<PAGE>
As filed with the Securities and Exchange Commission
on July 21, 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. 63 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 65
(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)
[x] 60 days after filing pursuant to paragraph (a)(i)
[ ] on ____________ pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on ___ (date) ___ pursuant to paragraph (a)(ii), of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered: Shares of Beneficial Interest
------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
PART A
<S> <C>
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
Item 22. Calculation of Performance Data . . . . . . . . . . . . . . . . . Performance Information
<PAGE>
Item 23. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . Not Applicable
PART C
Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to the
Registration Statement.
</TABLE>
<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
VALUE
SMALL CAP GROWTH
MINI CAP GROWTH
CONVERTIBLE
BALANCED GROWTH
FIXED INCOME FUNDS
SHORT INTERMEDIATE
HIGH QUALITY BOND
STRATEGIC INCOME
HIGH YIELD BOND
JULY 24, 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
Value 30
Small Cap Growth 32
Mini Cap Growth 34
Convertible 36
Balanced Growth 38
FIXED INCOME FUNDS
Short Intermediate 40
High Quality Bond 42
Strategic Income 44
High Yield Bond 46
POLICIES AND INSTRUCTIONS FOR
OPENING, MAINTAINING AND
CLOSING AN ACCOUNT IN ANY
FUND.
SIMPLIFIED ACCOUNT INFORMATION
Opening an Account 48
Buying Shares 48
Selling and Redeeming Shares 49
Signature Guarantees 50
Exchanging Shares 50
YOUR ACCOUNT
Transaction Policies 51
Features and Account Policies 51
DETAILS THAT APPLY TO THE
FUNDS AS A GROUP.
ORGANIZATION AND MANAGEMENT
Investment Adviser Compensation 53
Administrator Compensation 53
Distributor 53
Portfolio Trades 53
Investment Objective 54
Diversification 54
Prior Master-Feeder Structure 54
Portfolio Teams 55
RISK FACTORS AND SPECIAL CONSIDERATIONS 59
PRIOR PERFORMANCE OF CERTAIN FUNDS 66
<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 55.
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 59.
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 55.
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 59.
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 55.
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 59.
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 55.
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 59.
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 64.
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 55.
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 59.
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 figures below are unaudited with respect to the fiscal year ended March 31,
1998.
<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) 12.09
Net realized and unrealized gains (losses) on
securities and foreign currency 3.28
- ------------------------------------------------------------
Total from investment operations 3.95
Less distributions:
Dividends from net investment income 0.09
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 Fund of the Master Trust
+ Includes expenses allocated from 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, Italy 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 55.
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 59.
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 64. 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 55.
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 59.
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 64. 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 55.
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 59.
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 64. 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 55.
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 59.
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 64. 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 55.
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 59.
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 64.
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 55.
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 59.
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 55.
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 59.
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 2,555
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 primarily 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 55.
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 59.
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
VALUE FUND
INVESTMENT OBJECTIVE
Maximum long-term capital appreciation.
INVESTMENT STRATEGY
The Fund's Investment Adviser focuses on a "bottom-up" analysis that evaluates
the financial condition and competitiveness of individual companies. It uses a
blend of traditional fundamental research and computer intensive systematic
disciplines to uncover signs of "change at the margin"--positive business
developments which are not yet fully reflected in a company's stock price. It
searches for successful, growing companies that are managing change
advantageously and poised to exceed growth expectations.
The Fund emphasizes companies with market capitalizations generally above $5
billion. The Fund's portfolio is designed to have risk, capitalization and
industry characteristics similar to those of the Standard and Poor's 500 Stock
Index (the "S&P 500").
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 55.
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 59.
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>
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 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>
32
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 primarily 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 55.
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 59.
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>
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>
$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>
34
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 primarily 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 55.
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 59.
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>
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>
$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>
36
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 64.
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 55.
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 59.
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>
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>
$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>
38
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 64. 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 55.
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 59.
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>
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>
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>
40
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 55.
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 59.
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>
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>
$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>
42
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 total assets in
debt securities 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. 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 64. 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 55.
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 59.
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>
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>
$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>
44
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 64.
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 55.
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 59.
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>
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>
$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>
46
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 64. 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 55.
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 59.
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>
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 $13.20
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>
48
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 or contact your financial representative, or call us at (800) 551-8043 for
further information.
To initiate an ACH purchase, call the Trust at (800) 551-8043.
</TABLE>
<PAGE>
49
<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 that section below for further information.
information. The maximum amount which may be requested
You may sell up to the full account value. 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, they will not be available to be sold 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>
50
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>
51
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 quarter.
Every year you will also receive an applicable tax information statement, mailed
by January 31.
<PAGE>
52
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
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>
53
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
Value Fund 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 its management 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,
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
Nicholas-Applegate Capital Management a monthly fee at the annual rate of 0.10%
of average net assets. 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
<PAGE>
54
ORGANIZATION AND MANAGEMENT
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 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>
55
PORTFOLIO TEAMS
EQUITY MANAGEMENT--INTERNATIONAL/GLOBAL
CATHERINE SOMHEGYI, PARTNER
Chief Investment Officer--Global Equity Management
Joined firm in 1987; prior investment management experience with Professional
Asset Securities, Inc. and Pacific Century Advisers
M.B.A. and B.S.--University of Southern California
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP GROWTH,
EMERGING COUNTRIES, GLOBAL GROWTH & INCOME, GLOBAL TECHNOLOGY, GLOBAL BLUE CHIP,
LATIN AMERICA, PACIFIC RIM, AND GREATER CHINA
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 TECHNOLOGY, GLOBAL
BLUE CHIP, LATIN AMERICA, PACIFIC RIM AND GREATER CHINA
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
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP, EMERGING
COUNTRIES, GLOBAL TECHNOLOGY, GLOBAL BLUE CHIP, GLOBAL GROWTH & INCOME, PACIFIC
RIM, AND GREATER CHINA
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
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
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 AND GLOBAL TECHNOLOGY
AARON HARRIS
Portfolio Manager
Joined firm in 1995; 1 year prior investment management experience at Chemical
Bank
B.A.--Princeton University
EMERGING COUNTRIES, GLOBAL TECHNOLOGY, AND LATIN AMERICA
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
WORLDWIDE GROWTH, INTERNATIONAL CORE GROWTH, INTERNATIONAL SMALL CAP, EMERGING
COUNTRIES, GLOBAL TECHNOLOGY, GLOBAL BLUE CHIP, GLOBAL GROWTH & INCOME, PACIFIC
RIM, AND GREATER CHINA
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, PACIFIC RIM, AND GLOBAL GROWTH & INCOME
<PAGE>
56
ORGANIZATION AND MANAGEMENT
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, GLOBAL TECHNOLOGY, GLOBAL BLUE CHIP, GLOBAL GROWTH & INCOME,
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 TECHNOLOGY, GLOBAL BLUE CHIP, AND GLOBAL GROWTH & INCOME
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, GLOBAL TECHNOLOGY, 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 AND GLOBAL TECHNOLOGY
AYLIN UCKUNKAYA
Investment Analyst
Joined firm in 1997; 4 years investment management experience with Global
Securities
B.A. Istanbul University
EMERGING COUNTRIES AND GLOBAL TECHNOLOGY
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, GLOBAL TECHNOLOGY AND LATIN AMERICA
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
GLOBAL TECHNOLOGY, GREATER CHINA AND 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, GREATER CHINA AND PACIFIC RIM
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 AND GLOBAL TECHNOLOGY
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 AND GLOBAL TECHNOLOGY
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
LARGE CAP GROWTH
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57
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, VALUE, SMALL CAP GROWTH, MINI CAP GROWTH, BALANCED GROWTH,
CONVERTIBLE AND MID CAP 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
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
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
GLOBAL TECHNOLOGY, SMALL CAP GROWTH AND MINI 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
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
SMALL CAP GROWTH AND MID CAP GROWTH
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
AARON HARRIS
Portfolio Manager
Joined firm in 1995; 1 year prior investment management experience at Chemical
Bank
B.A.--Princeton University
SMALL CAP GROWTH AND MINI CAP GROWTH
TRAVIS PRENTICE
Portfolio Manager
Joined firm in 1997; prior experience with Merrill Lynch Private Client Group
B.A.--University of Arizona
MINI-CAP GROWTH
THOMAS J. SMITH
Portfolio Manager
Joined firm in 1995; 4 years prior investment experience with Wells Fargo Bank
and Dean Witter Reynolds
B.S.--San Diego State University
LARGE CAP GROWTH
PAUL E. CLUSKEY
Investment Analyst, Emerging Growth
Joined firm in 1998; 4 years prior investment experience at SEI Investments and
Piper Jaffray, Inc.
