THE LIPPER FUNDS, INC.
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LIPPER PRIME EUROPE EQUITY FUND
PROSPECTUS
June 30, 1999
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
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Page
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RISK/RETURN SUMMARY................................................................3
Fund Investment Objective.......................................................3
Principal Investment Strategies of the Fund.....................................3
Principal Risks of Investing in the Fund........................................3
Fees and Expenses of the Fund...................................................5
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS............6
Investment Objective............................................................6
Other Investments...............................................................6
Temporary Investments.........................................................7
Risks...........................................................................7
General.......................................................................7
Risks of Investment in Foreign Securities.....................................7
MANAGEMENT.........................................................................8
Compensation....................................................................8
Executive Officers, Members of the Investment Committee and Portfolio Manager...8
Year 2000......................................................................10
SHAREHOLDER INFORMATION...........................................................10
Pricing of Fund Shares.........................................................10
Minimum Purchases, Additional Investments and Account Balances.................10
Purchasing Fund Shares.........................................................11
Other Purchase Information...................................................12
Redeeming Fund Shares..........................................................12
Other Redemption Information.................................................12
Exchange Privilege.............................................................14
Other Exchange Information...................................................14
Transfer of Registration.......................................................14
Dividends and Distributions....................................................15
Taxation of Distributions......................................................15
The Transfer...................................................................16
DISTRIBUTION ARRANGEMENTS.........................................................16
Sales Loads....................................................................16
Rule 12b-1 Fees................................................................16
Retail Distribution Plan.....................................................16
Group Retirement Servicing Plan..............................................17
Multiple Classes...............................................................17
FINANCIAL HIGHLIGHTS..............................................................18
</TABLE>
2
<PAGE>
RISK/RETURN SUMMARY
Fund Investment Objective
The investment objective of the Lipper Primer Europe Equity Fund is
long-term capital appreciation.
Principal Investment Strategies of the Fund
The Fund will invest primarily in a diversified portfolio of medium and
large capitalization common stocks of "European companies." The Fund considers
European companies to include companies that:
o are organized under the laws of a European country, including
Austria, Belgium, Denmark, Finland, France, Germany, Italy,
Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the
United Kingdom and Ireland;
o derive at least 50% of their revenues in a European country or
have at least 50% of their assets in a European country; or
o have securities that are traded principally on a European stock
exchange.
The Fund may also invest in common stocks of issuers organized under the laws
of Greece, Norway and Portugal. The Fund will not invest in common stocks of
issuers principally based in Eastern Europe or other emerging market countries.
Prime Lipper Asset Management, the Fund's investment adviser, focuses on
medium and large capitalization stocks, including those that have at least
$500,000 in trading volume and at least $250 million in "free float" market
capitalization, and favors growth stocks over pure cyclical stocks. To evaluate
the most attractive growth stocks, the Adviser analyzes the issuer's balance
sheet strength (including leverage and free cash flow available for capital
investment), historic return on equity and projected earnings per share growth
rates. The Adviser also considers certain qualitative factors, including the
strength of the issuer's management, breadth of product lines and export
potential. The Adviser determines country allocation based on each country's
share of the overall European market capitalization. The Adviser expects to
invest its assets in a broad range of issuers in terms of country and industry.
The Fund is suitable for investors who seek long-term capital appreciation
and who want exposure to a diversified portfolio of medium and large
capitalization European common stocks.
Principal Risks of Investing in the Fund
The value of the Fund's shares will fluctuate in response to changes in
market and economic conditions, primarily in Europe, and changes in the
financial conditions and prospects of the issuers in which the Fund invests. In
addition, because the Adviser invests primarily in European common stocks, an
investment in the Fund involves additional risks not typically associated with
investing in U.S. common stocks, including:
o social, political, economic and currency risks;
o the fact that there may be less publicly available information
about European issuers than about U.S. issuers; and
o European issuers may not be subject to the same accounting,
auditing and financial recordkeeping standards as U.S. issuers.
Also the introduction of the Euro may increase volatility in financial markets
and may adversely affect the value of the Fund's shares. Finally, the Adviser
may engage in active and frequent trading to achieve its investment objective,
which may result in increased transaction costs and adverse tax consequences. As
a result, you may lose money by investing in the Fund.
3
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The following bar chart reflects the annual total returns for the Fund's
Premier Shares since the Fund's inception.* The information in this bar chart
provides some indication of the risks of investing in the Fund by showing the
changes in the Fund's performance from year to year. The Fund's past performance
is not necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(2.50)% 19.31% (1.77)% 23.17% 21.92% 18.83% 32.29%
[Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart]
1992 1993 1994 1995 1996 1997 1998
</TABLE>
The Fund's highest return for a quarter was 22.33%, which occurred in the
1st quarter of 1998. The Fund's lowest return for a quarter was (11.77)%, which
occurred in the 3rd quarter of 1998.
The following table provides some indication of the risks of investing in
the Fund by comparing the average annual total return of the Fund for the one
and five year periods and since inception to that of the Morgan Stanley Capital
International Equity Index ("MSCI Europe Index"), a capitalization-weighted
index in U.S. dollars that includes companies representing 15 developed
countries in Western Europe, and the Morningstar, Inc. European Stock Funds
Average, which reflects the average total return of 107 mutual funds with
investment objectives similar to those of the Fund:
<TABLE>
<CAPTION>
Average Annual Average Annual Total
1 Year Performance Five Year Return* Return Since Inception*
------------------ ------------------ ------------------------
<S> <C> <C> <C>
Lipper Prime Europe Equity Fund
Premier Shares 32.29% 18.30% 15.21%
Retail Shares 31.96% 18.14% 15.10%
Group Retirement Plan Shares 32.08% 18.17% 15.12%
MSCI Europe Index** 28.91% 19.54% 17.58%
Morningstar European Stock
Funds Average+ 18.99% 16.06% N/A
</TABLE>
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* Reflects performance of the Fund for the period April 1, 1996 through
December 31, 1998 and the performance of the Fund's predecessor partnership
for the period January 13, 1992 (date of inception) through March 31, 1996.
On April, 1996, the Fund's predecessor partnership transferred its assets
to the Fund and the Fund exchanges Premier Shares for the limited
partnership interests of the Fund's predecessor partnership. The investment
policies, objectives, guidelines and restrictions of the Fund are in all
material respects equivalent to those of its predecessor partnership. As a
mutual fund registered under the Investment Company Act of 1940, the Fund
is subject to certain restrictions under the Act and the Internal Revenue
Code to which its predecessor partnership was not subject. Had the Fund's
predecessor partnership been registered under the Act and subject to the
provisions of the Act and the Code, its investment performance may have
been adversely affected.
** Unlike the Fund's returns, the total returns for the MSCI Europe Index do
not include the effect of any brokerage commissions, transaction fees or
other costs of investing. Average Annual Total Return Since
Inception for the MSCI Europe Index reflects average annual total return
for the period January 13, 1992 through December 31, 1998.
+ Morningstar European Stock Funds Average includes the reinvestment of
dividends and capital gains.
4
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Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund:
<TABLE>
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees
Premier Shares 1.10%
Retail Shares 1.10%
Group Retirement Plan Shares 1.10%
Distribution and Service (12b-1) Fees+
Premier Shares None
Retail Shares 0.25%
Group Retirement Plan Shares 0.25%
Other Expenses
Premier Shares 0.44%
Retail Shares 0.44%
Group Retirement Plan Shares 0.44%
-----
Total Annual Fund Operating Expenses
Premier Shares 1.54%
Retail Shares 1.79%
Group Retirement Plan Shares 1.79%
</TABLE>
Certain investment dealers, banks and financial services firms may charge
you direct fees in connection with purchasing or redeeming the Fund's shares.
These tables do not reflect those fees.
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+ You may purchase Premier Shares if you invest more than $1 million in the
Fund and you will not pay any Distribution or Service (12b-1) Fees. If you
are part of a 401(k), pension or other type of retirement plan, you must
purchase Group Retirement Plan Shares and you will have to pay an annual
Service Fee of up to 0.25% of the value of the average daily net assets of
the Fund's Group Retirement Plan Shares. All other investors may purchase
Retail Shares and will have to pay an annual Distribution Fee of 0.25% of
the value of the average daily net assets of the Fund's Retail Shares.
5
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Example
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Premier Shares $157 $486 $839 $1,834
Retail Shares $182 $563 $970 $2,105
Group Retirement Plan Shares $182 $563 $970 $2,105
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
Investment Objective and Principal Investment Strategies
The Fund's investment objective is long-term capital appreciation. The
Adviser will invest primarily in a diversified portfolio of common stocks of
"European companies." The Fund considers European companies to include companies
that
o are organized under the laws of a European country, including
Austria, Belgium, Denmark, Finland, France, Germany, Italy,
Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the
United Kingdom and Ireland;
o derive at least 50% of their revenues in a European country or
have at least 50% of their assets in a European country; or
o have securities that are traded principally on a European stock
exchange.
The Adviser may also invest in common stocks of issuers organized under
the laws of Greece, Norway and Portugal. The Adviser will not invest in common
stocks of issuers principally based in Eastern Europe or other emerging market
countries.
The Adviser focuses on medium and large capitalization stocks, including
those that have at least $500,000 in trading volume and at least $250 million in
"free float" market capitalization. The Adviser favors growth stocks over pure
cyclical stocks. To evaluate the most attractive growth stocks, the Adviser
analyzes the issuer's balance sheet strength (including leverage and free cash
flow available for capital investment), historic return on equity and projected
earnings per share growth rates. The Adviser also considers certain qualitative
factors, including the strength of the issuer's management, breadth of product
lines and export potential.
To reduce risk, the Adviser emphasizes the more liquid European markets.
The Adviser determines country allocation based on each country's share of the
overall European market capitalization. The Adviser expects to invest the Fund's
assets in a broad range of issuers in terms of country and industry.
Other Investments
The portion of the Fund's assets not invested in common stocks of European
companies may be invested in preferred stock, convertible securities, rights and
warrants, and depositary receipts. Although the Adviser intends to invest
primarily in securities listed on foreign stock exchanges, it may also invest in
securities traded in over-the-counter markets, and may also from time to time
invest in securities for which a public market does not exist or whose transfer
may be restricted.
6
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Temporary Investments
For temporary defensive purposes, the Fund may invest in cash and/or high
quality short-term debt instruments of U.S. issuers. The Fund may also at any
time invest some of its assets in these instruments to meet redemptions and to
cover operating expenses. If the Fund takes a temporary defensive position, it
may not achieve its investment objective.
Risks
General
The value of the Fund's shares will fluctuate with the market value of its
portfolio positions. Factors affecting the value of the Fund's securities
include:
o social, economic or political factors;
o factors affecting the industry in which a particular issuer
operates, such as competition or technological advances; and
o factors affecting an issuer directly, such as management changes,
labor relations, collapse of key suppliers or customers, or
material changes in overhead.
There is no assurance that the Fund will achieve its investment objective.
Risks of Investment in Foreign Securities
The Fund will invest primarily in European common stock that trade on
European markets. Investments in European common stocks involves certain
considerations and risks not typically associated with investing in U.S.
common stocks, including
o future social, political and economic developments;
o the possible imposition of foreign withholding taxes on dividend
income payable on securities held by the Fund; and
o the possible seizure or nationalization of foreign assets.
The Fund's investments are denominated in foreign currencies. In general,
the Fund does not hedge any currency risks between the U.S. dollar and foreign
currencies. As a result, the strength or weakness of the U.S. dollar against
foreign currencies will account for part of the Fund's investment performance. A
decline in the value of any particular currency against the U.S. dollar will
cause a decline in the U.S. dollar value of the Fund's holdings of securities
denominated in that currency. As a result, the value of the Fund's shares will
decline.
On January 1, 1999, eleven European countries implemented a new currency
unit called the "Euro" that is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. While it
is impossible to predict the impact of the Euro, it is possible that it could
increase volatility in financial markets worldwide and adversely affect the
value of the Fund's shares. In addition, if the value of the Euro declines
against the U.S. dollar, the U.S. dollar value of the Fund's holdings of
securities denominated in the Euro will fall and the value of the Fund's shares
will decline.
Foreign securities markets may have substantially less volume and may be
smaller, less liquid and subject to greater price volatility than U.S. markets.
Delays or problems with settlement in foreign markets could affect the liquidity
of the Fund's investments and adversely affect performance.
7
<PAGE>
Investment by the Fund in European issuers may be restricted or controlled
to varying degrees. These restrictions may limit or preclude investment in
certain issuers or countries and may increase the costs and expenses of the
Fund.
There may be less publicly available information about European issuers
than about U.S. issuers, and European issuers may not be subject to the same
accounting, auditing and financial recordkeeping standards and requirements as
U.S. issuers.
The Fund may engage in active and frequent trading to achieve its principal
investment objective. Frequent trading may result in increased transaction costs
and adverse tax consequences and may detract from the Fund's performance.
MANAGEMENT
Prime Lipper Asset Management, located at 101 Park Avenue, New York, NY
10178, serves as the Fund's investment adviser. The Adviser is a joint venture
between affiliates of Lipper & Company, L.P., the Fund's distributor, and Prime
S.p.A.
Lipper & Company, L.P. is a privately owned investment management and
investment banking firm founded in 1987. At December 31, 1998, Lipper and its
affiliates managed assets having an aggregate market value on a gross basis of
approximately $5 billion on behalf of its institutional and high net worth
clients. Lipper and its affiliates serve as the general partner and/or
investment adviser to several investment limited partnerships and mutual funds
organized in the U.S. and offshore that offer complementary investment
strategies in intermediate term high yield bonds, hedged convertible securities,
investment grade bonds, U.S. large capitalization equities and merger arbitrage.
Prime S.p.A. is a subsidiary of Assicurazioni Generali S.p.A., the Italian
insurance company. Prime, through subsidiaries and affiliates, is among the
oldest asset managers in Italy, and specializes in the management of portfolios
invested in European issuers, with approximately $8.9 billion of assets under
management as of December 31, 1998 from domestic and international investors.
Compensation
The Fund pays the Adviser an annual fee computed daily and paid monthly at
the annual rate of 1.10% of the Fund's average daily net assets. The Adviser may
voluntarily waive for a period of time all or a portion of its investment
advisory fee with respect to the Fund. For the most recent fiscal year, the
Adviser's management fee was 1.10%.
Executive Officers, Members of the Investment Committee and Portfolio Manager
An Investment Committee of the Adviser consisting of Kenneth Lipper,
Francesco Taranto, Abraham Biderman and Guido Guzzetti is responsible for
strategic decisions for the Fund. Mr. Guzzetti is the Portfolio Manager of the
Fund and is responsible for the day-to-day management of the Fund's portfolio.
Set forth below is a biographical description of the Executive Officers and
Members of the Investment Committee of the Adviser and the Portfolio Manager of
the Fund.
8
<PAGE>
Kenneth Lipper is Co-Chairman of the Adviser and its Investment Committee.
Mr. Lipper has also been President of Lipper & Company, L.P. (together with its
predecessor, Lipper & Company, Inc.) since 1987. Mr. Lipper was a General
Partner of Lehman Brothers Inc. from 1969 to 1975 and a General Partner and
Managing Director of Salomon Brothers Inc. from 1976 to 1982. He subsequently
served as Deputy Mayor of New York City from 1983 to 1985. Mr. Lipper wrote the
novels Wall Street and City Hall, wrote and produced the film City Hall and
produced the films The Winter Guest and The Last Days. He graduated from
Columbia University and Harvard Law School and is a member of the New York State
Bar. As a specialist in corporate finance since 1969, Mr. Lipper has held all
levels of responsibility as an adviser to corporations in mergers, tender
offers, convertible issues, asset valuations and other investment banking
transactions. Since 1987, Mr. Lipper has supervised the investment management
and investment banking operations of Lipper. He is a director and chairman of
the audit committee of New Holland N.V., a director of the Lincoln Center for
the Performing Arts, a trustee of the Sundance Institute, a member of the
Federal Reserve Bank of New York's International Advisory Board, a member of the
Advisory Board of The Chase Manhattan Bank and a Senior Financial Adviser to the
New York City Council. Mr. Lipper also serves on the Harvard Executive Committee
on University Resources and the Visitor's Committee of the Kennedy School of
Government at Harvard University.
Francesco Taranto is Co-Chairman of the Adviser and its Investment
Committee. Mr. Taranto is also the Managing Director of Prime. Mr. Taranto
joined PrimeGest S.p.A., an affiliate of Prime, in 1987 as a Managing Director.
Mr. Taranto's market experience dates from 1959, and he is responsible for the
overall supervision of portfolio management of all mutual funds advised by
Prime. As Chairman of the Investment Committee of Prime, Mr. Taranto oversees
the development and implementation of investment strategy and asset allocation
policy. Mr. Taranto is also chairman of Banca Generali. Prior to joining Prime,
he served for four years as the General Manager of Interbancaria Gestione, a
prominent Milan-based mutual fund company.
Abraham Biderman is an Executive Vice President of the Adviser and a member
of its Investment Committee. Mr. Biderman is also an Executive Vice President of
Lipper & Company, L.P. and Co-Manager of Lipper Convertibles, L.P., an
investment limited partnership and an affiliate of Lipper and the Adviser. Mr.
Biderman joined Lipper in 1990. He was the Commissioner of the New York City
Department of Housing, Preservation and Development from 1988 to 1989, and in
that capacity was responsible for the largest housing development project in the
United States at that time. He was the Commissioner of the New York City
Department of Finance from 1986 to 1988, responsible for the collection of over
$20 billion per year in tax and other revenues. Mr. Biderman also served as a
Special Advisor to former Mayor Edward I. Koch from 1985 to 1987 and was an
Assistant to then-Deputy Mayor Kenneth Lipper from 1983 to 1985.
Guido Guzzetti is Chief Investment Officer for the Fund and a member of the
Adviser's Investment Committee. Mr. Guzzetti has been associated with Prime
since 1987. He is responsible for the overall investment process of Prime's
Europe Growth investment strategy and for the research and development of
structured asset management products for institutional investors. Mr. Guzzetti
is also responsible for the oversight and management of Prime's institutional
clients. From 1981 to 1986, Mr. Guzzetti was an information systems analyst and
sales representative at IBM. Prior to that he was a researcher on mathematical
and numerical modeling at ENI. Mr. Guzzetti holds a B.A. in Physics from Milan
University.
9
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Year 2000
The Adviser and the Fund's other service providers, including Chase Global
Funds Services Company, the Fund's Administrator and Transfer Agent, The Chase
Manhattan Bank, the Fund's Custodian, and the Distributor, are taking steps to
address any year 2000-related computer problems that may affect the Fund. The
Lipper Funds and the Adviser do not anticipate that computer problems related to
the year 2000 will have an adverse effect on the Fund. However, there can be no
assurance in this area. There exists the possibility that year 2000 computer
problems could negatively affect communications systems, investment markets or
the economy in general. The Lipper Funds will monitor the year 2000 readiness of
the Adviser, the Administrator and Transfer Agent and the other third-party
vendors that provide services to the Fund.
SHAREHOLDER INFORMATION
Pricing of Fund Shares
The price of each share is based on the net asset value of each class. The
Fund's net asset value is the value of its assets minus its liabilities.
Expenses attributable solely to a particular class will be borne exclusively by
that class. The net asset value per share of each class of shares of the Fund is
calculated every day the New York Stock Exchange is open.
The Fund determines the net asset value per share of each class as of the
close of regular trading on the NYSE, generally 4:00 p.m., New York time, on
days the NYSE is open. The Fund computes the net asset value per share by
dividing the value of the net assets of each class by the total number of shares
of that class outstanding. In calculating the net assets of each class, the Fund
values securities traded on an exchange on the basis of the last sale price or,
in the absence of a sale, at the mean between the closing bid and asked prices,
if available. The Fund values equity securities traded on the NASDAQ National
Market System for which no sales prices are available and over-the-counter
securities on the basis of the bid prices at the close of business on each day.
If market quotations for those securities are not readily available, the Fund
values such securities at fair value. Fair value is determined in accordance
with procedures approved by the Board of Directors. The Fund values fixed income
securities on the basis of valuations provided by brokers and/or a pricing
service, quotations from dealers, and prices of comparable securities. The Fund
may value short-term investments that mature within 60 days at amortized cost if
it reflects the fair value of those investments.
Minimum Purchases, Additional Investments and Account Balances
Each of the Fund's classes has the following minimum amounts to purchase
shares initially, to make additional investments, and to maintain your
investment in a particular class of shares:
<TABLE>
<CAPTION>
Minimum Minimum Minimum
Class of Shares Initial Purchase Additional Investment Account Balance
- --------------- ---------------- --------------------- ---------------
<S> <C> <C> <C>
Premier $1,000,000 $2,500 $500,000
Retail (non-I.R.A) $10,000 $2,500 $1,000
Retail (I.R.A.) $2,000 $250 $1,000
Group Retirement Plan None None None
</TABLE>
The Fund may vary or waive these minimum amounts at any time.
10
<PAGE>
Purchasing Fund Shares
Shares of the Fund are sold without any sales charge. You may purchase
shares of the Fund in one of the following ways:
Method for Purchase What You Need To Do
- ------------------- -------------------
Initial Purchase by Mail Mail your account application and a check made
payable to "The Lipper Funds, Inc." to:
The Lipper Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Initial Purchase by Wire First, call Chase Global Funds Services Company,
the Fund's Transfer Agent, at 1-800-LIPPER9 and
provide (1) your name, address, telephone number,
and social security or tax I.D. number, (2)
name of the Fund and class of shares you wish to
purchase, (3) amount you are wiring, (4)
name of the bank wiring the funds, and (5) whether
or not you have an existing account. The Transfer
Agent will provide you with a reference number.
Next, instruct your bank to wire the specified
amount to The Chase Manhattan Bank, the Fund's
Custodian, as follows:
The Chase Manhattan Bank
New York, NY 10003
ABA # 0210-0002-1
DDA Acct. #910-2-753168
F/B/O The Lipper Funds, Inc.
Ref: Lipper Prime Europe Equity Fund
Account/Reference Number ___________
Account Name _______________________
Finally, mail your account application to the
Transfer Agent at the address set forth above
under "Initial Purchase by Mail."
Additional Investments Mail a check payable to "The Lipper Funds, Inc."
to the Transfer Agent at the address set forth
above under "Initial Purchase by Mail" or wire
funds using the procedures set forth above under
"Initial Purchase by Wire." You should include the
name of the account, account number and the name
of the Fund and class of shares you wish to
purchase on the check or wire to ensure proper
crediting to your account.
11
<PAGE>
Other Purchase Information
You may also purchase shares of the Fund through participating dealers,
including banks and financial services firms that provide distribution,
administrative or shareholder services to the Fund, if you are a customer of
that participating dealer. Participating dealers may impose additional or
different conditions or other account fees on your purchase of Fund shares. Each
participating dealer is responsible for sending its customers a schedule of any
such fees and information regarding any additional or different conditions
regarding purchases and redemptions. If you are a customer of a participating
dealer, you should consult the dealer for information regarding these fees and
conditions. The Lipper Funds, the Distributor, the Adviser or any of the
Adviser's affiliates may compensate certain participating dealers. Compensation
may be different with respect to each class of shares.
The Distributor or a participating dealer must transmit your order to the
Transfer Agent within one business day after it receives your order. If the
Distributor or a participating dealer receives your order and transmits it to
the Transfer Agent prior to the close of regular trading on the NYSE, generally
4:00 p.m., New York time, on days the NYSE is open, the Fund will price your
shares at that day's net asset value. If not, the Fund will price your
shares based on the next business day's net asset value. The Distributor or a
participating dealer generally must receive payment for your shares on
settlement date, the third business day after the date on which you placed your
order. If you make payment prior to the settlement date, you may permit the
payment to be held in your brokerage account or you may designate a temporary
investment for such payment until the settlement date. The Fund may reject any
purchase order and suspend the offering of its shares for a period of time.
In the interest of economy and convenience, the Fund will not issue
certificates for shares unless you make a written request. The Fund will not
issue certificates for fractional shares under any circumstances. It is
considerably more difficult to redeem shares held in certificate form.
Redeeming Fund Shares
You may redeem shares of the Fund at any time in one of the following ways:
Method for Redemption What You Need to Do
- --------------------- -------------------
Redemption through the Call the Distributor at 1-800-LIPPER9 or your
Distributor or a Participating Dealer.
Participating Dealer
Redemption by Telephone Call the Transfer Agent at 1-800-LIPPER9
and request that the Transfer Agent send
you the redemption proceeds or wire the funds
to your account.
Redemption by Mail Mail the Transfer Agent a letter at the address
specified under "Initial Purchase by Mail"
requesting a redemption. The letter should
include (1) name of the account, social security
or tax I.D. number, account address and account
number, (2) name of the Fund from which you
wish to redeem, (3) number of shares or
amount you wish to redeem, and (4) signature of
each owner of the account.
