Fund may write covered call options. A call
option is "covered" if a Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer
of a call option receives a premium and gives the purchaser the right to buy the
security
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underlying the option at the exercise price. The writer has the obligation upon
exercise of the option to deliver the underlying security against payment of the
exercise price during the option period. If the writer of an exchange-traded
option wishes to terminate his obligation, he may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as
the option previously written. A writer may not effect a closing purchase
transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option will
permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. A Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, appreciation of the underlying security owned by the
Fund generally offsets, in whole or in part, any loss to the Fund resulting from
the repurchase of a call option.
STOCK INDEX OPTIONS. Each Fund 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 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.
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RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves. There are also significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective. In addition, a liquid secondary market for particular
options may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of option of underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or clearing corporation may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the exercise
of skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events. The extent to
which a Fund may enter into options transactions may be limited by the Internal
Revenue Code requirements for qualification of the Fund as a regulated
investment company. See "Dividends, Distributions and Taxes."
In addition, foreign options exchanges do not afford to participants many
of the protections available in United States option exchanges. For example,
there may be no daily price fluctuation limits in such exchanges or markets, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, a Fund as an option writer could lose amounts substantially
in excess of its initial investment, due to the margin and collateral
requirements typically associated with such option writing. See "Dealer
Options" below.
DEALER OPTIONS. Each Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to
dealer options. While the Funds might look to a clearing corporation to
exercise exchange-traded options, if a Fund purchases a dealer option it must
rely on the selling dealer to perform if the Fund exercises the option. Failure
by the dealer to do so would result in the loss of the premium paid by the Fund
as well as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, a Fund can realize the value of a dealer
option it has purchased only by exercising or reselling the option to the
issuing dealer. Similarly, when a Fund writes a dealer option, the Fund can
close out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer. While the Fund seeks to enter into dealer
options only with dealers who will agree to and can enter into closing
transactions with the Fund, no assurance exists
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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, because a Fund must
maintain a secured position with respect to any call option on a security it
writes, the Fund may not sell the assets which it has segregated to secure the
position while it is obligated under the option. This requirement may impair
the Fund's ability to sell portfolio securities at a time when such sale might
be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
takes the position that purchased dealer options are illiquid securities. A
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
With that exception, however, the Fund will treat dealer options as subject to
the Fund's limitation on illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
Each Fund may buy or sell put and call options on foreign currencies. A
put or call option on a foreign currency gives the purchaser of the option the
right to sell or purchase a foreign currency at the exercise price until the
option expires. The Funds use foreign currency options separately or in
combination to control currency volatility. Among the strategies employed to
control currency volatility is an option collar. An option collar involves the
purchase of a put option and the simultaneous sale of call option on the same
currency with the same expiration date but with different exercise (or "strike")
prices. Generally, the put option will have an out-of-the-money strike price,
while the call option will have either an at-the-money strike price or an
in-the-money strike price. Foreign currency options are derivative securities.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Funds to reduce foreign currency risk
using such options.
As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS
Each Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fix number of days from the date of the contract
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agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline
in the value of the hedged currency, it could also limit any potential gain from
an increase in the value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds may invest in futures contracts and in options on futures
contracts as a hedge against changes in market conditions or interest rates.
The Funds 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 a 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 a 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, a Fund may elect to
close the position by taking an opposite position, which will operate to
terminate the Fund's position in the futures contract. A final 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 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
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the S&P 500 Stock Price Index on the Chicago Mercantile Exchange, the Major
Market Index on the Chicago Board of Trade, the New York Stock Exchange
Composite Index on the New York Futures Exchange and the Value Line Stock Index
on the Kansas City Board of Trade. Foreign financial and stock index futures
are traded on foreign exchanges including the London International Financial
Futures Exchange, the Singapore International Monetary Exchange, the Sydney
Futures Exchange Limited and the Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. Each Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures sale by a Fund obligates
the Fund, as seller, to deliver the specific type of financial instrument called
for in the contract at a specific future time for a specified price. A futures
contract purchased by a Fund obligates the Fund, as purchaser, to take delivery
of the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without delivery of securities. A Fund
closes out a futures contract sale by entering into a futures contract purchase
for the same aggregate amount of the specific type of financial instrument and
the same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund receives the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes a loss. Similarly, the Fund closes out 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.
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<PAGE>
FOREIGN CURRENCY FUTURES CONTRACTS. Each Fund may use foreign currency
future contracts for hedging purposes. A foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("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
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correlate perfectly with movement in the stock index or cash market due to
certain market distortions. All participants in the futures market are subject
to margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship between the
index or cash market and futures markets. In addition, the deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions. As a result of price
distortions in the futures market and the imperfect correlation between
movements in the cash market and the price of securities and movements in the
price of futures, a correct forecast of general trends by the Investment Adviser
may still not result in a successful hedging transaction over a very short time
frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of 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
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futures contracts or options, the Fund could experience delays and losses in
liquidating open positions purchased or sold through the broker, and incur a
loss of all or part of its margin deposits with the broker.
OPTIONS ON FUTURES CONTRACTS. The Funds may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.
Investments in futures options involve some of the same considerations as
investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options are more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Funds because the maximum amount
at risk is limited to the premium paid for the options (plus transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS. Except
as described below under "Non-Hedging Strategic Transactions," a Fund will not
engage in transactions in futures contracts or related options for speculation,
but only as a hedge against changes resulting from market conditions in the
values of securities held in the Fund's portfolio or which it intends to
purchase and where the transactions are economically appropriate to the
reduction of risks inherent in the ongoing management of the Fund. A Fund may
not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. A Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
Upon the purchase of futures contracts, a Fund will deposit an amount of
cash or liquid debt or equity securities, equal to the market value of the
futures contracts, in a segregated account with the Custodian or in a margin
account with a broker to collateralize the position and thereby insure that the
use of such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Trust may change them if
applicable law permits such a change and the change is consistent with the
overall investment objective and policies of a Fund.
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The extent to which a Fund may enter into futures and options transactions
may be limited by the Internal Revenue Code requirements for qualification of
the Fund as a regulated investment company. See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
For hedging purposes, each Fund may enter into interest rate and currency
swap transactions and purchase or sell interest rate and currency caps and
floors. An interest rate or currency swap involves an agreement between a Fund
and another party to exchange payments calculated as if they were interest on a
specified ("notional") principal amount (e.g., an exchange of floating rate
payments by one party for fixed rate payments by the other). An interest rate
cap or floor entitles the purchaser, in exchange for a premium, to receive
payments of interest on a notional principal amount from the seller of the cap
or floor, to the extent that a specified reference rate exceeds or falls below a
predetermined level.
A Fund usually enters into such transactions on a "net" basis, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each swap is accrued on a daily basis, and
an amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess is maintained in a segregated
account by the Trust's custodian. If a Fund enters into a swap on other than a
net basis, or sells caps or floors, the Fund maintains a segregated account in
the full amount accrued on a daily basis of the Fund's obligations with respect
to the transaction. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
A Fund will not enter into any of these derivative transactions unless the
unsecured senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase by at least
one of the established rating agencies (e.g., AAA or AA by S&P). The swap
market has grown substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and agents utilizing standard
swap documentation, and the Investment Adviser has determined that the swap
market has become relatively liquid. Swap transactions do not involve the
delivery of securities or other underlying assets or principal, and the risk of
loss with respect to such transactions is limited to the net amount of payments
that the Fund is contractually obligated to make or receive. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed; accordingly, they are less liquid than swaps, and caps and
floors purchased by a Fund are considered to be illiquid assets.
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.
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CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future transfer of foreign exchange risk). The currency
swap market convention is to use the spot rate rather than the forward rate for
the exchange at maturity. The economic difference is realized through the
coupon exchanges over the life of the swap. In contrast to single currency
interest rate swaps, cross-currency swaps involve both interest rate risk and
foreign exchange risk.
SWAP OPTIONS. Each Fund may invest in swap options. A swap option is a
contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise change an
existing swap agreement, at some designated future time on specified terms. It
is different from a forward swap, which is a commitment to enter into a swap
that starts 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. Each Fund may invest in interest rate and currency caps
and floors. An interest rate cap is a right to receive periodic cash payments
over the life of the cap equal to the difference between any higher actual level
of interest rates in the future and a specified strike (or "cap") level. The
cap buyer purchases protection for a floating rate move above the strike. An
interest rate floor is the right to receive periodic cash payments over the life
of the floor equal to the difference between any lower actual level of interest
rates in the future and a specified strike (or "floor") level. The floor buyer
purchases protection for a floating rate move below the strike. The strikes are
typically based on the three-month LIBOR (although other indices are available)
and are measured quarterly. Rights arising pursuant to both caps and floors are
exercised automatically if the strike is in the money. Caps and floors
eliminate the risk that the buyer fails to exercise an in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate and
currency swaps and interest rate caps and floors are similar to those described
above with respect to dealer options. In connection with such transactions, a
Fund relies on the other party to the transaction to perform its obligations
pursuant to the underlying agreement. If there were a default by the other
party to the transaction, the Fund would have contractual remedies pursuant to
the agreement, but could incur delays in obtaining the expected benefit of the
transaction or loss of such benefit. In the event of insolvency of the other
party, the Fund might be unable to obtain its expected benefit. In addition,
while each Fund will seek to enter into such transactions only with parties
which are capable of entering into closing transactions with the Fund, there can
be no assurance that a Fund will be able to close out such a transaction with
the other party, or obtain an offsetting position with any other party, at any
time prior to the end of the term of the underlying agreement. This may impair
a Fund's ability to enter into other transactions at a time when doing so might
be
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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 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 Short-Intermediate, High Quality Bond, Strategic Income,
Global Blue Chip, Emerging Markets, Pacific Rim, Greater China and Latin America
Funds may enter into options, futures and swap transactions to enhance potential
gain in circumstances where hedging is not involved. Each Fund's net loss
exposure resulting from transactions entered into for each purposes will not
exceed 5% of the Fund's net assets at any one time and, to the extent necessary,
the Fund will close out transactions in order to comply with this limitation.
Such transactions are subject to the limitations described above under
"Options," "Futures Contracts," and "Interest Rate and Currency Swaps."
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Adviser, subject to the seller's agreement to
repurchase and the Fund's agreement to resell such securities at a mutually
agreed upon date and price. The repurchase price generally equals the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by the
Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent
foreign system. The seller under a repurchase agreement will be required to
maintain the value of the underlying securities at not less than 102% of the
repurchase price under the agreement. If the seller defaults on its repurchase
obligation, the Fund holding the repurchase agreement will suffer a loss to the
extent that the proceeds from a sale of the underlying securities is less than
the repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the Fund's rights with respect to such securities to
be delayed or limited. Repurchase agreements are considered to be loans under
the Investment Company Act.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements, which involve the
sale of a security by a Fund and its agreement to repurchase the security (or,
in the case of mortgage-backed securities, substantially similar but not
identical securities) at a specified time and price. A Fund will maintain in a
segregated account with the Custodian cash, U.S. Government securities or other
appropriate liquid securities in an amount sufficient to cover its obligations
under these agreements with broker-dealers (no such collateral is required on
such agreements with banks). Under the 1940 Act, these agreements are
considered borrowings by the Funds, and are subject to the
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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.
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
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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 7, 1999, unless renewed by the parties.
Under the Credit Agreement, each Fund may borrow, repay and reborrow
amounts (collectively, the "Revolving Credit Loans") in increments of $50,000,
provided the Revolving Credit Loans outstanding at any time aggregate at least
$350,000 (the "Credit Facility"). The Trust will pay a commitment fee at the
rate of 0.10% per annum of the average daily unused portion of the Credit
Facility, and may at any time terminate the Credit Agreement or reduce the
lenders' commitment thereunder in increments of $2,500,000.
While outstanding, the Revolving Credit Loans bear interest, fluctuating
daily and payable monthly, at either of the following rates or a combination
thereof, at the Trust's option: (i) at the weighted average of the rates on
overnight federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, plus 0.625% per annum; or (ii) the prime rate
of interest of The Chase Manhattan Bank. If, as a result of changes in
applicable laws, regulations or guidelines with respect to the capital adequacy
of any lender, the return on such lender's capital is reduced, the Trust may be
required to adjust the rate of interest to compensate such lender for such
reduction. Each Revolving Credit Loan is payable in thirty days, and may be
prepaid at any time in increments of $100,000 without premium or penalty. No
Fund is liable for repayment of a Revolving Credit Loan to any other Fund.
The Credit Agreement contains, among other things, covenants that require
each Fund to maintain certain minimum ratios of debt to net worth; limit the
ability of the Trust to incur other indebtedness and create liens on its assets
or guarantee obligations of others; merge or consolidate with, or sell its
assets to, others; make material changes in its method of conducting business;
make distributions to shareholders in excess of the requirements of Subchapter M
of the Internal Revenue Code in the event of a default under the Credit
Agreement; or make changes in fundamental investment policies. The Credit
Agreement also contains other terms and conditions customary in such agreements,
including various events of default.
LENDING FUND SECURITIES
Under 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
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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
Certain 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).
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
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position in the securities sold until it delivers the securities sold, at which
time it receives the proceeds of the sale. To secure its obligation to deliver
securities sold short, a Fund will deposit in escrow in a separate account with
the Custodian an equal amount of the securities sold short or securities
convertible into or exchangeable for such securities. The Fund can close out
its short position by purchasing and delivering an equal amount of the
securities sold short, rather than by delivering securities already held by the
Fund, because the Fund might want to continue to receive interest and dividend
payments on securities in its portfolio that are convertible into the securities
sold short.
A Fund's decision to make a short sale "against the box" may be a technique
to hedge against market risks when the Investment Adviser believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Fund or a security convertible into or exchangeable for such
security. In such case, any future losses in the Fund's long position would be
reduced by a gain in the short position. The extent to which such gains or
losses in the long position are reduced will depend upon the amount of
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the Investment Company Act, unless
the sale is "against the box" and the securities sold short are placed in a
segregated account (not with the broker), or unless the Fund's obligation to
deliver the securities sold short is "covered" by placing in a segregated
account (not with the broker) cash, U.S. Government securities or other liquid
debt or equity securities in an amount equal to the difference between the
market value of the securities sold short at the time of the short sale and any
such collateral required to be deposited with a broker in connection with the
sale (not including the proceeds from the short sale), which difference is
adjusted daily for changes in the value of the securities sold short. The total
value of the cash, U.S. Government securities or other liquid debt or equity
securities deposited with the broker and otherwise segregated may not at any
time be less than the market value of the securities sold short at the time of
the short sale. Each Fund will comply with these requirements. In addition, as
a matter of policy, the Trust's Board of Trustees has determined that 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.
The extent to which a Fund may enter into short sales transactions may be
limited by the Internal Revenue Code requirements for qualification of the Fund
as a regulated investment company. See "Dividends, Distributions and Taxes."
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the
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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, Global Blue Chip, Emerging Markets, Pacific Rim,
Greater China and Latin America Funds may invest in foreign securities that are
restricted against transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions. Unless these securities are
acquired directly from the issuer or its underwriter, the 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 Funds' prospectus. In making decisions with respect to equity
securities for the Funds, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal, and the Investment Adviser emphasizes
growth over time through investment in securities of companies with earnings
growth potential. Its investment techniques focus on discovering positive
developments when they first show up in an issuer's earnings, but before they
are fully reflected in the price of the issuer's securities.
As indicated in the Funds' prospectus, the Investment Adviser's techniques
and processes include relationships with an extensive network of brokerage
research firms located throughout the world. These analysts are often located
in the same geographic regions as the companies they follow, have followed those
companies for a number of years, and have developed excellent sources of
information about them. The Investment Adviser does not employ in-house
analysts other than the personnel actually engaged in managing investments for
the Funds and the
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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, except the Emerging Markets Bond Fund, is "diversified" within
the meaning of the Investment Company Act. In order to qualify as diversified,
a Fund must diversify its holdings so that at all times at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), securities issued or guaranteed as to principal or interest by the
United States or its agencies or instrumentalities, securities of other
investment companies, and other securities (for this purpose other securities of
any one issuer are limited to an amount not greater than 5% of the value of the
total assets of the Fund and to not more than 10% of the outstanding voting
securities of the issuer).
The equity securities of each issuer that are included in the investment
portfolio of a Fund are purchased by the Investment Adviser in approximately
equal amounts, and the Investment Adviser attempts to stay fully invested within
the applicable percentage limitations set forth in the Prospectus. In addition,
for each issuer whose securities are added to an investment portfolio, the
Investment Adviser sells the securities of one of the issuers currently included
in the portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of the appropriate Fund (as defined in the Investment
Company Act).
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
The investment objective of each Fund is a fundamental policy. In
addition, no Fund:
1. May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer, except that up to 25% of a Fund's total assets may be invested without
regard to this restriction 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.
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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.
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, provided that,
pursuant to the Investment Company Act, a Fund may borrow money if the borrowing
is made from a bank or banks and 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 proposed borrowings), and provided, further,
that, in the case of Funds other than the Pacific Rim, Greater China and Latin
America Funds, the borrowing may be made only for temporary, extraordinary or
emergency purposes or for the clearance of transactions in amounts not exceeding
20% of the value of the Fund's total assets at the time of the borrowing. If
such asset coverage of 300% is not maintained, the Fund will take prompt action
to reduce its borrowings as required by applicable law.
7. May pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Funds from
engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it may
be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% of the value of its net assets in securities
that at the time of purchase have legal or contractual restrictions on resale or
are otherwise illiquid.
10. May purchase securities on margin, except for initial and variation
margin on options and futures contracts, and except that a Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities.
11. May engage in short sales (other than the Mid Cap Growth, Mini Cap
Growth, Small Cap Growth, Large Cap Value, Worldwide Growth, International Core
Growth, International Small Cap Growth, Strategic Income, High Yield Bond,
Global Blue Chip, Emerging Markets, Pacific Rim, Greater China and Latin America
Funds), 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 the same
investment objective, policies and restrictions as the Fund; (b)
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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 Short-Intermediate, High Quality Bond,
Strategic Income, Global Blue Chip, Emerging Markets, Pacific Rim, Greater China
and Latin America Funds, 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.
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.
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PRINCIPAL HOLDERS OF SECURITIES
As of June 30, 1998, the following persons held of record more than 5% of
the outstanding shares of the Funds:
LARGE CAP GROWTH INSTITUTIONAL PORTFOLIO: Sherryl A. Nicholas TTEE, Sherryl
A. Nicholas Revocable Trust U/A DTD 12/08/95, P. O. Box 2295, Rancho Santa Fe,
California 92067-2295 (62.30%); CNA Trust Corporation TTEE, FBO Nicholas
Applegate 401(K) Plan, A/C #1050520327, P. O. Box 5024, Costa Mesa, California,
92628-5024 (14.69%); CNA Trust Corporation TTEE, FBO Nicholas Applegate Pension
Plan, A/C #1050520292, P. O. Box 5024, Costa Mesa, California 92628-5024
(5.36%).
MID CAP GROWTH INSTITUTIONAL PORTFOLIO: Consumers Energy Company Employees
Savings & Incentive Plan, Trust A/C #ZG2F, 212 W. Michigan Avenue, Jackson,
Michigan 49201-2276 (21.64%); Pacificorp Veba Trust, 700 N. E. Multonomah, Suite
1600, Portland, Oregon 97232-4194 (15.86%); US Bank National Assoc., Cust. FBO
The Ford Family Foundation ID, Account # 97320607, P.O. Box 64010, Saint Paul,
Minnesota 55164-0010 (8.45%); Local #1 IBEW Pension Benefit Trust Fund
Taft-Hartley Trust Fund, 3260 Hampton Avenue, St. Louis, Missouri 63139-2357
(8.04%); Lasalle National Bank TTEE, Metz Baking Co. Pension Trust, P.O. Box
1443, Chicago, Il 60690-1443 (6.08%).
VALUE INSTITUTIONAL PORTFOLIO: Retirement Plan for Non-Lawyer Personnel of
Baker & Botts LLP, 910 Louisiana, Houston, Texas 77002-4916 (42.15%); Sherryl A.
Nicholas TTEE, Sherryl A. Nicholas Revocable Trust U/A DTD 12/08/95, P. O. Box
2295, Rancho Santa Fe, California 92067-2295 (33.98%); CNA Trust Corporation
TTEE, FBO Nicholas Applegate 401(K) Plan, A/C #1050520327, P. O. Box 5024, Costa
Mesa, California, 92628-5024 (5.96%).
SMALL CAP GROWTH INSTITUTIONAL PORTFOLIO: KPMG Peat Marwick, Attn: Allan
Johnson, Partner & Employee Benefits, 3 Chestnut Ridge Road, Building-3, floor
2, Montvale, NJ 07645 (30.61%); Northern Trust Company Cust. FBO Advocate, A/C
26-48726, P.O. Box 92956, Chicago, Illinois 60675-2956 (18.42%); City of
Sarasota General Employees Pension fund, P.O. Box 1058, Sarasota, Florida,
34230-1058 (6.69%); US Bank National Assoc., Cust. FBO The Ford Family
Foundation ID, Account # 97320607, P.O. Box 64010, Saint Paul, Minnesota
55164-0010 (6.24%); Local #1 IBEW Pension Benefit Trust Fund Taft-Hartley Trust
Fund, 3260 Hampton Avenue, St. Louis, Missouri 63139-2357 (5.37%).
MINI-CAP GROWTH INSTITUTIONAL PORTFOLIO: Wake Forest University, P.O. Box
7354, Winston-Salem, North Carolina 27109-7354 (36.44%); Charles Schwab & Co.,
Inc., Attn: Mutual Funds, 101 Montgomery Street, 11th Floor, San Francisco,
California 94104-4122 (26.34%); US Bank National Association, Cust. FBO the Ford
Family Foundation, ID93-6026156, P.O. Box 64010, Saint Paul, MN 55164-0010
(13.36%), Arthur E. Nicholas, P.O. Box 2169, Del Mar, California 92014-1469
(6.44%).
CONVERTIBLE INSTITUTIONAL PORTFOLIO: The Cullen Trust for Higher Education,
601 Jefferson St., Suite 2300, Houston, Texas 77002-7910 (41.68%); Austin Fire
Fighters Relief & Retirement Fund, 3301 Northland Drive #215, Austin, Texas
78731-4951 (29.25%); Butler Family Fund, 501(C)(3) Exempt Private Foundation,
1600 20th Street, NW, Washington, DC 20009-1001
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(5.58%).
BALANCED GROWTH INSTITUTIONAL PORTFOLIO: CNA Trust Corporation TTEE, FBO
Nicholas Applegate 401(K) Plan, A/C #1050520327, P. O. Box 5024, Costa Mesa,
California, 92628-5024 (35.03%); Nicholas Applegate Capital Management, Attn:
Rommel Diawatan, 600 West Broadway, 30th Floor, San Diego, California,
92101-3311 (17.56%); CNA Trust Corporation TTEE, FBO Nicholas Applegate Pension
Plan, A/C #1050520292, P. O. Box 5024, Costa Mesa, California 92628-5024
(14.65%); Neil F. Marley MD, Diann Wylie Marley TTEES, N. Marley MD PS Keogh
Plan, U/A/D 1/1/89, 5175 Fox Ridge Rd Sw, Roanoke, Virginia 24014-4918 (10.32%);
New Orleans Museum of Art, P.O. Box 19123, New Orleans, Louisiana 70179-0123
(9.74%).
INTERNATIONAL CORE GROWTH INSTITUTIONAL PORTFOLIO: Austin Fire Fighters
Relief & Retirement Fund, 3301 Northland Drive #215, Austin, Texas 78731-4951
(38.35%); Norwest Bank MN NA, as Cust. FBO BCBS of Montana, A/C # 13424500,
Attn: MF Processing, P.O. Box 1533, Minneapolis, Minnesota 55480 (16.47%); NFIB
Qualified, Attn: Fred Holladay, 53 Century Blvd., Suite 300, Nashville,
Tennessee 37214-3693 (6.77%); NIB Corporate Reserve, Attn: Fred Holladay, 53
Century Blvd., Suite 300, Nashville, Tennessee 37214-3693 (6.46%); San Angelo
Health Foundation, 2909 Sherwood Way, San Angelo, Texas 76901-3558 (6.06%);
Chase Manhattan Bank TTEE, Defined Benefit Plan FBO Condea Vista Company
Retirement, U/A/D 07/20/1984, 900 Threadneedle St., Houston, Texas 77079-2907
(5.40%).
WORLDWIDE GROWTH INSTITUTIONAL PORTFOLIO: Retirement Plan For Non-Lawyer
Personnel of Baker & Botts LLP, 910 Louisiana, Houston, Texas 77002-4916
(28.45%); Independent Trust Corp., Custodian Funds 82B, 15255 South 94th Avenue,
Suite 300, Orland Park, Illinois 60462-3817 (23.65%); National City Bank NE
TTEE, Amer. Cunningham Brennan Co. LPA Prof/SH TR DTD 06-28-72, FO David L.
