<PAGE>
As filed with the Securities and Exchange Commission
on February 27, 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. 54 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 56
(Check appropriate box or boxes)
---------------------
NICHOLAS-APPLEGATE MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Address of Principal Executive Offices, including Zip Code)
ARTHUR E. NICHOLAS
C/O NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Name and Address of Agent for Service)
COPY TO: ROBERT E. CARLSON
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 S. FLOWER STREET, TWENTIETH FLOOR
LOS ANGELES, CALIFORNIA 90071
---------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVE DATE.
---------------------
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ______________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on ____________ pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii), of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered : Shares of Beneficial Interest
---------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
- ------------- --------
PART A
Item 1. Cover Page. . . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis. . . . . . . . . . . . . . . . . . Overview; High Yield Bond
Fund
Item 3. Condensed Financial Information . . . . . . Not Applicable
Item 4. General Description of Registrant . . . . . Overview; High Yield Bond
Fund
Item 5. Management of Fund. . . . . . . . . . . . . Organization and
Management; Portfolio
Teams
Item 6. Capital Stock and Other Securities. . . . . Your Account
Item 7. Purchase of Securities Being Offered. . . . Your Account
Item 8. Redemption or Repurchase. . . . . . . . . . Your Account
Item 9. Pending Legal Proceedings . . . . . . . . . Not Applicable
PART B
Item 10. Cover Page. . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . . . . General Information
Item 13. Investment Objectives and Policies. . . . . Investment Objectives,
Policies and Risks;
Investment Restrictions
Item 14. Management of the Fund. . . . . . . . . . . Trustees and Officers;
Administrators;
Distributor
Item 15. Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . Not Applicable
Item 16. Investment Advisory and Other Services. . . Administrators;
Investment Adviser;
Distributor; Custodian,
Transfer and Dividend
Disbursing Agent,
Independent Auditors and
Legal Counsel
Item 17. Brokerage Allocation and Other Practices. . Portfolio Transactions
and Brokerage
Item 18. Capital Stock and Other Securities. . . . . Miscellaneous
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered. . . . . . . . . . Purchase and Redemption
of Fund Shares;
Shareholder Services
Item 20. Tax Status. . . . . . . . . . . . . . . . . Dividends, Distributions
and Taxes
Item 21. Underwriters. . . . . . . . . . . . . . . . Distributor
Item 22. Calculation of Performance Data . . . . . . Performance Information
Item 23. Financial Statements. . . . . . . . . . . . Not Applicable
<PAGE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration Statement.
<PAGE>
NICHOLAS/APPLEGATE-Registered Trademark-
M U T U A L F U N D S
PROSPECTUS
The prospectus contains vital information about the Class A, B and C Shares
of this Fund. For your own benefit and protection, please read it before you
invest, and keep it on hand for future reference.
Please note that these Shares
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their investment objectives
THE HIGH YIELD BOND FUND MAY INVEST WITHOUT LIMITATION IN DEBT SECURITIES
RATED BELOW INVESTMENT GRADE, SOMETIMES REFERRED TO AS "JUNK BONDS." THESE
LOWER RATED SECURITIES ARE SPECULATIVE AND INVOLVE GREATER RISKS, INCLUDING
RISK OF DEFAULT, THAN HIGHER RATED SECURITIES. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
LIKE ALL MUTUAL FUND SHARES, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
HIGH YIELD BOND FUND
MARCH 2, 1998
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
OVERVIEW......................... 3
A LOOK AT THE FUND'S HIGH YIELD BOND FUND............. 4
GOALS, STRATEGIES, RISKS,
AND FINANCIAL HISTORY.
POLICIES AND INSTRUCTIONS DISTRIBUTION OF SHARES
Choosing a Portfolio............. 6
FOR OPENING, MAINTAINING How Sales Charges are
Calculated..................... 6
AND CLOSING AN ACCOUNT Contingent Deferred Sales
Charge......................... 6
IN THE FUND. Sales Charge Reductions and
Waivers........................ 6
Distribution Plan
and Shareholder Services....... 7
The Distributor of the
Trust's Shares................. 7
SIMPLIFIED ACCOUNT
INFORMATION
Opening an Account............... 8
Buying Shares.................... 8
Selling and Redeeming Shares..... 9
Signature Guarantees............. 10
Exchanging Shares................ 10
YOUR ACCOUNT
Transaction Policies............. 11
Features and Account Policies.... 11
DETAILS THAT APPLY TO ALL ORGANIZATION AND
MANAGEMENT
PORTFOLIOS OF THE TRUST AS A GROUP Investment Adviser Compensation.. 13
Administrator Compensation....... 13
Portfolio Trades................. 13
Investment Objectives............ 13
Diversification.................. 13
Prior Master-Feeder Structure....
Portfolio Team................... 14
RISK FACTORS AND
SPECIAL CONSIDERATIONS........... 15
</TABLE>
2
<PAGE>
OVERVIEW
FUND INFORMATION
A concise description of the High Yield Bond Fund begins on the next page. The
description provides the following information:
INVESTMENT OBJECTIVE
The Fund's particular investment goal.
INVESTMENT STRATEGY
The strategy the Fund intends to use in pursuing the investment objective.
PRINCIPAL INVESTMENTS
The primary types of securities in which the Fund invests. Secondary
investments are described in "Risk Factors and Special Considerations" at the
end of the prospectus.
RISK FACTORS
The major risk factors associated with the Fund. Other risk factors are also
described in "Risk Factors and Special Considerations."
INVESTOR EXPENSES
The overall costs borne by an investor in the Class A, B, and C Shares,
including sales charges and annual expenses.
FINANCIAL HIGHLIGHTS
A table showing the financial performance for the Fund 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 "Portfolio"). The Class A, B, and C Shares of each Portfolio represent
interests in a diversified, open-end management investment company (a mutual
fund).
Each Portfolio employs its own strategy and has its own risk/reward profile.
Because you could lose money by investing in a Portfolio, be sure to read all
risk disclosures carefully before investing.
WHO MAY WANT TO INVEST IN THE FUND
- - 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 FUND
- - those who are investing with a shorter time frame
- - those who are uncomfortable with an investment that will go up and down in
value
- - those who are unable to accept the special risks associated with foreign
investing
THE INVESTMENT ADVISER
Nicholas-Applegate Capital Management (the "Investment Adviser") serves as
investment adviser to the Trust. Arthur E. Nicholas and 23 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.
3
<PAGE>
HIGH YIELD BOND FUND
INVESTMENT OBJECTIVE
High level of current income and capital growth.
INVESTMENT STRATEGY
The Fund invests primarily in lower rated debt securities commonly referred
to as "junk bonds." When evaluating any bond, the Investment Adviser selects
bonds based upon a combination of both "top down" analysis of economic trends
and "bottom-up" analysis that evaluates the financial condition and
competitiveness of individual companies. It also analyzes credit quality, the
iyeld 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
lower rated debt securities and convertible securities rated below investment
grade by a nationally recognized statistical rating agency, or of comparable
quality if unrated. There is no limit on either the portfolio maturity or the
acceptable rating of securities bought by the Fund. For a description of
these ratings, see "Corporate Bond Ratings" beginning on page 45. Securities
may bear rates that are fixed, variable or floating. The Fund may invest up
to 35% of its total assets in equity securities of U.S. and foreign
companies. The Fund is not restricted to investments in companies of any
particular size, but currently intends to invest principally in companies
with market capitalization above $100 million at the time of purchase. The
Fund may also use options, futures contracts and interest rate and currency
swaps as hedging techniques.
PORTFOLIO MANAGEMENT
The Investment Adviser emphasizes a team approach to portfolio management to
maximize its overall effectiveness. For a complete list of the portfolio
team, see "Portfolio Teams" on page 14.
RISK FACTORS
As with any fund that invests primarily in bonds, the value of the Fund's
investments fluctuates in response to movements in interest rates. When rates
go up, debt security prices fall; when rates go down, debt security prices
rise. Lower rated securities, while usually offering higher yields, generally
have more risk and volatility than higher rated securities because of reduced
creditworthiness and greater chance of default. Periods of high interest
rates and recession may adversely affect the issuer's ability to pay interest
and principal. To the extent the Fund invests in stocks, the value of those
investments will fluctuate day to day with movements in the stock market as
well as in response to the activities of individual companies. The companies
in which the Fund invests may be more subject to volatile market movements
than securities of larger, more established companies. To the extent the Fund
invests in foreign securities, performance also depends on changes in foreign
currency values, different political and regulatory environments, and overall
economic factors in the countries where the Fund invests. For further
explanation, see "Risk Factors and Special Considerations" starting on page
15.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES - CLASS A, B AND C SHARES
Investors pay various expenses, either directly or indirectly. Actual
expenses may be more or less than those shown.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES: ----------- ----------- -----------
<S> <C> <C> <C>
Maximum sales charge on purchases (as a percentage of offering price)................ 4.75% None None
Sales charge on reinvested dividends................................................. None None None
Deferred sales charge (as a percentage of original purchase price or redemption
proceeds, whichever is lower)...................................................... None(1) 5.00% 1.00%
Redemption fee....................................................................... None None None
Exchange fee......................................................................... None None None
ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS:
Management fees...................................................................... 0.60% 0.60% 0.60%
12b-1 expenses....................................................................... 0.25% 0.50% 0.50%
Other expenses (after expense deferral)(2)........................................... 0.35% 0.75% 0.75%
Total operating expenses (after expense deferral)(2)................................. 1.10% 1.75% 1.75%
</TABLE>
(1) Shareholders who buy $1 million in shares without paying a sales charge may
be charged a contingent deferred sales charge of 1% on redemptions made
within one year of purchase. See "Contingent Deferred Sales Charge" in this
prospectus.
(2) The Investment Adviser has agreed to waive or defer its management fees and
to absorb other operating expenses payable by the Fund, subject to later
reimbursement. For Class A, B & C, Total operating expenses are expected
to be 7.73%, 8.38% and 5.03%, respectively, and Other expenses are
expected to be 7.38%, 7.93% and 4.58% respectively, absent the deferral.
See "Investment Adviser Compensation."
Because of the 12b-1 fee, long-term shareholders may indirectly pay more than
the equivalent of the maximum permitted front-end sales charge.
4
<PAGE>
EXAMPLE:
THE TABLE SHOWS WHAT YOU WOULD PAY IF YOU INVESTED $1,000 OVER THE VARIOUS
TIME FRAMES INDICATED. THE EXAMPLE ASSUMES YOU REINVEST ALL DIVIDENDS AND THE
AVERAGE ANNUAL RETURN IS 5%.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
CLASS A.......................................................................................... $ 68 $ 100
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
Assuming redemption at end of time period(1)..................................................... $ 74 $ 103
Assuming no redemption........................................................................... $ 23 $ 70
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
Assuming redemption at end of time period(1)..................................................... $ 33 $ 70
Assuming no redemption........................................................................... $ 23 $ 70
</TABLE>
This example is for comparison purposes only and is not a representation of the
Fund's actual expenses and returns, either past or future.
(1) Assumes deduction of a contingent deferred sales charge.
- --------------------------------------------------------------------------------
/ / FINANCIAL HIGHLIGHTS
The Class A, B and C Shares of the High Yield Bond Fund are new classes of
shares of the Fund for which financial highlights are not available.
5
<PAGE>
DISTRIBUTION OF SHARES
CHOOSING A PORTFOLIO
This prospectus offers A, B & C Classes. Each Class has its own cost
structure, allowing you to choose the one that best meets your requirements.
Your financial representative can help you decide. For actual past expenses
of A, B & C Classes, see the Fund Information earlier in this prospectus.
HOW SALES CHARGES ARE CALCULATED
CLASS A SHARES. Sales charges are as follows:
CLASS A SHARES OF FIXED INCOME FUNDS
<TABLE>
<CAPTION>
DEALER
COMMISSION
AS A % OF AS A % OF AS % OF
OFFERING YOUR OFFERING
YOUR INVESTMENT PRICE INVESTMENT PRICE
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Up to $49,999....................................................... 4.75% 4.99% 4.00%
$50,000 - $99,999................................................... 4.00% 4.17% 3.25%
$100,000 - $249,999................................................. 3.50% 3.63% 2.75%
$250,000 - $499,999................................................. 2.50% 2.56% 2.00%
$500,000 - $999,999................................................. 2.00% 2.04% 1.60%
$1,000,000 and over................................................. (see below) (see below) (see below)
</TABLE>
Investments of $1 million or more of Class A Shares have no front-end sales
charge. The Distributor pays a commission of 1% to financial institutions
that initiate purchases of $1 million and more.
`
CLASS B SHARES
Class B Shares are offered at their net asset value per share, without any
initial sales charge. The Distributor pays a commission of 3% to financial
institutions that initiate purchases. There is a contingent deferred sales
charge (CDSC) on shares you sell within six years of buying them.
CLASS C SHARES
Class C Shares are offered at their net asset value per share without any
initial sales charge. The Distributor pays a commission of .75% to financial
institutions that initiate purchases.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a CDSC upon redemption of their shares under
the following conditions:
CLASS A SHARES
Shareholders who buy $1 million in shares without a sales charge and redeem
within one full year of purchase may be charged a CDSC of 1% on shares
redeemed.
CLASS B SHARES
<TABLE>
<CAPTION>
CDSC ON SHARES
YEARS AFTER PURCHASE BEING SOLD
- ------------------------------------------------------------------------------------------------- -----------------
<S> <C>
1st year......................................................................................... 5.00%
2nd year......................................................................................... 4.00%
3rd or 4th years................................................................................. 3.00%
5th year......................................................................................... 2.00%
6th year......................................................................................... 1.00%
After 6 years.................................................................................... none
</TABLE>
CLASS C SHARES
Shareholders who redeem Class C Shares within one full year of the purchase
date may be charged a CDSC of 1%.
There is no CDSC imposed on shares acquired through reinvestment of dividends
or capital gains.
The CDSC will be imposed on the lesser of the original purchase price or the
net asset value of the redeemed shares at the time of redemption. CDSC
calculations are based on the numbers of shares involved, not the value of
your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that
represent reinvested dividends/capital gains and then shares that satisfy the
holding period. If there are not enough of these to meet your request, we
will sell your shares on a first in, first out basis. Your financial
institution may elect to waive some or all of the payment thereby reducing
the otherwise applicable CDSC.
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCING YOUR CLASS A SALES CHARGES.
There are several ways you can combine multiple purchases of shares of Class
A Shares to take advantage of the breakpoints in the sales charge schedule.
These can be combined in any manner:
- - ACCUMULATION PRIVILEGE -- lets you add the value of Class A Shares you and
your immediate family already own to the amount of your next investment for
purposes of calculating the sales charge.
6
<PAGE>
- - LETTER OF INTENT -- lets you purchase Class A Shares over a 13 month period
and receive the same sales charge as if all shares had been purchased at
once.
- - COMBINATION PRIVILEGE -- lets you combine Class A Shares for purposes of
reducing the sales charge.
TO UTILIZE: COMPLETE THE APPROPRIATE SECTION ON YOUR APPLICATION, OR CONTACT
YOUR FINANCIAL REPRESENTATIVE OR NICHOLAS-APPLEGATE MUTUAL FUNDS TO ADD THESE
OPTIONS TO AN EXISTING ACCOUNT.
CDSC WAIVERS. In general, the CDSC may be waived on shares you sell for the
following reasons:
- - make payments through certain systematic withdrawal plans
- - qualifying distributions from qualified retirement plans and other employee
benefit plans
- - distributions from custodial accounts under section 403(b)(7) of the Internal
Revenue Code as well as IRAs due to death, disability or attainment of age
59 1/2
TO UTILIZE: CONTACT YOUR FINANCIAL REPRESENTATIVE OR NICHOLAS-APPLEGATE
MUTUAL FUNDS, OR CONSULT THE SAI (SEE THE BACK COVER OF THIS PROSPECTUS).
REINSTATEMENT PRIVILEGE. If you sell Class A Shares, you may invest some or
all of the proceeds in the same class within 90 days without a sales charge.
If you paid a CDSC when you sold your shares, you will be credited with the
amount of the CDSC. All accounts involved must have the same registration.
TO UTILIZE: CONTACT YOUR FINANCIAL REPRESENTATIVE OR NICHOLAS-APPLEGATE
MUTUAL FUNDS.
NET ASSET VALUE PURCHASES. Class A Shares may be sold at net asset value to:
(1) current or retired directors, trustees, partners, officers and employees
of the Trust, the Distributor, the Investment Adviser and its general partner,
certain family members of the above persons, and trusts or plans primarily for
such persons;
(2) current or retired registered representatives or full time employees and
their spouses and minor children and plans of such persons;
(3) former limited partners and participants of certain investment
partnerships and pooled trusts previously managed by the Investment Adviser;
(4) investors who exchange their shares from an unaffiliated investment
company which has a sales charge, so long as shares are purchased within 60
days of the redemption;
(5) trustees or other fiduciaries purchasing shares for certain retirement
plans of organizations with 50 or more eligible employees;
(6) Investment Advisers and financial planners who place trades for their
own accounts or the accounts of their clients either individually or through
a master account and who charge a management, consulting or other fee for
their services;
(7) employee sponsored benefit plans in connection with purchases of Class A
Shares made as a result of participant directed exchanges between options in
such a plan;
(8) "wrap accounts" for the benefit of clients of broker dealers, financial
institutions or financial planners having sales or service agreements with
the distributor or another broker-dealer or financial institution with
respect to sales of Class A Shares; and
(9) such other persons as are determined by the Board of Trustees (or by the
distributor pursuant to guidelines established by the board) to have acquired
shares under circumstances not involving any sales expense to the trust or
the distributor.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
The Fund has adopted a distribution plan in accordance with Rule 12b-1 under
the Investment Company Act. Class B and C Shares may pay a fee to the
Distributor in an amount computed at an annual rate of .75% of the average
daily net assets to finance any activity which is principally intended to
result in the sale of shares. Class A Shares may pay the Distributor a fee
equal to .25% of the average daily net assets. The schedule of such fees and
the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Fund has entered into a Shareholder Services Agreement with the
Distributor under which the Fund will reimburse the Distributor up to .25% of
the average daily assets of the Fund to pay financial institutions for
certain personal services for shareholders and for the maintenance of
shareholder accounts.
The Distributor will pay financial institutions additional compensation on
sales of shares of the High Yield Fund as follows: on sales of A Shares, the
Distributor will reallow to financial institutions the full sales commission
of 4.75%; on sales of B Shares, the Distributor will pay an additional .50%;
on sales of C Shares, the Distributor will pay an additional 1.00%. The
additional compensation which the Distributor pays on B and C Shares does not
change the terms of the standard CDSC. The Distributor reserves the right to
discontinue or extend the special offering period.
In addition to the payments described above, the distributor may also pay
additional compensation to financial institutions in connection with selling
shares of the Fund. Compensation may include financial assistance for
conferences, shareholder services, computer software, training programs or
promotional activities. The distributor may offer additional compensation to
financial institutions that execute NAV exchanges from unaffiliated
investment companies or to those that the Distributor expects will sell a
significant amount of shares. Financial institutions may obtain more
information by calling (800) 551-8045.
THE DISTRIBUTOR OF THE TRUST'S SHARES
Nicholas-Applegate Securities
600 West Broadway, 30th Floor
San Diego, California 92101
7
<PAGE>
SIMPLIFIED ACCOUNT INFORMATION
OPENING AN ACCOUNT
<TABLE>
<CAPTION>
REGULAR INVESTMENT RETIREMENT
FOR THIS TYPE OF FOR A MINOR AUTOMATIC IRA, ROLLOVER,
ACCOUNT REGULAR (UGMA/UTMA) INVESTMENT SEP, ETC.
- --------------------- --------------------- --------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
This is the minimum $2,000 $250 $50 $250
subsequent investment
Use this type of New Account Form (Non-Retirement) IRA Application
application
Before completing the The Fund offers a variety of features, which are described in the "Your Account"
application section of this prospectus. Please read this section before completing the application.
Completing the If you need assistance, contact your financial representative, or call us at (800)
application 551-8043.
If you are sending Mail application and check, payable to: NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX 8326,
money by CHECK BOSTON, MA 02266-8326. The Trust WILL NOT accept third-party checks.
If you are sending Please read the bank wire or ACH section under the "Buying Shares" section below. You
money by BANK WIRE or will need an account number with the Trust by sending a completed application to:
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.
</TABLE>
BUYING SHARES
<TABLE>
<CAPTION>
REGULAR INVESTMENT RETIREMENT
FOR THIS TYPE OF FOR A MINOR AUTOMATIC IRA, ROLLOVER,
ACCOUNT REGULAR (UGMA/UTMA) INVESTMENT SEP, ETC.
- --------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
This is the minimum $100 $100 $50 $100
subsequent investment
The price you will The Trust is open on days that the New York Stock Exchange is open. All transactions
receive received in good order before the market closes receive that day's price.
If you are sending Mail application and check, payable to: NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX 8326,
money by CHECK BOSTON, MA 02266-8326. The Trust WILL NOT accept third-party checks.
If you are sending Instruct your bank to wire the amount you wish to invest to:
money by BANK WIRE STATE STREET BANK & TRUST CO.--ABA #011000028
DDA #9904-645-0
STATE STREET BOS, ATTN: MUTUAL FUNDS
CREDIT: NICHOLAS-APPLEGATE [FUND NAME], [SHARE CLASS], [YOUR NAME], [ACCOUNT NAME OR NUMBER]
If you are sending Call your bank to ensure (1) that your bank supports ACH, and (2) this feature is active
money by ACH on your bank account. To establish this option, either complete the appropriate sections
when opening an account, 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>
8
<PAGE>
SELLING OR REDEEMING SHARES
<TABLE>
<CAPTION>
IN WRITING BY PHONE
------------------------------------ ------------------------------------
<S> <C> <C>
Selling shares by phone is a service
option which must be established on
your account prior to making a
Certain requests may require a request. See the "Your Account"
SIGNATURE GUARANTEE. See that section, or contact your financial
section below for further representative or call us at (800)
information. You may sell up to the 551-8043 for further information.
Things you should know full account value, less any The maximum amount which may be
applicable sales charge. The Trust requested by phone, regardless of
may have additional requirements for account size, is $50,000. Amounts
redeeming shares. Please call us for greater than that must be requested
more information. 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 Trust is open on days that the New York Stock Exchange is open. All
The price you will receive 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 the Fund
and share Class you are redeeming Either contact your financial
from, and the share or dollar amount you representative or call us at (800)
If you want to receive your monies wish to sell, signed by all account 551-8043. The check will be sent to
by CHECK owners. Mail this request to: the existing check address listed on
NICHOLAS-APPLEGATE MUTUAL FUNDS, the account.
PO BOX 8326, BOSTON, MA 02266-8326.
The check will be sent to the existing
check address listed on the account.
Please put your request in writing,
including: the name of the account
owners, account number and the Fund
and share Class you are redeeming
from, and the share or dollar amount you Either contact your financial
If you want to receive your monies wish to sell, signed by all account representative or call us at (800)
by BANK WIRE owners. Mail this request to: 551-8043. The proceeds will be sent
NICHOLAS-APPLEGATE MUTUAL FUNDS, to the existing bank wire address
PO BOX 8326, BOSTON, MA 02266-8326. listed on the account.
The proceeds will be sent to the existing
bank wire address listed on the account.
Either contact your financial
representative or call us at (800)
551-8043. The proceeds will be sent
If you want to receive your monies Please call us at (800) 551-8043. in accordance with the existing ACH
by ACH instructions on the account and will generally
be received at your bank two business
days after your request is received.
</TABLE>
9
<PAGE>
SIMPLIFIED ACCOUNT INFORMATION
<TABLE>
SIGNATURE GUARANTEES
-------------------------------------------------------------------------------------------
<S> <C>
A definition A signature guarantee of a financial institution is required to verify the authenticity
of an individual's signature. It can usually be obtained from
a broker, commercial or savings bank, or credit union.
When you need one A signature guarantee is needed when making a written request for the following reasons:
1. When selling more than $50,000 worth of shares;
2. When you want a check or bank wire sent to a name or address that is not
currently listed on the account;
3. To sell shares from an account controlled by a corporation, partnership, trust
or fiduciary; or
4. If your address was changed within the last 60 days.
</TABLE>
EXCHANGING SHARES
<TABLE>
<CAPTION>
REGULAR INVESTMENT RETIREMENT
FOR A MINOR AUTOMATIC IRA, ROLLOVER,
FOR THIS TYPE OF ACCOUNT REGULAR (UGMA/UTMA) INVESTMENT SEP, ETC.
- -------------------------- -------------------------- --------------------------- ------------- -------------------
<S> <C> <C> <C> <C>
This is the minimum $2,000 $250 $50 $250
exchange amount to open
a new account
The price you will receive The Trust is generally open on days that the New York Stock Exchange is open.
All transactions received in good order before the market closes
receive that day's price.
Things you should know The exchange must be to the Class A, B or C Shares of another Portfolio (depending upon whether
the shares being exchanged are Class A, B or C Shares) or the Money Market Portfolio and to an
account with the same registration.
If opening an account as part of an exchange, you must obtain and read the prospectus. If
you intend to keep money in the Fund you are exchanging from, make sure that you leave an
amount equal to or greater than the Fund's minimum account size (see the "Opening an
Account" section).
To protect other investors, the Trust may limit the number of exchanges you can make.
How to request an exchange Either contact your financial representative, or call the Trust at (800) 551-8043.
by PHONE The Trust will accept a request by phone if this feature was previously established on your
account.
See the "Your Account" section for further information.
How to request an exchange Please put your exchange request in writing, including: the name on the account, the name
by MAIL of the Fund and the account number you are exchanging from, the shares or dollar amount you
wish to exchange, and the Fund you wish to exchange to. Mail this request to: PO BOX 8326,
BOSTON, MA 02266-8326.
</TABLE>
10
<PAGE>
YOUR ACCOUNT
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for the Fund is
determined each business day at the close of regular trading on the New York
Stock Exchange (usually 4 p.m. Eastern Time) by dividing the 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. The 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. The 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, the Fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business
days or longer, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, the Trust will take
measures to verify the identity of the caller, such as asking for name,
account number, Social Security or taxpayer ID number and other relevant
information. If these measures are not taken, your Fund may be responsible
for any losses that may occur in your account due to an unauthorized
telephone call.
EXCHANGES. You may exchange shares of any Class for shares of the same Class
(A, B, or C) of any other Portfolio, generally without paying any additional
sales charges. You may also exchange shares of the Fund for shares of the
Money Market Portfolio. Class C shares purchased through an exchange from a
like Class will continue to age from the original date and will retain the
same CDSC rate as they had before the exchange. The holding period of Money
Market Portfolio shares purchased through an exchange from Class B or C
shares is excluded from the calculation of the holding period on Class B and
C shares.
To protect the interests of other investors in the Fund, the trust may cancel
the exchange privileges of any parties that, in the opinion of the Investment
Adviser, are using market timing strategies that adversely affect the Fund.
Guidelines for exchanges are available from the distributor upon request. The
Fund may also refuse any exchange order.
CERTIFICATED SHARES. Most shares are electronically recorded. If you wish to
have certificates for your shares, please write to the transfer agent.
Certificated shares can only be sold by returning the certificates to the
transfer agent, along with a letter of instruction or a stock power and a
signature guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS. When you place a request to sell
shares for which the purchase money has not yet been collected, the request
will be executed in a timely fashion, but the Fund will not release the
proceeds to you until your purchase payment clears. This may take up to
fifteen calendar days after the purchase.
OTHER SHARE CLASSES. The Fund also offers Class Q shares. The Class Q
shares have no sales charges and have other expenses which may result in
performance for that Class which is different from that of Class A, B and
C shares. You can obtain more information about Class Q shares from
Nicholas-Applegate Securities at (800)551-8643.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be addressed to the
Trust, c/o the Trust's transfer agent,
State Street Bank and Trust Company
Attention: Nicholas-Applegate Mutual Funds
P.O. Box 8326
Boston, Ma 02266-8326
Telephone inquiries can be made by calling 1-800-551-8043 or, from outside
the U.S., 1-617-774-5000 (collect).
FEATURES AND ACCOUNT POLICIES
The services referred to in this section may be terminated or modified at any
time upon 60 days' written notice to shareholders. Shareholders seeking to
add to, change or cancel their selection of available services should contact
the transfer agent at the address and telephone number provided above.
RETIREMENT PLANS. You may invest in the Fund through various retirement
plans, including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans. For further information about any
of the plans, agreements, applications and annual fees, contact the
Distributor, your financial representative or plan sponsor. To determine
which retirement plan is appropriate for you, consult your tax adviser.
ACCOUNT STATEMENTS. In general, you will receive account statements as
follows:
- - After every transaction that affects your account balance.
- - After any changes of name or address of the registered owner(s).
- - In all other circumstances, every quarter.
Every year you will also receive an applicable tax information statement,
mailed by January 31.
11
<PAGE>
YOUR ACCOUNT
DIVIDENDS. The Fund generally distributes most or all of its net earnings in
the form of dividends. The Fund pays dividends monthly. 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.
SHAREHOLDER SERVICES. The Investment Adviser may make payments from its own
resources to brokers, consultants and financial institutions for performing
certain services for shareholders and for the maintenance of shareholder
accounts.