Other Redemption Information
If the Fund receives your redemption request in proper form (including all
of the information set forth above) prior to the close of regular trading on the
NYSE, generally 4:00 p.m., New York time, on days the NYSE is open, the Fund
will redeem your shares at that day's net asset value. If not, the Fund will
redeem your shares based on the next business day's net asset value. The
proceeds paid to you upon redemption may be more or less than the amount
12
<PAGE>
you originally invested depending upon the net asset value of the shares being
redeemed at the time of redemption. If you hold shares in more than one class of
the Fund, you must specify in your redemption request the class of shares being
redeemed. If you do not specify which class you want redeemed, or if you own
fewer shares of a class than specified, the Transfer Agent will delay your
request until it receives further instructions from you, the Distributor or a
participating dealer.
The Fund normally transmits redemption proceeds for credit to your account
at the Distributor or a participating dealer at no charge within seven days
after it receives your redemption request. Generally, the Fund will not invest
these funds for your benefit without specific instruction, and the Distributor
will benefit from the use of temporarily uninvested funds before these funds are
credited to your account. If you pay for your shares by personal check, you will
be credited with the proceeds of a redemption of those shares only after the
check has been collected, which may take up to 15 days form the purchase date.
If you anticipate the need for more immediate access to your investment, you
should purchase shares with Federal Funds, by bank wire or with a certified or
cashier's check.
If you reduce your account to below the minimum investment balances set
forth above, the Fund may redeem your account. The Fund will give you at least
30 days in which to increase your account balance to more than the required
minimum account balance. Group Retirement Plan Shareholders are not subject to
this minimum. If the Fund redeems your shares, you may reinvest in any class of
shares of the Fund at a later date provided that you meet any eligibility
requirements with respect to investing in the Fund at that time.
Certain participating dealers may charge you fees in connection with
redeeming your shares.
The Fund may suspend your right to redeem your shares or postpone the date
of payment for any period during which trading on the NYSE is closed (other than
customary weekend and holiday closings) or restricted. The Fund may also suspend
your right to redeem your shares or postpone the date of payment if an emergency
exists for which the Fund cannot reasonably dispose of or value its securities
or for such other periods as the Securities and Exchange Commission may permit.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay your redemption proceeds in whole or in part
by a distribution of readily marketable securities held by the Fund in lieu of
cash in conformity with applicable rules of the SEC. You may incur brokerage
charges on the sale of such securities.
You must provide the Transfer Agent with a "signature guarantee" if (1) you
want your redemption proceeds sent to another person, (2) you want your
redemption proceeds sent to an address other than your registered address, or
(3) you want your shares transferred to another person. A signature guarantee
verifies your identity. You may obtain a signature guarantee from an "eligible
guarantor institution" (including banks, brokers and dealers that are members of
a clearing corporation or that maintain net capital of at least $100,000, credit
unions authorized to issue signature guarantees, national securities exchanges,
registered securities associations, clearing agencies and savings associations)
that participates in a signature guarantee program. The signature guarantee must
appear on (1) your written request for redemption, (2) a stock power that
specifies the total number of shares and class of shares to be redeemed, or (3)
all of the stock certificates you tender for redemption (if you hold your shares
in certificated form).
13
<PAGE>
Exchange Privilege
You may exchange your shares of the Fund for shares of the same class of
the other funds in The Lipper Funds family, including the Lipper High Income
Bond Fund and the Lipper U.S. Equity Fund, in one of the following ways:
Method for Exchange What You Need To Do
- ------------------- -------------------
Exchange by Telephone Call the Transfer Agent at 1-800-LIPPER9 and
provide (1) name of the account, social security
or tax I.D. number, account address and account
number, (2) name of the Fund and class of
shares from which you wish to exchange,
(3) number of shares or amount you wish to
exchange, and (4) name of the Fund into which you
wish to exchange.
Exchange by Mail Mail the Transfer Agent a letter at the address
set forth above under "Initial Purchase by Mail"
requesting an exchange. The letter should include
(1) name of the account, social security or tax
I.D. number, account address and account number,
(2) name of the Fund and class of shares from
which you wish to exchange, (3) number of shares
or amount you wish to exchange, and (4) name of
the Fund into which you wish to exchange.
Other Exchange Information
You may exercise the exchange privilege if the shares of the Fund into
which you wish to exchange are offered for sale in your state of residence and
the purchase meets the minimum investment and other eligibility requirements of
the Fund into which you are exchanging. To use the exchange privilege, you
should consult the Distributor or your participating dealer to determine if it
is available and whether any other conditions are imposed on its use.
If you exercise the exchange privilege, The Lipper Funds will exchange your
shares at the next determined net asset value. The Lipper Funds does not
currently charge any fees directly in connection with exchanges, although it may
charge shareholders a nominal fee upon at least 60 days' written notice.
You must obtain and should carefully review a copy of the current
prospectus of the Fund into which you wish to exchange before making any
exchange.
The Lipper Funds may limit exchanges as to amounts or frequency, and may
impose other restrictions to assure that exchanges do not disadvantage the Funds
or their shareholders. If your shares are held in a broker "street name," you
must contact your participating dealer to exchange such shares; you may not
exchange such shares by mail or telephone. The Lipper Funds may reject any
exchange request in whole or in part. The Lipper Funds may modify or terminate
the exchange privilege at any time upon notice to shareholders.
If you exchange shares of the Fund for shares of another Fund, the Internal
Revenue Service treats such an exchange as a sale of the shares. Therefore, you
may realize a taxable gain or loss upon an exchange.
Transfer of Registration
You may instruct the Transfer Agent to transfer the registration of your
shares to another person by sending the Transfer Agent a letter at the address
set forth above under "Initial Purchase by Mail." The letter should include
(1) your name and account number, (2) the name of the Fund from which you wish
to transfer your shares, (3) the number and class of shares you wish to
transfer, (4) the name of the person to whom you are transferring your shares,
(5) your
14
<PAGE>
signature, (6) a signature guarantee, and (7) an account application from the
person to whom you are transferring your shares.
Dividends and Distributions
The Fund will distribute its net investment income and net capital gain, if
any. Shares of the Fund begin accruing dividends on the business day following
the day a purchase order is priced and continue to accrue dividends up to and
including the day that such shares are redeemed. The Fund will automatically
reinvest dividends and capital gains distributions on your shares in additional
shares of the same class at the net asset value of that class at the time of
reinvestment, unless you indicate on your application form that the Fund should
pay dividends and capital gains distributions on shares in cash to your account.
The Fund will distribute substantially all of its net investment income to
shareholders annually. The Fund will distribute net capital gain, if any, with
the last dividend for the calendar year.
If you own Retail or Group Retirement Plan Shares, you will receive lower
per share dividends than Premier Shareholders because of the additional expenses
borne by Retail and Group Retirement Plan Shareholders under the Fund's Retail
Distribution Plan and Group Retirement Servicing Plan.
The Fund may pay additional distributions and dividends at other times if
necessary to avoid federal income taxes.
The Lipper Funds will send you an annual statement setting forth the amount
of any dividends and distributions made to you during each year and their
federal tax qualification.
Taxation of Distributions
Fund dividends and distributions are taxable to you as ordinary income or
capital gain. Unless your Fund shares are in an IRA or other tax-advantaged
account, you are required to pay taxes on dividends and distributions whether
you receive them in cash or in the form of additional shares.
Distributions paid out of the Fund's "net capital gain" will be taxed to
you as long-term capital gain, regardless of how long you have owned shares. All
other distributions will be taxed to you as ordinary income.
You may want to avoid buying shares when the Fund is about to declare a
dividend or distribution, because the dividend or distribution will be taxable
to you even though it may actually represent a return of your capital.
Your annual tax statement from the Fund will present in detail the tax
status of your distributions for each year.
If more than half of the total asset value of the Fund is invested in
foreign stock or securities, the Fund may elect to "pass through" to its
shareholders the amount of foreign taxes paid. In such case, you would be
required to include your proportionate share of such taxes in your income and
may be entitled to deduct or credit such taxes when computing your taxable
income.
If you do not provide the Fund with your correct taxpayer identification
number and any required certifications, you may be subject to backup withholding
of 31% of your dividends, distributions or redemption proceeds.
Because every investor has an individual tax situation, and also because
the tax laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares of
the Fund.
15
<PAGE>
The Transfer
Prior to the Fund's inception, the Fund operated as a limited partnership
for which the Adviser served as general partner and investment adviser. The
Fund's predecessor partnership was not registered under and subject to the
provisions of the Investment Company Act of 1940 pursuant to an exemption from
registration for entities that have fewer than 100 holders. As an unregistered
entity, the Fund's predecessor partnership was not required to comply with the
requirements of the Investment Company Act, or the diversification, distribution
and other requirements imposed by the Internal Revenue Code. On April 1, 1996,
the Fund exchanged Premier Shares for certain portfolio securities of the Fund's
predecessor partnership and distributed Premier Shares to the partnership's
limited partners who elected to participate in the transfer.
If the Fund acquired securities in the transfer that appreciated in value
from the date its predecessor partnership originally acquired them, the transfer
may have adverse tax consequences to you. If the Fund sells securities acquired
in the transfer that appreciated in value from the date its predecessor
partnership originally acquired them, you will be taxed on any resulting gain
(including any appreciation in value from the date the partnership acquired them
through the date of the transfer). As a result, you will be taxed on a
distribution that economically represents a return of your purchase price rather
than an increase in the value of your investment. Your taxable gain will be
dependent on a number of factors, and there is no assurance that any gains
existing at the time of the transfer would in fact be recognized. Moreover, any
tax liability will affect shareholders differently, depending on, among other
things, individual decisions to redeem or continue to hold shares, the timing of
such decisions, and applicable tax rates.
DISTRIBUTION ARRANGEMENTS
Sales Loads
The Lipper Funds does not charge investors any sales load for purchasing or
selling shares of the Fund. Certain investment dealers, banks and financial
services firms may charge you fees in connection with the purchase or redemption
of the Fund's shares.
Rule 12b-1 Fees
The Board of Directors has adopted a Rule 12b-1 distribution plan for the
Fund's Retail Shares and a shareholder servicing plan for the Fund's Group
Retirement Plan Shares. Participating dealers may impose additional fees.
Retail Distribution Plan
Under the Retail Distribution Plan, Retail Shareholders pay the Distributor
an annual fee of 0.25% of the value of the average daily net assets of the
Fund's Retail Shares for distributing those shares. This fee may be more or less
than the actual expenses the Distributor incurs. The Distributor may, in turn,
pay one or more participating dealers all or a portion of this fee for selling
the Fund's Retail Shares. The Retail Distribution Plan also provides that the
Adviser may pay participating dealers out of its investment advisory fees, its
past profits or any other source available to the Adviser. From time to time,
the Distributor may defer or waive for a period of time its fees under the
Retail Distribution Plan.
16
<PAGE>
Group Retirement Servicing Plan
Under the Group Retirement Servicing Plan, Group Retirement Plan
Shareholders may pay one or more participating dealers and/or the Distributor an
annual fee of up to 0.25% of the value of the average daily net assets of the
Fund's Group Retirement Plan Shares for providing certain administrative
services to their customers who are beneficial owners of the Fund's Group
Retirement Plan Shares. These services are intended to supplement the services
provided by the Administrator and Transfer Agent and include:
o establishing and maintaining accounts and records relating to
customers that invest in Group Retirement Plan Shares;
o processing dividend and distribution payments from the Fund on
behalf of customers;
o arranging for bank wires;
o providing sub-accounting with respect to Group Retirement Plan
Shares beneficially owned by customers or the information
necessary for sub-accounting;
o forwarding shareholder communications from the Fund (such as
proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to
customers;
o assisting in processing purchase, exchange and redemption
requests from customers and in placing such orders with The
Lipper Funds' service contractors;
o assisting customers in changing dividend options, account
designations and addresses;
o providing customers with a service that invests the assets of
their accounts in Group Retirement Plan Shares pursuant to
specific or pre-authorized instructions;
o providing information periodically to customers showing their
positions in Group Retirement Plan Shares and integrating such
statements with those of other transactions and balances in
customers' other accounts with the participating dealer;
o responding to customer inquiries relating to the services
performed by the participating dealer or the Distributor;
o responding to customer inquiries concerning their investments in
Group Retirement Plan Shares; and
o providing other similar shareholder liaison services.
Multiple Classes
The Fund offers three classes of shares: Premier Shares, Retail Shares, and
Group Retirement Plan Shares. If you invest more than $1 million in the Fund,
you may purchase Premier Shares and will not pay any 12b-1 fees. If you are part
of a 401(k), pension or other type of retirement plan, you must purchase Group
Retirement Plan Shares and you will have to pay an annual fee of up to 0.25% of
the value of the average daily net assets of the Fund's Group Retirement Plan
Shares. All other investors may purchase Retail Shares and will have to pay the
Distributor a 12b-1 fee at an annual rate of 0.25% of the value of the average
daily net assets of the Fund's Retail Shares.
Retail and Group Retirement Plan Shareholders pay fees out of the net
assets of those classes of shares on an ongoing basis. As a result, if you
purchase those classes of shares, over time the fees will increase the cost of
your investment and may cost you more than paying other types of sales charges.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
Fund's financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that you would have earned on an
investment in the Fund (assuming you reinvested all dividends and
distributions). PricewaterhouseCoopers LLP, the Fund's independent accountants,
audited this information, and its report and the Fund's financial statements are
included in the Fund's annual report, which is available upon request.
Premier Shares
--------------
<TABLE>
<CAPTION>
January 1, 1998 to January 1, 1997 to April 1, 1996* to
December 31, 1998 December 31, 1997 December 31, 1996
------------------ ------------------- ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.74 $ 11.25 $ 10.00
----------- ----------- -----------
Income From Investment Operations:
Net Investment Income(1) (0.01) 0.05 0.04
Net Gains or Losses on Securities (both
realized and unrealized) 3.79 2.06 1.62
----------- ----------- -----------
Total from Investment Operations 3.78 2.11 1.66
----------- ----------- -----------
Less Distributions:
Dividends (from net investment income) -- (0.03) (0.02)
Distributions (from capital gains) (1.42) (1.59) (0.39)
----------- ----------- -----------
Total Distributions (1.42) (1.62) (0.41)
----------- ----------- -----------
Net Asset Value, End of Period $ 14.10 $ 11.74 $ 11.25
============ =========== ===========
Total Return(2) 32.29% 18.83% 16.68%
============ =========== ===========
Ratios/Supplemental Data:
Net Assets, End of Period (000's) $ 124,406 $ 82,787 $ 62,942
Ratios of Expenses to Average Net Assets After
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.54% 1.59% 1.60%**
Net Investment Income to Average Net (0.06)% 0.43% 0.53%**
Assets
Ratios of Expenses to Average Net Assets Before
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.54% 1.59% 1.78%**
Net Investment Income to Average Net (0.06)% 0.43% 0.35%**
Assets
Portfolio Turnover Rate 61% 71% 34%
</TABLE>
- ----------
* Commencement of Fund operations as a mutual fund.
** Annualized.
(1) Voluntarily waived fees and reimbursed expenses affected the net investment
income per share in the amount of $0.01 for the period ended December 31,
1996.
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the period ended December 31, 1996. Total return
for the period April 1, 1996 through December 31, 1996 is not annualized.
18
<PAGE>
Retail Shares
-------------
<TABLE>
<CAPTION>
January 1, 1998 to January 1, 1997 to April 11, 1996* to
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.73 $ 11.25 $ 9.93
---------- --------- ---------
Income From Investment Operations:
Net Investment Income(1) (0.03) 0.02 (0.01)
Net Gains or Losses on Securities (both
realized and unrealized) 3.77 2.05 1.73
--------- --------- ---------
Total from Investment Operations 3.74 2.07 1.72
--------- --------- ---------
Less Distributions:
Dividends (from net investment income) -- -- (0.01)
Distributions (from capital gains) (1.42) (1.59) (0.39)
--------- --------- ---------
Total Distributions (1.42) (1.59) (0.40)
--------- --------- ---------
Net Asset Value, End of Period $ 14.05 $ 11.73 $ 11.25
========= ========= =========
Total Return(2) 31.96% 18.49% 17.37%
========= ========= =========
Ratios/Supplemental Data:
Net Assets, End of Period (000's) $ 2,472 $ 1,137 $ 609
Ratios of Expenses to Average Net Assets After
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.79% 1.84% 1.85%**
Net Investment Income to Average Net (0.25)% 0.16% (0.13)%**
Assets
Ratios of Expenses to Average Net Assets Before
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.79% 1.84% 2.07%**
Net Investment Income to Average Net (0.25)% 0.16% (0.35)%**
Assets
Portfolio Turnover Rate 61% 71% 34%
</TABLE>
- ----------
* Initial offering of shares of the Fund.
** Annualized.
(1) Voluntarily waived fees and reimbursed expenses affected the net investment
income per share in the amount of $0.2 for the period ended December 31,
1996.
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the period ended December 31, 1996. Total return
for the period April 11, 1996 through December 31, 1996 is not annualized.
19
<PAGE>
Group Retirement Plan Shares
----------------------------
<TABLE>
<CAPTION>
January 1, 1998 to January 1, 1997 to April 12, 1996* to
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.72 $ 11.24 $ 9.92
---------- --------- ---------
Income From Investment Operations:
Net Investment Income(1) (0.03) 0.03 (0.02)
Net Gains or Losses on Securities (both
realized and unrealized) 3.78 2.05 1.74
--------- --------- ---------
Total from Investment Operations 3.75 2.08 1.72
--------- --------- ---------
Less Distributions:
Dividends (from net investment income) -- (0.01) (0.01)
Distributions (from capital gains) (1.42) (1.59) (0.39)
--------- --------- ---------
Total Distributions (1.42) (1.60) (0.40)
---------- --------- ---------
Net Asset Value, End of Period $ 14.05 $ 11.72 $ 11.24
========= ========= ==========
Total Return(2) 32.08% 18.60% 17.40%
========= ========= ==========
Ratios/Supplemental Data:
Net Assets, End of Period (000's) $ 2,318 $ 941 $ 195
Ratios of Expenses to Average Net Assets After
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.79% 1.84% 1.85%**
Net Investment Income to Average Net (0.29)% 0.34% (0.43)%**
Assets
Ratios of Expenses to Average Net Assets Before
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.79% 1.84% 2.04%**
Net Investment Income to Average Net (0.29)% 0.34% (0.62)%**
Assets
Portfolio Turnover Rate 61% 71% 34%
</TABLE>
- ----------
* Initial offering of shares of the Fund.
** Annualized.
(1) Voluntarily waived fees and reimbursed expenses affected the net investment
income per share in the amount of $01 for the period ended December 31,
1996.
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the period ended December 31, 1996. Total return
for the period April 12, 1996 through December 31, 1996 is not annualized.
20
<PAGE>
ADDITIONAL INFORMATION
- ---------------------------------------------
The Lipper Funds, Inc. offers three diversified
no-load portfolios: Lipper Prime Europe Equity
Fund, Lipper High Income Bond Fund and Lipper
U.S. Equity Fund.
The Statement of Additional Information
contains additional information about the Fund
and is incorporated by reference into this
Prospectus. The Fund's annual and semi-annual
reports to shareholders also contain
additional information, including a discussion
of the market conditions and investment
strategies that significantly affected the
Fund's performance during its last fiscal year.
To obtain free copies of the Statement of
Additional Information, the Fund's annual or
semi-annual reports, or the Prospectuses for
any of The Lipper Funds, or to make shareholder
inquiries or request other information about
the Fund, call 1-800-LIPPER9, write the Fund's
Distributor at the address listed below,
e-mail the Fund's Distributor at
[email protected], or visit The Lipper
Funds' Internet site at http://www.lipper.com.
You can review and copy information about the
Fund, including the Statement of Additional
Information, at the SEC's Public Reference Room
in Washington, DC. Call 1-800-SEC-0330 for more
information. You may also obtain reports and
other information about the Fund from the SEC's
Internet site at http://www.sec.gov or, upon
payment of a duplicating fee, by writing the
Public Reference Section of the SEC,
Washington, DC 20549-6009.
For further information
- ---------------------------------------------
contact us at: 1-800-LIPPER9
visit our web site: www.lipper.com
e-mail us at: [email protected]
write us at: The Lipper Funds, Inc.
101 Park Avenue
New York, NY 10178
- ---------------------------------------------------------------------
| INVESTMENT ADVISER: PRIME LIPPER ASSET MANAGEMENT |
| |
| ADMINISTRATOR AND |
| TRANSFER AGENT: CHASE GLOBAL FUNDS |
| SERVICES COMPANY |
| |
| DISTRIBUTOR: LIPPER & COMPANY, L.P. |
| |
| CUSTODIAN: THE CHASE MANHATTAN BANK |
| |
| LEGAL COUNSEL: SIMPSON THACHER & BARTLETT |
| |
| INDEPENDENT ACCOUNTANTS: PRICEWATERHOUSECOOPERTS LLP |
| |
| BOARD OF DIRECTORS: KENNETH LIPPER |
| ----------------------------------- |
| Chairman of the Board and President |
| The Lipper Funds, Inc. |
| Chairman of the Board and President |
| Lipper & Company |
| |
| ABRAHAM BIDERMAN |
| ----------------------------------- |
| Executive Vice President, |
| Secretary and Treasurer |
| The Lipper Funds, Inc. |
| Executive Vice President |
| Lipper & Company |
| |
| |
| STANLEY BREZENOFF |
| ----------------------------------- |
| Chief Executive Officer |
| Maimonides Medical Center |
| |
| MARTIN MALTZ |
| ----------------------------------- |
| Principal Scientist |
| Xerox Corporation |
| |
| IRWIN RUSSELL |
| ----------------------------------- |
| Attorney |
| Law Offices of Irwin E. Russell |
| Director |
| The Walt Disney Company |
| TICKER SYMBOLS: |
| |
| Premier Shares: LPEEX |
| Retail Shares: LPERX |
| Group Retirement Plan Shares: LPEGX |
| |
| |
| Investment Company Act File No. 811-9108 |
| |
| The Lipper Funds, Inc. is not affiliated with Lipper Inc. |
- ---------------------------------------------------------------------
<PAGE>
THE LIPPER FUNDS, INC.
- --------------------------------------------------------------------------------
LIPPER HIGH INCOME BOND FUND
PROSPECTUS
June 30, 1999
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
RISK/RETURN SUMMARY..........................................................3
Fund Investment Objective.................................................3
Principal Investment Strategies of the Fund...............................3
Principal Risks of Investing in the Fund..................................3
Fees and Expenses of the Fund.............................................5
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS......6
Investment Objective and Principal Investment Strategies..................6
Other Investments.......................................................7
Temporary Investments...................................................7
Risks.....................................................................8
General.................................................................8
Changes in Interest Rates...............................................8
High Yield Bonds .......................................................8
MANAGEMENT..................................................................10
Compensation.............................................................10
Executive Officers and Portfolio Manager.................................10
Year 2000................................................................11
SHAREHOLDER INFORMATION.....................................................11
Pricing of Fund Shares...................................................11
Minimum Purchases, Additional Investments and Account Balances...........12
Purchasing Fund Shares...................................................12
Other Purchase Information.............................................13
Redeeming Fund Shares....................................................13
Other Redemption Information...........................................14
Exchange Privilege.......................................................15
Other Exchange Information.............................................15
Transfer of Registration.................................................15
Dividends and Distributions..............................................16
Taxation of Distributions................................................16
The Transfer.............................................................16
DISTRIBUTION ARRANGEMENTS...................................................17
Sales Loads..............................................................17
Rule 12b-1 Fees..........................................................17
Retail Distribution Plan...............................................17
Group Retirement Servicing Plan........................................18
Multiple Classes.........................................................18
FINANCIAL HIGHLIGHTS........................................................19
2
<PAGE>
RISK/RETURN SUMMARY
Fund Investment Objective
The investment objective of the Lipper High Income Bond Fund is high total
return consistent with capital preservation.
Principal Investment Strategies of the Fund
The Fund invests primarily in a diversified portfolio of U.S. intermediate
term, high yield corporate bonds with maturities of 10 years or less rated at
the time of investment "Baa" to "B" by Moody's Investors Service, Inc.
("Moody's") or "BBB" to "B-" by Standard & Poor's Corporation ("S&P"), or of
similar quality. These bonds are rated below investment grade and, under rating
agency guidelines, involve a greater risk that the issuer will default in the
timely payment of interest and principal or comply with the other terms of the
contract over a long period of time than investment grade bonds.
Lipper & Company, L.L.C., the Fund's investment adviser, emphasizes high
yield bonds (commonly referred to as "junk bonds") with a target yield of
300-500 basis points above the corresponding U.S. Treasury security, and seeks
to maintain an average credit quality of BB-. The Adviser invests the assets of
the Fund in a broad range of issuers and industries. The Adviser anticipates
that the Fund's portfolio securities will have an assumed dollar-weighted
average maturity of between five and seven years. The Adviser seeks to actively
manage credit risk and minimize interest rate risk through credit analysis,
credit diversity and emphasis on short to intermediate maturities. Depending on
market and issuer-specific conditions, the Adviser will sell any of the Fund's
bonds that fall below "B" by Moody's or "B-" by S&P within a reasonable period
of time.