Brennan, Attn: MF 64A138037, P.O. Box 94984, Cleveland, Ohio 44101-4984
(19.52%); CNA Trust Corporation TTEE, FBO Nicholas Applegate 401(K) Plan, A/C
#1050520327, P. O. Box 5024, Costa Mesa, California, 92628-5024 (6.76%).
INTERNATIONAL SMALL CAP GROWTH INSTITUTIONAL PORTFOLIO: First Tennessee
Bank NA, Reinvest Account, 165 Madison Avenue, Fl.7, Memphis, Tennessee
38103-2723 (23.22%); University of B.C. (Canada) Endowment Fund, 220 Dundas
Street, 2nd Floor, London Ontario, Canada N6A 4S4 (18.17%); Austin Fire Fighters
Relief & Retirement Fund, 3301 Northland Drive #215, Austin, Texas 78731-4951
(17.06%); Arthur E. Nicholas, P.O. Box 2169, Del Mar, California 92014-1469
(7.75%); Methodist Home, Texas Non-Profit Corporation, 1111 Herring Avenue,
Waco, Texas 76708-3696 (7.67%).
EMERGING COUNTRIES INSTITUTIONAL PORTFOLIO: University of Notre Dame Du
Lac, Investment Office, Grace Hall, Suite 900, Notre Dame, Indiana 46556
(20.86%); Northern Trust, Cust., FBO Lor Aggressive Growth Emerging Markets,
P.O. Box 92956, Chicago, IL 60675-2956 (14.80%); Methodist Home, Texas
Non-Profit Corporation, 1111 Herring Avenue, Waco, Texas 76708-3696 (9.16%):
Bost. & Co., A/C # MURF4120002, Mutual Funds Operations, P.O. Box 3198,
Pittsburgh, Pennsylvania 15230-3198 (9.13%); First Tennessee Bank NA, Reinvest
Account, 165 Madison Avenue, Fl.7, Memphis, Tennessee 38103-2723 (6.54%); Austin
Fire Fighters Relief & Retirement Fund, 3301 Northland Drive #215, Austin, Texas
78731-4951 (6.33%).
GLOBAL GROWTH & INCOME INSTITUTIONAL PORTFOLIO: Arthur E. Nicholas, P.O.
Box 2169, Del
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<PAGE>
Mar, California 92014-1469 (60.41%); Sherryl A. Nicholas TTEE, Sherryl A.
Nicholas Revocable Trust U/A DTD 12/08/95, P. O. Box 2295, Rancho Santa Fe,
California 92067-2295 (17.28%); CNA Trust Corporation TTEE, FBO Nicholas
Applegate 401(K) Plan, A/C #1050520327, P. O. Box 5024, Costa Mesa, California,
92628-5024 (9.85%).
EMERGING MARKETS BOND FUND - CLASS I: Nicholas Applegate Capital
Management, Attn: Rommel Diawatan, 600 West Broadway, 30th Floor, San Diego,
California, 92101-3311 (90.07%).
LATIN AMERICA FUND - CLASS I: Arthur E. Nicholas, P.O. Box 2169, Del Mar,
California 92014-1469 (95.46%).
GREATER CHINA FUND - CLASS I: Arthur E. Nicholas, P.O. Box 2169, Del Mar,
California 92014-1469 (95.89%).
PACIFIC RIM FUND - CLASS INSTITUTIONAL: Arthur E. Nicholas, P.O. Box 2169,
Del Mar, California 92014-1469 (86.55%); State Street Bank & Trust Co., C/F The
IRA Rollover of Robertson Schaefer, P.O. Box 537, Rancho Santa Fe, California
92067-0537 (5.30%).
GLOBAL BLUE CHIP FUND - CLASS I: Arthur E. Nicholas, P.O. Box 2169, Del
Mar, California 92014-1469 (39.93%); Sherryl A. Nicholas TTEE, Sherryl A.
Nicholas Revocable Trust U/A DTD 12/08/95, P. O. Box 2295, Rancho Santa Fe,
California 92067-2295 (20.94%); CNA Trust Corporation TTEE, FBO Nicholas
Applegate 401(K) Plan, A/C #1050520327, P. O. Box 5024, Costa Mesa, California,
92628-5024 (5.95%).
SHORT-INTERMEDIATE FIXED INCOME INSTITUTIONAL PORTFOLIO: Indiana State
Council of Carpenters Health & Welfare Fund, DTD 9/16/75, William A. Johnson
Morris Assoc. In., P.O. Box 50440, Indianapolis, Indiana 46250-0440 (64.88%);
Community Hospital Foundation, P.O. Box 458, Channelsview, Texas 77530-0458
(32.06%).
HIGH QUALITY BOND INSTITUTIONAL PORTFOLIO: Charles Schwab & Co., Inc.,
Attn: Mutual funds, 101 Montgomery Street, 11th Floor, San Francisco, California
94104-4122 (73.79%); Retirement Plan for Non-Lawyer Personnel of Baker & Botts,
LLP., 910 Louisiana, Houston, Texas 77002-4916 (21.18%).
HIGH YIELD BOND FUND - CLASS I: Sherryl A. Nicholas TTEE, Sherryl A.
Nicholas Revocable Trust U/A DTD 12/08/95, P. O. Box 2295, Rancho Santa Fe,
California 92067-2295 (35.61%); Wuesthoff Memorial Hospital Fund, Depreciation
Not-for-Profit Corp., (501C-3), P.O. Box 565002, Rockledge, Florida 32956-5002
(28.60%); Wuesthoff Memorial Hospital Pension Plan Master Trust, Pen. PLS
Bargaining & Non-Bargaining, P.O. Box 565002, Rockledge, Florida 32956-5002
(9.94%); First American National Bank, Attn: Jeff D. Eubanks, 800 First American
Center, Nashville, Tennessee 37237 (6.22%); First American National Bank, Attn:
Jeff D. Eubanks, 800 First American Center, Nashville, Tennessee 37237 (5.69%).
STRATEGIC INCOME INSTITUTIONAL PORTFOLIO: Sherryl A. Nicholas TTEE,
Sherryl A. Nicholas Revocable Trust U/A DTD 12/08/95, P. O. Box 2295, Rancho
Santa Fe, California 92067-2295 (85.89%).
As of such date, the Trustees and officers of the Trust, as a group, owned
beneficially and
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<PAGE>
of record less than 1% of the outstanding shares of each of the Funds or the
Portfolios predecessors to the corresponding Funds, except for the shares
indicated above that are held by Nicholas-Applegate Capital Management.
TRUSTEES AND PRINCIPAL OFFICERS
The names, addresses and ages 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 (52), TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES. 885
La Jolla Corona Court, La Jolla, California. Private investor. 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.
DANN V. ANGELOFF (62), 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). Formerly Trustee,
Nicholas-Applegate Investment Trust (until 1998).
WALTER E. AUCH (76), 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). Formerly
Trustee, Nicholas-Applegate Investment Trust (until 1998). Mr. Auch is
considered to be an "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 (44), 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). Formerly Trustee, Nicholas-Applegate
Investment Trust (until 1998).
DARLENE DEREMER (42), TRUSTEE. 155 South Street, Wrentham, Massachusetts.
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<PAGE>
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). Formerly Trustee, Nicholas-Applegate Investment Trust
(until 1998).
GEORGE F. KEANE (68), 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); Formerly Trustee, Nicholas-Applegate Investment Trust
(until 1998).
ARTHUR B. LAFFER (57), TRUSTEE.*/ 5405 Morehouse Drive, Suite 340, San
Diego, California. Chairman, A.B. Laffer & 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 & 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 (66), 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 (51), PRESIDENT.*/ 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 (until 1998).
B-42
<PAGE>
E. BLAKE MOORE, JR. (40), CHIEF FINANCIAL OFFICER AND SECRETARY. Chief
Financial Officer, Nicholas-Applegate Capital Management and Nicholas-Applegate
Securities (since 1998), and General Counsel and Secretary, Nicholas-Applegate
Capital Management and Nicholas-Applegate Securities (since 1993); formerly
Attorney, Luce, Forward, Hamilton & Scripps (from 1989 to 1993).
PETER J. JOHNSON (42), VICE PRESIDENT. Partner and Director-Client
Services/Marketing, Nicholas-Applegate Capital Management (since January 1992)
and Vice President, Nicholas-Applegate Securities (since December 1995);
formerly, Marketing Director, Pacific Financial Asset Management Company, an
investment management firm (from July 1989 to December 1991), and Senior
Marketing Representative, Fidelity Investments Institutional Services (from
August 1987 to July 1989).
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, 1998, 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>
Aggregate Pension or Retirement Estimated Annual Total Compensation from Trust
Compensation from Benefits Accrued as Part of Benefits Upon and Trust Complex Paid to
Name Trust Trust Expenses Retirement Trustee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $ 23,000 None N/A $ 37,000 (63*)
Arthur B. Laffer $ 18,000 None N/A $ 32,000 (63*)
Charles E. Young $ 19,000 None N/A $ 34,000 (63*)
Dann V. Angeloff $ 22,000 None N/A $ 39,000 (18*)
Walter E. Auch $ 20,000 None N/A $ 20,000 (17*)
Theodore J. Coburn $ 20,000 None N/A $ 36,000 (18*)
Darlene Deremer $ 18,000 None N/A $ 18,000 (17*)
George F. Keane $ 20,000 None N/A $ 20,000 (17*)
</TABLE>
* Indicates total number of funds in Trust complex, including the Funds.
B-43
<PAGE>
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.
The Investment Adviser was organized in 1984 to manage discretionary
accounts investing in publicly traded securities for a variety of investors.
Its general partner is Nicholas-Applegate Capital Management Holdings, L.P., a
California limited partnership the general partner of which is
Nicholas-Applegate Capital Management Holdings, Inc., a California corporation
owned by Mr. Nicholas.
Personnel of the Investment Adviser may invest in securities for their own
accounts pursuant to a Code of Ethics that sets forth all partners' and
employees' fiduciary responsibilities regarding the Funds, establishes
procedures for personal investing, and restricts certain transactions. For
example, all personal trades in most securities require pre-clearance, and
participation in initial public offerings is prohibited. In addition,
restrictions on the timing of personal investing in relation to trades by the
Funds and on short-term trading have been adopted.
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Trust and the
Investment Adviser with respect to the Funds, the Trust retains the Investment
Adviser to manage the Funds' investment portfolios, subject to the direction of
the Trust's Board of Trustees. The Investment Adviser is authorized to
determine which securities are to be bought or sold by the Funds and in what
amounts.
The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any error of judgment or for any loss suffered by a Fund or
the Trust in connection with the matters to which the Investment Advisory
Agreement relates, except for liability resulting from willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of the
Investment Adviser's reckless disregard of its duties and obligations under the
Investment Advisory Agreement. The Trust has agreed to indemnify the Investment
Adviser against liabilities, costs and expenses that the Investment Adviser may
incur in connection with any action, suit, investigation or other proceeding
arising out of or otherwise based on any action actually or allegedly taken or
omitted to be taken by the Investment Adviser in connection with the performance
of its duties or obligations under the Investment Advisory Agreement or
otherwise as an investment adviser of the Trust. The Investment Adviser is not
entitled to indemnification with respect to any liability to the Trust or its
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties, or of its reckless disregard of its duties and
obligations under the Investment Advisory Agreement.
Prior to the Reorganization, the Trust had not engaged the services of an
investment adviser for the Trust's Institutional Portfolios because these
portfolios invested all 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
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<PAGE>
year ended March 31, 1998, 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:
<TABLE>
<CAPTION>
Fee Reductions and
Expense Reimbursements
Fund Advisory Fees (or Recoupments)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Global Blue Chip Fund $ 21,373 $ 25,177
International Core Growth Fund 308,562 30,669
Worldwide Growth Fund 1,251,181 111,071
International Small Cap Growth Fund 658,893 79,886
Global Growth & Income Fund 29,786 20,322
Emerging Countries Fund 2,790,216 84,868
Emerging Markets Bond Fund 7,492 25,250
Pacific Rim Fund 2,848 8,837
Greater China Fund 2,721 8,977
Latin America Fund 4,778 13,560
Large Cap Fund 32,530 53,872
Mid Cap Growth Fund 3,422,148 9,400
Value Fund 52,328 60,348
Small Cap Growth Fund 6,613,874 0
Mini Cap Growth Fund 866,987 (5,098)
Convertible Fund 1,427,198 0
Balanced Growth Fund 220,025 48,936
Short Intermediate Fund 37,524 93,900
High Quality Bond Fund (1) 94,359 193,047
Strategic Income Fund 24,977 75,946
High Yield Bond Fund 36,505 111,479
</TABLE>
(1) Includes the advisory fees, fee reductions and expense reimbursements of
the Government Income Fund, the assets and liabilities of which were assigned to
and assumed by the High Quality Bond Fund pursuant to the Reorganization.
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
B-45
<PAGE>
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), subject to possible reimbursement during a five year
period to ensure that the operating expenses for the Funds do not exceed the
amounts specified in the Funds' prospectus.
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<PAGE>
ADMINISTRATOR
The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, ICAC is responsible
for performing all administrative services required for the daily business
operations of the Trust, subject to the supervision of the Board of Trustees of
the Trust. ICAC has no supervisory responsibility over the investment
operations of the Funds. The management or administrative services of ICAC for
the Trust are not exclusive under the terms of the Administration Agreement and
ICAC is free to, and does, render management and administrative services to
others. ICAC also serves as the administrator for the Master Trust.
For its services, ICAC receives under the Administration Agreement 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, for the
fiscal year ended March 31, 1998, ICAC received aggregate compensation of
$848,799 for all of the series 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.
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<PAGE>
The Administration Agreement provides that ICAC will not be liable for any
error of judgment or for any loss suffered by the Trust in connection with the
matters to which the Administration Agreement relates, except a loss resulting
from ICAC's willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties. The Administration Agreement will terminate
automatically if assigned, and may be terminated without penalty by either ICAC
or the Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Trust, as defined in the Investment Company
Act), upon 60 days' written notice. The Administration Agreement will continue
in effect only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer agents,
accounting agents, independent accountants and legal counsel. These services
are comprised principally of assistance in coordinating with the Trust's various
service providers, providing certain officers of the Trust, responding to
inquiries from shareholders which are directed to the Trust rather than other
service providers, calculating performance data, providing various reports to
the Board of Trustees, and assistance in preparing reports, prospectuses, proxy
statements and other shareholder communications. The Agreement contains
provisions regarding liability and termination similar to those of the
Administration Agreement.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway, 30th
Floor, San Diego, California 92101, is the principal underwriter and distributor
for the Trust and, in such capacity, is responsible for distributing shares of
the Funds. The Distributor is a California limited partnership organized in
1992 to distribute shares of registered investment companies. Its general
partner is Nicholas-Applegate Capital Management Holdings, L.P., the general
partner of the Investment Adviser.
Pursuant to its Distribution Agreement with the Trust, the Distributor has
agreed to use its best efforts to effect sales of shares of the Portfolios, but
is not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar to
those in the Investment Advisory Agreement discussed above. The minimum assets
for investors in the Class I shares of the Funds may be waived from time to
time. Pursuant to the Distribution Agreement, the Trust has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under the Securities Act.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Trust's Board of Trustees, the
Investment Adviser executes the Funds' portfolio transactions and allocates the
brokerage business. In executing such transactions, the Investment Adviser
seeks to obtain the best price and execution for the Funds, taking into account
such factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. Securities in which the Funds
invest may be traded in the
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<PAGE>
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 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 substantially 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.
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<PAGE>
During the fiscal year ended March 31, 1998, the following 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: Worldwide Growth Fund -- Merrill
Lynch & Co.; International Small Cap Growth Fund -- Merrill Lynch & Co.; Global
Growth & Income Fund -- Salomon Smith Barney, J. P. Morgan & Co., Merrill Lynch
& Co.; Emerging Countries Fund -- Merrill Lynch & Co.; Large Cap Growth Fund --
Merrill Lynch & Co., J. P. Morgan & Co.; Mid Cap Growth Fund -- Merrill Lynch &
Co., J. P. Morgan & Co.; Small Cap Growth Fund -- Merrill Lynch & Co.; Mini Cap
Growth Fund -- Merrill Lynch & Co.; Convertible Fund -- Salomon Smith Barney,
Merrill Lynch & Co., J. P. Morgan & Co.; Balanced Growth Fund -- Bear Stearns
Co., Morgan Stanley Dean Witter Discover & Co.; Short-Intermediate Fund --
Lehman Brothers; Strategic Income Fund -- J. P. Morgan & Co.; High Yield Bond
Fund -- Merrill Lynch & Co., J. P. Morgan & Co. The holdings of securities of
such brokers and dealers were as follows as of March 31, 1998: Worldwide Growth
Fund -- Merrill Lynch & Co. ($456,500); Global Growth & Income -- Salomon Smith
Barney ($56,737); Large Cap Growth Fund -- Merrill Lynch & Co. ($116,200); Mid
Cap Growth Fund -- Merrill Lynch & Co. ($3,925,900); Convertible Fund -- Salomon
Smith Barney ($2,619,937); Balanced Growth Fund -- Bear Stearns Co. ($103,778),
Morgan Stanley Dean Witter Discover & Co. ($131,175); Short-Intermediate Fund --
Lehman Brothers ($202,356); Strategic Income Fund -- J. P. Morgan & Co.
($108,000); High Yield Bond Fund -- Merrill Lynch & Co. ($1,205,000).
The aggregate dollar amount of brokerage commissions paid by the master
fund predecessors to the corresponding Funds during the last three fiscal years
of the Trust were as follows:
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------
March 31, 1998 March 31, 1997 March 31, 1996
-----------------------------------------------------
<S> <C> <C> <C>
Global Blue Chip Fund $ 49,764 N/A N/A
International Core Growth Fund 464,615 $ 24,643 N/A
Worldwide Growth Fund 1,065,153 970,564 $ 484,310
International Small Cap Growth Fund 745,259 692,326 116,735
Global Growth & Income Fund 52,145 0 N/A
Emerging Countries Fund 3,634,338 1,427,861 169,728
Emerging Markets Bond Fund 0 N/A N/A
Pacific Rim Fund 10,403 N/A N/A
Greater China Fund 11,105 N/A N/A
Latin America Fund 12,759 N/A N/A
Large Cap Growth Fund 30,907 4,620 0
Mid Cap Growth Fund 1,809,755 1,139,938 862,396
Value Fund 14,316 8,996 N/A
Small Cap Growth Fund 1,002,867 987,245 1,038,140
Mini Cap Growth Fund 202,223 90,844 40,185
Convertible Fund 130,017 114,243 83,459
Balanced Growth Fund 43,966 35,105 51,038
B-50
<PAGE>
Short Intermediate Fund 0 0 0
High Quality Bond Fund (1) 100 0 0
Strategic Income Fund 43,966 2,556 N/A
High Yield Bond Fund 1,896 200 N/A
</TABLE>
(1) The Government Income Fund, the assets and liabilities of which were
assigned to and assumed by the High Quality Bond Fund paid no brokerage fees in
the fiscal year ended March 31, 1998.
Of the total commissions paid during the fiscal year ended March 31, 1998,
$1,155,155 (12.39%) were paid to firms which provided research, statistical or
other services to the Investment Adviser. The Investment Adviser has not
separately identified a portion of such commissions as applicable to the
provision of such research, statistical or otherwise.
PURCHASE AND REDEMPTION OF FUND SHARES
Class I shares of the Funds may be purchased and redeemed at their net
asset value without any initial or deferred sales charge.
The price paid for purchases and redemptions of Class I shares of the Funds
is based on the net asset value per share, which is calculated once daily at the
close of trading (normally 4:00 P.M. New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Martin Luther King's Birthday,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day. The offering price is effective for orders
received by the Transfer Agent or any sub-transfer agent prior to the time of
determination of net asset value. Dealers are responsible for promptly
transmitting purchase orders to the Transfer Agent or a sub-transfer agent. The
Trust reserves the right in its sole discretion to suspend the continued
offering of the 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
Portfolios. Payment for shares redeemed will be made not more than seven days
after receipt of a written or telephone request in appropriate form, except as
permitted by the Investment Company Act and the rules thereunder. Such payment
may be postponed or the right of redemption suspended at times when the New York
Stock Exchange is closed for other than customary weekends and holidays, when
trading on such Exchange is restricted, when an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Fund fairly to determine the value
of its net assets, or during any other period when the Securities and Exchange
Commission, by order, so permits.
SHAREHOLDER SERVICES
The services offered by the Trust to shareholders of Class I shares of the
Funds can vary, depending on the needs of the qualified retirement plan, and
should be arranged by contacting the Trust, the Distributor, the Administrator
or the Transfer Agent.
SHAREHOLDER INVESTMENT ACCOUNT
B-51
<PAGE>
Upon the initial purchase of Class I shares of a Fund, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. Certificates will be issued for
Class I shares of the Fund as indicated in the Prospectus.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable 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 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 I 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 I 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, (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
B-52
<PAGE>
will be at net asset value (without a sales charge).
AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Fund of sufficient
shares, deposited by the shareholder with the Transfer Agent, to provide the
withdrawal payment specified. Withdrawal payments should not be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value will reduce the aggregate value of the shareholder's account.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of a Fund redeemed, but the
Trust reserves the right to make payment wholly or partly in shares of readily
marketable investment securities. In such cases, a shareholder may incur
brokerage costs in converting such securities to cash. However, the Trust has
elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, pursuant to which it is obligated to pay in cash all requests for
redemptions by any shareholder of record, limited in amount with respect to each
shareholder during any 90-day period to the lesser of $250,000 or 1% of the net
asset value of the Trust at the beginning of such period.
EXCHANGE PRIVILEGE
Class I shares of a Fund may be exchanged into Class I shares of any other
Fund as provided in the Prospectus. The Trust's exchange privilege is not
intended to afford shareholders a way to speculate on short-term market
movements. Accordingly the Trust reserves the right to limit the number of
exchanges an investor or participant may make in any year, to avoid excessive
Fund expenses.
Before effecting an exchange, investors should obtain the currently
effective prospectus of the series into which the exchange is to be made.
Exchange purchases are subject to the minimum investment requirements of the
series being purchased. An exchange will be treated as a redemption and
purchase for tax purposes.
TELEPHONE PRIVILEGE
Investors may exchange or redeem shares by telephone if they have elected
the telephone privilege on their account applications as provided in the
Prospectus.
The Trust will employ procedures designed to provide reasonable assurance
that instructions communicated by telephone are genuine and, if it does not do
so, it may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures employed by the Trust include requiring personal
identification by account number and social security number, tape recording of
telephone instructions, and providing written confirmation of transactions. The
Trust reserves the right to refuse a telephone exchange or redemption request if
it believes, for example, that the person making the request is neither the
record owner of the shares being exchanged or
B-53
<PAGE>
redeemed nor otherwise authorized by the investor to request the exchange or
redemption. Investors will be promptly notified of any refused request for a
telephone exchange or redemption. No Fund or its agents will be liable for any
loss, liability or cost which results from acting upon instructions of a person
reasonably believed to be an investor with respect to the telephone privilege.
REPORTS TO INVESTORS
Each Fund will send its investors annual and semi-annual reports. The
financial statements appearing in annual reports will be audited by independent
accountants. In order to reduce duplicate mailing and printing expenses, the
Funds may provide one annual and semi-annual report and annual prospectus per
household. In addition, quarterly unaudited financial data are available from
the Funds upon request.
NET ASSET VALUE
The net asset value of a Class I share of a Fund is calculated by dividing
(i) the value of the securities held by the Fund , plus any cash or other
assets, minus all 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 Class I shares of the Fund
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 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 the 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
user, 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
B-54
<PAGE>
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.
The Trust may use a pricing service approved by its Board of Trustees.
Prices provided by such a service represent evaluations of the mean between
current bid and asked market prices, may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics, indications
of values from dealers and other market data. Such services may use electronic
data processing techniques and/or a matrix system to determine valuations. The
procedures of such services are reviewed periodically by the officers of the
Trust under the general supervision and responsibility of its Board of Trustees,
which may replace a service at any time if it determines that it is in the best
interests of the Funds to do so.
DIVIDENDS, DISTRIBUTIONS AND TAXES
B-55
<PAGE>
The Balanced, Convertible and Global Growth & Income Funds declare and pay
quarterly dividends of net investment income. The Short-Intermediate, High
Quality Bond, Strategic Income, High Yield Bond and Emerging Markets Bond Funds
declare and pay monthly dividends of net investment income. 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 Fund will remain
so qualified.