TAXABILITY OF DIVIDENDS. As long as the Fund meets the requirements for
being a tax-qualified regulated investment company, which the Fund has in the
past and intends to in the future, it pays no federal income tax on the
earnings it distributes to shareholders.
Dividends you receive from the Fund, whether reinvested or taken as cash, are
generally taxable. Dividends from the 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 the Fund of
$50 or more on a monthly or quarterly basis if you have an account of $5,000
or more in the Fund. Withdrawal proceeds will normally be received prior to
the end of the month or quarter. See the account application for further
information.
AUTOMATIC INVESTMENT PLAN. You may make regular monthly or quarterly
investments in Class A, B and C Shares of the 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 the Fund into Class A, B and C Shares of another
Portfolio, subject to conditions outlined in the Statement of Additional
Information and the applicable provisions of the qualified retirement plan.
CONVERSION OF CLASS B FUND SHARES. Class B shares in the Fund will
automatically be exchanged for Class A shares of such Fund seven years after
purchase. Exchanges will be made at relative net asset value free of any
charges and will not constitute a taxable event for income tax purposes. The
amount of time shares are held in the Money Market Portfolio will be excluded
from the calculation of the holding period.
12
<PAGE>
ORGANIZATION AND MANAGEMENT
INVESTMENT ADVISER COMPENSATION
Each Portfolio pays the Investment Adviser a fee pursuant to an investment
advisory agreement. The High Yield Bond Fund pays at the annual rate of 0.60%
of the Fund's net assets.
The Investment Adviser has agreed to defer its management fees payable by the
Fund, and to absorb other operating expenses of the Fund, subject to later
reimbursement, so that the expenses for the Class A, B and C Shares of the
Fund will not exceed the following expense ratios on an annual basis through
March 31, 1998: High Yield Bond Class A, B & C--1.60%, 2.25% and 2.25%. The
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 the Fund more than five years after the expenses
were incurred (March 31, 2003 in the case of expenses incurred prior to March
31, 1998).
ADMINISTRATOR COMPENSATION
The Fund pays administrative fees for administrative personnel and services
(including certain legal and financial reporting services). The Fund pays
Nicholas-Applegate Capital Management a monthly fee at the annual rate of
.10% of net assets. The Fund pays Investment Company Administration
Corporation (ICAC) a monthly fee at an annual rate ranging from .05% to .01%
of average net assets, with a minimum of $40,000.
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 Fund's portfolio transactions.
In placing portfolio trades, the Investment Adviser may use brokerage firms
that sell shares of the Fund or that provide research services to the Fund,
but only when the Investment Adviser believes no other firm offers a better
combination of quality execution (i.e. timeliness and completeness) and
favorable price. The Investment Adviser expects high annual portfolio
turnover up to 200%. This is generally higher than other funds and will
result in the Fund incurring higher brokerage costs.
INVESTMENT OBJECTIVE
The 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
The Fund is diversified.
REORGANIZATION OF THE FUND
The Trust currently has a High Yield Bond Institutional Portfolio that
invests all of its assets in a corresponding portfolio of Nicholas-Applegate
Investment Trust (the "Master Trust"), which is operated identically to the
Fund. In this "master-feeder" structure, the Investment Adviser serves as
the adviser to the Master Trust, and the Trust has no separate adviser. A
proposal is currently pending before the shareholders of the Portfolio to
reorganize the Portfolio by terminating the master-feeder structure, renaming
the Portfolio as the "High Yield Bond Fund," and classifying the currently
outstanding shares of the Portfolio as Class I shares. The Board of Trustees
and initial shareholder of the Class A, B and C shares of the Fund have
approved the tax-free reorganization of the Fund at the same time as the
reorganization of the Portfolio. Pursuant to the reorganization, holders of
the Class A, B and C shares of the Fund will receive corresponding Class A, B
and C shares of the new High Yield Bond Fund. The operation of the Fund will
not be affected by the reorganization.
13
<PAGE>
ORGANIZATION AND MANAGEMENT
PORTFOLIO TEAM
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
DOUGLAS FORSYTH, CFA
Portfolio Manager
Joined firm in 1994; 3 years prior investment management experience with AEGON
USA
B.B.A. - University of Iowa
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
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
14
<PAGE>
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 the Fund 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 Fund seeks 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 counterparty's
ability to perform, and any deterioration in the counterparty's
creditworthiness could adversely affect the instrument. The Fund will only
use derivatives in a manner consistent with its investment objectives,
policies and limitations.
GLOBAL INVESTING CONSIDERATIONS
CURRENCY FLUCTUATIONS. Because the assets in the Fund may be invested in
instruments issued by foreign companies, the principal, income and sales
proceeds may be paid to the Fund 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 Fund. 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
Fund may incur costs in connection with conversions between currencies.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. The economies of many of the
countries where the Fund 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 Fund invests.
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 Fund. For example, a foreign country could nationalize an
entire industry. In such a case, the Fund may not be fairly compensated for
its losses and might lose its entire investment in the country involved.
The economies of certain foreign countries are heavily dependent upon
international trade and accordingly are affected by protective trade barriers
and the economic conditions of their trading partners. The enactment by the
United States or other principal trading partners of protectionist
legislation could have a significant adverse effect on the securities markets
of these countries. Some foreign countries (mostly in Africa and Latin
America) are large debtors of commercial banks, foreign governments, and
supranational organizations. These obligations, as well as future
restructurings of debt, may affect the economic performance and political and
social stability of these countries.
15
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 the 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 Fund are not fully invested, or could result in the 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 the 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 Fund invests in debt and
convertible securities below investment grade. These securities usually offer
higher yields than higher rated securities but are also subject to more risk
than higher rated securities. Lower rated or unrated debt obligations are
more likely to react to developments affecting market and credit risks than
are more high rated securities, which react primarily to movements in
interest rates. In the past, economic downturns or increases in interest
rates caused a higher incidence of default by issuers of lower-rated
securities.
In some cases, such obligations may be highly speculative, and may have poor
prospects for reaching investment grade. To the extent the issuer defaults,
the Fund may incur additional expenses in order to enforce its rights or to
participate in a restructuring of 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 Fund may at
times experience difficulty in liquidating its investments at the desired times
and prices.
16
<PAGE>
THE FUND'S INVESTMENTS
EQUITY SECURITIES. Equity securities include common stocks, convertible
securities and warrants. The Fund may invest in growth companies, cyclical
companies, companies with smaller market capitalizations, or companies
believed to be undergoing a basic change in operations or markets. Although
equity securities have a history of long-term growth in value, their prices
rise and fall as a result of changes in the company's financial condition as
well as movements in the overall securities markets.
SMALLER ISSUERS. Smaller and medium sized issuers may be less seasoned, have
more limited product lines, markets, financial resources and management
depth, and be more susceptible to adverse market conditions than larger
issuers. As a result, the securities of such smaller issuers may be less
actively traded than those of larger issuers and may also experience greater
market volatility.
CONVERTIBLE SECURITIES. A convertible security is a fixed income equity
security that may be converted into a prescribed amount of common stock at a
specified formula. A convertible security entitles the owner to receive
interest until the security matures or is converted. Convertibles have
several unique investment characteristics such as: (a) higher yields than
common stocks but lower yields than straight debt securities; (b) lesser
degree of fluctuation in value than the underlying stock since they have
fixed income characteristics; and (c) potential for capital appreciation if
the market price of the underlying security increases.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligation (credit risk) and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
credit-worthiness of the issuer and general market liquidity (market risk).
When interest rates decline, the value of the Fund's 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 BBB or Baa 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" beginning on page 19.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities such as U.S. Treasury bills, notes, bonds, and
certificates issued by the Government National Mortgage Association (GNMA)
are supported by the full faith and credit of the United States. Other U.S.
Government securities, such as securities issued by the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Bank Board, are
supported by the right of the issuer to borrow from the U.S. Treasury. Still
others, such as securities of the Student Loan Marketing Association, are
supported only by the credit of the issuer. U.S. Government securities may
include zero coupon securities that are issued or purchased at a significant
discount from face value.
ZERO COUPON SECURITIES. The Fund may 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. 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, the Fund may have to sell other portfolio
securities to make necessary income distributions.
MORTGAGE-RELATED SECURITIES. Collateralized mortgage obligations (CMO's) are
debt obligations collateralized by a pool of mortgage loans or mortgage
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.
ASSET BACKED SECURITIES. The non-mortgage-related asset-backed securities in
which the Fund invests 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.
17
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
SOVEREIGN DEBT SECURITIES. The Fund may invest in sovereign debt securities
issued by governments of foreign countries. The sovereign debt in which the
Fund may invest may be rated below investment grade. These securities usually
offer higher yields than higher rated securities but are also subject to
greater risk than higher rated securities.
BRADY BONDS. Brady bonds represent a type of sovereign debt. These
obligations were created under a debt restructuring plan introduced by former
U.S. Secretary of the Treasury, Nicholas F. Brady, in which foreign entities
issued these obligations in exchange for their existing commercial bank
loans. Brady Bonds have been issued by Argentina, Brazil, Costa Rica,
Dominican Republic, Mexico, the Philippines, Uruguay and Venezuela, and may
be issued by other emerging countries.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 10% of its total
assets in the shares of other investment companies. The Fund may invest in
money market mutual funds in connection with the management of its daily cash
positions. The Fund may also make indirect foreign investments through other
investment companies that have comparable investment objectives and policies
as the Fund. In addition to the advisory and operational fees the 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. The 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.
The Fund may bear additional expenses if it has to register these securities
under U.S. securities laws before being resold.
TEMPORARY INVESTMENTS. The Fund may from time to time on a temporary basis
invest all of its assets in short-term instruments to maintain liquidity or
when the Investment Adviser determines that the market conditions call for a
temporary defensive posture. These temporary investments include: notes
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; commercial paper rated in the highest two rating
categories; certificates of deposit; repurchase agreements and other high
grade corporate debt securities.
THE FUND'S INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS. The 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 Fund enters into these agreements only with brokers,
dealers, or banks that meet credit quality standards established by the Board
of Trustees.
SECURITIES SWAPS. A securities swap is a technique primarily used to
indirectly participate in the securities market of a country from which the
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, the 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 the
Fund will not 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. The 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
18
<PAGE>
considered to be advantageous. The 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. The Fund may borrow up to 20% of its total assets for temporary,
extraordinary or emergency purposes. The Fund may also borrow money through
reverse repurchase agreements, uncovered short sales, and other techniques.
All borrowings by the Fund cannot exceed one-third of the Fund's total
assets. As a consequence of borrowing, the Fund will incur obligations to pay
interest, resulting in an increase in expenses.
SECURITIES LENDING. The Fund may lend securities to financial institutions
such as banks, broker/ dealers and other recognized institutional investors
in amounts up to 30% of the Fund's total assets. These loans earn income for
the Fund and are collateralized by cash, securities, letters of credit or any
combination thereof. The Fund might experience a loss if the financial
institution defaults on the loan.
FOREIGN CURRENCY TRANSACTIONS. The Fund may enter in to foreign currency
transactions either on a spot or cash basis at prevailing rates or through
forward foreign currency exchange contracts in order to have the necessary
currencies to settle transactions. The 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 the Fund.
OPTIONS. The Fund may deal in options on securities, securities indices and
foreign currencies. The Fund may use options to manage stock prices, interest
rate and currency risks. The Fund may not purchase or sell options if more
than 25% of its net assets would be hedged. The Fund 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. The Fund may enter into futures contracts, or
options thereon, involving foreign currency, interest rates, securities, and
securities indices, for hedging purposes only. A stock index futures contract
is a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the underlying stocks in the index is made.
As a general rule, the Fund will not purchase or sell futures if, immediately
thereafter, more than 25% of its net assets would be hedged.
RISKS OF FUTURES AND OPTIONS TRANSACTIONS. When the Fund uses options,
futures and options on futures as hedging devices, there is a risk that the
prices of the hedging vehicles may not correlate perfectly with the prices of
the securities in the portfolio. This may cause the futures contract and any
related options to react differently than the Fund's portfolio securities to
market changes. In addition, the Investment Adviser could be incorrect in its
expectations about the direction or the extent of market movements. In these
events, the Fund could lose money on the futures contracts or option.
It is not certain that a secondary market for positions in futures contracts
or for options will exist at all times. Although the Investment Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market will exist for these instruments.
CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes are most unlikely to impair the
fundamentally strong position of such issues.
19
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Aa--Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A--Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds rated Baa are considered medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
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.
20
<PAGE>
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.
21
<PAGE>
1
NICHOLAS APPLEGATE-Registered Trademark-
MUTUAL FUNDS
PROSPECTUS
The prospectus contains vital information about the Class Q Shares of this
Fund. For your own benefit and protection, please read it before you invest,
and keep it on hand for future reference.
Please note that these Shares
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their investment objectives
THE HIGH YIELD BOND FUND MAY INVEST WITHOUT LIMITATION IN DEBT SECURITIES RATED
BELOW INVESTMENT GRADE, SOMETIMES REFERRED TO AS "JUNK BONDS." THESE LOWER-RATED
SECURITIES ARE SPECULATIVE AND INVOLVE GREATER RISKS, INCLUDING 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.
HIGH YIELD BOND FUND
MARCH 2, 1998
<PAGE>
2
TABLE OF CONTENTS
<TABLE>
<S> <C>
OVERVIEW 3
- --------------------------------------------------------------------------------
A LOOK AT THE FUND'S GOALS, STRATEGIES, RISKS, AND FINANCIAL HISTORY.
HIGH YIELD BOND FUND 4
- --------------------------------------------------------------------------------
POLICIES AND INSTRUCTIONS FOR OPENING, MAINTAINING AND CLOSING AN ACCOUNT IN
THE FUND.
SIMPLIFIED ACCOUNT INFORMATION
Opening an Account 6
Buying Shares 6
Exchanging Shares 6
Selling and Redeeming Shares 7
Signature Guarantees 7
YOUR ACCOUNT
Transaction Policies 8
Features and Account Policies 9
ORGANIZATION AND MANAGEMENT
Investment Adviser Compensation 10
Administrator Compensation 10
Distributor 10
Portfolio Trades 10
Investment Objectives 10
Diversification 10
Portfolio Team 11
- --------------------------------------------------------------------------------
DETAILS THAT APPLY TO ALL PORTFOLIOS OF THE TRUST AS A GROUP.
RISK FACTORS AND SPECIAL CONSIDERATIONS 12
</TABLE>
<PAGE>
3
OVERVIEW
FUND INFORMATION
A CONCISE DESCRIPTION OF THE HIGH YIELD BOND FUND BEGINS ON THE NEXT
PAGE. THE 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] 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 Q Shares, including sales
charges and annual expenses.
[GRAPHIC] FINANCIAL HIGHLIGHTS
A table showing the financial performance for the Fund 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 "Portfolio"). The Class Q Shares of each Portfolio represent
interests in an open-end diversified open-end management investment company
(a mutual fund).
Each Portfolio employs its own strategy and has its own risk/reward profile.
Because you could lose money by investing in a Portfolio, be sure to read all
risk disclosures carefully before investing.
WHO MAY WANT TO INVEST IN THE FUND
- - 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 FUND
- - 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 Trust. Arthur E. Nicholas and 23 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
HIGH YIELD BOND FUND
[GRAPHIC] INVESTMENT OBJECTIVE
High level of current income and capital growth.
[GRAPHIC] 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.
[GRAPHIC] PRINCIPAL INVESTMENTS
Under normal conditions, the Fund invests at least 65% of its total assets in
lower-rated debt securities and convertible securities rated below investment
grade. 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 43. 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.
[GRAPHIC] 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 11.
[GRAPHIC] RISK FACTORS
As with any fund that invests primarily in bonds, the value of the Fund's
investments fluctuates in response to movements in interest rates. When rates go
up, debt security prices fall; when rates go down, debt security prices rise.
Lower-rated securities, while usually offering higher yields, generally have
more risk and volatility than higher-rated securities because of reduced
creditworthiness and greater chance of default. Periods of high interest rates
and recession may adversely affect the issuer's ability to pay interest and
principal. To the extent the Fund invests in stocks, the value of those
investments will fluctuate day to day with movements in the stock market as well
as in response to the activities of individual companies. The Fund which the
Fund invests may be more subject to volatile market movements than securities of
longer, 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 12.
- --------------------------------------------------------------------------------
[GRAPHIC] INVESTOR EXPENSES
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 0.60%
- -----------------------------------------------------------------
12b-1 expenses None
- -----------------------------------------------------------------
Other expenses (after expense deferral)(1) 0.40%
- -----------------------------------------------------------------
Total operating expenses (after expense deferral)(1) 1.00%
</TABLE>
(1) The Investment Adviser has agreed to defer its management fees and to
absorb other operating expenses, subject to later reimbursement. Total
operating expenses for the fiscal year ending March 31, 1998 are
estimated to be 1.95% and Other expenses are estimated to be 1.35%
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 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.
- -------------------------------------------------------------------------------
[GRAPHIC] FINANCIAL HIGHLIGHTS
The Class Q Shares of the High Yield Bond Fund are a new class of shares of
the Fund for which financial highlights are not available.
<PAGE>
6
SIMPLIFIED ACCOUNT INFORMATION
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
OPENING AN ACCOUNT
--------------------------------------------------------------------------------
<S> <C> <C>
FOR THIS TYPE OF ACCOUNT REGULAR INVESTMENT PARTICIPANTS IN QUALIFIED RETIREMENT PLANS
--------------------------------------------------------------------------------
This is the minimum $250,000 Contact your plan administration
initial investment or sponsor
Use this type of New Account Form (Non-Retirement)
application
Before completing The Fund offers a variety of features, which are described in the
the application "Your Account" section of this prospectus. Please read this
section before completing the application.
Completing the If you need assistance, contact your financial representative,
application or call us at (800) 551-8043.
If you are a participant in Make purchases through your plan administrator or sponsor,
a qualified retirement plan who is responsible for transmitting orders.
If you are sending money Mail application and check, payable to: NICHOLAS-APPLEGATE
by CHECK MUTUAL FUNDS, PO BOX 8326, BOSTON, MA 02266-8326.
The Trust WILL NOT accept third-party checks.
If you are sending money Please read the bank wire or ACH section under the
by BANK WIRE or ACH "Buying Shares" section below. You will need an account number
with the Trust by sending a completed application to:
NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX 8326, BOSTON, MA 02266-8326.
To receive your account number, contact your financial
representative or call us at (800) 551-8043.
--------------------------------------------------------------------------------
BUYING SHARES
--------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT REGULAR INVESTMENT PARTICIPANTS IN QUALIFIED RETIREMENT PLANS
--------------------------------------------------------------------------------
This is the minimum $10,000 Contact your plan administrator or sponsor
subsequent investment
The price you will receive The Trust is open on days that the New York Stock Exchange is open.
All transactions received in good order before the market closes receive that
day's price.
If you are a participant in Make purchases through your plan administrator or sponsor,
a qualified retirement plan who is responsible for transmitting orders.
If you are sending money Instruct your bank to wire the amount you wish to invest to:
by BANK WIRE STATE STREET BANK & TRUST CO.--ABA #011000028
DDA #9904-645-0
STATE STREET BOS, ATTN: MUTUAL FUNDS
CREDIT: NICHOLAS-APPLEGATE [FUND NAME], [YOUR NAME], [ACCOUNT NAME OR NUMBER]
If you are sending money Call your bank to ensure (1) that your bank supports ACH, and (2) this feature
by BANK WIRE or ACH is active on your bank account. To establish this option, either complete the
appropriate sections when opening an account, or contact your financial
representative, or call us at (800) 551-8043 for further information.
To initiate an ACH purchase, call the Trust at (800)551-8043.
--------------------------------------------------------------------------------
EXCHANGING SHARES
--------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT REGULAR INVESTMENT PARTICIPANTS IN QUALIFIED RETIREMENT PLANS
--------------------------------------------------------------------------------
This is the minimum exchange $250,000 Contact your plan administrator or sponsor
amount to open a new account
The price you will receive The Trust is generally open on days that the New York Stock Exchange is open.
All transactions received in good order before the market closes receive
that day's price.
The exchange must be to the Class Q Shares of another Portfolio
or the Money Market Portfolio and to an account with the same registration.
Things you should know If opening an account as part of an exchange, you must obtain and read the
prospectus. If you intend to keep money in the Fund you are exchanging
from, make sure that you leave an amount equal to or greater than the
Fund's minimum account size (see the "Opening an Account" section)
To protect other investors, the Trust may limit the number of exchanges
you can make. Participants in qualified retirement plans may exchange through
the plan administrator or sponsor and only with
those Portfolios that are included in the plan.
Either contact your financial representative, or call the Trust 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
How to request an on the account, the name of the fund and the account number
exchange by MAIL you are exchanging from, the shares or dollar amount you wish to
exchange, and the Fund you wish to exchange to. Mail this request to:
PO BOX 8326, BOSTON, MA 02266-8326.
<PAGE>
7
--------------------------------------------------------------------------------
SELLING OR REDEEMING SHARES
--------------------------------------------------------------------------------
IN WRITING BY PHONE
--------------------------------------------------------------------------------
Selling shares by phone is a service
option which must be established on your
account prior to making a request. See the
"Your Account" section, or contact your
financial representative or call us
Certain requests may require a at (800) 551-8043 for further
SIGNATURE GUARANTEE. See that section information. The maximum amount which
below for further information. may be requested by phone, regardless
You may sell up to the full of account size, is $50,000.
account value. Amounts greater than that must be
Things you should know 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 call your
financial representative, a plan administrator/sponsor
or us for further information.
The Trust is open on days that the New York Stock Exchange is open.
The price you will receive All transactions received in good order before the
market closes receives that day's price.
If you are a participant in Makes sales through your plan administrator or sponsor,
a qualified retirement plan who is responsible for transmitting orders.
- ----------------------------------------------------------------------------------------------------------------------------------
Please put your request in writing,
including: the name of the account
owners, account number and the
Fund and share Class you are
redeeming from, and the share or Either contact your financial
dollar amount you wish to sell, representative or call us
signed by all account owners. at (800) 551-8043.
Mail this request to: The proceeds will be sent to
If you want to receive NICHOLAS-APPLEGATE MUTUAL FUNDS, the existing bank wire
your monies by BANK WIRE PO BOX 8326, BOSTON, MA 02266-8326. address listed on the account.
The proceeds will be sent
to the existing bank wire address
listed on the account.
Either contact your financial
representative or call us
If you want to receive at (800) 551-8043. The
your monies by ACH Please call us at (800) 551-8043. proceeds will be sent in
accordance with the
existing ACH instructions on the
account and will generally be
received at your bank two
business days after your
request is received.
--------------------------------------------------------------------------------
SIGNATURE GUARANTEES
--------------------------------------------------------------------------------
A definition A signature guarantee of a financial institution is required to
verify the authenticity of an individual's signature.
It can usually be obtained from a broker, commercial or
savings bank, or credit union.
A signature guarantee is needed when making a written request for the
following reasons:
1. When selling more than $50,000 worth of shares;
When you need one 2. When you want a check or bank wire sent to a name or address that is
not currently listed on the account;
3. To sell shares from an account controlled by a corporation, partnership,
trust or fiduciary; or
4. If your address was changed within the last 60 days.
</TABLE>
<PAGE>
8
YOUR ACCOUNT
TRANSACTION POLICIES
PURCHASE OF SHARES. Class Q 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. The Fund also offers Class A, B and C Shares.
These other share classes have different sales charges and other expenses
which may result in performance for those Classes which is different from
that of Class Q shares. 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 Q 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. The 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. Investments by participants of
qualified retirement plans are made through the plan sponsor or administrator.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing. The 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, the 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).
<PAGE>
9
FEATURES AND ACCOUNT POLICIES
The services referred to in this section may be terminated or modified at any
time upon 60 days' written notice to shareholders. Shareholders seeking to add
to, change or cancel their selection of available services should contact the
transfer agent at the address and telephone number provided above.
RETIREMENT PLANS. You may invest in the Fund through various retirement
plans, including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans. For further information about any
of the plans, agreements, applications and annual fees, contact the
Distributor, your financial representative or plan sponsor. To determine
which retirement plan is appropriate for you, consult your tax adviser.
ACCOUNT STATEMENTS. In general, you will receive account statements as follows:
- - After every transaction that affects your account balance.
- - After any changes of name or address of the registered owner(s).
- - In all other circumstances, every quarter.
Every year you will also receive an applicable tax information statement, mailed
by January 31. Participants in qualified retirement plans will receive account
information from their plan sponsor or administrator.
DIVIDENDS. The Fund generally distributes most or all of its net earnings in
the form of dividends. The Fund pays dividends of net investment income
monthly.
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.
SHAREHOLDER SERVICES. The Investment Adviser may make payments from its own
resources to brokers, consultants, and financial institutions for performing
certain services for shareholders and for the maintenance of shareholder
accounts.
TAXABILITY OF DIVIDENDS. As long as the Fund meets the requirements for being a
tax-qualified regulated investment company, which the Fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Dividends you receive from the Fund, whether reinvested or taken as cash, are
generally taxable. Dividends from the 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 the 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 Q Shares of the 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 the Fund into Class Q Shares of another Portfolio,
subject to conditions outlined in the Statement of Additional Information and
the applicable provisions of the qualified retirement plan.
<PAGE>
10
ORGANIZATION AND MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER COMPENSATION
Each Portfolio pays the Investment Adviser a monthly fee pursuant to an
investment advisory agreement. The High Yield Bond Fund pays at the annual
rate of 0.60% of the Fund's net assets.
The Investment Adviser has agreed to defer its management fees payable by the
Fund, and to absorb other operating expenses of the Fund, subject to later
reimbursement, so that the expenses for the Class Q Shares of the Fund will
not exceed the following expense ratio on an annual basis through March 31,
1998: High Yield Bond Fund - 0.95%. The 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 the
Fund more than five years after the expenses were incurred (March 31, 2003 in
the case of expenses incurred prior to March 31, 1998).
ADMINISTRATOR COMPENSATION
The Fund pays administrative fees for administrative personnel and services
(including certain legal and financial reporting services). The Fund pays
Nicholas-Applegate Capital Management a monthly fee at the annual rate of
.10% of net assets. The Fund pays Investment Company Administration
Corporation (ICAC) a monthly fee at an annual rate ranging from .05% to .01%
of average net assets, with a minimum of $40,000.
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 Fund's portfolio transactions. In
placing portfolio trades, the Investment Adviser may use brokerage firms that
sell shares of the Fund or that provide research services to the Fund, but only
when the Investment Adviser believes no other firm offers a better combination
of quality execution (i.e. timeliness and completeness) and favorable price. The
Investment Adviser expects high annual portfolio turnover up to 200%. This is
generally higher than other funds and will result in the Fund incurring higher
brokerage costs.
INVESTMENT OBJECTIVE
The 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
The Fund is diversified.
REORGANIZATION OF THE FUND
The Trust currently has a High Yield Bond Institutional Portfolio that
invests all of its assets in a corresponding portfolio of Nicholas-Applegate
Investment Trust (the "Master Trust"), which is operated identically to the
Fund. In this "master-feeder" structure, the Investment Adviser serves as
the adviser to the Master Trust, and the Trust has no separate adviser. A
proposal is currently pending before the shareholders of the Portfolio to
reorganize the Portfolio by terminating the master-feeder structure, renaming
the Portfolio as the "High Yield Bond Fund," and classifying the currently
outstanding shares of the Portfolio as Class I shares. The Board of Trustees
and initial shareholder of the Class A, B and C shares of the Fund have
approved the tax-free reorganization of the Fund at the same time as the
reorganization of the Portfolio. Pursuant to the reorganization, holders of
the Class A, B and C shares of the Fund will receive corresponding Class A, B
and C shares of the new High Yield Bond Fund. The operation of the Fund will
not be affected by the reorganization.
<PAGE>
11
ORGANIZATION AND MANAGEMENT
PORTFOLIO TEAM
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
DOUGLAS FORSYTH, CFA
Portfolio Manager
Joined firm in 1994; 3 years prior investment management experience with AEGON
USA
B.B.A. -- University of Iowa
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
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
<PAGE>
12
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 the Fund
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 Fund seeks 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 counterparty's
ability to perform, and any deterioration in the counterparty's creditworthiness
could adversely affect the instrument. The Fund will only use derivatives in a
manner consistent with its investment objectives, policies and limitations.
GLOBAL INVESTING CONSIDERATIONS
CURRENCY FLUCTUATIONS. Because the assets in the Fund may be invested in
instruments issued by foreign companies, the principal, income and sales
proceeds may be paid to the Fund 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 Fund. 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
Fund may incur costs in connection with conversions between currencies.
SOCIAL, POLITICAL AND ECONOMIC FACTORS.
The economies of many of the countries where the Fund 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 Fund invests.
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 Fund. For example, a foreign country
could nationalize an entire industry. In such a case, the Fund may not be
fairly compensated for its losses and might lose its entire investment in
the country involved.
The economies of certain foreign countries are heavily dependent upon
international trade and accordingly are affected by protective trade barriers
and the economic conditions of their trading partners. The enactment by the
United States or other principal trading partners of protectionist legislation
could have a significant adverse effect on the securities markets of these
countries. Some foreign countries (mostly in Africa and Latin America) are large
debtors of commercial banks, foreign governments, and supranational
organizations. These obligations, as well as future restructurings of debt, may
affect the economic performance and political and social stability of these
countries.