The Fund is suitable for investors who seek a total return in excess of the
return typically offered by U.S. Treasury securities and who are comfortable
with the risks associated with investing in U.S. intermediate term, high yield
corporate bonds of the credit quality in which the Fund invests.
Principal Risks of Investing in the Fund
The value of the Fund's shares will fluctuate in response to:
o changes in the levels of interest rates;
o changes in the actual and perceived creditworthiness of the
issuers of the Fund's investments;
o social, economic or political factors;
o factors affecting the industry in which a particular issuer
operates, such as competition or technological advances; and
o factors affecting an issuer directly, such as management changes,
labor relations, collapse of key suppliers or customers, or
material changes in overhead.
The Fund invests in bonds rated below investment grade. High yield bonds
involve greater risks than investment grade bonds, including greater price
volatility and a greater risk that the issuer of such bonds will default in the
timely payment of principal and interest. In addition, the Fund may engage in
active and frequent trading to achieve its investment objective, which may
result in increased transaction costs and adverse tax consequences. As a result,
you may lose money by investing in the Fund.
3
<PAGE>
The following bar chart reflects the annual total returns for the Fund's
Premier Shares since the Fund's inception.* The information in this bar chart
provides some indication of the risks of investing in the Fund by showing the
changes in the Fund's performance from year to year. The Fund's past performance
is not necessarily an indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
10.64% 14.29% 0.47% 14.42% 11.01% 11.22% 3.61%
[Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart] [Bar Chart]
1992** 1993 1994 1995 1996 1997 1998
</TABLE>
The highest return for a quarter was 4.54% (1st quarter of 1993) and the
lowest return for a quarter was (2.45)% (3rd quarter of 1998).
The following table provides some indication of the risks of investing in
the Fund by comparing the average annual total return of the Fund for the one
and five year periods and since inception to that of the Lehman Brothers BB
Intermediate Index, an index of intermediate term, high yield corporate bonds
with BB credit ratings, and the Morningstar, Inc. Corporate High Yield Bond
Funds Average, which reflects the average total returns of 274 mutual funds with
investment objectives similar to the Fund:
<TABLE>
<CAPTION>
Average Annual Average Annual Total
1 Year Performance Five Year Return* Return Since Inception*
------------------ -------------------- --------------------------
<S> <C> <C> <C>
Lipper High Income Bond Fund
Premier Shares 3.61% 8.01% 9.37%
Retail Shares 3.36% 7.87% 9.27%
Group Retirement Plan Shares 3.37% 7.86% 9.27%
Lehman Brother BB Intermediate Index*** 5.78% 9.10% 10.39%
Morningstar Corporate High Yield
Bond Funds Average+ (0.62)% 7.36% N/A
</TABLE>
- ----------
* Reflects performance of the Fund for the period April 1, 1996 through
December 31, 1998, and the performance of the Fund's predecessor
partnership for the period February 1, 1992 (date of inception) through
March 31, 1996. On April 1, 1996, the Fund's predecessor partnership
transferred its assets to the Fund and the Fund exchanged Premier Shares
for the limited partnership interests of the Fund's predecessor
partnership. The investment policies, objectives, guidelines and
restrictions for the Fund are in all material respects equivalent to those
of its predecessor partnership. As a mutual fund registered under the
Investment Company Act of 1940, the Fund is subject to certain restrictions
under the Act and the Internal Revenue Code to which its predecessor
partnership was not subject. Had the Fund's predecessor partnership been
registered under the Act and subject to the provisions of the Act and
the Code, its investment performance may have been adversely affected.
** Reflects performance for the period February 1, 1992 (date of inception of
Fund's predecessor partnership) through December 31, 1992.
*** Unlike the Fund's return, the total returns for the Lehman Brothers BB
Intermediate Index do not include the effect of brokerage commissions,
transaction fees or other costs of investing. Average Annual Total Return
Since Inception for the Lehman Brothers BB Intermediate Index reflects
average annual total return for the period February 1, 1992 through
December 31, 1998.
+ Morningstar Corporate High Yield Bond Funds Average includes the
reinvestment of dividends and capital gains.
4
<PAGE>
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund:
<TABLE>
<CAPTION>
<S> <C>
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fee None
Exchange Fee None
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
Management Fees (before waiver)*
Premier Shares 0.75%
Retail Shares 0.75%
Group Retirement Plan Shares 0.75%
Distribution and Service (12b-1) Fees+
Premier Shares None
Retail Shares 0.25%
Group Retirement Plan Shares 0.25%
Other Expenses
Premier Shares 0.40%
Retail Shares 0.40%
Group Retirement Plan Shares 0.40%
-----
Total Annual Fund Operating Expenses (before waiver)*
Premier Shares 1.15%
Retail Shares 1.40%
Group Retirement Plan Shares 1.40%
Certain investment dealers, banks and financial services firms may charge
you direct fees in connection with purchasing or redeeming the Fund's shares.
These tables do not reflect those fees.
</TABLE>
- ----------
* The Adviser voluntarily waived a portion of its investment advisory fee
during the 1998 fiscal year. As a result, the actual Management Fee was
0.60% for each of the Fund's share classes and the Total Annual Fund
Operating Expenses were 1.00% for the Premier Shares and 1.25% for the
Retail and Group Retirement Plan Shares. The Adviser may discontinue this
waiver at any time.
+ You may purchase Premier Shares if you invest more than $1 million in the
Fund and you will not pay any Distribution or Service (12b-1) Fees. If you
are part of a 401(k), pension or other type of retirement plan, you must
purchase Group Retirement Plan Shares and you will have to pay an annual
Service Fee of up to 0.25% of the value of the average daily net assets of
the Fund's Group Retirement Plan Shares. All other investors may purchase
Retail Shares and will have to pay an annual Distribution Fee of 0.25% of
the value of average daily net assets of the Fund's Retail Shares.
5
<PAGE>
Example
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:*
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Premier Shares $117 $365 $633 $1,378
Retail Shares $143 $443 $766 $1,680
Group Retirement Plan Shares $143 $443 $766 $1,680
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
Investment Objective and Principal Investment Strategies
The Fund's primary investment objective is high total return consistent
with capital preservation. The Fund invests primarily in a diversified portfolio
of U.S. intermediate term, high yield corporate bonds with maturities of 10
years or less rated at the time of investment "Baa" to "B" by Moody's or "BBB"
to "B-" by S&P, or in bonds determined by the Adviser to be of comparable
quality. The Adviser will not invest any of the Fund's assets in high yield
bonds that, at the time of investment, are rated "Caa" or lower by Moody's or
"CCC" or lower by S&P, or in comparable unrated bonds. Depending on market and
issuer-specific conditions, the Adviser will sell any of the Fund's bonds that
fall below "B" by Moody's or "B-" by S&P within a reasonable period of time.
The Adviser focuses on high yield bonds (commonly referred to as "junk
bonds") with a target yield of 300-500 basis points above the corresponding U.S.
Treasury security, and seeks to maintain an average credit quality of BB- by
concentrating on the middle to high end of the non-investment grade spectrum.
The Adviser expects to invest the assets of the Fund in a broad range of issuers
and industries. The Adviser will actively seek to manage credit risk and
minimize interest rate risk through credit analysis, credit diversity and
emphasis on short to intermediate maturities.
- ----------
* The example reflects the Fund's total operating expenses before taking into
consideration that the Adviser voluntarily waived a portion of its investment
advisory fee during the 1998 fiscal year. If you consider this voluntary
waiver, your costs for the one, three, five and ten year periods would be
$102, $318, $552 and $1,225, respectively, for the Premier Shares, and $127,
$397, $686 and $1,511, respectively, for the Retail and Group Retirement Plan
Shares.
6
<PAGE>
The Adviser considers various factors in evaluating securities for purchase
by the Fund, including:
o yield to maturity, yield to call (where appropriate), current
yield and the price of the bond relative to other bonds
of comparable quality and maturity;
o the difference, or "spread," between the yield of the bond
and the yield of a comparable U.S. Treasury security;
o the size of the issuer, the issuer's sensitivity to economic
conditions and trends and the issuer's operating history;
o the issuer's financial resources and financial condition,
including leverage and cash flow to cover interest expense and
principal repayment;
o review of the terms under which the bonds are issued and the
nature of, and coverage under, financial covenants;
o the experience and track record of the issuer's management;
o market-technical factors, including the number and amount of new
high yield bonds being issued; and
o underwriting factors, including size, capital and reputation of
the lead underwriter, number of additional underwriters, and
their track records.
"High yield bonds" are fixed income securities rated below investment grade
that typically offer investors higher yields than other fixed income securities.
The higher yields are justified by the weaker credit profile of high yield
issuers as compared to investment grade issuers. High yield bonds include debt
obligations of all types issued by U.S. and non-U.S. corporate and governmental
issuers, including bonds, debentures and notes, and preferred stocks that have
priority over any other class of stock of the issuer as to the distribution of
assets or payment of dividends. A high yield bond itself may be convertible into
or exchangeable for equity securities, or it may carry with it the right to
acquire equity securities evidenced by warrants attached to the bond or acquired
as part of a unit with the bond.
Debt securities differ in their interest rates and maturities, among other
factors. The Adviser's expectations as to future changes in interest rates will
determine the maturity of the debt securities comprising the Fund's portfolio.
For example, if the Adviser expects interest rates to rise, the Fund may invest
more heavily in bonds with shorter maturities, enabling the Fund to benefit from
purchases of longer-term bonds after rates have risen. Conversely, if the
Adviser expects interest rates to fall, the Fund may invest more heavily in
bonds with longer maturities, in order to take advantage of the higher rates
then available. Under normal market conditions, the Adviser anticipates that the
Fund's portfolio will have an assumed dollar-weighted average maturity of
between five and seven years. By maintaining such a maturity, over the course of
a year the Adviser can reinvest approximately 20% of the Fund's capital at
current rates, minimizing potential volatility in a changing interest rate
environment.
Other Investments
The Fund may also invest in preferred stock (including convertible
preferred stock), warrants or common stock, as well as non-U.S. dollar
denominated securities.
Temporary Investments
If the Adviser believes that conditions in the securities markets would
make pursuing the Fund's basic investment strategy inconsistent with the best
interests of the Fund's shareholders, the Adviser may employ
7
<PAGE>
alternative strategies, including investing a substantial portion of the Fund's
assets in cash, high quality short-term debt instruments, bonds rated
higher than "Baa" by Moody's or "BBB" by S&P, or in unrated bonds of
comparable quality. The Fund may also at any time invest some of its assets in
these instruments to meet redemptions and to cover operating expenses. If the
Fund takes a temporary defensive position, it may not achieve its investment
objective.
Risks
General
The value of the Fund's shares will fluctuate with the market value of its
portfolio positions. Factors affecting the value of the Fund's portfolio
include:
o changes in the actual and perceived creditworthiness of the
issuers of such bonds;
o social, economic or political factors;
o factors affecting the industry in which a particular issuer
operates, such as competition or technological advances; and
o factors affecting an issuer directly, such as management
changes, labor relations, collapse of key suppliers or customers,
or material changes in overhead.
There is no assurance that the Fund will achieve its investment objective.
Changes in Interest Rates
The Fund's net asset value may change as general levels of interest rates
fluctuate. Generally, when interest rates decline, the value of the Fund's
investments will rise. Conversely, when interest rates rise, the value of the
Fund's investments will generally decline. These fluctuations are greater for
Fund investments with longer maturities than those with shorter maturities.
High Yield Bonds
The Fund will invest all or substantially all of its assets in U.S.
intermediate term, high yield corporate bonds, commonly referred to as "junk
bonds." High yield bonds are those securities rated below investment grade
(i.e., rated below "Baa" by Moody's or below "BBB" by S&P) and unrated
securities of comparable quality. These bonds involve greater risks, including
greater price volatility and a greater risk that the issuer of such bonds will
default in the timely payment of principal and interest, than higher rated
bonds.
Under rating agency guidelines, bonds that are rated in the category "B"
(the lowest category in which the Fund may make an initial investment), or
comparable unrated bonds, generally lack characteristics of a desirable
investment, and there is little assurance that the issuer will pay interest and
principal or comply with other terms of the contract over any long period of
time. These factors may reduce the value of the Fund's investments and, in turn,
the value of the Fund's shares.
8
<PAGE>
The following factors may adversely affect the Fund's ability to dispose of
particular portfolio investments at their fair value:
o the secondary markets for high yield bonds are not as liquid
as the secondary markets for higher rated bonds;
o there are relatively few market-makers for high yield bonds;
o participants in the market are mostly institutional investors,
including insurance companies, banks, mutual funds and other
financial institutions;
o the secondary markets for high yield bonds may contract
under adverse market or economic conditions independent of any
specific adverse changes in the condition of a particular issuer;
and
o adverse publicity and investor perceptions about lower-rated
bonds, whether or not based on fundamental analysis, may
tend to decrease the market value and liquidity of such
lower-rated bonds. Less liquid secondary markets may also
affect the Adviser's ability to sell the Fund's investments
at their fair value.
The ratings of bonds by Moody's and S&P are a generally accepted
barometer of credit risk. However, you should note that the rating of an issuer
is 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. In addition, there may be varying
degrees of difference in the credit risk of bonds within each rating
category in which the Fund may invest. The Fund's ability to achieve its
investment objective may be more dependent on the Adviser's credit analysis of
issuers than would be the case if the Fund invested in higher quality
bonds.
The market values of bonds rated below investment grade and comparable
unrated bonds tend to react less to fluctuations in interest rate levels than
those of higher-rated bonds. However, the market values of certain of these
bonds tend to be more sensitive to individual issuer developments and changes in
economic conditions than higher-rated bonds. In addition, these bonds generally
present a higher degree of credit risk. Issuers of these bonds are often highly
leveraged and may not have more traditional methods of financing available to
them, so that their ability to service their debt obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default in payment of interest or principal by such
issuers is significantly greater than with investment grade bonds because
such bonds frequently are subordinated to the prior payment of senior
indebtedness.
Many fixed income securities contain call or buy-back features that permit
the issuer of the bond to call or repurchase it. Such bonds may present risks
based on payment expectations. If an issuer exercises such a "call option" and
redeems the bond, the Adviser may have to replace the called bond with a lower
yielding bond, resulting in a decreased rate of return for the Fund.
The Fund may engage in active and frequent trading to achieve its principal
investment objective. Frequent trading may result in increased transaction costs
and adverse tax consequences and may detract from the Fund's performance.
9
<PAGE>
MANAGEMENT
Lipper & Company, L.L.C., located at 101 Park Avenue, New York, NY 10178,
serves as the Fund's investment adviser.
The Adviser is an affiliate of Lipper & Company, L.P., which serves as the
Fund's distributor. Lipper is a privately owned investment management and
investment banking firm founded in 1987. At December 31, 1998, Lipper and its
affiliates managed assets having an aggregate market value on a gross basis of
approximately $5 billion on behalf of its institutional and high net worth
clients. Lipper and its affiliates serve as the general partner and/or
investment adviser to several investment limited partnerships and mutual funds
organized in the U.S. and offshore that offer complementary investment
strategies in intermediate term high yield bonds, hedged convertible securities,
investment grade bonds, U.S. and European large capitalization equities and
merger arbitrage.
Compensation
The Fund pays the Adviser an annual fee computed daily and paid monthly at
the annual rate of 0.75% of the Fund's average daily net assets. The Adviser may
voluntarily waive for a period of time all or a portion of its investment
advisory fee with respect to the Fund. For the most recent fiscal year, the
Adviser's management fee was 0.60%.
Executive Officers and Portfolio Manager
Set forth below is a biographical description of the Executive Officers of
the Adviser and the Portfolio Manager of the Fund.
Kenneth Lipper is the President of the Adviser, and has been President of
Lipper & Company, L.P. (together with its predecessor, Lipper & Company, Inc.)
since 1987. Mr. Lipper was a General Partner of Lehman Brothers Inc. from 1969
to 1975 and a General Partner and Managing Director of Salomon Brothers Inc.
from 1976 to 1982. He subsequently served as Deputy Mayor of New York City from
1983 to 1985. Mr. Lipper wrote the novels Wall Street and City Hall, wrote and
produced the film City Hall and produced the films The Winter Guest and The Last
Days. He graduated from Columbia University and Harvard Law School and is a
member of the New York State Bar. As a specialist in corporate finance since
1969, Mr. Lipper has held all levels of responsibility as an adviser to
corporations in mergers, tender offers, convertible issues, asset valuations and
other investment banking transactions. Since 1987, Mr. Lipper has supervised the
investment management and investment banking operations of Lipper. He is a
director and chairman of the audit committee of New Holland N.V., a director of
the Lincoln Center for the Performing Arts, a trustee of the Sundance Institute,
a member of the Federal Reserve Bank of New York's International Advisory Board,
a member of the Advisory Board of The Chase Manhattan Bank and a Senior
Financial Adviser to the New York City Council. Mr. Lipper also serves on the
Harvard Executive Committee on University Resources and the Visitor's Committee
of the Kennedy School of Government at Harvard University.
Abraham Biderman is an Executive Vice President of the Adviser and of
Lipper & Company, L.P. Mr. Biderman is also Co-Manager of Lipper Convertibles,
L.P., an investment limited partnership and an affiliate of Lipper and the
Adviser. Mr. Biderman joined Lipper in 1990. He was the Commissioner of the New
York City Department of Housing, Preservation and Development from 1988 to 1989,
and in that capacity was responsible for the largest housing development project
in the United States at that time. He was the Commissioner of the New York City
Department of Finance from 1986 to 1988, responsible for the collection of over
$20 billion per year in tax and other revenues. Mr. Biderman also served as a
Special Advisor to former Mayor Edward I. Koch from 1985 to 1987 and was an
Assistant to then-Deputy Mayor Kenneth Lipper from 1983 to 1985.
10
<PAGE>
Edward Strafaci is an Executive Vice President and the Director of Fixed
Income Money Management for the Adviser and for Lipper & Company, L.P. Mr.
Strafaci is principally responsible for the trading operations of Lipper
Convertibles. He has co-managed Lipper Convertibles since 1989, and has been a
trader with Lipper Convertibles since its inception in 1985. Prior to joining
Lipper Convertibles, Mr. Strafaci was a trader at Dean Witter Reynolds Inc. from
1984 to 1985. Mr. Strafaci received his M.B.A. and B.S. from St. John's
University.
Wayne Plewniak is a Managing Director of Lipper & Company, L.P. and the
Portfolio Manager for the Fund. Mr. Plewniak joined Lipper in 1991. Prior to
joining Lipper, he served as a Senior Investment Analyst for Bell Atlantic
Corporation from 1988 to 1991, concentrating on private placement and high-yield
investments. From 1986 to 1988, Mr. Plewniak worked for Paribas North America in
its Merchant Banking department. Mr. Plewniak holds an M.B.A. from Georgetown
University and a B.S. in Industrial Engineering from Rochester Institute of
Technology.
Year 2000
The Adviser and the Fund's other service providers, including Chase Global
Funds Services Company, the Fund's Administrator and Transfer Agent, The Chase
Manhattan Bank, the Fund's Custodian, and the Distributor, are taking steps to
address any year 2000-related computer problems that may affect the Fund. The
Lipper Funds and the Adviser do not anticipate that computer problems related to
the year 2000 will have an adverse effect on the Fund. However, there can be no
assurance in this area. There exists the possibility that year 2000 computer
problems could negatively affect communications systems, investment markets or
the economy in general. The Lipper Funds will monitor the year 2000 readiness of
the Adviser, the Administrator and Transfer Agent and the other third-party
vendors that provide services to the Fund.
SHAREHOLDER INFORMATION
Pricing of Fund Shares
The price of each share is based on the net asset value of each class. The
Fund's net asset value is the value of its assets minus its liabilities.
Expenses attributable solely to a particular class will be borne exclusively by
that class. The net asset value per share of each class of shares of the Fund is
calculated every day the New York Stock Exchange is open.
The Fund determines the net asset value per share of each class as of the
close of regular trading on the NYSE, generally 4:00 p.m., New York time, on
days the NYSE is open. The Fund computes the net asset value per share by
dividing the value of the net assets of each class by the total number of shares
of that class outstanding. In calculating the net assets of each class, the Fund
values securities traded on an exchange on the basis of the last sale price or,
in the absence of a sale, at the mean between the closing bid and asked prices,
if available. The Fund values equity securities traded on the NASDAQ National
Market System for which no sales prices are available and over-the-counter
securities on the basis of the bid prices at the close of business on each day.
If market quotations for those securities are not readily available, the Fund
values such securities at fair value. Fair value is determined in accordance
with procedures approved by the Board of Directors. The Fund values fixed income
securities on the basis of valuations provided by brokers and/or a pricing
service, quotations from dealers, and prices of comparable securities. The Fund
may value short-term investments that mature within 60 days at amortized cost if
it reflects the fair value of those investments.
11
<PAGE>
Minimum Purchases, Additional Investments and Account Balances
Each of the Fund's classes has the following minimum amounts to purchase
shares initially, to make additional investments, and to maintain your
investment in a particular class of shares:
<TABLE>
<CAPTION>
Minimum Minimum Minimum
Class of Shares Initial Purchase Additional Investment Account Balance
- --------------- ---------------- --------------------- ---------------
<S> <C> <C> <C>
Premier $1,000,000 $2,500 $500,000
Retail (non-I.R.A) $10,000 $2,500 $1,000
Retail (I.R.A.) $2,000 $250 $1,000
Group Retirement Plan None None None
</TABLE>
The Fund may vary or waive these minimum amounts at any time.
Purchasing Fund Shares
Shares of the Fund are sold without any sales charge. You may purchase
shares of the Fund in one of the following ways:
Method for Purchase What You Need To Do
- ------------------- -------------------
Initial Purchase by Mail Mail your account application and a check made
payable to "The Lipper Funds, Inc." to:
The Lipper Funds, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Initial Purchase by Wire First, call Chase Global Funds Services Company,
the Fund's Transfer Agent, at 1-800-LIPPER9 and
provide (1) your name, address, telephone number,
and social security or tax I.D. number, (2) name
of the Fund and class of shares you wish to
purchase, (3) amount you are wiring, (4) name
of the bank wiring the funds, and (5) whether
or not you have an existing account. The Transfer
Agent will provide you with a reference number.
Next, instruct your bank to wire the specified
amount to The Chase Manhattan Bank, the Fund's
Custodian, as follows:
The Chase Manhattan Bank
New York, NY 10003
ABA # 0210-0002-1
DDA Acct. #910-2-753168
F/B/O The Lipper Funds, Inc.
Ref: Lipper High Income Bond Fund
Account/Reference Number ________
Account Name ____________________
Additional Investments Mail a check payable to "The Lipper Funds, Inc."
to the Transfer Agent at the address set forth
above under "Initial Purchase by Mail" or wire
funds using the procedures set forth above under
"Initial Purchase by Wire." You should include the
name of the account, the account number and the
name of the Fund and class of shares you wish to
purchase on the check or wire to ensure proper
crediting to your account.
12
<PAGE>
Other Purchase Information
You may also purchase shares of the Fund through participating dealers,
including banks and financial services firms that provide distribution,
administrative or shareholder services to the Fund, if you are a customer of
that participating dealer. Participating dealers may impose additional or
different conditions or other account fees on your purchase of Fund shares. Each
participating dealer is responsible for sending its customers a schedule of any
such fees and information regarding any additional or different conditions
regarding purchases and redemptions. If you are a customer of a
participating dealer, you should consult the dealer for information regarding
these fees and conditions. The Lipper Funds, the Distributor, the Adviser or any
of the Adviser's affiliates may compensate certain participating dealers.
Compensation may be different with respect to each class of shares.
The Distributor or a participating dealer must transmit your order to the
Transfer Agent within one business day after it receives your order. If the
Distributor or a participating dealer receives your order and transmits it to
the Transfer Agent prior to the close of regular trading on the NYSE, generally
4:00 p.m., New York time, on days the NYSE is open, the Fund will price your
shares at that day's net asset value. If not, the Fund will price your
shares based on the next business day's net asset value. The Distributor or a
participating dealer generally must receive payment for your shares on
settlement date, the third business day after the date on which you placed your
order. If you make payment prior to the settlement date, you may permit the
payment to be held in your brokerage account or you may designate a temporary
investment for such payment until the settlement date. The Fund may reject any
purchase order and suspend the offering of its shares for a period of time.
In the interest of economy and convenience, the Fund will not issue
certificates for shares unless you make a written request. The Fund will not
issue certificates for fractional shares under any circumstances. It is
considerably more difficult to redeem shares held in certificate form.