As a regulated investment company, a Fund will not be liable for federal
income tax on its income and gains provided it distributes all of its income and
gains currently. Qualification as a regulated investment company under the Code
requires, among other things, that 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
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
Portfolio during January of the following year. Such distributions will be
taxable to shareholders (other than those not subject to
B-56
<PAGE>
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
(described below) 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
during the 90-day period that begins 45 days before the stock becomes
ex-dividend with respect to the dividend (91 days during the 180-day period that
begins 90 days before the stock becomes ex-dividend with respect to the dividend
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% in 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
B-57
<PAGE>
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S. Government
obligations is exempt from tax at the state level when received directly and may
be exempt, depending on the state, when received by a shareholder from a Fund
provided that certain conditions are satisfied. Interest received on repurchase
agreements collateralized by U.S. Government obligations normally is not exempt
from state taxation. The Trust will inform shareholders annually of the
percentage of income and distributions derived from direct U.S. Government
obligations. Shareholders should consult their tax advisers to determine
whether any portion of the income dividends received from the Fund is considered
tax exempt in their particular states.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Funds are "section 1256 contracts." Any gains or losses
on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Funds at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under
the Code) are "marked to market" with the result that unrealized gains or losses
are treated as though they were realized and the resulting gain or loss is
treated as ordinary or 60/40 gain or loss, depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Funds. In
addition, losses realized by a Fund on positions that are part of a straddle may
be deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Funds are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by a Fund which is taxed
as 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.
B-58
<PAGE>
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 in
writing within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will be "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the Fund elects
pass-through treatment, the source of the Fund's income flows through to
shareholders of the Fund. With respect to such election, the Fund treats gains
from the sale of securities as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit applies separately to foreign
source passive income, and to certain other types of income. Shareholders may
be unable to claim a credit for the full amount of their proportion at share of
the foreign taxes paid by the Fund. The foreign tax credit is modified for
purposes of the federal alternative minimum tax and can be used to offset only
90% of the alternative minimum tax imposed on corporations and individuals and
foreign taxes generally are not deductible in computing alternative minimum
taxable income.
SHORT SALES. Generally, capital gain or loss realized by 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 was held by the
Fund for the long-term holding period as of the date of the short sale, any loss
on closing the short position will be long-term capital loss. These special
rules do not apply to substantially similar property to the extent such property
exceeds the property used by the Fund to close its short position.
ORIGINAL ISSUE DISCOUNT. The Funds may treat some of the debt securities
(with a fixed
B-59
<PAGE>
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) 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 generally must distribute dividends to shareholders representing
discount on debt securities that is currently includable in income, even though
the Funds have yet to receive cash representing such income. The Funds may
obtain cash to pay such dividends from sales proceeds of securities held by the
Funds.
OTHER TAX INFORMATION
The Funds may be required to withhold for U.S. federal income taxes 31% of
all taxable distributions payable to shareholders who fail to provide the Trust
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal 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 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
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<PAGE>
Trust will take into account the historical performance of the series of the
Trust corresponding to the Fund prior to the Reorganization.
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.
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<PAGE>
YIELD
The yield for a Fund is calculated based on a 30-day or one-month period,
according to the following formula:
6
Yield = 2[(a - b + 1) -1]
-----
(c x d)
For purposes of this formula, "a" is total dividends and interest earned
during the period; "b" is total expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
Yields for the predecessors to the Class I shares of the Funds for the
30-day period ended March 31, 1998 were as follows:
<TABLE>
<S> <C>
Income & Growth Fund Class I Shares 2.20%
Balanced Growth Fund Class I Shares 2.44%
Short-Intermediate Fund Class I Shares 6.01%
High Quality Bond Fund Class I Shares 6.28%
Strategic Income Fund Class I Shares 7.89%
High Yield Bond Fund Class I Shares 8.35%
</TABLE>
COMPARISON TO INDICES AND RANKINGS
A Fund may compare the performance of its Class I 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 Morgan Stanley Capital International Latin America Emerging Market
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
B-62
<PAGE>
Brothers, Merrill Lynch, Lehman Brothers, Smith Barney Shearson and Bloomberg
L.P. Unmanaged indices (I.E., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses.
A number of independent mutual fund ranking entities prepare performance
rankings. These entities categorize and rank funds by various criteria,
including fund type, performance over a given period of years, total return,
standardized yield, variations in sales charges and risk\reward considerations.
The following indices are referred to in the Fund's Prospectus in
connection with the Investment Strategy of the Large Cap Growth, Mid Cap Growth,
Value and Small Cap Growth Funds:
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.
The Russell 1000 Growth Index contains those companies among the Russell
1000 securities 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
1000 Growth Index is considered generally representative of the U.S. market
for large cap stocks. 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.
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 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.
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
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<PAGE>
investment. The index was not available until 1986.
PRIOR PERFORMANCE OF CERTAIN FUNDS AND THEIR PREDECESSORS
The following tables set forth historical performance information for the
Class I shares of the Large Cap, Value, Mini Cap Growth, Balanced,
Short-Intermediate, High Quality Bond, Strategic Income and High Yield Bond
Funds. It includes historical performance information for the Institutional
Portfolios which preceded the Funds prior to the reorganization of the Trust in
July 1998 and the Investment Adviser's composite performance data relating to
the historical performance of all 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 such Funds.
The composite 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 has advised the Trust that the net performance
results for the Funds are calculated as set forth above under "General
Information -- Performance Information." All information set forth in the
tables below 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, except as otherwise indicated, such
information has not been verified and is unaudited.
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, Value, Mini Cap Growth, Balanced, Short-Intermediate,
High Quality Bond, Strategic Income and High Yield Bond 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
- --------------------
(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.
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<PAGE>
returns are computed by geometrically linking the returns of each quarter within
the calendar year. Investors should be aware that the SEC uses a methodology
different from that used below to calculate performance which, as with the use
of any methodology different from that below, could result in different
performance data.
The institutional private accounts that are included in the Investment
Adviser's composites are not subject to the same types of expenses to which the
Large Cap, Value, Mini Cap Growth, Balanced, Short-Intermediate, High Quality
Bond, Strategic Income and High Yield Bond 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 subject to
the same expenses as the Funds or had been regulated as investment companies
under the federal securities laws.
The results presented below may not necessarily equate with the return
experienced by any particular investor as a result of the timing of investments
and redemptions. In addition, the effect of taxes on any investor 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.
The investment results presented below are not intended to predict or
suggest the returns that might be experienced by the Large Cap, Value, Mini Cap,
Balanced, Short-Intermediate, High Quality Bond, Strategic Income or High Yield
Bond Funds or an individual investor investing in such Funds.
B-65
<PAGE>
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
-------------------------------------------------------
BALANCED GROWTH PERFORMANCE VALUE
------------------------------------------------------- ---------------
PERFORMANCE
------------------------------------------------------- ---------------
INVESTMENT 60% S&P 500 INVESTMENT
BALANCED ADVISER'S LEHMAN BROS. INDEX 40% ADVISER'S
GROWTH BALANCED S&P 500 GOVT./CORP. LEHMAN BROS. VALUE VALUE S&P 500
YEAR FUND COMPOSITE INDEX(1) INDEX(2) INDEX(1,2) FUND COMPOSITE INDEX(1)
---- -------- ---------- -------- ------------ ------------ ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988(3). . . . . 4.98% 10.25% 3.80% 7.67%
1989 . . . . . . 17.61 31.61 14.23 12.59
1990 . . . . . . 5.69 (3.04) 8.29 1.58
1991 . . . . . . 32.73 30.46 16.13 24.81
1992 . . . . . . 9.40 7.62 7.57 7.67
1993 . . . . . . 2.89% 20.14 2.32 11.06 10.52
1994(3). . . . . (4.61) (5.37) 1.32 3.51 (0.57) 3.79% 1.32%
1995 . . . . . . 24.60 29.23 37.60 19.24 30.02 30.79 37.60
1996(3). . . . . 17.41 11.88 22.96 2.89 14.65 24.25% 32.01 22.96
1997 . . . . . . 21.38 17.70 33.31 9.75 23.63 40.55 40.55 33.31
1998(4). . . . . 9.88 10.19 13.95 1.52 8.90 14.54 14.54 13.95
Last Year(4) . . 40.38 36.38 47.97 12.39 32.91 57.78 57.78 47.97
Last 5 Years(4). N/A 14.87 22.39 6.95 16.11 N/A N/A N/A
Since Inception(4) 16.42 14.98 18.93 8.92 14.98 43.55 30.33 28.27
</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 Composite - April 1, 1988;
Balanced Growth Institutional Portfolio (predecessor to the Class I shares
of the Balanced Growth Fund) - October 1, 1993; Value Composite
(predecessor to the Class I shares of the Value Fund) - April
B-66
<PAGE>
1, 1994; Value Institutional Portfolio - April 30, 1996.
(4) Through March 31, 1998
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
-------------------------------------------
LARGE CAP GROWTH MINI CAP PERFORMANCE
------------------------------------------- -------------------------------
PERFORMANCE
-----------
INVESTMENT INVESTMENT
LARGE CAP ADVISER'S LARGE RUSSELL MINI CAP ADVISER'S RUSSELL 2000
GROWTH CAP GROWTH 1000 GROWTH GROWTH MINI CAP GROWTH STOCK
YEAR FUND COMPOSITE INDEX(1) FUND COMPOSITE INDEX(2)
---- --------- --------------- ----------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
1991(3). . . . . . 28.69% 14.77%
1992 . . . . . . . 11.58 7.77
1993 . . . . . . . 7.25 13.36
1994 . . . . . . . (5.85) (2.43)
1995(3). . . . . . 35.38% 25.26% 14.80% 55.93 31.06
1996(3). . . . . . (1.12%) 26.63 23.12 28.73 27.72 11.26
1997 . . . . . . . 46.07 33.06 30.48 30.19 30.61 12.84
1998(4). . . . . . 17.61 16.17 15.15 15.65 15.63 11.89
Last Year(3) . . . 63.32 57.24 49.45 68.89 68.95 41.16
Last 5 Years(3). . N/A N/A N/A N/A 24.78 15.70
Since Inception(4) 52.39 38.38 32.33 34.18 24.72 14.86
</TABLE>
- --------------------
(1) The Russell 1000 Growth Index contains those companies among the Russell
1000 securities 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
1000 Growth Index is considered generally representative of the U.S. market
for large cap stocks. 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.
(2) 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-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.
(3) Inception dates are as follows: Large Cap Growth Composite - April 1,
1995; Large Cap Growth Institutional Portfolio (predecessor to the Class I
shares of the Large Cap Growth Fund) - December 26, 1996; Mini Cap
Composite - August 1, 1991; Mini Cap Growth Institutional
B-67
<PAGE>
Portfolio (predecessor to the Class I shares of the Mini Cap Growth Fund) -
July 12, 1995.
(4) Through March 31, 1998
B-68
<PAGE>
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
---------------------------------------------------------------
SHORT-INTERMEDIATE
PERFORMANCE HIGH QUALITY BOND PERFORMANCE
---------------------------------------------- -----------------------------
Merrill Lynch LEHMAN BROS.
SHORT- Investment 1-3 Yr. HIGH QUALITY Investment GOVT./CORP.
INTERMEDIATE ADVISER'S Treasury BOND Adviser's BOND
YEAR FUND COMPOSITE Index(1) FUND Composite INDEX(2)
- ---- ---- --------- -------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1984(3). . . . . . . . . . 13.28% 13.78% 15.72% 15.00%
1985 . . . . . . . . . . . 15.66 13.96 21.98 21.30
1986 . . . . . . . . . . . 10.71 10.35 16.13 15.59
1987 . . . . . . . . . . . 5.09 5.65 2.60 2.31
1988 . . . . . . . . . . . 7.93 6.22 7.87 7.52
1989 . . . . . . . . . . . 10.16 10.87 12.53 14.23
1990 . . . . . . . . . . . 9.43 9.72 8.37 8.29
1991 . . . . . . . . . . . 12.56 11.68 17.38 16.13
1992 . . . . . . . . . . . 6.20 6.30 7.38 7.57
1993 . . . . . . . . . . . 7.19 5.41 12.32 11.06
1994 . . . . . . . . . . . 0.39 0.57 (4.16) (3.51)
1995 (3) . . . . . . . . . 4.95% 10.24 10.99 8.81% 16.69 19.24
1996 . . . . . . . . . . . 4.85 4.79 4.99 2.29 3.00 2.89
1997 . . . . . . . . . . . 6.67 6.66 6.65 9.52 9.49 9.75
1998(4). . . . . . . . . . 1.58 1.41 1.48 2.31 1.90 1.52
Last year (4). . . . . . . 7.50 7.23 7.51 12.60 11.86 12.39
Last 5 years (4) . . . . . N/A 5.41 5.52 N/A 6.62 6.95
Last 10 years (4). . . . . N/A 7.27 7.17 N/A 8.80 8.92
Since inception (4). . . . 7.05 8.46 9.05 8.92 10.27 10.25
</TABLE>
- --------------------
(1) The Merrill Lynch 1-3 Year Treasury Index is an index consisting of all
public U.S. Treasury obligations having maturities from one to 2.99 years.
The Index includes income and distributions but does not reflect fees,
brokerage commissions or other expenses of investing.
(2) The Lehman Brothers Government/Corporate Bond Index is an index consisting
of the Lehman Brothers Government Bond Index and the Lehman Brothers
Corporate Bond Index. The Government Bond Index includes all public
obligations of the U.S. Treasury (excluding flower bonds and
foreign-targeted issues), its agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. Government. The Corporate Bond Index
includes all publicly issued, fixed rate, non-convertible investment grade
U.S. dollar denominated corporate debt registered with the Securities and
Exchange Commission; it also includes debt issued or guaranteed by foreign
sovereign governments, municipalities, and governmental
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<PAGE>
or international agencies. The Index includes income and distributions but
does not reflect fees, brokerage commissions or other expenses of
investing.
(3) Inception dates are as follows: Short-Intermediate Composite - January 1,
1984; Short-Intermediate Institutional Portfolio (predecessor to the Class
I shares of the Short-Intermediate Fund) - August 31, 1995;
Discretionary-U.S. Composite - January 1, 1984; Fully Discretionary
Institutional Portfolio (predecessor to the Class I shares of the High
Quality Bond Fund) - August 31, 1995.
(4) Through March 31, 1998
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
--------------------------------------------------------------------------------------------------------
HIGH YIELD BOND PERFORMANCE STRATEGIC INCOME PERFORMANCE
-------------------------------------------- --------------------------------------------------------
LEHMAN BROS.
INVESTMENT INVESTMENT MORTGAGE-
HIGH YIELD ADVISER'S FIRST BOSTON STRATEGIC ADVISER'S BACKED
BOND HIGH YIELD HIGH YIELD INCOME STRATEGIC INCOME SECURITIES MODEL
YEAR FUND BOND COMPOSITE INDEX(1) FUND COMPOSITE INDEX(2) INDEX(3)
- ---- ---- -------------- -------- ---- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1994(4) . . . . . . . 1.45% 0.09%
1995. . . . . . . . . 19.40 17.38
1996(4, 5). . . . . . 11.33% 21.87 12.42 9.20% 14.80% 5.36% 10.72%
1997. . . . . . . . . 21.40 21.83 12.63 16.74 16.74 9.48 14.70
1998(5) . . . . . . . 5.75 6.12 3.01 4.60 4.60 2.21 2.95
Last Year(5). . . . . 25.49 26.4 14.33 20.06 20.06 10.01 17.15
Since inception(5). . 23.92 17.38 11.26 18.86 16.20 7.32 12.65
</TABLE>
- --------------------
(1) The First Boston High Yield Index includes over 180 U.S. domestic issues
with an average maturity range of seven to ten years and with a minimum
issue size of $100 million. The Index reflects the reinvestment of income,
if any, but does not reflect fees, dealer markups, or other expenses of
investing.
(2) The Lehman Brothers Mortgage-Backed Securities Index is composed of all
fixed-rate, securitized mortgage pools of GNMA, FNMA and the FHLMC,
including GNMA Graduated Payment Mortgages, with a principal amount of at
least $50 million. The Index reflects the reinvestment of income, if any,
but does not reflect fees, dealer markups, or other expenses of investing.
(3) The Model Index consists of 1/3 Lehman Brothers Mortgage-Backed Securities
Index, 1/3 First Boston Convertible Index and 1/3 First Boston High Yield
Bond Index. See note number 2 above for a description of the Lehman
Brothers Mortgage-Backed Securities Index. The 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. See note number 1 above for a description of the First
Boston High Yield Index.
(4) Inception dates are as follows: High Yield Bond Composite - April 1, 1994;
High Yield Bond Portfolio
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<PAGE>
(predecessor to the Class I shares of the High Yield Bond Fund) - July 31,
1996; Strategic Income Composite (predecessor to the Class I shares of the
Strategic Income Fund) - January 1, 1996; Strategic Income Portfolio - July
31, 1996.
(5) Through March 31, 1998
B-71
<PAGE>
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 Portfolios and
Funds.
Brown Brothers Harriman & Company, 40 Water Street, Boston, Massachusetts,
02109, serves as Foreign 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.
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 Charles Schwab Trust Company, 101 Montgomery Street, San Francisco,
California 94104, serves as co-transfer agent for shares of the Funds. The
following act as sub-transfer agents for the Funds: Financial Data Services,
Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville, Florida 32246; William M.
Mercer Plan Participant Services, Inc., 1417 Lake Cook Road, Deerfield, Illinois
60015; and Schwab Retirement Plan Services, Inc., 101 Montgomery Street, San
Francisco, California 94104.
Ernst & Young, L.L.P., 515 South Flower Street, Los Angeles, California
90071, serves as the independent auditors for the Trust, and in that capacity
examines the annual financial statements of the Trust.
Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust. It also acts as
legal counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 24 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 series unless otherwise
required by the Investment Company Act, in which case all shares of the Trust
will be voted in the aggregate. For example, a change in a Fund's fundamental
investment policies would be voted upon by shareholders of that Fund, as would
the approval of any advisory or distribution contract for the Portfolio.
However, all shares of the Trust may vote together in the election or selection
of Trustees, principal underwriters and accountants for the Trust.
Rule 18f-2 under the Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Trust shall not be
B-72
<PAGE>
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 Funds' prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of a Portfolio, means the vote of the lesser of (i) 67% of the
shares of the 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.
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
B-73
<PAGE>
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 1998 Annual Report to Shareholders of the Portfolios
(predecessor to the Class I shares of the Funds) accompanies 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, 1997 and 1998
have been audited by the Funds' independent auditors, Ernst & Young L.L.P.,
whose report thereon appears 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 1998 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.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating symbols
of securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating symbols
of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to commercial
paper investments permitted to be made by the Master Trust, are opinions of the
ability of issuers to repay punctually their senior debt obligations which have
an original maturity not exceeding one year. Moody's employs the following
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
PRIME 1: Issuers (or related supporting institutions) rated PRIME-1 have a
superior ability for repayment of short-term promissory obligations. PRIME-1
repayment ability will often be evidenced by the following characteristics: (A)
leading market positions in well-established industries; (B) high rates of
return on funds employed; (C) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (D) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (E) well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above in the PRIME-1
category but to a lesser degree. Earning trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME 3: Issuers rated PRIME-3 (or related supporting institutions) have
an acceptable ability for repayment of short-term debt obligations. The effect
of industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the "A"
category are delineated with the numbers 1, 2, and
A-1
<PAGE>
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.
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.
A-2
<PAGE>
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.
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.
A-3
<PAGE>
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.
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
A-4
<PAGE>
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 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:
A-5
<PAGE>
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" 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.
A-6
<PAGE>
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.
IBCA
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
BB, B, CCC, CC, AND C - Obligations are assigned one of these ratings where
it is considered that speculative characteristics are present. "BB" represents
the lowest degree of speculation and indicates a possibility of investment risk
developing. "C" represents the highest degree of speculation and indicates that
the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
THOMSON BANKWATCH
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
AAA - This designation represents the highest category assigned by Thomson
BankWatch to long-
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<PAGE>
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, 1998, Statements of
Assets and Liabilities as of March 31, 1998, Statements of Changes in
Net Assets for the period ended March 31, 1998, and related Notes and
Report of Independent Auditors with respect to Registrant's
Institutional Portfolios, the predecessors to the Class I 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 (e).
(1.2) CERTIFICATE OF AMENDMENT TO CERTIFICATE OF TRUST OF
REGISTRANT (e).
(1.3) AMENDED AND RESTATED DECLARATION OF TRUST OF REGISTRANT (e).
(1.4) CERTIFICATE OF TRUSTEES DATED AUGUST 6, 1993, ESTABLISHING
EMERGING GROWTH PORTFOLIO SERIES (e).
(1.5) CERTIFICATE OF TRUSTEES DATED DECEMBER 15, 1993,
ESTABLISHING INTERNATIONAL GROWTH PORTFOLIO SERIES (e).
(1.6) AMENDMENT NO. 2 TO AMENDED AND RESTATED DECLARATION OF TRUST
(e).
(1.7) AMENDMENT NO. 3 TO AMENDED AND RESTATED DECLARATION OF TRUST
(e).
(1.8) AMENDMENT NO. 4 TO AMENDED AND RESTATED DECLARATION OF TRUST
(e).
(1.9) AMENDMENT NO. 5 TO AMENDED AND RESTATED DECLARATION OF TRUST
(e).
(1.10) AMENDMENT NO. 6 TO AMENDED AND RESTATED DECLARATION OF TRUST
(e).
(1.11) AMENDMENT NO. 7 TO AMENDED AND RESTATED DECLARATION OF TRUST
(e).
(1.12) FORM OF AMENDMENT NO. 8 TO AMENDED AND RESTATED DECLARATION
OF TRUST (e).
C-1
<PAGE>
(1.13) AMENDMENT NO. 9 TO AMENDED AND RESTATED DECLARATION OF TRUST
(e).
(1.14) FORM OF AMENDMENT NO. 10 TO AMENDED AND RESTATED DECLARATION
OF TRUST (a).
(1.15) AMENDMENT NO. 11 TO AMENDED AND RESTATED DECLARATION OF
TRUST (f).
(1.16) FORM OF AMENDMENT NO. 12 TO AMENDED AND RESTATED DECLARATION
OF TRUST (f).
(1.17) AMENDMENT NO. 13 TO AMENDED AND RESTATED DECLARATION OF
TRUST (g).
(1.18) FORM OF AMENDMENT NO. 14 TO AMENDED AND RESTATED DECLARATION
OF TRUST (g).
(1.19) FORM OF AMENDMENT NO. 15 TO AMENDED AND RESTATED DECLARATION
OF TRUST (i).
(1.20) FORM OF AMENDMENT NO. 16 TO AMENDED AND RESTATED DECLARATION
OF TRUST (l).
(1.21) FORM OF AMENDMENT NO. 17 TO AMENDED AND RESTATED DECLARATION
OF TRUST (l).
(1.22) FORM OF AMENDMENT NO. 18 TO AMENDED AND RESTATED DECLARATION
OF TRUST (l).
(1.23) FORM OF AMENDMENT NO. 19 TO AMENDED AND RESTATED DECLARATION
OF TRUST (n).
(1.24) FORM OF AMENDMENT NO. 20 TO AMENDED AND RESTATED DECLARATION
OF TRUST (n).
(1.25) FORM OF AMENDMENT NO. 21 TO AMENDED AND RESTATED DECLARATION
OF TRUST.
(2.1) AMENDED BYLAWS OF REGISTRANT (e).
(2.2) AMENDMENT TO SECTION 2.5 OF BYLAWS OF REGISTRANT (e).
(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 (j).
(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 (j).
C-2
<PAGE>
(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 (j).
(5.4) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, ADDING ADDITIONAL
FUNDS TO THE INVESTMENT ADVISORY AGREEMENT (n).
(5.5) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, ADDING GLOBAL
TECHNOLOGY FUND TO THE INVESTMENT ADVISORY AGREEMENT (n).
(5.6) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, ADDING LARGE CAP
VALUE FUND TO THE INVESTMENT ADVISORY AGREEMENT.
(6.1) DISTRIBUTION AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE SECURITIES DATED AS OF APRIL 19, 1993
(e).
(6.2) 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 (j).
(6.3) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE SECURITIES, ADDING CLASSES OF SHARES TO
THE DISTRIBUTION AGREEMENT (n).
(6.4) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE SECURITIES, ADDING GLOBAL TECHNOLOGY FUND
TO THE DISTRIBUTION AGREEMENT (n).
(6.5) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE SECURITIES, ADDING LARGE CAP VALUE FUND
TO THE DISTRIBUTION AGREEMENT.
(7) NONE.
(8.1) CUSTODIAN SERVICES AGREEMENT BETWEEN REGISTRANT AND PNC BANK
DATED AS OF APRIL 1, 1993 (e).
(8.2) 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
(i).
(8.3) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PNC BANK,
ADDING PACIFIC RIM FUND, GREATER CHINA FUND AND LATIN
AMERICA FUND TO CUSTODIAN SERVICES AGREEMENT (j).
(8.4) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PNC BANK,
ADDING CLASSES OF SHARES AND GLOBAL TECHNOLOGY FUND TO
CUSTODIAN SERVICES AGREEMENT (n).
(8.5) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PNC BANK,
ADDING LARGE CAP VALUE FUND TO CUSTODIAN SERVICES AGREEMENT.