<PAGE>
13
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 the 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 Fund
are not fully invested, or could result in the 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 the 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 High Yield Bond Fund invests in
debt and convertible securities below investment grade. These securities
usually offer higher yields than higher rated securities but are also subject
to more risk than higher rated securities.
Lower-rated or unrated debt obligations are more likely to react to
developments affecting market and credit risks than are more high-rated
securities, which react primarily to movements in interest rates. In the
past, economic downturns or increases in interest rates caused a higher
incidence of default by issuers of lower-rated securities.
In some cases, such obligations may be highly speculative, and may have poor
prospects for reaching investment grade. To the extent the issuer defaults, the
Fund may incur additional expenses in order to enforce its rights or to
participate in a restructuring of 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 Fund may at
times experience difficulty in liquidating its investments at the desired
times and prices.
<PAGE>
14
RISK FACTORS AND SPECIAL CONSIDERATIONS
THE FUND'S INVESTMENTS
EQUITY SECURITIES. Equity securities include common stocks, convertible
securities and warrants. The Fund may invest in growth companies, cyclical
companies, companies with smaller market capitalizations, or companies believed
to be undergoing a basic change in operations or markets. Although equity
securities have a history of long-term growth in value, their prices rise and
fall as a result of changes in the company's financial condition as well as
movements in the overall securities markets.
SMALLER ISSUERS. Smaller and medium sized issuers may be less seasoned, have
more limited product lines, markets, financial resources and management depth,
and be more susceptible to adverse market conditions than larger issuers. As a
result, the securities of such smaller issuers may be less actively traded than
those of larger issuers and may also experience greater market volatility.
CONVERTIBLE SECURITIES. A convertible security is a fixed income equity security
that may be converted into a prescribed amount of common stock at a specified
formula. A convertible security entitles the owner to receive interest until the
security matures or is converted. Convertibles have several unique investment
characteristics such as: (a) higher yields than common stocks but lower yields
than straight debt securities; (b) lesser degree of fluctuation in value than
the underlying stock since they have fixed income characteristics; and (c)
potential for capital appreciation if the market price of the underlying
security increases.
CORPORATE DEBT SECURITIES. Corporate debt securities are subject to the risk of
an issuer's inability to meet principal and interest payments on the obligation
(credit risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the credit-worthiness of the
issuer and general market liquidity (market risk). When interest rates decline,
the value of the Fund's 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 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 BBB or Baa 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"
beginning on page 17.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities such as U.S. Treasury bills, notes, bonds, and
certificates issued by the Government National Mortgage Association (GNMA)
are supported by the full faith and credit of the United States. Other U.S.
Government securities, such as securities issued by the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Bank Board, are
supported by the right of the issuer to borrow from the U.S. Treasury. Still
others, such as securities of the Student Loan Marketing Association, are
supported only by the credit of the issuer. U.S. Government securities may
include zero coupon securities that are issued or purchased at a significant
discount from face value.
ZERO COUPON SECURITIES. The High Yield Bond Fund may 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. 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, the Fund may have to sell other portfolio
securities to make necessary income distributions.
MORTGAGE-RELATED SECURITIES. Collateralized mortgage obligations(CMOs) are debt
obligations collateralized by a pool of 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.
ASSET BACKED SECURITIES. The non-mortgage-related asset-backed securities in
which the Fund invests 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 differs in a number of
respects from those of traditional
<PAGE>
15
debt securities. Asset-backed securities generally do not have the benefit of
a security interest in collateral that is comparable to other debt
obligations, and there is a possibility that recoveries on repossessed
collateral may not be available to support payment on these securities.
SOVEREIGN DEBT SECURITIES. The Fund may invest in sovereign debt securities
issued by governments of foreign countries. The sovereign debt in which the
Fund may invest may be rated below investment grade. These securities usually
offer higher yields than higher rated securities but are also subject to
greater risk than higher rated securities.
BRADY BONDS. Brady bonds represent a type of sovereign debt. These obligations
were created under a debt restructuring plan introduced by former U.S. Secretary
of the Treasury, Nicholas F. Brady, in which foreign entities issued these
obligations in exchange for their existing commercial bank loans. Brady Bonds
have been issued by Argentina, Brazil, Costa Rica, Dominican Republic, Mexico,
the Philippines, Uruguay and Venezuela, and may be issued by other emerging
countries.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 10% of its total
assets in the shares of other investment companies. The Fund may invest in
money market mutual funds in connection with the management of its daily cash
positions. The Fund may also make indirect foreign investments through other
investment companies that have comparable investment objectives and policies as
the Fund. In addition to the advisory and operational fees the 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. The 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.
The Fund may bear additional expenses if it has to register these securities
under U.S. securities laws before being resold.
TEMPORARY INVESTMENTS. The Fund may from time to time on a temporary basis
invest all of its assets in short term instruments to maintain liquidity or
when the Investment Adviser determines that the market conditions call for a
temporary defensive posture. These temporary investments include: notes
issued or guaranteed by the U.S. government, its agencies or
instrumentalities; commercial paper rated in the highest two rating
categories; certificates of deposit; repurchase agreements and other high
grade corporate debt securities.
THE FUND'S INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements, that
is, the purchase by the Fund of 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 Fund enters into these agreements only with brokers,
dealers, or banks that meet credit quality standards established by the Board
of Trustees.
SECURITIES SWAPS. A securities swap is a technique primarily used to
indirectly participate in the securities market of a country from which the
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, the 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 the
Fund will not 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.
The 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
<PAGE>
16
RISK FACTORS AND SPECIAL CONSIDERATIONS
considered to be advantageous. The 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. The Fund may borrow up to 20% of its total assets for temporary,
extraordinary or emergency purposes, such as to provide cash for redemption
requests without having to sell portfolio securities at an inopportune time.
The Fund may also borrow money through reverse repurchase agreements, uncovered
short sales, and other techniques. All borrowings by the Fund cannot exceed
one-third of the Fund's total assets.
As a consequence of borrowing, the Fund will incur obligations to pay interest,
resulting in an increase in expenses.
SECURITIES LENDING. The Fund may lend securities to financial institutions
such as banks, broker/dealers and other recognized institutional investors in
amounts up to 30% of the Fund's total assets. These loans earn income for the
Fund and are collateralized by cash, securities, letters of credit or any
combination thereof. The Fund might experience a loss if the financial
institution defaults on the loan.
FOREIGN CURRENCY TRANSACTIONS. The Fund investing 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.
The Fund may also enter into such 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 the
Fund.
OPTIONS. The Fund may deal in options on securities, securities indices and
foreign currencies. The Fund may use options to manage stock prices, interest
rate and currency risks. The Fund may not purchase or sell options if more than
25% of its net assets would be hedged. The Fund 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. The Fund may enter into futures contracts, or
options thereon, involving foreign currency, interest rates, securities, and
securities indices, for hedging purposes only. A stock index futures contract is
a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the underlying stocks in the index is made.
As a general rule, the Fund will not purchase or sell futures if, immediately
thereafter, more than 25% of its net assets would be hedged.
RISKS OF FUTURES AND OPTIONS TRANSACTIONS. When the Fund uses options,
futures and options on futures as hedging devices, there is a risk that the
prices of the hedging vehicles may not correlate perfectly with the prices of
the securities in the portfolio. This may cause the futures contract and any
related options to react differently than the Fund's portfolio securities to
market changes. In addition, the Investment Adviser could be incorrect in its
expectations about the direction or the extent of market movements. In these
events, the Fund could lose money on the futures contracts or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Investment Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market will exist for these instruments.
<PAGE>
17
CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A - Bonds Rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations (I.E., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
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
<PAGE>
18
RISK FACTORS AND SPECIAL CONSIDERATIONS
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>
NICHOLAS-APPLEGATE -Registered Trademark- MUTUAL FUNDS
HIGH YIELD BOND FUND
CLASS A, B AND C SHARES
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
March 2, 1998
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company currently offering a number of separate diversified
portfolios. This Statement of Additional Information contains information
regarding the Class A, B and C shares of the Nicholas-Applegate High Yield Bond
Fund (the "Fund" or "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
Fund's Prospectus and should be read in conjunction with such Prospectus. The
Prospectus may be obtained without charge by calling or writing the Trust at the
address and phone number given above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information B-2
Investment Objectives, Policies and Risks B-2
Investment Restrictions B-27
Trustees and Principal Officers B-29
Investment Adviser B-31
Administrators B-33
Distributor B-34
Portfolio Transactions and Brokerage B-36
Purchase and Redemption of Fund Shares B-37
Shareholder Services B-41
Net Asset Value B-42
Dividends, Distributions and Taxes B-44
Performance Information B-48
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel B-50
Miscellaneous B-50
Appendix A - Description of Securities Ratings A-1
</TABLE>
B-1
<PAGE>
GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under the
laws of Delaware. Information regarding the Class A, B and C shares of the High
Yield Bond Fund is included in this Statement of Additional Information.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion describes the various investment policies and
techniques employed by the Fund. There can be no assurance that the Fund will
achieve its investment objectives.
EQUITY SECURITIES OF GROWTH COMPANIES
The 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. Some of these
companies will be organizations with market capitalizations of $500 million or
less or companies that have limited product lines, markets and financial
resources and are dependent upon a limited management group. Examples of
possible investments include emerging growth companies employing new technology,
cyclical companies, initial public offerings of companies offering high growth
potential, or other corporations offering good potential for high growth in
market value. The securities of such companies may be subject to more abrupt or
erratic market movements than larger, more established companies both because
the securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.
PREFERRED STOCK
The 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.
CONVERTIBLE SECURITIES AND WARRANTS
The 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
B-2
<PAGE>
investment value of a convertible security. The conversion value of a
convertible security is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment
value, the price of the convertible security is governed principally by its
investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the
convertible security will be increasingly influenced by its conversion value.
The market value of convertible debt securities tends to vary
inversely with the level of interest rates. The value of the security declines
as interest rates increase and increases as interest rates decline. Although
under normal market conditions longer term debt securities have greater yields
than do shorter term debt securities of similar quality, they are subject to
greater price fluctuations. A convertible security may be subject to redemption
at the option of the issuer at a price established in the instrument governing
the convertible security. If a convertible security held by the 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 Fund
because the Fund purchases such securities for their equity characteristics.
As a matter of operating policy, the Fund will not invest more than 5%
of its net assets in warrants. A warrant gives the holder a right to purchase
at any time during a specified period a predetermined number of shares of common
stock at a fixed price. Unlike convertible debt securities or preferred stock,
warrants do not pay a fixed dividend. Investments in warrants involve certain
risks, including the possible lack of a liquid market for resale of the
warrants, potential price fluctuations as a result of speculation or other
factors, and failure of the price of the underlying security to reach or have
reasonable prospects of reaching a level at which the warrant can be prudently
exercised (in which event the warrant may expire without being exercised,
resulting in a loss of the Fund's entire investment therein).
SYNTHETIC CONVERTIBLE SECURITIES.
The Fund may invest in "synthetic" convertible securities, which are
derivative positions composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, the Fund may purchase a non-convertible debt security
and a warrant or option, which enables the Fund to have a convertible-like
position with respect to a company, group of companies or stock index.
Synthetic convertible securities are typically offered by financial institutions
and investment banks in private placement transactions. Upon conversion, the
Fund generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike
a true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market
value of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. The Fund only invests in synthetic convertibles with
respect to companies whose corporate debt securities are rated "A" or higher by
Moody's or "A" or higher by S&P and will not invest more than 15% of its net
assets in such synthetic securities and other illiquid securities.
EURODOLLAR CONVERTIBLE SECURITIES
The 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
B-3
<PAGE>
Eurodollar securities are payable in U.S. dollars outside of the United
States. The Fund may invest without limitation in Eurodollar convertible
securities that are convertible into foreign equity securities listed, or
represented by ADRs listed, on the New York Stock Exchange or the American
Stock Exchange or convertible into publicly traded common stock of U.S.
companies. The Fund may also invest up to 15% of its total assets invested
in convertible securities, taken at market value, in Eurodollar convertible
securities that are convertible into foreign equity securities which are not
listed, or represented by ADRs listed, on such exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
The Fund may invest in Eurodollar and Yankee Dollar instruments.
Eurodollar instruments are bonds that pay interest and principal in U.S. dollars
held in banks outside the United States, primarily in Europe. Eurodollar
instruments are usually issued on behalf of multinational companies and foreign
governments by large underwriting groups composed of banks and issuing houses
from many countries. Yankee Dollar instruments are U.S. Dollar denominated
bonds issued in the U.S. by foreign banks and corporations. These investments
involve risks that are different from investments in securities issued by U.S.
issuers. See "Foreign Investment Considerations."
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred
to as "junk bonds." Such bonds are subject to greater market fluctuations and
risk of loss of income and principal than higher rated bonds for a variety of
reasons, including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of
a bond defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the 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, the 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 the 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.
B-4
<PAGE>
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 Fund's assets and hinder the Fund's 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 Fund's portfolio 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 Fund can meet redemption requests.
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and
instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund 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.
When the Fund holds instruments of foreign banks or financial
institutions, it 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 the
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 its Prospectus, the Fund may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest rate.
B-5
<PAGE>
SAVINGS ASSOCIATION OBLIGATIONS. The Fund 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 Fund may invest a portion of its 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 Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
GOVERNMENT OBLIGATIONS
The 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.
The 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.
B-6
<PAGE>
ZERO COUPON SECURITIES
The Fund may invest up to 35% of its net assets in zero coupon
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities. Zero coupon securities may be issued by the U.S. Treasury or
by a U.S. Government agency, authority or instrumentality (such as the Student
Loan Marketing Association or the Resolution Funding Corporation). In addition,
the Money Market Fund may invest up to 5% of its net assets in separately traded
interest and principal component parts of U.S. Treasury securities that are sold
as zero coupon securities and are transferable through the Federal book-entry
system known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupons Under Book Entry Safekeeping ("CUBES"). Zero coupon
securities are sold at a substantial discount from face value and redeemed at
face value at their maturity date without interim cash payments of interest and
principal. This discount is amortized over the life of the security and such
amortization will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may be
subject to greater volatility as a result of changes in prevailing interest
rates than interest paying investments in which the Fund may invest. Because
income on such securities is accrued on a current basis, even though the Fund
does not receive the income currently in cash, the Fund may have to sell other
portfolio investments to obtain cash needed to make income distributions.
PARTICIPATION INTERESTS
The Fund may invest in participation interests, subject to the
limitation on investments by the Fund in illiquid investments. The Fund
currently does not intend to invest more than 5% of its net assets in such
interests. Participation interests represent an undivided interest in or
assignment of a loan made by an issuing financial institution. No more than 5%
of the Fund's net assets can be invested in participation interests of the same
issuing borrower. Participation interests are primarily dependent upon the
financial strength of the borrowing corporation, which is obligated to make
payments of principal and interest on the loan, and there is a risk that such
borrowers may have difficulty making payments. In the event the borrower fails
to pay scheduled interest or principal payments, the Fund could experience a
reduction in its income and might experience a decline in the net asset value of
its shares. In the event of a failure by the financial institution to perform
its obligation in connection with the participation, the Fund might incur
certain costs and delays in realizing payment or may suffer a loss of principal
and/or interest. The Investment Adviser has set certain creditworthiness
standards for issuers of loan participations and monitors their
creditworthiness.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Fund may acquire variable and floating rate instruments. Credit
rating agencies frequently do not rate such instruments; however, the Investment
Adviser under guidelines established by the Trust's Board of Trustees will
determine what unrated variable and floating rate instruments are of comparable
quality at the time of the purchase to rated instruments eligible for purchase
by the Fund. In making such determinations, the Investment Adviser considers
the earning power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will monitor their financial condition. An active
secondary market may not exist with respect to particular variable or floating
rate instruments purchased by the Fund. The absence of such an active secondary
market could make it difficult for the Fund to dispose of the variable or
floating rate instrument involved in the event of the issuer of the instrument
defaulting on its payment obligation or during periods in which the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons,
B-7
<PAGE>
suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
The Fund may invest in "index-linked" or "commodity-linked" notes,
which are debt securities of companies that call for interest payments and/or
payment at maturity in different terms than the typical note where the borrower
agrees to make fixed interest payments and to pay a fixed sum at maturity.
Principal and/or interest payments on an index-linked note depend on the
performance of one or more market indices, such as the S&P 500 Index or a
weighted index of commodity futures such as crude oil, gasoline and natural gas.
The Fund may also invest in "equity linked" and "currency-linked" debt
securities. At maturity, the principal amount of an equity-linked debt security
is exchanged for common stock of the issuer or is payable in an amount based on
the issuer's common stock price at the time of maturity. Currency-linked debt
securities are 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
The 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.
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
B-8
<PAGE>
authorized to guarantee, with the full faith and credit of the United States
Government, the timely payment of principal and interest on securities issued
by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of mortgages
insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not
insured or guaranteed by any government agency from a list of approved
seller/services which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. FHLMC is a government-sponsored corporation created to
increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the
United States Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment rates
vary widely and may be affected by changes in market interest rates. In periods
of falling interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of the pool certificates. Conversely, when
interest rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is not
possible to predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"). A domestic or foreign
CMO in which the Fund may invest is a hybrid between a mortgage-backed bond and
a mortgage pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
seniority. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related, and private organizations (e.g.,
Canada Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). The mechanics of these mortgage-related
securities are generally the same as those issued in the United States.
However, foreign mortgage markets may differ materially from the U.S. mortgage
market
B-9
<PAGE>
with respect to matters such as the sizes of loan pools, pre-payment
experience, and maturities of loans.
"ROLL" TRANSACTIONS
The Fund may enter into "roll" transactions, which are the sale of
GNMA certificates and other securities together with a commitment to purchase
similar, but not identical, securities at a later date from the same party.
During the roll period, the Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Like when-issued securities or
firm commitment agreements, roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is committed to purchase similar securities. Additionally, in the
event the buyer of securities under a roll transaction files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the transactions may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered to be the economic equivalent of
borrowings by the Fund. To avoid leverage, the Fund will establish a segregated
account with its Custodian in which it will maintain liquid assets in an amount
sufficient to meet its payment obligations with respect to these transactions.
The Fund will not enter into roll transactions if, as a result, more than 15% of
the Fund's net assets would be segregated to cover such contracts.
FOREIGN INVESTMENTS
The Fund may invest in securities of foreign issuers that are not
publicly traded in the United States. The Fund may also invest in depository
receipts.
The United States Government has from time to time imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest substantially all of its assets in
United States securities. In such event, the Board of Trustees of the Trust
would consider alternative arrangements, including reevaluation of the Fund's
investment objectives and policies, or investment of all of the Fund's assets in
another investment company with different investment objectives and policies
than the Fund. However, the 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. The Fund may invest in American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuers. ADRs, in registered form, are designed for use in U.S. securities
markets. Such depository receipts may be sponsored by the foreign issuer or may
be unsponsored. The Fund may also invest in European and Global Depository
Receipts ("EDRs" and "GDRs"), which, in bearer form, are designed for use in
European securities markets, and in other instruments representing securities of
foreign companies. Such depository receipts may be sponsored by the foreign
issuer or may be unsponsored. Unsponsored depository receipts are organized
independently and without the cooperation of the 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
B-10
<PAGE>
volatile than if they were sponsored by the issuer of the underlying
securities. ADRs may be listed on a national securities exchange or may
trade in the over-the-counter market. ADR prices are denominated in United
States dollars; the underlying security may be denominated in a foreign
currency, although the underlying security may be subject to foreign
government taxes which would reduce the yield on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
MARKET CHARACTERISTICS. Settlement practices for transactions in
foreign markets may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Fund 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 the
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
LEGAL AND REGULATORY MATTERS. 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 Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's 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 Fund.
COSTS. The expense ratios of the Fund are likely to be higher than
those of investment companies investing in domestic securities, since the cost
of maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics of
the particular company, differences between economic trends and the performance
of securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which the
Fund will be invested in foreign companies and countries and depository receipts
will fluctuate from time to time within the limitations described in the
Prospectus, depending on the Investment Adviser's assessment of prevailing
market, economic and other conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. The Fund is authorized to purchase
put and call options with respect to securities which are otherwise eligible for
purchase by the Fund and with
B-11
<PAGE>
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. The Fund will engage in trading of such derivative
securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to
sell the underlying security at a specified price at any time during the term of
the option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Adviser perceives significant short-term
risk but substantial long-term appreciation for the underlying security. The
put option acts as an insurance policy, as it protects against significant
downward price movement while it allows full participation in any upward
movement. If the Fund holds a stock which the Investment Adviser believes has
strong fundamentals, but for some reason may be weak in the near term, the Fund
may purchase a put option on such security, thereby giving itself the right to
sell such security at a certain strike price throughout the term of the option.
Consequently, the Fund will exercise the put only if the price of such security
falls below the strike price of the put. The difference between the put's
strike price and the market price of the underlying security on the date the
Fund exercises the put, less transaction costs, is the amount by which the Fund
hedges against a decline in the underlying security. If during the period of
the option the market price for the underlying security remains at or above the
put's strike price, the put will expire worthless, representing a loss of the
price the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the premium paid for the put option less any
amount for which the put may be sold reduces the profit the Fund realizes on the
sale of the securities.
If the 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 the 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 Fund 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. The Fund may write covered call options. A
call option is "covered" if the 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
B-12
<PAGE>
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 the 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.
The 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. The Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option generally reflect increases in the market price of the
underlying security, appreciation of the underlying security owned by the Fund
generally offsets, in whole or in part, any loss to the Fund resulting from the
repurchase of a call option.
STOCK INDEX OPTIONS. The Fund may also purchase put and call options
with respect to the S&P 500 and other stock indices. The Fund may purchase such
options as a hedge against changes in the values of 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 the 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 Fund
purchases 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
B-13
<PAGE>
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 the Fund may enter into options transactions may be limited by
the Internal Revenue Code requirements for qualification of the corresponding
Portfolio as a regulated investment company. See "Dividends, Distributions and
Taxes."
In addition, foreign option exchanges do not afford to participants
many of the protections available in United States option exchanges. For
example, there may be no daily price fluctuation limits in such exchanges or
markets, and adverse market movements could therefore continue to an unlimited
extent over a period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction costs, this entire
amount could be lost. Moreover, the 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. The Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to
dealer options. While the Fund might look to a clearing corporation to exercise
exchange-traded options, if the 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, the 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 the Fund writes a dealer option, the Fund can
close out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer. While the Fund seeks to enter into dealer
options only with dealers who will agree to and can enter into closing
transactions with the Fund, no assurance exists that the Fund will at any time
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Unless the Fund, as a covered dealer call option writer, can effect
a closing purchase transaction, it will not be able to liquidate securities (or
other assets) used as cover until the option expires or is exercised. In the
event of insolvency of the other party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, since the Fund must maintain a secured position with respect to any
call option on a security it writes, the Fund may not sell the assets which it
has segregated to secure the position while it is obligated under the option.
This requirement may impair the Fund's ability to sell portfolio securities at a
time when such sale might be advantageous.
B-14
<PAGE>
The Staff of the Securities and Exchange Commission (the
"Commission") takes the position that purchased dealer options are illiquid
securities. The Fund may treat the cover used for written dealer options as
liquid if the dealer agrees that the Fund may repurchase the dealer option it
has written for a maximum price to be calculated by a predetermined formula.
In such cases, the dealer option would be considered illiquid only to the
extent the maximum purchase price under the formula exceeds the intrinsic
value of the option. With that exceptions, however, the Fund will treat
dealer options as subject to the Fund's limitation on illiquid securities.
If the Commission changes its position on the liquidity of dealer options,
the Fund will change its treatment of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The 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 Fund uses 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 Fund 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 Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movement adverse to the Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs.
FORWARD CURRENCY CONTRACTS
The 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, the
Fund might purchase a particular currency or enter into a forward currency
contract to preserve the U.S. dollar price of securities it intends to or has
contracted to purchase. Alternatively, it might sell a particular currency
on either a spot or forward basis to hedge against an anticipated decline in
the dollar value of securities it intends to or has contracted to sell.
Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from
an increase in the value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates.
The Fund trades in such derivative securities for bona fide hedging purposes
and otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund segregates liquid assets in a separate account
with its
B-15
<PAGE>
Custodian when required to do so by CFTC guidelines in order to cover its
obligation in connection with futures and options transactions.
The Fund does not pay or receive funds upon the purchase or sale of
a futures contract. When it enters into a domestic futures contract, the
Fund deposits in a segregated account with its Custodian liquid assets equal
to approximately 5% of the contract amount. This amount is known as initial
margin. The margin requirements for foreign futures contracts may be
different.
The nature of initial margin in futures transactions differs from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination
of the futures contract, assuming it satisfies all contractual obligations.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates,
to reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when
the Fund purchases a stock index futures contract and the price of the
underlying stock index rises, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to
that increase in value. Conversely, when the Fund purchases a stock index
futures contract and the price of the underlying stock index declines, the
position will be less valuable requiring the Fund to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will
operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is made on closing the position. The Fund
either pays or receives cash, thus realizing a loss or a gain.
STOCK INDEX FUTURES CONTRACTS. The 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. The 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 the Fund
obligates the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific
B-16
<PAGE>
future time for a specified price. A futures contract purchased by the Fund
obligates the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date,
would not be determined until at or near that date. The determination would
be in accordance with the rules of the exchange on which the futures contract
sale or purchase was made.
Although interest rate or financial futures contracts by their
terms call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. The 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 Fund deals 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. The Fund may trade in any futures contract for
which there exists a public market, including, without limitation, the
foregoing instruments. International interest rate futures contracts are
traded on the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The 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 Fund will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange,
board of trade, or similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several
risks related to the use of futures as a hedging device. One risk arises
because of the imperfect correlation between movements in the price of the
futures contract and movements in the price of the securities which are the
subject of the hedge. The price of the future may move more or less than the
price of the securities being hedged. If the price of the future moves less
than the price of the securities which are the subject of the hedge, the
hedge will not be fully effective, but if the price of the securities being
hedged has moved in an unfavorable direction, the 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
B-17
<PAGE>
than the price of the hedged securities, the Fund will experience either a
loss or a gain on the future which will not be completely offset by movements
in the price of the securities which are subject to the hedge.
To compensate for the imperfect correlation of movements in the
price of securities being hedged and movements in the price of the futures
contract, the 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 the 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
Fund intends 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 Fund would continue to be required to make daily cash
payments of variation margin. When futures contracts have been used to hedge
portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset to losses on a futures
contract.
B-18
<PAGE>
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 the 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 the 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 Fund may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy
(call) from or sell (put) to the writer of the option a futures contract at a
specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder or writer of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. There is
no guarantee that such closing transactions can be effected.
Investments in futures options involve some of the same
considerations as investments in futures contracts (for example, the
existence of a liquid secondary market). In addition, the purchase of an
option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option.
Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options are
more volatile than the market prices on the underlying futures contracts.
Compared to the purchase or sale of futures contracts, however, the purchase
of call or put options on futures contracts may frequently involve less
potential risk to the Fund 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.
The Fund will not engage in transactions in futures contracts or related
options for speculation, but only as a
B-19
<PAGE>
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. The 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, the Fund will deposit an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, in a segregated account with the Custodian or in a margin account
with a broker to collateralize the position and thereby insure that the use
of such futures is unleveraged.
These restrictions, which are derived from current federal and
state regulations regarding the use of options and futures by mutual funds,
are not "fundamental restrictions" and the Trustees of the Master Trust may
change them if applicable law permits such a change and the change is
consistent with the overall investment objective and policies of the Fund.
The extent to which the Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment
company. See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
The Fund may enter into interest rate swap transactions and
purchase or sell interest rate caps and floors, and may enter into currency
swap cap transactions. An interest rate or currency swap involves an
agreement between the Fund and another party to exchange payments calculated
as if they were interest on a specified ("notional") principal amount (e.g.,
an exchange of floating rate payments by one party for fixed rate payments by
the other). An interest rate cap or floor entitles the purchaser, in
exchange for a premium, to receive payments of interest on a notional
principal amount from the seller of the cap or floor, to the extent that a
specified reference rate exceeds or falls below a predetermined level.
The Fund usually enters into such transactions on a "net" basis,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payment streams. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis, and an amount of cash or high-quality liquid securities having
an aggregate net asset value at least equal to the accrued excess is
maintained in a segregated account by the Trust's custodian. If the Fund
enters into a swap on other than a net basis, or sells caps or floors, the
Fund maintains a segregated account in the full amount accrued on a daily
basis of the Fund's obligations with respect to the transaction. Such
segregated accounts are maintained in accordance with applicable regulations
of the Commission.
The Fund will not enter into any of these derivative transactions
unless the unsecured senior debt or the claims paying ability of the other
party to the transaction is rated at least "high quality" at the time of
purchase by at least one of the established rating agencies (e.g., AAA or AA
by S&P). The swap market has grown substantially in recent years, with a
large number of banks and investment banking firms acting both as principals
and agents utilizing standard swap documentation, and the Investment Adviser
has determined that the swap market has become relatively liquid. Swap
transactions do not involve the delivery of securities or other underlying
assets or principal, and the risk of loss with respect to such transactions
is limited to the net amount of payments that the Fund is contractually
obligated to make or receive. Caps and floors are more
B-20
<PAGE>
recent innovations for which standardized documentation has not yet been
developed; accordingly, they are less liquid than swaps, and caps and floors
purchased by the Fund are considered to be illiquid assets.
