<PAGE>
As filed with the Securities and Exchange Commission
on March 24, 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. 55 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 57
(Check appropriate box or boxes)
--------------
NICHOLAS-APPLEGATE MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Address of Principal Executive Offices, including Zip Code)
ARTHUR E. NICHOLAS
C/O NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Name and Address of Agent for Service)
COPY TO: ROBERT E. CARLSON
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 S. FLOWER STREET, TWENTIETH FLOOR
LOS ANGELES, CALIFORNIA 90071
--------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVE DATE.
--------------
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ______________ pursuant to paragraph (b)
[ X ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on ____________ pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii), of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered : Shares of Beneficial Interest
--------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
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>
1
NICHOLAS APPLEGATE-Registered Trademark-
MUTUAL FUNDS
PROSPECTUS
The prospectus contains vital information about the Class I 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 30, 1998
<PAGE>
2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
OVERVIEW 3
A LOOK AT THE FUND'S GOALS,
STRATEGIES, RISKS, AND FINAN-
CIAL HISTORY. HIGH YIELD BOND FUND 4
POLICIES AND INSTRUCTIONS
FOR OPENING, MAINTAINING
AND CLOSING AN ACCOUNT IN SIMPLIFIED ACCOUNT
THE FUND. INFORMATION
Opening an Account 6
Buying Shares 6
Selling and Redeeming Shares 7
Signature Guarantees 8
Exchanging Shares 8
YOUR ACCOUNT
Transaction Policies 9
Features and Account Policies 9
ORGANIZATION AND
MANAGEMENT
Investment Adviser Compensation 11
Administrator Compensation 11
Distributor 11
Portfolio Trades 11
Investment Objective 11
Diversification 11
Reorganization of the Fund 11
Portfolio Team 12
DETAILS THAT APPLY TO ALL RISK FACTORS AND
PORTFOLIOS OF THE TRUST AS A GROUP. SPECIAL CONSIDERATIONS 13
</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]
PORTFOLIO MANAGEMENT
The individuals who manage the Fund.
[GRAPHIC]
RISK FACTORS
The major risk factors associated with the Fund. Other risk factors are also
described in "Risk Factors and Special Considerations."
[GRAPHIC]
INVESTOR EXPENSES
The overall costs borne by an investor in the Class I Shares, including sales
charges and annual expenses.
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 I 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 21 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 16. 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(1) 0.60%
- ---------------------------------------------------------
12b-1 expenses None
- ---------------------------------------------------------
Other expenses (after expense deferral)(1) 0.15%
- ---------------------------------------------------------
Total operating expenses (after expense
deferral)(1) 0.75%
</TABLE>
1. The Investment Adviser has agreed to waive or defer its management fees and
to pay other operating expenses otherwise payable by the Fund, subject to
possible later reimbursement during a five year period. Management fees
would have been 0.60%, Total operating expenses would have been 1.95%, and
Other expenses would have been 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>
$8 $24 $42 $93
</TABLE>
This example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.
FINANCIAL HIGHLIGHTS
The following schedule provides selected data for a share of beneficial interest
of the predecessor Institutional Portfolio outstanding throughout each period
indicated. The figures for the period ending September 30, 1997 are unaudited.
The other figures have been audited by Ernst & Young L.L.P. with respect to the
fiscal year ended March 31, 1997. Please read in conjunction with the Trust's
1997 Annual Report and 1997-1998 Semi-Annual Report.
<TABLE>
<CAPTION>
7/31/96 4/1/97
TO 3/31/97 TO 9/30/97
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $13.20
Income from investment operations:
Net investment income (deficit) 0.74 1.09
Net realized and unrealized gains
(losses) on securities and foreign
currency 0.95 1.03
- ----------------------------------------------------------------
Total from investment operations 1.69 2.12
Less distributions:
Dividends from net investment income (0.73) (0.54)
Distributions from capital gains (0.26) --
- ----------------------------------------------------------------
Net asset value, end of period $13.20 $14.78
- ----------------------------------------------------------------
TOTAL RETURN: 13.90% 16.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,608 $4,749
Ratio of expenses to average net assets,
after expense reimbursement+ 0.75%* 0.76%*
Ratio of expenses to average net assets,
before expense reimbursement+ 1.95%* 2.83%*
Ratio of net investment income (deficit)
to average net assets, after expense
reimbursement+ 8.47%* 7.67%*
Ratio of net investment income (deficit)
to average net assets, before expense
reimbursement+ 7.97%* 5.60%*
Portfolio turnover** 465.36% 403.81%
Average commission rate paid** $0.0200 $0.0500
</TABLE>
* Annualized
** For the corresponding Series of the Master Trust
+ Includes expenses allocated from Master Trust Fund
<PAGE>
6
SIMPLIFIED ACCOUNT INFORMATION
<TABLE>
<CAPTION>
OPENING AN ACCOUNT
<S> <C>
This is the minimum
initial investment $250,000
- -----------------------------------------------------------------------------------------------------------
Use this type of
application New Account Form (Non-Retirement)
- -----------------------------------------------------------------------------------------------------------
The Fund offers a variety of features, which are described in the "Your Account"
Before completing section of this prospectus. Please read this section before completing the
the application application.
