<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
Registration No. 333-15881 and 811-07917
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. ___ [_]
Post-Effective Amendment No. 8 [X]
and/or
REGISTRATION STATEMENT
(Under the Investment Company Act of 1940) [_]
Amendment No. 9 [X]
(Check appropriate box or boxes)
______________
HORACE MANN MUTUAL FUNDS
(Exact name of Registrant as specified in Charter)
ONE HORACE MANN PLAZA
SPRINGFIELD, ILLINOIS 62715
(Address of principal executive offices) (Zip code)
with a copy to:
Ann M. Caparros Cathy G. O'Kelly, Esq.
One Horace Mann Plaza Vedder, Price, Kaufman & Kammholz
Springfield, Illinois 62715 222 North LaSalle Street
(Name and address of agent for service) Chicago, Illinois 60601
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b);
[X] on May 1, 2000 pursuant to paragraph (b);
[_] 60 days after filing pursuant to paragraph (a)(1);
[_] on (date) pursuant to paragraph (a)(1);
[_] 75 days after filing pursuant to paragraph (a)(2);
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Prospectus
May 1, 2000
Horace Mann Mutual Funds
Equity Fund
Balanced Fund
Income Fund
Short-Term Investment Fund
Small Cap Growth Fund
International Equity Fund
Socially Responsible Fund
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................... C-2
Equity Fund............................................................. C-2
Balanced Fund........................................................... C-4
Income Fund............................................................. C-6
Short-Term Investment Fund.............................................. C-8
Small Cap Growth Fund................................................... C-9
International Equity Fund............................................... C-10
Socially Responsible Fund............................................... C-11
More About Risk........................................................... C-12
Types of Investments and Associated Risks................................. C-13
Management................................................................ C-16
Investment Adviser...................................................... C-16
The Subadvisers......................................................... C-17
Administrator........................................................... C-19
Support Services Agreement.............................................. C-20
Transfer Agent and Dividend Paying Agent................................ C-20
Custodian and Fund Accounting Agent..................................... C-20
Additional Performance Information........................................ C-20
Other Information on the Performance of Sanford Bernstein, Mellon Equity
and Wellington Management.............................................. C-20
Other Information on the Performance of BlackRock....................... C-21
Other Information on the Performance of Scudder Kemper.................. C-21
Purchases and Redemptions................................................. C-23
Redemption of Equity Fund Shares by Existing Public Shareholders........ C-23
Systematic Cash Withdrawal Plan......................................... C-23
Dividends, Distributions and Federal Taxes................................ C-24
Financial Highlights...................................................... C-25
Equity Fund............................................................. C-25
Balanced Fund........................................................... C-26
Income Fund............................................................. C-27
Short-Term Investment Fund.............................................. C-28
Small Cap Growth Fund................................................... C-29
International Equity Fund............................................... C-30
Socially Responsible Fund............................................... C-31
Other Information......................................................... C-32
Public Shareholder Communications....................................... C-32
Ratings of Debt Obligations............................................. C-32
Statement of Additional Information..................................... C-33
</TABLE>
C-1
<PAGE>
Summary
- -------------------------------------------------------------------------------
Equity Fund
Investment Objective: The Equity Fund seeks long-term capital growth. As a
secondary objective, the Equity Fund seeks conservation of principal and
production of income.
Main Investment Strategies: The Equity Fund, formerly the Growth Fund,
ordinarily invests substantially all its assets in common stocks of domestic
companies. These companies vary in size and operating history, they may or may
not be listed on a stock exchange, and they may be in any industry. On
average, the Fund will have a value-bias, generally exhibiting an average
price to earnings ratio lower than, and an average dividend yield higher than,
that of the market (as measured by the S&P 500). The Equity Fund may also
invest in preferred stocks. Additionally, up to 10% of the Equity Fund's
assets may be invested in U.S. dollar-denominated securities of foreign
issuers, including common stock, preferred stock, convertible securities and
American Depository Receipts. Included within the definition of "domestic
companies" are companies that are not incorporated in the U.S. but have one or
more of the following attributes: principal place of business in the U.S.,
substantial portion of income derived from activities in the U.S., equity
securities traded on a major U.S. stock exchange or included in a recognized
index of U.S. stocks, or complies with U.S. accounting standards. Thus,
securities of such issuers are not subject to the 10% limitation on securities
of foreign issuers.
Wilshire Associates Incorporated ("Wilshire") serves as the investment
adviser to the Equity Fund. In its oversight of the investment program of the
Equity Fund, Wilshire selects investment managers as subadvisers to manage the
funds in the portfolio, and determines the allocation of the Equity Fund's
assets among those selected subadvisers. Wilshire has discretion to select,
retain, and discharge the subadvisers for the Equity Fund with approval from
the Fund's Board of Trustees. Wilshire may take these actions at any time
without shareholder approval.
Wilshire selects subadvisers to manage the assets of the Equity Fund based
upon a due diligence process that focuses on, but is not limited to, the
managers' philosophy and process, people and organization, resources, and
performance. Currently, Wilshire has retained Sanford C. Bernstein & Co., Inc.
("Sanford Bernstein"), Mellon Equity Associates, LLP ("Mellon Equity") and
Wellington Management Company, LLP ("Wellington Management") to manage the
Equity Fund. The basic investment philosophy of each subadviser is described
below:
In managing its portion of the Equity Fund, Sanford Bernstein uses
traditional methods of stock selection--research and analysis--to identify
undervalued stocks. In addition, Bernstein employs quantitative valuation
tools to identify attractive stocks and the most opportune time to purchase
them.
Mellon Equity believes that stock returns are a function of a security's
exposure to numerous fundamental factors that move in and out of favor over
time. By emphasizing those stocks with favorable attributes and de-emphasizing
those without, Mellon Equity seeks to purchase the better performing stocks
within a sector and attempts to neutralize risk through a well diversified
portfolio construction.
Wellington Management employs a conservative, long-term approach to
investing in high quality equity securities. Using a top-down, bottom-up
process, the firm's growth and income style emphasizes fundamental analysis in
security selection, and attempts to identify long lasting broad themes based
on demographic trends, technological changes and political and social
developments.
In normal circumstances, the Fund intends to be fully invested. Pending
investment to meet anticipated redemption requests, or as a temporary
defensive measure if its subadviser determines that market conditions warrant,
the Fund may also invest, without limitation, in high quality, U.S. dollar-
denominated money market instruments. To the extent the Fund is in a defensive
position, its ability to achieve its investment objective may be limited.
Main Risks of Investing: Since the Fund invests most of its assets in
common stocks, one of the primary risks is that the value of the stocks it
holds might decrease in response to the activities of the company that issued
the stock or general economic and market conditions. More information about
the risks of investing in the Fund is located in the sections entitled "More
About Risks" and "Types of Investments and Associated Risks" below. The Fund's
returns will vary, and you could lose money by investing in the Fund. There
can be no assurance that the Fund will meet its investment objectives.
Fund Performance History: The information below provides an illustration of
how the Equity Fund's performance has varied over time. The bar chart and
table provide some indication of the risks of investing in the Equity Fund by
showing the changes in the Equity Fund's performance from year to year during
the periods indicated and by showing how the Equity Fund's average annual
total returns for the periods indicated compare with a broad-based securities
market index. The total return figures do not reflect expenses that apply to
the separate account or related policies. The inclusion of these charges would
reduce the total return figures for all periods shown. The performance
information after March 1, 1999 reflects the Fund's current multi-manager
approach. The Equity Fund's past performance does not necessarily indicate how
it will perform in the future.
C-2
<PAGE>
Annual Total Returns
[LINE CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
- -5.48 26.50 9.59 19.74 -0.35 33.67 25.28 23.45 7.64 -2.54
<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------ -------------
<S> <C>
13.12 (2Q97) -11.71 (3Q99)
</TABLE>
Average Annual Total Returns
(periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Equity Fund............................................. -2.54% 16.67% 12.98%
S&P 500*................................................ 20.99% 28.56% 18.21%
</TABLE>
* The Standard and Poor's 500 Stock Index (the "S&P 500"). The S&P 500 is an
unmanaged index that is generally considered to be representative of the
United States equity market.
C-3
<PAGE>
Balanced Fund
Investment Objective: The Balanced Fund seeks to realize a high long-term
total rate of return consistent with prudent investment risks. Total rate of
return consists of current income, which includes dividends, interest,
discount accruals and capital appreciation.
Main Investment Strategies: The Balanced Fund operates under a "fund of
funds" structure. The Balanced Fund invests substantially all of its assets in
shares of the Equity Fund and Income Fund. In addition, the Balanced Fund may
also invest in certain individual securities, including money market
instruments and U.S. government securities.
The summaries for the Equity Fund and Income Fund have a description of the
types of stocks and bonds in which those Funds are permitted to invest.
The investment adviser will allocate the Balanced Fund's assets between
shares of the Equity Fund and Income Fund. This mixture reduces the volatility
of investment returns while still providing the potential for higher long-term
total returns that can be achieved only by including some exposure to stocks.
As a matter of investment policy, 50% to 75% of the Balanced Fund's total
assets will be invested in the Equity Fund and 25% to 50% of the value of its
assets will be invested in the Income Fund. Under normal circumstances, the
target asset mix is 60% to the equity sector and 40% to the fixed income
sector. The mix of assets is regularly adjusted between the equity sector and
the fixed income sector to maintain policy targets. Major changes in the
investment mix may occur several times within a year or over several years,
depending upon market and economic conditions. In general, however, the
investment adviser does not anticipate making frequent changes in asset
allocation and will not attempt to time the market.
Pending investment to meet anticipated redemption requests, or as a
temporary defensive measure if its subadviser determines that market
conditions warrant, the Fund may also invest, without limitation, in high
quality, U.S. dollar denominated money market instruments. To the extent the
Fund is in a defensive position, its ability to achieve its investment
objective may be limited.
An investor in the Balanced Fund should understand that alternatively he or
she could allocate investments directly to the Equity Fund and Income Fund. By
investing indirectly in these Funds through the Balanced Fund, an investor
bears not only his or her proportionate share of certain expenses of the
Balanced Fund (such as operating costs), but also, indirectly, similar expense
of the underlying Funds. However, shareholders of the Balanced Fund will not
be subject to duplicative advisory or administrative service fees as a result
of the "fund of funds" arrangement, as discussed below in "Management."
Main Risks of Investing: By investing in the Balanced Fund, an investor
assumes the same types of risks, either directly or indirectly, as investing
in the Equity Fund and Income Fund, which are described in this prospectus.
For assets allocated to the Equity Fund, the primary risk is that the value of
stocks it holds might decrease in response to the activities of the company
that issued the stock or general economic and market conditions. For assets
allocated to the Income Fund, the primary risk is interest rate risk. The
assets allocated to the Income Fund are also subject to credit risk. More
information about the risks of investing in the Fund is located in the
sections entitled "More About Risks" and "Types of Investments and Associated
Risks" below. There can be no assurance that the Fund will meet its investment
objective. The Fund's returns will vary, and you could lose money.
Fund Performance History: The information below provides an illustration of
how the Balanced Fund's performance has varied over time. The bar chart and
table provide some indication of the risks of investing in the Balanced Fund
by showing the changes in the Balanced Fund's performance from year to year
during the periods indicated and by showing how the Balanced Fund's average
annual total returns for the periods indicated compare with a broad-based
securities market index. The total return figures do not reflect expenses that
apply to the separate account or related policies. The inclusion of these
charges would reduce the total return figures for all periods shown. The
performance information after March 1, 1999 reflects the Fund's current multi-
manager approach. The Balanced Fund's past performance does not necessarily
indicate how it will perform in the future.
C-4
<PAGE>
Annual Total Returns
[LINE CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- -0.41 21.57 8.37 15.46 -1.12 27.12 18.27 19.04 7.68 -1.11
<TABLE>
<CAPTION>
Best Worst
Quarter Quarter
----------- ------------
<S> <C>
9.82 (2Q97) -7.01 (3Q99)
</TABLE>
Average Annual Total Returns
(periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Balanced Fund........................................... -1.11% 13.71% 11.05%
S&P 500*................................................ 20.99% 28.56% 18.21%
Lehman Intermediate/ Aggregate**........................ -0.83% 7.47% 7.46%
Stock/Bond Composite***................................. 12.00% 19.88% 13.97%
</TABLE>
* The Standard and Poor's 500 Stock Index (the "S&P 500"). The S&P 500 is an
unmanaged index that is generally considered to be representative of the
United States equity market.
** Lehman Brothers Intermediate Government/Corporate Bond Index through April
30, 1997, Lehman Brothers Aggregate Bond Index thereafter.
***Sixty percent S&P 500, forty percent Lehman Brothers Intermediate
Government/Corporate Bond Index through April 30, 1997, forty percent Lehman
Brothers Aggregate Bond Index thereafter.
C-5
<PAGE>
Income Fund
Investment Objective: The Income Fund seeks to achieve a long-term total
rate of return in excess of the U.S. bond market over a full market cycle.
Main Investment Strategies: The Income Fund invests primarily in U.S.
investment-grade fixed income securities, including government and corporate
securities, agency mortgage pass-through securities and asset-backed
securities.