B.S.--New York University
MINI 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, GLOBAL GROWTH & INCOME, AND STRATEGIC INCOME
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, GLOBAL TECHNOLOGY AND MINI CAP GROWTH
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58
ORGANIZATION AND MANAGEMENT
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 AND GLOBAL TECHNOLOGY
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, GLOBAL TECHNOLOGY 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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59
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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60
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 Strategic Income, High Yield Bond, Balanced Growth, Convertible, Global
Growth and Income, Emerging Markets Bond, High Quality Bond, Pacific Rim,
Greater China and Latin America Funds each 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
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61
investment grade. To the extent the issuer defaults, the Fund may incur
additional expenses in order to enforce its rights or to participate in a
restructuring of the obligation. In addition, the prices of lower-rated
securities generally tend to be more volatile and the market less liquid than
those of higher-rated securities. Consequently, the Funds may at times
experience difficulty in liquidating their investments at the desired times and
prices.
The average percentages of assets invested by the Funds listed below in bonds of
each permissible rating, on a monthly dollar-weighted basis, were as follows (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.
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62
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 Convertible, Balanced Growth and High Yield Bond
Funds may invest up to 35% of their net assets in zero coupon securities issued
or guaranteed by the U.S. Government and its agencies and instrumentalities.
These securities are sold at a substantial discount from face value and redeemed
at face value at their maturity date without interim payments of principal and
interest. They may be subject to greater volatility than other securities. In
addition, because income is accrued on a current basis, a Fund may have to sell
other portfolio securities to make necessary income distributions.
MORTGAGE RELATED SECURITIES. The High Yield Bond, Strategic Income,
Short-Intermediate and High Quality Bond 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 High Yield Bond, Strategic Income, Short-Intermediate and High Quality
Bond 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. Certain Funds may invest in sovereign debt securities
issued by governments of foreign countries. The sovereign debt in which the
Funds may invest may be rated below investment grade. These securities usually
offer higher yields than higher rated securities but are also subject to greater
risk than higher rated securities.
BRADY BONDS. The Pacific Rim, Greater China and Latin America 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
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63
instrumentalities; commercial paper rated in the highest two rating categories;
certificates of deposit; repurchase agreements and other high grade corporate
debt securities.
THE FUNDS' INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements--that is
the purchase by the Fund of a security that seller has agreed to buy back,
usually within one to seven days. The seller's promise to repurchase the
security is fully collateralized by securities equal in value to 102% of the
purchase price, including accrued interest. If the seller defaults and the
collateral value declines, the Fund might incur a loss. If the seller declares
bankruptcy, the Fund may not be able to sell the collateral at the desired time.
The Funds enter into these agreements only with brokers, dealers, or banks that
meet credit quality standards established by the Board of Trustees.
SECURITIES SWAPS. Each of the Global Blue Chip, Emerging Markets Bond, Pacific
Rim, Greater China and Latin America 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,
<PAGE>
64
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 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.
<PAGE>
65
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.
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>
66
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 in substantially the same manner 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>
67
<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:
- --------------------------------- M U T U A L F U N D S Nicholas-Applegate Mutual Funds
GLOBAL INSTITUTIONAL CLASS SHARES 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.
CLASS AMOUNT CLASS AMOUNT
- ------------------------------------------------------------- ---------------------------------------------------------
Emerging Countries I(179) / / $ Emerging Growth I(359) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
International Small Cap Growth I(356) / / $ Core Growth I(371) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
International Core Growth I(180) / / $ Large Cap Growth I(181) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Worldwide Growth I(374) / / $ Balanced Growth I(373) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Global Growth & Income I(970) / / $ Income & Growth I(372) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Global Technology I( ) / / $ Value I(378) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Global Blue Chip I( ) / / $ Short Intermediate I(182) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Emerging Markets Bond I( ) / / $ High Quality Bond I(183) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Pacific Rim I( ) / / $ Strategic Income I(752) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Greater China I( ) / / $ High Yield Bond I(377) / / $
- ------------------------------------------------------------- ---------------------------------------------------------
Latin America I( ) / / $ Other $
- ------------------------------------------------------------- ---------------------------------------------------------
Mini Cap Growth I(753) / / $ TOTAL $
- ------------------------------------------------------------- ---------------------------------------------------------
Large Cap Growth I(181) / / $
- -------------------------------------------------------------
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 Portfolio.
From To
Portfolio Name Portfolio 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 MIN.ACCT.VALUE) Day* Monthly Quarterly
(JAN/APRIL/JULY/OCT)
Account Number (IF KNOWN)
TO:
$ , .
Fund Name Amount ($50 MINIMUM, $5,000 MIN.ACCT.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)
$ , . 15
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)
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
P.O.Box 82169
San Diego, CA 92138-2169
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
July 24, 1998
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company currently offering a number of separate
diversified portfolios. This Statement of Additional Information contains
information regarding the Class 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 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").
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>
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Page
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General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-3
Investment Objectives, Policies and Risks. . . . . . . . . . . . . . . . . . . . .B-3
B-1
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Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-34
Principal Holders of Securities. . . . . . . . . . . . . . . . . . . . . . . . . B-36
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . . . . . . . B-40
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-43
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-45
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-46
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . B-46
Purchase and Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . B-49
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-49
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-52
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . B-53
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-58
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel . . . . . . . . . . . . . . . . . . . . B-67
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-67
Appendix A - Description of Securities Ratings . . . . . . . . . . . . . . . . . A-1
</TABLE>
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<PAGE>
GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under the
laws of Delaware. Information regarding 22 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 with a corporation's debt securities.
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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 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
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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 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
B-5
<PAGE>
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 (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.
B-6
<PAGE>
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 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
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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 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
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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 (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
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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
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
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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 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
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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 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
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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 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
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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.
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.
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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, 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 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
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option less any amount for which the put may be sold reduces the profit the Fund
realizes on the sale of the securities.
If a Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If a Fund purchases the call
option to hedge a short position in the underlying security and the price of the
underlying security thereafter falls, the premium paid for the call option less
any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Funds generally will purchase only those options for which the
Investment Adviser believes there is an active secondary market to facilitate
closing transactions.
WRITING CALL OPTIONS. Each Fund may write covered call options. A
call option is "covered" if a Fund owns the security underlying the call or has
an absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer
of a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer
of an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. A Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, appreciation of the underlying security owned by the
Fund
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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.
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
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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 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
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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 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.
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The nature of initial margin in futures transactions differs from that
of margin in securities transactions. Futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming it 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 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
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at or near that date. The determination would be in accordance with the rules
of the exchange on which the futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. A Fund closes out a futures contract sale by entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund receives the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the Fund pays the difference and realizes a loss. Similarly, the Fund
closes out a futures contract purchase by entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the Fund realizes a
gain, and if the purchase price exceeds the offsetting sale price, the Fund
realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United States Treasury bills; and 90-day commercial paper. A Fund may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments. International interest rate futures
contracts are traded on the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. 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
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hedged securities, the Fund will experience either a loss or a gain on the
future which will not be completely offset by movements in the price of the
securities which are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Adviser believes that over
time the value of a diversified portfolio will tend to move in the same
direction as the market indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Investment Adviser may still not
result in a successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of 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
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price of the securities will in fact correlate with the price movements in the
futures contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund depends on the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund hedges against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
OPTIONS ON FUTURES CONTRACTS. The Funds may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options are more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of
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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.
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
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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.
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.
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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 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."