- -----------------------------------------------------------------------------------------------------------
Completing the If you need assistance, contact your financial representative, or call us at
application (800) 551-8043.
- -----------------------------------------------------------------------------------------------------------
If you are sending money Mail application and check, payable to: NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX
by CHECK 8326, BOSTON, MA 02266-8326. The Trust will not accept third-party checks.
- -----------------------------------------------------------------------------------------------------------
Please read the bank wire or ACH section under the "Buying Shares" section
below. You will need to obtain an account number with the Trust by sending a
If you are sending money completed application to: NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX 8326, BOSTON,
by BANK WIRE or ACH MA 02266-8326. To receive your account number, contact your financial
representative or call us at (800) 551-8043.
<CAPTION>
BUYING SHARES
<S> <C>
This is the minimum
subsequent investment $10,000
- -----------------------------------------------------------------------------------------------------------
The Trust is generally open on days that the New York Stock Exchange is open.
The price you will All transactions received in good order before the market closes receive that
receive day's price.
- -----------------------------------------------------------------------------------------------------------
Instruct your bank to wire the amount you wish to invest to:
STATE STREET BANK & TRUST CO.--ABA #011000028
If you are sending money DDA #9904-645-0
by BANK WIRE STATE STREET BOS, ATTN: MUTUAL FUNDS
CREDIT: NICHOLAS-APPLEGATE [FUND NAME][SHARE CLASS], [YOUR NAME], [ACCOUNT NAME
OR NUMBER]
- -----------------------------------------------------------------------------------------------------------
Call your bank to ensure (1) that your bank supports ACH, and (2) this feature
is active on your bank account. To establish this option, either complete the
If you are sending money appropriate sections when opening an account, or contact your financial
by ACH representative, or call us at (800) 551-8043 for further information. To
initiate an ACH purchase, call the Trust at (800) 551-8043.
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
IN WRITING SELLING OR REDEEMING SHARES BY PHONE
<S> <C> <C>
--------------------------------------------------------------------------------------------
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
Certain requests may require a SIGNATURE representative or the Trust at (800) 551-8043
Things you should know GUARANTEE. See that section below for further for further information. The maximum amount
information. You may sell up to the full which may be requested by phone, regardless
account value. of account size, is $50,000. Amounts greater
than that must be requested in writing. If
you wish to receive your monies by bank wire,
the minimum request is $5,000.
- -----------------------------------------------------------------------------------------------------------------------
If you purchased shares through a financial representative or plan administrator/sponsor,
you should call them regarding the most efficient way to sell shares. If you bought shares
recently by check, they will not be available to be sold until the check clears, which may
take up to 15 calendar days from the date of purchase. Sales by a corporation, trust or
fiduciary may have special requirements. Please contact your financial representative, a
plan administrator/sponsor or us for further information.
- -----------------------------------------------------------------------------------------------------------------------
The price you will The Trust is open on days that the New York Stock Exchange is open. All transactions
receive received in good order before the market closes receive that day's price.
- -----------------------------------------------------------------------------------------------------------------------
Please put your request in writing,
including:
the name of the account owners, account
number and Fund and share Class you are
redeeming from, and the share or dollar Either contact your financial representative
If you want to receive amount you wish to sell, signed by all or call us at (800) 551-8043. The proceeds
your monies by BANK WIRE account owners. Mail this request to: will be sent to the existing bank wire
NICHOLAS-APPLEGATE MUTUAL FUNDS, address listed on the account.
PO BOX 8326, BOSTON, MA 02266-8326.
The check 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
If you want to receive will be sent in accordance with the existing
your monies by ACH Please call us at (800) 551-8043. ACH instructions on the account and will
generally be received at your bank two
business days after your request is received.