Redeeming Fund Shares
You may redeem shares of the Fund at any time in one of the following ways:
Method for Redemption What You Need to Do
- --------------------- -------------------
Redemption through the Call the Distributor at 1-800-LIPPER9 or your
Distributor or a Participating Dealer.
Participating Dealer
Redemption by Telephone Call the Transfer Agent at 1-800-LIPPER9 and
request that the Transfer Agent send you the
redemption proceeds or wire the funds to your
account.
Redemption by Mail Mail the Transfer Agent a letter at the address
specified under "Initial Purchase by Mail"
requesting a redemption. The letter should
include (1) name of the account, social security
or tax I.D. number, account address and account
number, (2) name of the Fund from which you
wish to redeem, (3) number of shares or
amount you wish to redeem, and (4) signature of
each owner of the account.
13
<PAGE>
Other Redemption Information
If the Fund receives your redemption request in proper form (including all
of the information set forth above) prior to the close of regular trading on the
NYSE, generally 4:00 p.m., New York time, on days the NYSE is open, it will
redeem your shares at that day's net asset value. If not, the Fund will redeem
your shares based on the next business day's net asset value. The proceeds paid
to you upon redemption may be more or less than the amount you originally
invested depending upon the net asset value of the shares being redeemed at the
time of redemption. If you hold shares in more than one class of the Fund, you
must specify in your redemption request the class of shares being redeemed. If
you do not specify which class you want redeemed, or if you own fewer shares of
a class than specified, the Transfer Agent will delay your request until it
receives further instructions from you, the Distributor or a participating
dealer.
The Fund normally transmits redemption proceeds for credit to your account
at the Distributor or a participating dealer at no charge within seven days
after it receives your redemption request. Generally, the Fund will not invest
these funds for your benefit without specific instruction, and the Distributor
will benefit from the use of temporarily uninvested funds before these funds are
credited to your account. If you pay for your shares by personal check, you will
be credited with the proceeds of a redemption of those shares only after the
check has been collected, which may take up to 15 days from the purchase date.
If you anticipate the need for more immediate access to your investment, you
should purchase shares with Federal Funds, by bank wire or with a certified or
cashier's check.
If you reduce your account to below the minimum investment balances set
forth above, the Fund may redeem your account. The Fund will give you at least
30 days in which to increase your account balance to more than the required
minimum account balance. Group Retirement Plan Shareholders are not subject to
this minimum. If the Fund redeems your shares, you may reinvest in any class of
shares of the Fund at a later date provided that you meet any eligibility
requirements with respect to investing in the Fund at that time.
Certain participating dealers may charge you fees in connection with
redeeming your shares.
The Fund may suspend your right to redeem your shares or postpone the date
of payment for any period during which trading on the NYSE is closed (other than
customary weekend and holiday closings) or restricted. The Fund may also suspend
your right to redeem your shares or postpone the date of payment if an emergency
exists for which the Fund cannot reasonably dispose of or value its securities
or for such other periods as the Securities and Exchange Commission may permit.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay your redemption proceeds in whole or in part
by a distribution of readily marketable securities held by the Fund in lieu of
cash in conformity with applicable rules of the SEC. You may incur brokerage
charges on the sale of such securities.
You must provide the Transfer Agent with a "signature guarantee" if (1) you
want your redemption proceeds sent to another person, (2) you want your
redemption proceeds sent to an address other than your registered address, or
(3) you want your shares transferred to another person. A signature guarantee
verifies your identity. You may obtain a signature guarantee from an "eligible
guarantor institution" (including banks, brokers and dealers that are members of
a clearing corporation or that maintain net capital of at least $100,000, credit
unions authorized to issue signature guarantees, national securities exchanges,
registered securities associations, clearing agencies and savings associations)
that participates in a signature guarantee program. The signature guarantee must
appear on (1) your written request for redemption, (2) a stock power that
specifies the total number of shares and class of shares to be redeemed, or (3)
all of the stock certificates you tender for redemption (if you hold your shares
in certificated form).
14
<PAGE>
Exchange Privilege
You may exchange your shares of the Fund for shares of the same class of
the other funds in The Lipper Funds family, including the Lipper U.S. Equity
Fund and the Lipper Prime Europe Equity Fund, in one of the following ways:
Method for Exchange What You Need To Do
- ------------------- -------------------
Exchange by Telephone Call the Transfer Agent at 1-800-LIPPER9 and
provide (1) name of the account, social security
or tax I.D. number, account address and account
number, (2) name of the Fund and class of
shares from which you wish to exchange, (3) number
of shares or amount you wish to exchange,
and (4) name of the Fund into which you wish
to exchange.
Exchange by Mail Mail the Transfer Agent a letter at the address
set forth above under "Initial Purchase by Mail"
requesting an exchange. The letter should include
(1) name of the account, social security or tax
I.D. number, account address and account number,
(2) name of the Fund and class of shares from
which you wish to exchange, (3) number of shares
or amount you wish to exchange, (4) the name of
the Fund into which you wish to exchange.
Other Exchange Information
You may exercise the exchange privilege if the shares of the Fund into
which you wish to exchange are offered for sale in your state of residence and
the purchase meets the minimum investment and other eligibility requirements of
the Fund into which you are exchanging. To use the exchange privilege, you
should consult the Distributor or your participating dealer to determine if it
is available and whether any other conditions are imposed on its use.
If you exercise the exchange privilege, The Lipper Funds will exchange your
shares at the next determined net asset value. The Lipper Funds does not
currently charge any fees directly in connection with exchanges, although it may
charge shareholders a nominal fee upon at least 60 days' written notice.
You must obtain and should carefully review a copy of the current
prospectus of the Fund into which you wish to exchange before making any
exchange.
The Lipper Funds may limit exchanges as to amounts or frequency, and may
impose other restrictions to assure that exchanges do not disadvantage the Funds
or their shareholders. If your shares are held in a broker "street name," you
must contact your participating dealer to exchange such shares; you may not
exchange such shares by mail or telephone. The Lipper Funds may reject any
exchange request in whole or in part. The Lipper Funds may modify or terminate
the exchange privilege at any time upon notice to shareholders.
If you exchange shares of the Fund for shares of another Fund, the Internal
Revenue Service treats such an exchange as a sale of the shares. Therefore, you
may realize a taxable gain or loss upon an exchange.
Transfer of Registration
You may instruct the Transfer Agent to transfer the registration of your
shares to another person by sending the Transfer Agent a letter at the address
set forth above under "Initial Purchase by Mail." The letter should include
(1) your name and account number, (2) the name of the Fund from which you wish
to transfer your shares, (3) the number and class of shares you wish to
transfer, (4) the name of the person to whom you are transferring your shares,
(5) your signature, (6) a signature guarantee, and (7) an account application
from the person to whom you are transferring your shares.
15
<PAGE>
Dividends and Distributions
The Fund will distribute its net investment income and net capital gain, if
any. Shares of the Fund begin accruing dividends on the business day following
the day a purchase order is priced and continue to accrue dividends up to and
including the day that such shares are redeemed. The Fund will automatically
reinvest dividends and capital gains distributions on your shares in additional
shares of the same class at the net asset value of that class at the time of
reinvestment, unless you indicate on your application form that the Fund should
pay dividends and capital gains distributions on shares in cash to your account.
The Fund will distribute substantially all of its net investment income to
shareholders annually. The Fund will distribute net capital gain, if any, with
the last dividend for the calendar year.
If you own Retail or Group Retirement Plan Shares, you will receive lower
per share dividends than Premier Shareholders because of the additional expenses
borne by Retail and Group Retirement Plan Shareholders under the Fund's Retail
Distribution Plan and Group Retirement Servicing Plan.
The Fund may pay additional distributions and dividends at other times if
necessary to avoid federal income taxes.
The Lipper Funds will send you an annual statement setting forth the amount
of any dividends and distributions made to you during each year and their
federal tax qualification.
Taxation of Distributions
Fund dividends and distributions are taxable to you as ordinary income or
capital gain. Unless your Fund shares are in an IRA or other tax-advantaged
account, you are required to pay taxes on dividends and distributions whether
you receive them in cash or in the form of additional shares.
Distributions paid out of the Fund's "net capital gain" will be taxed to
you as long-term capital gain, regardless of how long you have owned shares. All
other distributions will be taxed to you as ordinary income.
You may want to avoid buying shares when the Fund is about to declare a
dividend or distribution, because the dividend or distribution will be taxable
to you even though it may actually represent a return of your capital.
Your annual tax statement from the Fund will present in detail the tax
status of your distributions for each year.
If you do not provide the Fund with your correct taxpayer identification
number and any required certifications, you may be subject to backup withholding
of 31% of your dividends, distributions or redemption proceeds.
Because every investor has an individual tax situation, and also because
the tax laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares of
the Fund.
The Transfer
Prior to the Fund's inception, the Fund operated as a limited partnership
for which an affiliate of the Adviser served as general partner and investment
adviser. The Fund's predecessor partnership was not registered under and subject
to the provisions of the Investment Company Act of 1940 pursuant to an exemption
from registration for entities that have fewer than 100 holders. As an
unregistered entity, the Fund's predecessor partnership was not required to
comply with the requirements of the Investment Company Act, or the
diversification, distribution and other requirements imposed by the Internal
Revenue Code. On April 1, 1996, the Fund exchanged Premier Shares for certain
portfolio securities of the Fund's predecessor partnership and distributed
Premier Shares to the partnership's limited partners who elected to participate
in the transfer.
16
<PAGE>
If the Fund acquired securities in the transfer that appreciated in value
from the date its predecessor partnership originally acquired them, the transfer
may have adverse tax consequences to you. If the Fund sells securities acquired
in the transfer that appreciated in value from the date its predecessor
partnership originally acquired them, you will be taxed on any resulting gain
(including any appreciation in value from the date the partnership acquired them
through the date of the transfer). As a result, you will be taxed on a
distribution that economically represents a return of your purchase price rather
than an increase in the value of your investment. Your taxable gain will be
dependent on a number of factors, and there is no assurance that any gains
existing at the time of the transfer would in fact be recognized. Moreover, any
tax liability will affect shareholders differently, depending on, among other
things, individual decisions to redeem or continue to hold shares, the timing of
such decisions, and applicable tax rates.
DISTRIBUTION ARRANGEMENTS
Sales Loads
The Lipper Funds does not charge investors any sales load for purchasing or
selling shares of the Fund. Certain investment dealers, banks and financial
services firms may charge you fees in connection with the purchase or redemption
of the Fund's shares.
Rule 12b-1 Fees
The Board of Directors has adopted a Rule 12b-1 distribution plan for the
Fund's Retail Shares and a shareholder servicing plan for the Fund's Group
Retirement Plan Shares. Participating dealers may impose additional fees.
Retail Distribution Plan
Under the Retail Distribution Plan, Retail Shareholders pay the Distributor
an annual fee of 0.25% of the value of the average daily net assets of the
Fund's Retail Shares for distributing those shares. This fee may be more or less
than the actual expenses the Distributor incurs. The Distributor may, in turn,
pay one or more participating dealers all or a portion of this fee for selling
the Fund's Retail Shares. The Retail Distribution Plan also provides that the
Adviser may pay participating dealers out of its investment advisory fees, its
past profits or any other source available to the Adviser. From time to time,
the Distributor may defer or waive for a period of time its fees under the
Retail Distribution Plan.
17
<PAGE>
Group Retirement Servicing Plan
Under the Group Retirement Servicing Plan, Group Retirement Plan
Shareholders may pay one or more participating dealers and/or the Distributor an
annual fee of up to 0.25% of the value of the average daily net assets of the
Fund's Group Retirement Plan Shares for providing certain administrative
services to their customers who are beneficial owners of the Fund's Group
Retirement Plan Shares. These services are intended to supplement the services
provided by the Administrator and Transfer Agent and include:
o establishing and maintaining accounts and records relating to
customers that invest in Group Retirement Plan Shares;
o processing dividend and distribution payments from the Fund on
behalf of customers;
o arranging for bank wires;
o providing sub-accounting with respect to Group Retirement Plan
Shares beneficially owned by customers or the information
necessary for sub-accounting;
o forwarding shareholder communications from the Fund (such as
proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to
customers;
o assisting in processing purchase, exchange and redemption
requests from customers and in placing such orders with The
Lipper Funds' service contractors;
o assisting customers in changing dividend options, account
designations and addresses;
o providing customers with a service that invests the assets of
their accounts in Group Retirement Plan Shares pursuant to
specific or pre-authorized instructions;
o providing information periodically to customers showing their
positions in Group Retirement Plan Shares and integrating such
statements with those of other transactions and balances in
customers' other accounts with the participating dealer;
o responding to customer inquiries relating to the services
performed by the participating dealer or the Distributor;
o responding to customer inquiries concerning their investments in
Group Retirement Plan Shares; and
o providing other similar shareholder liaison services.
Multiple Classes
The Fund offers three classes of shares: Premier Shares, Retail Shares, and
Group Retirement Plan Shares. If you invest more than $1 million in the Fund,
you may purchase Premier Shares and will not pay any 12b-1 fees. If you are part
of a 401(k), pension or other type of retirement plan, you must purchase Group
Retirement Plan Shares and you will have to pay an annual fee of up to 0.25% of
the value of the average daily net assets of the Fund's Group Retirement Plan
Shares. All other investors may purchase Retail Shares and will have to pay
the Distributor a 12b-1 fee at an annual rate of 0.25% of the value of the
average daily net assets of the Fund's Retail Shares.
Retail and Group Retirement Plan Shareholders pay fees out of the net
assets of those classes of shares on an ongoing basis. As a result, if you
purchase those classes of shares, over time the fees will increase the cost of
your investment and may cost you more than paying other types of sales charges.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
Fund's financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that you would have earned on an
investment in the Fund (assuming you reinvested all dividends and
distributions). PricewaterhouseCoopers LLP, the Fund's independent accountants,
audited this information, and its report and the Fund's financial statements are
included in the Fund's annual report, which is available upon request.
Premier Shares
--------------
<TABLE>
<CAPTION>
January 1, 1998 to January 1, 1997 to April 1, 1996* to
December 31, 1998 December 31, 1997 December 31, 1996
------------------ ----------------- ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.11 $ 10.18 $ 10.00
----------- ----------- -----------
Income From Investment Operations:
Net Investment Income (1) 0.84 0.91 0.68
Net Gains or Losses on Securities (both
realized and unrealized) (0.48) 0.19 0.21
----------- ----------- -----------
Total from Investment Operations 0.36 1.10 0.89
----------- ----------- -----------
Less Distributions:
Dividends (from net investment income) (0.86) (0.91) (0.68)
Distributions (from capital gains) (0.04) (0.26) (0.03)
----------- ----------- -----------
Total Distributions (0.90) (1.17) (0.71)
----------- ----------- -----------
Net Asset Value, End of Period $ 9.57 $ 10.11 $ 10.18
=========== =========== ===========
Total Return(2) 3.61% 11.22% 9.23%
=========== =========== ===========
Ratios/Supplemental Data:
Net Assets, End of Period (000's) $ 85,662 $ 85,151 $ 102,945
Ratios of Expenses to Average Net Assets After
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.00% 1.00% 1.00%**
Net Investment Income to Average Net 8.50% 8.58% 9.01%**
Assets
Ratios of Expenses to Average Net Assets Before
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.15% 1.16% 1.27%**
Net Investment Income to Average Net 8.35% 8.42% 8.74%**
Assets
Portfolio Turnover Rate 110% 105% 74%
</TABLE>
- ----------
* Commencement of Fund operations as a mutual fund.
** Annualized.
(1) Voluntarily waived fees and reimbursed expenses affected the net investment
income per share in the amount of $0.01 for the year ended December 31,
1998, $0.02 for the year ended December 31, 1997, and $0.02 for the period
ended December 31, 1996.
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the years ended December 31, 1998 and December 31,
1997 and the period ended December 31, 1996. Total return for the period
April 1, 1996 through December 31, 1996 is not annualized.
19
<PAGE>
Retail Shares
-------------
<TABLE>
<CAPTION>
January 1, 1998 to January 1, 1997 to April 11, 1996* to
December 31, 1998 December 31, 1997 December 31, 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.11 $ 10.18 $ 9.91
--------- --------- ---------
Income From Investment Operations:
Net Investment Income (1) 0.82 0.84 0.62
Net Gains or Losses on Securities (both
realized and unrealized) (0.49) 0.23 0.34
--------- --------- ---------
Total from Investment Operations 0.33 1.07 0.96
--------- --------- ---------
Less Distributions:
Dividends (from net investment income) (0.83) (0.88) (0.66)
Distributions (from capital gains) (0.04) (0.26) (0.03)
--------- --------- ---------
Total Distributions (0.87) (1.14) (0.69)
--------- --------- ---------
Net Asset Value, End of Period $ 9.57 $ 10.11 $ 10.18
========= ========= =========
Total Return(2) 3.36% 10.97% 10.04%
========= ========= =========
Ratios/Supplemental Data:
Net Assets, End of Period (000's) $ 5,950 $ 4,697 $ 845
Ratios of Expenses to Average Net Assets After
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.25% 1.25% 1.25%**
Net Investment Income to Average Net 8.12% 8.31% 8.95%**
Assets
Ratios of Expenses to Average Net Assets Before
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.40% 1.41% 1.59%**
Net Investment Income to Average Net 7.97% 8.15% 8.61%**
Assets
Portfolio Turnover Rate 110% 105% 74%
</TABLE>
- ----------
* Initial offering of shares by the Fund.
** Annualized.
(1) Voluntarily waived fees and reimbursed expenses affected the net investment
income per share in the amount of $0.01 for the year ended December 31,
1998, $0.02 for the year ended December 31, 1997, and $0.02 for the period
ended December 31, 1996.
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the years ended December 31, 1998 and December 31,
1997 and the period ended December 31, 1996. Total return for the period
April 11, 1996 through December 31, 1996 is not annualized.
20
<PAGE>
Group Retirement Plan Shares
----------------------------
<TABLE>
<CAPTION>
January 1, 1998 to January 1, 1997 to April 12 1996* to
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.11 $ 10.18 $ 9.93
--------- --------- ---------
Income From Investment Operations:
Net Investment Income (1) 0.80 0.85 0.62
Net Gains or Losses on Securities (both
realized and unrealized) (0.47) 0.22 0.32
--------- --------- ---------
Total from Investment Operations 0.33 1.07 0.94
--------- --------- ---------
Less Distributions:
Dividends (from net investment income) (0.83) (0.88) (0.66)
Distributions (from capital gains) (0.04) (0.26) (0.03)
--------- --------- ---------
Total Distributions (0.87) (1.14) (0.69)
--------- --------- ---------
Net Asset Value, End of Period $ 9.57 $ 10.11 $ 10.18
========= ========= =========
Total Return(2) 3.37% 10.96% 9.78%
========= ========= =========
Ratios/Supplemental Data:
Net Assets, End of Period (000's) $ 4,515 $ 3,518 $ 2,198
Ratios of Expenses to Average Net Assets After
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.25% 1.25% 1.25%**
Net Investment Income to Average Net 8.13% 8.32% 8.91%**
Assets
Ratios of Expenses to Average Net Assets Before
Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets 1.40% 1.41% 1.55%**
Net Investment Income to Average Net 7.98% 8.16% 8.61%**
Assets
Portfolio Turnover Rate 110% 105% 74%
</TABLE>
- ----------
* Initial offering of shares by the Fund.
** Annualized.
(1) Voluntarily waived fees and reimbursed expenses affected the net investment
income per share in the amount of $0.01 for the year ended December 31,
1998, $0.02 for the year ended December 31, 1997, and $0.02 for the period
ended December 31, 1996.
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the years ended December 31, 1998 and December 31,
1997 and the period ended December 31, 1996. Total return for the period
April 12, 1996 through December 31, 1996 is not annualized.
21
<PAGE>
ADDITIONAL INFORMATION
- ---------------------------------------------
The Lipper Funds, Inc. offers three
diversified no-load portfolios: Lipper
High Income Bond Fund, Lipper Prime
Europe Equity Fund and Lipper U.S.
Equity Fund.
The Statement of Additional Information
contains additional information about
the Fund and is incorporated by
reference into this Prospectus. The
Fund's annual and semi-annual reports to
shareholders also contain additional
information, including a discussion of
the market conditions and investment
strategies that significantly affected
the Fund's performance during its last
fiscal year.
To obtain free copies of the Statement
of Additional Information, the Fund's
annual or semi-annual reports, or the
Prospectuses for any of The Lipper
Funds, or to make shareholder inquiries
or request other information about the
Fund, call 1-800-LIPPER9, write the
Fund's Distributor at the address listed
below, e-mail the Fund's Distributor at
[email protected], or visit The
Lipper Funds' Internet site at
http://www.lipper.com.
You can review and copy information
about the Fund, including the Statement
of Additional Information, at the SEC's
Public Reference Room in Washington, DC.
Call 1-800-SEC-0330 for more
information. You may also obtain reports
and other information about the Fund
from the SEC's Internet site at
http://www.sec.gov or, upon payment of a
duplicating fee, by writing the Public
Reference Section of the SEC,
Washington, DC 20549-6009.
For further information
- ---------------------------------------------
contact us at: 1-800-LIPPER9
visit our web site: www.lipper.com
e-mail us at: [email protected]
write us at: The Lipper Funds, Inc.
101 Park Avenue
New York, NY 10178
- ---------------------------------------------------------------------
| INVESTMENT ADVISER: LIPPER & COMPANY, L.L.C. |
| |
| ADMINISTRATOR AND |
| TRANSFER AGENT: CHASE GLOBAL FUNDS |
| SERVICES COMPANY |
| |
| DISTRIBUTOR: LIPPER & COMPANY, L.P. |
| |
| CUSTODIAN: THE CHASE MANHATTAN BANK |
| |
| LEGAL COUNSEL: SIMPSON THACHER & BARTLETT |
| |
| INDEPENDENT ACCOUNTANTS: PRICEWATERHOUSECOOPERTS LLP |
| |
| BOARD OF DIRECTORS: KENNETH LIPPER |
| ----------------------------------- |
| Chairman of the Board and President |
| The Lipper Funds, Inc. |
| Chairman of the Board and President |
| Lipper & Company |
| |
| ABRAHAM BIDERMAN |
| ----------------------------------- |
| Executive Vice President, |
| Secretary and Treasurer |
| The Lipper Funds, Inc. |
| Executive Vice President |
| Lipper & Company |
| |
| |
| STANLEY BREZENOFF |
| ----------------------------------- |
| Chief Executive Officer |
| Maimonides Medical Center |
| |
| MARTIN MALTZ |
| ----------------------------------- |
| Principal Scientist |
| Xerox Corporation |
| |
| IRWIN RUSSELL |
| ----------------------------------- |
| Attorney |
| Law Offices of Irwin E. Russell |
| Director |
| The Walt Disney Company |
| TICKER SYMBOLS: |
| |
| Premier Shares: LHIBX |
| Retail Shares: LHIRX |
| Group Retirement Plan Shares: LHIGX |
| |
| |
| Investment Company Act File No. 811-9108 |
| |
| The Lipper Funds, Inc. is not affiliated with Lipper Inc. |
- ---------------------------------------------------------------------
<PAGE>
THE LIPPER FUNDS, INC.
LIPPER HIGH INCOME BOND FUND
LIPPER U.S. EQUITY FUND
LIPPER PRIME EUROPE EQUITY FUND
The Lipper Funds, Inc.
101 Park Avenue
New York, New York 10178
1-800-LIPPER9
http://www.lipper.com
[email protected]
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1999
The Lipper Funds, Inc. is an open-end investment company that offers three
diversified portfolios: Lipper High Income Bond Fund, Lipper U.S. Equity Fund
and Lipper Prime Europe Equity Fund.
This Statement of Additional Information is not itself a prospectus and may
be distributed only if it is preceded or accompanied by a prospectus. You should
read this SAI in conjunction with the Funds' Prospectuses dated June 30, 1999,
and you should not make an investment in the Funds solely upon the information
contained herein. This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectuses.
The financial statements for each of the Funds for the year ended December
31, 1998, which appear in each Fund's 1998 Annual Report to Shareholders, and
the report thereon of PricewaterhouseCoopers LLP, the Fund's independent
accountants, also appearing therein, were previously filed electronically with
the Securities and Exchange Commission and are incorporated herein by reference.
You may obtain copies of the Funds' Prospectuses and Annual Reports without
charge by writing or calling the Company at the address and toll free telephone
number set forth above, by accessing our Internet site at http://www.lipper.com
or by sending us an electronic mail at [email protected].