C-3
<PAGE>
(8.6) CUSTODIAN AGREEMENT BETWEEN REGISTRANT AND BROWN BROTHERS
HARRIMAN & CO. DATED AS OF JUNE 1, 1998.
(8.7) FORM OF AMENDMENT TO CUSTODIAN AGREEMENT BETWEEN REGISTRANT
AND BROWN BROTHERS HARRIMAN & CO.
(8.8) FOREIGN CUSTODY MANAGER DELEGATION AGREEMENT BETWEEN
REGISTRANT AND BROWN BROTHERS HARRIMAN & CO. DATED AS OF
JUNE 1, 1998.
(9.1) FORM OF AMENDED ADMINISTRATION AGREEMENT BETWEEN REGISTRANT
AND INVESTMENT COMPANY ADMINISTRATION CORPORATION (k).
(9.2) ADMINISTRATIVE SERVICES AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT DATED AS OF NOVEMBER
18, 1996 (f).
(9.3) TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN REGISTRANT AND
STATE STREET BANK AND TRUST COMPANY DATED AS OF APRIL 1,
1993 (e).
(9.4) 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 (h).
(9.5) 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 (j).
(9.6) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND STATE STREET
BANK AND TRUST COMPANY, ADDING CLASSES OF SHARES AND GLOBAL
TECHNOLOGY FUND TO TRANSFER AGENCY AND SERVICE AGREEMENT
(n).
(9.7) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND STATE STREET
BANK AND TRUST COMPANY, ADDING LARGE CAP VALUE FUND TO
TRANSFER AGENCY AND SERVICE AGREEMENT.
(9.8) FORM OF AMENDED SHAREHOLDER SERVICE PLAN BETWEEN REGISTRANT
AND NICHOLAS-APPLEGATE SECURITIES (k).
(9.9) LICENSE AGREEMENT DATED AS OF DECEMBER 17, 1992, BETWEEN
REGISTRANT AND NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (e).
(9.10) ACCOUNTING SERVICES AGREEMENT BETWEEN REGISTRANT AND PFPC
INC. DATED AS OF APRIL 1, 1993 (e).
(9.11) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PFPC INC.,
ADDING GLOBAL BLUE CHIP FUND AND EMERGING MARKETS BOND FUND
TO ACCOUNTING SERVICES AGREEMENT (h).
(9.12) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PFPC INC.
WITH RESPECT TO ACCOUNTING SERVICES FEES RELATED TO
C-4
<PAGE>
THE GLOBAL BLUE CHIP FUND AND THE EMERGING MARKETS BOND FUND
(i).
(9.13) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PFPC INC.
ADDING THE PACIFIC RIM FUND, GREATER CHINA FUND AND LATIN
AMERICA FUND (j).
(9.14) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PFPC INC.
REGARDING FEES FOR ADDITIONAL FUNDS UNDER ACCOUNTING
SERVICES AGREEMENT (k).
(9.15) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PFPC INC.,
ADDING CLASSES OF SHARES AND GLOBAL TECHNOLOGY FUND TO
ACCOUNTING SERVICES AGREEMENT (n).
(9.16) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PFPC INC.,
ADDING LARGE CAP VALUE FUND ACCOUNTING SERVICES AGREEMENT.
(9.17) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT REGARDING EXPENSE
REIMBURSEMENTS (n).
(9.18) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT ADDING LARGE CAP VALUE
FUND TO THE AGREEMENT REGARDING EXPENSE REIMBURSEMENTS.
(9.19) CREDIT AGREEMENT AMONG REGISTRANT, CHEMICAL BANK AND CERTAIN
OTHER BANKS DATED APRIL 10, 1996 (e).
(9.20) FIRST AMENDMENT AGREEMENT TO CREDIT AGREEMENT DATED AS OF
APRIL 9, 1997 AMONG REGISTRANT, THE CHASE MANHATTAN BANK,
AND CERTAIN OTHER BANKS (h).
(9.21) FORM OF SECOND AMENDMENT AGREEMENT TO CREDIT AGREEMENT AMONG
REGISTRANT, THE CHASE MANHATTAN BANK, AND CERTAIN OTHER
BANKS (j).
(9.22) FORM OF THIRD AMENDMENT AGREEMENT TO CREDIT AGREEMENT AMONG
REGISTRANT, THE CHASE MANHATTAN BANK AND CERTAIN OTHER
BANKS.
(10) OPINION OF COUNSEL.
(11) CONSENT OF INDEPENDENT AUDITORS.
(12) NOT APPLICABLE.
(13) INVESTMENT LETTER OF INITIAL INVESTOR IN REGISTRANT DATED
APRIL 1, 1993 (e).
(14.1) IRA PLAN MATERIALS (c).
(14.2) 401(K) PROFIT-SHARING PLAN MATERIALS (c).
(15.1) AMENDED DISTRIBUTION PLAN OF REGISTRANT (e)
C-5
<PAGE>
(15.2) FORM OF FURTHER AMENDMENT TO DISTRIBUTION PLAN OF REGISTRANT
(k).
(16) SCHEDULE OF COMPUTATION OF PERFORMANCE QUOTATIONS (a).
(17) FINANCIAL DATA SCHEDULE AS OF MARCH 31, 1998. (n)
(18) NOT APPLICABLE.
(19.1) LIMITED POWERS OF ATTORNEY OF TRUSTEES (c).
(19.2) LIMITED POWER OF ATTORNEY OF WALTER E. AUCH (d).
(19.3) LIMITED POWER OF ATTORNEY OF ARTHUR E. NICHOLAS (m).
(19.4) CERTIFIED RESOLUTION OF BOARD OF TRUSTEES REGARDING LIMITED
POWER OF ATTORNEY OF ARTHUR E. NICHOLAS (m).
- -----------------------------
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
C-6
<PAGE>
(j) 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.
(k) FILED AS AN EXHIBIT TO REGISTRANT'S FORM N-14 REGISTRATION STATEMENT ON
DECEMBER 5, 1997 AND INCORPORATED HEREIN BY REFERENCE.
(l) FILED AS AN EXHIBIT TO AMENDMENT NO. 50 TO REGISTRANT'S FORM N-1A
REGISTRATION STATEMENT ON DECEMBER 15, 1997 AND INCORPORATED HEREIN BY
REFERENCE.
(m) FILED AS AN EXHIBIT TO AMENDMENT NO. 62 TO REGISTRANT'S FORM N-1A
REGISTRATION STATEMENT ON JUNE 15, 1998 AND INCORPORATED HEREIN BY
REFERENCE.
(n) FILED AS AN EXHIBIT TO AMENDMENT NO. 65 TO REGISTRANT'S FORM N-1A
REGISTRATION STATEMENT ON JULY 21, 1998 AND INCORPORATED HEREIN BY
REFERENCE.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
NONE.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
AS OF JUNE 30, 1998, THE NUMBER OF RECORD HOLDERS OF EACH SERIES OF
REGISTRANT WAS AS FOLLOWS:
<TABLE>
<CAPTION>
TITLE OF SERIES NUMBER OF RECORD HOLDERS
<S> <C>
LARGE CAP GROWTH PORTFOLIO A 189
CORE GROWTH PORTFOLIO A 5,318
EMERGING GROWTH PORTFOLIO A 9,240
INCOME & GROWTH PORTFOLIO A 2,455
BALANCED GROWTH PORTFOLIO A 828
GOVERNMENT INCOME PORTFOLIO A 312
MONEY MARKET PORTFOLIO 1,297
INTERNATIONAL CORE GROWTH PORTFOLIO A 962
WORLDWIDE GROWTH PORTFOLIO A 2,233
INTERNATIONAL SMALL CAP GROWTH PORTFOLIO A 796
EMERGING COUNTRIES PORTFOLIO A 5,000
LARGE CAP GROWTH PORTFOLIO B 387
CORE GROWTH PORTFOLIO B 3,337
EMERGING GROWTH PORTFOLIO B 4,215
INCOME & GROWTH PORTFOLIO B 2,212
BALANCED GROWTH PORTFOLIO B 286
GOVERNMENT INCOME PORTFOLIO B 193
C-7
<PAGE>
<S> <C>
INTERNATIONAL CORE GROWTH PORTFOLIO B 748
WORLDWIDE GROWTH PORTFOLIO B 953
INTERNATIONAL SMALL CAP GROWTH PORTFOLIO B 875
EMERGING COUNTRIES PORTFOLIO B 3,819
LARGE CAP GROWTH PORTFOLIO C 192
CORE GROWTH PORTFOLIO C 10,716
EMERGING GROWTH PORTFOLIO C 14,397
INCOME & GROWTH PORTFOLIO C 5,235
BALANCED GROWTH PORTFOLIO C 1,095
GOVERNMENT INCOME PORTFOLIO C 397
INTERNATIONAL CORE GROWTH PORTFOLIO C 159
WORLDWIDE GROWTH PORTFOLIO C 5,234
INTERNATIONAL SMALL CAP GROWTH PORTFOLIO C 934
EMERGING COUNTRIES PORTFOLIO C 3,069
LARGE CAP GROWTH INSTITUTIONAL PORTFOLIO 78
CORE GROWTH INSTITUTIONAL PORTFOLIO 161
EMERGING GROWTH INSTITUTIONAL PORTFOLIO 183
INCOME & GROWTH INSTITUTIONAL PORTFOLIO 138
BALANCED GROWTH INSTITUTIONAL PORTFOLIO 29
INTERNATIONAL CORE GROWTH INSTITUTIONAL PORTFOLIO 101
WORLDWIDE GROWTH INSTITUTIONAL PORTFOLIO 77
INTERNATIONAL SMALL CAP GROWTH INSTITUTIONAL
PORTFOLIO 105
EMERGING COUNTRIES INSTITUTIONAL PORTFOLIO 192
MINI CAP GROWTH INSTITUTIONAL PORTFOLIO 308
FULLY DISCRETIONARY INSTITUTIONAL FIXED INCOME
PORTFOLIO 18
SHORT-INTERMEDIATE INSTITUTIONAL FIXED INCOME
PORTFOLIO 14
VALUE INSTITUTIONAL PORTFOLIO 75
HIGH YIELD BOND FUND 2,160
STRATEGIC INCOME INSTITUTIONAL PORTFOLIO 23
GLOBAL GROWTH & INCOME INSTITUTIONAL PORTFOLIO 35
LARGE CAP GROWTH QUALIFIED PORTFOLIO 22
CORE GROWTH QUALIFIED PORTFOLIO 232
C-8
<PAGE>
<S> <C>
EMERGING GROWTH QUALIFIED PORTFOLIO 112
INCOME & GROWTH QUALIFIED PORTFOLIO 27
BALANCED GROWTH QUALIFIED PORTFOLIO 9
GOVERNMENT INCOME QUALIFIED PORTFOLIO 8
INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO 158
WORLDWIDE GROWTH QUALIFIED PORTFOLIO 68
INTERNATIONAL SMALL CAP GROWTH QUALIFIED PORTFOLIO 166
EMERGING COUNTRIES QUALIFIED PORTFOLIO 3,413
EMERGING MARKETS BOND INSTITUTIONAL PORTFOLIO 11
GLOBAL BLUE CHIP FUND 97
LATIN AMERICA FUND 14
GREATER CHINA FUND 11
PACIFIC RIM FUND 13
</TABLE>
ITEM 27. INDEMNIFICATION.
REGISTRANT'S TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS AGAINST
LIABILITIES INCURRED BY THEM IN CONNECTION WITH THE DEFENSE OR DISPOSITION OF
ANY ACTION OR PROCEEDING IN WHICH THEY MAY BE INVOLVED OR WITH WHICH THEY MAY
BE THREATENED, WHILE IN OFFICE OR THEREAFTER, BY REASON OF BEING OR HAVING
BEEN IN SUCH OFFICE, EXCEPT WITH RESPECT TO MATTERS AS TO WHICH IT HAS BEEN
DETERMINED THAT THEY ACTED WITH WILLFUL MISFEASANCE, BAD FAITH, GROSS
NEGLIGENCE OR RECKLESS DISREGARD OF THE DUTIES INVOLVED IN THE CONDUCT OF
THEIR OFFICE ("DISABLING CONDUCT").
SECTION 8 OF REGISTRANT'S ADMINISTRATION AGREEMENT, FILED HEREWITH AS
EXHIBIT 9.1, PROVIDES FOR THE INDEMNIFICATION OF REGISTRANT'S ADMINISTRATOR
AGAINST ALL LIABILITIES INCURRED BY IT IN PERFORMING ITS OBLIGATIONS UNDER
THE AGREEMENT, EXCEPT WITH RESPECT TO MATTERS INVOLVING ITS DISABLING
CONDUCT. SECTION 9 OF REGISTRANT'S DISTRIBUTION AGREEMENT, FILED HEREWITH AS
EXHIBIT 6.1, 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 9.8, 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
C-9
<PAGE>
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, 1997, NICHOLAS-APPLEGATE
CAPITAL MANAGEMENT HAS ENGAGED PRINCIPALLY IN THE BUSINESS OF PROVIDING
INVESTMENT SERVICES TO INSTITUTIONAL AND OTHER CLIENTS. ALL OF THE
ADDITIONAL INFORMATION REQUIRED BY THIS ITEM 28 WITH RESPECT TO THE
INVESTMENT ADVISER IS SET FORTH IN THE FORM ADV, AS AMENDED, OF
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT (FILE NO. 801-21442), WHICH IS
INCORPORATED HEREIN BY REFERENCE.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) NICHOLAS-APPLEGATE SECURITIES DOES NOT ACT AS A PRINCIPAL
UNDERWRITER, DEPOSITOR OR INVESTMENT ADVISER TO ANY INVESTMENT COMPANY OTHER
THAN REGISTRANT.
(b) NICHOLAS-APPLEGATE SECURITIES, THE DISTRIBUTOR OF THE SHARES OF
REGISTRANT'S PORTFOLIOS, IS A CALIFORNIA LIMITED PARTNERSHIP AND ITS GENERAL
PARTNER IS NICHOLAS-APPLEGATE CAPITAL MANAGEMENT HOLDINGS, L.P. (THE "GENERAL
PARTNER"). INFORMATION IS FURNISHED BELOW WITH RESPECT TO THE OFFICERS,
PARTNERS AND DIRECTORS OF THE GENERAL PARTNER AND NICHOLAS-APPLEGATE
SECURITIES. THE PRINCIPAL BUSINESS ADDRESS OF SUCH PERSONS IS 600 WEST
BROADWAY, 30TH FLOOR, SAN DIEGO, CALIFORNIA 92101, EXCEPT AS OTHERWISE
INDICATED BELOW.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH PRINCIPAL OFFICES WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
------------------ ----------- ------------
<S> <C> <C>
ARTHUR E. NICHOLAS PRESIDENT PRESIDENT
PETER J. JOHNSON VICE PRESIDENT VICE PRESIDENT
E. BLAKE MOORE, JR. CHIEF FINANCIAL OFFICER CHIEF FINANCIAL
OFFICER
E. BLAKE MOORE, JR. SECRETARY SECRETARY
TODD SPILLANE DIRECTOR OF COMPLIANCE NONE
</TABLE>
(c) NOT APPLICABLE.
C-10
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
ALL ACCOUNTS, BOOKS AND OTHER DOCUMENTS REQUIRED TO BE MAINTAINED BY
SECTION 31(a) OF THE INVESTMENT COMPANY ACT OF 1940 AND THE RULES PROMULGATED
THEREUNDER WILL BE MAINTAINED EITHER AT THE OFFICES OF THE REGISTRANT (600
WEST BROADWAY, 30TH FLOOR, SAN DIEGO, CALIFORNIA 92101); THE INVESTMENT
ADVISER TO THE TRUST AND MASTER TRUST, NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
(600 WEST BROADWAY, 30TH FLOOR, SAN DIEGO, CALIFORNIA 92101); THE 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.
C-11
<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 13TH DAY OF AUGUST 1998.
NICHOLAS-APPLEGATE MUTUAL FUNDS
BY ARTHUR E. NICHOLAS*
--------------------------------
ARTHUR E. NICHOLAS
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.
ARTHUR E. NICHOLAS* PRINCIPAL EXECUTIVE AUGUST 13, 1998
- -------------------------- OFFICER
ARTHUR E. NICHOLAS
E. BLAKE MOORE, JR. PRINCIPAL FINANCIAL AND AUGUST 13, 1998
- -------------------------- ACCOUNTING OFFICER
E. BLAKE MOORE, JR.
FRED C. APPLEGATE* TRUSTEE AUGUST 13, 1998
- --------------------------
FRED C. APPLEGATE
DONN V. ANGELOFF* TRUSTEE AUGUST 13, 1998
- --------------------------
DONN V. ANGELOFF
WALTER E. AUCH* TRUSTEE AUGUST 13, 1998
- --------------------------
WALTER E. AUCH
THEODORE J. COBURN* TRUSTEE AUGUST 13, 1998
- --------------------------
THEODORE J. COBURN
DARLENE DEREMER* TRUSTEE AUGUST 13, 1998
- --------------------------
DARLENE DEREMER
C-12
<PAGE>
GEORGE F. KEANE* TRUSTEE AUGUST 13, 1998
- --------------------------
GEORGE F. KEANE
ARTHUR B. LAFFER* TRUSTEE AUGUST 13, 1998
- --------------------------
ARTHUR B. LAFFER
CHARLES E. YOUNG* TRUSTEE AUGUST 13, 1998
- --------------------------
CHARLES E. YOUNG
* S/E. BLAKE MOORE, JR.
- --------------------------
BY: E. BLAKE MOORE, JR.
ATTORNEY IN FACT
C-13
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE MUTUAL FUNDS
AMENDMENT NO. 68 TO
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-7428
EXHIBIT NO.
TITLE OF EXHIBIT
(1.25) FORM OF AMENDMENT NO. 21 TO AMENDED AND RESTATED DECLARATION OF TRUST.
(5.6) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND NICHOLAS-APPLEGATE
CAPITAL MANAGEMENT, ADDING LARGE CAP VALUE FUND TO THE INVESTMENT
ADVISORY AGREEMENT.
(6.5) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND NICHOLAS-APPLEGATE
SECURITIES, ADDING LARGE CAP VALUE FUND TO THE DISTRIBUTION AGREEMENT.
(8.5) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PNC BANK, ADDING LARGE
CAP VALUE FUND TO CUSTODIAN SERVICES AGREEMENT.
(8.6) CUSTODIAN AGREEMENT BETWEEN REGISTRANT AND BROWN BROTHERS HARRIMAN &
CO. DATED AS OF JUNE 1, 1998.
(8.7) FORM OF AMENDMENT TO CUSTODIAN AGREEMENT BETWEEN REGISTRANT AND BROWN
BROTHERS HARRIMAN & CO.
(8.8) FOREIGN CUSTODY MANAGER DELEGATION AGREEMENT BETWEEN REGISTRANT AND
BROWN BROTHERS HARRIMAN & CO. DATED AS OF JUNE 1, 1998.
(9.7) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND STATE STREET BANK AND
TRUST COMPANY, ADDING LARGE CAP VALUE FUND TO TRANSFER AGENCY AND
SERVICE AGREEMENT.
(9.16) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND PFPC INC., ADDING
LARGE CAP VALUE FUND TO ACCOUNTING SERVICES AGREEMENT.
(9.18) FORM OF LETTER AGREEMENT BETWEEN REGISTRANT AND NICHOLAS-APPLEGATE
CAPITAL MANAGEMENT ADDING LARGE CAP
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<PAGE>
VALUE FUND TO THE AGREEMENT REGARDING EXPENSE REIMBURSEMENTS.
(9.22) FORM OF THIRD AMENDMENT AGREEMENT TO CREDIT AGREEMENT AMONG
REGISTRANT, THE CHASE MANHATTAN BANK AND CERTAIN OTHER BANKS.
(10) OPINION OF COUNSEL
(11) CONSENT OF INDEPENDENT AUDITORS.
C-15
<PAGE>
Exhibit 1.25
AMENDMENT NO. 21 TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS AMENDMENT NO. 21 TO THE AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS is made as of the 5th day of August, 1998 by
the undersigned, constituting a majority of the Trustees of the Trust.
WHEREAS, the Amended and Restated Declaration of Trust of the Trust
adopted as of December 17, 1992, as heretofore amended (the "Declaration of
Trust"), designated certain series of Interests of the Trust; and
WHEREAS, the Trustees wish to create an addition series of Interests
of the Trust to be known as the Large Cap Value Fund;
NOW THEREFORE, the Board of Trustees hereby amends the Declaration of
Trust as follows:
"Without limiting the authority of the Trustees set forth in this
Section 8.8 to establish and designate any further series, the
Trustees hereby establish and designate twenty-four series, as
follows:
Nicholas-Applegate Mid Cap Growth Fund
Nicholas-Applegate Convertible Fund
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate Small Cap Growth Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Money Market Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate High Quality Bond Fund
Nicholas-Applegate Mini-Cap Growth Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate International Core Growth Fund
Nicholas-Applegate Global Blue Chip Fund
Nicholas-APplegate Emerging Markets Bond Fund
Nicholas-Applegate Pacific Rim Fund
Nicholas-Applegate Greater China Fund
Nicholas-Applegate Latin America Fund
Nicholas-Applegate Global Technology Fund
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Nicholas-Applegate Large Cap Value Fund"
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
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Arthur B. Laffer Fred C. Applegate
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Charles E. Young Dann V. Angeloff
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Walter E. Auch Theodore J. Coburn
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Darlene Deremer George F. Keane
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Arthur E. Nicholas
Adopted as of August 14, 1998
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Exhibit 5.6
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
August 14, 1998
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, California 92101
Ladies and Gentlemen:
This will confirm our agreement that the Investment Advisory Agreement
between us dated September 7, 1997, as amended, is hereby amended by adding
thereto the Nicholas-Applegate Large Cap Value Fund as a Fund thereunder. The
full list of Funds covered by the Agreement and the annual advisory fee with
respect to each such Fund shall be as set forth on Exhibit A.
In all other respects, the Investment Advisory Agreement will remain
in full force and effect. Please sign this letter below to confirm your
agreement with this amendment.
Very truly yours,
--------------------
E. Blake Moore, Jr.
Secretary
AGREED:
Nicholas-Applegate Capital Management
By: Nicholas-Applegate Capital Management
Holdings, L.P., its General Partner
By: Nicholas-Applegate Capital Management
Holdings, Inc., its General Partner
By:
---------------------
E. Blake Moore, Jr.
Secretary
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EXHIBIT A
NICHOLAS-APPLEGATE MID CAP GROWTH FUND (formerly Nicholas-Applegate Core Growth
Fund): 0.75% of the first $500 million of the Fund's average net assets, 0.675%
of the next $500 million of net assets, and 0.65% of net assets in excess of $1
billion.
NICHOLAS-APPLEGATE LARGE CAP GROWTH FUND: 0.75% of the first $500 million of the
Fund's average net assets, 0.675% of the next $500 million of net assets, and
0.65% of net assets in excess of $1 billion.
NICHOLAS-APPLEGATE MINI CAP GROWTH FUND: 1.25% of the Fund's average net assets.
NICHOLAS-APPLEGATE SMALL CAP GROWTH FUND (formerly Nicholas-Applegate Emerging
Growth Fund): 1.00% of the Fund's average net assets.
NICHOLAS-APPLEGATE CONVERTIBLE FUND (formerly Nicholas-Applegate Income & Growth
Fund): 0.75% of the first $500 million of the Fund's average net assets, 0.675%
of the next $500 million of net assets, and 0.65% of net assets in excess of $1
billion.
NICHOLAS-APPLEGATE BALANCED GROWTH FUND: 0.75% of the first $500 million of the
Fund's average net assets, 0.675% of the next $500 million of net assets, and
0.65% of net assets in excess of $1 billion.
NICHOLAS-APPLEGATE WORLDWIDE GROWTH FUND: 1.00% of the first $500 million of the
Fund's average net assets, .90% of the next $500 million of net assets, and .85%
of net assets in excess of $1 billion.
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH FUND: 1.00% of the first $500
million of the Fund's average net assets, 0.90% of the next $500 million of net
assets, and 0.80% of net assets in excess of $1 billion.
NICHOLAS-APPLEGATE EMERGING COUNTRIES FUND: 1.25% of the Fund's average net
assets.
NICHOLAS-APPLEGATE GLOBAL GROWTH & INCOME FUND: .85% of the Fund's average net
assets.
NICHOLAS-APPLEGATE INTERNATIONAL SMALL CAP GROWTH FUND: 1.00% of the first $500
million of the Fund's average net assets, .90% of the next $500 million of net
assets, and .85% of net assets in excess of $1 billion.
NICHOLAS-APPLEGATE MONEY MARKET FUND: .25% of the first $500 million of the
Fund's average net assets, and .2275% of net assets in excess of $500 million.
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NICHOLAS-APPLEGATE VALUE FUND: 0.75% of the first $500 million of the Fund's
average net assets, 0.675% of the next $500 million of net assets, and 0.65% of
net assets in excess of $1 billion.