The Income Fund invests at least 75% of its total assets in:
. investment grade publicly offered debt securities, including mortgage-
backed and other asset-backed securities (within the four highest ratings
as determined by Moody's or by S&P at the time of purchase).
. securities issued or guaranteed by the U.S. Government or its agencies.
. high quality commercial paper (within the two highest grades as determined
by both Moody's and S&P), repurchase and reverse repurchase agreements,
time deposits with maturities less than seven days, and cash or cash
equivalents.
. high grade U.S. dollar-denominated debt obligations of foreign
governments, foreign corporations, foreign branches of U.S. banks, and
foreign banks (limited to the three highest ratings as determined by
Moody's or S&P at the time of purchase and to 15% of the Income Fund's
total assets).
. highest quality non-U.S. dollar-denominated debt obligations of foreign
issuers (limited to the highest rating as determined by Moody's or S&P at
the time of purchase) which are fully hedged back into U.S. dollars and do
not exceed 15% of the Income Fund's total assets.
Generally, the average duration of the U.S. portion of the portfolio will
range between +/-25% of the Lehman Brothers Aggregate Bond Index's duration.
There are no maximum maturity limits on individual securities. For defensive
purposes, the duration and maturity of the Fund may be shortened. The Fund
will maintain a high grade average quality for the portfolio (third highest
rating as determined by Moody's or S&P).
Up to 25% of the Income Fund's total assets may be invested in securities
not described above, including preferred stock, convertible securities,
securities carrying warrants to purchase equity securities, noninvestment-
grade debt obligations of U.S. and non-U.S. issuers (commonly referred to as
"junk bonds") and derivatives.
Wilshire Associates Incorporated ("Wilshire") serves as the investment
adviser to the Income Fund. In its oversight of the investment program of the
Income Fund, Wilshire selects investment managers as subadvisers to manage the
funds in the portfolio, and determines the allocation of the Income Fund's
assets among those selected subadvisers. Wilshire has discretion to select,
retain, and discharge the subadvisers for the Income Fund with approval from
the Fund's Board of Trustees. Wilshire may take these actions at any time
without shareholder approval.
Wilshire selects subadvisers to manage the assets of the Income Fund based
upon a due diligence process that focuses on, but is not limited to, the
managers' philosophy and process, people and organization, resources, and
performance. Currently, Wilshire has retained Wellington Management Company,
LLP ("Wellington Management"), Western Asset Management Company ("Western
Asset") and Western Asset Management Company Limited ("WAML") to manage the
Income Fund. The basic investment philosophy of each subadviser is described
below:
Wellington Management emphasizes sector analysis, which focuses on relative
value and yield spreads among security types and among quality, issuer and
industry sectors, as well as credit research and call protection. Credit
research on corporate bonds is based on both quantitative and qualitative
criteria established by the Wellington Management, such as an issuer's
industry, operating and financial profiles, business strategy, management
quality, and projected financial and business conditions.
The Western Asset Core Plus strategy seeks to provide investment results
that exceed the performance of the Lehman Brothers Aggregate Index. This Index
is a widely recognized measure of the aggregate U.S. bond market. The Western
Asset Core Plus strategy seeks to maximize total return by investing primarily
in U.S. dollar-denominated fixed income securities and other debt instruments
of domestic and foreign entities, including corporate bonds, securities issued
or guaranteed as to principal and interest by the U.S. government, its
agencies and instrumentalities, mortgage-related securities and money market
instruments. Western Asset will determine the relative portion of the Fund's
assets managed by Western Asset that is allocated to foreign securities. These
foreign assets will be invested at the discretion of WAML. WAML will select
the foreign country and currency composition based on its evaluation of
relative interest rates, inflation rates, exchange rates, monetary and fiscal
policies, trade and current account balances, and any other specific factors
WAML believes relevant.
C-6
<PAGE>
In normal circumstances, the Income Fund intends to be fully invested.
Pending investment, to meet anticipated redemption requests, or as a temporary
defensive measure if its subadviser determines that market conditions warrant,
the Fund may also invest, without limitation, in high quality, U.S. dollar
denominated money market instruments. To the extent the Fund is in a defensive
position, its ability to achieve its investment objective may be limited.
Main Risks of Investing: The primary risk of investing in the Fund is
interest rate risk. The yield paid by the Fund will vary with changes in
interest rates. Changes in interest rates may cause changes in the Fund's
yield, net asset value and total return. Investments with longer maturities,
which are typically more sensitive to changes in interest rates, may subject
the Fund to increased price changes resulting from market yield fluctuations.
The Fund is also subject to credit risk. The Fund's net asset value and total
return may be adversely affected by the inability of the issuers of the Fund's
securities to make payment at maturity. More information about the risks of
investing in the Fund is located in the sections entitled "More About Risks"
and "Types of Investments and Associated Risks" below. There can be no
assurance that the Fund will meet its investment objective. The Fund's returns
will vary, and you could lose money by investing in the Fund.
Fund Performance History: The information below provides an illustration of
how the Income Fund's performance has varied over time. The bar chart and table
provide some indication of the risks of investing in the Income Fund by showing
the changes in the Income Fund's performance from year to year during the
periods indicated and by showing how the Income Fund's average annual total
returns for the periods indicated compare with a broad-based securities market
index. The total return figures do not reflect expenses that apply to the
separate account or related policies. The inclusion of these charges would
reduce the total return figures for all periods shown. The performance
information reflects the performance of the Income Fund as managed solely by
Wellington Management. On January 26, 2000 the Income Fund was managed by
Wellington Management and Western Asset. Since March 24, 2000, the Income Fund
is managed by Wellington Management, Western Asset and WAML. The Income Fund's
past performance does not necessarily indicate how it will perform in the
future.
Annual Total Returns
FINACT:[EFT.TEMPL]00001.EDG
[LINE CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
7.58 14.93 7.20 8.07 -2.21 14.93 3.50 9.42 8.09 -1.57
<TABLE>
<CAPTION>
Best Worst
Quarter Quarter
----------- ------------
<S> <C>
4.90 (4Q91) -2.30 (1Q94)
</TABLE>
Average Annual Total Returns
(periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Income Fund............................................. -1.57% 6.75% 6.84%
Lehman Intermediate/Aggregate*.......................... -0.83% 7.47% 7.46%
</TABLE>
* Lehman Brothers Intermediate Government/Corporate Bond Index through April
30, 1997, Lehman Brothers Aggregate Bond Index thereafter.
C-7
<PAGE>
Short-Term Investment Fund
Investment Objective: The Short-Term Investment Fund seeks to realize
maximum current income to the extent consistent with liquidity. Preservation of
principal is a secondary objective. The Short-Term Investment Fund is not a
money market fund and does not maintain a stable net asset value per share.
Main Investment Strategies: The Short-Term Investment Fund primarily invests
in the following types of short-term debt instruments with maturities generally
not exceeding one year:
. U.S. Treasury Bills and other obligations of or guaranteed by the U.S.
Government or its agencies.
. commercial paper (within the two highest ratings as determined by Moody's
or S&P).
. U.S. dollar-denominated debt obligations of foreign governments, foreign
corporations, foreign branches of U.S. banks, and foreign banks (limited
to the three highest ratings as determined by Moody's or S&P and to 10% of
the Short-Term Investment Fund's total assets).
. publicly traded bonds, debentures and notes (with a rating within the four
highest ratings as determined by Moody's or S&P).
. repurchase and reverse repurchase agreements.
. cash or cash equivalents.
In seeking to achieve the Fund's investment objective, the subadviser uses a
multi-stage process. In the first stage, the subadviser analyzes general
economic and market factors, such as interest rate forecasts and anticipated
interest rate spreads among various sectors of money market instruments, and
sets broad strategies for the Fund. In the second stage, the subadviser
evaluates individual securities. The subadviser uses proprietary quantitative
and qualitative techniques to create and maintain a list of issuers whose
securities are approved for purchase. In the third stage, the subadviser
determines the structure and composition of the portfolio. In doing so, the
subadviser seeks to minimize exposure to credit risk and market risk. Market
risk is measured by the price volatility of securities. The Fund attempts to
maximize return to take advantage of changing money market conditions and
trends. The Fund also trades to take advantage of disparities in yield
relationships between money market instruments.
In normal circumstances, the Fund intends to be fully invested. Pending
investment to meet anticipated redemption requests, or as a temporary defensive
measure if its subadviser determines that market conditions warrant, the Fund
may also invest, without limitation, in high quality, U.S. dollar-denominated
money market instruments. To the extent the Fund is in a defensive position,
its ability to achieve its investment objective may be limited.
Main Risks of Investing: The primary risk of investing in the Fund is
interest rate risk. The yield paid by the Fund will vary with changes in
interest rates. Changes in interest rates may cause changes in the Fund's
yield, net asset value and total return. The Fund is also subject to credit
risk. The Fund's net asset value and total return may be adversely affected by
the inability of the issuers of the Fund's securities to make payment at
maturity. More information about the risks of investing in the Fund is located
in the sections entitled "More About Risks" and "Types of Investments and
Associated Risks" below. There can be no assurance that the Fund will meet its
investment objectives. The Fund's returns will vary and you could lose money by
investing in the Fund.
Fund Performance History: The information below provides an illustration of
how the Short-Term Investment Fund's performance has varied over time. The bar
chart and table provide some indication of the risks of investing in the Short-
Term Investment Fund by showing the changes in the Short-Term Investment Fund's
performance from year to year during the periods indicated and by showing how
the Short-Term Investment Fund's average annual total returns for the periods
indicated compare with a broad-based securities market index. The Short-Term
Investment Fund's past performance does not necessarily indicate how it will
perform in the future.
Annual Total Returns
FINACT:[EFT.TEMPL]00001.EDG
EFT SPINO PLOT POINT TABLES -- EDIT AS NEEDED
[BAR CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.89 5.93 3.3 2.53 3.89 5.25 5.02 5.09 4.97 4.77
<TABLE>
<CAPTION>
Best Worst
Quarter Quarter
----------- ----------
<S> <C>
1.97 (3Q90) .60 (3Q93)
</TABLE>
Average Annual Total Returns
(periods ended December 31, 1999)
<TABLE>
<CAPTION>
Year 5 Years 10 Years
----- ------- --------
<S> <C> <C> <C>
Short-Term Investment Fund............................... 4.77% 5.00% 4.84%
90-Day Treasury Bills.................................... 4.56% 5.37% 5.29%
</TABLE>
C-8
<PAGE>
Small Cap Growth Fund
Investment Objective: The Small Cap Growth Fund seeks long-term capital
appreciation.
Main Investment Strategies: The Fund ordinarily invests substantially all of
its assets in small cap equity securities (less than $2 billion at the time of
investment) with earnings growth potential. Such securities would be considered
by the subadviser to have favorable and above-average earnings growth
prospects; that is, securities with growth rate estimates in excess of the
average for the Fund's benchmark, the Russell 2000 Growth Index. The Russell
2000 Growth Index is composed of those Russell 2000 securities with a greater-
than-average growth orientation. Securities in this index generally have higher
price-to-book and price-to-earnings ratios than those in the Russell 2000 Value
Index. Under normal market conditions, the Fund will invest at least 80% of its
assets in equity securities of smaller-capitalization organizations.
The investment subadviser uses proprietary screens to identify growth stocks
with market capitalizations under $2 billion. The investment subadviser
conducts fundamental research on a company and technical analysis on a
company's stock before making purchase decisions.
The Fund generally will sell a stock when, in the investment subadviser's
opinion, the fundamentals deteriorate, when the stock's relative price momentum
declines, or upon an earnings disappointment.
In normal circumstances, the Fund intends to be fully invested. Pending
investment to meet anticipated redemption requests, or as a temporary defensive
measure if its subadviser determines that market conditions warrant, the Fund
may also invest, without limitation, in high quality, U.S. dollar-denominated
money market instruments. To the extent the Fund is in a defensive position,
its ability to achieve its investment objective may be limited. The reason for
acquiring money market securities would be to avoid market losses. However, if
market conditions improve, this strategy could result in reducing the potential
gains from market upswing, thus reducing the Fund's opportunity to achieve its
investment objective.
Main Risks of Investing: Since the Fund invests most of its assets in common
stocks, the primary risk is that value of the stocks it holds might decrease in
response to the activities of the company that issued the stock or general
economic and market conditions. Investments in securities of companies with
small- and medium-sized market capitalizations generally involve greater risk
than investment in larger, more established companies. This is because small
companies may be in an earlier stage of development, may be dependent on a
small number of products or services, may lack substantial capital reserves
and/or do not have proven track records. Smaller companies may be more
adversely affected by poor economic or market conditions. In addition, small
companies may be traded in low volumes, which can increase volatility and
liquidity risks. More information about the risks of investing in the Fund is
located in the sections entitled "More About Risks" and "Types of Investments
and Associated Risks" below. There can be no assurance that the Fund will meet
its investment objective. The Fund's returns will vary, and you could lose
money by investing in the Fund.
Fund Performance History: The information below provides an illustration of
how the Fund's performance has varied in each of the calendar years since its
inception. The table provides some indication of the risks of an investment in
the Fund by comparing the Fund's average annual total returns for the periods
indicated to a broad-based securities market index. The total return figures do
not reflect expenses that apply to the separate account or related policies.