INTEREST RATE SWAPS. As indicated above, an interest rate swap is
a contract between two entities ("counterparties") to exchange interest
payments (of the same currency) between the parties. In the most common
interest rate swap structure, one counterparty agrees to make floating rate
payments to the other counterparty, which in turn makes fixed rate payments
to the first counterparty. Interest payments are determined by applying the
respective interest rates to an agreed upon amount, referred to as the
"notional principal amount." In most such transactions, the floating rate
payments are tied to the London Interbank Offered Rate, which is the offered
rate for short-term Eurodollar deposits between major international banks.
As there is no exchange of principal amounts, an interest rate swap is not an
investment or a borrowing.
CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between
two counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the
swap (the initial exchange) is optional. An initial exchange of notional
principal amounts at the spot exchange rate serves the same function as a
spot transaction in the foreign exchange market (for an immediate exchange of
foreign exchange risk). An exchange at maturity of notional principal
amounts at the spot exchange rate serves the same function as a forward
transaction in the foreign exchange market (for a future rate for the
exchange risk). The currency swap market convention is to use the spot rate
rather than the forward rate for the exchange at maturity. The economic
difference is realized through the coupon exchanges over the life of the
swap. In contrast to single currency interest rate swaps, cross-currency
swaps involve both interest rate risk and foreign exchange risk.
SWAP OPTIONS. The Fund may invest in swap options. A swap option
is a contract that gives a counterpart the right (but not the obligation) to
enter into a new swap agreement or to shorten, extend, cancel or otherwise
change an existing swap agreement, at some designated future time on
specified terms. It is different from a forward swap, which is a commitment
to enter into a swap that starts at some future date with specified rates. A
swap option may be structured European-style (exercisable on the
pre-specified date) or American-style ( exercisable during a designated
period). The right pursuant to a swap option must be exercised by the right
holder. The buyer of the right to receive fixed pursuant to a swap option is
said to own a call.
CAPS AND FLOORS. The Fund may invest in interest rate caps and
floors and currency swap cap transactions. An interest rate cap is a right
to receive periodic cash payments over the life of the cap equal to the
difference between any higher actual level of interest rates in the future
and a specified strike (or "cap") level. The cap buyer purchases protection
for a floating rate move above the strike. An interest rate floor is the
right to receive periodic cash payments over the life of the floor equal to
the difference between any lower actual level of interest rates in the future
and a specified strike (or "floor") level. The floor buyer purchases
protection for a floating rate move below the strike. The strikes are
typically based on the three-month LIBOR (although other indices are
available) and are measured quarterly. Rights arising pursuant to both caps
and floors are exercised automatically if the strike is in the money. Caps
and floors eliminate the risk that the buyer fails to exercise
an-in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest
rate and currency swaps and interest rate caps and floors are similar to
those described above with respect to dealer options. In connection with
such transactions, the Fund relies on the other party to the transaction to
B-21
<PAGE>
perform its obligations pursuant to the underlying agreement. If there were
a default by the other party to the transaction, the Fund would have
contractual remedies pursuant to the agreement, but could incur delays in
obtaining the expected benefit of the transaction or loss of such benefit.
In the event of insolvency of the other party, the Fund might be unable to
obtain its expected benefit. In addition, while the Fund will seek to enter
into such transaction only with parties which are capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund
will be able to close out such a transaction with the other party, or obtain
an offsetting position with any other party, at any time prior to the end of
the term of the underlying agreement. This may impair the Fund's ability to
enter into other transactions at a time when doing so might be advantageous.
REPURCHASE AGREEMENTS
The 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 will suffer a
loss to the extent that the proceeds from a sale of the underlying securities
is less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with
respect to such securities to be delayed or limited. Repurchase agreements
are considered to be loans under the Investment Company Act.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements, which
involve the sale of a security by the Fund and its agreement to repurchase
the security (or, in the case of mortgage-backed securities, substantially
similar but not identical securities) at a specified time and price. The
Fund will maintain in a segregated account with the Custodian cash, U.S.
Government securities or other appropriate liquid securities in an amount
sufficient to cover its obligations under these agreements with
broker-dealers (no such collateral is required on such agreements with
banks). Under the 1940 Act, these agreements are considered borrowings by
the Fund, and are subject to the percentage limitations on borrowings
described below. The agreements are subject to the same types of risks as
borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The 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, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
B-22
<PAGE>
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the 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.
The 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, the 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 the 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 the 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 the Fund starting on the day the Fund
agrees to purchase the securities. The 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 the Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of the 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 Fund, 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 Fund and its other portfolios to sell portfolio securities,
at times when the Investment Adviser believes such sales are not in the best
interests of the shareholders of the Fund or other series of the Trust, in
order to provide the Fund or such other series with cash to meet such
redemption requests. The Credit Agreement expires on April 10, 1998, unless
renewed by the parties.
Under the Credit Agreement, the Fund will each other series of the
Trust 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
B-23
<PAGE>
(the "Credit Facility"). The Trust will pay a commitment fee at the rate of
0.10% per annum of the average daily unused portion of the Credit Facility,
and may at any time terminate the Credit Agreement or reduce the lenders'
commitment thereunder in increments of $2,500,000.
While outstanding, the Revolving Credit Loans bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or
(ii) the prime rate of interest of The Chase Manhattan Bank. If, as a result
of changes in applicable laws, regulations or guideline with respect to the
capital adequacy of any lender, the return on such lender's capital is
reduced, the Trust may be required to adjust the rate of interest to
compensate such lender for such reduction. Each Revolving Credit Loan is
payable in thirty days, and may be prepaid at any time in increments of
$100,000 without premium or penalty. The Fund is not liable for repayment of
a Revolving Credit Loan to any other series.
The Credit Agreement contains, among other things, covenants that
require the Fund to maintain certain minimum ratios of debt to net worth;
limit the ability of the Trust to incur other indebtedness and create liens
on its assets or guarantee obligations of others; merge or consolidate with,
or sell its assets to, others; make material changes in its method of
conducting business; make distributions to shareholders in excess of the
requirements of Subchapter M of the Internal Revenue Code in the event of a
default under the Credit Agreement; or make changes in fundamental investment
policies. The Credit Agreement also contains other terms and conditions
customary in such agreements, including various events of default.
LENDING PORTFOLIO SECURITIES
Under the present regulatory requirements which govern loans of
portfolio securities, the loan collateral must, on each business day, at
least equal the value of the loaned securities and must consist of cash,
letters of credit of domestic banks or domestic branches of foreign banks, or
securities of the U.S. Government or its agencies. To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demanded by
the Fund if the demand meets the terms of the letter. Such terms and the
issuing bank must satisfy the Fund. Any loan might be secured by any one or
more of the three types of collateral. The terms of the Fund's loans must
permit the Fund to reacquire loaned securities on five days' notice or in
time to vote on any serious matter and must meet certain tests under the
Internal Revenue Code.
SHORT SALES
The Fund may make short sales of securities it owns or has the
right to acquire at no added cost through conversion or exchange of other
securities it owns (referred to as short sales "against the box") and short
sales of securities which it does not own or have the right to acquire.
In a short sale that is not "against the box," the Fund sells a
security which it does not own, in anticipation of a decline in the market
value of the security. To complete the sale, the Fund must borrow the
security generally from the broker through which the short sale is made) in
order to make delivery to the buyer. The Fund must replace the security
borrowed by purchasing it at the market price at the time of replacement.
The Fund is said to have a "short position" in the securities sold until it
delivers them to the broker. The period during which the Fund has a short
position can range from one day to more than a year. Until the Fund replaces
the security, the proceeds of the short sale are retained by the broker, and
the Fund must pay to the broker a negotiated portion of any dividends or
interest which accrue during the period of the loan. To meet
B-24
<PAGE>
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 the 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 the 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 the 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, the 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.
The Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position. The extent to which such
gains or losses in the long position are reduced will depend upon the amount
of securities sold short relative to the amount of the securities the Fund
owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion
premiums of such securities.
In the view of the Commission, a short sale involves the creation
of a "senior security" as such term is defined in the 1940 Act, unless the
sale is "against the box" and the securities sold short are placed in a
segregated account (not with the broker), or unless the Fund's obligation to
deliver the securities sold short is "covered" by placing in a segregated
account (not with the broker) cash, U.S. Government securities or other
liquid debt or equity securities in an amount equal to the difference between
the market value of the securities sold short at the time of the short sale
and any such collateral required to be deposited with a broker in connection
with the sale (not including the proceeds from the short sale), which
difference is adjusted daily for changes in the value of the securities sold
short. The total value of the cash, U.S. Government securities or
B-25
<PAGE>
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. The Fund will comply
with these requirements. In addition, as a matter of policy, the Trust's
Board of Trustees has determined that the Fund will not 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 the Fund may enter into short sales
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment
company. See "Taxes."
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which
have not been registered under the Securities Act are referred to as private
placement or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio
securities and the Fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemption within seven days. The Fund
might also have to register such restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions
could impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act, including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand
for repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments. If such securities are subject to
purchase by institutional buyers in accordance with Rule 144A promulgated by
the Commission under the Securities Act, the Trust's Board of Trustees has
determined that such securities are not illiquid securities notwithstanding
their legal or contractual restrictions on resale. In all other cases,
however, securities subject to restrictions on resale will be deemed
illiquid. Investing in restricted securities eligible for resale under Rule
144A could have the effect of increasing the level of illiquidity in the Fund
to the extent that qualified institutional buyers become uninterested in
purchasing such securities.
INVESTMENT TECHNIQUES AND PROCESSES
The Investment Adviser's investment techniques and processes, which
it has used in managing institutional portfolios for many years, are
described generally in the Prospectus. In making decisions with respect to
equity securities for the Fund, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal. It's how the Investment Adviser built
its reputation. Over the past ten years, the Investment Adviser has built a
record as one of the finest performing investment managers in the United
States. It has successfully delivered growth over time to many institutional
investors, pension plans, foundations, endowments and high net worth
individuals. The Investment Adviser's
B-26
<PAGE>
methods have proven their ability to achieve growth over time through a
variety of investment vehicles.
The Investment Adviser emphasizes growth over time through
investment in securities of companies with earnings growth potential. The
Investment Adviser's style is a "bottom-up" growth approach that focuses on
the growth prospects of individual companies rather than on economic trends.
It builds portfolios stock by stock. The Investment Adviser's
decision-making is guided by three critical questions: Is there a positive
change? Is it sustainable? Is it timely? The Investment Adviser uses these
three factors because it focuses on discovering positive developments when
they first show up in an issuer's earnings, but before they are fully
reflected in the price of the issuer's securities. The Investment Adviser is
always looking for companies that are driving change and surpassing analysts'
expectations. It seeks to identify companies poised for rapid growth. The
Investment Adviser focuses on recognizing successful companies, regardless of
their capitalization or whether they are domestic or foreign companies.
The Investment Adviser's techniques and processes include
relationships with an extensive network of brokerage research firms located
throughout the world. These analysts are often located in the same
geographic regions as the companies they follow, have followed those
companies for a number of years, and have developed excellent sources of
information about them. The Investment Adviser does not employ in-house
analysts other than the personnel actually engaged in managing investments
for the Fund 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
The Fund is "diversified" within the meaning of the 1940 Act. In
order to qualify as diversified, the 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 the Fund are purchased by the Investment Adviser in
approximately equal amounts, and the Investment Adviser attempts to stay
fully invested within the applicable percentage limitations set forth in the
Prospectus. In addition, for each issuer whose securities are added to an
investment portfolio, the Investment Adviser sells the securities of one of
the issuers currently included in the portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, has adopted the following
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of the Fund (as defined in the Investment
Company Act).
B-27
<PAGE>
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 the Fund is a fundamental policy. In
addition, the Fund may not:
1. 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 the Fund's total assets may be invested without
regard to this restriction and the 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 the Fund in securities of the U.S. Government or any of its agencies and
instrumentalities.
2. 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 the 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. Invest 25% or more of the market value of its total assets in the
securities of issuers in any one particular industry, except that the 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 the Fund in securities of the U.S. Government or its
agencies and instrumentalities.
4. Purchase or sell real estate. However, the Fund may invest in
securities secured by, or issued by companies that invest in, real estate or
interests in real estate.
5. Make loans of money, except that the Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter into
repurchase agreements. The 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. Borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the extent
that the value of the Fund's total assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the Fund will
take prompt action to reduce its borrowings as required by applicable law.
7. 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 Fund from engaging
in options, futures and foreign currency transactions.
8. Underwrite securities of other issuers, except insofar as it may
be deemed an underwriter under the Securities Act in selling portfolio
securities.
B-28
<PAGE>
9. 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. Purchase securities on margin, except for initial and variation
margin on options and futures contracts, and except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of securities.
11. Invest in securities of other investment companies, except
(a) that the Fund will be permitted to invest all or a portion of its assets in
another diversified, open-end management investment company with substantially
the same investment objective, policies and restrictions as the Fund; (b) in
compliance with the Investment Company Act and applicable state securities laws;
or (c) as part of a merger, consolidation, acquisition or reorganization
involving the Fund.
12. Issue senior securities, except that the Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not prohibit
the Fund from engaging in short sales, options, futures and foreign currency
transactions.
13. Enter into transactions for the purpose of arbitrage, or invest
in commodities and commodities contracts, except that the Fund may invest in
stock index, currency and financial futures contracts and related options in
accordance with any rules of the Commodity Futures Trading Commission.
14. Purchase or write options on securities, except for hedging
purposes and then only if (i) aggregate premiums on call options purchased by
the Fund do not exceed 5% of its net assets, (ii) aggregate premiums on put
options purchased by the Fund do not exceed 5% of its net assets, (iii) not more
than 25% of the Fund's net assets would be hedged, and (iv) not more than 25% of
the Fund's net assets are used as cover for options written by the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust, the Fund may not:
1. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships, although
the Fund may invest in the securities of companies which invest in or sponsor
such programs.
2. Lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not less
than 100% of the value of the loaned securities by marking to market daily.
TRUSTEES AND PRINCIPAL OFFICERS
TRUST
The names, ages and addresses of the Trustees and principal officers
of the Trust, including their positions and principal occupations during the
past five years, are shown below. Trustees whose names are followed by an
asterisk are "interested persons" of the Trust (as defined by the Investment
Company Act). Unless otherwise indicated, the address of each Trustee and
officer is 600 West Broadway, 30th Floor, San Diego, California 92101.
B-29
<PAGE>
FRED C. APPLEGATE (52), TRUSTEE AND CHAIRMAN OF THE BOARD OF
TRUSTEES. 885 La Jolla Corona Court, La Jolla, California. Private investor.
President, Hightower Management Co., a financial management firm (January 1992
to __________); formerly President, Nicholas-Applegate Capital Management (from
August 1984 to December 1991). Director of Nicholas-Applegate Fund, Inc. (since
1987). Mr. Applegate's interests in Nicholas-Applegate Capital Management,
Inc., the general partner of the Investment Adviser, were acquired by Mr.
Nicholas in 1991 and 1992.
ARTHUR B. LAFFER (57), TRUSTEE.*/ 5405 Morehouse Drive, Suite 340,
San Diego, California. Chairman, A.B. Laffer, V.A. Canto & Associates, an
economic consulting firm (since 1979); Chairman, Laffer Advisers Incorporated,
economic consultants (since 1981); Director, Nicholas-Applegate Fund, Inc.
(since 1987); Director, U.S. Filter Corporation (since March 1991), MasTec Inc.,
construction (since 1994), and Coinmach Laundry Corporation (since 1996);
Chairman, Calport Asset Management, Inc. (since 1992); formerly Distinguished
University Professor and Director, Pepperdine University (from September 1985 to
May 1988) and Professor of Business Economics, University of Southern California
(1976 to 1984). Mr. Laffer is considered to be an "interested person" of the
Trust because A.B. Laffer, V.A. Canto & Associates or its affiliates received
material compensation from the Investment Adviser for consulting services
provided from time to time to the Investment Adviser, and because during the
last two fiscal years his son was an employee of the Investment Adviser.
CHARLES E. YOUNG (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. Trustee, Nicholas-Applegate Investment Trust
(since 1993).
THOMAS PINDELSKI (47), CHIEF FINANCIAL OFFICER. Partner (since
January 1996) and Chief Financial Officer, Nicholas-Applegate Capital Management
(since January 1993), and Chief Financial Officer, Nicholas-Applegate Securities
(since January 1993); formerly Chief Financial Officer, Aurora Capital
Partners/WSGP Partners L.P., an investment partnership (from November 1988 to
January 1993), and Vice President and Controller, Security Pacific Merchant
Banking Group (from November 1986 to November 1988).
PETER J. JOHNSON (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).
E. BLAKE MOORE, JR. (39), SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities (since
1993); formerly Attorney, Luce, Forward, Hamilton & Scripps (from 1989 to 1993).
B-30
<PAGE>
Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $14,000 for services rendered as a Trustee of the Trust, and $1,000 for
each meeting attended ($2,000 per Committee meeting for Committee chairmen).
Each Trustee is also reimbursed for out-of-pocket expenses incurred as a
Trustee.
The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1997, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):
<TABLE>
<CAPTION>
Total Compensation from
Aggregate Compensation Pension or Retirement Estimated Annual Trust and Trust Complex
from Trust Benefits Accrued as Part Benefits Upon Paid to Trustee
Name of Trust Expenses Retirement
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $ 10,635 None N/A $ 36,250 (47*)
Arthur B. Laffer $ 9,558 None N/A $ 31,750 (47*)
Charles E. Young $ 9,827 None N/A $ 31,750 (47*)
</TABLE>
* Indicates total number of funds in Trust complex, including the Fund.
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 August 1984 to manage
discretionary accounts investing primarily in publicly traded equity securities
and securities convertible into or exercisable for publicly traded equity
securities, with the goal of capital appreciation. Its general partner is
Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership, the general partner of which is Nicholas-Applegate Capital
Management Holdings, Inc., a California corporation owned by Mr. Nicholas.
Personnel of the Investment Adviser may invest in securities for their
own accounts pursuant to a Code of Ethics that sets forth all partners' and
employees' fiduciary responsibilities regarding the Fund, 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 Fund and on short-term
trading having been adopted.
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Trust and the
Investment Adviser with respect to the Fund, the Trust retains the Investment
Adviser to manage the Fund's
B-31
<PAGE>
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 Fund 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 the
Fund or the Trust in connection with the matters to which the Investment
Advisory Agreement relates, except for liability resulting from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of the Investment Adviser's reckless disregard of its duties and
obligations under the Investment Advisory Agreement. The Trust has agreed to
indemnify the Investment Adviser against liabilities, costs and expenses that
the Investment Adviser may incur in connection with any action, suit,
investigation or other proceeding arising out of or otherwise based on any
action actually or allegedly taken or omitted to be taken by the Investment
Adviser in connection with the performance of its duties or obligations under
the Investment Advisory Agreement or otherwise as an investment adviser of the
Trust. The Investment Adviser is not entitled to indemnification with respect
to any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
of its reckless disregard of its duties and obligations under the Investment
Advisory Agreement.
The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated with respect to the 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 the Fund for a period of more than
two years from its execution only so long as such continuance is specifically
approved at least annually in conformity with the Investment Company Act.
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of the Fund (including
administrative fees and distribution expenses for the Fund, but excluding
interest, taxes, brokerage commissions and other costs incurred in connection
with portfolio securities transactions, organizational expenses and other
capitalized expenditures and extraordinary expenses), to ensure that the
operating expenses for the Fund do not exceed the amounts specified in the
Fund's prospectus.
B-32
<PAGE>
ADMINISTRATORS
The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, ICAC is
responsible for performing all administrative services required for the daily
business operations of the Trust, subject to the supervision of the Board of
Trustees of the Trust. ICAC has no supervisory responsibility over the
investment operations of the Fund. 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.
For its services, ICAC receives under the Administration Agreement
annual fees from the 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, 1997, ICAC received aggregate compensation of
$581,542 for all of the series of the Trust.
In connection with its management of the corporate affairs of the
Trust, the Administrator pays the salaries and expenses of all its personnel and
pays all expenses incurred in connection with managing the ordinary course of
the business of the Trust, other than expenses assumed by the Trust as described
below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with ICAC or the
Investment Adviser, (c) out-of-pocket travel expenses for the officers and
Trustees of the Trust and other expenses of Board of Trustees' meetings, (d) the
fees and certain expenses of the Custodian, (e) the fees and expenses of the
Transfer and Dividend Disbursing Agent that relate to the maintenance of each
shareholder account, (f) the charges and expenses of the Trust's legal counsel
and independent accountants, (g) brokerage commissions and any issue or transfer
taxes chargeable to Trustees and officers of the Trust in connection with
securities transactions, (h) all taxes and corporate fees payable by the Trust
to federal, state and other governmental agencies, (i) the fees of any trade
association of which the Trust may be a member, (j) the cost of maintaining the
Trust's existence, taxes and interest, (k) the cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and maintaining the
registration of the Trust and of its shares with the Commission and registering
the Trust as a broker or dealer and qualifying their shares under state
securities laws, including the preparation and printing of the Trust's
registration statement, prospectuses and statements of additional information,
(m) allocable communication expenses with respect to investor services and all
expenses of shareholders' and Board of Trustees' meetings and of preparing,
printing and mailing prospectuses and reports to shareholders, (n) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the business of the Trust, and (o) expenses assumed by
the Trust pursuant to any plan of distribution adopted in conformity with Rule
12b-1 under the Investment Company Act.
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
B-33
<PAGE>
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 Fund. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management Holdings, L.P., the
general partner of the Investment Adviser.
DISTRIBUTION AGREEMENT
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Fund, but is
not obligated to sell any specified number of shares. The Distribution Agreement
contains provisions with respect to renewal and termination similar to those in
the Investment Advisory Agreement discussed above. Pursuant to the Distribution
Agreement, the Trust has agreed to indemnify the Distributor to the extent
permitted by applicable law against certain liabilities under the Securities
Act.
Sales charges on sales of Class A shares of the Fund are payable only
with respect to purchases of less than $1,000,000. However, the Distributor pays
an initial commission to broker-dealers and others on purchases of Class A
shares of the Fund of $1 million or more, and on purchases made at net asset
value by certain retirement plans. See "Purchase and Redemption of Portfolio
Shares -- Dealer Commissions."
DISTRIBUTION PLAN
Under a plan of distribution for the Trust with respect to the Class
A, B and C shares of the Fund (the "Distribution Plan") adopted pursuant to Rule
12b-1 under the Investment Company Act and distribution agreement (the
"Distribution Agreement"), the Distributor incurs the expense of distributing
such shares of the Fund. The Distribution Plan provides for compensation to the
Distributor for the services it provides, and the costs and expenses it incurs,
related to marketing such shares of the Fund. The Distributor is paid for: (a)
expenses incurred in connection with advertising and marketing such shares of
the Fund, including but not limited to any advertising by radio, television,
newspapers, magazines, brochures, sales literature, telemarketing or direct mail
solicitations; (b) periodic payments of fees or commissions for distribution
assistance made to one or more securities
B-34
<PAGE>
brokers, dealers or other industry professionals such as investment advisers,
accountants, estate planning firms and the Distributor itself in respect of
the average daily value of such shares owned by clients of such service
organizations, and (c) expenses incurred in preparing, printing and
distributing the Fund's prospectus and statement of additional information
with respect to such shares.
The Distribution Plan continues in effect from year to year, provided
that each such continuance is approved at least annually by a vote of the Board
of Trustees of the Trust, including a majority vote of the Trustees of the Trust
who are not interested persons of the Trust and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any
agreements related to the Distribution Plan (the "Rule 12b-1 Trustees"), cast in
person at a meeting called for the purpose of voting on such continuance. The
Distribution Plan may be terminated with respect to any Class of shares of the
Fund at any time, without penalty, by the vote of a majority of the Rule 12b-1
Trustees or by the vote of the holders of a majority of the outstanding shares
of the Fund. The Distribution Plan may not be amended to increase materially
the amounts to be paid by a Class of shares of the Fund for the services
described therein without approval by a majority of such outstanding shares of
the Fund, and all material amendments are required to be approved by the Board
of Trustees in the manner described above. The Distribution Plan will
automatically terminate in the event of its assignment. A Class of shares of
the Fund will not be contractually obligated to pay expenses incurred under the
Distribution Plan if the Plan is terminated or not continued with respect to
such shares.
Under the Distribution Plan, the Distributor is compensated for
distribution-related expenses with respect to the Fund at the following annual
rates, payable monthly, based on the average daily net assets of each class of
the Fund: for the Class A shares of the Fund, 0.25%; for the Class B and Class
C shares of the Fund, 0.75%. The Distributor recovers the distribution expenses
it incurs through the receipt of compensation payments from the Trust under the
Distribution Plan and the receipt of that portion of initial sales charges on
purchases of shares of the Fund remaining after the Distributor's reallowance to
selected dealers.
If the Distributor incurs expenses greater than the maximum
distribution fees payable under the Distribution Plan, as described above, with
respect to a Class of shares of the Fund, the Class will not reimburse the
Distributor for the excess in the subsequent fiscal year. However, because the
Distribution Plan is a "compensation-type" plan, the distribution fees are
payable even if the Distributor's actual distribution related expenses are less
than the percentages described above.
The Distributor pays broker-dealers and others out of its distribution
fees quarterly trail commissions of up to the following annual percentages of
the average daily net assets attributable to shares of respective classes held
in the accounts of their customers: 0.25% for the Class A and B shares of the
Fund; 0.75% for Class C shares of the Fund.
SHAREHOLDER SERVICE PLAN
The Trust has also adopted a Shareholder Service Plan with respect to
the Fund. Under the Shareholder Service Plan, the Distributor is compensated at
the annual rate of 0.10% of the average daily net assets of the Fund
attributable to the Class A shares of the Fund, and 0.25% of the average daily
net assets of the Fund attributable to the Class B and C shares of the Fund, for
certain shareholder service expenses provided by the Distributor and fees paid
to broker-dealers and others for the provision of support services to their
clients who are beneficial owners of shares of the Fund.
Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in Fund
shares; processing dividend and distribution payments from the Fund on behalf of
clients; preparing tax reports; arranging for bank wires;
B-35
<PAGE>
responding to client inquiries concerning their investments in Fund shares;
providing the information to the Fund necessary for accounting and
subaccounting; preparing tax reports, forms and related documents; forwarding
shareholder communications from the Trust (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to clients; assisting in processing exchange
and redemption requests from clients; assisting clients in changing dividend
options, account designations and addresses; and providing such other similar
services.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Trustees of the Trust, including a majority of the Trustees who
have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder Service
Plan (the "Independent Trustees"), cast in person at a meeting called for the
purpose of voting on such continuance. The Shareholder Service Plan may be
amended at any time by the Board, provided that any material amendments of the
terms of the Plan will become effective only upon the approval by a majority of
the Board and a majority of the Independent Trustees pursuant to a vote cast in
person at a meeting called for the purpose of voting on the Plan. The
Shareholder Service Plan may be terminated with respect to the Fund or class at
any time, without penalty, by the Board.
Under the Shareholder Service Plan, the Distributor pays
broker-dealers and others an account servicing fee of up to 0.25% annually of
the average daily net assets of the Fund attributable to the Class C shares of
such Fund in the accounts of their customers, as compensation for providing
certain shareholder-related services.
MISCELLANEOUS
Pursuant to the Distribution Plan and Shareholder Service Plan, the
Board of Trustees reviews at least quarterly a written report of the
distribution and service expenses incurred on behalf of shares of the Fund by
the Distributor. The report includes an itemization of the distribution and
service expenses and the purposes of such expenditures. In addition, as long as
the Plans remain in effect, the selection and nomination of Trustees who are not
interested persons of the Trust is committed to the Trustees who are not
interested persons of the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Trust's Board of Trustees, the
Investment Adviser executes the Fund's portfolio transactions and allocates the
brokerage business. In executing such transactions, the Investment Adviser
seeks to obtain the best price and execution for the Fund, 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 Fund
invests may be traded in the over-the- counter markets, and the Fund deals
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 Fund does not necessarily pay the lowest commissions
available. The Board of Trustees of the Trust periodically reviews the
commission rates and allocation of orders.
The Fund has 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
B-36
<PAGE>
shares of the Fund 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 Fund. 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 Fund. Similarly, such
information, services and products provided to the Investment Adviser by
brokers and dealers through whom other clients of the Investment Adviser
effect securities transactions may be useful to the Investment Adviser in
providing services to the Fund. The Investment Adviser may pay higher
commissions on brokerage transactions for the Fund 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 Fund may often also be made by such other accounts. When the
Investment Adviser buys or sells the same security at the same time on behalf of
the Fund 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 Fund and its other managed accounts, and the price paid to or received by
the Fund 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 Fund or the size of the position purchased or sold by
the Fund.
Securities trade in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's commission or discount. On occasion, certain money market
instruments and agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid.
PURCHASE AND REDEMPTION OF FUND SHARES
Class A, B, and C shares of the Fund may be purchased and redeemed at
their net asset value without any initial or deferred sales charge by former
partners of Whitehall Partners and Coventry Partners, California limited
partnerships, who received shares of the predecessor to the Class I shares of
the Trust's Core Growth Fund and Income & Growth Fund, respectively, in the
reorganization and conversion of such partnerships into such predecessor.