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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 percentage
limitations on borrowings described below. The agreements are subject to the
same types of risks as borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that a Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.
The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of the Investment Adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
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A Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When a Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in a
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
BORROWING
Short sales "not against the box" and roll transactions are considered
borrowings for purposes of the percentage limitations applicable to borrowings.
The use of borrowing by a Fund involves special risk considerations
that may not be associated with other funds having similar objectives and
policies. Since substantially all of a Fund's assets fluctuate in value,
whereas the interest obligation resulting from a borrowing remain fixed by the
terms of the Fund's agreement with its lender, the asset value per share of the
Fund tends to increase more when its portfolio securities increase in value and
to decrease more when its portfolio assets decrease in value than would
otherwise be the case if the Fund did not borrow funds. In addition, interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
The Trust entered into a Credit Agreement on behalf of its various
series, including the Funds, with several banks and The Chase Manhattan Bank, as
administrative agent for the lenders, to borrow up to $75,000,000 from time to
time to satisfy shareholder redemption requests without the necessity of
requiring the Funds to sell portfolio securities, at times when the Investment
Adviser believes such sales are not in the best interests of the shareholders of
the Funds or other series of the Trust, in order to provide the Funds or such
other series with cash to meet such redemption requests. The Credit Agreement
expires on April 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.
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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 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
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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 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
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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 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.
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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 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.
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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.
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
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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, 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) 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.
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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.
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.
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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 (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%).
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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 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%).
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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. PLAINTIFFS
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 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.
B-39
<PAGE>
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. 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
B-40
<PAGE>
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).
E. BLAKE MOORE, JR. (39), CHIEF FINANCIAL OFFICER AND SECRETARY. Chief
Financial Officer, Nicholas-Applegate Capital Management and Nicholas-Applegate
Securities (since
B-41
<PAGE>
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 Total Compensation
Compensation Benefits Accrued as Part Annual Benefits from Trust and Trust
Name from Trust of Trust Expenses Upon Retirement Complex Paid to 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-42
<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 year ended March 31, 1998, and the amounts of the reductions in fees
and reimbursement of expenses by the Investment
B-43
<PAGE>
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.
B-44
<PAGE>
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of each Fund (including
administrative fees and distribution expenses for the Fund, but excluding
interest, taxes, brokerage commissions and other costs incurred in connection
with portfolio securities transactions, organizational expenses and other
capitalized expenditures and extraordinary expenses), 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.
B-45
<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
B-46
<PAGE>
maintaining the registration of the Trust and of its shares with the Commission
and registering the Trust as a broker or dealer and qualifying their shares
under state securities laws, including the preparation and printing of the
Trust's registration statement, prospectuses and statements of additional
information, (m) allocable communication expenses with respect to investor
services and all expenses of shareholders' and Board of Trustees' meetings and
of preparing, printing and mailing prospectuses and reports to shareholders, (n)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the business of the Trust, and (o) expenses
assumed by the Trust pursuant to any plan of distribution adopted in conformity
with Rule 12b-1 under the Investment Company Act.
The Administration Agreement provides that ICAC will not be liable for
any error of judgment or for any loss suffered by the Trust in connection with
the matters to which the Administration Agreement relates, except a loss
resulting from ICAC's willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties. The Administration Agreement will terminate
automatically if assigned, and may be terminated without penalty by either ICAC
or the Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Trust, as defined in the Investment Company
Act), upon 60 days' written notice. The Administration Agreement will continue
in effect only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer agents,
accounting agents, independent accountants and legal counsel. These services
are comprised principally of assistance in coordinating with the Trust's various
service providers, providing certain officers of the Trust, responding to
inquiries from shareholders which are directed to the Trust rather than other
service providers, calculating performance data, providing various reports to
the Board of Trustees, and assistance in preparing reports, prospectuses, proxy
statements and other shareholder communications. The Agreement contains
provisions regarding liability and termination similar to those of the
Administration Agreement.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for distributing
shares of the Funds. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management Holdings, L.P., the
general partner of the Investment Adviser.
B-47
<PAGE>
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 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
B-48
<PAGE>
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.
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 &
B-49
<PAGE>
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
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.
B-50
<PAGE>
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
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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.
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<PAGE>
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 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
B-53
<PAGE>
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 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.
B-54
<PAGE>
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 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.
B-55
<PAGE>
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
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<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
B-57
<PAGE>
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 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.
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<PAGE>
Any loss realized on a sale, redemption or exchange of shares of a
Fund by a shareholder will be disallowed to the extent the shares are replaced
within a 61-day period (beginning 30 days before the disposition of shares).
Shares purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of a Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund
if the shareholder acquires shares in a Fund of the Trust pursuant to a
reinvestment right that reduces the sales charges in the subsequent acquisition
of shares.
SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by a
shareholder from a Fund provided that certain conditions are satisfied. Interest
received on repurchase agreements collateralized by U.S. Government obligations
normally is not exempt from state taxation. The Trust will inform shareholders
annually of the percentage of income and distributions derived from direct U.S.
Government obligations. Shareholders should consult their tax advisers to
determine whether any portion of the income dividends received from the Fund is
considered tax exempt in their particular states.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Funds are "section 1256 contracts." Any gains or losses
on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Funds at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under
the Code) are "marked to market" with the result that unrealized gains or losses
are treated as though they were realized and the resulting gain or loss is
treated as ordinary or 60/40 gain or loss, depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Funds. In
addition, losses realized by a Fund on positions that are part of a straddle may
be deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations
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<PAGE>
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.
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
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<PAGE>
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 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,
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<PAGE>
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.
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<PAGE>
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 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:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the period.
YIELD
The yield for a Fund is calculated based on a 30-day or one-month
period, according to the following formula:
Yield = 2[(a - b + 1)6 -1]
------
(c x d)
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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
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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 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
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<PAGE>
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 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 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
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<PAGE>
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"(1)), 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 returns are computed by geometrically linking the returns of each
quarter within the calendar year.
The institutional private accounts that are included in the Investment
Adviser's composites are not subject to the same types of expenses to which the
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
- -----------------
(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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Code. Consequently, the performance results for the Investment Adviser's
composites could have been adversely affected if the institutional private
accounts included in the composites had been regulated as investment companies
under the federal securities laws.
The 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. Investors should
also be aware that the uses of a methodology different form that used below to
calculated performance could result in different performance data.
B-68
<PAGE>
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
--------------------------------------------------------------------------------
BALANCED GROWTH PERFORMANCE VALUE PERFORMANCE
-------------------------------------------------------------------- -------------------------------------
INVESTMENT LEHMAN 60% S&P 500 INVESTMENT
ADVISER'S BALANCED BROS. INDEX 40% ADVISER'S
BALANCED GROWTH S&P 500 GOVT./CORP. LEHMAN BROS. VALUE VALUE S&P 500
YEAR COMPOSITE FUND INDEX(1) INDEX(2) INDEX(1,2) COMPOSITE FUND 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 . . . . . . 20.14 2.89% 2.32 11.06 10.52
1994(3) . . . . . (5.37) (4.61) 1.32 3.51 (0.57) 3.79% 1.32%
1995 . . . . . . 29.23 24.60 37.60 19.24 30.02 30.79 37.60
1996(3) . . . . . 11.88 17.41 22.96 2.89 14.65 32.01 24.25 22.96
1997 . . . . . . 17.70 21.38 33.31 9.75 23.63 40.55 40.55 33.31
1998(4) . . . . . 10.19 40.38 13.95 1.52 8.90 14.54 57.78 13.95
Last Year(4). . . 36.38 47.97 12.39 32.91 57.78 47.97
Last 5 Years(4) . 14.87 N/A 22.39 6.95 16.11 N/A N/A N/A
Since Inception(4) 14.98 16.42 18.93 8.92 14.98 30.33 43.55 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
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<PAGE>
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 1, 1994; Value
Institutional Portfolio - April 30, 1996.