<PAGE>
TABLE OF CONTENTS
Page
The Company.................................................................4
Investment Objectives, Strategies and Risks.................................4
Investment Objectives and Principal Investment Strategies................4
Additional Investments and Investment Strategies.........................4
Investment Risks........................................................14
Temporary Defensive Position............................................15
Turnover................................................................15
Policies and Investment Limitations of the Funds...........................16
Management.................................................................17
Board of Directors......................................................17
Directors and Officers..................................................18
Compensation of the Directors and Officers..............................19
Sales Loads.............................................................20
Control Persons and Principal Holders of Shares of the Funds...............20
Control Persons.........................................................20
Principal Holders of Shares of the Funds................................21
Management Ownership of Shares of the Funds.............................24
Investment Advisory and Other Services.....................................25
Investment Advisers.....................................................25
Investment Advisory Services and Compensation...........................25
Rule 12b-1 Plans........................................................26
Administrator...........................................................28
Custodian...............................................................28
Transfer Agent..........................................................28
Distribution of the Funds..................................................29
Distribution of Securities..............................................29
Compensation............................................................29
Other Payments..........................................................29
Compensation to Dealers.................................................29
Brokerage Allocation and Other Practices...................................30
Brokerage Transactions..................................................30
Brokerage Selection.....................................................31
Capital Stock..............................................................31
Valuation of Shares........................................................33
Additional Purchase, Redemption and Exchange Information...................33
Purchase, Redemption and Exchange of Shares.............................33
Suspension of the Right of Redemption...................................33
Redemption in Kind......................................................34
2
<PAGE>
Page
Additional Information Concerning Taxation of the Funds....................34
Performance Data...........................................................37
Average Annual Total Return.............................................37
Aggregate Total Return..................................................38
Thirty Day Yield........................................................39
Other Information Concerning Performance Data...........................40
Independent Accountants....................................................41
Counsel....................................................................42
Financial Statements.......................................................42
Description of Corporate Bond Ratings......................................43
The Lipper Funds, Inc. is not affiliated with Lipper Inc.
3
<PAGE>
THE COMPANY
The Lipper Funds, Inc. was organized as a corporation in Maryland on August
22, 1995. The Company is an open-end, management company that offers three
portfolios: Lipper High Income Bond Fund; Lipper U.S. Equity Fund; and Lipper
Prime Europe Equity Fund (formerly known as the "Prime Lipper Europe Equity
Fund"). Lipper & Company, L.L.C. serves as the investment adviser to the High
Income Bond Fund and the U.S. Equity Fund. Prime Lipper Asset Management serves
as the investment adviser to the Europe Equity Fund. Each Fund is diversified.
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
Investment Objectives and Principal Investment Strategies
The High Income Bond Fund will invest at least 80% of its total net assets
under normal market conditions in U.S. intermediate term, high yield corporate
bonds rated at the time of investment "Baa" to "B" by Moody's Investors Service,
Inc. or "BBB" to "B" by Standard & Poor's Corporation, or in comparable
securities. The U.S. Equity Fund will invest at least 65% of its total net
assets under normal market conditions in common stocks issued by U.S. issuers
with market capitalizations in excess of $500 million. The Europe Equity Fund
will invest at least 65% of its total net assets under normal market conditions
in common stocks of European companies.
The High Income Bond Fund may invest up to 20% of its total assets in
preferred stock (including convertible preferred stock), warrants, convertible
securities, common stock or other equity securities. The High Income Bond Fund
will generally hold such equity investments as a result of purchases of unit
offerings of fixed income securities that include such securities or in
connection with actual or proposed conversion or exchange of fixed income
securities. However, the Fund may also purchase equity securities not associated
with fixed-income securities when, in the opinion of the Fund's Adviser, such
purchase is appropriate.
The investment objectives and principal investment strategies of each Fund
are described in the Prospectuses.
Additional Investments and Investment Strategies
In addition to the principal investment strategies set forth in the
Prospectuses, the Funds may make investments in the securities, and engage in
the investment strategies, set forth below.
Depositary Receipts
The Funds may invest in American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and other types
of Depositary Receipts. Depositary Receipts evidence ownership of underlying
securities issued by either a non-U.S. or a U.S. corporation that have been
deposited with a depository or custodian bank. Depositary Receipts may be issued
in connection with an offering of securities by the issuer of the underlying
securities or issued by a depository bank as a vehicle to promote investment and
trading in the underlying securities. ADRs are receipts issued by U.S. banks or
trust companies in respect of securities of non-U.S. issuers held on deposit for
use in the U.S. securities markets. GDRs, EDRs and other types of Depositary
Receipts are typically issued by a U.S. bank or trust company and traded
principally in the U.S. and other international markets. The Funds will treat
Depositary Receipts as interests in the underlying securities for purposes of
their investment policies. While Depositary Receipts may not necessarily be
denominated in the same currency as the securities into which they may be
converted, they entail certain of the risks associated with investments in
foreign securities.
A purchaser of Depositary Receipts that are not sponsored by the issuer of
the underlying
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securities may not have unlimited voting rights and may not receive as much
information about the issuer of the underlying security as with sponsored
Depositary Receipts. The Funds will limit their investment in such unsponsored
Depositary Receipts to no more than 5% of the value of their net assets (at the
time of investment).
Convertible Securities
The Funds may invest in convertible securities, including bonds,
debentures, notes, preferred stocks or other securities that may be converted
into or exchanged for a prescribed amount of equity securities (generally common
stock) of the same or a different issuer within a particular period of time at a
specified price or formula. Convertible securities have general characteristics
similar to both fixed income and equity securities. Although to a lesser extent
than with fixed income securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying security and therefore also
will react to variations in the general market for equity securities. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
A unique feature of convertible securities is that as the market price of
the underlying security declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying security. When the market price of the
underlying security increases, the price of the convertible securities tends to
rise as a reflection of the value of the underlying security. Fixed income
convertible securities are investments that provide for a stable stream of
income with generally higher yields than common stocks. Of course, like all
fixed income securities, there can be no assurance of current income because the
issuers of the fixed income convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the potential for capital appreciation. A fixed income convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, that enables the holder to benefit
from increases in the market price of the underlying security. There can be no
assurance of capital appreciation, however, because securities prices fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Warrants
The Funds may invest in warrants, which are securities permitting, but not
obligating, their holder to subscribe for other securities. Warrants do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holder to purchase, and they do not represent
any rights in the assets of the issuer. As a result, an investment in warrants
may be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying security and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Illiquid and Restricted Securities
Each Fund may invest up to 15% of its assets in illiquid securities.
Illiquid securities are securities that may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at
which the Fund has valued the investments. Illiquid securities include
securities with legal or contractual restrictions on resale, time deposits,
repurchase agreements having maturities longer than seven days and securities
that do not have readily available market quotations and may involve the risk
that a Fund may be unable to sell such a security at the desired time. The price
at which a Fund values these securities could be less than that originally paid
by the Fund or less than that which may be considered the fair value of the
securities. In addition, a Fund may invest in securities that are sold in
private placement transactions between their issuers and
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their purchasers and that are neither listed on an exchange nor traded
over-the-counter. These factors may have an adverse effect on a Fund's ability
to dispose of particular securities and may limit the Fund's ability to obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and to sell securities at fair value. If any privately placed
securities held by a Fund are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purpose of this limitation.
Each Fund may also purchase securities that are not registered under the
Securities Act of 1933, as amended, but that can be sold to qualified
institutional buyers in accordance with Rule 144A under the Securities Act. Rule
144A securities generally must be sold to other qualified institutional buyers.
Rule 144A allows for a broader institutional trading market for securities
otherwise subject to restrictions on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act of 1933 for resales of certain securities to qualified institutional buyers.
The Fund's Advisers anticipate that the market for certain restricted securities
will expand further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and non-U.S. issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc.
The ability to sell Rule 144A securities to qualified institutional buyers
is a relatively recent development and it is not possible to predict how this
market will mature. Each of the Fund's Advisers will monitor the liquidity of
restricted and other illiquid securities under the supervision of the Board of
Directors. In reaching liquidity decisions with respect to Rule 144A securities,
the Advisers will consider, among others, the following factors: (1) the
unregistered nature of a Rule 144A security; (2) the frequency of trades and
quotes for a Rule 144A security; (3) the number of dealers wishing to purchase
or sell the Rule 144A security and the number of other potential purchasers; (4)
dealer undertakings to make a market in the Rule 144A security; (5) the trading
markets for the Rule 144A security; and (6) the nature of the Rule 144A security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the Rule 144A security, the method of soliciting offers and the mechanics of the
transfer).
The Funds may also invest in commercial obligations issued in reliance on
the so-called "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as
to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Funds who agree that they are purchasing the
paper for investment and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Funds through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not determined
to be liquid, that investment will be included within the 15% limitation on
investment in illiquid securities.
Preferred Stock
The Funds may invest in preferred stocks. Generally, preferred stocks are
non-voting shares of a corporation that pay a fixed or variable stream of
dividends. Preferred stock has a preference over common stock in liquidation and
generally in dividends as well, but is subordinated to the liabilities of the
issuer in all respects. Preferred stock may or may not be convertible into
common stock. As a general rule, the market value of preferred stock with a
fixed dividend rate and no conversion element varies inversely with interest
rates and perceived credit risk. Because preferred stock is subordinate to debt
securities and other obligations of the issuer, deterioration in the credit
quality of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar stated yield
characteristics.
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Repurchase Agreements
The Funds may purchase instruments from financial institutions, such as
banks and broker-dealers, subject to the seller's agreement to repurchase them
at an agreed upon time and price ("repurchase agreements"). The Funds will enter
into repurchase agreements to generate additional income. The repurchase price
under the repurchase agreements generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (that may be more
or less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements will be held by the Company's
custodian, sub-custodian or in the Federal Reserve/Treasury book-entry system.
Each Fund will enter into repurchase agreements only with counterparties
determined to be creditworthy in accordance with standards adopted by the
Company's Board of Directors. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price. Default by the seller would, however, expose a
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying obligations.
Zero Coupon Securities, Pay-in-Kind Bonds and Discount Obligations
The High Income Bond Fund may invest in zero coupon securities and
pay-in-kind bonds. In addition, the Funds may acquire certain debt securities at
a discount. These discount obligations involve special risk considerations. Zero
coupon securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. When a zero coupon security
is held to maturity, its entire return, consisting of the amortization of the
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know at the time of their
investment what the expected return on their investment will be. Certain zero
coupon securities, sold at substantial discounts from their maturity value,
provide for the commencement of regular interest payments at a deferred date.
The High Income Bond Fund may also purchase pay-in-kind bonds. Pay-in-kind bonds
pay all or a portion of their interest in the form of additional debt or equity
securities.
Zero coupon securities, pay-in-kind bonds and discount obligations tend to
be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
The value of zero coupon securities and discount obligations appreciates more
during periods of declining interest rates and depreciates more during periods
of rising interest rates than ordinary interest-paying debt securities with
similar maturities. Under current federal income tax law, the High Income Bond
Fund is required to accrue as income each year the value of securities received
in respect of pay-in-kind bonds and a portion of the original issue discount
with respect to zero coupon securities and other securities issued at a discount
to the stated redemption price. In addition, the High Income Bond Fund will
elect similar treatment for any market discount with respect to discount
obligations. Accordingly, the High Income Bond Fund may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements.
Index Securities
The U.S. Equity Fund may invest in various securities that are intended to
track broad-based market indexes, including Standard & Poor's Depositary
Receipts (SPDRs) and Diamonds. SPDRs represent units in a trust that holds a
portfolio of common stocks that closely tracks the price, performance and
dividend yield of the S&P 500 Index. SPDRs also entitle holders to receive
proportionate quarterly cash distributions corresponding to the dividends that
accrue to the S&P 500 stocks in the underlying portfolio. Diamonds represent
units in an investment trust that holds the 30 component stocks comprising the
Dow Jones Industrial Average (DJIA) and are designed to track the performance of
the DJIA. Diamonds pay monthly dividends that correspond to the dividend yields
of the DJIA component stocks. Both SPDRs and Diamonds are listed on the American
Stock Exchange.
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Other Investment Funds
The Funds may invest in the securities of other investment funds to the
extent permitted by the Investment Company Act of 1940, as amended. Under the
1940 Act, each of the Funds as a general rule may invest up to 10% of its total
assets in shares of other investment funds and up to 5% of its total assets in
any one investment fund, provided that the investment does not represent more
than 3% of the voting stock of the acquired investment fund. By investing in
another investment fund, the Funds bear a ratable share of the other investment
fund's expenses, as well as continuing to bear the Fund's advisory and
administrative fees with respect to the amount of the investment. In addition,
the Funds may, in the future, seek to achieve their investment objective through
the adoption of a "master-feeder" structure pursuant to which the Funds would
invest all of their assets in a no-load, open-end management investment company
having the same investment objective and policies and substantially the same
investment restrictions as those applicable to the Funds.
When-Issued and Delayed Delivery Securities
The Funds may purchase securities on a "when-issued" or delayed delivery
basis. When-issued and delayed delivery securities are securities purchased for
delivery beyond the normal settlement date at a stated price. The Funds will
generally not pay for such securities or start earning income on them until they
are received. Fixed income securities purchased on a when-issued or delayed
delivery basis are recorded as an asset and are subject to changes in value
based, among other factors, upon changes in the general level of interest rates.
The Funds will make commitments to purchase when-issued or delayed delivery
securities with the intention of actually acquiring the securities, but may sell
them before the settlement date if it is deemed advisable.
When a Fund agrees to purchase when-issued or delayed delivery securities,
The Chase Manhattan Bank, the Fund's 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, and in such a case a Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of a Fund's commitment. It may
be expected that a Fund's net assets will fluctuate to a greater degree when it
sets aside portfolio securities to cover such purchase commitments than when it
sets aside cash. When a Fund engages in when-issued or delayed delivery
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in such Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
U.S. Government Obligations
The Funds may hold certain types of U.S. government securities, including
U.S. Treasury Bills, the obligations of the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, Federal
National Mortgage Association, Federal Financing Bank, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Farm Credit
Banks, Maritime Administration, Resolution Trust Corporation, Tennessee Valley
Authority and the U.S. Postal Service.
Bank Obligations
The Funds may invest in bank obligations, including negotiable certificates
of deposit, bankers' acceptances, fixed time deposits and deposit notes. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, that unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
United States banks or foreign banks that are payable at a stated maturity date
and
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bear a fixed rate of interest. Although fixed time deposits do not have a
market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party. Deposit notes are notes
issued by commercial banks that generally bear fixed rates of interest and
typically have original maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be made
and the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulation. Investors should also be aware that securities of
foreign banks and foreign branches of U.S. banks may involve investment risks in
addition to those relating to domestic bank obligations. Such risks include
future political and economic developments, the possible seizure or
nationalization of foreign deposits, and the possible adoption of foreign
governmental restrictions that might adversely affect the payment of principal
and interest on such obligations. In addition, foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements and
non-U.S. issuers generally are subject to different accounting, auditing,
reporting and recordkeeping standards than those applicable to U.S. issuers.
Borrowing
The Funds may borrow only from banks or by entering into reverse repurchase
agreements, in aggregate amounts not to exceed 33 1/3 % of its total assets
(including the amount borrowed) less its liabilities (excluding the amount
borrowed), and only for temporary or emergency purposes. Bank borrowings may be
from U.S. or foreign banks and may be secured or unsecured. The Funds may also
borrow by entering into reverse repurchase agreements, pursuant to which it
would sell portfolio securities to financial institutions, such as banks and
broker-dealers, and agree to repurchase them at an agreed upon date and price.
The Funds may also enter into reverse repurchase agreements to avoid otherwise
selling securities during unfavorable market conditions to meet redemptions.
Reverse repurchase agreements involve the risk that the market value of the
portfolio securities sold by a Fund may decline below the price at which the
Fund is obligated to repurchase such securities. Each Fund will enter into
reverse repurchase agreements only with counterparties determined to be
creditworthy by its Adviser.
Loans of Fund Securities
Each Fund may lend securities from their portfolios to brokers, dealers and
other financial organizations in order to generate additional income. There is
no limitation on the amount of securities that a Fund may loan. The Funds may
not lend their portfolio securities to their Advisers or their affiliates
without specific authorization from the Securities and Exchange Commission. The
Funds may lend portfolio securities, consisting of cash or securities that are
consistent with their permitted investments, against collateral that is equal at
all times to at least 100% of the value of the securities loaned. Loans of
portfolio securities by a Fund will be collateralized by cash, letters of credit
or securities that are consistent with its permitted investments, that will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. From time to time, the Funds may return a
part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party, that is unaffiliated
with the Funds or the Advisers, and that is acting as a "finder." With respect
to loans by a Fund of its portfolio securities, such Fund would continue to
accrue interest on loaned securities and would also earn income on loans. Any
cash collateral received by a Fund in connection with such loans would be
invested in securities in which such Fund is permitted to invest. Such loans
would involve risks of delay in receiving additional collateral or in recovering
the securities loaned or even loss of rights in the collateral should the
borrower of the securities fail financially. However, loans
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will be made only to borrowers deemed by the Advisers to be of good standing and
only when, in the judgment of the Adviser, the income to be earned from the
loans justifies the attendant risks.
Short Sales
The Funds may make short sales of securities "against the box." A short
sale is a transaction in which a Fund sells a security it does not own in
anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale a Fund owns or has the immediate and
unconditional right to acquire the identical security. Short sales against the
box are a form of hedging to offset potential declines in long positions in
similar securities.
Hedging and Derivatives
Each Fund is authorized to use various hedging and investment strategies to
hedge market risks (such as broad or specific market movements and interest
rates, or other factors relevant to the Funds' investments, such as rates of
inflation), to manage the effective maturity or duration of debt instruments
held by a Fund, or to seek to increase the Fund's income or gain. The Funds will
not be obligated, however, to use any derivatives (as defined below) and make no
representations as to the availability or use of these techniques at this time
or at any time in the future. "Derivatives," as used herein, refers to the
purchase and sale (or writing) of exchange listed and over-the-counter put and
call options on securities, securities indices, currencies and other financial
instruments, and entering into currency forward contracts. Over time, techniques
and instruments may change as new instruments and strategies are developed or
regulatory changes occur. The Funds will not engage in transactions in futures
or options on futures.
Derivatives may be used to attempt to protect against possible changes in
the market value of securities held in or to be purchased by the Funds resulting
from securities markets or currency exchange rate fluctuations, to protect the
Funds' unrealized gains in the value of its securities, to facilitate the sale
of those securities for investment purposes, to establish a position in the
Derivatives markets as a substitute for purchasing or selling particular
securities or to seek to enhance the Funds' income or gain. The Fund may use any
or all types of Derivatives at any time; no particular strategy will dictate the
use of one type of transaction rather than another, as use of any authorized
Derivative will be a function of numerous variables, including market
conditions. The ability of the Funds to utilize Derivatives successfully will
depend on the Advisers' ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select
securities. The use of Derivatives in certain circumstances will require the
Funds to segregate cash or other liquid assets to the extent the Funds'
obligations are not otherwise "covered" through ownership of the underlying
security or financial instrument.
Set forth below is a detailed discussion of Derivatives that may be used by
the Advisers on behalf of the Funds.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Derivatives involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, index or other instrument at the exercise price. A Fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
such Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the
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underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, index or other instrument might be intended to protect such Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase the
instrument. An "American" style put or call option may be exercised at any time
during the option period, whereas a "European" style put or call option may be
exercised only upon expiration or during a fixed period prior to expiration.
Exchange-listed options are issued by a regulated intermediary such as the
Options Clearing Corporation, which guarantees the performance of the
obligations of the parties to the options. The discussion below uses the Options
Clearing Corporation as an example, but is also applicable to other similar
financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security, although in the future,
cash settlement may become available. Index options are cash settled for the net
amount, if any, by which the option is "in-the-money" (that is, the amount by
which the value of the underlying instrument exceeds, in the case of a call
option, or is less than, in the case of a put option, the exercise price of the
option) at the time the option is exercised. Frequently, rather than taking or
making delivery of the underlying instrument through the process of exercising
the option, listed options are closed by entering into offsetting purchase or
sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options; (2) restrictions on transactions imposed by an
exchange; (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits; (4) interruption of the normal operations
of the OCC or an exchange; (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other "counterparties" through a direct bilateral agreement with
the counterparty. In contrast to exchange-listed options, that generally have
standardized terms and performance mechanics, all of the terms of an
over-the-counter option, including such terms as method of settlement, term,
exercise price, premium, guarantees and security, are determined by negotiation
of the parties. It is anticipated that any Fund authorized to use
over-the-counter options will generally only enter into over-the-counter options
that have cash settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee
function is involved in an over-the-counter option. As a result, if a
counterparty fails to make or take delivery of the security or other instrument
underlying an over-the-counter option it has entered into with a Fund or fails
to make a cash settlement payment due in accordance with the terms of that
option, such Fund will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Thus, a Fund's Adviser must assess the
creditworthiness of each such counterparty or any guarantor or credit
enhancement of the counterparty's credit to determine the likelihood that the
terms of the over-the-counter option will be met. A Fund will enter into
over-the-counter option transactions only with U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York as "primary dealers,"
or broker-dealers, domestic or foreign banks, or other financial institutions
that its Adviser deems to be creditworthy. In the absence of a change in the
current position of the staff of the SEC, over-the-counter options purchased by
a Fund and the amount of such Fund's obligation pursuant to an over-the-counter
option sold by
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such Fund (the cost of the sell-back plus the in-the-money amount, if any) or
the value of the assets held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by such Fund or will
increase such Fund's income. Similarly, the sale of put options can also provide
gains.
A Fund may purchase and sell call options on securities that are traded on
U.S. and foreign securities exchanges and in the over-the-counter markets, and
on securities indices. All calls sold by a Fund must be "covered" (that is, such
Fund must own the securities subject to the call), or must otherwise meet the
asset segregation requirements described below for so long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by such Fund will expose such Fund during the term
of the option to possible loss of opportunity to realize appreciation in the
market price of the underlying security or instrument and may require such Fund
to hold a security or instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments and
indices that may be developed in the future to the extent consistent with
applicable law, such Fund's investment objective and the restrictions set forth
herein.
Each Fund may purchase and sell put options on securities (whether or not
it holds the securities in its portfolio) and on securities indices. A Fund will
not sell put options if, as a result, more than 50% of such Fund's assets would
be required to be segregated to cover its potential obligations under put
options. In selling put options, a Fund faces the risk that it may be required
to buy the underlying security at a disadvantageous price above the market
price.
Options on Securities Indices and Other Financial Indices. Each Fund may
purchase and sell call and put options on securities indices and other financial
indices. In so doing, a Fund can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, options on indices
settle by cash settlement; that is, an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an over-the-counter option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments comprising the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Options on Currencies. Each Fund may purchase and sell put and call options
on foreign currencies for the purposes of protecting against declines in the
U.S. dollar value of foreign portfolio securities and anticipated dividends on
such securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. Each Fund may use options on currency to cross-hedge,
which involves writing or purchasing options of one currency to hedge against
changes in exchange rates for a different currency, if there is a pattern of
correlation between the two currencies. As with other kinds of options
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. A
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 a Fund's position,
the Fund may forfeit the entire amount of the premium plus related transactions
costs. In addition, a Fund may purchase call or put options on a currency for
non-hedging purposes when its Adviser anticipates that the currency will
appreciate or depreciate in value, but
12
<PAGE>
securities denominated in that currency do not present attractive investment
opportunities. Currency transactions are subject to risks different from other
portfolio transactions, as discussed below under "Risk Factors."
Forward Foreign Currency Exchange Contracts. Each Fund may enter into
forward foreign currency exchange contracts that provide for the purchase or
sale of an amount of a specified currency at a future date. Forward contracts
may be used to (1) protect against fluctuations in the value of a foreign
currency against the U.S. dollar between the trade date and settlement date when
a Fund purchases or sells securities, (2) lock in the U.S. dollar value of
dividends declared on securities held by a Fund, and (3) generally protecting
the U.S. dollar value of securities held by a Fund against exchange rate
fluctuation.
Combined Transactions. A Fund may enter into multiple transactions,
including multiple options transactions, multiple interest rate transactions and
any combination of options and interest rate transactions, instead of a single
Derivative, as part of a single or combined strategy when, in the judgment of
its Adviser, it is in the best interests of such Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions will normally be
entered into by a Fund based on its Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase the risks or hinder achievement of such Fund's management objective.
Use of Segregated and Other Special Accounts. Use of many Derivatives by a
Fund will require, among other things, that such Fund segregate cash or other
assets with the Custodian, or a designated sub-custodian, to the extent such
Fund's obligations are not otherwise "covered" through ownership of the
underlying security or financial instrument. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities or instruments required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or other assets at
least equal to the current amount of the obligation must be segregated with the
Custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by a Fund, for
example, will require such Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate assets sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by a Fund on an index
will require such Fund to own portfolio securities that correlate with the index
or to segregate assets equal to the excess of the index value over the exercise
price on a current basis. A put option on securities written by a Fund will
require such Fund to segregate assets equal to the exercise price.