NICHOLAS-APPLEGATE HIGH YIELD BOND FUND: 0.60% of the Fund's average net assets.
NICHOLAS-APPLEGATE STRATEGIC INCOME FUND: 0.60% of the Fund's average net
assets.
NICHOLAS-APPLEGATE SHORT-INTERMEDIATE FIXED INCOME FUND: 0.30% of the first $250
million of the Fund's average net assets and 0.25% of the net assets in excess
of $250 million.
NICHOLAS-APPLEGATE HIGH QUALITY BOND FUND (formerly Nicholas-Applegate Fully
Discretionary Fixed Income Fund): 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.
NICHOLAS-APPLEGATE GLOBAL BLUE CHIP FUND: 0.80% of the Fund's average net
assets.
NICHOLAS-APPLEGATE EMERGING MARKETS BOND FUND: 0.70% of Fund's average net
assets.
NICHOLAS-APPLEGATE PACIFIC RIM FUND: 1.00% of Fund's average net assets.
NICHOLAS-APPLEGATE GREATER CHINA FUND: 1.00% of the Fund's average net assets.
NICHOLAS-APPLEGATE LATIN AMERICA FUND: 1.25% of the Fund's average net assets.
NICHOLAS-APPLEGATE GLOBAL TECHNOLOGY FUND: 1.00% of the Fund's average net
assets.
NICHOLAS-APPLEGATE LARGE CAP VALUE FUND: 0.75% of the Fund's average net
assets.
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Exhibit 6.5
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
August 14, 1998
Nicholas-Applegate Securities
600 West Broadway
San Diego, CA 92101
Ladies and Gentlemen:
This will confirm our agreement that the Distribution Agreement
between us dated April 19, 1993, as previously amended, is hereby further
amended by adding the Nicholas-Applegate Large Cap Value Fund as an additional
Portfolio thereunder. The full list of Portfolios covered by the Agreement is
attached as Exhibit A.
In all other respects, the Distribution Agreement, as previously
amended, will remain in full force and effect. Please sign this letter below to
confirm your agreement with this amendment.
Very truly yours,
E. Blake Moore, Jr.
Secretary
AGREED:
Nicholas-Applegate Securities
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E. Blake Moore, Jr.
Secretary
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Exhibit A
Nicholas-Applegate Mid Cap Growth Fund (formerly Nicholas-Applegate
Core Growth Fund)
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate Mini Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund (formerly Nicholas-Applegate
Emerging Growth Fund)
Nicholas-Applegate Convertible Fund (formerly Nicholas-Applegate
Income & Growth Fund)
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate International Core Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Money Market Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate High Quality Bond Fund(formerly Nicholas-Applegate
Fully Discretionary Fixed Income Fund)
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
Nicholas-Applegate Pacific Rim Fund
Nicholas-Applegate Greater China Fund
Nicholas-Applegate Latin America Fund
Nicholas-Applegate Global Technology Fund
Nicholas-Applegate Large Cap Value Fund
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Exhibit 8.5
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
August 14, 1998
PNC Bank, National Association
Airport Business Center
200 Stevens Drive, Suite A-440
Lester, Pennsylvania 19113
Ladies and Gentlemen:
Reference is made to the Custodian Services Agreement between us dated
as of April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, this will confirm that we wish
to appoint you to provide custodian services under the Agreement to our newly
established Large Cap Value Fund. A full list of Funds covered by the Agreement
is set forth in Exhibit A.
Please indicate your acceptance of this amendment by signing the
letter below and returning a copy to us. Thank you for your assistance
regarding this matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
AGREED:
PNC BANK, NATIONAL ASSOCIATION
By:
---------------------------
Title:
------------------------
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EXHIBIT A
Nicholas-Applegate Mid Cap Growth Fund (formerly Nicholas-Applegate
Core Growth Fund)
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate Mini Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund (formerly Nicholas-Applegate
Emerging Growth Fund)
Nicholas-Applegate Convertible Fund (formerly Nicholas-Applegate
Income & Growth Fund)
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate International Core Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Money Market Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate High Quality Bond Fund (formerly Nicholas-
Applegate Fully Discretionary Fixed Income Fund)
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
Nicholas-Applegate Pacific Rim Fund
Nicholas-Applegate Greater China Fund
Nicholas-Applegate Latin America Fund
Nicholas-Applegate Global Technology Fund
Nicholas-Applegate Large Cap Value Fund
<PAGE>
EXHIBIT 8.6
CUSTODIAN AGREEMENT
THIS AGREEMENT, dated as of June 1, 1998, between Nicholas Applegate Mutual
Funds, an open-end management investment company organized under the laws of the
State of Delaware and registered with the Securities and Exchange Commission
under the 1940 Act (the FUND) on behalf of each of the portfolios listed on the
attached Appendix "C" as the same may be amended from time to time (each a
PORTFOLIO and collectively the PORTFOLIOS), and BROWN BROTHERS HARRIMAN & CO., a
limited partnership formed under the laws of the State of New York (BBH&CO. or
the CUSTODIAN),
W I T N E S S E T H:
WHEREAS, the Fund wishes to employ BBH&Co. to act as custodian for the Fund
and to provide related services, all as provided herein, and BBH&Co. is willing
to accept such employment, subject to the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Fund and BBH&Co. hereby agree, as follows:
1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints BBH&Co. as the Fund's
custodian, and BBH&Co. hereby accepts such appointment. All Investments of the
Fund delivered to the Custodian or its agents or Subcustodians shall be dealt
with as provided in this Agreement. The duties of the Custodian with respect
to the Fund's Investments shall be only as set forth expressly in this Agreement
which duties are generally comprised of safekeeping and various administrative
duties that will be performed in accordance with Instructions and as reasonably
required to effect Instructions.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FUND. The Fund hereby
represents, warrants and covenants each of the following:
2.1 This Agreement has been, and at the time of delivery of each
Instruction such Instruction will have been, duly authorized, executed and
delivered by the Fund. This Agreement does not violate any Applicable Law
or conflict with or constitute a default under the Fund's
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prospectus or other organic document, agreement, judgment, order or decree
to which the Fund is a party or by which it or its Investments is bound.
2.2 By providing an Instruction with respect to the first acquisition
of an Investment in a jurisdiction other than the United States of America,
the Fund shall be deemed to have confirmed to the Custodian that the Fund
has (a) assessed and accepted all material Country or Sovereign Risks and
accepted responsibility for their occurrence, (b) made all determinations
required to be made by the Fund under the 1940 Act, and (iii) appropriately
and adequately disclosed to its shareholders, all material investment
risks, including those relating to the custody and settlement
infrastructure or the servicing of securities in such jurisdictions.
2.3 The Fund shall safeguard and shall solely be responsible for the
safekeeping of any testkeys, identification codes, passwords, other
security devices or statements of account with which the Custodian provides
it. In furtherance and not limitation of the foregoing, in the event the
Fund utilizes any on-line service offered by the Custodian, the Fund and
the Custodian shall be fully responsible for the security of its respective
connecting terminal, access thereto and the proper and authorized use
thereof and the initiation and application of continuing effective
safeguards in respect thereof.
3. REPRESENTATION AND WARRANTY OF BBH&CO. BBH&Co. hereby represents and
warrants that this Agreement has been duly authorized, executed and delivered by
BBH&Co. and does not and will not violate any Applicable Law or conflict with or
constitute a default under BBH&Co.'s limited partnership agreement or any
agreement, instrument, judgment, order or decree to which BBH&Co. is a party or
by which it is bound.
BBH&Co. hereby further warrants to the Fund that as of the date of this
Agreement it is maintaining a sufficient bankers blanket bond and hereby agrees
to notify the Fund in the event its bankers blanket bond is canceled or
otherwise lapses.
4. INSTRUCTIONS. Unless otherwise explicitly indicated herein, the Custodian
shall perform its duties pursuant to Instructions. As used herein, the term
INSTRUCTION shall mean a directive initiated by the Fund, acting directly or
through its board of directors, officers or other Authorized Persons, which
directive shall conform to the requirements of this Section 4.
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4.1 AUTHORIZED PERSONS. For purposes hereof, an AUTHORIZED PERSON shall
be a person or entity authorized to give Instructions for or on behalf of the
Fund by written notices to the Custodian or otherwise in accordance with
procedures delivered to and acknowledged by the Custodian, including without
limitation the Fund's Investment Adviser or Foreign Custody Manager. The
Custodian may treat any Authorized Person as having full authority of the Fund
to issue Instructions hereunder unless the notice of authorization contains
explicit limitations as to said authority. The Custodian shall be entitled to
rely upon the authority of Authorized Persons until it receives appropriate
written notice from the Fund to the contrary.
4.2 FORM OF INSTRUCTION. Each Instruction shall be transmitted by such
secured or authenticated electro-mechanical means as the Custodian shall make
available to the Fund from time to time unless the Fund shall elect to transmit
such Instruction in accordance with Subsections 4.2.1 through 4.2.3 of this
Section.
4.2.1 FUND DESIGNATED SECURED-TRANSMISSION METHOD. Instructions may
be transmitted through a secured or tested electro-mechanical means
identified by the Fund or by an Authorized Person entitled to give
Instruction and acknowledged and accepted by the Custodian; it being
understood that such acknowledgment shall authorize the Custodian to
receive and process instructions received by such means of delivery but
shall not represent a judgment by the Custodian as to the reasonableness or
security of the method determined by the Authorized Person.
4.2.2 WRITTEN INSTRUCTIONS. Instructions may be transmitted in a
writing that bears the manual signature of Authorized Persons.
4.2.3 OTHER FORMS OF INSTRUCTION. Instructions may also be
transmitted by another means determined by the Fund or Authorized Persons
and acknowledged and accepted by the Custodian (subject to the same limits
as to acknowledgements as is contained in Subsection 4.2.1, above)
including Instructions given orally or by SWIFT, telex or telefax (whether
tested or untested).
When an Instruction is given by means established under this Subsection 4.2, it
shall be the responsibility of the Custodian to use reasonable care to adhere to
any security or other procedures established in writing between the Custodian
and the Authorized Person with respect to such means of Instruction. When an
Instruction is given by means established under Subsections 4.2.1 through 4.2.3,
it shall be the responsibility
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of such Authorized Person for determining that the particular means chosen is
reasonable under the circumstances. Oral Instructions shall be binding upon the
Custodian only if and when the Custodian takes action with respect thereto.
With respect to telefax instructions, the parties agree and acknowledge that
receipt of legible Instructions cannot be assured, that the Custodian cannot
verify that authorized signatures on telefax Instructions are original or
properly affixed, and that the Custodian shall not be liable for losses or
expenses incurred through actions taken in reliance on inaccurately stated,
illegible or unauthorized telefax Instructions. The provisions of Section 4A of
the Uniform Commercial Code shall apply to funds transfers performed in
accordance with Instructions. In the event that a Fund's Transfer Services
Agreement is executed between the Fund or an Authorized Person and the
Custodian, such an agreement shall comprise a designation of form of a means of
delivering Instructions for purposes of this Section 4.2.
4.3 COMPLETENESS AND CONTENTS OF INSTRUCTIONS. The Authorized Person shall
be responsible for assuring the adequacy and accuracy of Instructions.
Particularly, upon any acquisition or disposition or other dealing in the
Fund's Investments and upon any delivery and transfer of any Investment or
moneys, the person initiating such Instruction shall give the Custodian an
Instruction with appropriate detail, including, without limitation:
4.3.1 The transaction date and the date and location of settlement;
4.3.2 The specification of the type of transaction;
4.3.4 A description of the Investments or moneys in question,
including, as appropriate, quantity, price per unit, amount of money to be
received or delivered and currency information. Where an Instruction is
communicated by electronic means, or otherwise where an Instruction
contains an identifying number such as a CUSIP, SEDOL or ISIN number, the
Custodian shall be entitled to rely on such number as controlling
notwithstanding any inconsistency contained in such Instruction,
particularly with respect to Investment description;
4.3.5 The name of the broker or similar entity concerned with
execution of the transaction.
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If the Custodian shall determine that an Instruction is either unclear or
incomplete, the Custodian may give prompt notice of such determination to the
Fund, and the Fund shall thereupon amend or otherwise reform such Instruction.
In such event, the Custodian shall have no obligation to take any action in
response to the Instruction initially delivered until the redelivery of an
amended or reformed Instruction.
4.4 TIMELINESS OF INSTRUCTIONS. In giving an Instruction, the Fund shall
take into consideration delays which may occur due to the involvement of a
Subcustodian or agent, differences in time zones, and other factors particular
to a given market, exchange or issuer. When the Custodian has established
specific timing requirements or deadlines with respect to particular classes of
Instruction, or when an Instruction is received by the Custodian at such a time
that it could not reasonably be expected to have acted on such Instruction due
to time zone differences or other factors beyond its reasonable control, the
execution of any Instruction received by the Custodian after such deadline or at
such time (including any modification or revocation of a previous Instruction)
shall be at the risk of the Fund.
5. SAFEKEEPING OF FUND ASSETS. The Custodian shall hold Investments delivered
to it or Subcustodians for the Fund in accordance with the provisions of this
Section. The Custodian shall not be responsible for (a) the safekeeping of
Investments not delivered or that are not caused to be issued to it or its
Subcustodians; or (b) pre-existing faults or defects in Investments that are
delivered to the Custodian, or its Subcustodians. The Custodian is hereby
authorized to hold with itself or a Subcustodian, and to record in one or more
accounts, all Investments delivered to and accepted by the Custodian, any
Subcustodian or their respective agents
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pursuant to an Instruction or in consequence of any corporate action. The
Custodian shall hold Investments for the account of the Fund and shall segregate
Investments from assets belonging to the Custodian and shall cause its
Subcustodians to segregate Investments from assets belonging to the Subcustodian
in an account held for the Fund or in an account maintained by the Subcustodian
generally for non-proprietary assets of the Custodian.
5.1 USE OF SECURITIES DEPOSITORIES. The Custodian may deposit and
maintain Investments in any Securities Depository, either directly or through
one or more Subcustodians appointed by the Custodian. Investments held in a
Securities Depository shall be held (a) subject to the agreement, rules,
statement of terms and conditions or other document or conditions effective
between the Securities Depository and the Custodian or the Subcustodian, as the
case may be, and (b) in an account for the Fund or in bulk segregation in an
account maintained for the non-proprietary assets of the entity holding such
Investments in the Depository. If market practice or the rules and regulations
of the Securities Depository prevent the Custodian, the Subcustodian or (any
agent of either) from holding its client assets in such a separate account, the
Custodian, the Subcustodian or other agent shall as appropriate segregate such
Investments for benefit of the Fund or for benefit of clients of the Custodian
generally on its own books.
5.2 CERTIFICATED ASSETS. Investments which are certificated may be held
in registered or bearer form: (a) in the Custodian's vault; (b) in the vault of
a Subcustodian or agent of the Custodian or a Subcustodian; or (c) in an account
maintained by the Custodian, Subcustodian or agent at a Securities Depository;
all in accordance with customary market practice in the jurisdiction in which
any Investments are held.
5.3 REGISTERED ASSETS. Investments which are registered may be registered
in the name of the
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Custodian, a Subcustodian, or in the name of the Fund or a nominee for any of
the foregoing, and may be held in any manner set forth in paragraph 5.2 above
with or without any identification of fiduciary capacity in such registration.
5.4 BOOK ENTRY ASSETS. Investments which are represented by book-entry
may be so held in an account maintained by the Book-Entry Agent on behalf of the
Custodian, a Subcustodian or another agent of the Custodian, or a Securities
Depository.
5.5 REPLACEMENT OF LOST INVESTMENTS. In the event of a loss of
Investments for which the Custodian is responsible under the terms of this
Agreement, the Custodian shall replace such Investment, or in the event that
such replacement cannot be effected, the Custodian shall pay to the Fund the
fair market value of such Investment based on the last available price as of
the close of business in the relevant market on the date that a claim was
first made to the Custodian with respect to such loss, or, if less, such
other amount as shall be agreed by the parties as the date for settlement.
6. ADMINISTRATIVE DUTIES OF THE CUSTODIAN. The Custodian shall perform the
following administrative duties with respect to Investments of the Fund.
6.1 PURCHASE OF INVESTMENTS. Pursuant to Instruction, Investments
purchased for the account of the Fund shall be paid for (a) against delivery
thereof to the Custodian or a Subcustodian, as the case may be, either directly
or through a Clearing Corporation or a Securities Depository (in accordance with
the rules of such Securities Depository or such Clearing Corporation), or (b)
otherwise in accordance with an Instruction, Applicable Law, generally accepted
trade practices, or the terms of the instrument representing such Investment.
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6.2 SALE OF INVESTMENTS. Pursuant to Instruction, Investments sold for
the account of the Fund shall be delivered (a) against payment therefor in cash,
by check or by bank wire transfer, (b) by credit to the account of the Custodian
or the applicable Subcustodian, as the case may be, with a Clearing Corporation
or a Securities Depository (in accordance with the rules of such Securities
Depository or such Clearing Corporation), or (c) otherwise in accordance with an
Instruction, Applicable Law, generally accepted trade practices, or the terms of
the instrument representing such Investment.
6.3 DELIVERY IN CONNECTION WITH BORROWINGS OF THE FUND OR OTHER COLLATERAL
AND MARGIN REQUIREMENTS. Pursuant to Instruction, the Custodian may deliver
Investments or cash of the Fund in connection with borrowings and other
collateral and margin requirements.
6.4 FUTURES AND OPTIONS. If, pursuant to an Instruction, the Custodian
shall become a party to an agreement with the Fund and a futures commission
merchant regarding margin (TRI-PARTY AGREEMENT), the Custodian shall (a)
receive and retain, to the extent the same are provided to the Custodian,
confirmations or other documents evidencing the purchase or sale by the Fund
of exchange-traded futures contracts and commodity options, (b) when required
by such Tri-Party Agreement, deposit and maintain in an account opened
pursuant to such Agreement (MARGIN ACCOUNT), segregated either physically or
by book-entry in a Securities Depository for the benefit of any futures
commission merchant, such Investments as the Fund shall have designated as
initial, maintenance or variation "margin" deposits or other collateral
intended to secure the Fund's performance of its obligations under the terms
of any exchange-traded futures contracts and commodity options; and (c)
thereafter pay, release or transfer Investments into or out of the margin
account in accordance with the provisions of the such Agreement.
Alternatively, the Custodian may deliver Investments, in accordance with an
Instruction, to a futures commission merchant for purposes of margin
requirements in accordance with Rule 17f-6 under the 1940 Act. The Custodian
shall in no event be responsible for the acts and omissions of any futures
commission merchant to whom Investments are delivered pursuant to this
Section; for the sufficiency of Investments held in any Margin Account; or,
for the performance of any terms of any exchange-traded futures contracts and
commodity options.
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6.5 CONTRACTUAL OBLIGATIONS AND SIMILAR INVESTMENTS. From time to time,
the Fund's Investments may include Investments that are not ownership interests
as may be represented by certificate (whether registered or bearer), by entry in
a Securities Depository or by book entry agent, registrar or similar agent for
recording ownership interests in the relevant Investment. If the Fund shall at
any time acquire such Investments, including without limitation deposit
obligations, loan participations, repurchase agreements and derivative
arrangements, the Custodian shall (a) receive and retain, to the extent the same
are provided to the Custodian, confirmations or other documents evidencing the
arrangement; and (b) perform on the Fund's account in accordance with the terms
of the applicable arrangement, but only to the extent directed to do so by
Instruction. The Custodian shall have no responsibility for agreements running
to the Fund as to which it is not a party other than to retain, to the extent
the same are provided to the Custodian, documents or copies of documents
evidencing the arrangement and, in accordance with Instruction, to include such
arrangements in reports made to the Fund.
6.6 EXCHANGE OF SECURITIES. Unless otherwise directed by Instruction, the
Custodian shall: (a) exchange securities held for the account of the Fund for
other securities in connection with any reorganization, recapitalization,
conversion, split-up, change of par value of shares or similar event, and (b)
deposit any such securities in accordance with the terms of any reorganization
or protective plan.
6.7 SURRENDER OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian may surrender securities: (a) in temporary form for definitive
securities; (b) for transfer into the name of an entity allowable under Section
5.3; and (c) for a different number of certificates or instruments representing
the same number of shares or the same principal amount of indebtedness.
6.8 RIGHTS, WARRANTS, ETC. Pursuant to Instruction, the Custodian shall
(a) deliver warrants, puts, calls, rights or similar securities to the issuer or
trustee thereof, or to any agent of such issuer or trustee, for purposes of
exercising such rights or selling such securities, and (b) deposit securities in
response to any invitation for the tender thereof.
6.9 MANDATORY CORPORATE ACTIONS. Unless otherwise directed by
Instruction, the Custodian shall: (a) comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions or similar
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rights of securities ownership affecting securities held on the Fund's account
and promptly notify the Fund of such action, and (b) collect all stock
dividends, rights and other items of like nature with respect to such
securities.
6.10 INCOME COLLECTION. Unless otherwise directed by Instruction, the
Custodian shall collect any amount due and payable to the Fund with respect to
Investments and promptly credit the amount collected to a Principal or Agency
Account; provided, however, that the Custodian shall not be responsible for: (a)
the collection of amounts due and payable with respect to Investments that are
in default, or (b) the collection of cash or share entitlements with respect to
Investments that are not registered in the name of the Custodian or its
Subcustodians. The Custodian is hereby authorized to endorse and deliver any
instrument required to be so endorsed and delivered to effect collection of any
amount due and payable to the Fund with respect to Investments.
6.11 OWNERSHIP CERTIFICATES AND DISCLOSURE OF THE FUND'S INTEREST. The
Custodian is hereby authorized to execute on behalf of the Fund ownership
certificates, affidavits or other disclosure required under Applicable Law or
established market practice in connection with the receipt of income, capital
gains or other payments by the Fund with respect to Investments, or in
connection with the sale, purchase or ownership of Investments.
6.12 PROXY MATERIALS. The Custodian shall deliver, or cause to be
delivered, to the Fund proxy forms, notices of meeting, and any other notices
or announcements materially affecting or relating to Investments received by the
Custodian or any nominee.
6.13. TAXES. The Custodian shall, where applicable, assist the Fund in
the reclamation of taxes withheld on dividends and interest payments received by
the Fund. In the performance of its duties with respect to tax withholding and
reclamation, the Custodian shall be entitled to rely on the advice of counsel
and upon information and advice regarding the Fund's tax status that is received
from or on behalf of the Fund without duty of separate inquiry.
6.14 OTHER DEALINGS. The Custodian shall otherwise act as directed by
Instruction, including without limitation effecting the free payments of moneys
or the free delivery of securities, provided that such
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Instruction shall indicate the purpose of such payment or delivery and that the
Custodian shall record the party to whom such payment or delivery is made.
The Custodian shall attend to all nondiscretionary details in connection
with the sale or purchase or other administration of Investments, except as
otherwise directed by an Instruction, and may make payments to itself or others
for minor expenses of administering Investments under this Agreement; provided
that the Fund shall have the right to request an accounting with respect to such
expenses.
In fulfilling the duties set forth in Sections 6.6 through 6.10 above, the
Custodian shall provide to the Fund all material information pertaining to a
corporate action which the Custodian actually receives; provided that the
Custodian shall not be responsible for the completeness or accuracy of such
information. Any advance credit of cash or shares expected to be received as a
result of any corporate action shall be subject to actual collection and may,
when the Custodian deems collection unlikely, be reversed by the Custodian.
The Custodian may at any time or times in its discretion appoint (and may
at any time remove) agents (other than Subcustodians) to carry out some or all
of the administrative provisions of this Agreement (AGENTS), provided, however,
that the appointment of such agent shall not relieve the Custodian of its
administrative obligations under this Agreement.
7. CASH ACCOUNTS, DEPOSITS AND MONEY MOVEMENTS. Subject to the terms and
conditions set forth in this Section 7, the Fund hereby authorizes the Custodian
to open and maintain, with itself or with Subcustodians, cash accounts in United
States Dollars, in such other currencies as are the currencies of the countries
in which the Fund maintains Investments or in such other currencies as the Fund
shall from time
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to time request by Instruction.
7.1 TYPES OF CASH ACCOUNTS. Cash accounts opened on the books of the
Custodian (PRINCIPAL ACCOUNTS) shall be opened in the name of the Fund. Such
accounts collectively shall be a deposit obligation of the Custodian and shall
be subject to the terms of this Section 7 and the general liability provisions
contained in Section 9. Cash accounts opened on the books of a Subcustodian may
be opened in the name of the Fund or the Custodian or in the name of the
Custodian for its customers generally (AGENCY ACCOUNTS). Such deposits shall be
obligations of the Subcustodian and shall be treated as an Investment of the
Fund. Accordingly, the Custodian shall be responsible for exercising reasonable
care in the administration of such accounts but shall not otherwise be liable
for their repayment in the event such Subcustodian, by reason of its bankruptcy,
insolvency or otherwise, fails to make repayment.