(4) Through March 31, 1998
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
--------------------------------------------------------------------------------
LARGE CAP GROWTH PERFORMANCE MINI CAP PERFORMANCE
----------------------------- --------------------
INVESTMENT RUSSELL INVESTMENT
ADVISER'S LARGE LARGE CAP 1000 ADVISER'S MINI CAP RUSSELL 2000
CAP GROWTH GROWTH GROWTH MINI CAP GROWTH GROWTH STOCK
YEAR COMPOSITE FUND INDEX(1) COMPOSITE FUND 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% 55.93 14.80% 31.06
1996(3) . . . . . . 26.63 (1.12%) 23.12 27.72 28.73 11.26
1997 . . . . . . . . 33.06 46.07 30.48 30.61 30.19 12.84
1998(4) . . . . . . 16.17 15.15 15.63 11.89
Last Year(3) . . . . 57.24 63.32 49.45 68.95 68.89 41.16
Last 5 Years(3). . . N/A N/A N/A 24.78 N/A 15.70
Since Inception(4) . 38.38 52.39 32.33 24.72 34.18 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
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<PAGE>
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 Portfolio (predecessor to
the Class I shares of the Mini Cap Growth Fund) - July 12, 1995.
(4) Through March 31, 1998
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<PAGE>
<TABLE>
<CAPTION>
CLASS I SHARES OF THE FUNDS
--------------------------------------------------------------------------------
SHORT-INTERMEDIATE
PERFORMANCE HIGH QUALITY BOND PERFORMANCE
----------- -----------------------------
MERRILL LYNCH LEHMAN BROS.
INVESTMENT SHORT- 1-3 YR. INVESTMENT HIGH QUALITY GOVT./CORP.
ADVISER'S INTERMEDIATE TREASURY ADVISER'S BOND BOND
YEAR COMPOSITE FUND INDEX(1) COMPOSITE FUND 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). . . . . . . . 10.24 4.95% 10.99 16.69 8.81% 19.24
1996 . . . . . . . . . 4.79 4.85 4.99 3.00 2.29 2.89
1997 . . . . . . . . . 6.66 6.67 6.65 9.49 9.52 9.75
1998(4) . . . . . . . . 1.41 1.48 1.90 1.52
Last year (4) . . . . . 7.23 7.50 7.51 11.86 12.60 12.39
Last 5 years (4) . . . 5.41 - 5.52 6.62 - 6.95
Last 10 years (4) . . . 7.27 - 7.17 8.80 - 8.92
Since inception (4) . . 8.46 7.05 9.05 10.27 8.92 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.
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<PAGE>
(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 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-
ADVISER'S HIGH YIELD FIRST BOSTON ADVISER'S STRATEGIC BACKED
HIGH YIELD BOND HIGH YIELD STRATEGIC INCOME INCOME SECURITIES MODEL
Year BOND COMPOSITE FUND INDEX(1) COMPOSITE FUND 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). . . . . . . 21.87 11.33% 12.42 14.80% 9.20% 5.36% 10.72%
1997. . . . . . . . . . . 21.83 21.40 12.63 16.74 16.74 9.48 14.70
1998(5) . . . . . . . . . 6.12 3.01 4.60 20.06 2.21 2.95
Last Year(5) . . . . . . 26.4 25.49 14.33 20.06 10.01 17.15
Since inception(5) . . . 17.38 23.92 11.26 16.20 18.86 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
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<PAGE>
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 (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
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<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.
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.
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<PAGE>
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 23 series each consisting of one
or more classes of shares -- A, B, C, Q or I.
On any matter submitted to a vote of shareholders of the Trust, all
shares then entitled to vote will be voted by the affected 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 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
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<PAGE>
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
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.
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<PAGE>
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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<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating symbols
of securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating
symbols of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to
commercial paper investments permitted to be made by the Master Trust, are
opinions of the ability of issuers to repay punctually their senior debt
obligations which have an original maturity not exceeding one year. Moody's
employs the following designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
PRIME 1: Issuers (or related supporting institutions) rated PRIME-1
have a superior ability for repayment of short-term promissory obligations.
PRIME-1 repayment ability will often be evidenced by the following
characteristics: (A) leading market positions in well-established industries;
(B) high rates of return on funds employed; (C) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (D) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (E) well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above in the
PRIME-1 category but to a lesser degree. Earning trends and coverage ratios,
while sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME 3: Issuers rated PRIME-3 (or related supporting institutions)
have an acceptable ability for repayment of short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
A-1
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STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the "A"
category are delineated with the numbers 1, 2, and 3 to indicate the relative
degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to possess
overwhelming safety characteristics are denoted with a "PLUS" (+) designation.
A-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.
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<PAGE>
F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near term adverse changes could cause these securities to be
rated below investment grade.
DUFF & PHELPS
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
DUFF 1+ - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
DUFF 1- - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2 - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
DUFF 3 - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
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:
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TBW-1 - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
TBW-3 - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
IBCA
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest capacity for timely
repayment.
A1 - Obligations are supported by a strong capacity for timely
repayment.
A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
CORPORATE BONDS
MOODY'S
Moody's corporate bond ratings are opinions of the relative investment
qualities of bonds. Moody's employs nine designations to indicate such relative
qualities, ranging from "AAA" for the highest quality obligations to "C" for the
lowest. Issues are further refined with the designation 1,2, and 3 to indicate
the relative ranking within designations. Bonds with the following Moody's
ratings have the following investment qualities:
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
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<PAGE>
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds in this category are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in AAA securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in AAA
securities.
A: Bonds in this category possess many favorable investment
attributes and are considered to be as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA: Bonds in this category are considered medium-grade obligations,
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA: Bonds in this category are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds in this category generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA: Bonds in this category are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.
C: Bonds in this category are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-5
<PAGE>
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.
A-6
<PAGE>
C: This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
AAA - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
BB, B, CCC, DD, AND DP - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
FITCH INVESTORS SERVICE, INC.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
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<PAGE>
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, C, DDD, DD, AND D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings "BB"
to "C" represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
ICBA
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank 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-8
<PAGE>
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
BB, B, CCC, CC, AND C - Obligations are assigned one of these ratings
where it is considered that speculative characteristics are present. "BB"
represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
THOMSON BANKWATCH
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
AA - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
A - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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
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<PAGE>
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).
(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).
C-1
<PAGE>
(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.
(1.24) Form of Amendment No. 20 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).
(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.
(5.5) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding Global
Technology 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.
(6.4) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding Global Technology Fund
to the Distribution Agreement.
(7) None.
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<PAGE>
(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.
(8.5) Form of Sub-Custodian Agreement among Registrant, PNC Bank
and Chase Manhattan Bank, with respect to Global Blue Chip
Fund, Emerging Markets Bond Fund, Greater China Fund,
Pacific Rim Fund and Latin America Fund (k).
(8.6) Form of letter agreement among Registrant, PNC Bank
and Chase Manhattan Bank, adding additional Funds to
Sub-Custodian Agreement.
(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
(9.7) Form of amended Shareholder Service Plan between Registrant
and Nicholas-Applegate Securities (k).
(9.8) License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (e).
(9.9) Accounting Services Agreement between Registrant and PFPC
Inc. dated as of April 1, 1993 (e).
(9.10) Form of letter agreement between Registrant and PFPC Inc.,
adding Global Blue Chip Fund and Emerging Markets Bond Fund
to Accounting Services Agreement (h).
(9.11) Form of letter agreement between Registrant and PFPC Inc.
with respect to accounting services fees related to the
Global Blue Chip Fund and the Emerging Markets Bond Fund
(i).
(9.12) Form of letter agreement between Registrant and PFPC Inc.
adding the Pacific Rim Fund, Greater China Fund and Latin
America Fund (j).
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<PAGE>
(9.13) Form of letter agreement between Registrant and PFPC Inc.
regarding fees for additional Funds under Accounting
Services Agreement (k).
(9.14) Form of letter agreement between Registrant and PFPC Inc.,
adding Classes of shares and Global Technology Fund to
Accounting Services Agreement.
(9.15) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management regarding expense
reimbursements.
(9.16) Credit Agreement among Registrant, Chemical Bank and certain
other banks dated April 10, 1996 (e).