The inclusion of these charges would reduce the total return figures for all
periods shown. The Fund's past performance does not necessarily indicate how it
will perform in the future.
Annual Total Returns
[BAR CHART]
1998 1999
- ---- -----
5.81 71.55
<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------- --------------
<S> <C>
44.56% (4Q99) -18.77% (3Q98)
</TABLE>
Average Annual Total Returns
(periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
Inception
1 Year (3/10/97)
------ ---------
<S> <C> <C>
Small Cap Growth Fund.......................................... 71.55% 30.45%
Russell 2000 Growth*........................................... 43.10% 20.57%
</TABLE>
* The Russell 2000 Growth Index (the "Russell 2000 Growth") is an unmanaged
securities index composed of those Russell 2000 securities with a greater than
average growth orientation.
C-9
<PAGE>
International Equity Fund
Investment Objective: The International Equity Fund seeks long-term growth
of capital primarily through diversified holdings of marketable foreign equity
investments.
Main Investment Strategies: The Fund invests in companies, wherever
organized, which do business primarily outside the United States. The Fund
intends to diversify investments among several countries and to have
represented in its holdings business activities in not less than three
different countries. The Fund does not intend to concentrate investments in any
particular industry. The Fund invests primarily in equity securities of
established companies that the subadviser believes have favorable
characteristics and that are listed on foreign exchanges. It may also invest in
fixed-income securities of foreign governments and companies. However,
management intends to maintain a portfolio consisting primarily of equity
securities.
The Fund has no present intention of altering its general policy of being
primarily invested under normal conditions in foreign securities. However, in
the event of exceptional conditions abroad, the Fund may temporarily invest all
or a portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in Canada or the United States. To the extent the Fund is
in a defensive position, its ability to achieve its investment objective may be
limited.
For hedging purposes, the Fund may purchase forward foreign currency
exchange contracts, foreign currency options and futures contracts and foreign
currencies in the form of bank deposits. The Fund may also purchase other
foreign money market instruments, including, but not limited to, bankers'
acceptances, certificates of deposit, commercial paper, short-term government
and corporate obligations and repurchase agreements.
Main Risks of Investing: Because the Fund invests most of its assets in
common stocks, the primary risk is that the value of the stocks it holds might
decrease in response to the activities of those companies or market and
economic conditions. Foreign investments often involve additional risks,
including political instability, differences in financial reporting standards,
and less stringent regulation of securities markets. These risks are magnified
in less-established, emerging markets. Because the securities held by the Fund
usually will be denominated in currencies other than the U.S. dollar, changes
in foreign currency exchange rates may adversely affect the value of the Fund's
investments. In addition, the Fund may invest in the securities of small
companies, which may be more volatile and less liquid than securities of large
companies. More information about the risks of investing in the Fund is located
in the sections entitled "More About Risks" and "Types of Investments and
Associated Risks" below. There can be no assurance that the Fund will meet its
investment objective. The Fund's returns will vary, and you could lose money by
investing in the Fund.
Fund Performance History: The information below provides an illustration of
how the Fund's performance has varied in each of the calendar years since its
inception. The table provides some indication of the risks of an investment in
the Fund by comparing the Fund's average annual total returns for the periods
indicated to a broad-based securities market index. The total return figures do
not reflect expenses that apply to the separate account or related policies.
The inclusion of these charges would reduce the total return figures for all
periods shown. The Fund's past performance does not necessarily indicate how it
will perform in the future.
Annual Total Returns
[LINE CHART]
1998 1999
- ----- -----
18.95 51.83
<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------ -------------
<S> <C>
28.45 (4Q99) -13.52 (3Q98)
</TABLE>
Average Annual Total Returns
(periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
Inception
1 Year (3/10/97)
------ ---------
<S> <C> <C>
International Equity Fund...................................... 51.83% 24.71%
MSCI EAFE*..................................................... 26.97% 17.53%
</TABLE>
* The Morgan Stanley Capital International Europe, Australia, Far East Index.
C-10
<PAGE>
Socially Responsible Fund
Investment Objective: The Socially Responsible Fund seeks long-term growth
of capital, current income and growth of income.
Main Investment Strategies: The Socially Responsible Fund pursues its
objectives through a diversified portfolio composed primarily of marketable
equity securities. The Socially Responsible Fund seeks to achieve its
objectives by investing in socially responsive companies which the subadviser
determines:
. do not produce tobacco products;
. do not produce alcoholic beverages;
. do not own and/or operate casinos or manufacture gaming devices;
. do not produce pornographic materials;
. do not produce nuclear weapons or guidance and/or delivery systems
specifically for nuclear weapons;
. by popular standards, maintain nondiscriminatory employment practices
throughout a company's facilities; and
. by popular standards, maintain environmental policies, practices and
procedures that are currently acceptable, or that are exhibiting
improvement.
Dividends are emphasized in the management of the portfolio, as stock
portfolios with high relative dividend yields may provide above average returns
with below average volatility in the long run. Although the Fund intends to
maintain a premium yield (versus the S&P 500 Index and a value-oriented
benchmark like the Russell 1000 Value Index) not every stock in the Fund will
have a premium yield. The investment process employs a three-factor screen
combining relative dividend yield, price/earnings and price/cash flow ratios to
identify attractive investment ideas among the largest 1000 U.S. companies and
100 ADR's that constitute the investible universe. This process allows for
consideration of an ivestment in value-oriented companies and cheap cyclical
growth companies that pay little or no dividends.
While the Fund emphasizes investments in U.S. chartered companies, it can
commit up to 25% of the Fund's total assets to equity securities issued by non-
U.S. chartered companies that meet the criteria applicable to domestic
investments.
In addition, from time to time, for temporary defensive purposes, when the
Fund's subadviser determines such a position is advisable in light of economic
or market conditions, the Fund may invest a portion of its assets in cash and
cash equivalents. Pending investment to meet anticipated redemption requests,
or as a temporary defensive measure if its subadviser determines that market
conditions warrant, the Fund may also invest, without limitation, in high
quality, U.S. dollar-denominated money market instruments. To the extent the
Fund is in a defensive position, its ability to achieve its investment
objective may be limited.
Main Risks of Investing: The Fund only invests in companies that meet its
criteria for socially responsible investing. Because of this restriction, the
investments that the Fund's portfolio managers may choose from may be more
limited than those of a fund that is not restricted to investing in companies
that meet social criteria. More information about the risks of investing in the
Fund is located in the sections entitled "More About Risks" and "Types of
Investments and Associated Risks" below. There can be no assurance that the
Fund will meet its investment objective. The Fund's returns will vary, and you
could lose money by investing in the Fund.
Fund Performance History: The bar chart below provides an illustration of
how the Fund's performance has varied in each of the calendar years since its
inception. The table provides some indication of the risks of an investment in
the Fund by comparing the Fund's average annual total returns for the periods
indicated to a broad-based securities market index. The total return figures do
not reflect expenses that apply to the separate account or related policies.
The inclusion of these charges would reduce the total return figures for all
periods shown. The Fund's past performance does not necessarily indicate how it
will perform in the future.
Annual Total Returns
1998 1999
- ---- ----
9.8 8.39
<TABLE>
<CAPTION>
Best Quarter Worst Quarter
------------ -------------
<S> <C>
13.22 (1Q98) -12.06 (3Q98)
</TABLE>
Average Annual Total Returns
(periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
Inception
1 Year (3/10/97)
------ ---------
<S> <C> <C>
Socially Responsible Fund...................................... 8.39% 14.42%
S&P 500*....................................................... 20.99% 25.69%
</TABLE>
* The Standard and Poor's 500 Stock Index (the "S&P 500"). The S&P 500 is an
unmanaged index that is generally considered to be representative of the
United States equity market.
C-11
<PAGE>
More About Risk
The Funds have principal investment strategies that come with inherent
risks. The following is a list of the principal risks associated with those
strategies. Because the Balanced Fund invests in the shares of the Equity Fund
and Income Fund, the Balanced Fund will be subject to the risks of those
Funds. The following table summarizes the types of risks described below that
each Fund may experience:
<TABLE>
<CAPTION>
Invest- Port-
Deriva- Finan- Interest ment Liqui- Oppor- folio Prepay- Reinvest- Valu-
Credit Currency tives cial Rate Style dity Market tunity Strategy ment ment ation
Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk Risk
------ -------- ------- ------ -------- ------- ------ ------ ------ -------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity X X X X X X X
Balanced X X X X X X X X X X X X X
Income X X X X X X X X X X X X X
Short-term X X X X X X X X
Small Cap Growth X X X X X X X
International Equity X X X X X X
Socially Responsible X X X X X X X
</TABLE>
Credit Risk. Debt securities are subject to the risk that the issuer of a
security, or the counterparty to a contract, will default or otherwise become
unable to honor a financial obligation. In general, the lower the credit
quality of a fund's securities, the higher a fund's risk, all other factors
such as maturity being equal.
Currency Risk. Non-U.S. dollar-denominated securities are subject to
fluctuations in the exchange rates between the U.S. dollar and foreign
currencies which may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign currency
denominated investments, and may widen any losses.
Derivatives Risk. When a Fund uses derivatives (securities whose value is
based upon the value of another security or an index) to hedge positions in
the portfolio, any loss generated by the derivative security should be
substantially offset by gains on the hedged investment and vice versa. While
hedging can reduce or eliminate losses, it can also reduce or eliminate gains.
To the extent that a derivative is not used as a hedge (i.e., for
speculation), the Fund is directly exposed to the potential gains and losses
of that derivative. Gains and losses from non-hedging derivative positions may
be substantially greater than the derivative's original cost.
Financial Risk. For equity securities held in a Fund, financial risk is the
possibility that the price of the security will fall because the market
perceives that there is or will be a deterioration in the fundamental value of
the issuer of poor earnings performance by the issuer. For debt securities
held in a Fund, financial risk is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a Fund. The financial risk
of a fund depends on the credit quality of its underlying securities.
Interest Rate Risk. For debt securities held in a Fund, interest rate risk
is the possibility that the price will fall because of changing interest
rates. In general, debt securities' prices vary inversely with changes in
interest rates. If interest rates rise, bond prices generally fall; if
interest rates fall, bond prices generally rise. In addition, for a given
change in interest rates, longer-maturity bonds fluctuate more in price
(gaining or losing more in value) than shorter-maturity bonds.
Investment-Style Risk. During certain market conditions, Funds with more
specific investment styles may perform less well than funds that allow greater
flexibility in the investment of assets.
Liquidity Risk. A Fund may invest in certain securities that may be
difficult or impossible to sell at a certain time and at a price that the Fund
finds to be favorable. A Fund may have to accept an unfavorable price, sell
other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance.
Market Risk. For equity securities, stock market movements will affect a
Fund's share price on a daily basis. Declines in value are possible because of
declines in the stock market in general or because of a decline in the
specific securities held by a Fund. Market risk may affect a single company,
industry, sector or the market as a whole. For debt securities, the market
value of a security may move up and down, sometimes rapidly and unpredictably.
Market risk may affect a single issuer, an industry, a sector or the bond
market as a whole.
Opportunity Risk. Because each Fund is normally fully invested, each Fund
may defer an investment opportunity because the assets that would be necessary
to purchase that security or act on that opportunity are invested in other
securities. At the subadviser's direction, securities may be sold if
opportunities warrant.
Portfolio Strategy Risk. The performance of each Fund is in part dependent
upon the investment subadviser's skill in making appropriate investments. To
the extent that the sub-adviser's investments differ from the portfolio
represented by the
C-12
<PAGE>
benchmark, there exists the potential for volatility of the return of the Fund
relative to its index. As the industry and sector composition of the market or
index changes over time, the implementation of Fund strategy can lead to
substantial differences in the sector or industry allocation of the Fund
relative to the market or index.
Prepayment Risk. Mortgage-backed securities are subject to the risk of
unanticipated prepayments of principal with respect to mortgages in the
security's underlying pool of assets. While principal pre-payments are passed
through to the holders of the securities, prepayments also reduce the future
payments on such securities and may reduce their value. Mortgage-backed
securities are subject to the risk that an unexpected rise in interest rates
will extend the life of a mortgage-backed security beyond the expected
prepayment time, typically reducing the security's value. Mortgage-backed
securities are subject to the risk that an unexpected decline in interest
rates will contract the life of a mortgage-backed security, thereby affecting
its prepayment schedule, which may affect the value of the security.
Reinvestment Risk. During periods of falling interest rates, debt
securities with a high stated interest rate may be prepaid (or "called") prior
to its expected maturity date. If, during periods of falling interest rates, a
debt security with a high stated interest rate is called, the unanticipated
proceeds would likely be invested at lower interest rates, and the Fund's
income or yield may decline. Call provisions, which may lead to reinvestment
risk, are most common for intermediate- and long-term municipal, corporate and
mortgage-backed securities. To the extent securities subject to call were
acquired at a premium, the potential for appreciation in the event of a
decline in interest rates may be limited and may even result in losses.