</TABLE>
<PAGE>
8
SIMPLIFIED ACCOUNT INFORMATION
<TABLE>
<CAPTION>
SIGNATURE GUARANTEES
<S> <C>
A signature guarantee of a financial institution is required to verify the
A definition 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;
2. When you want a check or bank wire sent to a name or address that is not
When you need one currently listed on the account;
3. To sell shares from an account controlled by a corporation, partnership,
trust or fiduciary; or
4. If your address was changed within the last 60 days.
<CAPTION>
EXCHANGING SHARES
<S> <C>
This is the minimum
exchange
amount to open a new $250,000
account
- -----------------------------------------------------------------------------------------------------------
The Trust is open on days that the New York Stock Exchange is open. All
The price you will transactions received in good order before the market closes receive that day's
receive price.
- -----------------------------------------------------------------------------------------------------------
The exchange must be to the shares of an Institutional Portfolio or Class I
Shares of another Fund or to 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 Portfolio or
Things you should know Fund you are exchanging from, make sure that you leave an amount equal to or
greater than the Portfolio's or 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.
- -----------------------------------------------------------------------------------------------------------
Either contact your financial representative, or call the Trust at (800)
How to request an 551-8043. The Trust will accept a request by phone if this feature was
exchange by PHONE previously established on your account. See the "Your Account" section for
further information.
- -----------------------------------------------------------------------------------------------------------
Please put your exchange request in writing, including: the name on the account,
How to request an the name of the Portfolio or Fund and the account number you are exchanging
exchange by MAIL 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>
<PAGE>
9
YOUR ACCOUNT
TRANSACTION POLICIES
PURCHASE OF SHARES. Class I Shares are offered at net asset value without a
sales charge to qualified retirement plans, financial and other institutions and
"wrap accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment is $10,000. The Distributor may waive these minimums from
time to time. The Fund also offers Class A, B and C and Q 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 I 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 I Shares of
the Fund is determined each business day at the close of regular trading on the
New York Stock Exchange (usually 4 p.m. Eastern Time) by dividing the value of
the Class' net assets by the number of its shares outstanding.
BUY AND SELL PRICES. When you buy shares, you pay the NAV, as described earlier.
When you sell shares, you receive the NAV. Your financial institution may charge
you a fee to execute orders on your behalf.
EXECUTION OF REQUESTS. 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).
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).
<PAGE>
10
YOUR ACCOUNT
/ / 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.
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 I 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 I Shares of another Portfolio,
subject to conditions outlined in the Statement of Additional Information and
the applicable provisions of the qualified retirement plan.
SHAREHOLDER SERVICES. The Investment Adviser may make payments from its own
resources to brokers, consultants, and financial institutions for performing
certain services for shareholders and for the maintenance of shareholder
accounts.
<PAGE>
11
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 I Shares of the Fund will not
exceed the following expense ratio on an annual basis through March 31, 1998:
High Yield Bond Fund--0.75%. 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.
PRIOR MASTER FEEDER STRUCTURE
Prior to March 30, 1998, the I Class of the Fund was the High Yield Bond
Institutional Portfolio, and invested all of its assets in the High Yield Bond
Fund of Nicholas-Applegate Investment Trust (the "Master Trust"). In this
"master-feeder" structure, the Investment Adviser served as the adviser to the
Master Trust, and the Trust had no separate adviser. The master-feeder structure
was terminated, with the approval of shareholders of the High Yield Bond
Institutional Portfolio, in order to achieve certain economies for the Fund.
<PAGE>
12
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>
13
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.
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
<PAGE>
14
RISK FACTORS AND SPECIAL CONSIDERATIONS
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.
The average percentage of assets invested by the Fund in bonds of each
permissible rating (as rated by Standard & Poor's Corporation) on a monthly
dollar-weighted basis, was as follows for the nine month period ended December
31, 1997: AA--0%; A--0%, BBB--0%, BB--11.89%, B--42.37%; CCC--16.91%, non-
rated--19.09%. A description of the rating categories is contained in this
prospectus.
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
<PAGE>
15
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 16.
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 debt securities. Asset-backed securities
generally do not have the benefit of a security interest
<PAGE>
16
RISK FACTORS AND SPECIAL CONSIDERATIONS
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. The Board of Trustees has determined that Rule 144A
securities are not illiquid securities.
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
<PAGE>
17
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 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.