Over-the-counter options entered into by a Fund, including those on
securities, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although such Fund
will not be required to do so. As a result, when a Fund sells these instruments
it will segregate an amount of assets equal to its obligations under the
options. OCC-issued and exchange-listed options sold by such Fund other than
those described above generally settle with physical delivery, and such Fund
will segregate an amount of assets equal to the full value of the option.
Over-the-counter options settling with physical delivery or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related Derivatives.
A Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by such
Fund. Moreover, instead of segregating assets if it holds a forward contract, a
Fund could purchase a put option on the same forward contract with a strike
price as high or higher than the price of the contract held. Other Derivatives
may also be offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction, no segregation is required, but if
it terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
13
<PAGE>
Investment Risks
The principal risks of investing in each of the Funds are described in the
Prospectuses. The Funds may also be subject to the additional investment risks
set forth below.
Foreign Securities
The Europe Equity Fund will, and the High Income Bond Fund and U.S. Equity
Fund may from time to time, invest in securities of foreign corporate and
government issuers. The U.S. Equity Fund may invest up to 15% of its total net
assets in equity securities issued by non-U.S. issuers and Depositary Receipts.
The High Income Bond Fund may invest up to 15% of its total net assets in
non-U.S. dollar-denominated securities. Securities of non-U.S. issuers may trade
in U.S. or foreign securities markets. Securities of non-U.S. issuers involve
certain considerations and risks not typically associated with investing in
securities of U.S. companies or the U.S. Government, including uncertainties
regarding future social, political and economic developments, the possible
imposition of foreign withholding taxes on dividend income payable on securities
held by the Funds, the possible seizure or nationalization of foreign assets and
the possible establishment of foreign government laws or restrictions that might
adversely affect the payment of interest on equity securities held by the Fund.
Because the Funds may invest in the securities of foreign issuers denominated in
foreign currencies, the strength or weakness of the U.S. dollar against such
foreign currencies will account for part of the Funds' investment performance. A
decline in the value of any particular currency against the U.S. dollar will
cause a decline in the U.S. dollar value of the Funds' holdings of securities
denominated in such currency and, therefore, will cause an overall decline in
the Funds' net asset value and any net investment income and capital gains to be
distributed in U.S. dollars to shareholders of the Funds. Foreign securities
markets may have substantially less volume and may be smaller, less liquid and
subject to greater price volatility than U.S. markets. Delays or problems with
settlement in foreign markets could affect the liquidity of the Funds' foreign
investments and adversely affect performance. Investment in foreign securities
also may result in higher brokerage and other costs and the imposition of
transfer taxes or transaction charges. Investment by the Funds in non-U.S.
issuers may be restricted or controlled to varying degrees. These restrictions
may limit or preclude investment in certain issuers or countries and may
increase the costs and expenses of the Funds. In addition, the repatriation of
both investment income and capital from some countries requires governmental
approval and if there is a deterioration in a country's balance of payments or
for other reasons, a country may impose temporary restrictions on foreign
capital remittances abroad. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the Funds. The Funds could be adversely affected by
delays in, or a refusal to grant any required governmental approval for
repatriation of capital, as well as by the application to the Funds of any
restrictions on investments. In addition, there may be less publicly available
information about a non-U.S. issuer than about a U.S. issuer, and non-U.S.
issuers may not be subject to the same accounting, auditing and financial
recordkeeping standards and requirements as U.S. issuers. Finally, in the event
of a default in any such foreign obligations, it may be more difficult for the
Funds to obtain or enforce a judgment against the issuers of such securities.
On January 1, 1999, eleven European countries implemented a new currency
unit called the "Euro" that is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. While it
is impossible to predict the impact of the Euro, it is possible that it could
increase volatility in financial markets worldwide and adversely affect the
value of the Fund's shares.
Derivatives
Derivatives involve special risks, including possible default by the other
party to the transaction, illiquidity and, to the extent the Advisers' views as
to certain market movements is incorrect, the risk that the use of Derivatives
could result in greater losses than if they had not been used. Use of put and
call options could result in losses to the Funds, force the purchase or sale of
portfolio securities at inopportune times or for prices
14
<PAGE>
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause the Funds to hold a security they might
otherwise not purchase or sell. The use of currency transactions could result in
the Funds' incurring losses as a result of the imposition of exchange controls
or the inability to deliver or receive a specified currency in addition to
exchange rate fluctuations. Losses resulting from the use of Derivatives will
reduce the Funds' net asset values, and possibly income, and the losses may be
greater than if Derivatives had not been used.
The use of options transactions entails certain special risks. In
particular, options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time it will tend to limit any potential gain to
the Fund that might result from an increase in value of the position.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in hedging. Currency
transactions are also subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and
manipulations or exchange restrictions imposed by governments. Currency exchange
rates may fluctuate based on factors extrinsic to the issuing countries'
economies.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
Foreign Derivatives
When conducted outside the United States, Derivatives may not be regulated
as rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities and other
instruments. The value of positions taken as part of non-U.S. Derivatives also
could be adversely affected by: (1) other complex foreign political, legal and
economic factors; (2) lesser availability of data on which to make trading
decisions than in the United States; (3) delays in a Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States; (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and (5) lower
trading volume and liquidity.
Temporary Defensive Position
For temporary defensive purposes, the Funds may invest up to all of their
assets in cash and/or high quality short-term U.S. debt instruments. The Fund
may also at any time invest some of its assets in these instruments to meet
redemptions and to cover operating expenses. If the Funds take a temporary
defensive position, they may not achieve their investment objectives.
Turnover
The portfolio turnover rate of a Fund is calculated by dividing the lesser
of sales or purchases of portfolio securities for any given year by the average
monthly value of the Fund's portfolio securities for that year. For purposes of
this calculation, no regard is given to securities having a maturity or
expiration date at the time of
15
<PAGE>
acquisition of one year or less. Portfolio turnover directly affects the amount
of transaction costs that are borne by each Fund. Higher portfolio turnover
results in the incurrence of higher transaction costs.
The "Financial Highlights" section of the Prospectuses sets forth the
portfolio turnover rates for each of the Funds. The Funds have not experienced
any significant variation in their portfolio turnover rates over the two most
recently completed fiscal years. Nor do the Funds anticipate any variation in
their portfolio turnover rates in the fiscal year ending December 31, 1999, from
the reported portfolio turnover rates for the fiscal year ended December 31,
1998.
POLICIES AND INVESTMENT LIMITATIONS OF THE FUNDS
Policies numbered 1 through 8 below are fundamental policies and may not be
changed with respect to a Fund without a vote of the Fund's shareholders. The
Funds' investment objectives (as set forth in the Prospectuses) and policies
numbered 9 through 12 below may be changed by the Company's Board of Directors
without shareholder approval at any time.
1. A Fund may not purchase the securities of any one issuer if as a
result more than 5% of the value of its total assets would be invested
in the securities of such issuer, except that up to 25% of the value
of its total assets may be invested without regard to this 5%
limitation and provided that there is no limitation with respect to
investments in U.S. Government Securities, and provided further that a
Fund may invest all or substantially all of its assets in another
regulated investment compay having the same investment objective and
policies and substantially the same investment restrictions as those
with respect to such Fund.
2. A Fund may not borrow money, except that each Fund may borrow money
from banks or enter into reverse repurchase agreements, in each case
for temporary or emergency purposes only (not for leveraging or
investment), in aggregate amounts not exceeding 33 1/3% of the value
of its total assets at the time of such borrowing. For purposes of the
foregoing investment limitation, the term "total assets" shall be
calculated after giving effect to the net proceeds of any borrowings
and reduced by any liabilities and indebtedness other than such
borrowings. Additional investments will not be made by a Fund when
borrowings exceed 5% of its total net assets.
3. A Fund may not issue senior securities, except as permitted under the
Investment Company Act of 1940.
4. A Fund may not purchase any securities that would cause 25% or more
of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry; provided that
there is no limitation with respect to investments in U.S. Government
Securities, and provided further, that a Fund may invest all or
substantially all of its assets in another regulated investment compay
having the same investment objective and policies and substantially
the same investment restrictions as those with respect to such Fund.
The Fund would invest all or substantially all of its assets in
another regulated investment compay in connection with the adoption by
The Lipper Funds of a "master-feeder" structure.
5. A Fund may not make loans, except that it may purchase or hold debt
instruments in accordance with its investment objective and policies,
may lend its portfolio securities as described in its Prospectus and
may enter into repurchase agreements with respect to portfolio
securities.
16
<PAGE>
6. A Fund may not act as an underwriter of securities, except insofar as
it may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
7. A Fund may not purchase or sell real estate or real estate limited
partnerships, provided that it may purchase securities of issuers that
invest in real estate or interests therein.
8. A Fund may not purchase or sell commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent a Fund from purchasing or selling options and futures
contracts or from investment in securities or other instruments backed
by or indexed to, or representing interests in, physical commodities
or investing or trading in Derivatives), or invest in oil, gas or
mineral exploration or development programs or in mineral leases.
9. A Fund may not invest more than 15% of the value of its assets in
securities that are illiquid, provided, however, that a Fund may
invest all or substantially all of its assets in another regulated
investment compay having the same investment objective and policies
and substantially the same investment restrictions as those with
respect to such Fund.
10. A Fund may not purchase securities on margin, make short sales of
securities or maintain a short position, except that a Fund may make
short sales against the box and except in connection with Derivatives.
11. A Fund may not write or sell puts, calls, straddles, spreads or
combinations thereof except in connection with Derivatives.
12. A Fund may not purchase securities of other investment companies
except as permitted under the Investment Company Act of 1940 or in
connection with a merger, consolidation, acquisition or
reorganization.
The percentage limitations set forth above apply at the time a transaction
is effected. Subsequent changes in a percentage resulting from market
fluctuations or any other cause other than a direct action by a Fund will not
require the Fund to dispose of its securities or to take other action to satisfy
the percentage limitation. Thus, if a percentage restriction set forth above is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changes in value or in the number of outstanding securities of an
issuer will not be considered a violation. However, with respect to investment
restriction 2 above, to the extent that asset coverage with respect to
borrowings falls at any time below 300%, then the Fund will within three
business days or such longer period as the SEC may prescribe, reduce the amount
of borrowings so that asset coverage shall be at least 300%.
Each Fund may, in the future, seek to achieve its investment objective by
investing all of its assets in a no-load, open-end management investment company
having the same investment objective and policies and substantially the same
investment restrictions as those applicable to a Fund. In such event, the Funds'
investment advisory agreement would be terminated since the investment
management would be performed by or on behalf of such other investment company.
MANAGEMENT
Board of Directors
The Board of Directors manages the business and affairs of The Lipper Funds
and is responsible for the overall management and operations of each Fund. The
Board of Directors approves all significant agreements
17
<PAGE>
between The Lipper Funds and the persons or companies that furnish services to
it, including agreements with the Lipper & Company, L.L.C. and Prime Lipper
Asset Management, the Funds' investment advisers, Lipper & Company, L.P., the
Funds' distributor, Chase Global Funds Services Company, the Funds'
administrator and transfer agent, and The Chase Manhattan Bank, the Funds'
custodian. The Board of Directors delegated the day-to-day operations of The
Lipper Funds to the advisers and the Administrator.
Directors and Officers
The directors and officers of The Lipper Funds, their addresses, ages and
principal occupations during the past five years are set forth below:
<TABLE>
<CAPTION>
====================================================================================================================================
(1) (2) (3)
====================================================================================================================================
Position(s) Held Principal Occupation(s)
Name, Address and Age with the Company During Past 5 Years
====================================================================================================================================
<S> <C>
Kenneth Lipper* Director, Chairman of the Board President of Lipper & Company, L.L.C. since 1995;
101 Park Avenue and President Co-chairman of Prime Lipper Asset Management and its
New York, NY 10178 Investment Committee since 1992; Chairman and
Age: 57 President of Lipper & Company, L.P. since 1991;
Chairman and President of Lipper & Company, Inc. since
1987.
====================================================================================================================================
Abraham Biderman* Director, Executive Vice Executive Vice President of Lipper & Company, L.L.C.
101 Park Avenue President, Treasurer and Secretary since 1995; Executive Vice President and Member of the
New York, NY 10178 Investment Committee of Prime Lipper Asset Management
Age: 51 since 1992; Executive Vice President of Lipper &
Company, L.P. since 1991; Executive Vice President of
Lipper & Company, Inc. since 1990.
====================================================================================================================================
Steven Finkel Executive Vice President Executive Vice President of Lipper & Company, L.L.C.
101 Park Avenue since 1995; Executive Vice President of Lipper &
New York, NY 10178 Company, L.P. since 1991; Executive Vice President of
Age: 52 Lipper & Company, Inc. since 1987.
====================================================================================================================================
Stanley Brezenoff** Director Chief Executive Officer of Maimonides Medical Center
510 E. 23rd Street since February 1995; Executive Director of Port
New York, NY 10010 Authority of New York and New Jersey from September
Age: 62 1990 through February 1995.
====================================================================================================================================
Martin Maltz** Director Principal Scientist, Xerox Corporation
25 Dunrovin Lane
Rochester, NY 14618
Age: 58
====================================================================================================================================
</TABLE>
- ----------
* Director considered to be an "interested person" of The Lipper Funds as
defined in the Investment Company Act of 1940.
** Member of The Lipper Funds' Audit Committee and Nominating Committee.
18
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
(1) (2) (3)
====================================================================================================================================
Position(s) Held Principal Occupation(s)
Name, Address and Age with the Company During Past 5 Years
====================================================================================================================================
<S> <C> <C>
Irwin Russell** Director Attorney, Law Offices of Irwin E. Russell since
433 North Camden Drive November 1992.
#1200
Los Angeles, CA 90210
Age: 73
====================================================================================================================================
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General Counsel
Chase Global Funds of Chase Global Funds Services Company ("CGFSC") since
Services Company November 1991.
73 Tremont Street
Boston, MA 02108-3913
Age: 44
====================================================================================================================================
Ellen Watson Assistant Secretary Supervisor of State Regulation of CGFSC since November 1991.
Chase Global Funds
Services Company
73 Tremont Street
Boston, MA 02108-3913
Age: 41
====================================================================================================================================
Helen A. Robichaud Assistant Secretary Vice President and Associate General Counsel of CGFSC
Chase Global Funds since August 1994; Associate Counsel of 440 Financial
Services Company Group of Worcester, Inc. from 1993 through August 1994.
73 Tremont Street
Boston, MA 02108-3913
Age: 47
====================================================================================================================================
John M. Corcoran Assistant Treasurer Vice President, Director of Fund Administration of CGFSC
Chase Global Funds since April 1998; Vice President and Senior Manager of
Services Company CGFSC from July 1996 through April 1998; Assistant Vice
Boston, MA 02108-3913 Company President and Manager of CGFSC from October 1993 through
Age: 33 July 1996.
====================================================================================================================================
Patricia M. Leyne Assistant Treasurer Assistant Vice President of Fund Administration of CGFSC
Chase Global Funds since July 1998; Assistant Treasurer of CGFSC from November
Services Company 1996 through July 1998; Supervisor of CGFSC from September
73 Tremont Street 1995 through November 1996; Fund Administrator of CGFSC
Boston, MA 02108-3913 from February 1993 through September 1995.
Age: 31
====================================================================================================================================
</TABLE>
Compensation of the Directors and Officers
The Lipper Funds does not pay any compensation to any officer or employee
of either of the Advisers or the Administrator for serving as an officer or
director of The Lipper Funds, including Messrs. Lipper and Biderman. The Lipper
Funds pays each director who is not a director, officer or employee of either of
the Advisers (or any of their affiliates) a fee of $8,000 per annum plus $500
per quarterly meeting attended and reimburses them for their travel and
out-of-pocket expenses. The Lipper Funds does not provide any pension or
retirement benefits to directors. The
19
<PAGE>
aggregate amount of fees paid to each non-interested director of The Lipper
Funds during the fiscal year ending December 31, 1998 is set forth below:
================================================================================
(1) (2) (3)
================================================================================
Name of Board Member Aggregate Compensation Total Compensation
================================================================================
Stanley Brezenoff $10,000 $10,000
================================================================================
Martin Maltz $10,000 $10,000
================================================================================
Irwin Russell $10,000 $10,000
================================================================================
In addition, the Company reimbursed directors for travel and out-of-pocket
expenses for the fiscal year ending December 31, 1998 in the aggregate amount of
$13,120.24.
By virtue of the responsibilities assumed by the Funds' Advisers, the
Administrator and their affiliates under their respective agreements with The
Lipper Funds, The Lipper Funds itself requires no employees other than its
officers.
Sales Loads
The Lipper Funds does not charge investors any sales loads for the Funds.
The Lipper Funds offers shares of the Funds to directors, officers and other
affiliated persons on the same terms as it offers such shares to the public.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SHARES OF THE FUNDS
Control Persons
Listed below are the names, addresses and percentage ownership of those
shareholders of record of the Funds who own greater than 25% of the shares of a
class of a Fund as of April 14, 1999. Because of their percentage ownership of
shares of a class, such shareholders are deemed to be "control persons" of such
class. In the event of a vote by all of shareholders of The Lipper Funds or by
the shareholders of a particular Fund, the vote of such "control person" will
have greater weight than the vote of other shareholders.
20
<PAGE>
<TABLE>
<CAPTION>
Fund and Class of Shares Name and Address of Shareholder Percentage Held
- ------------------------ ------------------------------- ---------------
<S> <C> <C>
High Income Bond Fund - Jacques C. Nordeman and 33.79%
Group Retirement Plan Shares Peter Grimm, Trustees
FBO Nordeman Grimm Inc. 401(k)
Profit Sharing Trust
DTD 1/1/76
717 Fifth Avenue
New York, NY 10022
HEP & Co. 29.24%
c/o Wells Fargo Bank
Attn. Mutual Fund 9139-027
P.O. Box 9800
Calabasas, CA 91372
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fund and Class of Shares Name and Address of Shareholder Percentage Held
- ------------------------ ------------------------------- ---------------
<S> <C> <C>
Europe Equity Fund - HEP & Co. 46.22%
Group Retirement Plan Shares c/o Wells Fargo Bank
Attn. Mutual Fund 9139-027
P.O. Box 9800
Calabasas, CA 91372
Lipper & Company Salary Savings Plan 38.00%
101 Park Avenue, 6th Floor
New York, NY 10178-0694
U.S. Equity Fund - Kenneth and Evelyn Lipper Foundation 35.78%
Premier Shares Lipper & Company
101 Park Avenue, 6th Floor
New York, NY 10178
U.S. Equity Fund - HEP & Co. 55.26%
Group Retirement Plan Shares c/o Wells Fargo Bank
Attn. Mutual Fund 9139-027
P.O. Box 9800
Calabasas, CA 91372
Lipper & Company Salary Savings Plan 29.92%
101 Park Avenue, 6th Floor
New York, NY 10178-0694
Principal Holders of Shares of the Funds
Listed below are the names, addresses and percentage ownership of those
shareholders of record of the Funds who own greater than 5% of the shares of a
class of a Fund as of April 14, 1999:
<CAPTION>
Fund and Class of Shares Name and Address of Shareholder Percentage Held
- ------------------------ ------------------------------- ---------------
<S> <C> <C>
High Income Bond Fund - First Trust National Association 10.47%
Premier Shares Agent Frey Group
Tax Escrow Mutual Funds A/C 33317961
P.O. Box 64010
St. Paul, MN 55164-0010
Leir Foundation, Inc. 8.43%
c/o Steven Rosenthal
641 Lexington Avenue
New York, NY 10022
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Fund and Class of Shares Name and Address of Shareholder Percentage Held
- ------------------------ ------------------------------- ---------------
<S> <C> <C>
High Income Bond Fund - Hadassah Medical Relief Association Inc. 8.28%
Premier Shares c/o Jodi Wechter
50 West 58th Street
New York, NY 10019
Kenneth and Evelyn Lipper Foundation 6.07%
Lipper & Company
101 Park Avenue, 6th Floor
New York, NY 10178
Claremont University Center 5.94%
Pooled Endowment Funds
c/o Michael Groener
Harper Hall 160/150 East 10th St.
Claremont, CA 91711
Bank Leumi New Corp. 5.69%
Attn. John J. Derpich
SVP & Controller
139 Centre Street
New York, NY 10013
U.S. Bank Trust National Association 5.11%
Acct. H Enterprises, Inc.
P.O. Box 64010
St. Paul, MN 55164
High Income Bond Fund - Edgewise Entertainment 10.79%
Retail Shares Profit Sharing Plan
760 N. La Cienega Boulevard
Los Angeles, CA 90069
Sean Daniel 6.30%
760 N. La Cienega Boulevard
Los Angeles, CA 90069
Netherfield Park Productions Inc. 6.13%
Money Purchase Plan
863 Park Avenue
New York, NY 10021
Donald Petrie 5.61%
FBO Quartus Prod Inc. MP PL
DTD 2/1/94
760 N. La Cienega Boulevard
Los Angeles, CA 90069
High Income Bond Fund - Lipper & Company Salary Savings Plan 16.12%
Group Retirement Plan Shares 101 Park Avenue, 6th Floor
New York, NY 10178-0694
Lipper & Company Deferred Benefit Plan 13.76%
101 Park Avenue, 6th Floor
New York, NY 10178
Europe Equity Fund - Kenneth and Evelyn Lipper Foundation 12.68%
Premier Shares Lipper & Company
101 Park Avenue, 6th Floor
New York, NY 10178
Kenneth Lipper, Trustee 7.23%
UWIL Joseph Gruss Trust
FBO Evelyn G. Lipper Descendants
101 Park Avenue, 6th Floor
New York, NY 10178
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Fund and Class of Shares Name and Address of Shareholder Percentage Held
- ------------------------ ------------------------------- ---------------
<S> <C> <C>
Europe Equity Fund - Lipper & Company, L.P. 6.06%
Premier Shares c/o Steven Finkel
101 Park Avenue, 6th Floor
New York, NY 10178
Trust 5.76%
FBO Evelyn Lipper
U/A DTD 12/10/48
c/o Kenneth Lipper
101 Park Avenue, 6th Floor
New York, NY 10178
Europe Equity Fund - Lee Caldecot Chubb, Trustee 15.42%
Retail Shares FBO Chubb Family Trust
U/A DTD 8/15/90
410 23rd Street
Santa Monica, CA 90402-3281
Michael Black, Trustee 7.27%
FBO The Black 1989 Trust
U/A DTD 9/25/89
760 N. La Cienega Boulevard
Los Angeles, CA 90069
George J. Mitchell 5.82%
and Heather M. Mitchell
JT Ten
1965 Broadway
New York, NY 10023
Europe Equity Fund - Lipper & Company Deferred Benefit Plan 14.04%
Group Retirement Plan Shares 101 Park Avenue, 6th Floor
New York, NY 10178
U.S. Equity Fund - Kenneth Lipper, Trustee 10.52%
Premier Shares FBO Joseph Gruss Settlor Trust
U/A DTD 07/22/92 101 Park Avenue, 6th
Floor New York, NY 10178
Joseph Gruss Charitable Lead Trust 9.27%
U/A dtd. 12/6/91
c/o Lipper & Co.
101 Park Avenue, 6th Floor
New York, NY 10178
U.S. Equity Fund - Michael Black, Trustee 20.17%
Retail Shares FBO The Black 1989 Trust
U/A DTD 9/25/89
760 N. La Cienega Boulevard
Los Angeles, CA 90069
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Fund and Class of Shares Name and Address of Shareholder Percentage Held
- ------------------------ ------------------------------- ---------------
<S> <C> <C>
U.S. Equity Fund - J. Paul Amaden 6.48%
Retail Shares and Christine B. Amaden
JT Ten
P.O. Box 407
East Hampton, NY 11937
Susan Fales 6.32%
863 Park Avenue
New York, NY 10021
Gemini Investment Company 6.07%
9 Cindy Lane
Holmdel, NJ 07773
U.S. Equity Fund - Lipper & Company 12.28%
Group Retirement Plan Shares Deferred Benefit Plan
101 Park Avenue, 6th Floor
New York, NY 10178-0694
</TABLE>
Management Ownership of Shares of the Funds
Listed below are the number of shares of each class of each Fund owned
beneficially by all directors and officers of The Lipper Funds as a group as of
April 14, 1999:
Number of Shares Percentage
Fund and Class Beneficially Owned Ownership
- -------------- ------------------ ---------
High Income Bond Fund
Premier Shares 755,597.39 8.82%
Retail Shares 37,702.73 5.27%
Group Retirement Plan Shares 163,964.90 30.01%
Europe Equity Fund
Premier Shares 3,407,169.31 38.36%
Retail Shares 11,019.59 5.26%
Group Retirement Plan Shares 106,730.48 53.04%
U.S. Equity Fund
Premier Shares 1,159,531.03 64.70%
Retail Shares 3,893.01 3.96%
Group Retirement Plan Shares 125,130.18 42.25%
24
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisers
Lipper & Company, L.L.C. serves as investment adviser to the High Income
Bond Fund and the U.S. Equity Fund. Prime Lipper Asset Management serves as
investment adviser to the Europe Equity Fund. The Advisers are located at 101
Park Avenue, New York, New York 10178, and are registered as investment advisers
under the Investment Advisers Act of 1940, as amended.