Valuation Risk. A Fund may invest in securities that are difficult to value
and may value certain of its securities at a higher price than the market will
bear.
Types of Investments and Associated Risks
The following provides additional information on various types of
instruments in which the Funds may invest and their associated risks. Because
the Balanced Fund invests in shares of the Equity Fund and Income Fund, the
Balanced Fund indirectly invests in the same investments as listed for the
Equity Fund and Income Fund. For a more detailed description of the various
types of instruments in which the Funds may invest and their associated risks,
please see the section entitled "Description of Securities and Risks" in the
Statement of Additional Information ("SAI").
ADRs, EDRs and GDRs. The Small Cap Growth Fund, International Equity Fund
and Socially Responsible Fund may invest in both sponsored and unsponsored
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"),
Global Depository Receipts ("GDRs") and other similar global instruments. The
Equity Fund may invest in ADRs. ADRs typically are issued by an American bank
or trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental
Depository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic
underlying securities. GDRs are depository receipts structured like global
debt issues to facilitate trading on an international basis. Unsponsored ADR,
EDR and GDR programs are organized independently and without the cooperation
of the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, EDRs and
GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile
than if such instruments were sponsored by the issuer. Investments in ADRs,
EDRs and GDRs present additional investment considerations, as described below
under "Foreign Securities Risk."
Foreign Securities. The Equity Fund, International Equity Fund, Small Cap
Growth Fund, Socially Responsible Fund, Income Fund and Short-Term Investment
Fund may invest in foreign securities. Global investing involves economic and
political considerations not typically applicable to U.S. markets. These
considerations, which may favorably or unfavorably affect a Fund's
performance, include, but are not limited to, changes in exchange rates and
exchange rate controls (which may include suspension of the ability to
transfer currency from a given country), costs incurred in conversions between
currencies, non-negotiable brokerage commissions, different accounting
standards, lower trading volume and greater market volatility, the difficulty
of enforcing obligations in other countries, less securities regulation,
different tax provisions (including withholding on interest and dividends paid
to the Fund), war, expropriation, political and social instability, and
diplomatic developments. Further, the settlement period of securities
transactions in foreign markets may be longer than in domestic markets. These
considerations generally are heightened in developing countries. For example,
the possibility of political upheaval and the dependence on foreign economic
assistance may be greater in these countries than in developed countries. The
adviser and subadvisers seek to mitigate the risks associated with these
considerations through diversification and active professional management. For
a more detailed description of foreign securities, see the SAI.
Forward Foreign and Currency Exchange Contracts. The Small Cap Growth Fund
and International Equity Fund may invest in foreign currencies. The Income
Fund may enter into forward foreign currency exchange contracts ("forward
contracts") up to 15% of the value of its total assets, for hedging purposes
only. A forward contract is a contract individually negotiated and privately
traded by currency traders and their customers. A forward contract involves an
obligation to purchase or sell a specific currency for an agreed price at a
future date, which may be any fixed number of days from the date of the
contract. The agreed price may be fixed or within a specified range of prices.
C-13
<PAGE>
The Income Fund also may enter into foreign currency futures contracts and
foreign currency options up to 15% of the value of total assets, for hedging
purposes only. Foreign currency futures contracts are standardized contracts
traded on commodities exchanges that involve an obligation to purchase or sell
a predetermined amount of currency at a predetermined date at a specified
price. The purpose of entering into these contracts is to minimize the risk to
a Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies. A Fund may purchase and sell options on foreign currencies
for hedging purposes in a manner similar to that of transactions in forward
contracts. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not engaged in forward
contracts, foreign currency futures contracts and foreign currency options.
For a more detailed description of foreign currencies, see the SAI.
High Yield (High Risk) Securities. The Income Fund may invest in fixed
income or convertible securities rated lower than "Baa" by Moody's or "BBB" by
S&P, or unrated securities of comparable quality, which are commonly referred
to as "junk bonds" or "high yield/high risk" securities. These securities are
considered speculative and generally involve a higher risk of loss of
principal and income than higher-rated, investment grade securities. The value
of these securities generally fluctuate more than those of higher-rated
securities. The value of high-yield, high-risk securities may also be
influenced by the bond market's perception of an issuer's credit quality or
its outlook for economic growth. In times when economic conditions appear to
be deteriorating, lower-rated securities may decline in market value primarily
due to investors' heightened concern over an issuer's credit quality and its
ability to make timely interest and principal payments. Other potential risks
associated with investing in high-yield/high risk securities include:
substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions and changes in the actual
or perceived ability of the issuer to meet its obligations; greater
sensitivity of highly leveraged issuers to adverse economic changes and
individual-issuer developments; subordination to the prior claims of other
creditors; and adverse publicity and changing investor perceptions about these
securities.
As with any other asset in a Fund's portfolio, any reduction in the value
of such securities as a result of the factors listed above would be reflected
in the net asset value of a Fund. In addition, a Fund that invests in lower-
quality securities may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal and interest on
its holdings. As a result of the associated risks, successful investments in
high-yield (high-risk) securities will be more dependent on the adviser's and
subadviser's credit analysis than generally would be the case with investments
in investment-grade securities. Lower-quality securities tend to be less
liquid than higher-quality debt securities because the market for them is not
as broad or active. The lack of a liquid secondary market may have an adverse
effect on market price and a Fund's ability to sell particular securities. For
a description of ratings, see Appendix A. For a more detailed description of
high-yield (high-risk) securities, see the SAI.
Illiquid Securities. The Income Fund may invest up to 10% of its respective
net assets in securities that are illiquid. Variable and floating rate
instruments that cannot be disposed of within seven days and repurchase
agreements and time deposits that do not provide for payment within seven days
after notice, without taking a reduced price, are subject to these limits. The
Small Cap Growth Fund, International Equity Fund, Socially Responsible Fund
and Income Fund may purchase securities which are not registered under the
Securities Act of 1933 (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act if they
are determined to be liquid. Any such security will be considered liquid so
long as it is determined by the subadviser that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities. As a matter of operating policy, each Fund will invest only in
Rule 144A securities that are deemed to be liquid, and will limit its
investment in Rule 144A securities to 20% of each Fund's net assets.
The Equity Fund and Short-Term Investment Fund may not invest in restricted
securities or securities not fully marketable.
Investment Companies. In connection with the management of its daily cash
position, the Small Cap Growth Fund may invest in securities issued by other
investment companies which invest in short-term debt securities and which seek
to maintain a $1.00 net asset value per share. The International Equity Fund
may purchase shares of investment companies investing primarily in foreign
securities, including so-called "country funds." Country funds have portfolios
consisting exclusively of securities of issuers located in one foreign
country. As a shareholder of another investment company, a Fund would bear,
along with other shareholders, its pro rata portion of the other company's
expenses, including advisory fees. These expenses would be in addition to the
expenses each bears directly in connection with its own operations.
Mortgage- and Asset-backed Securities. The Income Fund may invest in
mortgage- and asset-backed securities which represent shares in a pool of
mortgages or other debt. These securities are generally pass-through
securities, which means that principal and interest payments on the underlying
securities (less servicing fees) are passed through to shareholders on a pro
rata basis. These securities involve prepayment risk, which is the risk that
the underlying mortgages or other debt may be refinanced or paid off before
they mature, particularly during periods of declining interest rates. In that
case, a portfolio
C-14
<PAGE>
manager may have to reinvest the proceeds from the securities at a lower rate.
This could lower a fund's return and result in losses to the fund if some
securities were acquired at a premium. Potential market gains on a security
subject to prepayment risk may be more limited than potential market gains on
a comparable security that is not subject to prepayment risk. The Income Fund
may also invest in collateralized mortgage obligations ("CMOs"). In a CMO, a
series of bonds or certificates is issued in multiple classes, which have
varying levels of risks. For a more detailed description of mortgage- and
asset-backed securities, see the SAI.
Adjustable Rate Mortgage Securities. The Income Fund may invest in
adjustable rate mortgage securities. Adjustable rate mortgage securities are
pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. For a more detailed description of adjustable rate
mortgage securities, see the SAI.
Options and Futures Contracts. Options are the right, but not the
obligation to buy or sell a specified amount of securities or other assets on
or before a fixed date. Futures contracts are contracts that obligate the
buyer to receive and the seller to deliver an instrument or money at a
specified price on a specified date. The Funds may write covered call options,
buy put options, buy call options and write secured put options for the
purpose of hedging or earning additional income, which may be deemed
speculative or, with respect to the International Equity Fund, cross-hedging.
The Funds may also invest in financial futures contracts and options on
futures contracts to commit funds awaiting investment in securities or
maintain cash liquidity or for other risk management purposes. The primary
risks associated with the use of futures contracts and options are: (a) the
imperfect correlation between the change in market value of the instruments
held by a Fund and the price of the futures contract or option; (b) possible
lack of liquid secondary market for a futures contract and the resulting
inability to close a futures contract when desired; (c) losses caused by
unanticipated market movements, which are potentially unlimited; and (d) a
subadviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors.
Securities Lending. The Small Cap Growth Fund, International Equity Fund
and Socially Responsible Fund may seek additional income by lending securities
on a short-term basis. The securities lending agreements will require that the
loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a current basis equal in
value to at least the market value of the loaned securities. These Funds may
not make such loans in excess of 33 1/3 of the value of its total assets,
including collateral received. Loaned securities involve risks of delay in
receiving additional collateral or in recovering the loaned securities, or
possibly loss of rights in the collateral if the borrower of the securities
becomes insolvent. The Equity Fund, Balanced Fund, Income Fund and Short-Term
Investment Fund may not make loans to other persons, except by the purchase of
obligations in which the Fund is authorized to invest.
Strategic Transactions. The International Equity Fund and Socially
Responsible Fund may engage in so-called "strategic transactions," and in this
regard, the Funds may purchase and sell exchange-listed and over-the-counter
put and call options on securities, on securities indices and on other
financial instruments, purchase and sell financial futures contracts and
options thereon, enter into various interest rate transactions such as swaps,
caps, floors or collars, enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures, purchase and sell derivatives and
other similar instruments, and engage in other similar or related investment
techniques or strategies. Any or all of these investment techniques or
strategies may be used at any time and there is no particular technique or
strategy that dictates the use of one technique or strategy rather than
another, as use of any "strategic transaction" is a function of numerous
variables, including market conditions.
Although certain "strategic transactions" may be used to enhance potential
gain, the Funds will not enter into any "strategic transactions" for non-
hedging purposes if, as a result of entering into any such transactions, more
than 5% of a Fund's total assets would then be committed for non-hedging
purposes. "Strategic transactions" involving financial futures and options
thereon will be purchased, sold or entered into only for bona fide hedging,
risk management or portfolio management purposes and not for speculative
purposes, and with respect to transactions which do not qualify as hedging
transactions within the meaning of applicable regulations of the Commodity
Futures Trading Commission, the Funds will not enter into futures contracts or
related options if, as a result of entering into such futures contracts or
related options, the aggregate initial margin and premiums for establishing
all such positions exceed 5% of the fair market value of such Fund's net
assets, not including any in-the-money amount on any such options in computing
such 5%. The Funds will comply with applicable regulatory requirements when
implementing these "strategic transactions." For a more detailed description
of strategic transactions, see the SAI.
When-Issued Purchases and Forward Commitments. The Small Cap Growth Fund,
International Equity Fund, Socially Responsible Fund and Income Fund each may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Fund to purchase or sell particular securities with payment
and delivery taking place at a future date (perhaps one or two months later),
and permit a Fund to lock in a price or yield on a security it owns or intends
to purchase, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk,
C-15
<PAGE>
however, that the price or yield obtained in a transaction may be less
favorable than the price or yield available in the market when the securities
delivery takes place. The Funds do not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of their investment objectives. For a more detailed description of
when-issued purchases and forward commitments, see the SAI.
Management
The overall responsibility for the supervision of the affairs of the Funds
rests with the Board of Trustees. As described below, the Board has contracted
with others to provide certain services to the Funds.
Investment Adviser. Since March 1, 1999, the Horace Mann Mutual Funds (the
"Trust") employs Wilshire Associates Incorporated (the "Adviser") to manage
the investment and reinvestment of the assets of the Funds and to continuously
review, supervise and administer the Funds' investment programs under an
Investment Advisory Agreement dated March 1, 1999 (the "Investment Advisory
Agreement"). The Adviser's principal office is located at 1299 Ocean Avenue,
Santa Monica, California 90401-1085.
The Adviser's duties under the Investment Advisory Agreement include
recommending to the Board of Trustees one or more unaffiliated subadvisers to
provide a continuous investment program for each Fund or a portion of such
Fund's assets designated from time to time by the Adviser, including
investment, research, and management with respect to all securities and
investments and cash equivalents for the Fund or a designated portion of such
Fund's assets. The Adviser also reviews, monitors, and reports to the Board of
Trustees regarding the performance and investment procedures of each
subadviser and assists and consults with each subadviser in connection with
the Fund's continuous investment program. In addition, the Adviser maintains
books and records with respect to its services under the Investment Advisory
Agreement and furnishes the Board of Trustees with such periodic special
reports as the Board may request.