(9.17) First Amendment Agreement to Credit Agreement dated as of
April 9, 1997 among Registrant, The Chase Manhattan Bank,
and certain other banks (h).
(9.18) Form of Second Amendment Agreement to Credit Agreement among
Registrant, The Chase Manhattan Bank, and certain other
banks (j).
(10) Opinion of Counsel (b).
(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)
(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.
(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.
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<PAGE>
(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.
(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.
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
C-5
<PAGE>
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
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
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.
C-6
<PAGE>
Registrant's trustees, officers, employees and agents against
liabilities incurred by them in connection with the defense or disposition of
any action or proceeding in which they may be involved or with which they may be
threatened, while in office or thereafter, by reason of being or having been in
such office, except with respect to matters as to which it has been determined
that they acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office
("Disabling Conduct").
Section 8 of Registrant's Administration Agreement, filed herewith as
Exhibit 9.1, provides for the indemnification of Registrant's Administrator
against all liabilities incurred by it in performing its obligations under the
Agreement, except with respect to matters involving its Disabling Conduct.
Section 9 of Registrant's Distribution Agreement, filed herewith as Exhibit 6,
provides for the indemnification of Registrant's Distributor against all
liabilities incurred by it in performing its obligations under the Agreement,
except with respect to matters involving its Disabling Conduct. Section 4 of
the Shareholder Service Agreement, filed herewith as Exhibit 9.3, provides for
the indemnification of Registrant's Distributor against all liabilities incurred
by it in performing its obligations under the Agreement, except with respect to
matters involving its Disabling Conduct.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Nicholas-Applegate Capital Management, the investment adviser to the
Master Trust, is a California limited partnership, the general partner of which
is Nicholas-Applegate Capital Management, Inc. (the "General Partner"). During
the two fiscal years ended December 31, 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
C-7
<PAGE>
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.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder will be maintained either at the offices of the
Registrant (600 West Broadway, 30th Floor, San Diego, California 92101); the
Investment Adviser to the Trust and Master Trust, Nicholas-Applegate Capital
Management (600 West Broadway, 30th Floor, San Diego, California 92101); the
primary administrator for the Trust and Master Trust, Investment Company
Administration Corporation (4455 East Camelback Road, Suite 261-E, Phoenix,
Arizona 85018); the Custodian, PNC Bank (Airport Business Center,
International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113); or the
Transfer and Dividend Disbursing Agent, State Street Bank & Trust Company (2
Heritage Drive, 7th Floor, North Quincy, Massachusetts 02171).
Item 31. MANAGEMENT SERVICES.
Not Applicable.
Item 32. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the holders of
at least 10% of its outstanding shares to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee, it will do so and
will assist in communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 17th day
of July 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 Officer July 17, 1998
-----------------------
Arthur E. Nicholas
Principal Financial and
E. Blake Moore, Jr. Accounting Officer July 17, 1998
-----------------------
E. Blake Moore, Jr.
Fred C. Applegate* Trustee July 17, 1998
-----------------------
Fred C. Applegate
Arthur B. Laffer* Trustee July 17, 1998
-----------------------
Arthur B. Laffer
Charles E. Young* Trustee July 17, 1998
-----------------------
Charles E. Young
* s/E. Blake Moore, Jr.
-----------------------
By: E. Blake Moore, Jr.
Attorney In Fact
C-9
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE MUTUAL FUNDS
AMENDMENT NO. 65 TO
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-7428
<TABLE>
<CAPTION>
Exhibit No. Title of Exhibit
- ----------- ----------------
<S> <C>
(1.23) Form of Amendment No. 19 to Amended and Restated Declaration of
Trust.
(1.24) Form of Amendment No. 20 to Amended and Restated Declaration of
Trust.
(5.4) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding additional Funds to
the Investment Advisory Agreement.
(5.5) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding Global Technology
Fund to the Investment Advisory Agreement.
(6.3) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding Classes of shares to the
Distribution Agreement.
(6.4) Form of letter agreement between Registrant and
Nicholas-Applegate Securities adding Global Technology Fund to
the Distribution Agreement.
(8.4) Form of letter agreement between Registrant and PNC Bank, adding
Classes of shares and Global Technology Fund to Custodian
Services Agreement.
(8.6) Form of letter agreement among Registrant, PNC Bank and Chase
Manhattan Bank, adding additional Funds to Sub-Custodian
Agreement.
(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
(9.14) Form of letter agreement between Registrant and PFPC Inc., adding
Classes of shares and Global Technology Fund to Accounting
Services Agreement.
(9.15) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management regarding expense
reimbursements.
(11) Consent of independent auditors.
(17) Financial Data Schedule as of March 31, 1998.
</TABLE>
C-10
<PAGE>
Exhibit 1.23
AMENDMENT NO. 19 TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS AMENDMENT NO. 19 TO THE AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS is made as of the 24th day of July, 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, in connection with the reorganization of the Trust from a
"master-feeder" structure to a "multi-class" structure, the undersigned wish to
change the name of each Institutional Portfolio series of the Trust to a "Fund",
to reclassify the current Interests of each Fund as "Class I" Interests of the
Fund, to designate certain additional classes of Interests of each Fund, and to
terminate certain series of Interests of the Trust; and
WHEREAS, the Board of Trustees and the shareholders of the
Institutional Portfolio series of the Trust have approved an amendment to the
Declaration of Trust related to the creation of multiple classes of series of
Interest of the Trust; and
WHEREAS, the Board of Trustees and the shareholders of the Government
Income A, B, C and Qualified Portfolio series of the Trust have approved the
reorganization of such series into the Fully Discretionary Fixed Income Fund
series of the Trust, and the Board of Trustees wishes to terminate such
Government Income Portfolio series; and
WHEREAS, the Trustees wish to create an addition series of Interests
of the Trust to be known as the Global Technology Fund;
NOW THEREFORE, the Board of Trustees hereby amends the Declaration of
Trust as follows:
1. The first sentence of Section 6.1(b) of the Declaration of Trust
is hereby amended to read in full as follows: "The Trustees may, without Holder
approval, divide
<PAGE>
Interests of any series created after the Effective Date, or any Institutional
Portfolio series created prior to the Effective Date, into two or more classes,
Interests of each such class having such preferences and special or relative
rights and privileges (including conversion rights, if any) as the Trustees may
determine."
2. The name of each Institutional Portfolio series of the Trust is
hereby amended to replace the phrase "Institutional Portfolio" with the phrase
"Fund".
3. The Board of Trustees hereby creates Class A, B, C, Q and I
Interests of each currently existing Fund and each Fund created hereafter, and
all currently outstanding Interests of each Fund are hereby classified as "Class
I" Interests of such Fund. The relative rights and privileges of such Classes
shall be as set forth in the Multiple Class Plan attached hereto as Exhibit A.