Similarly, Class A, B and C shares of the Fund may be purchased and redeemed at
their net asset value without any initial or deferred sales charge by former
partners and participants of Stratford Partners and Nicholas-Applegate Emerging
Growth Pooled Trust, who received shares of the predecessor to the Class I
Shares of the Trust's Emerging Growth Fund in the reorganization and conversion
of such partnerships and pooled trust into such predecessor.
B-37
<PAGE>
The price paid for purchase and redemption of shares of the Fund is
based on the net asset value per share, which is calculated once daily at the
close of trading (currently 4:00 P.M. New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Martin Luther King's Birthday,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day. The offering price is effective for orders
received by the Transfer Agent prior to the time of determination of net asset
value. Dealers are responsible for promptly transmitting purchase orders to the
Transfer Agent. The Trust reserves the right in its sole discretion to suspend
the continued offering of the Fund's shares and to reject purchase orders in
whole or in part when such rejection is in the best interests of the Trust and
the Fund. Payment for shares redeemed will be made more than seven days after
receipt of a written or telephone request in appropriate form, except as
permitted by the 1940 Act and the rules thereunder.
REDUCED SALES CHARGES
Sales charges on purchases of Class A shares of the Fund are subject
to a reduction in certain circumstances, as indicated in the Prospectus.
RIGHTS OF ACCUMULATION. The Fund makes available to its Class A
shareholders the ability to aggregate the value (at the current maximum offering
price on the date of the purchase) of their existing holdings of all Class A
shares to determine the reduced sales charge, provided the shares are held in a
single account. The value of existing holdings for purposes of determining the
reduced sales charge is calculated using the maximum offering price (net asset
value plus sales charge) as of the previous business day. The Transfer Agent
must be notified at the time of purchase that the shareholder is entitled to a
reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings.
CONCURRENT PURCHASES. Purchasers may combine concurrent purchases of
Class A shares of two or more series of the Trust to qualify for a reduced sales
charge. If the shares of the series purchased concurrently are subject to
different sales charges, the concurrent purchases are aggregated to determine
the reduced sales charge applicable to series purchased, and each separate
reduced sales charge is imposed on the amount of shares purchased for that
series.
To illustrate, suppose an investor concurrently purchases $40,000 of
the Class A shares of the Core Growth Fund and $20,000 of the Class A shares of
the Fund, for an aggregate concurrent purchase of $60,000. Because the sales
charges are reduced for purchases of $50,000 or more and because concurrent
purchases can be combined, the applicable sales charge imposed on the $40,000
purchase of shares of the Core Growth Fund would be reduced to 4.50% (from
5.25%), and the sales charge imposed on the concurrent $20,000 purchase of
shares of the Fund would be reduced to 4.00% (from 4.75%).
LETTER OF INTENT. Reduced sales charges are available to purchasers
of Class A shares of the Fund who enter into a written Letter of Intent
providing for the purchase, within a 13-month period, of Class A shares of the
series of the Trust, provided the shares are held in a single account. All
Class A shares of such series which were previously purchased and are still
owned are also included in determining the applicable reduction. The Letter of
Intent privilege may be withdrawn by the Distributor or the Transfer Agent for
future purchases upon receipt of information that any shares subject to the
Letter of Intent have been transferred or redeemed during the 13-month Period.
A Letter of Intent permits a purchaser to establish a total investment
goal to be achieved by any number of investments over a 13-month period. Each
investment made during the
B-38
<PAGE>
period will receive the reduced sales charge applicable to the amount
represented by the goal, as if it were a single investment. Investors should
refer to their Letter of Intent when placing orders for Class A shares of the
Fund. During the 13-month period, an investor may increase his or her Letter
of Intent goal and all subsequent purchases will be treated as a new Letter
of Intent except as to the 13-month period, which does not change. The sales
charge paid on purchases made before the increase to the Letter of Intent
goal will be retroactively reduced at the end of the period.
The Transfer Agent will hold in escrow Class A shares of the Fund and
other series of the Trust totaling 5% of the dollar amount of the Letter of
Intent in the name of the purchaser. Any dividends and capital gains
distributions on the escrowed shares will be paid to the investor or as
otherwise directed by the investor. The effective date of a Letter of Intent
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal. Upon completion of the Letter of Intent goal
within the 13-month period, the investor will promptly receive the escrowed
shares.
The Letter of Intent does not obligate the investor to purchase, or
the Fund to sell, the indicated amount of Class A shares. In the event the
Letter of Intent goal is not achieved within the 13-month period, the investor
must pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such payment
may be made directly to the Transfer Agent or, if not paid within 20 days after
written request, the Transfer Agent will liquidate sufficient escrowed shares to
obtain such difference. If the redemption or liquidation proceeds are
inadequate to cover the differences, investors will be liable for the extent of
the inadequacy. By executing the Letter of Intent, investors irrevocably
appoint the Transfer Agent as attorney in fact with full power of substitution
in the premises to surrender for redemption any or all escrowed shares. If the
goal Letter of Intent is exceeded in an amount which qualified for a lower sales
charge, a price adjustment is made by refunding to the purchaser the amount of
excess sales charge, if any, paid during the 13-month period.
DEALER COMMISSIONS
The Distributor pays the following commissions to dealers who initiate
and are responsible for purchases of a Class of Fund shares of $1 million or
more and for purchases made at net asset value by certain retirement plans of
organizations with 50 or more eligible employees. Such commissions are paid
twice monthly at the following annual rates:
<TABLE>
<CAPTION>
Current Market Value
of Accounts at
Commission Rate Time of Purchase
--------------- --------------------
<S> <C>
1.00% $1,000,000 up to $2,000,000.
.80% over $2,000,000 up to $5,000,000.
.50% over $5,000,000 up to $25,000,000.
.25% over $25,000,000.
</TABLE>
For this purpose, exchanges between series are not considered to be purchases.
The Distributor reserves the right to require reimbursement of any such
commissions paid with respect to such purchases if such shares are redeemed
within twelve months after purchase. Dealers requesting further information may
call (800) 551-8045.
B-39
<PAGE>
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of the Fund redeemed,
the Trust reserves the right to make payment wholly or partly in shares of
portfolio securities. In such cases, a shareholder may incur brokerage costs in
converting such securities to cash. However, the Trust has elected to be
governed by the provisions of Rule 18f-1 under the Investment Company Act,
pursuant to which it is obligated to pay in cash all requests for redemptions by
any shareholder of record, limited in amount with respect to each shareholder
during any 90-day period to the lesser of $250,000 or 1% of the net asset value
of the Trust at the beginning of such period.
WAIVER OF CDSC
The CDSC is waived for redemptions by: (1) current or retired
directors, trustees, partners, officers and employees of the Trust, the
Distributor, the Investment Adviser and its general partner, certain family
members of the above persons, and trusts or plans primarily for such persons;
(2) former limited partners and participants of certain investment partnerships
and pooled trusts previously managed by the Investment Adviser; and
(3) participants in certain pension, profit-sharing or employee benefit plans
that are sponsored by the Distributor and its affiliates.
The CDSC is also waived for:
(1) exchanges of Class B or C shares of the Fund (however, the shares
acquired by exchange will continue to be subject to a CDSC on the same
basis as the shares exchanged);
(2) redemptions in connection with mergers, acquisitions and exchange
offers involving Class B or C shares of the Fund;
(3) qualifying distributions from qualified retirement plans and other
employee benefit plans;
(4) distributions from custodial accounts under Section 403(b)(7) of the
Internal Revenue Code or IRAs due to death, disability or attainment of age
591/2;
(5) tax-free returns of excess contributions to IRAs;
(6) any partial or complete redemptions following the death or disability
of a shareholder, provided the redemption is made within one year of death
or initial determination of disability; and
(7) redemptions when the Distributor did not pay an advance commission to
a broker upon the purchase of the shares being redeemed.
CERTAIN EMPLOYEE BENEFIT PLANS
Class A shares are made available to certain 401(k) plans at net asset
value, with waiver of the CDSC, if (i) the plan is recordkept on a daily
valuation basis by Merrill Lynch and, on the date the plan sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the plan has $3 million or more
in assets invested in broker/dealer funds not advised or managed by Merrill
Lynch Asset Management, L.P. ("MLAM") that are made available pursuant to a
Services Agreement between Merrill Lynch and the Distributor and in funds
advised or managed by MLAM (collectively, the "Applicable Investments"); or (ii)
the plan is recordkept on a daily valuation basis by an independent recordkeeper
whose services are provided through a contract or alliance arrangement with
Merrill Lynch, and on the date the plan sponsor
B-40
<PAGE>
signs the Merrill Lynch Recordkeeping Service Agreement, the plan has $3
million or more in assets, excluding money market funds, invested in
Applicable Investments; or (iii) the plan has 500 or more eligible employees,
as determined by the Merrill Lynch plan conversion manager, on the date the
plan sponsor signs the Merrill Lynch Recordkeeping Service Agreement.
Class B shares are made available to certain 401(k) plans at net asset
value, with waiver of the CDSC, if (i) the plan is recordkept on a daily
valuation basis by Merrill Lynch and, on the date the plan sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the plan has less than $3 million
in assets invested in Applicable Investments; or (ii) the plan is recordkept on
a daily valuation basis by an independent recordkeeper whose services are
provided through a contract or alliance arrangement with Merrill Lynch, and on
the date the plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the plan has less than $3 million in assets, excluding money market
funds, invested in Applicable Investments; or (iii) the plan has less than 500
eligible employees, as determined by the Merrill Lynch plan conversion manager,
on the date the plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares of the Fund will be converted to Class A shares once the plan has
reached $5 million invested in Applicable Investments. The conversion will be
effected at the plan level.
SHAREHOLDER SERVICES
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. If a share certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Account at any time. There
is no charge to the investor for issuance of a certificate. Whenever a
transaction takes place in the Shareholder Investment Account, the shareholder
will be mailed a statement showing the transaction and the status of the
Account.
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 the 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 the Fund on a monthly or
quarterly basis on any day of the month or
B-41
<PAGE>
quarter by authorizing his or her bank account to be debited to invest
specified dollar amounts in shares of the Fund. The investor's bank must be
a member of the Automatic Clearing House System. Stock certificates are not
issued to participants of the Automatic Investment Plan. Participation in
the Plan will begin within 30 days after receipt of the account application.
If the investor's bank account cannot be charged due to insufficient funds, a
stop-payment order or closing of the account, the investor's Plan may be
terminated and the related investment reversed. The investor may change the
amount of the investment or discontinue the Plan at any time by writing to
the Transfer Agent. Further information about this program and an
application form can be obtained from the Transfer Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder of Class A, B and C shares of the Fund may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by the
Fund (the "paying Fund") into Class A, B or C shares of any other series of the
Trust (the "receiving Fund") subject to the following conditions: (i) the
aggregate value of the shareholder's account(s) in the paying Fund(s) must equal
or exceed $5,000 (this condition is waived if the value of the account in the
receiving Fund equals or exceeds that Fund's minimum initial investment
requirement), (ii) as long as the value of the account in the receiving Fund is
below that Fund's minimum initial investment requirement, dividends and capital
gain distributions paid by the receiving Fund must be automatically reinvested
in the receiving Fund, and (iii) if this privilege is discontinued with respect
to a particular receiving Fund, the value of the account in that Fund must equal
or exceed the Fund's minimum initial investment requirement or the Fund will
have the right, if the shareholder fails to increase the value of the account to
such minimum within 90 days after being notified of the deficiency,
automatically to redeem the account and send the proceeds to the shareholder.
These cross-reinvestments of dividends and capital gain distributions will be at
net asset value (without a sales charge).
AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Fund of
sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be made
into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.
NET ASSET VALUE
The net asset value of a share of a Class of the Fund is calculated by
dividing (i) the value of the securities held by the Fund (I.E., the value of
its investments in the Fund), plus any cash or other assets, minus the Class'
proportional interest in the Fund's liabilities (including accrued estimated
expenses on an annual basis) and all liabilities allocable to such Class, by
(ii) the total number of shares of the Class outstanding. The value of the
investments and assets of the Fund is determined each business day.
Investment securities, including ADRs and EDRs, that are traded on a
stock exchange or on the NASDAQ National Market System are valued at the last
sale price as of the close of business on the New York Stock Exchange (normally
4:00 P.M. New York time) on the day the securities are being valued, or lacking
any sales, at the mean between the closing bid and asked prices. Securities
listed or traded on certain foreign exchanges whose operations are similar to
the United States over-the-counter market are valued at the price within the
limits of the latest available current bid and asked
B-42
<PAGE>
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 Fund values long-term debt obligations at the quoted bid prices
for such securities or, if such prices are not available, at prices for
securities of comparable maturity, quality and type; however, the Investment
Adviser will use, when it deems it appropriate, prices obtained for the day of
valuation from a bond pricing service, as discussed below. The Fund values 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 Fund values repurchase agreements at cost plus
accrued interest.
The Fund values U.S. Government securities which trade in the
over-the-counter market at the last available bid prices, except that securities
with a demand feature exercisable within one to seven days are valued at par.
Such valuations are based on quotations of one or more dealers that make markets
in the securities as obtained from such dealers, or on the evaluation of a
pricing service.
The Fund values 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
B-43
<PAGE>
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 Fund to do so.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares and pays dividends of all investment income. The
Fund makes distributions at least annually of its net capital gains, if any. In
determining amounts of capital gains to be distributed by the Fund, any capital
loss carryovers from prior years will be offset against its capital gains.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify the Fund as a regulated investment
company under Subchapter M of the Code, and intends that each Portfolio will
remain so qualified.
As a regulated investment company, the 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 the 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.
The 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, the Fund must distribute
during each calendar year an amount equal to the sum of (1) at
B-44
<PAGE>
least 98% of its ordinary income and net capital gain (not taking into
account any capital gains or losses as an exception) for the calendar year,
(2) at least 98% of its capital gains in excess of its capital losses (and
adjusted for certain ordinary losses) for the twelve month period ending on
October 31 of the calendar year, and (3) all ordinary income and capital
gains for previous years that were not distributed during such years. A
distribution will be treated as paid on December 31 of the calendar year if
it is declared by the Fund in October, November, or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders (other than those not subject to federal income tax) in the
calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To avoid the excise
tax, the Fund intends to make timely distributions of its income in
compliance with these requirements and anticipate that it will not be subject
to the excise tax.
Dividends paid by the 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 Fund is derived from dividends on common or preferred stock of
domestic corporations. Dividend income earned by the Fund will be eligible for
the dividends received deduction only if the Fund has satisfied a 46-day holding
period requirement with respect to the underlying portfolio security (91 days in
the case of dividends derived from preferred stock). In addition, a corporate
shareholder must have held its shares in the Fund for not less than 46 days (91
days in the case of dividends derived from preferred stock) in order to claim
the dividend received deduction. Not later than 60 days after the end of its
taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during such year which may be
taken into account by its shareholders for purposes of such deduction provisions
of the Code. Net capital gain distributions are not eligible for the dividends
received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to the Fund's shareholders as long-term capital gains,
regardless of the holding period of such shareholders. Such distributions of
net capital gains will be designated by the Fund as a capital gains distribution
in a written notice to its shareholders which accompanies the distribution
payment. Any loss on the sale of shares held for less than six months will be
treated as a long-term capital loss for federal tax purposes to the extent a
shareholder receives net capital gain distributions on such shares. The maximum
federal income tax rate applicable to long-term capital gains is currently 28%
(20% for 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 the Fund.
Any loss realized on a sale, redemption or exchange of shares of the
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 the 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 series of the Trust pursuant to a
reinvestment right that reduces the sales charges in the subsequent acquisition
of shares.
B-45
<PAGE>
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 the 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 Fund 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 Fund 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 Fund
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 Fund. In
addition, losses realized by the Fund on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Fund are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by the Fund which is
taxed as ordinary income when distributed to shareholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes 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 Fund's assets may limit the extent to which the Fund 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 the
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the
B-46
<PAGE>
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 the 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 Fund 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 the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to elect to "pass-through" to the Fund's shareholders the amount of
foreign income and similar taxes paid by the Fund. Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the Fund elects
pass-through treatment, the source of the Fund's income flows through to
shareholders of the Fund. With respect to such election, the Fund treats gains
from the sale of securities as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit applies separately to foreign
source passive income, and to certain other types of income. Shareholders may
be unable to claim a credit for the full amount of their proportion at share of
the foreign taxes paid by the Fund. The foreign tax credit is modified for
purposes of the federal alternative minimum tax and can be used to offset only
90% of the alternative minimum tax imposed on corporations and individuals and
foreign taxes generally are not deductible in computing alternative minimum
taxable income.
SHORT SALES. Generally, capital gain or loss realized by the Fund in
a short sale may be long-term or short-term depending on the holding period of
the short position. Under a special rule, however, the capital gain will be
short-term gain if (1) as of the date of the short sale, the Fund owned property
for the short-term holding period that was substantially identical to that which
the Fund used to close the sale or (2) after the short sale and on or before its
closing, the Fund acquired substantially similar property. Similarly, if the
Fund held property substantially identical to that sold short for the long-term
holding period as of the date of the short sale, any loss on closing the short
position will be long-term capital loss. These special rules do not apply to
substantially similar property to the extent such property exceeds the property
used by the Fund to close its short position.
ORIGINAL ISSUE DISCOUNT. The Fund may treat some of the debt
securities (with a fixed maturity date of more than one year from the date of
issuance) it may acquire as issued originally at a discount. Generally, the
Fund treats 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 Fund treats 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 Fund may treat some of the debt securities (with a fixed maturity
date of more than one year from the date of issuance) that it may acquire in the
secondary market as having market
B-47
<PAGE>
discount. Generally, the Fund treats any gain recognized on the disposition
of, and any partial payment of principal on, a debt security having market
discount as ordinary interest income to the extent the gain, or principal
payment, does not exceed the "accrued market discount" on such debt security.
Market discount generally accrues in equal daily installments. The Fund 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 Fund generally must distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though the Fund has yet to receive cash representing such income. The Fund
may obtain cash to pay such dividends from sales proceeds of securities held by
the Fund.
OTHER TAX INFORMATION
The Fund 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 the
Fund with respect to distributions by the Fund may differ from federal tax
treatment. Distributions to shareholders may be subject to additional state and
local taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
The Trust may from time to time advertise total returns and yields for
the Fund, compare Fund performance to various indices, and publish rankings of
the Fund prepared by various ranking services. Any performance information
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the its portfolio, and the market conditions
during the given time period, and should not be considered to be representative
of what may be achieved in the future.
TOTAL RETURN
The total return for the 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.
B-48
<PAGE>
Total return is computed according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or fractional
portion thereof) of a hypothetical $1,000 payment made at the beginning of the
period.
YIELD
The yield for the Fund is calculated based on a 30-day or one-month
period, according to the following formula:
6
Yield = 2[{a - b + 1) -1]
-----
{c x d }
For purposes of this formula, "a" is total dividends and interest
earned during the period; "b" is total expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
COMPARISON TO INDICES AND RANKINGS
The Fund may compare the performance of its Classes of shares to
various unmanaged indices such as the Dow Jones Composite Average or its
component averages, Standard and Poor's 500 Stock Index or its component
indices, Standard and Poor's 100 Stock Index, the Russell Midcap Growth Index,
the Russell 2000 Growth Index, the Russell 1000 Index, the CS First Boston
Convertible Index, the Lehman Brothers Government Bond Index, the Morgan Stanley
Capital International World Index, the Morgan Stanley Capital International
Emerging Markets Free Index, the Emerging Markets Investible Index, the Morgan
Stanley Capital International Europe, Australia and Far East Index, the IFC
Emerging Markets Investible Index, The New York Stock Exchange composite or
component indices, the Wilshire 5000 Equity Index, indices prepared by Lipper
Analytical Services and Morningstar, Inc., the CDA Mutual Fund Report published
by CDA Investment Technologies, Inc., performance statistics reported in
financial publications such as The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines, the Consumer Price
Index (or Cost of Living Index) published by the U.S. Bureau of Labor
Statistics, Stocks, Bonds, Bills and Inflation published by Ibbotson Associates,
Savings and Loan Historical Interest Rates published in the U.S. Savings & Loan
League Fact Book, and historical data supplied by the research departments of
First Boston Corporation, The J.P. Morgan companies, Salomon Brothers, Merrill
Lynch, Lehman Brothers, Smith Barney Shearson and Bloomberg L.P. Unmanaged
indices (I.E., other than Lipper) generally do not reflect deductions for
administrative and management costs and expenses.
A number of independent mutual fund ranking entities prepare
performance rankings. These entities categorize and rank funds by various
criteria, including fund type, performance over a given period of years, total
return, standardized yield, variations in sales charges and risk\reward
considerations.
B-49
<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 Fund 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
Fund.
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 Fund. The Transfer Agent provides
customary transfer agency services to the Trust, including the handling of
shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, and related functions. The
Dividend Disbursing Agent provides customary dividend disbursing services to
the Trust, including payment of dividends and distributions and related
functions.
The following act as sub-transfer agents for the Fund: Financial
Data Services, Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville, Florida
32246; and William M. Mercer Plan Participant Services, Inc., 1417 Lake Cook
Road, Deerfield, Illinois 60015.
Ernst & Young, L.L.P., 515 South Flower Street, Los Angeles,
California 90071, serves as the independent auditors for the Trust, and in
that capacity examines the annual financial statements of the Trust.
Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust. It also acts as
legal counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 62 series. 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 or by Classes, as the case may be. For example, a change in
the Fund's fundamental investment policies would be voted upon by
shareholders of all Classes of the Fund, as would the approval of any
advisory or distribution contract for the Fund. However, all shares of the
Trust may vote together in the election or selection of Trustees, principal
underwriters and accountants for the Trust.
Rule 18f-2 under the 1940 Act provides that any matter required to
be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding
shares of the series of the Trust affected by the matter. Under Rule 18f-2,
a series is presumed to be affected by a matter, unless the interests of each
series in the matter are identical or the matter does not affect any interest
of such series. Under Rule 18f-2 the approval of an investment advisory
agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to the Fund only if approved by a
majority of its outstanding shares. However, the rule also provides that the
B-50
<PAGE>
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 series.
As used in the Fund's prospectus and in this Statement of
Additional Information, the term "majority," when referring to approvals to
be obtained from shareholders of the Fund, means the vote of the lesser of
(i) 67% of the shares of the Fund represented at a meeting if the holders of
more than 50% of the outstanding shares of the Fund are present in person or
by proxy, or (ii) more than 50% of the outstanding shares of the Fund. The
term "majority," when referring to the approvals to be obtained from
shareholders of the Trust, means the vote of the lesser of (i) 67% of the
Trust's shares represented at a meeting if the holders of more than 50% of
the Trust's outstanding shares are present in person or by proxy, or (ii)
more than 50% of the Trust's outstanding shares. Shareholders are entitled to
one vote for each full share held and fractional votes for fractional shares
held. Unless otherwise provided by law (for example, by Rule 18f-2 discussed
above) or by the Trust's Declaration of Trust or Bylaws, the Trust may take
or authorize any action upon the favorable vote of the holders of more than
50% of the outstanding shares of the Trust.
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment
Company Act. However, the Trust undertakes to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a
Trustee or Trustees if requested in writing by the holders of at least 10% of
the Trust's outstanding voting securities, and to assist in communicating
with other shareholders as required by Section 16(c) of the Investment
Company Act.
Each share of each Class of the 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 the 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 series 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 the Fund shall be enforceable against the assets and property
of the Fund only, and not against the assets or property of any other series
or the investors therein.
REGISTRATION STATEMENT
The Registration Statement of the Trust, including the Fund's
Prospectuses, the Statements of Additional Information and the exhibits filed
therewith, may be examined at the office of
B-51
<PAGE>
the Commission in Washington, D.C. Statements contained in the Fund's
Prospectuses or the Statements of Additional Information as to the contents
of any contract or other document referred to herein or in the Prospectuses
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to these
Registration Statements, each such statement being qualified in all respects
by such reference.
B-52
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating
symbols of securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating
symbols of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to
commercial paper investments permitted to be made by the Master Trust, are
opinions of the ability of issuers to repay punctually their senior debt
obligations which have an original maturity not exceeding one year. Moody's
employs the following designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
PRIME 1: Issuers (or related supporting institutions) rated
PRIME-1 have a superior ability for repayment of short-term promissory
obligations. PRIME-1 repayment ability will often be evidenced by the
following characteristics: (a) leading market positions in well-established
industries; (b) high rates of return on funds employed; (c) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (d) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (e) well-established access to a range
of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting
institutions) have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above in the PRIME-1 category but to a lesser degree. Earning trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
PRIME 3: Issuers rated PRIME-3 (or related supporting
institutions) have an acceptable ability for repayment of short-term debt
obligations. The effect of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result
in changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by 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
<PAGE>
A-1: This designation indicates the degree of safety regarding
timely payment is overwhelming or very strong. Those issuers determined to
possess overwhelming safety characteristics are denoted with a "PLUS" (+)
designation.
A-2: Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as overwhelming as
for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B: Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
C: Issues rated "C" are regarded as having a doubtful capacity for
payment.
FITCH INVESTORS SERVICE, INC.
F-1+: Exceptionally strong credit quality. Commercial paper
assigned this rating is regarded as having the strongest degree of assurance
for timely payment.
F-1: Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2: Good credit quality. Commercial paper assigned this rating
has a satisfactory degree of assurance for timely payment but the margin of
safety is not as great as for issuers assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near term adverse changes could cause these securities to
be rated below investment grade.
DUFF & PHELPS
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," Duff 1" and "Duff 1-," within the highest
rating category. The following summarizes the rating categories used by Duff
& Phelps for commercial paper:
DUFF 1+ - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
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.
A-2
<PAGE>
DUFF 2 - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
DUFF 3 - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4 - Debt possesses speculative investment characteristics.
DUFF 5 - Issuer has failed to meet scheduled principal and/or
interest payments.
THOMSON BANKWATCH
Thomson BankWatch commercial paper ratings assess the likelihood of
an untimely payment of principal or interest of debt having a maturity of one
year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
TBW-1 - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
TBW-2 - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
TBW-3 - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
IBCA
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes
the rating categories used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest capacity for timely
repayment.
A1 - Obligations are supported by a strong capacity for timely
repayment.
A2 - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse
changes in business, economic, or financial conditions.
A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
A-3
<PAGE>
CORPORATE BONDS
MOODY'S
Moody's corporate bond ratings are opinions of the relative
investment qualities of bonds. Moody's employs nine designations to indicate
such relative qualities, ranging from "Aaa" for the highest quality
obligations to "C" for the lowest. Issues are further refined with the
designation 1,2, and 3 to indicate the relative ranking within designations.
Bonds with the following Moody's ratings have the following investment
qualities:
Aaa: Bonds in this category are judged to be of the highest
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds in this category are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A: Bonds in this category possess many favorable investment
attributes and are considered to be as upper-medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa: Bonds in this category are considered medium-grade
obligations, (I.E., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds in this category are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds in this category generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa: Bonds in this category are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.
C: Bonds in this category are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-4
<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.
C: This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
A-5
<PAGE>
AAA - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because
of economic conditions.
A - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
BB, B, CCC, DD, AND DP - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major
categories.
FITCH INVESTORS SERVICE, INC.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
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
A-6
<PAGE>
assessment of the likelihood of timely payment of principal and interest in
accordance with the terms of obligation for bond issues not in default. For
defaulted bonds, the rating "DDD" to "D" is an assessment of the ultimate
recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
rating categories.
ICBA
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes
the rating categories used by IBCA for long-term debt ratings:
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions
may increase investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may
lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in higher categories.
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.
A-7
<PAGE>
AA - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
A - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.
BBB - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
BB, B, CCC, AND CC, - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded
as having speculative characteristics regarding the likelihood of timely
payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
D - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-8
<PAGE>
NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
HIGH YIELD BOND FUND
CLASS Q SHARES
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8643
STATEMENT OF ADDITIONAL INFORMATION
March 2, 1998
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company currently offering a number of separate
diversified funds. This Statement of Additional Information contains
information regarding the Class Q shares of the Nicholas-Applegate High Yield
Bond Fund (the "Fund" or "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 Fund's Prospectus and should be read in conjunction with such Prospectus.
The Prospectus may be obtained without charge by calling or writing the
Trust at the address and phone number written above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objectives, Policies and Risks. . . . . . . . . . . . . . . B-2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . B-25
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . . B-27
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . B-28
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-30
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-31
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . B-32
Purchase and Redemption of Fund Shares . . . . . . . . . . . . . . . . B-33
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . B-33
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-35
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . B-37
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . B-41
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel . . . . . . . . . . . . . . . B-42
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-43
Appendix A - Description of Securities Ratings . . . . . . . . . . . . A-1
</TABLE>
B-1
<PAGE>
GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under the
laws of Delaware. Information regarding the Class Q shares of the High Yield
Bond Fund is included in this Statement of Additional Information.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion describes the various investment policies and
techniques employed by the Fund. There can be no assurance that the Fund
will achieve its investment objectives.
EQUITY SECURITIES OF GROWTH COMPANIES
The 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.
Some of these companies will be organizations with market capitalizations of
$500 million or less or companies that have limited product lines, markets
and financial resources and are dependent upon a limited management group.
Examples of possible investments include emerging growth companies employing
new technology, cyclical companies, initial public offerings of companies
offering high growth potential, or other corporations offering good potential
for high growth in market value. The securities of such companies may be
subject to more abrupt or erratic market movements than larger, more
established companies both because the securities typically are traded in
lower volume and because the issuers typically are subject to a greater
degree to changes in earnings and prospects.