The Adviser selects investment subadvisers based on a continuing
quantitative and qualitative evaluation of their skills and proven abilities
in managing assets pursuant to a particular investment style. Short-term
performance is not by itself a significant factor in selecting or terminating
investment subadvisers, and therefore the Adviser does not anticipate frequent
changes in the investment subadvisers. Criteria for employment of investment
subadvisers includes, but is not limited to, the managers' philosophy and
process, people and organization, resources and performance. Investment
subadvisers may have different investment styles and security selection
disciplines.
The Adviser monitors the performance of each investment subadviser and of
the Funds and, to the extent it deems appropriate to achieve the Funds'
investment objective, reallocates assets among individual subadvisers or
recommends that the Funds employ or terminate particular investment
subadvisers.
Pursuant to an exemptive order from the SEC, the Adviser, without
shareholder approval, as normally would be required under the 1940 Act, may
replace or add subadvisers and enter into sub-advisory agreements with these
subadvisers upon approval of the Board of Trustees. Within sixty days of the
hiring of any new subadviser or the implementation of any proposed material
change to a sub-advisory agreement, shareholders will be furnished with an
information statement that contains all information that would be included in
a proxy statement regarding the new subadviser or sub-advisory agreement,
except as modified by exemptive relief. Moreover, the Adviser will not enter
into a sub-advisory agreement with any subadviser that is an "affiliated
person," as defined in the 1940 Act, of the Trust or the Adviser, other than
by reason of serving as a subadviser to one or more of the Funds, without
shareholder approval. In addition, whenever a subadviser is hired or fired,
the Adviser will provide the Board of Trustees with information showing the
expected impact on the Adviser's profitability and will report such impact
quarterly.
Each subadviser's fees will be paid by the Adviser out of the advisory fees
that it receives from each of the Funds. Fees paid to a subadviser of a Fund
with multiple subadvisers will depend upon the fee rate negotiated with the
Adviser and upon the percentage of the Fund's assets allocated to that
subadviser by the Adviser, which may vary from time to time. Thus, the basis
for fees paid to any such subadviser will not be constant, and the relative
amounts of fees paid to the various subadvisers of a Fund will fluctuate.
These internal fluctuations, however, will not affect the total advisory fees
paid by a Fund, which will remain fixed on the terms described above. The
Adviser may, however, determine in its discretion to waive a portion of its
fee if internal fluctuations in the fee to be paid to the subadvisers results
in excess profit to the Adviser. Because the Adviser will pay each
subadviser's fees out of its own fees from the Funds, there will not be any
"duplication" of advisory fees paid by the Funds.
Shareholders should recognize, however, that in engaging new subadvisers
and entering into sub-advisory agreements, the Adviser will negotiate fees
with those subadvisers and, because these fees are paid by the Adviser and not
directly by each Fund, any fee reduction negotiated by the Adviser may inure
to the Adviser's benefit and any increase may inure to its detriment. However,
the Adviser has voluntarily agreed to waive its fee to the extent any fee
reduction is negotiated with a subadviser. The fees paid to the Adviser by the
Funds and the fees paid to the subadvisers by the Adviser are considered by
the Board in approving the Funds' advisory and sub-advisory arrangements. Any
change in fees paid by a Fund to the Adviser would require shareholder
approval.
C-16
<PAGE>
For the services provided and the expenses assumed pursuant to the
Investment Advisory Agreement, the Adviser receives a fee based on each Fund's
average daily net assets, computed daily and payable monthly, at the following
annual rates:
<TABLE>
<CAPTION>
Fund Rate
- ---- ------
<S> <C>
Equity Fund............................................................. 0.400%
Balanced Fund........................................................... 0.400%*
Income Fund............................................................. 0.400%
Short-Term Investment Fund.............................................. 0.125%
Small Cap Growth Fund................................................... 1.150%
International Equity Fund............................................... 0.850%
Socially Responsible Fund............................................... 0.700%
</TABLE>
* The Balanced Fund operates under a fund of funds structure, primarily
investing in shares of the Equity Fund and the Income Fund. Under the fund
of funds arrangement, the Adviser receives directly from the Balanced Fund a
fee of 0.400% of the average daily net assets of the Balanced Fund that are
not invested in another Fund.
Through consulting arrangements, the Adviser has also provided the same
types of services to registered investment companies as are provided under the
Investment Advisory Agreement. As of December 31, 1999, the Adviser's
consulting division had approximately 220 clients with approximately $1
trillion in assets, for which the Adviser provides a variety of services, very
often including evaluation, selection, and monitoring of investment advisers,
as well as negotiating investment advisory contracts for the management of
clients' assets.
Prior to March 1, 1999, Horace Mann Investors, Inc. ("HM Investors") was
the investment adviser to the Small Cap Growth, International Equity and
Socially Responsible Funds since the beginning of operations of the Trust on
March 10, 1997, and the Equity, Income, Balanced and Short-Term Investment
Funds since the beginning of their operations as portfolios of the Trust on
May 1, 1997.
Under the prior investment management relationship, HM Investors was
compensated for both investment advisory and administrative services. HM
Investors continues to be compensated for administrative services under an
Administration Agreement described below. For the investment advisory and
administration services and facilities furnished to the Small Cap Growth Fund,
the International Equity Fund, and the Socially Responsible Fund, HM Investors
received, under the prior Management Agreement with the Trust, a monthly
management fee based upon each Fund's average daily net assets. This fee was
equal, on an annual basis, to 1.40% for the Small Cap Growth Fund, 1.10% for
the International Equity Fund, and 0.95% for the Socially Responsible Fund.
For the investment advisory and administration services and facilities
furnished to the Equity Fund, Balanced Fund, Income Fund, and Short-Term
Investment Fund, HM Investors received under the prior Management Agreement
with the Trust a two-part fee at the end of each month, as follows:
For part one, each Fund's management fee was accrued daily and calculated
on a pro rata basis by applying the following percentage rates to the
aggregate of all four Funds' daily net assets for the respective month: On the
first $100 million of assets, 0.250%; on assets over $100 million, 0.200%.
For part two, each Fund's management fee was accrued daily and calculated
by applying the following annual percentage rates to the average daily net
assets of each Fund for the respective month:
<TABLE>
<CAPTION>
Fund Net Assets Rate
- ---- ---------- ------
<S> <C> <C>
Equity Fund On initial $100 million 0.400%
On next $100 million 0.300%
Over $200 million 0.250%
Balanced Fund On initial $100 million 0.325%
On next $100 million 0.275%
On next $300 million 0.225%
Over $500 million 0.200%
Income Fund On initial $100 million 0.250%
On next $100 million 0.200%
Over $200 million 0.150%
Short-Term On initial $100 million 0.125%
Investment Fund On next $100 million 0.100%
Over $200 million 0.075%
</TABLE>
The Subadvisers. Each subadviser serves pursuant to a subadvisory agreement
with the Adviser. The Adviser uses a "manager of managers" approach for the
Equity Fund and Income Fund (and indirectly the Balanced Fund) by which the
Adviser allocates each Fund's assets among one or more "specialist" investment
subadvisers. The assets of the Equity Fund are managed in part by Sanford C.
Bernstein & Co., Inc. ("Sanford Bernstein"), in part by Mellon Equity
Associates, LLP ("Mellon Equity") and in part by Wellington Management
Company, LLP ("Wellington Management"). The assets of the Income Fund are
managed in part by Wellington Management and in part by Western Asset
Management Company ("Western Asset") and Western Asset Management Limited
("WAML"). Wellington Management also serves as the subadviser for the Short-
Term Investment Fund. BlackRock Financial Management, Inc. ("BlackRock")
serves as the subadviser for the Small Cap Growth Fund. Scudder Kemper
Investments, Inc., ("Scudder Kemper") serves as the subadviser for the
International Equity Fund and the Socially Responsible Fund.
The following chart summarizes who the subadvisers are for each Fund
(except the Balanced Fund*) and the current percentage of asset allocation to
each subadviser. The asset allocations for each subadviser are as of May 1,
2000, and are
C-17
<PAGE>
expected to deviate occasionally from these levels, but not significantly.
<TABLE>
<CAPTION>
% of Asset
Fund Subadviser Allocation
- ---- ---------- ----------
<S> <C> <C>
Equity Fund Bernstein 40%
Mellon Equity 30%
Wellington Management 30%
Income Fund Wellington Management 50%
Western Asset** 50%
Western Asset up to 50%
WAML up to 7.5%
Short-Term Wellington Management 100%
Investment Fund
Small Cap BlackRock 100%
Growth Fund
International Scudder Kemper 100%
Equity Fund
Socially Scudder Kemper 100%
Responsible Fund
</TABLE>
* Substantially all of the Balanced Fund's assets are allocated between shares
of the Equity Fund and Income Fund. See the Equity Fund and Income Fund in
the chart above, for the relevant subadvisers of the Balanced Fund.
** Of the 50% of the Income Fund's assets that are allocated to Western Asset,
up to 15% may be allocated to WAML.
Sanford Bernstein, 767 Fifth Avenue, New York, New York 10153, is an
investment advisory firm founded in 1967. As of October 31, 1999, Bernstein
managed about $85.6 billion in assets. Two managers are primarily responsibile
for overseeing Sanford Bernstein's portion of the Growth Fund. Marilyn G.
Fedak, Chief Investment Officer and Chairman of the U.S. Equity Investment
Polciy Group at Sanford Bernstein since 1993; has worked in investment
management since 1972; has managed portfolio investments since 1976; joined
Sanford Bernstein in 1984; B.A., Smith College; M.B.A., Harvard Business
School. Steven Pisarkiewicz, with Sanford Bernstein since 1989; Senior
Portfolio Manager since 1997; B.S., University of Missouri; M.B.A., University
of California at Berkeley.
Mellon Equity, 500 Grant Street, Suite 4200, Pittsburgh, Pennsylvania
15258, is a Pennsylvania limited liability partnership founded in 1987. Mellon
Bank, N.A., is the 99% limited partner and MMIP, Inc. is the 1% general
partner. MMIP, Inc. is a wholly owned subsidiary of Mellon Bank, N.A., which
itself is a wholly-owned subsidiary of the Mellon Financial Corporation.
Mellon Equity is a professional investment counseling firm that provides
investment management services to the equity and balanced pension, public fund
and profit-sharing investment management markets, and is an investment adviser
registered under the Investment Advisers Act of 1940. Mellon Equity has
discretionary management authority with respect to approximately $35 billion
of assets as of December 31, 1999.
Robert A. Wilk, CFA, Senior Vice President and Senior Portfolio Manager of
Mellon Equity, assumed the primary responsibility for the day-to-day
investment management of the portion of the Equity Fund's assets managed by
Mellon Equity on March 1, 1999. Mr. Wilk joined Mellon Equity in 1990 and
began his investment experience in 1971. Prior to joining Mellon Equity, Mr.
Wilk founded and was the Head of Equity Management at Triangle Portfolio
Associates, a former Mellon Bank subsidiary, which provided aggressive,
quantitatively managed portfolios. Mr. Wilk earned a B.S. in Management and
Electrical Engineering from M.I.T. and an M.S. in Finance from M.I.T.'s Sloan
School of Management. He is a member of the Association for Investment
Management and Research and of the Pittsburgh Society of Financial Analysts.
Wellington Management, 75 State Street, Boston, Massachusetts 02109, is a
registered investment adviser and has over $235 billion under management and
manages over 100 investment company portfolios as of December 31, 1999.
Matthew E. Megargel, CFA and Senior Vice President of Wellington
Management, serves as the portfolio manager for the portion of the Equity
Fund's assets managed by Wellington Management. Mr. Megargel began providing
investment advice to the Equity Fund on March 1, 1999. Mr. Megargel has been a
portfolio manager with Wellington Management since 1991 and has 17 years of
professional experience. He is supported by the U.S. Core Equity team and
Wellington Management's 33 global industry analysts, along with specialized
fundamental, quantitative, and technical analysts, macroanalysts and traders.
Robert D. Payne, CFA and Senior Vice President of Wellington Management,
serves as the portfolio manager of the Income Fund. Mr. Payne has been a
portfolio manager with Wellington Management's fixed-income group since 1972
and held the position of Vice President from 1972 until he was promoted to
Senior Vice President of Wellington Management in January 1996.
John C. Keogh, Senior Vice President of Wellington Management, serves as
the portfolio manager for the Short-Term Investment Fund. Mr. Keogh has been a
portfolio manager with Wellington Management's fixed income group since 1985
and held the position of Vice President from 1984 until he was promoted to
Senior Vice President of Wellington Management in January 1994.
Western Asset, a wholly owned subsidiary of Legg Mason, Inc., acts as
investment adviser to institutional accounts, such as corporate pension plans,
mutual funds, and endowment funds. Total assets under management were
approximately $58.5 billion as of September 30, 1999. Western Asset is located
at 117 East Colorado Blvd., Pasadena, CA 91105.
C-18
<PAGE>
Western Asset uses a strategy group comprised of professionals who are
expert in various investment disciplines to determine the investments for its
portion of the Income Fund.