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
<PAGE>
18
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 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.
<PAGE>
19
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>
FOR MORE INFORMATION
Two documents are available that offer further information on the
Nicholas-Applegate Mutual Funds:
ANNUAL OR SEMI-ANNUAL REPORTS TO SHAREHOLDERS
Include financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management, and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the Funds.
A current SAI has been filed with the Securities and Exchange Commission and
is incorporated by reference into this prospectus.
To request a free copy of the current annual or semi-annual report or SAI,
please call or write:
Nicholas-Applegate Mutual Funds
600 West Broadway
San Diego, CA 92101
Telephone: (800) 551-8643
Nicholas/Applegate-Registered Trademark-
600 West Broadway
San Diego, California 92101
800-551-8643
Nicholas-Applegate Securities, Distributor
www.nacm.com
MFHYTMPPROII398
<PAGE>
NICHOLAS-APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
HIGH YIELD BOND FUND
CLASS I SHARES
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8643
STATEMENT OF ADDITIONAL INFORMATION
March 30, 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 I 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
Page
----
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objectives, Policies and Risks. . . . . . . . . . . . . . . . . . B-2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . .B-25
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . . . . .B-27
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-29
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-30
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-31
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . .B-31
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-44
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-44
Appendix A - Description of Securities Ratings . . . . . . . . . . . . . . . A-1
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 I shares of the High Yield
Bond Fund is included in this Statement of Additional Information.
Prior to a reorganization effective on March 30, 1998 (the
"Reorganization"), the Trust offered shares in the High Yield Bond Institutional
Portfolio, which was one of a number of separate diversified portfolios, each of
which invested all of its assets in a corresponding master fund of
Nicholas-Applegate Investment Trust (the "Master Trust"). The Reorganization
eliminated this two-tiered "master-feeder" structure with respect to the High
Yield Bond Institutional Portfolio.
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
B-2
<PAGE>
yields of other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The credit
standing of the issuer and other factors may also affect the investment value of
a convertible security. The conversion value of a convertible security is
determined by the market price of the underlying common stock. If the
conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. To the
extent the market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly
influenced by its conversion value.
The market value of convertible debt securities tends to vary inversely
with the level of interest rates. The value of the security declines as
interest rates increase and increases as interest rates decline. Although under
normal market conditions longer term debt securities have greater yields than do
shorter term debt securities of similar quality, they are subject to greater
price fluctuations. A convertible security may be subject to redemption at the
option of the issuer at a price established in the instrument governing the
convertible security. If a convertible security held by 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
B-3
<PAGE>
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.
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
B-4
<PAGE>
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 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
B-5
<PAGE>
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.
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
B-6
<PAGE>
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.
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
B-7
<PAGE>
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 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
B-8
<PAGE>
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
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.
B-9
<PAGE>
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 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.
B-10
<PAGE>
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 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
B-11
<PAGE>
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 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
B-12
<PAGE>
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 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
B-13
<PAGE>
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, 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
B-14
<PAGE>
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 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
B-15
<PAGE>
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 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
B-16
<PAGE>
the future moves more than the price of the hedged securities, the Fund will
experience either a loss or a gain on the future which will not be completely
offset by movements in the price of the securities which are subject to the
hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of the futures contract, 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
B-17
<PAGE>
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 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
B-18
<PAGE>
account with the Custodian or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Trust may change them if
applicable law permits such a change and the change is consistent with the
overall investment objective and policies of 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.
B-19
<PAGE>
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 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
B-20
<PAGE>
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.
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. 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>
Pension or Total
Retirement Compensation
Benefits Estimated from Trust
Aggregate Accrued as Annual and Trust
Compensation Part of Trust Benefits Upon Complex Paid
Name from Trust Expenses Retirement 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), subject to possible
reimbursement during a five year period, 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 cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and
B-30
<PAGE>
maintaining the registration of the Trust and of its shares with the Commission
and registering the Trust as a broker or dealer and qualifying their shares
under state securities laws, including the preparation and printing of the
Trust's registration statement, prospectuses and statements of additional
information, (m) allocable communication expenses with respect to investor
services and all expenses of shareholders' and Board of Trustees' meetings and
of preparing, printing and mailing prospectuses and reports to shareholders, (n)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the business of the Trust, and (o) expenses
assumed by the Trust pursuant to any plan of distribution adopted in conformity
with Rule 12b-1 under the Investment Company Act.