PREFERRED STOCK
The 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.
CONVERTIBLE SECURITIES AND WARRANTS
The 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
B-2
<PAGE>
or exceeds the conversion price, the price of the convertible security will
be increasingly influenced by its conversion value.
The market value of convertible debt securities tends to vary
inversely with the level of interest rates. The value of the security
declines as interest rates increase and increases as interest rates decline.
Although under normal market conditions longer term debt securities have
greater yields than do shorter term debt securities of similar quality, they
are subject to greater price fluctuations. A convertible security may be
subject to redemption at the option of the issuer at a price established in
the instrument governing the convertible security. If a convertible security
held by the 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 Fund because the Fund purchases such securities
for their equity characteristics.
As a matter of operating policy, the Fund will not invest more than 5%
of its net assets in warrants. A warrant gives the holder a right to
purchase at any time during a specified period a predetermined number of
shares of common stock at a fixed price. Unlike convertible debt securities
or preferred stock, warrants do not pay a fixed dividend. Investments in
warrants involve certain risks, including the possible lack of a liquid
market for resale of the warrants, potential price fluctuations as a result
of speculation or other factors, and failure of the price of the underlying
security to reach or have reasonable prospects of reaching a level at which
the warrant can be prudently exercised (in which event the warrant may expire
without being exercised, resulting in a loss of the Fund's entire investment
therein).
SYNTHETIC CONVERTIBLE SECURITIES
The Fund may invest in "synthetic" convertible securities, which are
derivative positions composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, the Fund may purchase a non-convertible debt
security and a warrant or option, which enables the Fund to have a
convertible-like position with respect to a company, group of companies or
stock index. Synthetic convertible securities are typically offered by
financial institutions and investment banks in private placement
transactions. Upon conversion, the Fund generally receives an amount in cash
equal to the difference between the conversion price and the then current
value of the underlying security. Unlike a true convertible security, a
synthetic convertible comprises two or more separate securities, each with
its own market value. Therefore, the market value of a synthetic convertible
is the sum of the values of its fixed-income component and its convertible
component. For this reason, the values of a synthetic convertible and a true
convertible security may respond differently to market fluctuations. The
Fund only invests in synthetic convertibles with respect to companies whose
corporate debt securities are rated "A" or higher by Moody's or "A" or higher
by S&P and will not invest more than 15% of its net assets in such synthetic
securities and other illiquid securities.
EURODOLLAR CONVERTIBLE SECURITIES
The Fund may invest in Eurodollar convertible securities, which are
fixed-income securities of a U.S. issuer or a foreign issuer that are issued
outside the United States and are convertible into equity securities of the
same or a different issuer. Interest and dividends on Eurodollar securities
are payable in U.S. dollars outside of the United States. The Fund may
invest without limitation in Eurodollar convertible securities that are
convertible into foreign equity securities listed, or represented by ADRs
listed, on the New York Stock Exchange or the American Stock Exchange or
convertible into publicly traded common stock of U.S. companies. The Fund
may also invest up to 15% of its total assets invested in convertible
securities, taken at market value, in Eurodollar convertible securities that
are convertible into foreign equity securities which are not listed, or
represented by ADRs listed, on such exchanges.
B-3
<PAGE>
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
The Fund may invest in Eurodollar and Yankee Dollar instruments.
Eurodollar instruments are bonds that pay interest and principal in U.S.
dollars held in banks outside the United States, primarily in Europe.
Eurodollar instruments are usually issued on behalf of multinational
companies and foreign governments by large underwriting groups composed of
banks and issuing houses from many countries. Yankee Dollar instruments are
U.S. Dollar denominated bonds issued in the U.S. by foreign banks and
corporations. These investments involve risks that are different from
investments in securities issued by U.S. issuers. See "Foreign Investment
Considerations."
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors,
including the general condition of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. Debt securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred
to as "junk bonds." Such bonds are subject to greater market fluctuations
and risk of loss of income and principal than higher rated bonds for a
variety of reasons, including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other
securities. For example, the prices of high yield bonds have been found to be
less sensitive to interest rate changes than higher-rated investments, but
more sensitive to adverse economic changes or individual corporate
developments. Also, during an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal
and interest obligations, to meet projected business goals, and to obtain
additional financing. If the issuer of a bond defaults, the Fund may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high yield bonds and the 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, the 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 the 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 Fund's assets and hinder the Fund's 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
B-4
<PAGE>
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 Fund's portfolio
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 Fund can meet redemption requests.
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or
bills of exchange, normally drawn by an importer or exporter to pay for
specific merchandise, which are "accepted" by a bank, meaning in effect that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Certificates of deposit and bankers' acceptances acquired by the
Fund 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.
When the Fund holds instruments of foreign banks or financial
institutions, it 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 the Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its Prospectus, the Fund may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest
rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund 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 Fund may invest a portion of its 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.
B-5
<PAGE>
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
Fund may purchase corporate obligations which have remaining maturities of
one year or less from the date of purchase and which are rated "AA" or higher
by S&P or "Aa" or higher by Moody's.
GOVERNMENT OBLIGATIONS
The 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.
The Fund may invest in sovereign debt obligations of foreign
countries. A number of factors affect a sovereign debtor's willingness or
ability to repay principal and interest in a timely manner, including its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints
to which it may be subject. Emerging market governments could default on
their sovereign debt. Such sovereign debtors also may be dependent on
expected disbursements from foreign governments, multilateral agencies and
other entities abroad to reduce principal and interest arrearages on their
debt. The commitments on the part of these governments, agencies and others
to make such disbursements may be conditioned on a sovereign debtor's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to meet such conditions could
result in the cancellation of such third parties' commitments to lend funds
to the sovereign debtor, which may further impair such debtor's ability or
willingness to service its debt in a timely manner.
ZERO COUPON SECURITIES
The Fund may 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 amortized over the life of the
security and such amortization will constitute the income earned on the
security for both accounting and tax purposes. Because of these features,
such securities may be subject to greater volatility as a result of changes
in prevailing interest rates than interest paying investments in which the
Fund may invest. Because income on such securities is accrued on a current
basis, even though the Fund does not receive the income currently in cash,
the Fund may have to sell other portfolio investments to obtain cash needed
by the Fund to make income distributions.
B-6
<PAGE>
PARTICIPATION INTERESTS
The Fund may invest in participation interests, subject to the
limitation on investments by the Fund in illiquid investments. The Fund
currently does not intend to invest more than 5% of its net assets in such
interests. Participation interests represent an undivided interest in or
assignment of a loan made by an issuing financial institution. No more than
5% of the Fund's net assets can be invested in participation interests of the
same issuing borrower. Participation interests are primarily dependent upon
the financial strength of the borrowing corporation, which is obligated to
make payments of principal and interest on the loan, and there is a risk that
such borrowers may have difficulty making payments. In the event the
borrower fails to pay scheduled interest or principal payments, the Fund
could experience a reduction in its income and might experience a decline in
the net asset value of its shares. In the event of a failure by the
financial institution to perform its obligation in connection with the
participation, the Fund might incur certain costs and delays in realizing
payment or may suffer a loss of principal and/or interest. The Investment
Adviser has set certain creditworthiness standards for issuers of loan
participations and monitors their creditworthiness.
VARIABLE AND FLOATING RATE INSTRUMENTS
The 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
the Fund. The absence of such an active secondary market could make it
difficult for the Fund to dispose of the variable or floating rate instrument
involved in the event of the issuer of the instrument defaulting on its
payment obligation or during periods in which the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
The Fund may invest in "index-linked" or "commodity-linked" notes,
which are debt securities of companies that call for interest payments and/or
payment at maturity in different terms than the typical note where the
borrower agrees to make fixed interest payments and to pay a fixed sum at
maturity. Principal and/or interest payments on an index-linked note depend
on the performance of one or more market indices, such as the S&P 500 Index
or a weighted index of commodity futures such as crude oil, gasoline and
natural gas. The Fund may also invest in "equity linked" and
"currency-linked" debt securities. At maturity, the principal amount of an
equity-linked debt security is exchanged for common stock of the issuer or is
payable in an amount based on the issuer's common stock price at the time of
maturity. Currency-linked debt securities are 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,
B-7
<PAGE>
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
The 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.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing
or foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities (such as securities issued by the Government
National Mortgage Association) are described as "modified pass-throughs."
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment.
The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association ("GNMA"). GNMA is
a wholly owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the
full faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of mortgages insured by the Federal Housing
Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by
private stockholders and subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages not insured or guaranteed by any government agency from a list of
approved seller/services which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. FHLMC is a government-sponsored corporation
created to increase availability of mortgage credit for residential housing
and owned entirely by private stockholders. FHLMC issues participation
certificates which represent interests in conventional mortgages from FHLMC's
national portfolio. Pass-through securities issued by FNMA and participation
certificates issued by FHLMC are guaranteed as to timely payment of principal
and interest by FNMA and FHLMC, respectively, but are not backed by the full
faith and credit of the United States Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment
rates vary widely and may be affected by changes in market interest rates.
In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the
B-8
<PAGE>
actual average life of the pool certificates. Conversely, when interest
rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is
not possible to predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"). A domestic or foreign
CMO in which the 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 States. However, foreign mortgage markets may differ materially
from the U.S. mortgage market with respect to matters such as the sizes of
loan pools, pre-payment experience, and maturities of loans.
"ROLL" TRANSACTIONS
The Fund may enter into "roll" transactions, which are the sale of
GNMA certificates and other securities together with a commitment to purchase
similar, but not identical, securities at a later date from the same party.
During the roll period, the Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase, as well as by the
interest earned on the cash proceeds of the initial sale. Like when-issued
securities or firm commitment agreements, roll transactions involve the risk
that the market value of the securities sold by the Fund may decline below
the price at which the Fund is committed to purchase similar securities.
Additionally, in the event the buyer of securities under a roll transaction
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of
the transactions may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation
to repurchase the securities.
The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered to be the economic equivalent of
borrowings by the Fund. To avoid leverage, the Fund will establish a
segregated account with its Custodian in which it will maintain liquid assets
in an amount sufficient to meet its payment obligations with respect to these
transactions. The Fund will not enter into roll transactions if, as a result,
more than 15% of the Fund's net assets would be segregated to cover such
contracts.
B-9
<PAGE>
FOREIGN INVESTMENTS
The Fund may invest in securities of foreign issuers that are not
publicly traded in the United States. The Fund may also invest in depository
receipts.
The United States Government from time to time has imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest substantially all of its assets
in United States securities. In such event, the Board of Trustees of the
Trust would consider alternative arrangements, including reevaluation of the
Fund's investment objectives and policies or investment of all of the Fund's
assets in another investment company with different investment objectives and
policies than the Fund. However, the 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. The Fund may invest in American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuers. ADRs, in registered form, are designed for use in U.S. securities
markets. Such depository receipts may be sponsored by the foreign issuer or
may be unsponsored. The Fund may also invest in European and Global
Depository Receipts ("EDRs" and "GDRs"), which, in bearer form, are designed
for use in European securities markets, and in other instruments representing
securities of foreign companies. Such depository receipts may be sponsored
by the foreign issuer or may be unsponsored. Unsponsored depository receipts
are organized independently and without the cooperation of the foreign issuer
of the underlying securities; as a result, available information regarding
the issuer may not be as current as for sponsored depository receipts, and
the prices of unsponsored depository receipts may be more volatile than if
they were sponsored by the issuer of the underlying securities. ADRs may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in United States dollars; the underlying
security may be denominated in a foreign currency, although the underlying
security may be subject to foreign government taxes which would reduce the
yield on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
MARKET CHARACTERISTICS. Settlement practices for transactions in
foreign markets may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Fund 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
the Fund's positions may also be adversely impacted by delays in its ability
to act upon economic events occurring in foreign markets during non-business
hours in the United States.
LEGAL AND REGULATORY MATTERS. 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.
B-10
<PAGE>
TAXES. The interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
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 Fund.
COSTS. The expense ratios of the Fund are likely to be higher than
those of investment companies investing in domestic securities, since the
cost of maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics
of the particular company, differences between economic trends and the
performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental
and social conditions of the country or countries where the company is
located. The extent to which the Fund will be invested in foreign companies
and countries and depository receipts will fluctuate from time to time within
the limitations described in the Prospectus, depending on the Investment
Adviser's assessment of prevailing market, economic and other conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. The 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. The Fund will engage in
trading of such derivative securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to
sell the underlying security at a specified price at any time during the term
of the option (for "American-style" options) or on the option expiration date
(for "European-style" options). Purchasing put options may be used as a
portfolio investment strategy when the Investment Adviser perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an insurance policy, as it
protects against significant downward price movement while it allows full
participation in any upward movement. If the Fund holds a stock which the
Investment Adviser believes has strong fundamentals, but for some reason may
be weak in the near term, the Fund may purchase a put option on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike
price of the put. The difference between the put's strike price and the
market price of the underlying security on the date the Fund exercises the
put, less transaction costs, is the amount by which the Fund hedges against a
decline in the underlying security. If during the period of the option the
market price for the underlying security remains at or above the put's strike
price, the put will expire worthless, representing a loss of the price the
Fund paid for the put, plus transaction costs. If the price of the underlying
security increases, the premium paid for the put option less any amount for
which the put may be sold reduces the profit the Fund realizes on the sale of
the securities.
If the 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,
B-11
<PAGE>
representing a loss of the price paid for the option, plus transaction costs.
If the 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 Fund 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. The Fund may write covered call options. A
call option is "covered" if the 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 the 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.
The 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. The Fund realizes a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing
transaction are less than the premium paid to purchase the option. However,
because increases in the market price of a call option generally reflect
increases in the market price of the underlying security, appreciation of the
underlying security owned by the Fund generally offsets, in whole or in part,
any loss to the Fund resulting from the repurchase of a call option.
STOCK INDEX OPTIONS. The Fund may also purchase put and call options
with respect to the S&P 500 and other stock indices. The Fund may purchase
such options as a hedge against changes in the values of 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 the 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.
B-12
<PAGE>
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 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 Fund
purchases 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 the Fund may enter into options transactions may be
limited by the Internal Revenue Code requirements for qualification of the
Fund as a regulated investment company. See "Dividends, Distributions and
Taxes."
In addition, foreign options exchanges do not afford to participants
many of the protections available in United States option exchanges. For
example, there may be no daily price fluctuation limits in such exchanges or
markets, and adverse market movements could therefore continue to an
unlimited extent over a period of time. Although the purchaser of an option
cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the 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. The Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to
dealer options. While the Fund might look to a clearing corporation to
exercise exchange-traded options, if the 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, the 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 the 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
B-13
<PAGE>
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 the Fund must maintain a
secured position with respect to any call option on a security it writes, the
Fund may not sell the assets which it has segregated to secure the position
while it is obligated under the option. This requirement may impair the
Fund's ability to sell portfolio securities at a time when such sale might be
advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
takes the position that purchased dealer options are illiquid securities.
The Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written
for a maximum price to be calculated by a predetermined formula. In such
cases, the dealer option would be considered illiquid only to the extent the
maximum purchase price under the formula exceeds the intrinsic value of the
option. With that exception, however, the Fund will treat dealer options as
subject to the Fund's limitation on illiquid securities. If the Commission
changes its position on the liquidity of dealer options, the Fund will change
its treatment of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The 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 Fund uses 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 Fund 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 Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of
an option on foreign currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate movements
adverse to the Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs.
FORWARD CURRENCY CONTRACTS
The 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, the
Fund might purchase a particular currency or enter into a forward currency
contract to preserve the U.S. dollar price of securities it intends to or has
contracted to purchase. Alternatively, it might sell a particular currency
on either a spot or forward basis to hedge against an anticipated decline in
the dollar value of securities it intends to or has contracted to sell.
Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from
an increase in the value of the currency.
B-14
<PAGE>
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates.
The Fund trades in such derivative securities for bona fide hedging purposes
and otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The 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.
The Fund does not pay or receive funds upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
deposits in a segregated account with its Custodian liquid assets equal to
approximately 5% of the contract amount. This amount is known as initial
margin. The margin requirements for foreign futures contracts may be
different.
The nature of initial margin in futures transactions differs from that
of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination
of the futures contract, assuming it satisfies all contractual obligations.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates,
to reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when
the Fund purchases a stock index futures contract and the price of the
underlying stock index rises, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to
that increase in value. Conversely, when the Fund purchases a stock index
futures contract and the price of the underlying stock index declines, the
position will be less valuable requiring the Fund to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will
operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is made on closing the position. The Fund
either pays or receives cash, thus realizing a loss or a gain.
STOCK INDEX FUTURES CONTRACTS. The 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. The 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.
B-15
<PAGE>
The sale of an interest rate or financial futures sale by the 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 the Fund obligates the
Fund, as purchaser, to take delivery of the specific type of financial
instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale
or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. The 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 Fund deals 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. The Fund may trade in any futures contract for
which there exists a public market, including, without limitation, the
foregoing instruments. International interest rate futures contracts are
traded on the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The 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 Fund will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange,
board of trade, or similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because
of the imperfect correlation between movements in the price of the futures
contract and movements in the price of the securities which are the subject
of the hedge. The price of the future may move more or less than the price of
the securities being hedged. If the price of the future moves less than the
price of the securities which are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position
than if it had not hedged at all. If the price of the securities being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the future. If the price of the future moves more than
the price of the hedged securities, the Fund will experience either a loss or
a gain on the future which will not be completely offset by movements in the
price of the securities which are subject to the hedge.
B-16
<PAGE>
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures
contract, the 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 the 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 Fund
intends 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 Fund would continue to be required to make daily cash
payments of variation margin. When futures contracts have been used to hedge
portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset to losses on a futures
contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a price beyond
that limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days
B-17
<PAGE>
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 the 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 the 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 Fund may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy
(call) from or sell (put) to the writer of the option a futures contract at a
specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder or writer of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. There is
no guarantee that such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option. Depending on the pricing of the
option compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or may not be
less risky than ownership of the futures contract or such securities. In
general, the market prices of options are more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale
of futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund 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. The
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. The 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, the 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.
B-18
<PAGE>
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 the Fund.
The extent to which the Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Fund as a regulated investment company.
See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
The Fund may enter into interest rate swap transactions and purchase
or sell interest rate caps and floors, and may enter into currency swap cap
transactions. An interest rate or currency swap involves an agreement
between the Fund and another party to exchange payments calculated as if they
were interest on a specified ("notional") principal amount (e.g., an exchange
of floating rate payments by one party for fixed rate payments by the other).
An interest rate cap or floor entitles the purchaser, in exchange for a
premium, to receive payments of interest on a notional principal amount from
the seller of the cap or floor, to the extent that a specified reference rate
exceeds or falls below a predetermined level.
The Fund usually enters into such transactions on a "net" basis, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payment streams. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis, and an amount of cash or high-quality liquid securities having
an aggregate net asset value at least equal to the accrued excess is
maintained in a segregated account by the Trust's custodian. If the Fund
enters into a swap on other than a net basis, or sells caps or floors, the
Fund maintains a segregated account in the full amount accrued on a daily
basis of the Fund's obligations with respect to the transaction. Such
segregated accounts are maintained in accordance with applicable regulations
of the Commission.
The Fund will not enter into any of these derivative transactions
unless the unsecured senior debt or the claims paying ability of the other
party to the transaction is rated at least "high quality" at the time of
purchase by at least one of the established rating agencies (e.g., AAA or AA
by S&P). The swap market has grown substantially in recent years, with a
large number of banks and investment banking firms acting both as principals
and agents utilizing standard swap documentation, and the Investment Adviser
has determined that the swap market has become relatively liquid. Swap
transactions do not involve the delivery of securities or other underlying
assets or principal, and the risk of loss with respect to such transactions
is limited to the net amount of payments that the Fund is contractually
obligated to make or receive. Caps and floors are more recent innovations
for which standardized documentation has not yet been developed; accordingly,
they are less liquid than swaps, and caps and floors purchased by the Fund
are considered to be illiquid assets.
INTEREST RATE SWAPS. As indicated above, an interest rate swap is a
contract between two entities ("counterparties") to exchange interest
payments (of the same currency) between the parties. In the most common
interest rate swap structure, one counterparty agrees to make floating rate
payments to the other counterparty, which in turn makes fixed rate payments
to the first counterparty. Interest payments are determined by applying the
respective interest rates to an agreed upon amount, referred to as the
"notional principal amount." In most such transactions, the floating rate
payments are tied to the London Interbank Offered Rate, which is the offered
rate for short-term Eurodollar deposits between major international banks.
As there is no exchange of principal amounts, an interest rate swap is not an
investment or a borrowing.
CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal
B-19
<PAGE>
at the start of the swap (the initial exchange) is optional. An initial
exchange of notional principal amounts at the spot exchange rate serves the
same function as a spot transaction in the foreign exchange market (for an
immediate exchange of foreign exchange risk). An exchange at maturity of
notional principal amounts at the spot exchange rate serves the same function
as a forward transaction in the foreign exchange market (for a future rate
for the exchange risk). The currency swap market convention is to use the
spot rate rather than the forward rate for the exchange at maturity. The
economic difference is realized through the coupon exchanges over the life of
the swap. In contrast to single currency interest rate swaps, cross-currency
swaps involve both interest rate risk and foreign exchange risk.
SWAP OPTIONS. The Fund may invest in swap options. A swap option is
a contract that gives a counterpart the right (but not the obligation) to
enter into a new swap agreement or to shorten, extend, cancel or otherwise
change an existing swap agreement, at some designated future time on
specified terms. It is different from a forward swap, which is a commitment
to enter into a swap that starts at some future date with specified rates. A
swap option may be structured European-style (exercisable on the
pre-specified date) or American-style ( exercisable during a designated
period). The right pursuant to a swap option must be exercised by the right
holder. The buyer of the right to receive fixed pursuant to a swap option is
said to own a call.
CAPS AND FLOORS. The Fund may invest in interest rate caps and floors
and currency swap cap transactions. An interest rate cap is a right to
receive periodic cash payments over the life of the cap equal to the
difference between any higher actual level of interest rates in the future
and a specified strike (or "cap") level. The cap buyer purchases protection
for a floating rate move above the strike. An interest rate floor is the
right to receive periodic cash payments over the life of the floor equal to
the difference between any lower actual level of interest rates in the future
and a specified strike (or "floor") level. The floor buyer purchases
protection for a floating rate move below the strike. The strikes are
typically based on the three-month LIBOR (although other indices are
available) and are measured quarterly. Rights arising pursuant to both caps
and floors are exercised automatically if the strike is in the money. Caps
and floors eliminate the risk that the buyer fails to exercise
an-in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate
and currency swaps and interest rate caps and floors are similar to those
described above with respect to dealer options. In connection with such
transactions, the Fund relies on the other party to the transaction to
perform its obligations pursuant to the underlying agreement. If there were
a default by the other party to the transaction, the Fund would have
contractual remedies pursuant to the agreement, but could incur delays in
obtaining the expected benefit of the transaction or loss of such benefit.
In the event of insolvency of the other party, the Fund might be unable to
obtain its expected benefit. In addition, while the Fund will seek to enter
into such transaction only with parties which are capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund
will be able to close out such a transaction with the other party, or obtain
an offsetting position with any other party, at any time prior to the end of
the term of the underlying agreement. This may impair the Fund's ability to
enter into other transactions at a time when doing so might be advantageous.
REPURCHASE AGREEMENTS
The 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
B-20
<PAGE>
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 will suffer a loss to the extent that the
proceeds from a sale of the underlying securities is less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting
seller may cause the Fund's rights with respect to such securities to be
delayed or limited. Repurchase agreements are considered to be loans under
the Investment Company Act.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements, which involve
the sale of a security by the Fund and its agreement to repurchase the
security (or, in the case of mortgage-backed securities, substantially
similar but not identical securities) at a specified time and price. The
Fund will maintain in a segregated account with the Custodian cash, U.S.
Government securities or other appropriate liquid securities in an amount
sufficient to cover its obligations under these agreements with
broker-dealers (no such collateral is required on such agreements with
banks). Under the 1940 Act, these agreements are considered borrowings by
the Fund, and are subject to the percentage limitations on borrowings
described below. The agreements are subject to the same types of risks as
borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The 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, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will set aside cash or liquid Fund 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.
The 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, the 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 the 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 the 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 the Fund starting on the day the Fund agrees
to purchase the securities. The Fund does not earn interest on the
securities it has committed to purchase until they are paid for and delivered
on the settlement date.
B-21
<PAGE>
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 the Fund involves special risk considerations
that may not be associated with other funds having similar objectives and
policies. Since substantially all of the 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 has entered into a Credit Agreement on behalf of its various
series, including the Fund, 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 Fund and its other Portfolios to sell portfolio securities,
at times when the Investment Adviser believes such sales are not in the best
interests of the shareholders of the Fund or other series of the Trust, in
order to provide the Fund or such other series with cash to meet such
redemption requests. The Credit Agreement expires on April 10, 1998, unless
renewed by the parties.
Under the Credit Agreement, the Fund and each other series of the
Trust may borrow, repay and reborrow amounts (collectively, the "Revolving
Credit Loans") in increments of $50,000, provided the Revolving Credit Loans
outstanding at any time aggregate at least $350,000 (the "Credit Facility").
The Trust will pay a commitment fee at the rate of 0.10% per annum of the
average daily unused portion of the Credit Facility, and may at any time
terminate the Credit Agreement or reduce the lenders' commitment thereunder
in increments of $2,500,000.
While outstanding, the Revolving Credit Loans bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or
(ii) the prime rate of interest of The Chase Manhattan Bank. If, as a result
of changes in applicable laws, regulations or guidelines with respect to the
capital adequacy of any lender, the return on such lender's capital is
reduced, the Trust may be required to adjust the rate of interest to
compensate such lender for such reduction. Each Revolving Credit Loan is
payable in thirty days, and may be prepaid at any time in increments of
$100,000 without premium or penalty. The Fund is not liable for repayment of
a Revolving Credit Loan to any other series.
The Credit Agreement contains, among other things, covenants that
require the 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.
B-22
<PAGE>
LENDING PORTFOLIO SECURITIES
Under the present regulatory requirements which govern loans of
portfolio securities, the loan collateral must, on each business day, at
least equal the value of the loaned securities and must consist of cash,
letters of credit of domestic banks or domestic branches of foreign banks, or
securities of the U.S. Government or its agencies. To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demanded by
the Fund if the demand meets the terms of the letter. Such terms and the
issuing bank must satisfy the Fund. Any loan might be secured by any one or
more of the three types of collateral. The terms of the Fund's loans must
permit the Fund to reacquire loaned securities on five days' notice or in
time to vote on any serious matter and must meet certain tests under the
Internal Revenue Code.
SHORT SALES
The Fund may make short sales of securities it owns or has the right
to acquire at no added cost through conversion or exchange of other
securities it owns (referred to as short sales "against the box") and short
sales of securities which it does not own or have the right to acquire.
In a short sale that is not "against the box," the Fund sells a
security which it does not own, in anticipation of a decline in the market
value of the security. To complete the sale, the Fund must borrow the
security generally from the broker through which the short sale is made) in
order to make delivery to the buyer. The Fund must replace the security
borrowed by purchasing it at the market price at the time of replacement.
The Fund is said to have a "short position" in the securities sold until it
delivers them to the broker. The period during which the Fund has a short
position can range from one day to more than a year. Until the Fund replaces
the security, the proceeds of the short sale are retained by the broker, and
the Fund must pay to the broker a negotiated portion of any dividends or
interest which accrue during the period of the loan. To meet current margin
requirements, the Fund must deposit with the broker additional cash or
securities so that it maintains with the broker a total deposit equal to 150%
of the current market value of the securities sold short (100% of the current
market value if a security is held in the account that is convertible or
exchangeable into the security sold short within 90 days without restriction
other than the payment of money).
Short sales by the 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 the 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 the 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, the 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
B-23
<PAGE>
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.
The Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position. The extent to which such
gains or losses in the long position are reduced will depend upon the amount
of securities sold short relative to the amount of the securities the Fund
owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion
premiums of such securities.
In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the Investment Company Act,
unless the sale is "against the box" and the securities sold short are placed
in a segregated account (not with the broker), or unless the Fund's
obligation to deliver the securities sold short is "covered" by placing in a
segregated account (not with the broker) cash, U.S. Government securities or
other liquid debt or equity securities in an amount equal to the difference
between the market value of the securities sold short at the time of the
short sale and any such collateral required to be deposited with a broker in
connection with the sale (not including the proceeds from the short sale),
which difference is adjusted daily for changes in the value of the
securities sold short. The total value of the cash, U.S. Government
securities or other liquid debt or equity securities deposited with the
broker and otherwise segregated may not at any time be less than the market
value of the securities sold short at the time of the short sale. The Fund
will comply with these requirements. In addition, as a matter of policy, the
Trust's Board of Trustees has determined that the Fund will not 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 the 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
B-24
<PAGE>
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 Fund
to the extent that qualified institutional buyers become uninterested in
purchasing such securities.