7.2 PAYMENTS AND CREDITS WITH RESPECT TO THE CASH ACCOUNTS. The Custodian
shall make payments from or deposits to any of said accounts in the course of
carrying out its administrative duties, including but not limited to income
collection with respect to the Fund's Investments, and otherwise in accordance
with Instructions. The Custodian and its Subcustodians shall be required to
credit amounts to the cash accounts only when moneys are actually received in
cleared funds in accordance with banking practice in the country and currency of
deposit. Any credit made to any Principal or Agency Account before actual
receipt of cleared funds shall be provisional and may be reversed by the
Custodian in the event such payment is not actually collected. Unless otherwise
specifically agreed in writing by the Custodian or any Subcustodian, all
deposits shall be payable only at the branch of the Custodian or Subcustodian
where the deposit is made or carried.
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7.3 CURRENCY AND RELATED RISKS. The Fund bears risks of holding or
transacting in any currency. The Custodian shall not be liable for any loss or
damage arising from the applicability of any law or regulation now or hereafter
in effect, or from the occurrence of any event, which may delay or affect the
transferability, convertibility or availability of any currency in the country
(a) in which such Principal or Agency Accounts are maintained or (b) in which
such currency is issued, and in no event shall the Custodian be obligated to
make payment of a deposit denominated in a currency during the period during
which its transferability, convertibility or availability has been affected by
any such law, regulation or event. Without limiting the generality of the
foregoing, neither the Custodian nor any Subcustodian shall be required to repay
any deposit made at a foreign branch of either the Custodian or Subcustodian if
such branch cannot repay the deposit due to a cause for which the Custodian
would not be responsible in accordance with the terms of Section 9 of this
Agreement unless the Custodian or such Subcustodian expressly agrees in writing
to repay the deposit under such circumstances. All currency transactions in any
account opened pursuant to this Agreement are subject to exchange control
regulations of the United States and of the country where such currency is the
lawful currency or where the account is maintained. Any taxes, costs, charges or
fees imposed on the convertibility of a currency held by the Fund shall be for
the account of the Fund.
7.4 FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall, subject to the
terms of this Section, Settle foreign exchange transactions (including
contracts, futures, options and options on futures) on behalf and for the
account of the Fund with such currency brokers or banking institutions,
including Subcustodians, as the Fund may direct pursuant to Instructions. The
Custodian may act as principal in any
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Foreign exchange transaction with the Fund in accordance with Section 7.4.2 Of
this Agreement. The obligations of the Custodian in respect of all foreign
exchange transactions (whether or not the Custodian shall act as principal in
such transaction) shall be contingent on the free, unencumbered transferability
of the currency transacted on the actual settlement date of the transaction.
7.4.1 THIRD PARTY FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall
process foreign exchange transactions (including without limitation
contracts, futures, options, and options on futures), where any third
party acts as principal counterparty to the Fund on the same basis it
performs duties as agent for the Fund with respect to any other of the
Fund's Investments. Accordingly the Custodian shall only be responsible for
delivering or receiving currency on behalf of the Fund in respect of such
contracts pursuant to Instructions. The Custodian shall not be responsible
for the failure of any counterparty (including any Subcustodian) In such
agency transaction to perform its obligations thereunder. The Custodian (a)
shall transmit cash and instructions to and from the currency broker or
banking institution with which a foreign exchange contract or option has
been executed pursuant hereto, (b) may make free outgoing payments of cash
in the form of United States Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or confirmation that
the countervalue currency completing the foreign exchange contract has been
delivered or received or that the option has been delivered or received,
and (c) shall hold all confirmations, certificates and other documents and
agreements received by the Custodian and evidencing or relating to such
foreign exchange transactions in safekeeping. The Fund accepts full
responsibility for its use of third-party foreign exchange dealers and for
execution of said foreign exchange contracts and options and understands
that the Fund shall be responsible for any and all costs and interest
charges which may be incurred by the Fund or the Custodian as a result of
the failure or delay of third parties to deliver foreign exchange.
7.4.2 FOREIGN EXCHANGE WITH THE CUSTODIAN AS PRINCIPAL. The
Custodian may undertake foreign exchange transactions with the Fund as
principal as the Custodian and the Fund may agree from time to time. In
such event, the foreign exchange transaction will be performed in
accordance with the particular agreement of the parties, or in the event a
principal foreign exchange transaction is initiated by instruction in the
absence of specific agreement, such transaction will be performed in
accordance with the usual commercial terms of the Custodian.
7.5 DELAYS. If no event of Force Majeure shall have occurred and be
continuing and in the event that a delay shall have been caused by the
negligence or willful misconduct of the Custodian in carrying out an Instruction
to credit or transfer cash, the Custodian shall be liable to the Fund: (a) with
respect to Principal Accounts, for interest to be calculated at the rate
customarily paid on such deposit and currency
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by the Custodian on overnight deposits at the time the delay occurs for the
period from the day when the transfer should have been effected until the day it
is in fact effected; and, (b) with respect to Agency Accounts, for interest to
be calculated at the rate customarily paid on such deposit and currency by the
Subcustodian on overnight deposits at the time the delay occurs for the period
from the day when the transfer should have been effected until the day it is in
fact effected. Except is set forth in Section 8.3, the Custodian shall not be
liable for delays in carrying out such Instructions to transfer cash which are
not due to the Custodian's own negligence or willful misconduct.
7.6 ADVANCES. If, for any reason in the conduct of its safekeeping duties
pursuant to Section 5 hereof or its administration of the Fund's assets pursuant
to Section 6 hereof, the Custodian or any Subcustodian advances monies to
facilitate settlement or otherwise for benefit of the Fund (whether or not any
Principal or Agency Account shall be overdrawn either during, or at the end of,
any Business Day), the Fund hereby does:
7.6.1 acknowledge that the Fund shall have no right or title to any
Investments purchased with such Advance save a right to receive such
Investments upon: (a) the debit of the Principal or Agency Account; or, (b)
if such debit would produce an overdraft in such account, other
reimbursement of the associated Advance;
7.6.2 grant to the Custodian a security interest in all Investments; and,
7.6.3 agree that the Custodian may secure the resulting Advance by
perfecting a security interest in all Investments under Applicable Law.
Neither the Custodian nor any Subcustodian shall be obligated to advance monies
to the Fund, and in the event that such Advance occurs, any transaction giving
rise to an Advance shall be for the account and risk of the Fund and shall not
be deemed to be a transaction undertaken by the Custodian for its own account
and risk. If such Advance shall have been made by a Subcustodian or any other
person, the Custodian may assign the
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security interest and any other rights granted to the Custodian hereunder to
such Subcustodian or other person. If the Fund shall fail to repay when due the
principal balance of an Advance and accrued and unpaid interest thereon, the
Custodian or its assignee, as the case may be, shall be entitled to utilize the
available cash balance in any Agency or Principal Account and to dispose of any
Property to the extent necessary to recover payment of all principal of, and
interest on, such Advance in full. The Custodian may assign any rights it has
hereunder to a Subcustodian or third party. Any security interest in
Investments taken hereunder shall be treated as financial assets credited to
securities accounts under Articles 8 and 9 of the Uniform Commercial Code as
adopted in New York. Accordingly, the Custodian shall have the rights and
benefits of a secured creditor that is a securities intermediary under such
Articles 8 and 9.
7.7 INTEGRATED ACCOUNT. Subject to Section 16 hereof, for purposes
hereof, deposits maintained in all Principal Accounts (whether or not
denominated in United States Dollars) shall collectively constitute a single
and indivisible current account with respect to the Fund's obligations to the
Custodian, or its assignee, and balances in such Principal Accounts shall be
available for satisfaction of the Fund's obligations under this Section 7.
The Custodian shall further have a right of offset against the balances in
any Agency Account maintained hereunder to the extent that the aggregate of
all Principal Accounts is overdrawn.
8. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Subject to the provisions
hereinafter set forth in this Section 8, the Fund hereby authorizes the
Custodian to utilize Securities Depositories to act on behalf of the Fund and
to appoint from time to time and to utilize Subcustodians. With respect to
securities and funds held by a Subcustodian, either directly or indirectly
(including by a Securities Depository or Clearing Corporation),
notwithstanding any provisions of this Agreement to the contrary, payment for
securities purchased and
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delivery of securities sold may be made prior to receipt of securities or
payment, respectively, and securities or payment may be received in a form,
in accordance with (a) governmental regulations, (b) rules of Securities
Depositories and clearing agencies, (c) generally accepted trade practice in
the applicable local market, (d) the terms and characteristics of the
particular Investment, or (e) the terms of Instructions.
8.1 DOMESTIC SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain, either directly or through one or more agents
appointed by the Custodian, Investments of the Fund in any Securities
Depository in the United States, including The Depository Trust Company, The
Participants Trust Company and the Federal Reserve Book-Entry System provided
such Depository meets applicable requirements of the Federal Reserve Bank or
of the Securities and Exchange Commission. With the prior approval of Fund
which shall not be unreasonably withheld, the Custodian may, appoint any
bank as defined in Section 2(a)(5) of the 1940 Act meeting the requirements
of a custodian under Section 17(f) of the 1940 Act and the rules and
regulations thereunder, to act on behalf of the Fund as a Subcustodian for
purposes of holding Investments of the Fund in the United States. Such
appointment of domestic Subcustodians shall be subject to approval of the
Fund in accordance with Section 8.2.1.
8.2 FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain Investments of the Fund for which the primary
market is outside the United States, and such cash and cash equivalents as
are reasonably necessary, (at the direction of the Fund) to effect the Fund's
transactions in such Investments, in any non-U.S. Securities Depository
provided such Securities Depository meets the requirements of an "eligible
foreign custodian" under Rule 17f-5 promulgated under the 1940 Act, or any
successor rule or regulation ("Rule 17f-5") or which by order of the
Securities and Exchange Commission is
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exempted therefrom. Additionally, the Custodian may, at any time and from time
to time, appoint (a) any bank, trust company or other entity meeting the
requirements of an eligible foreign custodian under Rule 17f-5 or which by order
of the Securities and Exchange Commission is exempted therefrom, or (b) any bank
as defined in Section 2(a)(5) of the 1940 Act meeting the requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act on behalf of the Fund as a Subcustodian for purposes of
holding Investments of the Fund (including foreign currencies) of the Fund for
which the primary market is outside the United States, and such cash and cash
equivalents as are reasonably necessary, (at the direction of the Fund) to
effect the Fund's transactions in such Investments. Such appointment of foreign
Subcustodians shall be subject to approval of the Fund in accordance with
Subsections 8.2.1 and 8.2.2.
8.2.1 BOARD APPROVAL OF SUBCUSTODIANS. Unless and except to the
extent that review of certain matters concerning the appointment of
Subcustodians shall have been delegated to the Custodian pursuant to
Subsection 8.2.2, the Custodian shall, prior to the appointment of any
Subcustodian for purposes of holding Investments of the Fund obtain written
confirmation of the approval of the Board of Trustees of the Fund with
respect to (a) the identity of a Subcustodian, (b) the country or countries
in which, and the Securities Depositories, if any, through which, any
proposed Subcustodian is authorized to hold Investments of the Fund, and
(c) the Subcustodian agreement which shall govern such appointment. Each
such duly approved country, Subcustodian and Securities Depository shall be
listed on Appendix A attached hereto as the same may from time to time be
amended.
8.2.2 DELEGATION OF BOARD REVIEW OF SUBCUSTODIANS. From time to
time, the Custodian may offer to perform, and the Fund may accept such
offer to perform, that the Custodian perform certain reviews of
Subcustodians and of Subcustodian contracts as delegate of the Fund's
Board. In such event, the Custodian's duties and obligations with respect
to this delegated review will be performed in accordance with the terms of
SCHEDULE "1" (Foreign Custody Manager Delegation Agreement) of this
Agreement/the separate delegation agreement between the Fund and the
Custodian.
8.3 RESPONSIBILITY FOR SUBCUSTODIANS. With respect to those
Subcustodians listed on Appendix "A" hereto, the Custodian shall be liable to
the Fund for any loss or damage to the Fund caused by or resulting from the
acts omissions of any Subcustodian to the extent that such acts or omissions
would be deemed to be
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negligence, gross negligence or willful misconduct in accordance with the
terms of the relevant subcustodian agreement under the laws, circumstances
and practices prevailing in the place where the act or omission occurred. In
the countries indicated in Appendix "B" to this Agreement, the liability of
the Custodian shall be subject to the additional condition that the Custodian
actually recovers such loss or damage from the Subcustodian.
8.4 NEW COUNTRIES. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed Investment which is to be
held in a country in which no Subcustodian is authorized to act in order that
the Custodian shall, if it deems appropriate to do so, have sufficient time
to establish a subcustodial arrangement in accordance herewith. In the event,
however, the Custodian is unable to establish such arrangements prior to the
time such Investment is to be acquired, the Custodian is authorized to
designate at its discretion a local safekeeping agent, and the use of such
local safekeeping agent with respect to such Investment shall be at the sole
risk of the Fund, and accordingly the Custodian shall be responsible to the
Fund for the actions of such agent if and only to the extent the Custodian
shall have recovered from such agent for any damages caused the Fund by such
agent.
9. RESPONSIBILITY OF THE CUSTODIAN. In performing its duties and
obligations hereunder, the Custodian shall comply with all requirements of
applicable law and shall use reasonable care under the facts and
circumstances prevailing in the market where performance is effected.
Subject to the specific provisions of this Section, the Custodian shall be
liable for any direct damage incurred by the Fund in consequence of the
Custodian's negligence, bad faith or willful misconduct. In no event shall
the Custodian be liable hereunder
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for any special, indirect, punitive or consequential damages arising out of,
pursuant to or in connection with this Agreement even if the Custodian has
been advised of the possibility of such damages. It is agreed that the
Custodian shall have no duty to assess the risks inherent in the Fund's
Investments or to provide investment advice with respect to such Investments
and that the Fund as principal shall bear any risks attendant to particular
Investments such as failure of counterparty or issuer.
9.1 LIMITATIONS OF PERFORMANCE. The Custodian shall not be responsible
under this Agreement for any failure to perform its duties, and shall not
liable hereunder for any loss or damage in association with such failure to
perform, for or in consequence of the following causes:
9.1.1 FORCE MAJEURE. FORCE MAJEURE shall mean any circumstance or
event which is beyond the reasonable control of the Custodian, a
Subcustodian or any agent of the Custodian or a Subcustodian and which
adversely affects the performance by the Custodian of its obligations
hereunder, by the Subcustodian of its obligations under its Subcustody
Agreement or by any other agent of the Custodian or the Subcustodian,
including any event caused by, arising out of or involving (a) an act of
God, (b) accident, fire, water damage or explosion, (c) any computer,
system or other equipment failure or malfunction caused by any computer
virus or the malfunction or failure of any communications medium, (d) any
interruption of the power supply or other utility service, (e) any strike
or other work stoppage, whether partial or total, (f) any delay or
disruption resulting from or reflecting the occurrence of any Sovereign
Risk, (g) any disruption of, or suspension of trading in, the securities,
commodities or foreign exchange markets, whether or not resulting from or
reflecting the occurrence of any Sovereign Risk, (h) any encumbrance on the
transferability of a currency or a currency position on the actual
settlement date of a foreign exchange transaction, whether or not resulting
from or reflecting the occurrence of any Sovereign Risk, or (i) any other
cause similarly beyond the reasonable control of the Custodian.
9.1.2 COUNTRY RISK. COUNTRY RISK shall mean, with respect to the
acquisition, ownership, settlement or custody of Investments in a
jurisdiction, all risks relating to, or arising in consequence of, systemic
and market factors affecting the acquisition, payment for or ownership of
Investments including (a) the prevalence of crime and corruption, (b) the
inaccuracy or unreliability of business and financial information, (c) the
instability or volatility of banking and financial systems, or the absence
or inadequacy of an infrastructure to support such systems, (d) custody and
settlement infrastructure of the market in which such Investments are held
and transactions in such Investment take place, (e) the acts, omissions and
operation of any Securities Depository, (f) the risk of the bankruptcy or
insolvency of banking agents, counterparties to cash and securities
transactions, registrars or transfer agents, and (g) the existence of
market conditions which prevent the orderly execution or settlement of
transactions or which affect the value of assets.
9.1.3 SOVEREIGN RISK. SOVEREIGN RISK shall mean, in respect of any
jurisdiction, including the United States of America, where Investments are
acquired or held hereunder or under a
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Subcustody Agreement, (a) any act of war, terrorism, riot, insurrection or
civil commotion, (b) the imposition of any investment, repatriation or
exchange control restrictions by any Governmental Authority, (c) the
confiscation, expropriation or nationalization of any Investment by any
Governmental Authority, whether de facto or de jure, (iv) any devaluation
or revaluation of the currency, (d) the imposition of taxes, levies or
other charges affecting Investments, (vi) any change in the Applicable Law,
or (e) any other economic or political risk incurred or experienced.
9.2. LIMITATIONS ON LIABILITY. The Custodian shall not be liable for
any loss, claim, damage or other liability arising from the following causes:
9.2.1 FAILURE OF THIRD PARTIES. The failure of any third party
including: (a) any issuer of Investments or book-entry or other agent of
any issuer; (b) any counterparty with respect to any Investment, including
any issuer of exchange-traded or other futures, option, derivative or
commodities contract; (c) failure of an Investment Advisor, Foreign Custody
Manager or other agent of the Fund; or (d) failure of other third parties
similarly beyond the control or choice of the Custodian.
9.2.2 INFORMATION SOURCES. The Custodian may rely upon information
received from issuers of Investments or agents of such issuers,
information received from Subcustodians and from other commercially
reasonable sources such as commercial data bases and the like, but shall
not be responsible for specific inaccuracies in such information, provided
that the Custodian has relied upon such information in good faith, or for
the failure of any commercially reasonable information provider.
9.2.3 RELIANCE ON INSTRUCTION. Action by the Custodian or the
Subcustodian in accordance with an Instruction, even when such action
conflicts with, or is contrary to any provision of, the Fund's declaration
of trust or by-laws, Applicable Law, or actions by the trustees, or
shareholders of the Fund.
9.2.4 RESTRICTED SECURITIES. The limitations inherent in the rights,
transferability or similar investment characteristics of a given Investment
of the Fund.
10. INDEMNIFICATION. The Fund hereby indemnifies the Custodian and each
Subcustodian, and their respective agents, nominees and their partners,
employees, officers and directors, and agrees to hold each of them harmless
from and against all claims and liabilities, including counsel fees and
taxes, incurred or assessed against any of them in connection with the
performance of this Agreement and any Instruction, provided that such
performance was without negligence, bad faith or willful misconduct on the
part of the Custodian or Subcustodian. If a Subcustodian or any other person
indemnified under the preceding sentence, gives written
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notice of claim to the Custodian, the Custodian shall promptly give written
notice to the Fund.
11. REPORTS AND RECORDS. The Custodian shall:
11.1 create and maintain records relating to the performance of
its obligations under this Agreement;
11.2 make available to the Fund, its auditors, agents and
employees, during regular business hours of the Custodian, upon reasonable
request, all records maintained by the Custodian pursuant to Subsection
11.1 above, subject, however, to all reasonable security requirements of
the Custodian then applicable to the records of its custody customers
generally; and
11.3 make available to the Fund all electronic reports; it being
understood that the Custodian shall not be liable hereunder for the
inaccuracy or incompleteness thereof or for errors in any information
included therein.
The Fund shall examine all records, howsoever produced or transmitted,
promptly upon receipt thereof and notify the Custodian promptly of any
discrepancy or error therein. Unless the Fund delivers written notice of any
such discrepancy or error within 60 days after its receipt thereof, such
records shall be deemed to be true and accurate. It is understood that the
Custodian now obtains and will in the future obtain information on the value
of assets from outside sources which may be utilized in certain reports made
available to the Fund. The Custodian deems such sources to be reliable but it
is acknowledged and agreed that the Custodian does not verify nor represent
nor warrant as to the accuracy or completeness of such information and
accordingly shall be without liability in selecting and using such sources
and furnishing such information, provided such sources are selected and
information is utilized with reasonable care.
The books and records pertaining to the Fund and each designated series
or portfolio of the Fund, which are in the possession of the Custodian shall
be the property of the Fund. Such books and records shall be prepared and
maintained as required by the 1940 Act and other applicable securities laws,
rules and
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regulations. The Custodian shall, send copies of statements of custodial
activity to the Fund and to its recordkeeping agent. Such statements shall
include; statement of cash account(s) including transfers to and from such
account(s), statements regarding receipt and delivery of securities and
statements reflecting month end activity, such statements may also be
available through BBH&Co.'s BIDS system.
The Custodian shall enter into and shall maintain in effect, at no
additional expense to the Fund, with appropriate parties one or more
agreements making reasonable provision for emergency use of electronic data
processing equipment to the extent appropriate equipment is available. In
the event of equipment failures, the Custodian shall, at no additional
expense to the Fund, take reasonable steps to minimize service interruptions
but shall have no liability with respect thereto.
12. MISCELLANEOUS.
12.1 PROXIES, ETC. The Fund will promptly execute and deliver,
upon request, such proxies, powers of attorney or other instruments as may be
reasonably necessary or desirable for the Custodian to provide, or to cause
any Subcustodian to provide, custody services to the Fund hereunder.
12.2 ENTIRE AGREEMENT. Except as specifically provided herein,
this Agreement constitutes the entire agreement between the Fund and the
Custodian with respect to the subject matter hereof. Accordingly, this
Agreement supersedes any custody agreement or other oral or written
agreements heretofore in effect between the Fund and the Custodian with
respect to the custody of the Fund's Investments.
12.3 WAIVER AND AMENDMENT. No provision of this Agreement may be
waived, amended or modified, and no addendum to this Agreement shall be or
become effective, or be waived, amended or
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modified, except by an instrument in writing executed by the party against
which enforcement of such waiver, amendment or modification is sought;
provided, however, that an Instruction, whether or not such Instruction shall
constitute a waiver, amendment or modification for purposes hereof, shall be
deemed to have been accepted by the Custodian when it commences actions
pursuant thereto or in accordance therewith.
12.4 GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH, AND BE GOVERNED BY THE LAWS OF, THE STATE OF
NEW YORK, WITHOUT GIVING EFFECT TO THE LAWS OF CONFLICTS OF LAW OF SUCH
STATE. THE PARTIES HERETO IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION
OF THE COURTS OF THE STATE OF NEW YORK AND THE FEDERAL COURTS LOCATED IN NEW
YORK CITY IN THE BOROUGH OF MANHATTAN WITH RESPECT TO MATTERS RESULTING FROM
THIS AGREEMENT.
12.5 NOTICES. Notices and other writings contemplated by this
Agreement, other than Instructions, shall be delivered (a) by hand, (b) by
first class registered or certified mail, postage prepaid, return receipt
requested, (c) by a nationally recognized overnight courier or (d) by
facsimile transmission, provided that any notice or other writing sent by
facsimile transmission shall also be mailed, postage prepaid, to the party to
whom such notice is addressed. All such notices shall be addressed, as
follows:
If to the Fund:
Attn: Global Operations
Nicholas Applegate Mutual Funds
600 West Broadway San Diego, California 92101
Telephone: 800-551-8045
Facsimile: 619-645-4078
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If to the Custodian:
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Attn: Manager, Securities Department
Telephone: (617) 772-1818
Facsimile: (617) 772-2263,
or such other address as the Fund or the Custodian may from time to time
designate in writing to the other.
12.6 HEADINGS. Paragraph headings included herein are for
convenience of reference only and shall not modify, define, expand or limit
any of the terms or provisions hereof.
12.7 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original. This Agreement
shall become effective when one or more counterparts have been signed and
delivered by the Fund and the Custodian.
12.8 CONFIDENTIALITY. The parties hereto agree that each shall
treat confidentially the terms and conditions of this Agreement and all
information provided by each party to the other regarding its business and
operations. All confidential information provided by a party hereto shall be
used by any other party hereto solely for the purpose of rendering or
obtaining services pursuant to this Agreement and, except as may be required
in carrying out this Agreement, shall not be disclosed to any third party
without the prior consent of such providing party. The foregoing shall not
be applicable to any information that is publicly available when provided or
thereafter becomes publicly available other than through a breach of this
Agreement, or that is required to be disclosed by or to any bank examiner of
the Custodian or any
25
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Subcustodian, any regulatory authority, any auditor of the parties hereto, or by
judicial or administrative process or otherwise by Applicable Law.
13. DEFINITIONS. For the purpose of this Agreement, the following defined
terms will have the respective meanings set forth below.
13.1 ADVANCE shall mean any extension of credit by or through the
Custodian or by or through any Subcustodian and shall include amounts paid to
third parties for account of the Fund or in discharge of any expense, tax or
other item payable by the Fund.
13.2 AGENCY ACCOUNT shall mean any deposit account opened on the
books of a Subcustodian or other banking institution in accordance with
Section 7.1.
13.3 AGENT shall have the meaning set forth in the last system of
Section 6.