4. The following series of Interests of the Trust are hereby
terminated and dissolved, and the assets of each such series shall be
distributed to the holders of Interests of such series pro rata in proportion to
their Interests in such series:
Nicholas-Applegate Core Growth Portfolio A
Nicholas-Applegate Core Growth Portfolio B
Nicholas-Applegate Core Growth Portfolio C
Nicholas-Applegate Core Growth Qualified Portfolio
Nicholas-Applegate Government Income Portfolio A
Nicholas-Applegate Government Income Portfolio B
Nicholas-Applegate Government Income Portfolio C
Nicholas-Applegate Government Income Qualified Portfolio
Nicholas-Applegate Income & Growth Portfolio A
Nicholas-Applegate Income & Growth Portfolio B
Nicholas-Applegate Income & Growth Portfolio C
Nicholas-Applegate Income & Growth Qualified Portfolio
Nicholas-Applegate Balanced Growth Portfolio A
Nicholas-Applegate Balanced Growth Portfolio B
Nicholas-Applegate Balanced Growth Portfolio
Nicholas-Applegate Balanced Growth Qualified Portfolio
Nicholas-Applegate Worldwide Growth Portfolio A
Nicholas-Applegate Worldwide Growth Portfolio B
Nicholas-Applegate Worldwide Growth Portfolio C
Nicholas-Applegate Worldwide Growth Qualified Portfolio
Nicholas-Applegate Emerging Growth Portfolio A
Nicholas-Applegate Emerging Growth Portfolio B
Nicholas-Applegate Emerging Growth Portfolio C
Nicholas-Applegate Emerging Growth Qualified Portfolio
<PAGE>
Nicholas-Applegate International Small Cap Growth Portfolio A
Nicholas-Applegate International Small Cap Growth Portfolio B
Nicholas-Applegate International Small Cap Growth Portfolio C
Nicholas-Applegate International Small Cap Growth Qualified Portfolio
Nicholas-Applegate Emerging Countries Portfolio A
Nicholas-Applegate Emerging Countries Portfolio B
Nicholas-Applegate Emerging Countries Portfolio C
Nicholas-Applegate Emerging Countries Qualified Portfolio
Nicholas-Applegate Global Growth & Income Portfolio A
Nicholas-Applegate Global Growth & Income Portfolio B
Nicholas-Applegate Global Growth & Income Portfolio C
Nicholas-Applegate Global Growth & Income Qualified Portfolio
Nicholas-Applegate Large Cap Growth Portfolio A
Nicholas-Applegate Large Cap Growth Portfolio B
Nicholas-Applegate Large Cap Growth Portfolio C
Nicholas-Applegate Large Cap Growth Qualified Portfolio
Nicholas-Applegate International Core Growth Portfolio A
Nicholas-Applegate International Core Growth Portfolio B
Nicholas-Applegate International Core Growth Portfolio C
Nicholas-Applegate International Core Growth Qualified Portfolio
5. The second sentence of Section 8.8 of the Declaration of Trust is
hereby amended and restated to read in full as follows:
"Without limiting the authority of the Trustees set forth in this Section 8.8 to
establish and designate any further series, the Trustees hereby establish and
designate twenty-three series, as follows:
Nicholas-Applegate Core Growth Fund
Nicholas-Applegate Income & Growth Fund
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate Emerging 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 Fully Discretionary Fixed Income Fund
-3-
<PAGE>
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"
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
______________________________ _______________________________
Arthur B. Laffer Fred C. Applegate
______________________________
Charles E. Young
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<PAGE>
EXHIBIT A
THE NICHOLAS-APPLEGATE MUTUAL FUNDS
MULTIPLE CLASS PLAN
This Multiple Class Plan ("Plan") has been prepared, pursuant to the
requirements of rule 18f-3(d) under the Investment Company Act of 1940
("Investment Company Act" or "Act"), in connection with the offer and sale of
shares of the various series of Nicholas-Applegate Mutual Funds (the "Trust").
Each series other than the Money Market Fund (each a "Fund" and collectively the
"Funds") is a multiple class fund within the meaning of rule 18f-3.
In accordance with the requirements of rule 18f-3, this Plan describes
the differences among the classes of shares that are issued by the Funds,
including the distribution arrangement that pertains to each class, the methods
of allocating expenses relating to those differences, and the conversion
features or exchange privileges relating to the classes.
I. BACKGROUND
The Trust is an open-end investment company registered under the
Investment Company Act. The Trust currently has 17 series, and may have other
Funds in the future. Each Fund has differing investment objectives and
policies.
Each Fund currently offers up to five classes of shares -- Class A, B,
C, Q, and I, although certain Funds currently have only Class I shares. The
classes of each Fund represent interests in the same portfolio of investments
held by the Fund and, except as described below, are identical in all respects.
The classes differ in the following respects: (1) in the shareholder service
plan attributable to Class A, B, C and Q shares but not Class I shares; (2) in
the distribution plan attributable to Class A, B and C shares but not Class Q or
I shares; (3) in the expenses that may be incurred by or allocated to one class
as compared to another, and in the expense limitations applicable to one class
as compared to the others; (4) in the substantially greater minimum investment
required to purchase Class Q and I shares than the other classes of
<PAGE>
shares; (5) in the types of investors eligible to purchase Class Q and I shares;
and (6) in the voting rights accorded to each class. These differences are
discussed below in more detail.
II. DISCUSSION OF DIFFERENCES
A. SALES LOADS
An investor in Class A shares pays a front-end sales charge ranging up
to 5.25% of the offering price, subject to certain quantity discounts and
eligibility for purchases at net asset value, as described in the Funds'
prospectuses. In addition, the Funds may impose a contingent deferred sales
charge on redemption of Class A shares purchased within one year without a
front-end sales charge as a result of the purchase of more than $1 million. An
investor in Class B or C shares pays no front-end sales charge. However, the
Funds impose a contingent deferred sales charge on redemptions of Class B shares
redeemed within six years of purchase, at rate declining from 5% to zero over
the period. In addition, the Funds may impose a contingent deferred sales
charge on redemptions of Class C shares purchased within one year, similar to
the charge imposed on Class A shares.
B. DISTRIBUTION PLAN ARRANGEMENTS
Class A, B and C shares of the Funds are subject to a Rule 12b-1
Distribution Plan. Pursuant to the Rule 12b-1 Distribution Plan, Class A shares
of the Funds pay the Fund's Distributor an annual fee of up to 0.25% of the
average net assets of the Fund attributable to Class A shares, and Class B and C
shares pay the Distributor an annual fee of up to 0.75% of the average net
assets attributable to Class B and C shares, respectively.
-2-
<PAGE>
C. SHAREHOLDER SERVICE ARRANGEMENTS
Class A, B, C and Q shares are subject to a Shareholder Service Plan
(the "Service Plan"). Pursuant to the Service Plan, shares of each such Class
of a Fund pay the Fund's Distributor an annual fee of up to 0.25% of the average
net assets of the Fund attributable to the shares of the Class.
D. MINIMUM INVESTMENTS.
In general, the minimum initial investment in Class A, B and C shares
is $2,000, and the minimum additional investment is $100, subject to certain
waivers described in the Funds' prospectuses. In general, the minimum initial
investment in Class Q and I shares is $250,000, and the minimum additional
investment is $10,000, subject to certain waivers described in the Funds'
prospectuses.
E. ELIGIBLE INVESTORS.
In general, any investor may purchase Class A, B and C shares of the
Funds, which are offered primarily through broker dealers who are not affiliated
with the Distributor. Class Q shares are offering primarily to qualified
retirement plans, certain financial institutions, and asset allocation programs
through the Distributor and unaffiliated broker-dealers. Class I shares are
available only to institutions and certain asset allocation programs through the
Distributor.
F. EXPENSE LIMITATIONS.
The Fund's Adviser has guaranteed that, for so long as it acts as
investment adviser to a Fund, the total expenses of the various Classes of
shares of the Fund, including advisory fees (but excluding interest, taxes,
portfolio transaction expenses, blue sky fees, 12b-1 plan fees and extraordinary
expenses), will not exceed a specified percentage of the Class' average daily
net assets on an annualized basis. Each Class will reimburse the Adviser for
fees foregone or other expenses paid by the Adviser in any fiscal year pursuant
to the expense guarantee at a later date, without interest, so long as such
-3-
<PAGE>
reimbursement will not cause the annual expense ratio for the year in which it
is made to exceed the amount of the expense guarantee. No Class will be
required to repay any unreimbursed amounts to the Adviser upon termination of
its investment management contract with respect to the Fund.
The expense limitation for Class I shares will generally be lower than
for the other Classes of shares by the amount of the Service Plan and
Distribution Plan fees attributable to the other Classes. The expense
limitation for Class Q shares will generally be lower than for the Class A, B
and C shares by the amount of the Distribution Plan fees attributable to the
Class A, B and C shares. The expense limitation for Class A shares will
generally be lower than for the Class B and C shares as a result of lower
Distribution Plan fees. The net income attributable to the various Classes of
shares and the dividends payable on the various Classes of shares will vary as a
result of the differing applicable expenses and expense limitations.