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 Fund's prospectus. In making decisions with respect to
equity securities for the Fund, 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 Fund's 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 Fund 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
The Fund is "diversified" within the meaning of the Investment Company
Act. In order to qualify as diversified, the 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 the Fund are purchased by the Investment Adviser in
approximately equal amounts, and the Investment Adviser attempts to stay
fully invested within the applicable percentage limitations set forth in the
Prospectus. In addition, for each issuer whose securities are added to an
investment portfolio, the Investment Adviser sells the securities of one of
the issuers currently included in the portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Fund, has adopted the following
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of the Fund (as defined in the Investment
Company Act).
B-25
<PAGE>
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 the Fund is a fundamental policy. In
addition, the Fund may not:
1. 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 the Fund's total assets may be invested
without regard to this restriction and the 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 the Fund in securities of the U.S. Government or any of its
agencies and instrumentalities.
2. 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
the 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. Invest 25% or more of the market value of its total assets in
the securities of issuers in any one particular industry, except that the
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 the Fund in securities of the
U.S. Government or its agencies and instrumentalities.
4. Purchase or sell real estate. However, the Fund may invest in
securities secured by, or issued by companies that invest in, real estate or
interests in real estate.
5. Make loans of money, except that the Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter into
repurchase agreements. The 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. Borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the
extent that the value of the Fund's total assets, less its liabilities other
than borrowings, is equal to at least 300% of all borrowings (including the
proposed borrowing). If such asset coverage of 300% is not maintained, the
Fund will take prompt action to reduce its borrowings as required by
applicable law.
7. 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 Fund from
engaging in options, futures and foreign currency transactions.
8. Underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. 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.
B-26
<PAGE>
10. Purchase securities on margin, except for initial and variation
margin on options and futures contracts, and except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of securities.
11. Invest in securities of other investment companies, except (a)
that the Fund will be permitted to invest all or a portion of its assets in
another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as the
Fund; (b) in compliance with the Investment Company Act and applicable state
securities laws; or (c) as part of a merger, consolidation, acquisition or
reorganization involving the Fund.
12. Issue senior securities, except that the Fund may borrow money
as permitted by restrictions 6 and 7 above. This restriction shall not
prohibit the Fund from engaging in short sales, options, futures and foreign
currency transactions.
13. Enter into transactions for the purpose of arbitrage, or invest
in commodities and commodities contracts, except that the Fund may invest in
stock index, currency and financial futures contracts and related options in
accordance with any rules of the Commodity Futures Trading Commission.
14. Purchase or write options on securities, except for hedging
purposes and then only if (i) aggregate premiums on call options purchased by
the Fund do not exceed 5% of its net assets, (ii) aggregate premiums on put
options purchased by the Fund do not exceed 5% of its net assets, (iii) not
more than 25% of the Fund's net assets would be hedged, and (iv) not more
than 25% of the Fund's net assets are used as cover for options written by
the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust, the Fund may not:
1. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships, although
the Fund may invest in the securities of companies which invest in or sponsor
such programs.
2. Lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not less
than 100% of the value of the loaned securities by marking to market daily.
TRUSTEES AND PRINCIPAL OFFICERS
TRUST
The names, ages and addresses of the Trustees and principal officers
of the Trust, including their positions and principal occupations during the
past five years, are shown below. Trustees whose names are followed by an
asterisk are "interested persons" of the Trust (as defined by the Investment
Company Act). Unless otherwise indicated, the address of each Trustee and
officer is 600 West Broadway, 30th Floor, San Diego, California 92101.
FRED C. APPLEGATE (52), TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES.
885 La Jolla Corona Court, La Jolla, California. Private investor.
President, Hightower Management Co., a financial management firm (January
1992 to _____); formerly President, Nicholas-Applegate Capital Management
(from August 1984 to December 1991). Director of Nicholas-Applegate Fund,
Inc. (since 1987). Mr. Applegate's interests in Nicholas-Applegate Capital
Management, Inc., the general partner of the Investment Adviser, were
acquired by Mr. Nicholas in 1991 and 1992.
B-27
<PAGE>
ARTHUR B. LAFFER (57), TRUSTEE.*/ 5405 Morehouse Drive, Suite 340,
San Diego, California. Chairman, A.B. Laffer, V.A. Canto & Associates, an
economic consulting firm (since 1979); Chairman, Laffer Advisors
Incorporated, economic consultants (since 1981); Director, Nicholas-Applegate
Fund, Inc. (since 1987); Director, U.S. Filter Corporation (since March 1991)
and MasTec, Inc. (construction) (since 1994), and Coinmach Laundry
Corporation (since 1996); Chairman, Calport Asset Management, Inc. (since
1992); formerly Distinguished University Professor and Director, Pepperdine
University (from Sept. 1985 to May 1988) and Professor of Business Economics,
University of Southern California (1976 to 1984). Mr. Laffer is considered
to be an "interested person" of the Trust because A.B. Laffer, V.A. Canto &
Associates received 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. Trustee, Nicholas-Applegate
Investment Trust (since 1993).
THOMAS PINDELSKI (47), CHIEF FINANCIAL OFFICER. Partner (since
January 1996) and Chief Financial Officer, Nicholas-Applegate Capital
Management (since January 1993), and Chief Financial Officer,
Nicholas-Applegate Securities (since January 1993); formerly Chief Financial
Officer, Aurora Capital Partners/WSGP Partners L.P., an investment
partnership (from November 1988 to January 1993), and Vice President and
Controller, Security Pacific Merchant Banking Group (from November 1986 to
November 1988).
PETER J. JOHNSON (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).
E. BLAKE MOORE, JR. (39), SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities
(since 1993); formerly Attorney, Luce, Forward, Hamilton & Scripps (from 1989
to 1993).
Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $14,000 for services rendered as a Trustee of the Trust, and $1,000
for each meeting attended ($2,000 per Committee meeting for Committee
chairmen). Each Trustee is also reimbursed for out-of-pocket expenses
incurred as a Trustee.
The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1997, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):
B-28
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation from
from Trust Benefits Accrued as Part Benefits Upon Retirement Trust and Trust Complex
Name of Trust Expenses Paid to Trustee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $10,635 None N/A $36,250 (47*)
Arthur B. Laffer $ 9,558 None N/A $31,750 (47*)
Charles E. Young $ 9,827 None N/A $31,750 (47*)
</TABLE>
* Indicates number of funds in Trust complex, including the Fund.
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 Fund, 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
Fund 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 Fund, the Trust retains the Investment
Adviser to manage the Fund's investment portfolio, 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 Fund 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 the
Fund or the Trust in connection with the matters to which the Investment
Advisory Agreement relates, except for liability resulting from willful
misfeasance, bad faith or gross negligence in the performance of its duties
or by reason of the Investment Adviser's reckless disregard of its duties and
obligations under the Investment Advisory Agreement. The Trust has agreed to
indemnify the Investment Adviser against liabilities, costs and expenses that
the Investment Adviser may incur in connection with any action, suit,
investigation or other proceeding arising out of or otherwise based on any
action actually or allegedly taken or omitted to be taken by the Investment
Adviser in connection with the performance of its duties or obligations under
the Investment Advisory Agreement or otherwise as an investment adviser of
the Trust. The Investment Adviser is not entitled to indemnification with
respect to any liability to the Trust or its shareholders by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or of its reckless disregard of its duties and obligations under the
Investment Advisory Agreement.
The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated with respect to the Fund by
the Trust (by the Board of Trustees of the Trust or
B-29
<PAGE>
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 the Fund for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually
in conformity with the Investment Company Act.
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of the Fund (including
administrative fees and distribution expenses for the Fund, but excluding
interest, taxes, brokerage commissions and other costs incurred in connection
with portfolio securities transactions, organizational expenses and other
capitalized expenditures and extraordinary expenses), to ensure that the
operating expenses for the Fund do not exceed the amounts specified in the
Fund's prospectus.
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 Fund. 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.
For its services, ICAC receives under the Administration Agreement
annual fees from the 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, 1997 ICAC received aggregate
compensation of $581,542 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
B-30
<PAGE>
cost of fidelity and liability insurance, (l) the fees and expenses involved
in registering and maintaining the registration of the Trust and of its
shares with the Commission and registering the Trust as a broker or dealer
and qualifying their shares under state securities laws, including the
preparation and printing of the Trust's registration statement, prospectuses
and statements of additional information, (m) allocable communication
expenses with respect to investor services and all expenses of shareholders'
and Board of Trustees' meetings and of preparing, printing and mailing
prospectuses and reports to shareholders, (n) litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course
of the business of the Trust, and (o) expenses assumed by the Trust pursuant
to any plan of distribution adopted in conformity with Rule 12b-1 under the
Investment Company Act.
The Administration Agreement provides that ICAC will not be liable for
any error of judgment or for any loss suffered by the Trust in connection
with the matters to which the Administration Agreement relates, except a loss
resulting from ICAC's willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties. The Administration Agreement will
terminate automatically if assigned, and may be terminated without penalty by
either ICAC or the Trust (by the Board of Trustees of the Trust or vote of a
majority of the outstanding voting securities of the Trust, as defined in the
Investment Company Act), upon 60 days' written notice. The Administration
Agreement will continue in effect only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act.
Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer
agents, accounting agents, independent accountants and legal counsel. These
services are comprised principally of assistance in coordinating with the
Trust's various service providers, providing certain officers of the Trust,
responding to inquiries from shareholders which are directed to the Trust
rather than other service providers, calculating performance data, providing
various reports to the Board of Trustees, and assistance in preparing
reports, prospectuses, proxy statements and other shareholder communications.
The Agreement contains provisions regarding liability and termination
similar to those of the Administration Agreement.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for
distributing shares of the Fund. The Distributor is a California limited
partnership organized in 1992 to distribute shares of registered investment
companies. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., the general partner of the Investment Adviser.
DISTRIBUTION AGREEMENT
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Fund, 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 Class Q shares of the Fund may be waived from time to
time. Pursuant to the Distribution Agreement, the Trust has agreed to
indemnify the Distributor to the extent permitted by applicable law against
certain liabilities under the Securities Act.
SHAREHOLDER SERVICE PLAN
The Trust has also adopted a Shareholder Service Plan with respect to
the Fund. Under the Shareholder Service Plan, the Distributor is compensated
at the annual rate of 0.25% of the average daily net assets of the Fund
attributable to the Class Q shares of the Fund, for certain shareholder
B-31
<PAGE>
service expenses provided by the Distributor and fees paid to plan sponsors
and others for the provision of support services to their clients who are
beneficial owners of shares of the Fund.
Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in
Fund shares; processing dividend and distribution payments from the Fund on
behalf of clients; preparing tax reports; arranging for bank wires;
responding to client inquiries concerning their investments in Fund shares;
providing the information to the Fund necessary for accounting and
subaccounting; preparing tax reports, forms and related documents; forwarding
shareholder communications from the Trust (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to clients; assisting in processing exchange
and redemption requests from clients; assisting clients in changing dividend
options, account designations and addresses; and providing such other similar
services.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote
of the Board of Trustees of the Trust, including a majority of the Trustees
who have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder
Service Plan (the "Independent Trustees"), cast in person at a meeting called
for the purpose of voting on such continuance. The Shareholder Service Plan
may be amended at any time by the Board, provided that any material
amendments of the terms of the Plan will become effective only upon the
approval by a majority of the Board and a majority of the Independent
Trustees pursuant to a vote cast in person at a meeting called for the
purpose of voting on the Plan. The Shareholder Service Plan may be
terminated with respect to any Fund or class at any time, without penalty, by
the Board.
Under the Shareholder Service Plan, the Distributor pays plan sponsors
and others an account servicing fee of up to 0.25% annually of the average
daily net assets of the Fund attributable to the Class Q shares of the Fund
in the accounts of their customers, as compensation for providing certain
shareholder-related services.
MISCELLANEOUS
Pursuant to the Shareholder Service Plan, the Board of Trustees
reviews at least quarterly a written report of the service expenses incurred
on behalf of shares of the Fund by the Distributor. The report includes an
itemization of the service expenses and the purposes of such expenditures.
Because the Trust offers shares of numerous series (other than those to which
this Statement of Additional Information applies) which are subject to Rule
12b-1 under the Investment Company Act, the selection and nomination of
Trustees who are not interested persons of the Trust is committed to the
Trustees who are not interested persons of the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Trust's Board of Trustees, the
Investment Adviser executes the Fund's portfolio transactions and allocates
the brokerage business. In executing such transactions, the Investment
Adviser seeks to obtain the best price and execution for the Fund, 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 Fund invests may be traded in the over-the-counter markets, and the
Fund deals 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 Fund does not necessarily pay
the lowest commissions available. The Board of Trustees of the Trust
periodically reviews the commission rates and allocation of orders.
B-32
<PAGE>
The Fund has 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 Fund 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 Fund. 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 Fund. Similarly, such information, services
and products provided to the Investment Adviser by brokers and dealers
through whom other clients of the Investment Adviser effect securities
transactions may be useful to the Investment Adviser in providing services to
the Fund. The Investment Adviser may pay higher commissions on brokerage
transactions for the Fund 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 Fund 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 Fund 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 Fund and its other managed accounts, and the
price paid to or received by the Fund 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 Fund or the
size of the position purchased or sold by the Fund.
Securities trade in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's commission or discount. On occasion,
certain money market instruments and agency securities may be purchased
directly from the issuer, in which case no commissions or discounts are paid.
PURCHASE AND REDEMPTION OF FUND SHARES
Class Q shares of the Fund 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 shares of the Fund 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 Fund's shares and to reject purchase orders in
whole or in part when such rejection is in the
B-33
<PAGE>
best interests of the Trust and the Fund. 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 the
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 the Class Q
shares can vary, depending on the needs of the retirement plan, and should be
arranged by contacting the Trust, the Distributor, the Administrator or the
Transfer Agent.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, a Shareholder
Investment Account is established for each investor under which the shares
are held for the investor by the Transfer Agent. No certificates will be
issued for shares of the Class Q shares of the Fund.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable
Class Q shares of the 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 the Fund on a monthly or
quarterly basis on any day of the month or quarter by authorizing his or her
bank account to be debited to invest specified dollar amounts in shares of
the Fund. The investor's bank must be a member of the Automatic Clearing
House System. Stock certificates are not issued to participants of the
Automatic Investment Plan. Participation in the Plan will begin within 30
days after receipt of the account application. If the investor's bank
account cannot be charged due to insufficient funds, a stop-payment order or
closing of the account, the investor's Plan may be terminated and the related
investment reversed. The investor may change the amount of the investment or
discontinue the Plan at any time by writing to the Transfer Agent. Further
information about this program and an application form can be obtained from
the Transfer Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder of Class Q shares of the Fund may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
the Fund (the "paying Fund") into Class Q shares of any other series of the
Trust (the "receiving Fund") subject to the following conditions: (i) the
aggregate value of the shareholder's account(s) in the paying Fund must equal
or exceed $5,000
B-34
<PAGE>
(this condition is waived if the value of the account in the receiving Fund
equals or exceeds that Fund's minimum initial investment requirement), (ii)
as long as the value of the account in the receiving Fund is below that
Fund's minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving Fund must be automatically reinvested in
the receiving Fund, and (iii) if this privilege is discontinued with respect
to a particular receiving Fund, the value of the account in that Fund must
equal or exceed the Fund's minimum initial investment requirement or the Fund
will have the right, if the shareholder fails to increase the value of the
account to such minimum within 90 days after being notified of the
deficiency, automatically to redeem the account and send the proceeds to the
shareholder. These cross-reinvestments of dividends and capital gain
distributions will be at net asset value (without a sales charge).
AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Fund of
sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be
made into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of the Fund redeemed,
but when the Trust makes payment to the Fund in readily marketable investment
securities, the Trust reserves the right to make payment wholly or partly in
shares of such securities. In such cases, a shareholder may incur brokerage
costs in converting such securities to cash. However, the Trust has elected
to be governed by the provisions of Rule 18f-1 under the Investment Company
Act, pursuant to which it is obligated to pay in cash all requests for
redemptions by any shareholder of record, limited in amount with respect to
each shareholder during any 90-day period to the lesser of $250,000 or 1% of
the net asset value of the Trust at the beginning of such period.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged into shares of any other series of
the Trust or Class A shares of the Fund as provided in the Prospectus. The
Trust's exchange privilege is not intended to afford shareholders a way to
speculate on short-term market movements. Accordingly the Trust reserves the
right to limit the number of exchanges an investor or participant may make in
any year, to avoid excessive Fund expenses.
Before effecting an exchange, investors should obtain the currently
effective prospectus of the series into which the exchange is to be made.
Exchange purchases are subject to the minimum investment requirements of the
series being purchased. An exchange will be treated as a redemption and
purchase for tax purposes.
TELEPHONE PRIVILEGE
Investors may exchange or redeem shares by telephone if they have
elected the telephone privilege on their account applications as provided in
the Prospectus.
The Trust will employ procedures designed to provide reasonable
assurance that instructions communicated by telephone are genuine and, if it
does not do so, it may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures employed by the Trust include
requiring personal identification by account number and social security
number, tape recording of telephone instructions, and providing written
confirmation of transactions. The Trust reserves the right to refuse a
telephone exchange or redemption request if it believes, for example, that
the person making the request is neither the record owner of the shares being
exchanged or
B-35
<PAGE>
redeemed nor otherwise authorized by the investor to request the exchange or
redemption. Investors will be promptly notified of any refused request for a
telephone exchange or redemption. The Fund or its agents will not 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
The 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 Fund may provide one annual and semi-annual report and annual
prospectus per household. In addition, quarterly unaudited financial data
are available from the Fund upon request.
NET ASSET VALUE
The net asset value of a share of a Class of the Fund is calculated by
dividing (i) the value of the securities held by the Fund (I.E., the value of
its investments in the Fund), plus any cash or other assets, minus the Class'
proportional interest in the Fund's liabilities (including accrued estimated
expenses on an annual basis) and all liabilities allocable to such Class, by
(ii) the total number of shares of the Class outstanding. The value of the
investments and assets of the Fund is determined each business day.
Investment securities, including ADRs and EDRs, that are traded on a stock
exchange or on the NASDAQ National Market System are valued at the last sale
price as of the close of business on the New York Stock Exchange (normally
4:00 P.M. New York time) on the day the securities are being valued, or
lacking any sales, at the mean between the closing bid and asked prices.
Securities listed or traded on certain foreign exchanges whose operations are
similar to the United States over-the-counter market are valued at the price
within the limits of the latest available current bid and asked prices deemed
by the Investment Adviser best to reflect fair value. A security which is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security by the
Investment Adviser. Listed securities that are not traded on a particular
day and other over-the-counter securities are valued at the mean between the
closing bid and asked prices.
In the event that the New York Stock Exchange or the national
securities exchange on which stock or stock options are traded adopt
different trading hours on either a permanent or temporary basis, the Board
of Trustees of the Trust will reconsider the time at which 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 Fund values long-term debt obligations at the quoted bid prices
for such securities or, if such prices are not available, at prices for
securities of comparable maturity, quality and type; however, the Investment
Adviser will use, when it deems it appropriate, prices obtained for the day
of valuation from a bond pricing service, as discussed below. The Fund
values 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 or 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 Fund values repurchase agreements at cost plus accrued interest.
The Fund values 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-36
<PAGE>
The Fund values 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 Fund to do so.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares and pays monthly dividends of net investment income.
The Fund makes distributions at least annually of its net capital gains, if
any. In determining amounts of capital gains to be distributed by the Fund,
any capital loss carryovers from prior years will be offset against its
capital gains.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify the Fund as a regulated investment
company under Subchapter M of the Code, and intends that the Fund will remain
so qualified.
As a regulated investment company, the 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 the 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
B-37
<PAGE>
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.
The 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, the Fund must
distribute during each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income and net capital gain (not taking into
account any capital gains or losses as an exception) for the calendar year,
(2) at least 98% of its capital gains in excess of its capital losses (and
adjusted for certain ordinary losses) for the twelve month period ending on
October 31 of the calendar year, and (3) all ordinary income and capital
gains for previous years that were not distributed during such years. A
distribution will be treated as paid on December 31 of the calendar year if
it is declared by the Fund in October, November, or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders (other than those not subject to federal income tax) in the
calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To avoid the excise
tax, the Fund intends to make timely distributions of its income in
compliance with these requirements and anticipate that it will not be subject
to the excise tax.
Dividends paid by the 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 Fund is derived from dividends on common or preferred stock
of domestic corporations. Dividend income earned by the Fund will be
eligible for the dividends received deduction only if the Fund have satisfied
a 46-day holding period requirement with respect to the underlying portfolio
security (91 days in the case of dividends derived from preferred stock). In
addition, a corporate shareholder must have held its shares in the Fund for
not less than 46 days (91 days in the case of dividends derived from
preferred stock) in order to claim the dividend received deduction. Not
later than 60 days after the end of its taxable year, the Fund will send to
its shareholders a written notice designating the amount of any distributions
made during such year which may be taken into account by its shareholders for
purposes of such deduction provisions of the Code. Net capital gain
distributions are not eligible for the dividends received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to the Fund's shareholders as long-term capital
gains, regardless of the holding period of such shareholders. Such
distributions of net capital gains will be designated by the Fund as a
capital gains distribution in a written notice to its shareholders which
accompanies the distribution payment. Any loss on the sale of shares held
for less than six months will be treated as a long-term capital loss for
federal tax purposes to the extent a shareholder receives net capital gain
distributions on such shares. The maximum federal income tax rate applicable
to long-term capital gains is currently 28% (20% for 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 the Fund.
B-38
<PAGE>
Any loss realized on a sale, redemption or exchange of shares of the
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 the 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 the series 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 the 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 Fund 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 Fund 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 Fund
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 Fund. In
addition, losses realized by the Fund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable year in which
such losses are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences of transactions in
options, futures and forward contracts to the Fund are not entirely clear.
The transactions may increase the amount of short-term capital gain realized
by the Fund which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes 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.
B-39
<PAGE>
The qualifying income and diversification requirements applicable to the
Fund's assets may limit the extent to which the Fund 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 the
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 the 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 Fund 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 the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to elect to "pass-through" to the Fund's shareholders the amount of
foreign income and similar taxes paid by the Fund. Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the Fund elects
pass-through treatment, the source of the Fund's income flows through to
shareholders of the Fund. With respect to such election, the Fund treats gains
from the sale of securities as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit applies separately to foreign
source passive income, and to certain other types of income. Shareholders may
be unable to claim a credit for the full amount of their proportion at share of
the foreign taxes paid by the Fund. The foreign tax credit is modified for
purposes of the federal alternative minimum tax and can be used to offset only
90% of the alternative minimum tax imposed on corporations and individuals and
foreign taxes generally are not deductible in computing alternative minimum
taxable income.
SHORT SALES. Generally, capital gain or loss realized by the Fund in
a short sale may be long-term or short term depending on the holding period
of the short position. Under a special rule, however, the capital gain will
be short-term gain if (1) as of the date of the short sale, the Fund owned
property for the short-term holding period that was substantially identical
to that which the Fund used to close the sale or (2) after the short sale and
on or before its closing, the Fund acquired substantially similar property.
Similarly, if the Fund held property substantially identical to that sold
short for the long-term holding period as of the date of the short sale, any
loss on closing the short position will be long-term capital loss. These
special rules do not apply to substantially similar property to the extent
such property exceeds the property used by the Fund to close its short
position.
ORIGINAL ISSUE DISCOUNT. The Fund may treat some of the debt securities
(with a fixed maturity date of more than one year from the date of issuance) it
may acquire as issued originally at a discount. Generally, the Fund treats the
amount of the original issue discount ("OID") as interest income and includes it
in income over the term of the debt security, even though it does not receive
payment of that amount until a later time, usually when the debt security
matures. The Fund treats
B-40
<PAGE>
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 Fund may treat some of the debt securities (with a fixed maturity
date of more than one year from the date of issuance) that it may acquire in the
secondary market as having market discount. Generally, the Fund treats any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount as ordinary interest income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund 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 Fund generally must distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though the Fund has yet to receive cash representing such income. The Fund
may obtain cash to pay such dividends from sales proceeds of securities held by
the Fund.
OTHER TAX INFORMATION
The Fund 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 the
Fund with respect to distributions by the Fund may differ from federal tax
treatment. Distributions to shareholders may be subject to additional state and
local taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
The Trust may from time to time advertise total returns and yields for
the Fund, compare Fund performance to various indices, and publish rankings of
the Fund 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 its portfolio, and the market conditions during
the given period, and should not be considered to be representative of what may
be achieved in the future.
TOTAL RETURN
The total return for the 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.
B-41
<PAGE>
Total return is computed according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the period.
YIELD
The yield for the Fund is calculated based on a 30-day or one-month
period, according to the following formula:
6
Yield = 2[{a - b + 1) -1]
-----
{c x d }
For purposes of this formula, "a" is total dividends and interest earned
during the period; "b" is total expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
COMPARISON TO INDICES AND RANKINGS
The Fund may compare its performance to various unmanaged indices such
as the Dow Jones Composite Average or its component averages, Standard and
Poor's 500 Stock Index or its component indices, Standard and Poor's 100 Stock
Index, the Russell Midcap Growth Index, the Russell 2000 Growth Index, the
Russell 1000 Index, the CS First Boston Convertible Index, the Lehman Brothers
Government Bond Index, the Morgan Stanley Capital International World Index, the
Morgan Stanley Capital International Emerging Markets Free Index, the Emerging
Markets Investible Index, the Morgan Stanley Capital International Europe,
Australia and Far East Index, the IFC Emerging Markets Investible Index, The New
York Stock Exchange composite or component indices, the Wilshire 5000 Equity
Index, indices prepared by Lipper Analytical Services and Morningstar, Inc., the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc.,
performance statistics reported in financial publications such as The Wall
Street Journal, Business Week, Changing Times, Financial World, Forbes, Fortune
and Money magazines, the Consumer Price Index (or Cost of Living Index)
published by the U.S. Bureau of Labor Statistics, Stocks, Bonds, Bills and
Inflation published by Ibbotson Associates, Savings and Loan Historical Interest
Rates published in the U.S. Savings & Loan League Fact Book, and historical data
supplied by the research departments of First Boston Corporation, The J.P.
Morgan companies, Salomon Brothers, Merrill Lynch, Lehman Brothers, Smith Barney
Shearson and Bloomberg L.P. Unmanaged indices (I.E., other than Lipper)
generally do not reflect deductions for administrative and management costs and
expenses.
A number of independent mutual fund ranking entities prepare performance
rankings. These entities categorize and rank funds by various criteria,
including fund type, performance over a given period of years, total return,
standardized yield, variations in sales charges and risk\reward considerations.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT AUDITORS AND LEGAL COUNSEL
PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Fund and in
B-42
<PAGE>
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 Fund.
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 Fund. 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 Fund. The
following act as sub-transfer agents for the Fund: Financial Data Services,
Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville, Florida 32246; William M.
Mercer Plan Participant Services, Inc., 1417 Lake Cook Road, Deerfield, Illinois
60015; and Schwab Retirement Plan Services, Inc., 101 Montgomery Street, San
Francisco, California 94104.
Ernst & Young, L.L.P., 515 South Flower Street, Los Angeles, California
90071, serves as the independent auditors for the Trust, and in that capacity
examines the annual financial statements of the Trust.
Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust. It also acts as
legal counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 62 series. 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 or by Classes, as the case may be. For example, a change in
the Fund's fundamental investment policies would be voted upon only by
shareholders of all Classes of the Fund, as would the approval of any
advisory or distribution contract for the Fund. However, all shares of the
Trust may vote together in the election or selection of Trustees, principal
underwriters and accountants for the Trust.
Rule 18f-2 under the Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of the series of the Trust affected by the matter. Under Rule 18f-2, a series
is presumed to be affected by a matter, unless the interests of each series in
the matter are identical or the matter does not affect any interest of such
series. Under Rule 18f-2 the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to the 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 series.
As used in the Fund's prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of the Fund, means the vote of the lesser of (i) 67% of the
shares of the Fund represented at a meeting if the holders of
B-43
<PAGE>
more than 50% of the outstanding shares of the Fund are present in person or
by proxy, or (ii) more than 50% of the outstanding shares of the Fund. The
term "majority," when referring to the approvals to be obtained from
shareholders of the Trust, means the vote of the lesser of (i) 67% of the
Trust's shares represented at a meeting if the holders of more than 50% of
the Trust's outstanding shares are present in person or by proxy, or (ii)
more than 50% of the Trust's outstanding shares. Shareholders are entitled to
one vote for each full share held and fractional votes for fractional shares
held. Unless otherwise provided by law (for example, by Rule 18f-2 discussed
above) or by the Trust's Declaration of Trust or Bylaws, the Trust may take
or authorize any action upon the favorable vote of the holders of more than
50% of the outstanding shares of the Trust.
The Trust will dispense with annual meetings of shareholders in any year
in which it is not required to elect Trustees under the Investment Company Act.
However, the Trust undertakes to hold a special meeting of its shareholders for
the purpose of voting on the question of removal of a Trustee or Trustees if
requested in writing by the holders of at least 10% of the Trust's outstanding
voting securities, and to assist in communicating with other shareholders as
required by Section 16(c) of the Investment Company Act.
Each share of each class of the 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 the
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 series 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 trusts or their respective investors to which
the Trustee, officer, employee or agent would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of his
or her duties. The Declaration of Trust also provides that the debts,
liabilities, obligations and expenses incurred, contracted for or existing with
respect to the Fund shall be enforceable against the assets and property of the
Fund only, and not against the assets or property of any other series or the
investors therein.