WAML, 155 Bishopsgate, London, EC2M 3XG, is a registered investment adviser
founded in 1984 by the American Express organization. In 1992, the firm became
a wholly-owned indirect subsidiary of Lehman Brothers Holdings, Inc. In 1996,
the firm was acquired by Legg Mason, Inc., on behalf of Western Asset
Management Company. WAML is responsible for the management of global and
international fixed income mandates including the non-US portion of Western
Asset's US domestic clients' portfolios. WAML has approximately $3 billion
under management as of December 31, 1999. WAML uses a strategy group comprised
of professionals who are expert in various investment diciplines to determine
the investments for its portion of the Income Fund.
BlackRock, 345 Park Avenue, New York, New York 10154, is a subsidiary of
PNC Bank and a registered investment adviser. BlackRock has approximately $165
billion under management as of December 31, 1999.
The Small Cap Growth Fund is managed by BlackRock's Small Cap Growth Team.
The team is supported by BlackRock's Small Cap Growth research analysts along
with quantitative analysts and traders. The Small Cap Growth team includes the
following individuals:
William J. Wykle is the Fund's lead portfolio manager. Mr. Wykle, who has
over 32 years of investment experience, has been a portfolio manager at
BlackRock since 1995 and had been a portfolio manager with PNC Asset
Management Group since 1986.
Thomas P. Callan, Portfolio Manager, has been with BlackRock since 1995 and
had been with PNC Bank since 1988. Mr. Callan has over 10 years of investment
experience.
Michael D. Carey, CFA, Vice President and investment manager, has primary
responsibility for the coverage of stocks in the business and commercial
services sector. Mr. Carey has been with BlackRock since 1992 and has over 8
years of investment experience.
Scudder Kemper, 345 Park Avenue, New York, New York, a registered
investment adviser, serves as the investment subadviser of the International
Equity Fund and Socially Responsible Fund. Zurich Financial Services, a
leading internationally recognized provider of insurance and financial
services in property/casualty and life insurance, reinsurance and structured
financial solutions, as well as asset management, owns approximately 70% of
Scudder Kemper with the balance owned by Scudder Kemper officers and
employees. Scudder Kemper is responsible for managing the Funds, subject to
the direction of the Board of Trustees and the Adviser. Scudder Kemper is one
of the largest and most experienced management organizations worldwide,
managing in excess of $280 billion in assets globally as of December 31, 1999.
The International Equity Fund and Socially Responsible Fund are managed by
teams of investment professionals who individually represent different areas
of expertise and who together develop investment strategies and make buy and
sell decisions. Supporting the fund managers are Scudder Kemper's many
economists, research analysts, traders and other investment specialists
located in offices across the United States and around the world.
The International Equity Fund's team includes the following individuals:
Effective August 1, 1997, Irene Cheng became the team's Lead Portfolio
Manager. Ms. Cheng, who has over 13 years of industry experience and joined
Scudder Kemper in 1993, focuses on portfolio management and equity strategy
for Scudder Kemper's international equity investments.
Nicholas Bratt, Portfolio Manager, leader of the global equity group,
directs Scudder Kemper's overall global equity investment strategies. Mr.
Bratt joined Scudder Kemper and the team in 1976.
Carol L. Franklin, Portfolio Manager, a member of the international equity
team, joined Scudder Kemper International Fund's portfolio management team in
1986. Ms. Franklin, who has over 20 years of experience in finance and
investing, joined Scudder Kemper in 1981.
Marc Slendebroek, Portfolio Manager, a member of the international equity
team, joined Scudder Kemper in 1994. Mr. Slendebroek began his investment
career in 1989.
The Socially Responsible Fund's team includes the following individuals:
Lori Ensinger, Lead Portfolio Manager, joined Scudder Kemper and the
portfolio management team in 1993. Ms. Ensinger focuses on stock selection and
investment strategy. She has worked as a portfolio manager since 1983.
Diane Sobin, Portfolio Manager, is the Fund's chief analyst and strategist
for convertible securities. Ms. Sobin, who has 15 years of investment
experience, joined Scudder Kemper in 2000 as a portfolio manager.
Administrator. Horace Mann Investors, Inc. ("HM Investors"), a wholly owned
subsidiary of Horace Mann Educators Corporation which is the indirect owner of
Horace Mann Life Insurance Company ("HMLIC"), serves as administrator to the
Funds pursuant to an Administration Agreement dated March 1, 1999 with the
Trust (the "Administration Agreement"). HM Investors provides for the
management of the business affairs of each Fund, including, but
C-19
<PAGE>
not limited to, office space, secretarial and clerical services, bookkeeping
services, wire and telephone communications services, and other similar
services necessary for the proper management of each Fund's business affairs.
Under the current administration agreement, the Funds agree to assume and pay
the charges and expenses of its operations, including, by way of example, the
compensation of Trustees other than those affiliated with HM Investors,
charges and expenses of independent auditors, of legal counsel, of any
transfer or dividend disbursing agent, of the custodian, all costs of
acquiring and disposing of portfolio securities, interest, if any, on
obligations incurred by the Funds, reports and notices to shareholders, other
like miscellaneous expenses, and all taxes and fees to federal, state, or
other governmental agencies.
For the services and facilities furnished to the Funds, HM Investors
receives a fee based upon the combined assets of the Funds as follows: 0.25%
of the first $1 billion of assets and 0.20% of assets in excess of $1 billion.
An administration fee is charged directly against all assets in the Balanced
Fund. However, in order to avoid duplication of charges, under the fund of
funds structure, HM Investors has indicated that it intends to waive the
majority of the administrative fees charged to the Balanced Fund directly. In
addition, Balanced Fund shareholders will indirectly pay the administration
fee of the assets invested in the Equity Fund and Income Fund under the fund
of funds structure. Therefore, the aggregate administration fee directly and
indirectly borne by shareholders of the Balanced Fund will be higher than the
fees shareholders would bear if they invested directly in the Equity Fund and
Income Fund.
Support Services Agreement. The Trust has a support services agreement (the
"Support Services Agreement") with HMLIC under which the Trust has retained
HMLIC to provide certain administrative services to the Trust. As the Trust's
servicer, HMLIC will provide those administrative and support services
reasonably necessary to coordinate the activities of the Funds with those of
the separate account of HMLIC (for which the Funds serve as the underlying
investment medium) other than the administrative services provided by HM
Investors under the Administration Agreement. As compensation for its
services, HMLIC will receive a fee equal to 0.15% on the first $1 billion in
net assets and 0.10% on all assets over $1 billion.
Transfer Agent and Dividend Paying Agent
Horace Mann Service Corporation
One Horace Mann Plaza
P.O. Box 4657
Springfield, Illinois 62708-4657
Custodian and Fund Accounting Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Additional Performance Information
Other Information on the Performance of Sanford Bernstein, Mellon Equity and
Wellington Management
The table below sets forth information relating to prior performance by
Sanford Bernstein, Mellon Equity and Wellington Management, each for an AIMR
(Association for Investment Management and Research) compliant composite of
accounts managed in a similar manner as the Equity Fund and the equity portion
of the Balanced Fund. The performance data is included to provide investors
with the performance record for accounts managed by the subadvisers in a
substantially similar manner as the Equity Fund and the equity portion of the
Balanced Fund.
The table below shows its performance record for each subadviser over the
specified time periods. Each of the subadvisers' composites included in the
following performance composites have an investment objective and investment
policies, strategies and risks substantially similar to those of the Equity
Fund and the equity portion of the Balanced Fund.
The performance data included for Sanford Bernstein, Mellon Equity and
Wellington Management does not represent the past, present or future
performance of the Equity Fund or the equity portion of the Balanced Fund. The
actual past performance of the Equity Fund and Balanced Fund is shown on pages
3 and 5, respectively, of this prospectus, and shows performance for the Funds
prior to the change in advisers, which became effective March 1, 1999. Past
performance is no guarantee of future results. Share prices and investment
returns will fluctuate, reflecting market conditions and cash flows, as well
as changes in company-specific fundamentals of portfolio securities.
Consequently, investments in the Funds may be worth more or less than their
original cost at the time of redemption. The performance presentation is not
audited.
In addition, performance information for the Wilshire Large Value Index and
the Lipper Variable Annuity Growth & Income Index has been included for
comparison. All returns presented were calculated on a total return basis and
include all dividends and interest, accrued income and realized and unrealized
gains and losses. All returns also reflect the brokerage costs borne by the
accounts for all periods presented. The use of a different methodology to
calculate performance could result in different performance data.
C-20
<PAGE>
Average Annual Total Returns
<TABLE>
<CAPTION>
Wilshire Lipper Variable
Wellington Large Annuity Growth
Sanford Mellon Equity Management Value Income
Years Ended 12/31/99 Bernstein(/1/) Associates(/2/) Company(/3/) Index(/4/) Index(/5/)
- ------------------------ -------------- --------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
One Year................ 8.20% 5.64% 19.80% 8.27% 11.61%
Three Years............. 18.48 19.89 26.82 18.36 18.12
Five Years.............. 23.17 23.68 26.82 23.34 20.91
</TABLE>
(1) Sanford Bernstein composite is presented gross of fees for the Diversified
Equity Value Product.
(2) Mellon Equity Associates composite is presented gross of fees for their
Russell 1000 Value product.
(3) Wellington Management composite is presented gross of fees for their Core
Growth and Income product.
(4) The Wilshire Large Value Index is an unmanaged, capitalization-weighted
index of large-capitalization, value oriented securities. Index returns
reflect dividends reinvested net of withholding tax. Investments cannot be
made directly into the Wilshire Large Value Index.
(5) The Lipper Variable Annuity Growth & Income Index is a representation of
average returns for select growth and income subaccounts in various
variable annuity programs. Index returns reflect dividends reinvested net
of withholding tax. Investments cannot be made directly into the Lipper
Variable Annuity Growth & Income Index.
Other Information on the Performance of BlackRock
The table below sets forth performance information relating to the
BlackRock Small Cap Growth Equity Portfolio-Investor A Shares ("BlackRock
Portfolio"), which is also managed by BlackRock. The BlackRock Portfolio is a
portfolio of an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and which has an
investment objective, and investment policies, strategies and risks
substantially similar to those of the Small Cap Growth Fund.
The performance data for the BlackRock Portfolio is included to provide
investors with the performance record for an account substantially similar to
the Small Cap Growth Fund. Although BlackRock manages additional accounts in a
similar fashion, performance for those accounts has not been included because
the gross performance record would not be materially changed by inclusion of
such other accounts. In addition, performance information from the Russell
2000 Growth Index ("Russell 2000 Growth") has been included for comparison.
The actual total operating expenses of the BlackRock Portfolio were 1.23% for
the fiscal year ended September 30, 1999, and vary from year to year. The
gross operating expenses for the Small Cap Growth Fund were 1.71% for the
fiscal year ended December 31, 1999. HM Investors voluntarily waived fees and
reimbursed certain expenses. For the fiscal year ended December 31, 1999, the
net operating expenses were 1.62%.
The BlackRock Portfolio performance data does not represent the past,
present or future performance of the Small Cap Growth Fund. Past performance
is no guarantee of future results; investors should not consider this
performance data as an indication of future performance of the Small Cap
Growth Fund or of BlackRock. Share prices and investment returns will
fluctuate, reflecting market conditions and cash flows, as well as changes in
company-specific fundamentals of portfolio securities. Consequently,
investments in either the BlackRock Portfolio or the Small Cap Growth Fund may
be worth more or less than their original cost at the time of redemption. The
performance presentation is not audited.
All returns presented were calculated on a total return basis and include
all dividends and interest, accrued income and realized and unrealized gains
and losses. Performance reflects the deduction of a 4.5% front-end sales
charge for the BlackRock Portfolio. The Small Cap Growth Fund does not have a
front-end sales charge. All returns also reflect the brokerage costs borne by
the BlackRock Portfolio for all periods presented. The use of a different
methodology to calculate performance could result in different performance
data.
Average Annual Total Returns(/1/)
<TABLE>
<CAPTION>
BlackRock Russell
Portfolio(/2/) 2000 Growth(/3/)
-------------- ----------------
<S> <C> <C>
Year or Periods Ended 12/31/99
One Year.......................................... 64.16% 43.10%
Five Years........................................ 29.60% 18.99%
From Inception (9/14/93)............................ 24.61% 15.46%
</TABLE>
(1) Total Return Calculation--The Fund commenced operations on September 14,
1993. Class A shares were introduced on September 15, 1993. In accordance
with Securities and Exchange Commission policy, performance information
presented for Class A shares prior to their introduction date does not
reflect service and distribution fees and certain other expenses borne by
Class A shares which, if reflected, would reduce the performance quoted.
HM Investors should note that the information presented for Class A shares
prior to their introduction is based upon historical expenses of the
predecessor class, which do not reflect the actual expenses that an
investor would incur as a holder of Class A shares of the Fund.
(2) Had the sales charge not been reflected, the performance figures for the
one year, five years and since inception periods would have been 71.89%,
30.80% and 25.53%, respectively.