H. PAYING FOR EXPENSES
1. EXPENSES ALLOCATED TO A PARTICULAR CLASS
Certain expenses of a Fund will be allocated solely to a particular
class of shares of the Fund because they relate only to the expenses of that
class. Such expenses include:
(a) distribution expenses associated with distribution of Class A, B and C
shares of the Funds for which distribution plan fees will be assessed,
and shareholder servicing expenses associated with the servicing of
Class A, B, C and Q shareholders of the Funds for which a shareholder
servicing fee will be assessed;
(b) incremental transfer agent fees identified by the transfer agent as
being attributable to a specific class;
(c) printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses, and proxies to
shareholders of a particular class;
-4-
<PAGE>
(d) blue sky registration fees incurred by a particular class;
(e) SEC registration fees incurred by a particular class;
(f) the expenses of administrative personnel and services as required to
support the shareholders of a particular class;
(g) accounting expenses relating to a particular class;
(h) litigation or other legal expenses relating to a particular class;
(i) trustees' fees and expenses incurred as a result of issues relating to
a particular class;
(j) any other incremental expenses subsequently identified that should be
properly allocated to a particular class of shares.
2. EXPENSES ALLOCATED TO ALL CLASSES
Other expenses of a Fund will be allocated to all classes of shares of
the Fund in accordance with the requirements of rule 18f-3(c). These include
the management fee paid to the Adviser to the Fund; the custodial fee; and
certain other expenses of the Fund. These expenses will be allocated to each
class of a Fund based on the net asset value of such class in relation to the
net asset value of the Fund.
I. CONVERSION FEATURES AND EXCHANGE PRIVILEGES
Shareholders of any Class of a Fund may exchange their shares for
shares of the same Class of any of the other Funds, or for shares of the Money
Market Fund, at the respective net asset values determined after receipt of the
request in good order. Class B shares will automatically convert to Class A
shares approximately seven years after purchase, at the respective net asset
values on the date of conversion. If a shareholder who has exchanged Class B or
C shares for shares of the Money Market Fund seeks to redeem his Money Market
Fund shares before satisfying the applicable holding period with respect to the
Class A, B or
-5-
<PAGE>
C shares, the redemption proceeds will be subject to the applicable contingent
deferred sales charge, if any. If a shareholder seeks to acquire Class A shares
of any Fund, or shares of the Money Market Fund, through exchange for shares of
any other Class, the shareholder will be required to pay the applicable sales
charge of the Fund into which the shares are exchanged.
J. VOTING OF CLASS SHARES
The voting rights of each shareholder of a Fund are the same, except
that A, B and C shares will have the exclusive right to vote on matters relating
to the Distribution Plan, to the extent that such a shareholder vote is required
by the Investment Company Act or otherwise requested. Rule 12b-1 adopted by the
Securities and Exchange Commission under the Investment Company Act requires
that (i) any amendment of the Distribution Plan to increase materially the costs
which a Class of shares of a Fund may bear for distribution services under the
Plan must be approved by a vote of a majority of the outstanding shares of that
Class of the Fund; and (ii) the Distribution Plan may be terminated at any time
with respect to any Class of shares of a Fund by the vote of a majority of the
outstanding shares of the Class. Each shareholder is entitled to one vote for
each full share held and fractional votes for fractional shares held.
Shareholders will vote in the aggregate and not by class or series, except as
noted above and where otherwise required by law (or when permitted by the Board
of Trustees).
Adopted as of November 14, 1997
<PAGE>
Exhibit 1.24
AMENDMENT NO. 20 TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS AMENDMENT NO. 20 TO THE AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS is made as of the 24th day of July, 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 rename the Emerging Growth Fund series
of the Trust as the Small Cap Growth Fund series, rename the Core Growth Fund
series of the Trust as the Mid Cap Growth Fund series, rename the Income Growth
Fund series of the Trust as the Convertible Fund series, and rename the Fully
Discretionary Fixed Income Fund series of the Trust as the High Quality Bond
Fund series;
NOW THEREFORE, the Board of Trustees hereby amends the second sentence
of Section 8.8 of the Declaration of Trust to read in full as follows:
"Without limiting the authority of the Trustees set forth in this Section 8.8 to
establish and designate any further series, the Trustees hereby establish and
designate twenty-four series, as follows:
Nicholas-Applegate Mid Cap Growth Fund
Nicholas-Applegate Government Income 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
<PAGE>
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"
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
- ----------------------------------- ----------------------------------------
Arthur B. Laffer Fred C. Applegate
- -----------------------------------
Charles E. Young
<PAGE>
Exhibit 5.4
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
July 24, 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 is hereby amended by adding thereto the
series set forth on Exhibit A as Funds thereunder. 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 Managmenet
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
1
<PAGE>
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 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.
2
<PAGE>
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.
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.
3
<PAGE>
Exhibit 5.5
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
July 24, 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 is hereby amended by adding thereto the
Nicholas-Applegate Global Technology 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 Managmenet
By: Nicholas-Applegate Capital Management
Holdings, L.P., its General Partner
By: Nicholas-Applegate Capital Management
Holdings, Inc., its General Partner
By: _____________________
1
<PAGE>
E. Blake Moore, Jr.
Secretary
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 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.
2
<PAGE>
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.
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 the Fund's average net
assets.
NICHOLAS-APPLEGATE PACIFIC RIM FUND: 1.00% of the 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.
3
<PAGE>
Exhibit 6.3
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
July 24, 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 to delete all series A, B, C and Qualified Portfolios therefrom. This
will further confirm that all Institutional Portfolio series have been renamed
to substitute the phrase "Fund" for the phrase "Institutional Portfolio," and
that such series now have Class A, B, C, Q and I shares, all of which are
covered by the Distribution Agreement.
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
- ------------------------------
E. Blake Moore, Jr.
Secretary
<PAGE>
EXHIBIT A
Nicholas-Applegate Core Growth Fund
Nicholas-Applegate Large Cap Growth Fund
Nicholas-Applegate Mini Cap Growth Fund
Nicholas-Applegate Emerging Growth Fund
Nicholas-Applegate Income & Growth Fund
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate International 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 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
<PAGE>
Exhibit 6.4
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
July 24, 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 Global Technology Fund as an additional
Portfolio thereunder. The full list of Portfolios covered by the Agreement is
attached as Appendix 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
_________________________
E. Blake Moore, Jr.
Secretary
<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 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
<PAGE>
Exhibit 8.4
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
July 24, 1998
PNC Bank, National Association
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
Ladies and Gentlemen:
Reference is made to the Custodian Services Agreement between us dated
as of April 1, 1993 (the "Agreement").
This is to inform you that we have completed our reorganization from a
"master-feeder" structure to a "multi-class" structure. As a result of this
reorganization, each of our various Institutional Portfolio series has been
renamed to replace the phrase "Institutional Portfolio" with the phrase "Fund,"
and the former shareholders of each Institutional Portfolio now hold Class I
shares of the Fund. The Funds will continue as Portfolios under the Agreement.
In addition, the A, B, C and Qualified Portfolio series which
previously corresponded to each Institutional Portfolio series have been
dissolved, and the shareholders of such Portfolios now hold Class A, B, C and Q
shares of the corresponding Fund. Accordingly, the previous A, B, C and
Qualified Portfolio series are hereby deleted as Portfolios under the Agreement.
This will confirm that the names of the following Portfolios have been
changed: Core Growth Fund has been changed to Mid Cap Fund; Emerging Growth Fund
has been changed to Small Cap Growth Fund; Income & Growth Fund has been changed
to Convertible Fund; and Fully Discretionary Fixed Income Fund has been changed
to High Quality Bond Fund. This will further confirm that the Global Technology
Fund has been added as a Portfolio under the Agreement.
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
<PAGE>
AGREED:
PNC BANK, NATIONAL ASSOCIATION
By:
-------------------------
Title:
-------------------------
<PAGE>
Exhibit 8.6
Nicholas-Applegate Mutual Funds
600 West Broadway, 30th Floor
San Diego, California 92101
July 24, 1998
The Chase Manhattan Bank, N.A.
1211 Avenue of the Americas, 32nd Floor
New York, New York 10036
Attention: Global Custody Division
PNC Bank, National Association
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
Ladies and Gentlemen:
Reference is made to the Sub-Custodian Agreement dated as of September
26, 1997 among Nicholas-Applegate Mutual Funds and you (the "Agreement").