REGISTRATION STATEMENT
The Registration Statement of the Trust, including the Fund's
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 Fund's Prospectuses or the Statements of Additional
Information as to the contents of any contract or other document referred to
herein or in the Prospectus are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to these Registration Statements, each such statement being qualified in
all respects by such reference.
B-44
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating symbols of
securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating
symbols of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to commercial
paper investments permitted to be made by the Master Trust, are opinions of the
ability of issuers to repay punctually their senior debt obligations which have
an original maturity not exceeding one year. Moody's employs the following
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
PRIME 1: Issuers (or related supporting institutions) rated PRIME-1
have a superior ability for repayment of short-term promissory obligations.
PRIME-1 repayment ability will often be evidenced by the following
characteristics: (a) leading market positions in well-established industries;
(b) high rates of return on funds employed; (c) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (d) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (e) well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above in the
PRIME-1 category but to a lesser degree. Earning trends and coverage ratios,
while sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME 3: Issuers rated PRIME-3 (or related supporting institutions)
have an acceptable ability for repayment of short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the "A"
category are delineated with the numbers 1, 2, and 3 to indicate the relative
degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to possess
overwhelming safety characteristics are denoted with a "PLUS" (+) designation.
A-1
<PAGE>
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C: Issues rated "C" are regarded as having a doubtful capacity for
payment.
FITCH INVESTORS SERVICE, INC.
F-1+: Exceptionally strong credit quality. Commercial paper assigned
this rating is regarded as having the strongest degree of assurance for
timely payment.
F-1: Very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2: Good credit quality. Commercial paper assigned this rating has a
satisfactory degree of assurance for timely payment but the margin of safety is
not as great as for issuers assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near term adverse changes could cause these securities to be
rated below investment grade.
DUFF & PHELPS
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," Duff 1" and "Duff 1-," within the highest
rating category. The following summarizes the rating categories used by Duff
& Phelps for commercial paper:
DUFF 1+ - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
DUFF 1- - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2 - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
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.
A-2
<PAGE>
THOMSON BANKWATCH
Thomson BankWatch commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the ratings used by Thomson BankWatch:
TBW-1 - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
TBW-3 - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
IBCA
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest capacity for timely
repayment.
A1 - Obligations are supported by a strong capacity for timely
repayment.
A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
CORPORATE BONDS
MOODY'S
Moody's corporate bond ratings are opinions of the relative investment
qualities of bonds. Moody's employs nine designations to indicate such relative
qualities, ranging from "Aaa" for the highest quality obligations to "C" for the
lowest. Issues are further refined with the designation 1,2, and 3 to indicate
the relative ranking within designations. Bonds with the following Moody's
ratings have the following investment qualities:
Aaa: Bonds in this category are judged to be of the highest quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds in this category are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or
A-3
<PAGE>
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.
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
A-4
<PAGE>
business, financial or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "BBB-" rating.
B: Bonds in this category have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating is also used
for debt subordinated to senior debt that is assigned an actual or implied "BB"
or "BB-" rating.
CCC: Bonds in this category have currently identifiable vulnerability
to default, and are dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
C: This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for corporate
and municipal long-term debt:
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:
A-5
<PAGE>
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, C, DDD, DD, AND D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings "BB"
to "C" represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
ICBA
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
BB, B, CCC, CC, AND C - Obligations are assigned one of these ratings
where it is considered that speculative characteristics are present. "BB"
represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
A-6
<PAGE>
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
THOMSON BANKWATCH
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
AA - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
A - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BB, B, CCC, AND CC, - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
D - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
A-7
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
FORM N-1A
PART C: OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements - Not applicable.
b. Exhibits:
(1.1) Certificate of Trust of Registrant (f).
(1.2) Certificate of Amendment to Certificate of Trust of
Registrant (f).
(1.3) Amended and Restated Declaration of Trust of Registrant (f).
(1.4) Certificate of Trustees dated August 6, 1993, establishing
Emerging Growth Portfolio series (f).
(1.5) Certificate of Trustees dated December 15, 1993,
establishing International Growth Portfolio series (f).
(1.6) Amendment No. 2 to Amended and Restated Declaration of Trust
(f).
(1.7) Amendment No. 3 to Amended and Restated Declaration of Trust
(f).
(1.8) Amendment No. 4 to Amended and Restated Declaration of Trust
(f).
(1.9) Amendment No. 5 to Amended and Restated Declaration of Trust
(f).
(1.10) Amendment No. 6 to Amended and Restated Declaration of Trust
(f).
(1.11) Amendment No. 7 to Amended and Restated Declaration of Trust
(f).
(1.12) Form of Amendment No. 8 to Amended and Restated Declaration
of Trust (f).
(1.13) Amendment No. 9 to Amended and Restated Declaration of Trust
(f).
(1.14) Form of Amendment No. 10 to Amended and Restated Declaration
of Trust (b).
(1.15) Amendment No. 11 to Amended and Restated Declaration of
Trust (i).
(1.16) Form of Amendment No. 12 to Amended and Restated Declaration
of Trust (i).
(1.17) Amendment No. 13 to Amended and Restated Declaration of
Trust (j).
(1.18) Form of Amendment No. 14 to Amended and Restated Declaration
of Trust (j).
(1.19) Form of Amendment No. 15 to Amended and Restated Declaration
of Trust (m).
(1.20) Form of Amendment No. 16 to Amended and Restated Declaration
of Trust (r).
(1.21) Form of Amendment No. 17 to Amended and Restated Declaration
of Trust (r).
(1.22) Form of Amendment No. 18 to Amended and Restated Declaration
of Trust (r).
C-1
<PAGE>
(2.1) Amended Bylaws of Registrant (f).
(2.2) Amendment to Section 2.5 of Bylaws of Registrant (f).
(3) None.
(4) None.
(5.1) Form of Investment Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management, with respect to
Global Blue Chip Fund, Emerging Markets Bond Fund, Pacific
Rim Fund, Greater China Fund and Latin America Fund (n).
(5.2) Form of Sub-Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management-Hong Kong, with
respect to the Pacific Rim Fund and Greater China Fund (n).
(5.3) Form of Sub-Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management-Asia, with respect to
the Pacific Rim Fund and Greater China Fund (n).
(5.4) Amended form of letter agreement between Registrant and
Nicholas-Applegate Capital Management adding the Class A, B,
C, Q and I shares of Registrant's additional Funds to the
Investment Advisory Agreement (s).
(6.1) Distribution Agreement between Registrant and Nicholas-
Applegate Securities dated as of April 19, 1993 (f).
(6.2) Letter agreement between Registrant and Nicholas-Applegate
Securities dated May 17, 1993, adding certain Institutional
(formerly Qualified) Portfolio series and Emerging Growth
Portfolio series to Distribution Agreement (f).
(6.3) Letter agreement between Registrant and Nicholas-Applegate
Securities dated December 15, 1993, adding International
Growth Portfolio series to Distribution Agreement (f).
(6.4) Letter agreement between Registrant and Nicholas-Applegate
Securities dated April 22, 1994, adding Qualified Portfolio
series to Distribution Agreement (f).
(6.5) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Emerging Countries Growth Portfolio
series, Global Growth & Income Portfolio series and Mini-Cap
Growth Portfolio series to Distribution Agreement (f).
(6.6) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Series B Portfolios to Distribution
Agreement (f).
(6.7) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Fixed Income and Qualified Portfolio
series to Distribution Agreement (f).
(6.8) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding Value Institutional Portfolio
series to Distribution Agreement (a).
(6.9) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding High Yield Bond and Strategic
Income Institutional Portfolio series to Distribution
Agreement (b).
(6.10) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Large Cap Growth and Core Growth
International Portfolio series to Distribution Agreement
(i).
(6.11) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Core Growth International
Portfolio C series to Distribution Agreement (i).
C-2
<PAGE>
(6.12) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Large Cap Growth Portfolio A, B,
C and Q series to Distribution Agreement (j).
(6.13) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding Global Blue Chip Fund, Emerging
Markets Bond Fund, Pacific Rim Fund, Greater China Fund and
Latin America Fund to Distribution Agreement (n).
(6.14) Amended form of letter agreement between Registrant and
Nicholas-Applegate Securities adding the Class A, B, C, Q
and I shares of Registrant's additional Funds to the
Distribution Agreement (s).
(7) None.
(8.1) Custodian Services Agreement between Registrant and PNC Bank
dated as of April 1, 1993 (f).
(8.2) Letter agreement between Registrant and PNC Bank dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Custodian Services Agreement (f).
(8.3) Letter agreement between Registrant and PNC Bank dated
August 20, 1993, adding Emerging Growth Portfolio series to
Custodian Services Agreement (f).
(8.4) Letter agreement between Registrant and PNC Bank dated
December 15, 1993, adding International Growth Portfolio
series to Custodian Services Agreement (f).
(8.5) Letter agreement between Registrant and PNC Bank dated April
22, 1994, adding Core Growth Qualified Portfolio series to
Custodian Services Agreement (f).
(8.6) Letter agreement between Registrant and PNC Bank, adding
Emerging Countries Growth Portfolio series, Global Growth &
Income Portfolio series and Mini-Cap Growth Portfolio series
to Custodian Services Agreement (f).
(8.7) Letter agreement between Registrant and PNC Bank, adding
Series B Portfolios to Custodian Services Agreement (f).
(8.8) Letter agreement between Registrant and PNC Bank, adding
Fixed Income Portfolio series to Custodian Services
Agreement (f).
(8.9) Form of letter agreement between Registrant and PNC Bank
adding Value Institutional Portfolio series to Custodian
Services Agreement (a).
(8.10) Form of letter agreement between Registrant and PNC Bank
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Custodian Services Agreement (b).
(8.11) Form of letter agreement between Registrant and PNC Bank
adding Large Cap Growth and Core Growth International
Portfolio series to Custodian Services Agreement (i).
(8.12) Form of letter agreement between Registrant and PNC Bank
adding Core Growth International Portfolio C series to
Custodian Services Agreement (i).
(8.13) Form of letter agreement between Registrant and PNC Bank
adding Large Cap Growth Portfolio A, B, C and Q series to
Custodian Services Agreement (j).
(8.14) Form of letter agreement between Registrant and PNC Bank,
adding Global Blue Chip Fund and Emerging Markets Bond Fund
to Custodian Services Agreement (l).
(8.15) Form of letter agreement between Registrant and PNC Bank
with respect to custodian services fees related to the
Global Blue Chip Fund and the Emerging Markets Bond Fund
(m).
C-3
<PAGE>
(8.16) Form of letter agreement between Registrant and PNC Bank,
adding Pacific Rim Fund, Greater China Fund and Latin
America Fund to Custodian Services Agreement (n).
(8.17) Form of letter agreement between Registrant and PNC Bank,
adding the Class A, B, C, Q and I shares of Registrant's
additional Funds to Custodian Services Agreement (o).
(8.18) Form of Sub-Custodian Agreement among Registrant, PNC Bank
and Chase Manhattan Bank, with respect to Global Blue Chip
Fund, Emerging Markets Bond Fund, Greater China Fund,
Pacific Rim Fund and Latin America Fund (o).
(8.19) Amended form of letter agreement among Registrant, PNC Bank
and Chase Manhattan Bank, adding the Class A, B, C, Q and I
shares of Registrant's additional Funds to Sub-Custodian
Agreement (s).
(9.1) Form of amended Administration Agreement between Registrant
and Investment Company Administration Corporation (o).
(9.2) Administrative Services Agreement between Registrant and
Nicholas-Applegate Capital Management dated as of November
18, 1996 (i).
(9.3) Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1,
1993 (f).
(9.4) Letter agreement between Registrant and State Street Bank
and Trust Company dated July 19, 1993, adding certain
Institutional (formerly Qualified) Portfolio series to
Transfer Agency and Service Agreement (f).
(9.5) Letter agreement between Registrant and State Street Bank
and Trust Company dated August 20, 1993, adding Emerging
Growth Portfolio Series to Transfer Agency and Service
Agreement (f).
(9.6) Letter agreement between Registrant and State Street Bank
and Trust Company dated December 15, 1993, adding
International Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.7) Letter agreement between Registrant and State Street Bank
and Trust Company dated April 22, 1994, adding Core Growth
Qualified Portfolio series to Transfer Agency and Service
Agreement (f).
(9.8) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Emerging Countries Growth
Portfolio series, Global Growth & Income Portfolio series
and Mini-Cap Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.9) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Series B Portfolios to Transfer
Agency and Service Agreement (f).
(9.10) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Fixed Income Portfolio series
to Transfer Agency and Service Agreement (f).
(9.11) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Value Institutional Portfolio
series to Transfer Agency and Service Agreement (a).
(9.12) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding High Yield Bond and Strategic
Income Institutional Portfolio series to Transfer Agency and
Service Agreement (b).
C-4
<PAGE>
(9.13) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Large Cap Growth and Core
Growth International Portfolio series to Transfer Agency and
Service Agreement (i).
(9.14) Form of letter agreement between Registrant and State Street
Bank and Trust Company adding Core Growth International
Portfolio C series to Transfer Agency and Service Agreement
(i).
(9.15) Form of letter agreement between Registrant and State Street
Bank and Trust Company adding Large Cap Growth Portfolio A,
B, C and Q series to Transfer Agency and Service Agreement
(j).
(9.16) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Global Blue Chip Fund and
Emerging Markets Bond Fund to Transfer Agency and Service
Agreement (l).
(9.17) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Pacific Rim Fund, Greater
China Fund and Latin America Fund to Transfer Agency and
Service Agreement (n).
(9.18) Amended form of letter agreement between Registrant and
State Street Bank and Trust Company, adding the Class A, B,
C, Q and I shares of Registrant's additional Funds to
Transfer Agency and Service Agreement (s).
(9.19) Form of amended Shareholder Service Plan between Registrant
and Nicholas-Applegate Securities (o).
(9.20) License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (f).
(9.21) Accounting Services Agreement between Registrant and PFPC
Inc. dated as of April 1, 1993 (f).
(9.22) Letter agreement between Registrant and PFPC Inc. dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Accounting Services Agreement (f).
(9.23) Letter agreement between Registrant and PFPC Inc. dated
August 20, 1993, adding Emerging Growth Portfolio series to
Accounting Services Agreement (f).
(9.24) Letter agreement between Registrant and PFPC Inc. dated
December 15, 1993, adding International Growth Portfolio
series to Accounting Services Agreement (f).
(9.25) Letter agreement between Registrant and PFPC Inc. dated
April 22, 1994, adding Core Growth Qualified Portfolio
series to Accounting Services Agreement (f).
(9.26) Letter agreement between Registrant and PFPC Inc., adding
Emerging Countries Growth Portfolio series, Global Growth &
Income Portfolio series and Mini-Cap Growth Portfolio series
to Accounting Services Agreement (f).
(9.27) Letter agreement between Registrant and PFPC Inc., adding
Series B Portfolios to Accounting Services Agreement (f).
(9.28) Letter agreement between Registrant and PFPC Inc., adding
Fixed Income Portfolio series to Accounting Services
Agreement (f).
(9.29) Form of letter agreement between Registrant and PFPC Inc.
adding Value Institutional Portfolio series to Accounting
Services Agreement (a).
C-5
<PAGE>
(9.30) Form of letter agreement between Registrant and PFPC Inc.
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Accounting Services Agreement (b).
(9.31) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth and Core Growth International
Portfolio series to Accounting Services Agreement (i).
(9.32) Form of letter agreement between Registrant and PFPC Inc.
adding Core Growth International Portfolio C series to
Accounting Services Agreement (i).
(9.33) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth Portfolio A, B, C and Q series to
Accounting Services Agreement (j).
(9.34) Form of letter agreement between Registrant and PFPC Inc.,
adding Global Blue Chip Fund and Emerging Markets Bond Fund
to Accounting Services Agreement (l).
(9.35) Form of letter agreement between Registrant and PFPC Inc.
with respect to accounting services fees related to the
Global Blue Chip Fund and the Emerging Markets Bond Fund
(m).
(9.36) Form of letter agreement between Registrant and PFPC Inc.
adding the Pacific Rim Fund, Greater China Fund and Latin
America Fund (n).
(9.37) Form of letter agreement between Registrant and PFPC Inc.
regarding fees for additional Funds under Accounting
Services Agreement (o).
(9.38) Amended form of letter agreement between Registrant and PFPC
Inc., adding the Class A, B, C, Q and I shares of
Registrant's additional Funds to Accounting Service
Agreement (s).
(9.39) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated September 27, 1993 regarding
expense reimbursements (f).
(9.40) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Global Blue Chip Fund,
Emerging Markets Bond Fund, Pacific Rim Fund, Greater China
Fund and Latin America Fund to agreement regarding expense
reimbursement (n).
(9.41) Amended form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding the Class A,
B, C, Q and I shares of Registrant's additional Funds to
agreement regarding expense reimbursement (s).
(9.42) Credit Agreement among Registrant, Chemical Bank and certain
other banks dated April 10, 1996 (f).
(9.43) First Amendment Agreement to Credit Agreement dated as of
April 9, 1997 among Registrant, The Chase Manhattan Bank,
and certain other banks (l).
(9.44) Form of Second Amendment Agreement to Credit Agreement among
Registrant, The Chase Manhattan Bank, and certain other
banks (n).
(10) Opinion of Counsel.
(11) Not Applicable.
(12) Not Applicable.
(13) Investment Letter of initial investor in Registrant dated
April 1, 1993 (f).
(14.1) IRA Plan Materials (d).
(14.2) 401(k) Profit-Sharing Plan Materials (d).
C-6
<PAGE>
(15.1) Amended Distribution Plan of Registrant (f)
(15.2) Form of further Amendment to Distribution Plan of Registrant
(o).
(16) Schedule of Computation of Performance Quotations (c).
(17.1) Financial Data Schedule as of March 31, 1997 (p).
(17.2) Financial Data Schedule as of September 30, 1997 (q).
(18) Not Applicable.
(19.1) Limited Powers of Attorney of Trustees (d).
(19.2) Limited Power of Attorney of Walter E. Auch (e).
(19.3) Limited Power of Attorney of John D. Wylie (h).
(19.4) Certified Resolution of Board of Trustees of Registrant
regarding Limited Power of Attorney of John D. Wylie (h).
(19.5) Limited Power of Attorney of Thomas Pindelski (k).
(19.6) Certified Resolution of Board of Trustees regarding Limited
Power of Attorney of Thomas Pindelski (k).
- -------------------
(a) Filed as an Exhibit to Amendment No. 28 to Registrant's Form N-1A
Registration Statement on January 19, 1996 and incorporated herein by
reference.
(b) Filed as an Exhibit to Amendment No. 29 to Registrant's Form N-1A
Registration Statement on May 3, 1996 and incorporated herein by reference.
(c) Filed as an Exhibit to Amendment No. 1 to Registrant's Form N-1A
Registration Statement on March 15, 1993 and incorporated herein by
reference.
(d) Filed as an Exhibit to Amendment No. 12 to Registrant's Form N-1A
Registration Statement on August 1, 1994 and incorporated herein by
reference.
(e) Filed as an Exhibit to Amendment No. 14 to Registrant's Form N-1A
Registration Statement on September 26, 1994 and incorporated herein by
reference.
(f) Filed as an Exhibit to Amendment No. 32 to Registrant's Form N-1A
Registration Statement on June 3, 1996 and incorporated herein by
reference.
(g) Filed as an Exhibit to Amendment No. 37 to Registrant's Form N-1A
Registration Statement on October 15, 1996 and incorporated herein by
reference.
(h) Filed as an Exhibit to Amendment No. 38 to Registrant's Form N-1A
Registration Statement on October 25, 1996 and incorporated herein by
reference.
(i) Filed as an Exhibit to Amendment No. 40 to Registrant's Form N-1A
Registration Statement on January 3, 1997 and incorporated herein by
reference.
(j) Filed as an Exhibit to Amendment No. 42 to Registrant's Form N-1A
Registration Statement on May 1, 1997 and incorporated herein by reference.
C-7
<PAGE>
(k) Filed as an Exhibit to Amendment No. 44 to Registrant's Form N-1A
Registration Statement on May 22, 1997 and incorporated herein by
reference.
(l) Filed as an Exhibit to Amendment No. 45 to Registrant's Form N-1A
Registration Statement on July 14, 1997 and incorporated herein by
reference.
(m) Filed as an Exhibit to Amendment No. 47 to Registrant's Form N-1A
Registration Statement on July 28, 1997 and incorporated herein by
reference.
(n) Filed as an Exhibit to Amendment No. 49 to Registrant's Form N-1A
Registration Statement on September 2, 1997 and incorporated herein by
reference.
(o) Filed as an Exhibit to Registrant's Form N-14 Registration Statement on
December 5, 1997 and incorporated herein by reference.
(p) Filed as an Exhibit to Registrant's Form N-SAR on June 9, 1997 and
incorporated herein by reference.
(q) Filed as an Exhibit to Registrant's Form N-SAR on December 12, 1997 and
incorporated herein by reference.
(r) Filed as an Exhibit to Amendment No. 50 to Registrant's Form N-1A
Registration Statement on December 15, 1997 and incorporated herein by
reference.
(s) Filed as an Exhibit to Amendment No. 52 to Registrant's Form N-1A
Registration Statement on December 29, 1997 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 November 30, 1997, 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 58
Core Growth Portfolio A 6,438
Emerging Growth Portfolio A 10,733
Income & Growth Portfolio A 2,496
Balanced Growth Portfolio A 930
Government Income Portfolio A 492
Money Market Portfolio 853
International Core Growth Portfolio A 315
Worldwide Growth Portfolio A 2,044
International Small Cap Growth Portfolio A 799
Emerging Countries Portfolio A 4,598
Large Cap Growth Portfolio B 116
Core Growth Portfolio B 3,351
Emerging Growth Portfolio B 4,273
Income & Growth Portfolio B 1,521
Balanced Growth Portfolio B 347
Government Income Portfolio B 240
International Core Growth Portfolio B 465
Worldwide Growth Portfolio B 810
International Small Cap Growth Portfolio B 688
Emerging Countries Portfolio B 3,713
Large Cap Growth Portfolio C 31
Core Growth Portfolio C 12,653
C-8
<PAGE>
Emerging Growth Portfolio C 16,227
Income & Growth Portfolio C 5,208
Balanced Growth Portfolio C 1,278
Government Income Portfolio C 475
International Core Growth Portfolio C 186
Worldwide Growth Portfolio C 5,531
International Small Cap Growth Portfolio C 866
Emerging Countries Portfolio C 3,069
Large Cap Growth Institutional Portfolio 39
Core Growth Institutional Portfolio 183
Emerging Growth Institutional Portfolio 185
Income & Growth Institutional Portfolio 121
Balanced Growth Institutional Portfolio 28
International Core Growth Institutional Portfolio 71
Worldwide Growth Institutional Portfolio 79
International Small Cap Growth Institutional Portfolio 81
Emerging Countries Institutional Portfolio 204
Mini Cap Growth Institutional Portfolio 317
Fully Discretionary Institutional Fixed Income Portfolio 13
Short-Intermediate Institutional Fixed Income Portfolio 15
Value Institutional Portfolio 49
High Yield Bond Institutional Portfolio 25
Strategic Income Institutional Portfolio 20
Global Growth & Income Institutional Portfolio 50
Large Cap Growth Qualified Portfolio 12
Core Growth Qualified Portfolio 193
Emerging Growth Qualified Portfolio 75
Income & Growth Qualified Portfolio 10
Balanced Growth Qualified Portfolio 9
Government Income Qualified Portfolio 9
International Core Growth Qualified Portfolio 25
Worldwide Growth Qualified Portfolio 9
International Small Cap Growth Qualified Portfolio 12
Emerging Countries Qualified Portfolio 1,678
Emerging Markets Bond Institutional Portfolio 16
Global Blue Chip Fund 80
</TABLE>
Item 27. INDEMNIFICATION.
Registrant's trustees, officers, employees and agents against
liabilities incurred by them in connection with the defense or disposition of
any action or proceeding in which they may be involved or with which they may be
threatened, while in office or thereafter, by reason of being or having been in
such office, except with respect to matters as to which it has been determined
that they acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office
("Disabling Conduct").
Section 8 of Registrant's Administration Agreement, filed herewith as
Exhibit 9.1, provides for the indemnification of Registrant's Administrator
against all liabilities incurred by it in performing its obligations under the
Agreement, except with respect to matters involving its Disabling Conduct.
Section 9 of Registrant's Distribution Agreement, filed herewith as Exhibit 6,
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.
C-9
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Nicholas-Applegate Capital Management, the investment adviser to the
Master Trust, is a California limited partnership, the general partner of which
is Nicholas-Applegate Capital Management, Inc. (the "General Partner"). During
the two fiscal years ended December 31, 1996, Nicholas-Applegate Capital
Management has engaged principally in the business of providing investment
services to institutional and other clients. All of the additional information
required by this Item 28 with respect to the Investment Adviser is set forth in
the Form ADV, as amended, of Nicholas-Applegate Capital Management (File No.
801-21442), which is incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Nicholas-Applegate Securities does not act as a principal
underwriter, depositor or investment adviser to any investment company other
than Registrant.
(b) Nicholas-Applegate Securities, the Distributor of the shares of
Registrant's Portfolios, is a California limited partnership and its general
partner is Nicholas-Applegate Capital Management Holdings, L.P. (the "General
Partner"). Information is furnished below with respect to the officers,
partners and directors of the General Partner and Nicholas-Applegate
Securities. The principal business address of such persons is 600 West
Broadway, 30th Floor, San Diego, California 92101, except as otherwise indicated
below.
Positions and Positions and
Name and Principal Offices with Principal Offices with
Business Address Underwriter Registrant
---------------- ----------- ----------
Arthur E. Nicholas President President
Peter J. Johnson Vice President Vice President
Thomas Pindelski Chief Financial Officer Chief Financial
Officer
E. Blake Moore, Jr. Secretary Secretary
Todd Spillane Director of Compliance None
(c) Not Applicable.
C-10
<PAGE>
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained either at the offices of the Registrant (600 West
Broadway, 30th Floor, San Diego, California 92101); the Investment Adviser to
the Trust and Master Trust, Nicholas-Applegate Capital Management (600 West
Broadway, 30th Floor, San Diego, California 92101); the primary administrator
for the Trust and Master Trust, Investment Company Administration Corporation
(4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018); the Custodian,
PNC Bank (Airport Business Center, International Court 2, 200 Stevens Drive,
Lester, Pennsylvania 19113); or the Transfer and Dividend Disbursing Agent,
State Street Bank & Trust Company (2 Heritage Drive, 7th Floor, North Quincy,
Massachusetts 02171).
Item 31. MANAGEMENT SERVICES.
Not Applicable.
Item 32. UNDERTAKINGS.
Registrant undertakes to file a Post-Effective amendment containing
reasonably current financial statements with respect to its High Yield Bond
Fund, which need not be certified, within four to six months from the effective
date of this Amendment.
Registrant hereby undertakes that if it is requested by the holders of
at least 10% of its outstanding shares to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee, it will do so and
will assist in communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 25th day
of February 1998.
NICHOLAS-APPLEGATE MUTUAL FUNDS
By s/ 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.
s/Arthur E. Nicholas Principal Executive February 25, 1998
---------------------------- Officer
Arthur E. Nicholas
Principal Financial and
Thomas Pindelski* Accounting Officer February 25, 1998
----------------------------
Thomas Pindelski
Fred C. Applegate* Trustee February 25, 1998
----------------------------
Fred C. Applegate
Arthur B. Laffer* Trustee February 25, 1998
----------------------------
Arthur B. Laffer
Charles E. Young* Trustee February 25, 1998
----------------------------
Charles E. Young
* s/E. Blake Moore, Jr.
----------------------------
By: E. Blake Moore, Jr.
Attorney In Fact
C-12
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE MUTUAL FUNDS
AMENDMENT NO. 56 TO
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-7428
Exhibit No. Title of Exhibit
- ----------- ----------------
(10) Opinion of Counsel.
<PAGE>
Exhibit 10
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 West Flower Street
Los Angeles, California 90071
(213) 683-6000
February 25, 1998
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, California 92101
Ladies and Gentlemen:
We have acted as counsel to Nicholas-Applegate Mutual Funds, a
Delaware business trust (the "Trust"), in connection with the issuance of an
indefinite number of shares of beneficial interest ("Shares") in the Nicholas-
Applegate High Yield Bond Fund series of the Trust in a public offering pursuant
to a Registration Statement on Form N-1A (Registration No. 33-56094), as
amended, filed with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Registration Statement").
In our capacity as counsel for the Trust, we have examined the Amended
and Restated Declaration of Trust of the Trust dated as of December 17, 1992, as
amended, the bylaws of the Trust, as amended, originals or copies of actions of
the Trustees as furnished to us by the Trust, certificates of public officials,
statutes and such other documents, records and certificates as we have deemed
necessary for the purposes of this opinion.
Based upon our examination as aforesaid, we are of the opinion that
the Shares are duly authorized and, when purchased and paid for as described in
the Registration Statement, will be validly issued, fully paid and
nonassessable.
<PAGE>
We hereby consent to the filing of this opinion of counsel as an
exhibit to the Registration Statement.
Very truly yours,
s/PAUL, HASTINGS, JANOFSKY & WALKER LLP