Lipper & Company, L.L.C. is an affiliate of Lipper & Company, L.P., the
principal distributor of The Lipper Funds. Lipper is a privately owned
investment management and investment banking firm founded in 1987. At December
31, 1998, Lipper and its affiliates managed assets having an aggregate market
value on a gross basis of approximately $5 billion on behalf of its
institutional and high net worth clients. Lipper and its affiliates serve as the
general partner and/or investment adviser to several investment limited
partnerships and mutual funds organized in the U.S. or offshore that offer
complementary investment strategies in intermediate term high yield bonds,
hedged convertible securities, investment grade bonds, U.S. and European large
capitalization equities and merger arbitrage. Lipper & Company, L.P. is
registered as a broker-dealer with the SEC and the NASD and as an investment
adviser with the SEC. Lipper's address is the same as that of the Advisers.
Prime Lipper Asset Management is a joint venture between Lipper Europe,
L.P., an affiliate of Lipper, and Prime USA Inc., a wholly owned subsidiary of
Prime S.p.A. Lipper Europe is a limited partnership for which Lipper & Company,
Inc. is the general partner and Lipper & Company, L.P. is the limited partner.
Prime S.p.A. is a subsidiary of Assicurazioni Generali S.p.A., the Italian
insurance company. Prime, through subsidiaries and affiliates, is among the
oldest asset managers in Italy, and specializes in management of portfolios
invested in European issuers, with approximately $8.9 billion of assets under
management as of December 31, 1998 from domestic and international investors.
Kenneth Lipper, Chairman and President of The Lipper Funds, is a control
person of the Funds' Advisers and the Distributor. Mr. Lipper is Chairman and
President of Lipper & Company, L.L.C. and Lipper & Company, L.P., and
Co-Chairman of Prime Lipper Asset Management and its Investment Committee.
Abraham Biderman, a director, Secretary, Treasurer and Executive Vice President
of The Lipper Funds, is an Executive Vice President of the Advisers and the
Distributor and a member of the Investment Committee of Prime Lipper Asset
Management. Francesco Taranto, Managing Director of Prime S.p.A., is Co-Chairman
of Prime Lipper Asset Management and a Member of its Investment Committee.
Steven Finkel, an Executive Vice President of The Lipper Funds, is an Executive
Vice President of Lipper & Company, L.L.C. and the Distributor.
Investment Advisory Services and Compensation
The Advisers serve as the Funds' investment advisers pursuant to separate
written advisory agreements approved by the Board of Directors, including a
majority of the directors who are not "interested persons" (as defined in the
Investment Company Act of 1940) of The Lipper Funds or the Advisers.
The Lipper Funds has agreed to pay Lipper & Company, L.L.C. under separate
investment advisory agreements an annual fee computed daily and paid monthly at
the annual rate of 0.75% of the High Income Bond Fund's average daily net assets
and 0.85% of the U.S. Equity Fund's average daily net assets. The Lipper Funds
has agreed to pay Prime Lipper Asset Management under an investment advisory
agreement an annual fee computed daily and paid monthly at the annual rate of
1.10% of the Europe Equity Fund's average daily net assets. From time to time,
the Advisers may voluntarily waive for a period of time all or a portion of
their investment advisory fees with respect to any of the Funds.
25
<PAGE>
For the fiscal year ended December 31, 1998, the High Income Bond Fund and
U.S. Equity Fund paid advisory fees of $553,087 and $110,556, respectively.
During this period Lipper & Company, L.L.C. voluntarily waived advisory fees of
$137,400 for the High Income Bond Fund and $103,555 for the U.S. Equity Fund.
For the fiscal year ended December 31, 1998, the Europe Equity Fund paid
advisory fees of $1,198,678 and Prime Lipper Asset Management waived advisory
fees of $0. For the fiscal year ended December 31, 1997, the High Income Bond
Fund and U.S. Equity Fund paid advisory fees of $608,516 and $30,017,
respectively. During this period Lipper & Company, L.L.C. voluntarily waived
advisory fees of $170,854 for the High Income Bond Fund and $100,445 for the
U.S. Equity Fund. For the fiscal year ended December 31, 1997, the Europe Equity
Fund paid advisory fees of $837,255 and Prime Lipper Asset Management waived
advisory fees of $0. For the fiscal year ended December 31, 1996, the High
Income Bond Fund and U.S. Equity Fund paid advisory fees of $344,390 and $0,
respectively. During this period, Lipper & Company, L.L.C. voluntarily waived
advisory fees of $198,834 for the High Income Bond Fund and $99,280 for the U.S.
Equity Fund. For the fiscal year ended December 31, 1996, the Europe Equity Fund
paid advisory fees of $383,796 and Prime Lipper Asset Management waived advisory
fees of $74,333.
The Advisers bear all expenses in connection with the performance of their
services and pay the salaries of all officers or employees who are employed by
the Advisers and The Lipper Funds. The Funds pay for brokerage fees and
commissions (if any) in connection with the purchase and sale of portfolio
securities.
Rule 12b-1 Plans
The Board of Directors has adopted a Rule 12b-1 distribution plan for the
Retail Shares of the Funds and a shareholder servicing plan for the Group
Retirement Plan Shares of the Funds.
Retail Distribution Plan
An investment company may bear expenses of distributing its shares only
pursuant to a plan adopted in accordance with Rule 12b-1, promulgated by the SEC
under the Investment Company Act of 1940. Some or all of the fees paid by the
Retail Shares of each Fund to the Fund's Distributor and to certain
participating dealers, including banks and financial services firms that provide
distribution, administrative or shareholder services to the Funds, could be
deemed to be payment of distribution expenses. Accordingly, the Board of
Directors has adopted a plan with respect to the Retail Shares of each Fund. The
Board of Directors believes that there is a reasonable likelihood that the
Retail Distribution Plan will benefit each Fund and the holders of its Retail
Shares.
Under the Retail Distribution Plan, Retail Shareholders pay the Funds'
Distributor an annual fee of up to 0.25% of the value of the average daily net
assets of the Funds' Retail Shares for distributing those shares. The Retail
Shareholders pay this fee to cover various expenses of the Distributor,
including advertising, printing and mailing prospectuses to persons other than
current shareholders of the Funds, and compensation to participating dealers,
without regard to the actual expenses the Distributor incurs. The Distributor
may, in turn, pay one or more participating dealers a fee for distributing the
Funds' Retail Shares in an amount and manner the Distributor determines. The
Retail Distribution Plan also provides that the Advisers may pay participating
dealers out of their investment advisory fees, their past profits or any other
source available to the Advisers. From time to time, the Distributor may defer
or waive for a period of time its fees under the Retail Distribution Plan. The
Funds' Premier Shares and Group Retirement Plan Shares do not bear any fees
under the Retail Distribution Plan.
Quarterly reports of the amounts expended under the Retail Distribution
Plan with respect to each Fund, and the purposes for which such expenditures
were incurred, must be made to the Board of Directors for its review. In
addition, the Retail Distribution Plan provides that it may not be amended to
increase materially the costs that the Retail Shares of any Fund may bear
pursuant to such plan without shareholder approval of the holders of such Fund's
Retail Shares, and that other material amendments of the Retail Distribution
Plan must be approved by the Board of Directors, and by the directors who are
neither interested persons of The Lipper Funds nor have any direct or indirect
financial interest in the operation of such plan or in any agreements entered
into in
26
<PAGE>
connection with such plan, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Retail Distribution Plan and any
agreements entered into in connection with such plan are subject to annual
approval with respect to each Fund by such vote of the Board of Directors cast
in person at a meeting called for the purpose of voting on the Retail
Distribution Plan. The Retail Distribution Plan may be terminated at any time
with respect to any Fund by vote of a majority of the directors who are not
interested persons and have no direct or indirect financial interest in the
operation of such plan or in any agreements entered into in connection with such
plan or by vote of a majority of the Retail Shares of a Fund. Any agreement
entered into in connection with the Retail Distribution Plan may be terminated
without penalty at any time, by such vote. Each such agreement will terminate
automatically in the event of its assignment (as defined in the Investment
Company Act of 1940).
In accordance with the Retail Distribution Plan, the Distributor accrued
fees from the High Income Bond Fund, U.S. Equity Fund and Europe Equity Fund in
the amount of $4,795, $10,065 and $9,520, respectively, as compensation for the
distribution of the Funds' Retail Shares during the fiscal year ended December
31, 1998.
For the fiscal year ending December 31, 1998, the Distributor incurred fees
for distributing the High Income Bond Fund in the amount of $1,664 for
advertising, $3,672 for printing and mailing prospectuses to persons other than
current shareholders of the Fund, and $3,920 to compensate other broker-dealers
for distributing the Fund's shares. For the fiscal year ending December 31,
1998, the Distributor incurred fees for distributing the U.S. Equity Fund in the
amount of $1,664 for advertising, $2,761 for printing and mailing prospectuses
to persons other than current shareholders of the Fund, and $3,702 to compensate
other broker-dealers for distributing the Fund's shares. For the fiscal year
ending December 31, 1998, the Distributor incurred fees for distributing the
Europe Equity Fund in the amount of $75,216 for advertising, $2,761 for printing
and mailing prospectuses to persons other than current shareholders of the Fund,
and $2,285 to compensate other broker-dealers for distributing the Fund's
shares.
Group Retirement Servicing Plan
As stated in the Prospectuses, the Board of Directors has adopted a Group
Retirement Servicing Plan, whereby The Lipper Funds intends to enter into
servicing agreements pursuant to which participating dealers and sometimes the
Funds' Distributor will, as agent for their customers, render certain
administrative services to their customers who are beneficial owners of Group
Retirement Plan Shares. Under the Group Retirement Servicing Plan, Group
Retirement Plan Shareholders may pay one or more participating dealers and/or
the Distributor an annual fee of up to 0.25% of the value of the average daily
net assets of the Funds' Group Retirement Plan Shares for providing one or more
of the services described in the Prospectuses. Such services are intended to
supplement the services provided by the Funds' Administrator and Transfer Agent.
Servicing agreements between The Lipper Funds and participating dealers and/or
the Distributor with respect to the Funds' Group Retirement Plan Shares will be
terminable by either party at any time without penalty.
Conflict of interest restrictions may apply to an institution's receipt of
compensation paid by the Funds in connection with the investment of fiduciary
monies in the Funds. Institutions, including banks regulated by state banking
authorities and the Board of Governors of the Federal Reserve System and
investment advisers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor or state securities commissions are urged to
consult their legal advisers before investing fiduciary monies in the Funds.
In connection with the shareholder servicing fees of their Group Retirement
Plan Shares, the High Income Bond Fund, U.S. Equity Fund and Europe Equity Fund
paid fees of $10,423, $6,801 and $4,375, respectively, during the fiscal year
ended December 31, 1998.
27
<PAGE>
Administrator
Chase Global Funds Services Company, 73 Tremont Street, Boston, MA 02108,
serves as the Funds' administrator. The Administrator is a corporate affiliate
of The Chase Manhattan Bank. The Administrator has agreed to provide the
following services to the Company: (1) assist generally in supervising each
Fund's operations, providing and supervising the operation of an automated data
processing system to process purchase and redemption orders, providing
information concerning the Funds to their shareholders of record, handling
shareholder problems, supervising the services of employees whose principal
responsibility and function is to preserve and strengthen shareholder relations
and monitoring the arrangements pertaining to The Lipper Funds' agreements with
participating dealers; (2) prepare reports to the Funds' shareholders and
prepare tax returns and reports to and filings with the SEC; (3) compute the net
asset value per share of each class of each Fund; (4) provide the services of
certain persons who may be elected as directors or appointed as officers by the
Board of Directors; and (5) maintain the registration of each Fund's shares for
sale under state securities laws.
The Lipper Funds pays the Administrator as compensation for its services a
monthly fee at the annual rate of 0.20% of the value of the Funds' average daily
net assets up to and including $200 million; 0.10% of the Funds' average daily
net assets in excess of $200 million up to and including $400 million; and 0.05%
of the Funds' average daily net assets in excess of $400 million. During the
year ending December 31, 1998, The Lipper Funds paid administrative services
fees to the Administrator in the amount of $204,009 on behalf of the High Income
Bond Fund, $224,826 on behalf of the Europe Equity Fund, and $76,675 on behalf
of the U.S. Equity Fund. During the year ending December 31, 1997, The Lipper
Funds paid administrative services fees to the Administrator in the amount of
$245,328 on behalf of the High Income Bond Fund, $170,709 on behalf of the
Europe Equity Fund, and $73,478 on behalf of the U.S. Equity Fund. During the
fiscal period from April 1, 1996 through December 31, 1996, The Lipper Funds
paid administrative services fees to the Administrator in the amount of $164,042
on behalf of the High Income Bond Fund and $96,187 on behalf of the Europe
Equity Fund. During the fiscal year ended December 31, 1996, The Lipper Funds
paid administrative services fees to the Administrator in the amount of $76,284
on behalf of the U.S. Equity Fund.
Custodian
The Chase Manhattan Bank, 270 Park Avenue, New York, NY 10017, serves as
The Lipper Funds custodian pursuant to a custody agreement. Under the custody
agreement, the Custodian holds the Funds' portfolio securities and keeps all
necessary accounts and records. For its services, the Custodian receives a
monthly fee based upon the month-end market value of securities held in custody
and also receives securities transaction charges, including out-of-pocket
expenses. The Lipper Funds' assets are held under bank custodianship in
compliance with the Investment Company Act of 1940.
Transfer Agent
Chase Global Funds Services Company serves as The Lipper Funds' transfer
agent. Under the transfer agency agreement, the Transfer Agent maintains the
shareholder account records for The Lipper Funds, handles certain communications
between shareholders and The Lipper Funds, distributes dividends and
distributions payable by The Lipper Funds and produces statements with respect
to account activity for The Lipper Funds and its shareholders. For these
services, the Transfer Agent receives a monthly fee computed separately for each
class of each Fund's shares and is reimbursed separately by each class for
out-of-pocket expenses.
28
<PAGE>
DISTRIBUTION OF THE FUNDS
Distribution of Securities
Lipper & Company, L.P., 101 Park Avenue, New York, NY 10178, serves as the
principal distributor of the shares of The Lipper Funds. The Distributor and its
employees are affiliated persons of the Advisers and The Lipper Funds. The
Distributor distributes the Funds' shares continuously on a best efforts basis
pursuant to an agreement that is renewable annually. Pursuant to the Retail
Distribution Plan, the Distributor is entitled to receive an annual distribution
fee in the amount of 0.25% of the value of the average daily net assets of the
Funds' Retail Shares. The Distributor may also receive all or a portion of the
annual service fee of up to 0.25% (on an annualized basis) of the value of the
average daily net assets of the Funds' Group Retirement Plan Shares. See "Rule
12b-1 Plans."
For the fiscal years ending December 31, 1998, December 31, 1997 and
December 31, 1996, the Distributor accrued fees from the Rule 12b-1 Plans in the
amount of $24,795, $13,478 and $3,583, respectively, from the High Income Bond
Fund, $10,065, $4,559 and $1,529, respectively, from the U.S. Equity Fund, and
$9,520, $3,513 and $1,026, respectively, from the Europe Equity Fund.
Compensation
Set forth below is the commissions and other compensation received by the
Distributor, directly or indirectly, for the fiscal year ending December 31,
1998:
<TABLE>
<CAPTION>
=====================================================================================================
(1) (2) (3) (4)
=====================================================================================================
Net Underwriting Compensation on
Name of Discounts and Redemptions and Brokerage
Principal Distributor Commissions Repurchases Commissions
=====================================================================================================
<S> <C> <C> <C>
Lipper & Company, L.P. $0 $0 $0
=====================================================================================================
</TABLE>
Other Payments
In accordance with the Group Retirement Servicing Plan, The Lipper Funds
may enter into servicing agreements whereby participating dealers, including the
Distributor, will render certain administrative services to their customers who
are beneficial owners of the Funds' Group Retirement Plan Shares. These services
are intended to supplement the services provided by the Administrator and
Transfer Agent. Under the Group Retirement Servicing Plan, Group Retirement Plan
Shareholders may pay one or more participating dealers and/or the Distributor an
annual fee of up to 0.25% of the value of the average daily net assets of the
Funds' Group Retirement Plan Shares for providing various administrative or
shareholder services to the Funds' Group Retirement Shares.
The Distributor, the Advisers and their affiliates may pay one or more
participating dealers out of their fees, their past profits or any other
available source, a fee for distributing the Funds' Premier Shares.
Compensations to Dealers
Under the Retail Distribution Plan, the Fund's Retail Shareholders pays the
Distributor an annual fee of up to 0.25% of the value of the average daily net
assets of the Funds' Retail Shares for distributing those shares. The
Distributor may use this distribution fee, among other things, to compensate or
reimburse selected dealers for providing distribution and related services to
the Fund.
The Distributor customarily pays selected dealers with whom it has entered
into a distribution agreement for distribution of the Funds' Retail Shares a fee
in the amount of 0.25% of the value of the average daily assets of the Funds
attributable to the dealer. However, the Distributor has entered into
distribution agreements with Fidelity Investment Advisor Group and Charles
Schwab & Co. Inc., whereby the Distributor has agreed to pay 0.35% of the value
of the average daily net assets of the Funds' Retail Classes attributable to
Fidelity and Schwab, respectively.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Brokerage Transactions
Subject to the general control of the Board of Directors, the Advisers are
responsible for making decisions with respect to, and placing orders for, all
purchases and sales of portfolio securities for the Funds for which each serves
as investment adviser. Portfolio transactions for the U.S. Equity Fund and the
29
<PAGE>
Europe Equity Fund will involve the payment of brokerage commissions. The High
Income Bond Fund's portfolio transactions will occur primarily with issuers,
underwriters and major dealers acting as principals, and the U.S. Equity Fund's
and the Europe Equity Fund's portfolio transactions may consist of such
transactions. Such transactions are normally on a net basis, include any markups
and markdowns, and do not involve the payment of brokerage commissions. The cost
of securities purchased from underwriters includes an underwriter's commission
or concession, and the prices at which securities are purchased from and sold to
dealers include an undisclosed dealer spread. Transactions on foreign securities
exchanges may involve the payment of negotiated brokerage commissions, that may
vary among different brokers, or the payment of fixed brokerage commissions.
Investment decisions for each Fund are made independently from those for
the other Funds or other investment company portfolios or accounts advised by
the Advisers or their affiliates. Such other portfolios may also invest in the
same securities as the Funds. When purchases or sales of the same security are
made at substantially the same time on behalf of such other portfolios or
accounts, transactions are averaged as to price, and available investments
allocated as to amount, in a manner that the Advisers believe to be equitable to
each portfolio, including the Funds, pursuant to procedures adopted by the
Advisers. In some instances, this investment procedure may adversely affect the
price paid or received by the Funds or the size of the position obtainable for a
Fund.
To the extent permitted by law, the Advisers may aggregate or "bunch" the
securities to be sold or purchased for the Funds with those to be sold or
purchased for such other portfolios or accounts in order to obtain best
execution. Bunching allows the Advisers to facilitate best execution and to
reduce brokerage commissions or other costs. The Funds and such other portfolios
participate at the average share price for all of the Advisers' transactions in
a particular security on a given business day for such bunched order. An Adviser
generally allocates securities purchased or sold in a bunched transaction to the
Fund and such other portfolio before the bunched order is placed, as determined
by the Adviser to be fair and equitable and consistent with the Adviser's
fiduciary responsibility. Allocation decisions may vary from transaction to
transaction and depend upon factors including, but not limited to, the type of
investment, the number of shares purchased or sold, the size of the account, and
the size of an existing security position in a client account. After execution
of the bunched order, the Adviser allocates the transaction to the Fund and such
other portfolio according to the allocation decision made by the Adviser before
it placed the transaction. If the Adviser is unable to fully execute a bunched
transaction, the transaction is allocated pro rata to the Fund and such other
portfolio. However, if the Adviser determines that it would be impractical to
allocate a small number of securities among the Fund and such other portfolios
on a pro-rata basis, the Adviser may allocate the securities in a manner
determined in good faith to be fair and equitable. In addition, the Adviser may
increase or decrease the amount of securities allocated to the Fund and such
other portfolio if necessary to avoid holding odd-lot or small number of shares
or to satisfy the regulatory or other investment requirements of the Fund or
such other portfolio.
For the fiscal years ended December 31, 1998, December 31, 1997 and
December 31, 1996, the High Income Bond Fund, U.S. Equity Fund and Europe Equity
Fund incurred brokerage commissions of $0, $56,289 and $346,663, respectively,
$0, $25,838 and $370,449, respectively, and $0, $163,654 (April 1, 1996 through
December 31, 1996) and $26,389, respectively.
Brokerage Selection
In making portfolio investments, the Advisers seek to obtain the best net
price and the most favorable execution of orders, taking into account factors
such as (1) the general execution and operational facilities of the broker or
dealer, (2) the type and size of the transaction involved, (3) the
creditworthiness of the broker or dealer, (4) the stability of the broker or
dealer, (5) execution and settlement capabilities, (6) time required to
negotiate and execute the trade, (7) overall performance and (8) the broker's
commissions or dealer's spread or mark-up. To the extent that the execution and
price offered by more than one broker or dealer are comparable, the Advisers
may, in their discretion, effect transactions in portfolio securities with
brokers or dealers who provide the Advisers with research advice or other
services. Research advice and other services furnished by brokers through whom
the Funds effect securities transactions may be used by the Advisers and their
affiliates in servicing accounts in addition to the Funds, and not all such
services will necessarily benefit the Funds.
30
<PAGE>
While the Advisers generally seek the best price in placing its order, the
Funds may not necessarily be paying the lowest price available. Notwithstanding
the above, the Advisers may, in compliance with Section 28(e) of the Securities
Exchange Act of 1934, as amended, select brokers who charge a commission in
excess of that charged by other brokers, if the Advisers determine in good faith
that the commission to be charged is reasonable in relation to the brokerage and
research services provided to the Advisers by such broker. The Advisers may also
have arrangements with brokers pursuant to which such brokers provide research
services to the Advisers in exchange for a certain volume of brokerage
transactions to be executed through such broker.
With respect to over-the-counter transactions, the Funds, where possible,
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by or enter into repurchase agreements with the
Advisers or any affiliated person (as such term is defined in the Investment
Company Act of 1940) of the Advisers, except to the extent permitted by the SEC.
The Funds will not purchase securities during the existence of any underwriting
or selling group relating thereto of which the Advisers or any affiliate thereof
is a member, except to the extent permitted by the SEC. Under certain
circumstances, the Funds may be at a disadvantage because of these limitations
in comparison with other investment company portfolios that have similar
investment objectives but are not subject to such limitations.
CAPITAL STOCK
The Lipper Funds has authorized capital stock of 10,000,000,000 shares
having a par value of $.001 per share. The Lipper Funds' Articles of Amendment
and Restatement currently authorizes the issuance of three series of shares, one
series corresponding to each of the U.S. Equity Fund, High Income Bond Fund and
Europe Equity Fund. The Articles of Amendment and Restatement also authorizes
three classes of shares with respect to each series, Premier Shares, Retail
Shares and Group Retirement Plan Shares. The Board of Directors may, in the
future, authorize the issuance of additional series of capital stock
representing shares of additional investment funds or additional classes of
shares of the Funds.
Shares of each class of each Fund represent interests in the Fund in
proportion to the net asset value of each class. The Fund's expenses are
allocated to each class of the Fund's shares based upon expenses identifiable by
class or the relative net assets of the class and the other classes of its
shares.
All shares of The Lipper Funds have equal voting rights and will be voted
in the aggregate, and not by series or class, except where voting by series or
class is required by law or where the matter involved affects one series or
class. Under the corporate law of Maryland, The Lipper Funds' state of
incorporation, and The Lipper Funds' By-Laws (except as required under the
Investment Company Act of 1940), The Lipper Funds is not required and does not
currently intend to hold annual meetings of shareholders for the election of
directors. Shareholders, however, do have the right to call for a meeting to
consider the removal of one or more of the directors if such a request is made,
in writing, by the holders of at least 10% of the outstanding voting The Lipper
Funds' securities. To the extent required by law, The Lipper Funds will assist
in shareholder communication in such matters.
All shares of The Lipper Funds, when issued, will be fully paid and
nonassessable.