Pursuant to Appendix A to the Agreement, we wish to add the Funds
listed on attachment 1 to the Agreement. Please indicate your acceptance of
this addition by signing two copies of this letter below and returning them to
us. Thank you for your assistance regarding this matter.
Very truly yours,
E. Blake Moore, Jr.
Secretary
AGREED:
PNC BANK, NATIONAL ASSOCIATION
By:______________________________
Title:___________________________
THE CHASE MANHATTAN BANK, N.A.
By:______________________________
Title:___________________________
<PAGE>
ATTACHMENT 1
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 ConvertibleFund (formerly Nicholas-Applegate Income & Growth
Fund)
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate International Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate International Small Cap Growth Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate High Quality Bond Fund (formerly Nicholas-Applegate Fully
Discretionary Fixed Income Fund)
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Money Market Fund
<PAGE>
Exhibit 9.6
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
July 24, 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").
This is to inform you that we have completed our reorganization from a
"master-feeder" structure to a "multi-class" structure. As a result of this
reorganization, each of our various Institutional Portfolio series has been
renamed to replace the phrase "Institutional Portfolio" with the phrase "Fund,"
and the former shareholders of each Institutional Portfolio now hold Class I
shares of the Fund. The Funds will continue as Portfolios under the Agreement.
In addition, the A, B, C and Qualified Portfolio series which
previously corresponded to each Institutional Portfolio series have been
dissolved, and the shareholders of such Portfolios now hold Class A, B, C and Q
shares of the corresponding Fund. Accordingly, the previous A, B, C and
Qualified Portfolio series are hereby deleted as Portfolios under the Agreement.
This will confirm that the names of the following Portfolios have been
changed: Core Growth Fund has been changed to Mid Cap Fund; Emerging Growth Fund
has been changed to Small Cap Growth Fund; Income & Growth Fund has been changed
to Convertible Fund; and Fully Discretionary Fixed Income Fund has been changed
to High Quality Bond Fund. This will further confirm that the Global Technology
Fund has been added as a Portfolio under the Agreement.
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
<PAGE>
AGREED:
STATE STREET BANK AND TRUST COMPANY
By:
------------------------------
Title:
----------------------------
<PAGE>
Exhibit 9.14
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
July 24, 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").
This is to inform you that we have completed our reorganization from a
"master-feeder" structure to a "multi-class" structure. As a result of this
reorganization, each of our various Institutional Portfolio series has been
renamed to replace the phrase "Institutional Portfolio" with the phrase "Fund,"
and the former shareholders of each Institutional Portfolio now hold Class I
shares of the Fund. The Funds will continue as Portfolios under the Agreement.
In addition, the A, B, C and Qualified Portfolio series which
previously corresponded to each Institutional Portfolio series have been
dissolved, and the shareholders of such Portfolios now hold Class A, B, C and Q
shares of the corresponding Fund. Accordingly, the previous A, B, C and
Qualified Portfolio series are hereby deleted as Portfolios under the Agreement.
This will confirm that the names of the following Portfolios have been
changed: Core Growth Fund has been changed to Mid Cap Fund; Emerging Growth Fund
has been changed to Small Cap Growth Fund; Income & Growth Fund has been changed
to Convertible Fund; and Fully Discretionary Fixed Income Fund has been changed
to High Quality Bond Fund. This will further confirm that the Global Technology
Fund has been added as a Portfolio under the Agreement.
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
<PAGE>
AGREED:
PFPC INC.
By:
-------------------------
Title:
-------------------------
<PAGE>
Exhibit 9.15
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
July 24, 1998
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, California 92101
Ladies and Gentlemen:
In connection with our reorganization as a multiple class investment
company, this will confirm that the expense limitation letter agreement between
us dated September 27, 1993, as previously amended, is hereby amended and
restated in full, as follows.
Nicholas-Applegate Capital Management (the "Investment Adviser") will
reduce its investment advisory fees with respect to the various series (each a
"Fund") of Nicholas-Applegate Mutual Funds, and will pay or reimburse the Funds
for other expenses, as necessary in order to ensure that the total Basic
Expenses paid by the Funds (as defined below) do not exceed, as a percentage of
the Funds' net assets on an annual basis, the Basic Expense Limitations set
forth in Exhibit A. Any such fee reductions, expenses and reimbursements made
with respect to a Fund will be allocated among the various classes of shares of
the Fund in accordance with the preferential dividend requirements of Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Preferential Dividend
Requirements"). For purposes of this paragraph, the term "Basic Expenses" of a
Fund means all expenses of the Fund which are allocated among the various
classes of the Fund pro rata based on the relative net asset values attributable
to each class, and excludes all class-specific expenses of the Fund which are
incurred by and allocated specifically to any class.
In addition, the Investment Adviser will reduce its investment
advisory fees with respect to the Funds, and will pay or reimburse the Funds for
other expenses, as necessary in order to ensure that the Total Expenses of the
Funds (as defined below) do not exceed, as a percentage of the Funds' net assets
on an annual basis, the Current Total Expense Limitations set forth in
Exhibit A. The Total Expenses covered by this paragraph are comprised of all
expenses of the Funds other than interest, taxes, brokerage commissions and
other portfolio transaction expenses, capital expenditures and extraordinary
expenses. Any such fee reductions or expense reimbursements made with
<PAGE>
respect to a Fund will be allocated among the various classes of shares of the
Fund in accordance with the Preferential Dividend Requirements. You acknowledge
that, in order to comply with the Current Total Expense Limitations with respect
to any Fund in a manner consistent with the Preferential Dividend Requirements,
it may be necessary to reduce the Basic Expense Limitations applicable to the
various classes of shares of such Fund.
Each Fund will reimburse the Investment Adviser for fees foregone or
other expenses paid by the Investment Adviser pursuant to the foregoing
limitations in later years in which the relevant expenses of the Fund are less
than the Basic Expense Limitations and Current Total Expense Limitations for
such Fund in effect at the time such fees were foregone or expenses were paid by
the Investment Adviser. However, this reimbursement obligation with respect to
fees foregone or other expenses paid by the Investment Adviser on behalf of a
Fund will expire on the later of the following dates: (i) the end of the fiscal
year of the Fund which is five years after the fiscal year in which such fees
were foregone or expenses paid; and (ii) March 31, 2002. Any reimbursements
made with respect to a Fund will be allocated among the various classes of
shares of the Fund in accordance with the Preferential Dividend Requirements.
The expense limitations set forth above will remain in effect until
March 31, 1999, and thereafter if and to the extent agreed upon by you with the
Funds, as reflected in a written agreement between us or in the prospectus and
statement of additional information of the Funds as in effect from time to time.
Please sign this letter below to confirm your agreement with the
foregoing.
.
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>
Current
Basic Expense Total Expense
Name of Fund and Class Limitation Limitation
- ---------------------- ---------- ----------
<S> <C> <C>
Mid Cap Growth Fund
(formerly Core Growth 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
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 Fund)
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 Fund)
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Current
Basic Expense Total Expense
Name of Fund and Class Limitation Limitation
- ---------------------- ---------- ----------
<S> <C> <C>
Class Q 1.11 1.25
Class I 0.86 1.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Current
Basic Expense Total Expense
Name of Fund and Class Limitation Limitation
- ---------------------- ---------- ----------
<S> <C> <C>
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
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 I 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Current
Basic Expense Total Expense
Name of Fund and Class Limitation Limitation
- ---------------------- ---------- ----------
<S> <C> <C>
High Yield Bond Fund, Class A 1.01 1.10
Class B 1.66 1.75
Class C 1.66 1.75
Class Q 0.91 1.00
Class I 0.75 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 Fund)
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
Global Blue Chip, Class I 1.40 1.40
Emerging Markets Bond, Class I 0.95 0.95
Pacific Rim, Class I 1.40 1.40
Greater China, Class I 1.40 1.40
Latin America, Class I 1.65 1.65
Global Technology, Class I 1.40 1.40
</TABLE>
<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. 63 under the Securities Act of 1933 and Amendment No. 65 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
July 20, 1998
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