The Administration Agreement provides that ICAC will not be liable for
any error of judgment or for any loss suffered by the Trust in connection with
the matters to which the Administration Agreement relates, except a loss
resulting from ICAC's willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties. The Administration Agreement will terminate
automatically if assigned, and may be terminated without penalty by either ICAC
or the Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Trust, as defined in the Investment Company
Act), upon 60 days' written notice. The Administration Agreement will continue
in effect only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer agents,
accounting agents, independent accountants and legal counsel. These services
are comprised principally of assistance in coordinating with the Trust's various
service providers, providing certain officers of the Trust, responding to
inquiries from shareholders which are directed to the Trust rather than other
service providers, calculating performance data, providing various reports to
the Board of Trustees, and assistance in preparing reports, prospectuses, proxy
statements and other shareholder communications. The Agreement contains
provisions regarding liability and termination similar to those of the
Administration Agreement.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for distributing
shares of the 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.
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 I 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.
B-31
<PAGE>
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 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.
B-32
<PAGE>
During the fiscal year ended March 31, 1997, the High Yield Bond
Fund master fund of the Master Trust (predecessor to the Fund) acquired
securities of its regular brokers or dealers (as defined in Rule 10b-1 under the
Investment Company Act) or their parents as follows: J.P. Morgan & Co., UBS
Securities. No securities of such brokers and dealers were held as of March 31,
1997.
The aggregate dollar amount of brokerage commissions paid by the
master fund predecessor to the Fund during the last three fiscal years of the
Trust were, for the fiscal years ended March 31, 1997, March 31, 1996 and March
31, 1995: $200, N/A and N/A, respectively.
PURCHASE AND REDEMPTION OF FUND SHARES
Class I 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 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 I
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 I 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
I 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
B-33
<PAGE>
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 I 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 I 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 (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
B-34
<PAGE>
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 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
B-35
<PAGE>
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.
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
B-36
<PAGE>
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 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
B-37
<PAGE>
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.
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
B-38
<PAGE>
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 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
B-39
<PAGE>
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 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
B-40
<PAGE>
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.
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.
Yield for the predecessor to the Class I shares of the Fund for the
30-day period ended September 30, 1997 was 6.50%.
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
B-41
<PAGE>
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.
PRIOR PERFORMANCE OF THE PREDECESSOR TO THE FUND
The following table sets forth historical performance information for
the Class I shares of the High Yield Bond Fund. It includes historical
performance information for the Institutional Portfolio which preceded the Fund
prior to the reorganization of the High Yield Bond Institutional Portfolio of
the Trust in March 1998 and the Investment Adviser's composite performance data
relating to the historical performance of institutional private accounts managed
by the Investment Adviser, since the dates indicated, that have investment
objectives, policies, strategies and risks substantially similar to those of
such Fund. The composite data is provided to illustrate the past performance of
the Investment Adviser in managing substantially similar accounts as measured
against specified market indices and does not represent the performance of the
Fund. Investors should not consider this performance data as an indication of
future performance of the Fund or of the Investment Adviser.
The Investment Adviser has advised the Trust that the net performance
results for the Fund are calculated as set forth above under "General
Information -- Performance Information." All information set forth in the
tables below relies on data supplied by the Investment Adviser or from
statistical services, reports or other sources believed by the Investment
Adviser to be reliable. However, except as otherwise indicated, such
information has not been verified and is unaudited.
The Investment Adviser's composite performance data shown below were
calculated in accordance with recommended standards of the Association for
Investment Management and Research ("AIMR"(1), retroactively applied to all time
periods. All returns presented were calculated on a total return basis and
include all dividends and interest, accrued income and realized and unrealized
gains and loses. All returns reflect the deduction of investment
- ------------------------------------
(1) AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and
(ii) ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.
B-42
<PAGE>
advisory fees, brokerage commissions and execution costs paid by the Investment
Adviser's institutional private accounts, without provision for federal or state
income taxes. Custodial fees, if any, were not included in the calculation.
The Investment Adviser's composite includes all actual, fee-paying,
discretionary institutional private accounts managed by the Investment Adviser
that have investment objectives, policies, strategies and risks substantially
similar to those of the High Yield Bond Fund. Securities transactions are
accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns. The monthly returns of the
Investment Adviser's composite combines the individual accounts' returns
(calculated on a time-weighted rate of return that is revalued whenever cash
flows exceed $500) by asset-weighing each individual account's asset value as of
the beginning of the month. Quarterly and yearly returns are calculated by
geometrically linking the monthly and quarterly returns, respectively. The
yearly returns are computed by geometrically linking the returns of each quarter
within the calendar year.