As used in this Statement of Additional Information and in the
Prospectuses, a "majority of the outstanding shares," when referring to the
Investment Company Act of 1940 approvals to be obtained from shareholders in
connection with matters affecting any particular Fund (e.g., approval of
investment advisory contracts) or any particular class (e.g., approval of the
plan of distribution with respect to the Retail Shares of
31
<PAGE>
each Fund) means the lesser of (1) 67% of the shares of that particular
portfolio or class, as appropriate, represented at a meeting at which the
holders of more than 50% of the outstanding shares of such portfolio or class,
as appropriate, are present in person or by proxy, or (2) more than 50% of the
outstanding shares of such portfolio or class, as appropriate.
Shares of each class of each Fund are entitled to such dividends and
distributions out of the assets belonging to that class as are declared in the
discretion of the Board of Directors. In determining the net asset value of a
class of a portfolio, assets belonging to a particular class are credited with a
proportionate share of any general assets of The Lipper Funds not belonging to a
particular class of a portfolio and are charged with the direct liabilities in
respect of that class of the portfolio and with a share of the general
liabilities of The Lipper Funds that are normally allocated in proportion to the
relative net asset values of the respective classes of the portfolios of The
Lipper Funds at the time of allocation.
Shareholders of each class of each Fund have the right to redeem their
shares, as more fully set forth in the Prospectuses under "Shareholder
Information - Purchasing Fund Shares" and "Shareholder Information - Other
Purchase Information."
Subject to compliance with the requirements of the Investment Company Act
of 1940, the Articles of Amendment and Restatement authorizes the Board of
Directors to provide that shareholders of each class of each Fund shall have the
right to convert or exchange their shares into shares of one or more other
Funds. The Board of Directors has established such procedures, which are more
fully set forth in the Prospectuses under "Shareholder Information - Exchange
Privilege" and "Shareholder Information - Other Exchange Information."
In the event of the liquidation or dissolution of The Lipper Funds, shares
of each class of a Fund are entitled to receive the assets attributable to it
that are available for distribution, and a proportionate distribution, based
upon the relative net assets of the classes of each portfolio, of any general
assets not attributable to a portfolio that are available for distribution.
Shareholders are not entitled to any preemptive rights.
Subject to the provisions of the Articles of Amendment and Restatement,
determinations by the Board of Directors as to the direct and allocable
liabilities and the allocable portion of any general assets of The Lipper Funds
with respect to a particular portfolio or class are conclusive.
VALUATION OF SHARES
The net asset value of each share is based on the net asset value of each
of the Fund's classes. Because of the differences in distribution fees, service
fees and class-specific expenses, the net asset value per share of each class of
each Fund may differ. In addition, although The Lipper Funds does not charge any
sales loads, certain dealers may charge you fees in connection with your
purchases of the Funds' shares.
The Lipper Funds computes the net asset value per share by dividing the
value of the net assets of each of the Fund's classes by the total number of
shares of that class outstanding as of the close of regular trading on the New
York Stock Exchange. The net asset value per share of each class of shares of
each Fund is calculated Monday through Friday, except on days on which the NYSE
is closed. Currently, the NYSE is closed on New Year's Day, Martin Luther King,
Jr.'s Birthday, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Thanksgiving Day and Christmas Day.
The following is a description of the procedures used by each Fund in
valuing its assets. Except as described below, securities traded on an exchange
will be valued on the basis of the last sale price on the principal market on
which such securities are traded, on the date on which the valuation is made or,
in the absence of sales in such market will be valued at the mean between the
closing bid and asked prices, if available. Equity securities traded on the
NASDAQ National Market System for which no sales prices are available and
32
<PAGE>
over-the-counter securities will be valued on the basis of the bid prices at the
close of business on each day, or, if market quotations for those securities are
not readily available, at fair value, as determined in good faith by the Board
of Directors. Fixed income securities may be valued on the basis of valuations
provided by brokers and/or a pricing service that uses information with respect
to transactions in fixed income securities, quotations from dealers and prices
of comparable securities. Such valuations may reflect bid or mean between bid
and asked prices for securities. Securities that are traded both in the
over-the-counter market and on a stock exchange will be valued according to the
broadest and most representative market. Securities may be valued by independent
pricing services or other sources. Short-term obligations with maturities of 60
days or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a Fund will be valued at fair value as determined
in good faith by the Board of Directors.
ADDITIONAL PURCHASE, REDEMPTION AND EXCHANGE INFORMATION
Purchase, Redemption and Exchange of Shares
Information on how to purchase, redeem and exchange shares of each Fund is
included in the Prospectuses under "Shareholder Information." The issuance of a
Fund's shares is recorded on such Fund's books, and certificates for shares are
not issued unless expressly requested in writing to the Transfer Agent.
Certificates are not issued for fractional shares.
Suspension of the Right of Redemption
Under the Investment Company Act of 1940, a Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC by rule or regulation) an emergency exists as a result of which
disposal or valuation of portfolio securities is not reasonably practicable, or
for such other periods as the SEC may permit. (A Fund may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.)
Redemption in Kind
Each Fund is obligated to redeem shares solely in cash up to $250,000 or 1%
of its net asset value, whichever is less, for any one shareholder within a
90-day period. Any redemption beyond this amount will also be in cash unless the
Board of Directors determines that conditions exist that make payment of
redemption proceeds wholly in cash unwise or undesirable. In such a case, a Fund
may make payment wholly or partly in readily marketable securities or other
property, valued in the same way as such Fund determines net asset value.
Redemption in kind is not as liquid as a cash redemption. Shareholders who
receive a redemption in kind may incur transaction costs, if they sell such
securities or property, and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity.
ADDITIONAL INFORMATION CONCERNING TAXATION OF THE FUNDS
The following discussion is only a brief summary of certain additional tax
considerations affecting the Funds and their shareholders. No attempt is made to
present a detailed explanation of all federal, state and local tax concerns, and
the discussion set forth here and in the Prospectuses is not intended as a
substitute for careful
33
<PAGE>
tax planning. Investors are urged to consult their own tax advisers with
specific questions relating to federal, state or local taxes.
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, and to continue
to so qualify. Qualification as a regulated investment company requires, among
other things, that a Fund: (1) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stocks,
securities or currencies; and (2) diversify its holdings so that, at the end of
each quarter of each taxable year, (a) at least 50% of the market value of such
Fund's assets is represented by cash, cash items, U.S. government securities,
securities of other registered investment companies and other securities with
such other securities limited, in respect of any issuer, to an amount not
greater than 5% of the value of such Fund's assets and 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of its
assets is invested in the securities (other than U.S. government securities or
the securities of other registered investment companies) of any one issuer, or
in two or more issuers that a Fund controls and that are engaged in the same or
similar trades or businesses.
If a Fund qualifies as a regulated investment company, such Fund will not
be subject to federal income tax on the portion of its net investment income
(i.e., it investment company taxable income, as that term is defined in the
Internal Revenue Code, without regard to the deduction for dividends paid) and
net capital gain (i.e., the excess of its net long-term capital gains over net
short-term capital losses) that it distributes to shareholders, provides that it
distributes at least 90% of its net investment income for the taxable year.
Distributions by a Fund made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the distribution requirement.
If for any taxable year a Fund does not qualify for tax treatment as a
regulated investment compay, all of such Fund's taxable income will be subject
to tax at regular corporate rates without any deduction for distributions to
such Fund's shareholders. In such event, dividend distributions to shareholders
would be taxable as ordinary income to the extent of such Fund's earnings and
profits, and would be eligible for the dividends received deduction in the case
of corporate shareholders.
A 4% non-deductible excise tax is imposed on registered investment
companies that fail to distribute in each calendar year an amount equal to 98%
of ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or, at
the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year election")).
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year. Each Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
Each Fund may make investments that produce income that is not matched by a
corresponding cash distribution to such Fund, such as investments in obligations
that have original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security at maturity over its basis immediately after it was
acquired) if such Fund elects to accrue market discount on a current basis.
Because such income may not be matched by a corresponding cash distribution to a
Fund, such Fund may be required to dispose of other securities to be able to
make distributions to its investors.
Each Fund may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, option and futures contracts (including
options, futures and forward contracts on foreign currencies)
34
<PAGE>
and short sales. Such transactions will be subject to special provisions of the
Internal Revenue Code that, among other things, may affect the character of
gains and losses realized by a Fund (that is, may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to a Fund and defer
recognition of certain of a Fund's losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. In addition,
these provisions (1) will require a Fund to "mark-to-market" certain types of
positions in its portfolio (that is, treat them as if they were closed out) and
(2) may cause a Fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. Each Fund
intends to monitor its transactions, will make the appropriate tax elections and
will make the appropriate entries in its books and records when it acquires any
forward contracts, options or hedged investment in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment compay.
A Fund may be subject to certain taxes, including without limitation, taxes
imposed by foreign countries with respect to its income and capital gains.
Each Fund's net capital gain will be taxable to each Fund's shareholders as
long-term capital gain, regardless of how long a shareholder has held such
Fund's shares. Such distributions will be designated as a capital gain dividend
in a written notice mailed by a Fund to its shareholders not later than 60 days
after the close of such Fund's taxable year.
Distributions of a Fund's net investment income will be taxable to such
Fund's shareholders as ordinary income, whether paid in cash or reinvested in
additional shares.
Investors should consider the tax implications of buying shares just prior
to distribution. Although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those purchasing just prior to a
distribution will receive a distribution that will nevertheless be taxable to
them.
Gain or loss, if any, on the sale or other disposition of shares of a Fund
will generally result in capital gain or loss to shareholders. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. If a shareholder sells or otherwise disposes
of a share of a Fund before holding it for more than six months, any loss on the
sale or other disposition of such share shall be treated as a long-term capital
loss to the extent of any capital gain dividends received by the shareholder
with respect to such share. Currently, the maximum federal income tax rate
imposed on individuals with respect to long-term capital gain is 20%. The
maximum federal income tax rate imposed on individuals with respect to
short-term capital gain (that is taxed at the same rates as ordinary income) is
39.6%.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or 31% of gross redemption proceeds paid
to its shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to backup withholding by the
Internal Revenue Service for failure properly to include on their return
payments of taxable interest or dividends, or who have failed to certify to such
Fund that they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
A portion of the dividends of net investment income received by corporate
shareholders from a Fund may qualify for the federal dividends received
deduction generally available to corporations. The dividends received deduction
for corporate shareholders may be reduced if the securities with respect to
which dividends are received by a Fund are (1) considered to be "debt-financed"
(generally, acquired with borrowed funds), (2) held by a Fund for less than 46
days (91 days in the case of certain preferred stock) during the 90 day period
beginning on the date that is 45 days before the date on which such shares
become ex-dividend with respect to such dividend (during the 180 day period
beginning 90 days before such date in the case of certain preferred stock)) or
(3) subject to certain forms of hedges or short sales. The amount of any
dividend distribution eligible for the corporate dividends received deduction
will be designated by a Fund in a written notice within 60 days of the
35
<PAGE>
close of the taxable year. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced if the corporate shareholder
fails to satisfy the foregoing requirements with respect to its shares of a
Fund.
If more than 50% of the value of a Fund's total assets at the close of its
taxable year consists of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by such Fund. If the Fund so elects, each shareholder would
be required to include in gross income, even though not actually received, his
pro rata share of the foreign taxes paid by the Fund, but would be treated as
having paid his pro rata share of such foreign taxes and would therefore be
allowed to either deduct such amount in computing taxable income or use such
amount (subject to various Internal Revenue Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
tax credit limitation rules of the Internal Revenue Code, each shareholder would
treat as foreign source income his pro rata share of such foreign taxes plus the
portion of dividends received from the Fund representing income derived from
foreign sources. No deduction for foreign taxes could be claimed by an
individual shareholder who does not itemize deductions. In certain
circumstances, a shareholder that (1) has held shares of the Fund for less than
a specified minimum period during which it is not protected from risk of loss or
(2) is obligated to make payments related to the dividends, will not be allowed
a foreign tax credit for foreign taxes deemed imposed on dividends paid on such
shares. Additionally, the Fund must also meet this holding period requirement
with respect to its foreign stocks and securities in order for "creditable"
taxes to flow-through. Each shareholder should consult his own tax adviser
regarding the potential application of foreign tax credits.
If a Fund purchases shares in "passive foreign investment companies", the
Fund may be subject to U.S. federal income tax on a portion of any "excess
distribution" or gain from the disposition of shares even if the income is
distributed as a taxable dividend by the Fund to its shareholders. Additional
charges in the nature of interest may be imposed on a Fund with respect to
deferred taxes arising from the distribution or gains. If a Fund were to invest
in a passive foreign investment company and (if the Fund received the necessary
information available from the passive foreign investment company, that may be
difficult to obtain) elected to treat the passive foreign investment company as
a "qualified electing fund" under the Internal Revenue Code, in lieu of the
foregoing requirements, the Fund might be required to include in income each
year a portion of the ordinary earnings and net capital gain of the passive
foreign investment company, even if not distributed to the Fund. Alternatively,
a Fund can elect to mark-to-market at the end of each taxable year its shares in
a passive foreign investment company; in this case, the Fund would recognize as
ordinary income any increase in the value of such shares, and as ordinary loss
any decrease in such value to the extent it did not exceed prior increases
included in income. Under either election, a Fund might be required to recognize
in a year income in excess of its distributions from passive foreign investment
companies and its proceeds from dispositions of passive foreign investment
company stock during that year, and such income would nevertheless be subject to
the distribution requirements to avoid corporate level taxes and the 4% excise
tax.
PERFORMANCE DATA
From time to time, each Fund may quote total return information, and the
High Income Bond Fund may quote yield information, for one or more classes of
its shares in advertisements or in reports and other communications to
shareholders and compare total return and yield on one or more classes of its
shares to that of other funds or accounts with a similar objective and to
relevant indices. Total return for the High Income Bond Fund and the Europe
Equity Fund will include the performance of a corresponding limited partnership
that was the predecessor entity to each Fund.
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Average Annual Total Return
Under the rules of the SEC, funds advertising performance must include
"average annual total return" figures computed according to a formula prescribed
by the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10 year periods at the end of the
1-, 5-, or 10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.
The following tables sets forth the average annual return for the Funds for
the one and five year periods and since inception:
<TABLE>
<CAPTION>
Annual Return Average Annual Return for Average
for the One Year Period the Five Year Period Annual Return
Fund and Class Ending December 31, 1998 Ending December 31, 1998 Since Inception*
- -------------- ------------------------ ------------------------ ---------------
<S> <C> <C> <C>
U.S. Equity Fund
Premier Shares 11.35% N/A 16.56%
Retail Shares 11.15% N/A 16.42%
Group Retirement Plan Shares 11.16% N/A 16.43%
Europe Equity Fund**
Premier Shares 32.29% 18.30% 15.21%
Retail Shares 31.96% 18.14% 15.10%
Group Retirement Plan Shares 32.08% 18.17% 15.12%
High Income Bond Fund**
Premier Shares 3.61% 8.01% 9.37%
Retail Shares 3.36% 7.87% 9.27%
Group Retirement Plan Shares 3.37% 7.86% 9.27%
</TABLE>
- ----------
* Inception dates for the U.S. Equity Fund are January 2, 1996 for the
Premier Shares and January 4, 1996 for the Retail and Group Retirement Plan
Shares. Inception dates for the Europe Equity Fund, as a mutual fund, are
April 1, 1996 for the Premier Shares, April 11, 1996 for the Retail Shares,
and April 12, 1996 for the Group Retirement Plan Shares. The Europe Equity
Fund's predecessor partnership had an inception date of January 13, 1992.
Inception dates for the High Income Bond Fund, as a mutual fund, are April
1, 1996 for the Premier Shares, April 11, 1996 for the Retail Shares, and
April 12, 1996 for the Group Retirement Plan Shares. The High Income Bond
Fund's predecessor partnership had an inception date of February 1, 1992.
** Average Annual Return for the Five Year Period Ending December 31, 1998 and
Average Annual Return Since Inception reflects the performance of the
Funds' predecessor partnerships for periods prior to April 1, 1996. On
April 1, 1996, the assets of the Fund's predecessor partnerships were
transferred to the Funds and the limited partnership interests of the
Funds' predecessor partnerships were exchanged for the Funds' Premier
Shares. The investment policies, objectives, guidelines and restrictions of
the Funds are in all material respects equivalent to those of their
predecessor partnerships. As mutual funds registered under the Investment
Company Act, these Funds are subject to certain restrictions under the Act
and the Internal Revenue Code to which their predecessor partnerships were
not subject. Had the Funds' predecessor partnerships been registered under
the Act and subject to the provisions of the Act and the Code, their
investment performance may have been adversely affected.
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Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in the
value of an investment in a class of a Fund's shares for the specified period
and are computed by the following formula:
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where:
P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made at
the beginning of a 1-, 5-, or 10-year period at the end of the 1-, 5-,
or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The following tables sets forth the aggregate total return for the Funds
for the for a five year period and since inception:
<TABLE>
<CAPTION>
Aggregate Total Return for
the Five Year Period Aggregate Total
Ending December 31, 1998 Return Since Inception*
Fund and Class --------------------------- ----------------------
- --------------
<S> <C> <C>
U.S. Equity Fund
Premier Shares N/A 58.70%
Retail Shares N/A 57.66%
Group Retirement Plan Shares N/A 57.72%
Europe Equity Fund**
Premier Shares 131.88% 169.73%
Retail Shares 130.37% 167.97%
Group Retirement Plan Shares 130.63% 168.28%
High Income Bond Fund**
Premier Shares 47.06% 85.94%
Retail Shares 43.13% 84.77%
Group Retirement Plan Shares 46.06% 84.68%
Thirty Day Yield
</TABLE>
- ----------
* Inception dates for the U.S. Equity Fund are January 2, 1996 for the
Premier Shares and January 4, 1996 for the Retail and Group Retirement Plan
Shares. Inception dates for the Europe Equity Fund, as a mutual fund, are
April 1, 1996 for the Premier Shares, April 11, 1996 for the Retail Shares,
and April 12, 1996 for the Group Retirement Plan Shares. The Europe Equity
Fund's predecessor partnership had an inception date of January 13, 1992.
Inception dates for the High Income Bond Fund, as a mutual fund, are April
1, 1996 for the Premier Shares, April 11, 1996 for the Retail Shares, and
April 12, 1996 for the Group Retirement Plan Shares. The High Income Bond
Fund's predecessor partnership had an inception date of February 1, 1992.
** Aggregate Total Return for the Five Year Period Ending December 31, 1998
and Aggregate Total Return Since Inception reflects the performance of the
Funds' predecessor partnerships for periods prior to April 1, 1996. On
April 1, 1996, the assets of the Funds' predecessor partnership were
transferred to the Funds and the limited partnership interests of the
Funds' predecessor partnerships were exchanged for the Funds' Premier
Shares. The investment policies, objectives, guidelines and restrictions of
the Funds are in all material respects equivalent to the Funds' predecessor
partnerships. As mutual funds registered under the Investment Company Act,
the Funds are subject to certain restrictions under the Act and the
Internal Revenue Code to which their predecessor partnerships were not
subject. Had the Funds' predecessor partnerships been registered under the
Act and subject to the provisions of the Act and the Code, their investment
performance may have been adversely affected.
38
<PAGE>
Thirty Day Yield
The High Income Bond Fund may advertise the yield on one or more classes of
its shares based on a 30-day (or one month) period, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2[(a-b)/CD+1)6-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the High Income Bond Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation in the High Income Bond Fund's portfolio (assuming a month of
30 days) and (3) computing the total of the interest earned on all debt
obligations during the 30-day or one month period. Undeclared earned income,
computed in accordance with generally accepted accounting principles, may be
subtracted from the maximum offering price calculation required pursuant to "d"
above.
The thirty-day yield of the High Income Bond Fund as of December 31, 1998
was 6.88% for the Premier Shares, 6.63% for the Retail Shares and 6.62% for the
Group Retirement Plan Shares.
Other Information Concerning Performance Data
Each Fund may also from time to time include in advertisements a total
return figure that is not calculated according to the formulas set forth above.
Any such figure, and any quotation of the High Income Bond Fund's performance
stated in terms of yield (whether or not based on a 30-day period), will be
given no greater prominence than the information prescribed under SEC rules.
Each Fund's performance will vary from time to time depending upon market
conditions, the composition of such Fund's portfolio and operating expenses.
Consequently, any given performance quotations should not be considered
representative of the performance of any class of a Fund's shares for any
specified period in the future. Because performance will vary, it may not
provide a basis for comparing an investment in a Fund's shares with certain bank
deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing a Fund's performance with that of other mutual funds
should give consideration to the nature, quality and maturity of the respective
investment companies' portfolio securities and market conditions.
Each Fund may also from time to time include discussions or illustrations
of the effects of compounding in advertisements. "Compounding" refers to the
fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original
investment in the Fund, but also of the additional Fund shares received through
reinvestment. Each Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including materials that
describe general principles of investing, such as asset allocation,
diversification, risk tolerance and goal setting, questionnaires designed to
help create a personal financial profile,
39
<PAGE>
worksheets used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment alternatives),
investment management techniques, policies or investment suitability of a Fund
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing and the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic and political conditions and the relationship between
sectors of the economy and the economy as a whole, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements, sales
literature, communications to shareholders or other materials may summarize the
substance of information contained in relevant articles appearing in newspapers
or periodicals, shareholder reports (including the investment composition of a
Fund), as well as the views of the Funds' Advisers as to current market,
economy, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Fund. In addition, selected indices may be used to illustrate
historic performance of select asset classes. Each Fund may also include in
advertisements, sales literature, communications to shareholders or other
materials, charts, graphs or drawings that illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury bills and shares of a Fund. In addition,
advertisements, sales literature, shareholder communications or other materials
may include a discussion of certain attributes or benefits to be derived by an
investment in a Fund and/or other mutual funds, benefits, characteristics or
services associated with a particular class of shares, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and investment alternatives to certificates of deposit
and other financial instruments. Such advertisements or communications may
include symbols, headlines or other materials that highlight or summarize the
information discussed in more detail therein. Materials may include lists of
representative clients of the Funds' Advisers. Materials may refer to the CUSIP
numbers of the various classes of the Funds and may illustrate how to find the
listings of the Funds in newspapers and periodicals. Materials may also include
discussions of other Funds, products and services.
Charts and graphs using net asset value, adjusted NAVs and benchmark
indices may be used to exhibit performance. An adjusted NAV includes any
distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
Each Fund may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
Each Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, each Fund may compare these measures to
those of other mutual funds. Measures of volatility seek to compare the
historical share price fluctuations or total returns to those of a benchmark.
Measures of benchmark correlation indicate how valid a comparative benchmark may
be. All measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate a Fund's price movements over specific periods
of time. Each point on the momentum indicator represents the Fund's percentage
change in price movements over that period.
Each Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. Each Fund may be
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available for purchase through retirement plans or other programs offering
deferral of, or exemption from, income taxes, that may produce superior
after-tax returns over time.
Each Fund may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Fund may include
information regarding the background, experience and expertise of the Advisers
and/or portfolio managers for each Fund.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Company's independent accountants. The financial statements
incorporated by reference in this SAI have been so incorporated in reliance on
the report of the Company's independent accountant, given on the authority of
that firm as experts in auditing and accounting
COUNSEL
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York
10017-3954, serves as counsel to the Company. Piper & Marbury L.L.P., 36 South
Charles Street Baltimore, Maryland 21201-3018, passed upon the validity of the
Company's shares under Maryland law.
FINANCIAL STATEMENTS
The financial highlights for each of the Funds for the year ended December
31, 1998 are set forth in the Prospectuses. The financial statements for each of
the Funds for the year ended December 31, 1998, that appear in each Fund's 1998
Annual Report to Shareholders, and the report thereon of PricewaterhouseCoopers
LLP, the Fund's independent accountants, also appearing therein, that were
previously filed electronically with the SEC, are incorporated herein by
reference.
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
A description of the rating policies of Moody's Investor Services Corp. and
Standard & Poor's with respect to bonds and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa -- Bonds rated "Aaa" are judged to be of the best quality and carry the
smallest degree of investment risk. 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 rated "Aa" 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 that
make the long-term risks appear somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment qualities 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 that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds rated "Baa" are considered as 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 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 rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
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 that are speculative in high
degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds rated "C" 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.
Moody's applies numerical modifiers "1," "2" and "3" to certain of its
rating classifications. The modifier "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.
Standard & Poor's Ratings Group Corporate Bond Ratings
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA -- Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.
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A -- Bonds rated "A" have a strong capacity to repay principal and pay
interest, 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 rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to repay principal and pay interest
for bonds in this category than for higher rated categories.
BB-B-CCC-CC-C -- Bonds rated "BB," "B," "CCC," "CC" and "C" are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI -- Bonds rated "CI" are income bonds on which no interest is being paid.
D -- Bonds rated "D" are in default. The "D" 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 is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1 -- Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings 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 alternative liquidity is
maintained.
Prime-3 -- Issuers (or related supporting institutions) rated "Prime-3"
have an acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime -- Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
Standard & Poor's Ratings Group Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
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A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat 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 speculative capacity for
timely payment.
C -- This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
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.
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