(3) Total return data is presented for each period. The Russell 2000 Growth is
an unmanaged securities index composed of those Russell 2000 Growth
securities with a greater-than-average growth orientation. The Russell
2000 Growth reflects the reinvestment of dividends and capital gain
distributions, if any, but does not reflect fees, brokerage commissions or
other expenses of investing. The Russell 2000 Growth is an unmanaged
securities index, and an investment cannot be made directly in the Russell
2000 Growth.
Other Information on the Performance of Scudder Kemper
International Equity Performance. The table below sets forth performance
information relating to the International Portfolio of the Scudder Kemper
Variable Life Investment Fund ("Scudder Kemper International Portfolio") that
is also managed by Scudder Kemper. The Scudder Kemper International Portfolio
is a portfolio of an open-end management investment
C-21
<PAGE>
company registered under the 1940 Act, and is the only other account managed
by Scudder Kemper that has investment objectives, policies, strategies and
risks substantially similar to those of the International Equity Fund.
The performance data for the Scudder Kemper International Portfolio is
included to provide investors with the performance record for an account
substantially similar to the International Equity Fund. In addition,
performance information from the Morgan Stanley Capital International Europe,
Australia, Far East Index ("MSCI EAFE Index") has been included for
comparison. The actual total operating expenses of the Scudder Kemper
International Portfolio were 1.03% in 1999, and vary from year to year. The
gross operating expenses for the International Equity Fund were 1.76% for the
fiscal year ended December 31, 1999. HM Investors voluntarily waived fees and
reimbursed certain expenses. For the fiscal year ended December 31, 1999, the
net operating expenses were 1.37%.
The Scudder Kemper International Portfolio performance data does not
represent the past, present or future performance of the International Equity
Fund. Past performance is no guarantee of future results; investors should not
consider this performance data as an indication of future performance of the
International Equity Fund or of Scudder Kemper. Share prices and investment
returns will fluctuate reflecting market conditions and cash flows, as well as
changes in company-specific fundamentals of portfolio securities.
Consequently, investments in either the Scudder Kemper International Portfolio
or the International Equity Fund may be worth more or less than their original
cost at the time of redemption. The performance presentation is not audited.
All returns presented were calculated on a total return basis and include
all dividends and interest, accrued income and realized and unrealized gains
and losses. All returns also reflect the brokerage costs borne by the Scudder
Kemper International Portfolio for all periods presented. The use of a
different methodology to calculate performance could result in different
performance data.
Average Annual Total Returns
<TABLE>
<CAPTION>
Scudder
Kemper
International MSCI EAFE
Portfolio Index(/1/)
------------- ----------
<S> <C> <C>
Year or Periods Ended 12/31/99
One Year............................................... 54.51% 25.96%
Five Years............................................. 20.56 12.83
Ten Years.............................................. 13.25 7.01
From Inception (5/1/87)................................ 13.52 7.68
</TABLE>
(1) Total return data is presented for each period. The MSCI EAFE Index is an
unmanaged capitalization weighted measure of stock markets in Europe,
Australia, and the Far East. Index returns assume dividends reinvested net
of withholding tax, and unlike Fund returns, do not reflect fees or
expenses. Returns reflect the investment of income dividends and capital
gain distributions, if any, but do not reflect fees, brokerage commissions
or other expenses of investing. Investment cannot be made directly into
the MSCI EAFE Index.
Socially Responsible Growth and Income Performance. The table below sets
forth performance information relating to the Scudder Kemper Socially
Responsive Growth & Income Equity Only Composite ("Scudder Kemper Socially
Responsive Composite"). The performance data for the Scudder Kemper Socially
Responsive Composite is included to provide investors with the performance
record for a composite of accounts managed in a similar manner as the Socially
Responsible Fund. In addition, performance information from the Standard &
Poor's 500 Stock Index ("S&P 500") has been included for comparison. The
Scudder Kemper Socially Responsive Composite currently is a composite of nine
separately managed accounts that are managed by Scudder Kemper. The Scudder
Kemper Socially Responsive Composite is not registered under the 1940 Act, and
thus, was not subject to certain investment and operational restrictions
imposed by the 1940 Act. If the product had been registered under the 1940 Act
or subject to certain restrictions imposed by the Internal Revenue Code, the
performance noted below might have been lower. The Scudder Kemper Socially
Responsive Composite is composed of accounts with investment objectives,
policies, strategies and risks substantially similar to those of the Socially
Responsible Fund. However, the Socially Responsible Fund differs from the
accounts in the Scudder Kemper Socially Responsive Composite in certain ways,
none of which HM Investors or Scudder Kemper believe would cause a material
change in investment results. While the nine accounts in the composite are
managed following Scudder Kemper's growth and income investment style, each
account has socially responsible screens that are used to exclude certain
types of industries as investment options. Each account uses screens that are
somewhat modified from those used by the Socially Responsible Fund. The
performance of the Scudder Kemper Socially Responsive Composite is presented
net of the gross operating expenses for the Socially Responsible Fund which is
1.16%. HM Investors voluntarily waived fees and reimbursed certain expenses.
For the fiscal year ending December 31, 1999, the net operating expenses were
1.10%.
C-22
<PAGE>
The Scudder Kemper Socially Responsive Composite performance data does not
represent the past, present or future performance of the Socially Responsible
Fund. Past performance is no guarantee of future results; investors should not
consider this performance data as an indication of future performance of the
Socially Responsible Fund or of Scudder Kemper. Principal value and investment
returns will fluctuate reflecting market conditions and cash flows, as well as
changes in company-specific fundamentals of portfolio securities.
Consequently, the account value of accounts in the Scudder Kemper Socially
Responsive Composite or investments in the Socially Responsible Fund may be
worth more or less than their original cost at the time of redemption. The
performance presentation is not audited.
All returns presented were calculated on a total return basis and include
all dividends and interest, accrued income and realized and unrealized gains
and losses. All returns also reflect the brokerage costs borne by the accounts
within the Scudder Kemper Socially Responsive Composite for all periods
presented. The use of a different methodology to calculate performance could
result in different performance data.
Average Annual Total Returns
<TABLE>
<CAPTION>
Scudder Kemper
Socially Responsive
Composite S&P 500(/1/)
------------------- ------------
<S> <C> <C>
Year or Periods
Ended 12/31/99
One Year....................................... 5.33% 21.04%
Five Years..................................... 20.13 28.56
Ten Years...................................... 15.40 18.21
From Inception (12/31/89) 15.40 18.21
</TABLE>
(1) Total return data is presented for each period. The S&P 500 is an
unmanaged index considered to be generally representative of the U.S.
stock market. Index returns assume dividends reinvested net of withholding
tax. Investment cannot be made directly into the S&P 500.
Purchases and Redemptions
Shares of each Fund are currently sold only to HMLIC separate accounts. In
the event that HMLIC establishes additional separate accounts, shares of these
Funds may be made available for purchase by such additional separate accounts.
Previously, shares of the Equity Fund were available to the public. While
Equity Fund shares may no longer be purchased by the general public, existing
public shareholders may acquire additional shares through the automatic
reinvestment of dividends and distributions.
Each Fund sells and redeems its shares at net asset value per share,
without a sales or redemption charge. The net asset value of each Fund's
shares is determined on each day the New York Stock Exchange ("NYSE") is open
for trading at the close of the NYSE (normally 3:00 p.m. Central Time). No
valuations are made for any day that the NYSE is closed, and for 2000, no
valuations are made for the day after Thanksgiving. The computation is made by
dividing the net assets by the number of outstanding shares. Net assets are
equal to the total assets of the Fund, less its liabilities.
A purchase is effected at the price based on the next calculation of net
asset value per share after receipt of a request. A security listed or traded
on an exchange is valued at its last sales price on the exchange where it is
principally traded. In the absence of a current quotation, the security is
valued at the mean between the last bid and asked prices on the exchange.
Securities traded over-the-counter are valued at the last current bid price.
Debt securities that have a remaining maturity of 60 days or less are valued
at cost, plus or minus any amortized discount or premium. When market
quotations are not available, securities are valued at fair value as
determined in good faith by the Board of Trustees.
Except in extraordinary circumstances and as permissible under the 1940
Act, redemption proceeds are paid on or before the third business day
following the date the request for redemption is received.
Redemption of Equity Fund Shares by Existing Public Shareholders--The
Equity Fund will redeem shares from public shareholders at the net asset value
per share next determined after receipt of a redemption request. If stock
certificates have been issued, the signature of each party must be guaranteed
by an officer of a commercial bank or trust company or a member of the New
York Stock Exchange. If certificates are lost, the shareholder will need to
submit an Affidavit of Loss form with the signature(s) notarized if 100 or
less shares are surrendered, and a Lost Instrument Bond will be required if
over 100 shares are surrendered. A Lost Instrument Bond can be obtained from
an insurance carrier. The cost for this bond must be paid by the shareholder.
If no certificates have been issued to the shareholder, redemption may be
accomplished by signing a written request. The request should be sent to the
Horace Mann Equity Fund, P.O. Box 4657, Springfield, Illinois 62708-4657, and
should identify the account by number and the name(s) in which the account is
registered. The request must be signed exactly as the account is registered.
On a jointly held account, all owners must sign.
All redemption requests by mail should be sent certified mail with return
receipt requested. Provided the request is received in good form, payment for
shares redeemed will be made by the Fund within three business days of the
receipt.
Systematic Cash Withdrawal Plan--When an Equity Fund public shareholder has
accumulated $5,000 or more of Equity Fund shares in his or her account, shares
may be withdrawn automatically through the Systematic Cash Withdrawal Plan
(the "Plan"). A shareholder may receive checks monthly, quarterly,
semiannually or annually in any amount requested, but not less than $25. A
Plan application is available,
C-23
<PAGE>
upon request, from the transfer agent. The value of a public shareholder's
account is determined at the net asset value on the date a Plan application is
received by the Equity Fund. Payments under the Plan will be made either on
the 1st or 15th of the month, as selected by the shareholder. A sufficient
number of shares will be redeemed from the shareholder's account to provide
funds for payments made under the Plan, thus reducing the shareholder's
account value. Depending on the amount and frequency of withdrawals, payments
under the Plan may exhaust the shareholder's account. There is no redemption
charge with respect to the shares redeemed from the shareholder's account. A
Plan may be terminated upon written request.
Dividends, Distributions and Federal Taxes
Each Fund distributes substantially all its net investment income and net
capital gains to shareholders each year. All dividends or distributions paid
on Fund shares held by a separate account, net of separate account contract
charges, are automatically reinvested in shares of the respective Fund at the
net asset value determined on the dividend payment date.
Under the Internal Revenue Code ("Code"), HMLIC is taxed as a life
insurance company and the operations of its separate accounts are taxed as
part of its total operations. Under current interpretations of existing
federal income tax law, investment income and capital gains of separate
accounts are not subject to federal income tax to the extent applied to
increase the value of variable annuity contracts. Tax consequences to variable
annuity contract holders are described in a separate prospectus issued by the
HMLIC.
Public shareholders of the Equity Fund may elect to receive cash dividends
and will be notified of the amount and type of distribution. If a shareholder
elects to receive a cash dividend and the dividend check is returned by the
postal service, attempts will be made to locate the shareholder. If the
attempts to locate are unsuccessful, the shareholder's dividend option will be
changed to reinvestment. When new shares are added to an Equity Fund public
shareholder's account through the reinvestment of dividends or when
distributions occur (which dividends will be taxable to the shareholder
whether paid in cash or reinvested in additional shares), a confirmation
statement is sent to the public shareholder showing the number of shares that
were credited or debited to the account, the net asset value per share and the
total number of shares in the account. A dividend or capital gains
distribution will reduce the per share net asset value by the amount of the
dividend or distribution. Shortly after the end of each year, Equity Fund
shareholders will be informed of the amount of and the federal income tax
treatment of all distributions made during the year. If not otherwise subject
to tax on their income, public shareholders will not be required to pay tax on
amounts distributed to them. Shareholders must determine for themselves the
applicability of state and local taxes to dividends and distributions received
on Equity Fund shares.
By law, a Fund must withhold 31% of your distributions and proceeds if you
do not provide your correct taxpayer identification number, or certify that
such number is correct, or if the IRS instructs the Fund to do so.
The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers concerning
the federal, state, local or foreign tax consequences of an investment in a
Fund.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
C-24
<PAGE>
Equity Fund Financial Highlights
- -------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each
Fund's financial performance for the past 5 years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in each Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with each Fund's financial statements, are included in the annual
report, which is available upon request.
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 24.34 $ 25.66 $ 23.76 $ 21.66 $ 17.64
Income From Investment
Operations:
Net Investment Income/1./. 0.26 0.41 0.40 0.43 0.52
Net Gains or Losses on
Securities (both realized
and unrealized)/1....../. (0.91) 1.51 5.09 5.08 5.41
-------- -------- -------- -------- --------
Total From Investment
Operations................. (0.65) 1.92 5.49 5.51 5.93
Less Distributions:
Dividends (from net
investment income)....... 0.25 0.41 0.39 0.40 0.49
Distributions (from
capital gains)........... 1.52 2.83 3.20 3.01 1.42
Returns of Capital........ 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total Distributions......... 1.77 3.24 3.59 3.41 1.91
-------- -------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 21.92 $ 24.34 $ 25.66 $ 23.76 $ 21.66
======== ======== ======== ======== ========
Total Return (%)/2/,/3..../. (2.54)% 7.64% 23.45% 25.28% 33.67%
Ratios/Supplemental Data:
Net Assets, End of Period
($000s).................. $625,133 $670,731 $598,502 $430,556 $297,100
Ratio of Expenses to
Average Net Assets/4/,/5/
......................... 0.73 % 0.51% 0.53% 0.59% 0.63%
Ratio of Net Income to
Average Net Assets/4.../. 1.09 % 1.57% 1.50% 1.79% 2.50%
Portfolio Turnover Rate
(%)...................... 205.70 % 59.63% 54.56% 67.63% 64.59%
Ratio of Expenses to
Average Net Assets
(before waived and
reimbursed expenses)..... 0.79 % -- -- -- --
Ratio of Net Income to
Average Net Assets
(before waived and
reimbursed expenses...... 1.04 % -- -- -- --
</TABLE>
/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds' Annual Report for the respective year.