The institutional private accounts that are included in the Investment
Adviser's composite are not subject to the same types of expenses to which the
High Yield Bond Fund is subject nor to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Fund by the
Investment Company Act or Subchapter M of the Internal Revenue Code.
Consequently, the performance results for the Investment Adviser's composite
could have been adversely affected if the institutional private accounts
included in the composite had been regulated as investment companies under the
federal securities laws.
The results presented below may not necessarily equate with the return
experienced by any particular investor as a result of the timing of investments
and redemptions. In addition, the effect of taxes on any investor will depend
on such person's tax status, and the results have not been reduced to reflect
any income tax which may have been payable.
The investment results presented below are not intended to predict or
suggest the returns that might be experienced by the High Yield Bond Fund or an
individual investor investing in such Fund. Investors should also be aware that
the uses of a methodology different form that used below to calculated
performance could result in different performance data.
CLASS I SHARES OF THE HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
High Yield Bond Performance
<TABLE>
<CAPTION>
Investment Adviser's First Boston
High Yield High Yield High Yield
Year Bond Composite Bond Fund Index(1)
<S> <C> <C> <C>
1994(2). . . . . 1.45% 0.09%
1995 . . . . . . 19.40 17.38
1996(2),(3). . . 21.87 11.33% 12.42
1997 . . . . . . 19.09 19.09 10.84
Last Year(3) . . 24.74 24.74 15.72
Since inception(3) 17.51 27.41 11.51
</TABLE>
_______________________
(1) The First Boston High Yield Index includes over 180 U.S. domestic issues
with an average maturity range of seven to ten years and with a minimum
issue size of $100 million. The Index reflects the reinvestment of
income, if any, but does not reflect fees, dealer markups, or other
expenses of investing.
B-43
<PAGE>
(2) Inception dates are as follows: High Yield Bond Composite - April 1,
1994; High Yield Bond Institutional Portfolio (predecessor to the Class
I shares of the High Yield Bond Fund) - July 31, 1996.
(3) Through September 30, 1997.
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 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 63 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
B-44
<PAGE>
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 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
B-45
<PAGE>
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-46
<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 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-3
<PAGE>
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 business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
A-4
<PAGE>
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:
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.
A-5
<PAGE>
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, C, DDD, DD, and D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings "BB"
to "C" represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
ICBA
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A - 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.
A-6
<PAGE>
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).
C-1
<PAGE>
(1.22) Form of Amendment No. 18 to Amended and Restated Declaration
of Trust (r).
(2.1) Amended Bylaws of Registrant (f).
(2.2) Amendment to Section 2.5 of Bylaws of Registrant (f).
(3) None.
(4) None.
(5.1) Form of Investment Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management, with respect to
Global Blue Chip Fund, Emerging Markets Bond Fund, Pacific
Rim Fund, Greater China Fund and Latin America Fund (n).
(5.2) Form of Sub-Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management-Hong Kong, with
respect to the Pacific Rim Fund and Greater China Fund (n).
(5.3) Form of Sub-Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management-Asia, with respect to
the Pacific Rim Fund and Greater China Fund (n).
(5.4) 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 Thomas Pindelski (k).
(19.4) 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.
(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.
C-7
<PAGE>
(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
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
C-8
<PAGE>
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.
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
C-9
<PAGE>
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.
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.
C-10
<PAGE>
Item 32. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the holders of
at least 10% of its outstanding shares to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee, it will do so and
will assist in communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 23rd day
of March 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 March 23, 1998
- ------------------------- Officer
Arthur E. Nicholas
Thomas Pindelski* Principal Financial and March 23, 1998
- ------------------------- Accounting Officer
Thomas Pindelski
Fred C. Applegate* Trustee March 23, 1998
- -------------------------
Fred C. Applegate
Arthur B. Laffer* Trustee March 23, 1998
- -------------------------
Arthur B. Laffer
Charles E. Young* Trustee March 23, 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. 57 TO
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-7428
Exhibit No. Title of Exhibit
- ----------- -----------------
(10) Opinion of Counsel.
C-13
<PAGE>
Exhibit 10
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 West Flower Street
Los Angeles, California 90071
(213) 683-6000
March 23, 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 (formerly the
Nicholas-Applegate High Yield Bond Institutional Portfolio)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.
C-14
<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