13.4 APPLICABLE LAW shall mean with respect to each jurisdiction,
all (a) laws, statutes, treaties, regulations, guidelines (or their
equivalents); (b) orders, interpretations licenses and permits; and (c)
judgments, decrees, injunctions writs, orders and similar actions by a court
of competent jurisdiction; compliance with which is required or customarily
observed in such jurisdiction.
13.5 AUTHORIZED PERSON shall mean any person or entity authorized
to give Instructions on behalf of the Fund in accordance with Section 4.1.
13.6 BOOK-ENTRY AGENT shall mean an entity acting as agent for the
issuer of Investments for purposes of recording ownership or similar
entitlement to Investments, including without limitation a transfer agent or
registrar.
13.7 CLEARING CORPORATION shall mean any entity or system
established for purposes of providing securities settlement and movement and
associated functions for a given market.
13.8 Delegation Agreement shall mean any separate agreement
entered into between the Custodian and the Fund or its authorized
representative with respect to certain matters concerning the appointment and
administration of Subcustodians delegated to the Custodian pursuant to Rule
17f-5.
13.9 FOREIGN CUSTODY MANAGER shall mean the Fund's foreign custody
manager appointed pursuant to Rule 17f-5.
13.10 FUNDS TRANSFER SERVICES AGREEMENT shall mean any separate
agreement entered into between the Custodian and the Fund or its authorized
representative with respect to certain matters concerning the processing of
payment orders from Principal Accounts of the Fund.
13.11 INSTRUCTION(S) shall have the meaning assigned in Section 4.
13.12 INVESTMENT ADVISOR shall mean any person or entity who is an
Authorized Person to give
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Instructions with respect to the investment and reinvestment of the Fund's
Investments.
13.13 INVESTMENTS shall mean any investment asset of the Fund,
including without limitation securities, bonds, notes, and debentures as well
as receivables, derivatives, contractual rights or entitlements and other
intangible assets.
13.14 MARGIN ACCOUNT shall have the meaning set forth in Section
6.4 hereof.
13.15 PRINCIPAL ACCOUNT shall mean deposit accounts of the Fund
carried on the books of BBH&Co. As principal in accordance with Section 7.
13.16 SAFEKEEPING ACCOUNT shall mean an account established on the
books of the Custodian or any Subcustodian for purposes of segregating the
interests of the Fund (or clients of the Custodian or Subcustodian) from the
assets of the Custodian or any Subcustodian.
13.17 SECURITIES DEPOSITORY shall mean a central or book entry
system or agency established under Applicable Law for purposes of recording
the ownership and/or entitlement to investment securities for a given market.
13.18 SUBCUSTODIAN shall mean each foreign bank appointed by the
Custodian pursuant to Section 8, but shall not include Securities
Depositories.
13.19 TRI-PARTY AGREEMENT shall have the meaning set forth in
Section 6.4 hereof.
13.20 1940 ACT shall mean the Investment Company Act of 1940, as
amended.
14. COMPENSATION. The Fund agrees to pay to the Custodian (a) a fee in an
amount set forth in the fee letter between the Fund and the Custodian in
effect on the date hereof or as amended from time to time, and (b) all
reasonable out-of-pocket expenses incurred by the Custodian, including the
fees and expenses of all Subcustodians, and payable from time to time.
Amounts payable by the Fund under and pursuant to this Section 14 shall be
payable by wire transfer to the Custodian at BBH&Co. in New York, New York.
15. TERMINATION. This Agreement may be terminated by either party in
accordance with the provisions of this Section. The provisions of this
Agreement and any other rights or obligations incurred or accrued by any
party hereto prior to termination of this Agreement shall survive any
termination of this Agreement.
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15.1 NOTICE AND EFFECT. This Agreement may be terminated by either
party by written notice effective no sooner than seventy-five days
following the date that notice to such effect shall be delivered to other
party at its address set forth in paragraph 12.5 hereof.
15.2 SUCCESSOR CUSTODIAN. In the event of the appointment of a
successor custodian, it is agreed that the Investments of the Fund held by
the Custodian or any Subcustodian shall be delivered to the successor
custodian in accordance with reasonable Instructions. The Custodian agrees
to cooperate with the Fund in the execution of documents and performance of
other actions necessary or desirable in order to facilitate the succession
of the new custodian. If no successor custodian shall be appointed, the
Custodian shall in like manner transfer the Fund's Investments in
accordance with Instructions.
15.3 DELAYED SUCCESSION. If no Instruction has been given as of the
effective date of termination, Custodian may at any time on or after such
termination date and upon ten days written notice to the Fund either (a)
deliver the Investments of the Fund held hereunder to the Fund at the
address designated for receipt of notices hereunder; or (b) deliver any
investments held hereunder to a bank or trust company having a
capitalization of $2 million United States Dollars or equivalent and
operating under the Applicable law of the jurisdiction where such
Investments are located and qualified to act as a Custodian or Subcustodian
of the Funds' Investments under the 1940 Act, such delivery to be at the
risk of the Fund. In the event that Investments or moneys of the Fund
remain in the custody of the Custodian or its Subcustodians after the date
of termination owing to the failure of the Fund to issue Instructions with
respect to their disposition or owing to the fact that such disposition
could not be accomplished in accordance with such Instructions despite
diligent efforts of the Custodian, the Custodian shall be entitled to
compensation for its services with respect to such Investments and moneys
during such period as the Custodian or its Subcustodians retain possession
of such items and the provisions of this Agreement shall remain in full
force and effect until disposition in accordance with this Section is
accomplished.
16. LIMITATIONS ON LIABILITY. Pursuant to the Fund's Declaration of Trust,
no trustee, officer, employee or agent of the Fund shall be subject to any
personal liability whatsoever, in his or her official or individual capacity,
to any person, including the Custodian or any Subcustodian, other than to the
Fund or its shareholders, in connection with Fund property or the affairs of
the Fund, save only that arising from his or her bad faith, willful
misfeasance, gross negligence or reckless disregard of his or her duty to
such person; and all persons shall look solely to the Fund property for
satisfaction of claims of any nature against a trustee, officer, employee or
agent of the Fund arising in connection with the affairs of the Fund.
Moreover, notwithstanding any other provision of this Agreement to the
contrary, the debts, liabilities,
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obligations and expenses incurred, contracted for or otherwise existing with
respect to a designated series or Portfolio of the Fund shall be enforceable
against the assets and property of such series or Portfolio only, and not
against the assets and property of any other series or Portfolio.
29
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed as of the date first above written.
NICHOLAS APPLEGATE MUTUAL FUNDS
on behalf of each of the portfolios listed on the attached Appendix "C"
By:
-------------------------------
By: BROWN BROTHERS HARRIMAN & CO.
By:
-------------------------------
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EXHIBIT 8.7
AMENDMENT TO THE CUSTODIAN AGREEMENT
AMENDMENT entered into as of this _____ day of ____________, 1998 to the
Custodian Agreement between Nicholas Applegate Mutual Funds (the "Fund") on
behalf of each of the portfolios listed on the attached Appendix "C" as the same
may be amended from time to time (each a Portfolio and collectively the
Portfolios) and BROWN BROTHERS HARRIMAN & CO. (the "Custodian") dated as of
____________________(the "Agreement").
In consideration of the Custodian's offering subcustodial services to the
Portfolios in Russia, the Fund and the Custodian agree that the Agreement is
hereby amended as follows:
1. Section 5. SAFEKEEPING OF FUND ASSETS is amended by the addition of
the following phrase at the end of said Section:
"The Custodian's responsibility for safekeeping equity securities of
Russian issuers ("Russian Equities") hereunder shall be limited to the
safekeeping of relevant share extracts from the share registration books
maintained by the entities providing share registration services to issuers
of Russian Equities (each a "Registrar") indicating an investor's ownership
of such securities (each a "Share Extract")."
2. Section 5.4 BOOK ENTRY ASSETS, is amended by the addition of the
following at the end of said Section:
"With respect to Russian Equities, the Custodian shall instruct a
Subcustodian to endeavor to assure that registration thereof shall be
reflected on the books of the issuer's Registrar, subject to the following
conditions, but shall in no event be liable for losses or costs incurred as
a result of delays or failures in the registration process, including
without limitation the inability to obtain or enforce relevant Share
Extracts. Such registration may be in the name of a nominee of a
Subcustodian. In the event registration is in the name of a Portfolio, the
Fund hereby acknowledges that only the Custodian or Subcustodian may give
instructions to the Registrar to transfer or engage in other transactions
involving the Russian Equities so registered.
A Subcustodian may from time to time enter into contracts with
Registrars with respect to the registration of Russian Equities ("Registrar
Contracts"). Such Registrar Contracts may provide for (i) regular share
confirmations by the Subcustodian, (ii) reregistrations within set
timeframes, (iii) use of a Subcustodian's nominee name, (iv) direct access
by auditors of the Subcustodian or its clients to share registers, and (v)
specification of the Registrar's responsibilities and liabilities. It is
hereby acknowledged and agreed that the Custodian does not represent or
warrant that such Registrar Contracts
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<PAGE>
are enforceable.
If the Fund instructs the Custodian to settle a purchase of a Russian
Equity, the Custodian will instruct a Subcustodian to endeavor on a best
efforts basis to reregister the Russian Equity and obtain a Share Extract
in a timely manner.
After completion of reregistration of a Russian Equity in respect of
which a Subcustodian has entered into a Registrar Contract, the Custodian
shall instruct the Subcustodian to monitor such registrar on a best efforts
basis and to notify the Custodian upon the Subcustodian's obtaining
knowledge of the occurrence of any of the following events ("Registrar
Events"): (i) a Registrar has eliminated a shareholder from the register or
has altered registration records; (ii) a Registrar has refused to register
securities in the name of a particular purchaser and the purchaser or
seller has alleged that the registrar's refusal to so register was
unlawful; (iii) a Registrar holds for its own account shares of an issuer
for which it serves as registrar; (iv) if a Registrar Contract is in effect
with a Registrar, the Registrar notifies the Subcustodian that it will no
longer be able materially to comply with the terms of the Registrar
Contract; or (v) if a Registrar Contract is in effect with a Registrar,
the Registrar has materially breached such Contract. The Custodian shall
inform the Fund of the occurrence of a Registrar Event provided the
Custodian has in fact received actual notice thereof from the Subcustodian.
It shall be the sole responsibility of the Fund to contact the
Custodian prior to executing any transaction in a Russian Equity to
determine whether a Registrar Contract exists in respect of such issuer.
If the Fund instructs the Custodian by Proper Instruction to settle a
purchase of a Russian Equity in respect of which the Subcustodian has not
entered into a Registrar Contract, then the Custodian shall instruct the
Subcustodian to endeavor to settle such transaction in accordance with the
Proper Instruction and with the provisions of Section 6.1 of this
Agreement, notwithstanding the absence of any such Registrar Contract and
without the Custodian being required to notify the Fund that no such
Registrar Contract is then in effect, and it being understood that neither
the Custodian nor the Subcustodian shall be required to follow the
procedure set forth in the second preceding paragraph."
3. Section 6.1 PURCHASE OF INVESTMENTS, is amended by the addition of
the following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of purchases of
securities in Russia. Unless otherwise instructed by Proper Instructions
acceptable to the Custodian, the Custodian shall only authorize a
Subcustodian to make payment for purchases of Russian Equities upon receipt
of the relevant Share Extract in respect of the Portfolio's purchases. With
respect to securities other than Russian Equities, settlement of purchases
shall be made in accordance with securities processing or settlement
practices which the Custodian in its discretion determines to be a market
practice. The Custodian shall only be responsible for securities purchased
upon actual receipt of such securities at the premises of its Subcustodian,
provided that the Custodian's responsibility for securities represented by
Share Extracts shall be limited to the safekeeping of the relevant Share
Extract upon
2
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actual receipt of such Share Extract at the premises of the Subcustodian."
4. Section 6.2 SALE OF INVESTMENTS is amended by the addition of the
following at the end of said Section:
"Without limiting the generality of the foregoing, the following
provisions shall apply with respect to settlement of sales of securities in
Russia. Unless otherwise expressly instructed by Proper Instructions
acceptable to the Custodian, settlement of sales of securities shall be
made in accordance with securities processing or settlement practices which
the Custodian in its discretion determines to be a market practice. The
Fund hereby expressly acknowledges that such market practice might require
delivery of securities prior to receipt of payment and that the Fund bears
the risk of payment in instances where delivery of securities is made prior
to receipt of payment therefor in accordance with Proper Instructions
received by the Custodian or pursuant to the Custodian's determination in
its discretion that such delivery is in accordance with market practice.
The Custodian shall not be responsible for any securities delivered from
the premises of the Subcustodian from the time they leave such premises."
5. Section 5.1 USE OF SECURITIES DEPOSITORIES is amended by the addition
of the following at the end of said Section:
"With respect to Russia, the Fund hereby expressly acknowledges that a
Subcustodian for Russian securities may from time to time delegate any of
its duties and responsibilities to any securities depository, clearing
agency, share registration agent or sub-subcustodian (collectively,
"Russian Agent") in Russia, including without limitation Rosvneshtorgbank
(also called Vneshtorgbank RF) ("VTB"). The Fund acknowledges that the
rights of the Subcustodian against any such Russian Agent may consist only
of a contractual claim against the Russian Agent.
Notwithstanding any provision of this Agreement to the contrary,
neither the Custodian nor the Subcustodian shall be responsible or liable
to the Fund or its shareholders for the acts or omissions of any such
Russian Agent. In the event of a loss of securities or cash held on behalf
of a Portfolio through any Russian Agent, the Custodian shall not be
responsible to the Fund or its shareholders unless and to the extent it in
fact recovers from the Subcustodian."
6. Section 6.13 TAXES is amended by the insertion of the following at
the end of said Section:
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"It is agreed that the Fund shall be responsible for preparation and
filing of tax returns, reports and other documents on any activities it
undertakes in Russia which are to be filed with any relevant governmental
or other authority and for the payment of any taxes, levies, duties or
similar liability the Fund incurs in respect of property held or sold in
Russia or of payments or distributions received in respect thereof in
Russia. Accordingly, the Fund hereby agrees to indemnify and hold harmless
the Custodian from any loss, cost or expense resulting from the imposition
or assessment of any such tax, duty, levy or liability or any expenses
related thereto."
7. A new Section 15 RISK DISCLOSURE ACKNOWLEDGMENT, is added at the end
of the present Section 15.3:
"The Fund hereby acknowledges that it has received, has read and has
understood the Custodian's Risk Disclosure Statement, a copy of which is
attached hereto and is incorporated herein by reference. The Fund further
acknowledges that the Risk Disclosure Statement is not comprehensive, and
warrants and represents to the Custodian that it has undertaken its own
review of the risks associated with investment in Russia and has concluded
that such investment is appropriate for the Fund and in no way conflicts
with the Fund's constitutive documents, investment objective, duties to its
shareholders or with any regulatory requirements applicable to the Fund."
Except as amended above, all the provisions of the Agreement as heretofore
in effect shall remain in full force and effect.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
Nicholas Applegate Mutual Funds (the "Fund")
on behalf of each of the portfolios listed on
the attached Appendix "C" as the same may be
amended from time to time (each a Portfolio
and collectively the Portfolios) BROWN BROTHERS HARRIMAN & CO.
- ----------------------------- -----------------------------
Name: Name:
Title: Title:
5
<PAGE>
EXHIBIT 8.8
FOREIGN CUSTODY MANAGER DELEGATION AGREEMENT
AGREEMENT made as of this 1st day of June 1998 between Nicholas Applegate
Mutual Funds, a management investment company registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "Act"), acting through its Board of Trustees or its duly
appointed representative on behalf of the portfolios listed on the attached
Appendix "C" as the same may be amended from time to time (the "Fund"), and
BROWN BROTHERS HARRIMAN & CO., a New York limited partnership with an office in
Boston, Massachusetts (the "Delegate").
WITNESSETH
WHEREAS the Fund has appointed the Delegate as custodian (the "Custodian")
of certain of the Fund's Assets pursuant to a Custodian Agreement dated June 1,
1998 (the "Custodian Agreement");
WHEREAS the Fund may, from time to time, determine to invest and maintain
some or all of the Fund's Assets outside the United States;
WHEREAS the Board of Trustees of the Fund (the "Board") wishes to delegate
to the Delegate certain functions with respect to the custody of Fund's Assets
outside the United States;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Fund and the Delegate agree as follows. Capitalized
terms shall have the meaning indicated in Section 12 unless otherwise indicated.
1. MAINTENANCE OF FUND'S ASSETS ABROAD. The Fund, acting through its
Board or its duly authorized representative, hereby instructs Delegate pursuant
to the terms of the Custodian Agreement to place and maintain the Fund's Assets
within the countries listed in Schedule 1 attached hereto (as such Schedule may
be amended from time to time in accordance herewith). Such instruction shall be
deemed to include an instruction to use any Compulsory Securities Depository in
any such country and shall represent on instruction under the terms of the
Custodian Agreement. Countries may be added to Schedule 1 by written
instruction of the Fund that is accepted in writing by the Delegate as an
amendment to Schedule 1. With respect to amendments adding countries to
Schedule 1, the Fund acknowledges that - (a) the Delegate shall perform services
hereunder only with respect to the countries where it provides custodial
services to the Fund under the Custodian Agreement; (b) depending on
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conditions in the particular country, advance notice may be required before the
Delegate shall be able to perform its duties hereunder in or with respect to
such country (such advance notice to be reasonable in light of the specific
facts and circumstances attendant to performance of duties in such country); and
(c) nothing in this Agreement shall require the Delegate to provide delegated or
custodial services in any country not listed in Schedule 1 until such amended
Schedule 1 has been accepted by the Delegate in accordance herewith.
2. DELEGATION. Pursuant to the provisions of Rule 17f-5 under the Act
as amended, the Board hereby delegates to the Delegate, and the Delegate hereby
accepts such delegation and agrees to perform, only those duties set forth in
this Agreement concerning the safekeeping of the Fund's Assets in each of the
countries set forth in Schedule 1 hereto as amended from time to time. The
Delegate is hereby authorized to take such actions on behalf of or in the name
of the Fund as are reasonably required to discharge its duties under this
Agreement, including, without limitation, to cause the Fund's Assets to be
placed with a particular Eligible Foreign Custodian in accordance herewith. The
Fund confirms to the Delegate that the Fund or its investment adviser has
considered the Sovereign Risk and Country Risk as part of its continuing
investment decision process, including such factors as may be reasonably related
to the systemic risk of maintaining the Fund's Assets in a particular country,
including, but not limited to, financial infrastructure, prevailing custody and
settlement systems and practices (including the use of any Compulsory Securities
Depository), and the laws relating to the safekeeping and recovery of the Fund's
Assets held in custody pursuant to the terms of the Custodian Agreement.
3. SELECTION OF ELIGIBLE FOREIGN CUSTODIAN AND CONTRACT ADMINISTRATION.
The Delegate shall perform the following duties with respect to the selection of
Eligible Foreign Custodians and administration of certain contracts governing
the Fund's foreign custodial arrangements:
(a) SELECTION OF ELIGIBLE FOREIGN CUSTODIAN. The Delegate shall place and
maintain the Fund's Assets with an Eligible Foreign Custodian; PROVIDED that
the Delegate shall have determined that the Fund's Assets will be subject to
reasonable care based on the standards applicable to custodians in the relevant
market after considering all factors relevant to the safekeeping of such assets
including without limitation:
(i) The Eligible Foreign Custodian's practices, procedures, and
internal controls, including, but not limited to, the physical protections
available for certificated securities (if applicable), the controls and
procedures for dealing with any Securities Depository, the method of
keeping custodial records, and the security and data protection practices;
(ii) Whether the Eligible Foreign Custodian has the requisite
financial strength to provide reasonable care for the Fund's Assets;
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(iii) The Eligible Foreign Custodian's general reputation and
standing and, in the case of a Securities Depository, the depository's
operating history and number of participants; and
(iv) Whether the Fund will have jurisdiction over and be able to
enforce judgments against the Eligible Foreign Custodian, such as by virtue
of the existence of any offices of such Eligible Foreign Custodian in the
United States or such Eligible Foreign Custodian's appointment of an agent
for service of process in the United States or consent to jurisdiction in
the United States.
The Delegate shall be required to make the foregoing determination to the best
of its knowledge and belief based only on information reasonably available to
it.
(b) CONTRACT ADMINISTRATION. In the case of an Eligible Foreign Custodian
that is not a Securities Depository or a U.S. Bank, the Delegate shall cause
that the foreign custody arrangements shall be governed by a written contract
that the Delegate has determined will provide reasonable care for Fund assets
based on the standards applicable to custodians in the relevant market. Each
such contract shall, except as set forth in the last paragraph of this
subsection (b), include provisions that provide:
(i) For indemnification or insurance arrangements (or any
combination of the foregoing) such that the Fund will be adequately
protected against the risk of loss of assets held in accordance with such
contract;
(ii) That the Fund's Assets will not be subject to any right,
charge, security interest, lien or claim of any kind in favor of the
Eligible Foreign Custodian or its creditors except a claim of payment for
their safe custody or administration or, in the case of cash deposits,
liens or rights in favor of creditors of such Custodian arising under
bankruptcy, insolvency or similar laws;
(iii) That beneficial ownership of the Fund's Assets will be
freely transferable without the payment of money or value other than for
safe custody or administration;
(iv) That adequate records will be maintained identifying the
Fund's Assets as belonging to the Fund or as being held by a third party
for the benefit of the Fund;
(v) That the Fund's independent public accountants will be given
access to those records described in (iv) above or confirmation of the
contents of such records; and
(vi) That the Delegate will receive sufficient and timely
periodic reports with respect to the safekeeping of the Fund's Assets,
including, but not limited to, notification of any transfer to or from the
Fund's account or a third party account containing the Fund's Assets.
Such contract may contain, in lieu of any or all of the provisions
specified in this Section 3 (b), such other
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provisions that the Delegate determines will provide, in their entirety,
the same or a greater level of care and protection for the Fund's Assets as
the specified provisions, in their entirety.
(c) LIMITATION TO DELEGATED SELECTION. Notwithstanding anything in this
Agreement to the contrary, the duties of Delegate under this Section 3 shall
apply only to Eligible Foreign Custodians selected by the Delegate and shall not
apply to Compulsory Securities Depositories or to any Eligible Foreign Custodian
that the Delegate is directed to use pursuant to Section 7.
4. MONITORING. The Delegate shall establish a system to monitor at
reasonable intervals (but at least annually) the appropriateness of maintaining
the Fund's Assets with each Eligible Foreign Custodian that has been selected by
the Delegate pursuant to Section 3 of this Agreement. The Delegate shall
monitor the continuing appropriateness of placement of the Fund's Assets in
accordance with the criteria established under Section 3(a) of this Agreement.
The Delegate shall monitor the continuing appropriateness of the contract
governing the Fund's arrangements in accordance with the criteria established
under Section 3(b) of this Agreement.
5. REPORTING. At least annually and more frequently as mutually
agreed between the parties, the Delegate shall provide to the Board and the
Investment Advisor written reports specifying placement of the Fund's Assets
with each Eligible Foreign Custodian selected by the Delegate pursuant to
Section 3 of this Agreement and shall promptly report as to any material changes
to such foreign custody arrangements. Delegate will prepare such a report with
respect to any Eligible Foreign Custodian that the Delegate has been instructed
to use pursuant to Section 7 only to the extent specifically agreed with respect
to the particular situation.
6. WITHDRAWAL OF FUND'S ASSETS. If the Delegate determines that an
arrangement with a specific Eligible Foreign Custodian selected by the Delegate
under Section 3 of this Agreement no longer meets the requirements of said
Section, Delegate shall withdraw the Fund's Assets from the non-complying
arrangement as soon as reasonably practicable; PROVIDED, however, that if in the
reasonable judgment of the Delegate, such withdrawal would require liquidation
of any of the Fund's Assets or would materially impair the liquidity, value or
other investment characteristics of the Fund's Assets, it shall be the duty of
the Delegate to
Page 4
<PAGE>
provide information regarding the particular circumstances and to act only in
accordance with Instructions of the Fund with respect to such liquidation or
other withdrawal.
7. DIRECTION AS TO ELIGIBLE FOREIGN CUSTODIAN. Notwithstanding this
Delegation Agreement, the Fund, acting through its Board, its Investment Adviser
or its other authorized representative, may direct the Delegate to place and
maintain the Fund's Assets with a particular Eligible Foreign Custodian. In
such event, the Delegate shall be entitled to rely on any such instruction as a
Proper Instruction under the terms of the Custodian Agreement and shall have no
duties under this Delegation Agreement with respect to such arrangement save
those that it may undertake specifically in writing with respect to each
particular instance.
8. STANDARD OF CARE. In carrying out its duties under this Agreement,
the Delegate agrees to exercise reasonable care, prudence and diligence such as
a person having responsibility for safekeeping the Fund's Assets would exercise.
9. REPRESENTATIONS. The Delegate hereby represents and warrants that
it is a U.S. Bank and that this Agreement has been duly authorized, executed and
delivered by the Delegate and is a legal, valid and binding agreement of the
Delegate.
The Fund hereby represents and warrants that its Board has determined that
it is reasonable to rely on the Delegate to perform the delegated
responsibilities provided for herein and that this Agreement has been duly
authorized, executed and delivered by the Fund and is a legal, valid and binding
agreement of the Fund.
10. EFFECTIVENESS; TERMINATION. This Agreement shall be effective as of
the date on which this Agreement shall have been accepted by the Delegate, as
indicated by the date set forth below the Delegate's signature. This Agreement
may be terminated at any time, without penalty, by written notice from the
terminating party to the non-terminating party. Such termination shall be
effective on the 30th day following the date on which the non-terminating party
shall receive the foregoing notice. The foregoing to the contrary
notwithstanding, this Agreement shall be deemed to have been terminated
concurrently with the termination of the Custodian Agreement.
11. NOTICES. Notices and other communications under this Agreement are
Page 5
<PAGE>
to be made in accordance with the arrangements designated for such purpose under
the Custodian Agreement unless otherwise indicated in a writing referencing this
Agreement and executed by both parties.
12. DEFINITIONS. Capitalized terms in this agreement have the following
meanings:
COMPULSORY SECURITIES DEPOSITORY - shall mean a Securities Depository the
use of which is mandatory (i) under applicable law or regulation; (ii)
because securities cannot be withdrawn from the depository; or, (iii)
because maintaining securities outside the Securities Depository is
not consistent with prevailing custodial practices.
b. COUNTRY RISK - shall have the meaning set-forth in Section 9.1.2 of
the Custodian Agreement.
c. ELIGIBLE FOREIGN CUSTODIAN - shall have the meaning set forth in Rule
17f-5(a)(1) and shall also include a U.S. Bank.
d. FUND'S ASSETS - shall mean any of the Fund's investments (including
foreign currencies) for which the primary market is outside the United
States, and such cash and cash equivalents as are reasonably necessary to
effect the Fund's transactions in such investments.
e. PROPER INSTRUCTIONS - shall have the meaning set forth in the
Custodian Agreement.
f. SECURITIES DEPOSITORY - shall have the meaning set forth in Rule
17f-5(a)(6).
g. SOVEREIGN RISK - shall have the meaning set forth in Section 9.1.3 of
the Custodian Agreement.
h. U.S. BANK - shall mean a bank which qualifies to serve as a custodian
of assets of investment companies under Section 17(f) of the Act.
13. GOVERNING LAW AND JURISDICTION. This Agreement shall be construed
in
Page 6
<PAGE>
accordance with the laws of the State of New York. The parties hereby submit to
the exclusive jurisdiction of the Federal courts sitting in the State of New
York or of the state courts of such State.
14. FEES. Delegate shall perform its functions under this agreement
for the compensation determined under the Custodian Agreement.
15. INTEGRATION. This Agreement sets forth all of the Delegate's duties
with respect to the selection and monitoring of Eligible Foreign Custodians, the
administration of contracts with Eligible Foreign Custodians, the withdrawal of
assets from Eligible Foreign Custodians and the issuance of reports in
connection with such duties. The terms of the Custodian Agreement (including
without limitation the provisions of Section 8.2 thereof) shall apply generally
as to matters not expressly covered in this Agreement, including dealings with
the Eligible Foreign Custodians in the course of discharge of the Delegate's
obligations under the Custodian Agreement.
Page 7
<PAGE>
NOW THEREFORE, the parties have caused this Agreement to be executed by its duly
authorized representatives, effective as of the date first above written.
BROWN BROTHERS HARRIMAN & CO. Nicholas Applegate Mutual Funds on
behalf of the Portfolios listed on the
attached Appendix "C"
By: By:
------------------------------- -------------------------------
Name: Name:
-------------------- ------------------------
Title: Title:
-------------------- ------------------------
Date: Date:
-------------------- ------------------------
Page 8
<PAGE>
SCHEDULE 1
TO NICHOLAS APPLEGATE MUTUAL FUNDS
DELEGATION AGREEMENT
AS OF JUNE ______, 1998
ARGENTINA
AUSTRALIA
AUSTRIA
BAHRAIN
BANGLADESH
BELGIUM
BERMUDA
BOLIVIA
BOTSWANA
BRAZIL
BULGARIA
CANADA
CHILE
CHINA
COLOMBIA
CZECH REPUBLIC
DENMARK
ECUADOR
EGYPT
FINLAND
FRANCE
GERMANY
GHANA
GREECE
HONG KONG
HUNGARY
INDIA
INDONESIA
IRELAND
ISRAEL
ITALY
JAPAN
JORDAN
KENYA
KOREA
LATVIA
LEBANON
LUXEMBOURG
MALAYSIA
MAURITIUS
MEXICO
NAMIBIA
NETHERLANDS
NEW ZEALAND
NORWAY
OMAN
PAKISTAN
PANAMA
Page 9
<PAGE>
PERU
PHILIPPINES
POLAND
PORTUGAL
ROMANIA
RUSSIA
SINGAPORE
SLOVAKIA
SOUTH AFRICA
SPAIN
SRI LANKA
SWAZILAND
SWEDEN
SWITZERLAND
TAIWAN
THAILAND
TURKEY
UKRAINE
UNITED KINGDOM
URUGUAY
VENEZUELA
ZAMBIA
ZIMBABWE
Page 10
<PAGE>
Exhibit 9.7
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
August 14, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies and Gentlemen:
Reference is made to the Transfer Agency and Service Agreement between
us dated as of April 1, 1993 (the "Agreement").
Pursuant to Section 10.01 of the Agreement, we wish to add the
Nicholas-Applegate Large Cap Value Fund to the Agreement. The full list of Funds
covered by the Agreement as set forth in Exhibit A.
Please indicate your acceptance of this amendment by signing the
letter below and returning a copy to us. Thank you for your assistance
regarding this matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
AGREED:
STATE STREET BANK AND TRUST COMPANY
By:
--------------------------------
Title:
-----------------------------
<PAGE>
EXHIBIT A
Nicholas-Applegate Mid Cap Growth Fund (formerly Nicholas-
Applegate Core Growth Fund)
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate Mini Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund (formerly Nicholas-
Applegate Emerging Growth Fund)
Nicholas-Applegate Convertible Fund (formerly Nicholas-Applegate
Income & Growth Fund)
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate International Core Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Money Market Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate High Quality Bond Fund(formerly Nicholas-
Applegate Fully Discretionary Fixed Income Fund)
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
Nicholas-Applegate Pacific Rim Fund
Nicholas-Applegate Greater China Fund
Nicholas-Applegate Latin America Fund
Nicholas-Applegate Global Technology Fund
Nicholas-Applegate Large Cap Value Fund
<PAGE>
Exhibit 9.16
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
August 14, 1998
PFPC Inc.
103 Bellevue Parkway
Wilmington, Delaware 19809
Ladies and Gentlemen:
Reference is made to the Accounting Services Agreement between us
dated as of April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, we wish to add the
Nicholas-Applegate Large Cap Value Fund to the Agreement. The full list of
Funds covered by the Agreement is set forth on Exhibit A.
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
AGREED:
PFPC INC.
By:
---------------------------------
Title:
------------------------------
<PAGE>
EXHIBIT A
Nicholas-Applegate Mid Cap Growth Fund (formerly Nicholas-Applegate
Core Growth Fund)
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate Mini Cap Growth Fund
Nicholas-Applegate Small Cap Growth Fund (formerly Nicholas-Applegate
Emerging Growth Fund)
Nicholas-Applegate Convertible Fund (formerly Nicholas-Applegate
Income & Growth Fund)
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate International Core Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Money Market Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate High Quality Bond Fund(formerly Nicholas-Applegate
Fully Discretionary Fixed Income Fund)
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
Nicholas-Applegate Pacific Rim Fund
Nicholas-Applegate Greater China Fund
Nicholas-Applegate Latin America Fund
Nicholas-Applegate Global Technology Fund
Nicholas-Applegate Large Cap Value Fund
<PAGE>
Exhibit 9.18
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
August 14, 1998
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, California 92101
Ladies and Gentlemen:
This will confirm our agreement that the expense limitation letter agreement
between us dated July 24, 1998, as previously amended, is hereby further amended
to add the Large Cap Value Fund as a Fund thereunder. The full list of Funds
covered by the Agreement and the expense limitations with respect to each such
Fund are as set forth in Exhibit A.
In all other respects, the expense limitation letter agreement, as
previously amended, will remain in full force and effect. Please sign this
letter below to confirm your agreement with this amendment.
Very truly yours,
--------------------
E. Blake Moore, Jr.
Secretary
AGREED:
Nicholas-Applegate Capital Management
By: Nicholas-Applegate Capital Management
Holdings, L.P., its General Partner
By: Nicholas-Applegate Capital Management
Holdings, Inc., its General Partner
By:
---------------------
E. Blake Moore, Jr.
Secretary
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
NAME OF FUND & CLASS BASIC EXPENSE CURRENT TOTAL EXPENSE
LIMITATION (%) LIMITATION (%)
<S> <C> <C> <C>
Mid Cap Growth Fund, Class A 1.29 1.60
(formerly Core Growth) Class B 1.94 2.25
Class C 1.94 2.25
Class Q 1.19 1.25
Class I 0.94 1.00
Large Cap Growth Fund, Class A 1.34 1.60
Class B 1.99 2.25
Class C 1.99 2.25
Class Q 1.24 1.25
Class I 0.99 1.00
Mini Cap Growth FUND, Class I 1.56 1.56
Small Cap Growth Fund,
(formerly Emerging Growth) Class A 1.47 1.95
Class B 2.12 2.60
Class C 2.12 2.60
Class Q 1.37 1.50
Class I 1.12 1.17
Convertible Fund,
(formerly Income & Growth) Class A 1.30 1.60
Class B 1.95 2.25
Class C 1.95 2.25
Class Q 1.20 1.25
Class I 0.95 1.00
Balanced Growth Fund, Class A 1.21 1.60
Class B 1.86 2.25
Class C 1.86 2.25
Class Q 1.11 1.25
Class I 0.86 1.00
Worldwide Growth Fund, Class A 1.60 1.85
Class B 2.25 2.50
Class C 2.25 2.50
Class Q 1.50 1.60
Class I 1.25 1.35
International Core Growth
Fund, Class A 1.69 1.95
Class B 2.34 2.60
Class C 2.34 2.60
Class Q 1.59 1.65
<PAGE>
NAME OF FUND & CLASS BASIC EXPENSE CURRENT TOTAL EXPENSE
LIMITATION LIMITATION
<S> <C> <C> <C>
International Core Growth
Fund, Class I 1.34 1.40
Emerging Countries Fund, Class A 1.95 2.25
Class B 2.60 2.90
Class C 2.60 2.90
Class Q 1.85 1.90
Class I 1.60 1.65
Global Growth & Income
Fund, Class A 1.35 1.35
International Small Cap
Growth Fund, Class A 1.66 1.95
Class B 2.31 2.60
Class C 2.31 2.60
Class Q 1.56 1.65
Class I 1.31 1.40
Money Market Fund, 1.10 1.10
Value Fund, Class A 1.29 1.60
Class B 1.94 2.25
Class C 1.94 2.25
Class Q 1.19 1.25
Class I 0.94 1.00
High Yield Bond Fund, Class A 1.01 1.60
Class B 1.66 2.25
Class C 1.66 2.25
Class Q 0.91 0.95
Class I 0.66 0.75
Strategic Income Fund, Class I 0.75 0.75
Short-Intermediate Fixed
Income Fund, Class I 0.35 0.35
High Quality Bond Fund,
(formerly Fully
Discretionary Fixed Income) Class A 0.75 1.30
Class B 1.40 1.70
Class C 1.40 1.70
Class Q 0.65 0.88
Class I 0.40 0.45
<PAGE>
NAME OF FUND & CLASS BASIC EXPENSE CURRENT TOTAL EXPENSE
LIMITATION LIMITATION
<S> <C> <C> <C>
Global Blue Chip Fund, Class I 1.40 1.40
Emerging Markets Bond
Fund, Class I 0.95 0.95
Pacific Rim Fund, Class I 1.40 1.40
Greater China Fund, Class I 1.40 1.40
Latin America Fund, Class I 1.65 1.65
Global Technology Fund, Class I 1.40 1.40
Large Cap Value Fund, Class I 1.00 1.00
</TABLE>
<PAGE>
Exhibit 9.22
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THIRD AMENDMENT AGREEMENT
DATED AS OF APRIL 8, 1998
AMONG
NICHOLAS-APPLEGATE MUTUAL FUNDS
ON BEHALF OF EACH SERIES
OF SHARES NAMED HEREIN,
AND
THE CHASE MANHATTAN BANK
AND
THE LENDERS NAMED HEREIN
------------------------
TO THE CREDIT AGREEMENT DATED AS OF APRIL 10, 1996
----------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THIS THIRD AMENDMENT AGREEMENT, dated as of April 8, 1998 (this "THIRD
AMENDMENT"), among Nicholas-Applegate Mutual Funds, a Delaware business trust
(the "FUND"), on behalf of itself and each series of shares of the Fund listed
on SCHEDULE I hereto as revised from time to time (collectively, all such
series, the "BORROWERS" and each series individually, a "BORROWER"), the banks
and other financial institutions (the "LENDERS") from time to time parties to
the Agreement (as hereinafter defined) and The Chase Manhattan Bank, a New York
banking corporation, as administrative agent for the Lenders hereunder (in such
capacity, the "ADMINISTRATIVE AGENT"), to the Credit Agreement, dated as of
April 10, 1996 among all of such parties, as amended by the First Amendment,
dated as of April 9, 1997, and the Second Amendment, dated as of February 25,
1998 (the "AGREEMENT");
W I T N E S S E T H :
WHEREAS, the Fund on behalf of the Borrowers has requested the Lenders
to amend the Agreement as of April 8, 1998 (the "THIRD AMENDMENT EFFECTIVE
DATE") in order to extend the period during which loans are made under the
Agreement;
WHEREAS, the Fund in undergoing a Proposed Reorganization (as defined
in the Second Amendment to the Agreement), pursuant to which Schedule I will be
revised to reflect such Proposed Reorganization;
WHEREAS, the Fund desires, and each Lender and the Administrative
Agent are willing, on the terms and conditions set forth below, to modify
certain terms of the Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
SECTION 1. DEFINED TERMS. Capitalized terms used herein and not
defined herein shall have the meanings specified in the Agreement.
SECTION 2. AMENDMENTS TO THE AGREEMENT; NOTICE OF ADDRESS.
(A) The definition of "Termination Date" contained in Section 1.1 (Defined
Terms) of the Agreement is hereby amended and restated to read in its entirety
as follows:
"TERMINATION DATE": the date which is 364 days following the Third
Amendment Effective Date, or such earlier date on which the Commitments shall
terminate as provided herein.
1
<PAGE>
(B) Section 1.1 (Defined Terms) of the Agreement is hereby amended by
adding the following definition in the proper alphabetical order:
"'THIRD AMENDMENT EFFECTIVE DATE': April 8, 1998."
(C) Schedule I to the Agreement shall reflect, prior to and on the
effectiveness of the Proposed Reorganization, Schedule I to this Third Amendment
as stated therein.
SECTION 3. CONDITIONS TO EFFECTIVENESS. This Third Amendment shall
become effective only upon the satisfaction or waiver of all of the following
conditions precedent:
(A) The parties hereto shall have duly executed and delivered this Third
Amendment.
(B) The Administrative Agent shall have received a certificate of the
Secretary or Assistant Secretary of the Fund dated as of the Third Amendment
Effective Date, certifying (i) that attached thereto are true and complete
copies of the resolutions of the board of trustees of the Fund authorizing the
execution, delivery and performance by the Fund of this Third Amendment and
borrowing under the Agreement as amended hereby, (ii) that said resolutions are
all of the resolutions adopted by the board of trustees of the Fund in
connection with the transactions contemplated hereby and are in full force and
effect without modification as of such date, (iii) that the Fund's By-laws
either are attached to such certificate, or to the extent not attached have not
been amended since the Closing Date, (iv) that its charter or certificate, as
the case may be, either is attached to such certificate or to the extent not
attached has not been amended since the Closing Date, and (v) as to the
incumbency and signatures of each of its officers executing this Third Amendment
and any other documents to which it is a party.
(C) The Administrative Agent shall have received from the Borrowers the
fees and expense reimbursements referred to under Section 6 hereof.
(D) The Administrative Agent shall have received such other documents,
opinions, approvals or appraisals as the Administrative Agent may reasonably
request.
SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce the
Lenders and Administrative Agent to enter into this Third Amendment, the Fund
hereby represents and warrants to the Administrative Agent, on behalf of itself
and on behalf of each Borrower: (i) the representations and warranties contained
in the Agreement are true and correct on and as of the Third Amendment Effective
Date as though made on and as of such date, except for changes which have
occurred and which were not prohibited by the terms of the Agreement, (ii) no
Default or Event of Default has occurred and is continuing, or would result from
the execution, delivery and performance by the Fund and each Borrower, of this
Third Amendment or the Agreement (as amended by this
2
<PAGE>
Third Amendment), (iii) that the Fund has full power, right and legal authority
to execute, deliver and perform its obligations under this Third Amendment; (iv)
that the Fund has taken all action necessary to authorize the execution and
delivery of, and the performance of its obligations, and the obligations of each
Borrower, under this Third Amendment, including, without limitation, receiving
the approval of the majority of non-interested members of the board of trustees
of the Fund as to entering into the transactions contemplated by this Third
Amendment; and (v) that this Third Amendment constitutes a legal, valid and
binding obligation of the Fund and each Borrower enforceable against the Fund
and each Borrower in accordance with its terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization or moratorium or similar laws
affecting the rights of creditors generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
SECTION 5. REFERENCE TO AND EFFECT ON THE DOCUMENTS. Each reference in
the Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
like import, and each reference to the Agreement in documents related to the
Agreement, shall mean and be a reference to the Agreement as amended hereby.
Except as specifically amended hereby, the Agreement and all such related
documents, and all other documents, agreements, instruments or writings entered
into in connection therewith, shall remain in full force and effect and are
hereby ratified, confirmed and acknowledged by the Fund, on behalf of itself and
on behalf of each Borrower.
SECTION 6. FEES AND EXPENSES. The Borrowers agree severally to pay or
reimburse the Administrative Agent, as stated in Section 9.5 of the Agreement
(as amended hereby), for its reasonable out-of-pocket costs and expenses,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent incurred by the Administrative Agent in connection
with the preparation, reproduction, execution and delivery of this Third
Amendment and any other instruments and documents to be delivered hereunder.
SECTION 7. GOVERNING LAW. This Third Amendment and the rights and
obligations of the parties hereunder shall be governed by and construed and
interpreted in accordance with the substantive laws of the State of New York,
without regard to its conflict of laws principles.
SECTION 8. COUNTERPARTS. This Third Amendment may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Third Amendment by
signing any such counterpart.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
NICHOLAS-APPLEGATE MUTUAL FUNDS,
for itself and on behalf of each Borrower
By:
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By:
--------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A., as
Lender
By:
--------------------------------
Name:
Title:
AUSTRALIA AND NEW ZEALAND BANKING
GROUP LIMITED, as Lender
By:
--------------------------------
Name:
4
<PAGE>
Title:
5
<PAGE>
SCHEDULE I (PRIOR TO EFFECTIVENESS OF THE PROPOSED REORGANIZATION)
BORROWERS
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
Nicholas-Applegate Global Growth and Income Institutional Portfolio
(to be known as Nicholas-Applegate Global Growth and Income Fund)
Nicholas-Applegate Emerging Growth Portfolio A
Nicholas-Applegate Emerging Growth Portfolio B
Nicholas-Applegate Emerging Growth Portfolio C
Nicholas-Applegate Emerging Growth Institutional Portfolio
Nicholas-Applegate Emerging Growth Qualified Portfolio
Nicholas-Applegate Core Growth Portfolio A
Nicholas-Applegate Core Growth Portfolio B
Nicholas-Applegate Core Growth Portfolio C
Nicholas-Applegate Core Growth Institutional Portfolio
Nicholas-Applegate Core Growth Qualified Portfolio
Nicholas-Applegate Worldwide Growth Portfolio A
Nicholas-Applegate Worldwide Growth Portfolio B
Nicholas-Applegate Worldwide Growth Portfolio C
Nicholas-Applegate Worldwide Growth Institutional Portfolio
Nicholas-Applegate Worldwide Growth Qualified Portfolio
Nicholas-Applegate Income & Growth Portfolio A
Nicholas-Applegate Income & Growth Portfolio B
Nicholas-Applegate Income & Growth Portfolio C
Nicholas-Applegate Income & Growth Institutional Portfolio
Nicholas-Applegate Income & Growth Qualified Portfolio
Nicholas-Applegate Balanced Growth Portfolio A
Nicholas-Applegate Balanced Growth Portfolio B
Nicholas-Applegate Balanced Growth Portfolio C
Nicholas-Applegate Balanced Growth Institutional Portfolio
Nicholas-Applegate Balanced Growth Qualified Portfolio
6
<PAGE>
Nicholas-Applegate Emerging Countries Portfolio A
Nicholas-Applegate Emerging Countries Portfolio B
Nicholas-Applegate Emerging Countries Portfolio C
Nicholas-Applegate Emerging Countries Institutional Portfolio
Nicholas-Applegate Emerging Countries Qualified Portfolio
Nicholas-Applegate Government Income Portfolio A
Nicholas-Applegate Government Income Portfolio B
Nicholas-Applegate Government Income Portfolio C
Nicholas-Applegate Government Income Qualified Portfolio
Nicholas-Applegate International Growth Portfolio A
Nicholas-Applegate International Growth Portfolio B
Nicholas-Applegate International Growth Portfolio C
Nicholas-Applegate International Growth Institutional Portfolio
Nicholas-Applegate International Growth Qualified Portfolio
Nicholas-Applegate Short-Intermediate Institutional Fixed Income Portfolio
Nicholas-Applegate Fully Discretionary Institutional Fixed Income Portfolio
Nicholas-Applegate Mini Cap Growth Institutional Portfolio
Nicholas-Applegate High Yield Institutional Portfolio
Nicholas-Applegate Strategic Income Institutional Portfolio
Nicholas-Applegate Value Institutional Portfolio
Nicholas-Applegate International Core Growth A
Nicholas-Applegate International Core Growth B
Nicholas-Applegate International Core Growth C
Nicholas-Applegate International Core Growth Institutional Portfolio
Nicholas-Applegate International Core Growth Qualified Portfolio
Nicholas-Applegate Large Cap Institutional Portfolio
7
<PAGE>
SCHEDULE I (ON AND FOLLOWING THE EFFECTIVENESS OF THE PROPOSED REORGANIZATION)
BORROWERS
Nicholas-Applegate Emerging Growth Fund
Nicholas-Applegate Core Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate Income & Growth Fund
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate International Growth Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate Fully Discretionary Fixed Income Fund
Nicholas-Applegate Mini Cap Growth Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate Global Growth and Income Fund
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
8
<PAGE>
Exhibit 10
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 South Flower Street
Los Angeles, California 90071
(213) 683-6000
August 14, 1998
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
Ladies and Gentlemen:
We have acted as counsel to Nicholas-Applegate Mutual Funds, a
Delaware business trust (the "Trust"), in connection with the issuance of an
indefinite number of shares of beneficial interest ("Shares") in the
Nicholas-Applegate Large Cap Value Fund series of the Trust in a public offering
pursuant to a Registration Statement on Form N-1A (Registration no. 33-56094),
as amended, filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Registration Statement").
In our capacity as counsel for the Trust, we have examined the
Declaration of Trust dated as of December 17, 1992, as amended, the bylaws of
the Trust, as amended, originals or copies of actions of the Trustees as
furnished to us by the Trust, certificates of public officials, statutes and
such other documents, records and certificates as we have deemed necessary for
the purposes of this opinion.
Based upon our examination as aforesaid, we are of the opinion that
the Shares are duly authorized and, when purchased and paid for as described in
the Registration Statement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion of counsel as an
exhibit to the Registration Statement.
Very truly yours,
S/PAUL, HASTINGS, JANOFSKY & WALKER LLP
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Custodian, Transfer and Dividend Disbursing Agent, Independent
Auditors and Legal Counsel" and "Financial Statements" in Post-Effective
Amendment No. 66 under the Securities Act of 1933 and Amendment No. 68 under
the Investment Company Act of 1940 to the Registration Statement (Form N-1A, No.
33-56094) and related Prospectus and Statement of Additional Information of
Nicholas-Applegate Mutual Funds and to the incorporation by reference therein of
our report dated May 15, 1998, with respect to the financial statements and
financial highlights of Nicholas-Applegate Mutual Funds included in its Annual
Report for the year ended March 31, 1998 filed with the Securities and Exchange
Commission.
Los Angeles, California
August 5, 1998