/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
/4/Ratios of Expenses and Net Investment Income to Average Net Assets do not
reflect commission credits and earnings credits on cash balances.
/5/Certain expenses for the Growth Fund were assumed or waived during 1999.
C-25
<PAGE>
Balanced Fund Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 18.90 $ 19.82 $ 18.94 $ 18.00 $ 15.26
Income From Investment
Operations:
Net Investment Income/1./. 0.62 0.73 0.65 0.60 0.67
Net Gains or Losses on
Securities (both realized
and unrealized)/1....../. (0.84) 0.77 2.92 2.70 3.46
-------- -------- -------- -------- --------
Total From Investment
Operations................. (0.22) 1.50 3.57 3.30 4.13
Less Distributions:
Dividends (from net
investment income)....... 0.63 0.74 0.62 0.57 0.61
Distributions (from
capital gains)........... 0.78 1.68 2.07 1.79 0.78
Returns of Capital........ 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total Distributions......... 1.41 2.42 2.69 2.36 1.39
-------- -------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 17.27 $ 18.90 $ 19.82 $ 18.94 $ 18.00
======== ======== ======== ======== ========
Total Return (%)/2/,/3..../. (1.11)% 7.68% 19.04% 18.27% 27.12%
Rations/Supplemental Data:
Net Assets, End of Period
($000s).................. $402,539 $427,920 $387,110 $300,551 $228,193
Ratio of Expenses to
Average Net Assets/4.../. 0.75 % 0.50% 0.51% 0.56% 0.59%
Ratio of Net Income to
Average Net
Assets/4/,/5.........../. 3.30 % 3.60% 3.12% 3.12% 3.79%
Portfolio Turnover Rate
(%)...................... 155.53 % 63.69% 77.54% 72.10% 64.80%
Ratio of Expenses to
Average Net Assets
(before waived and
reimbursed expenses)..... 0.77 % -- -- -- --
Ratio of Net Income to
Average Net Assets
(before waived and
reimbursed expenses...... 3.28 % -- -- -- --
</TABLE>
/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds' Annual Report for the respective year.
/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
/4/Ratio of expenses to average net assets do not reflect commission credits.
/5/Certain expenses for the Balanced Fund were assumed or waived during 1999.
C-26
<PAGE>
Income Fund Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997 1996 1995
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 13.24 $ 13.00 $12.69 $ 13.03 $ 12.02
Income From Investment Operations:
Net Investment Income/1......./. 0.76 0.78 0.81 0.76 0.80
Net Gains or Losses on
Securities (both realized and
unrealized)/1................/. (0.97) 0.27 0.39 (0.31) 0.99
------- ------- ------ ------- -------
Total From Investment Operations.. (0.21) 1.05 1.20 0.45 1.79
Less Distributions:
Dividends (from net investment
income)........................ 0.79 0.69 0.85 0.79 0.78
Distributions (from capital
gains)......................... -- 0.12 0.04 -- --
Returns of Capital.............. 0.00 0.00 0.00 0.00 0.00
------- ------- ------ ------- -------
Total Distributions............... 0.79 0.81 0.89 0.79 0.78
------- ------- ------ ------- -------
Net Asset Value, End of Period.... $ 12.24 $ 13.24 $13.00 $ 12.69 $ 13.03
======= ======= ====== ======= =======
Total Return (%)/2/,/3........../. (1.57)% 8.09% 9.42% 3.50% 14.93%
Ratios/Supplemental Data:
Net Assets, End of Period
($000s)........................ $13,175 $13,959 $9,658 $10,848 $10,532
Ratio of Expenses to Average Net
Assets/4/,/5................./. .99% 0.88% 0.92% 0.70% 0.62%
Ratio of Net Income to Average
Net Assets..................... 5.83% 5.85% 6.09% 5.88% 6.16%
Portfolio Turnover Rate (%)..... 33.09% 46.60% 96.80% 112.60% 74.53%
Ratio of Expenses to Average Net
Assets (before waived and
reimbursed expenses)........... 1.03% -- -- 0.91% 0.88%
Ratio of Net Income to Average
Net Assets (before waived and
reimbursed expenses)........... 5.79% -- -- 5.67% 5.89%
</TABLE>
/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds' Annual Report for the respective year.
/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
/4/Ratios of Expenses and Net Investment Income to Average Net Assets do not
reflect Commission Credits and earnings credit on asset balances.
/5/Certain expenses for the Income Fund were assumed or waived by Horace Mann
Investors, Inc. through December 31, 1996.
C-27
<PAGE>
Short-Term Investment Fund Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 9.98 $ 9.99 $10.03 $10.00 $10.08
Income From Investment Operations:
Net Investment Income/1............/. 0.47 0.49 0.51 0.50 0.53
Net Gains or Losses on Securities
(both realized and unrealized)/1../. 0.01 0.01 -- (0.01) --
------ ------ ------ ------ ------
Total From Investment Operations....... 0.48 0.50 0.51 0.49 0.53
Less Distributions:
Dividends (from net investment
income)............................. 0.56 0.51 0.55 0.46 0.61
Distributions (from capital gains)... 0.01 -- -- -- --
Returns of Capital................... 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions.................... 0.57 0.51 0.55 0.46 0.61
------ ------ ------ ------ ------
Net Asset Value, End of Period......... $ 9.89 $ 9.98 $ 9.99 $10.03 $10.00
====== ====== ====== ====== ======
Total Return (%)/2/,/3.............../. 4.77% 4.97% 5.09% 5.02% 5.25%
Ratios/Supplemental Data:
Net Assets, End of Period ($000s).... $1,743 $1,331 $1,151 $1,229 $1,006
Ratio of Expenses to Average Net
Assets/4........................../. 0.32% 0.69% 0.50% 0.53% 0.84%
Ratio of Net Income to Average Net
Assets.............................. 4.71% 4.78% 4.98% 4.93% 5.11%
Portfolio Turnover Rate (%).......... 0.00% 0.00% 0.00% 0.00% 0.00%
Ratio of Expenses to Average Net
Assets (before waived and reimbursed
expenses)........................... 1.90% 2.59% 2.52% 2.44% 2.35%
Ratio of Net Income to Average Net
Assets (before waived and reimbursed
expenses)........................... 3.13% 2.88% 2.96% 3.02% 3.60%
</TABLE>
/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds' Annual Report for the respective year.
/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
/4/Certain expenses for the Short-Term Investment Fund were assumed or waived
by Horace Mann Investors, Inc. through December 31, 1999.
C-28
<PAGE>
Small Cap Growth Fund Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 12.38 $ 11.70 $ 10.00
Income From Investment Operations:
Net Investment Income/1.................../. (0.15) (0.07) (0.02)
Net Gains or Losses on Securities (both
realized and unrealized)/1.............../. 8.96 0.75 1.72
-------- -------- --------
Total From Investment Operations.............. 8.81 0.68 1.70
Less Distributions:
Dividends (from net investment income)...... -- -- --
Distributions (from capital gains).......... 1.43 -- --
Returns of Capital.......................... 0.00 0.00 0.00
-------- -------- --------
Total Distributions........................... 1.43 -- --
-------- -------- --------
Net Asset Value, End of Period................ $ 19.76 $ 12.38 $ 11.70
======== ======== ========
Total Return (%)/2/,/3/,/4................../. 71.55 % 5.81 % 17.01 %
Ratios/Supplemental Data:
Net Assets, End of Period ($000s)........... $ 60,497 $ 28,655 $ 16,525
Ratio of Expenses to Average Net Assets/5./. 1.50 % 1.11 % 0.78 %
Ratio of Net Income to Average Net Assets... (1.03)% (0.59)% (0.19)%
Portfolio Turnover Rate (%)................. 172.20 % 168.31 % 91.49 %
Ratio of Expenses to Average Net Assets
(before waived and reimbursed expenses).... 1.64 % 1.75 % 1.44 %
Ratio of Net Income to Average Net Assets
(before waived and reimbursed expenses).... (1.17)% (1.23)% (0.85)%
</TABLE>
/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds' Annual Report for the respective year.
/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
/4/The return for 1997 is not annualized.
/5/Certain expenses for the Fund were assumed and/or waived by Horace Mann
Investors, Inc. since its inception of investment operations, March 10, 1997.
C-29
<PAGE>
International Equity Fund Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 12.13 $ 10.27 $ 10.00
Income From Investment Operations:
Net Investment Income/1...................../. 0.08 0.11 0.08
Net Gains or Losses on Securities (both
realized and unrealized)/1/ ................. 6.18 1.84 0.27
-------- -------- -------
Total From Investment Operations................ 6.26 1.95 0.35
Less Distributions:
Dividends (from net investment income)........ 0.03 0.09 0.08
Distributions (from capital gains)............ 0.84 -- --
Return of Capital............................. 0.00 0.00 0.00
-------- -------- -------
Total Distributions............................. 0.87 0.09 .08
-------- -------- -------
Net Asset Value, End of Period.................. $ 17.52 $ 12.13 $ 10.27
======== ======== =======
Total Return (%)/2/,/3/,/4/,.................... 51.83% 18.95% 3.46%
Ratios/Supplemental Data:
Net Assets, End of Period ($000s)............. $ 26,403 $ 10,311 $ 5,214
Ratio of Expenses to Average Net Assets/5.../. 1.30% 1.03% 0.46%
Ratio of Net Income to Average Net Assets..... 0.53% 0.99% 1.29%
Portfolio Turnover Rate (%)................... 77.74% 57.71% 31.99%
Ratio of Expenses to Average Net Assets
(before waived and reimbursed expenses)...... 1.69% 2.06% 1.82%
Ratio of Net Income to Average Net Assets (be-
fore waived and reimbursed expenses)......... 0.14% (0.04)% (0.07)%
</TABLE>
/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds" Annual Report for the respective year.
/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
/4/The return for 1997 is not annualized.
/5/Certain expenses for the Fund were assumed and/or waived by Horace Mann
Investors, Inc. since its inception of investment operations, March 10, 1997.
C-30
<PAGE>
Socially Responsible Fund Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended December 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................ $12.99 $12.10 $10.00
Income From Investment Operations:
Net Investment Income/1........................./. 0.17 0.27 0.10
Net Gains or Losses on Securities (both realized
and unrealized)/1............................../. 0.91 0.91 2.20
-------- -------- --------
Total From Investment Operations.................... 1.08 1.18 2.30
Less Distributions:
Dividends (from net investment income)............ 0.14 0.17 0.10
Distributions (from capital gains)................ 0.12 0.12 0.10
Returns of Capital................................ 0.00 0.00 0.00
-------- -------- --------
Total Distributions................................. 0.26 0.29 0.20
-------- -------- --------
Net Asset Value, End of Period...................... $13.81 $12.99 $12.10
======== ======== ========
Total Return (%)/2/,/3/,/4......................../. 8.39% 9.80% 23.04%
Ratios/Supplemental Data:
Net Assets, End of Period ($000s)................. $59,533 $35,564 $9,213
Ratio of Expenses to Average Net Assets/5......./. 1.00% 0.64% 0.49%
Ratio of Net Income to Average Net Assets......... 1.28% 2.10% 1.65%
Portfolio Turnover Rate (%)....................... 60.46% 41.63% 20.85%
Ratio of Expenses to Average Net Assets (before
waived and reimbursed expenses).................. 1.12% 1.12% 1.16%
Ratio of Net Income to Average Net Assets (before
waived and reimbursed expenses).................. 1.16% 1.62% 0.98%
</TABLE>
/1/The "Net investment income" per share and the "Net realized and unrealized
gains (losses)" per share represent a proportionate share respective to the
increase in net assets as presented in the Statement of Operations of the
Horace Mann Mutual Funds' Annual Report for the respective year.
/2/The total return is determined by the ratio of ending net asset value to
beginning net asset value, adjusted for reinvestment of dividends from net
investment income and net realized capital gains.
/3/If you are an annuity contract owner, the above total return does not
reflect expenses that apply to the separate account or related policies. The
inclusion of these charges would reduce the total return figures for all
periods shown.
/4/The return for 1997 is not annualized.
/5/Certain expenses for the Fund were assumed and/or waived by Horace Mann
Investors, Inc. since its inception of investment operations, March 10, 1997.
C-31
<PAGE>
Other Information
Public Shareholder Communications
To ensure receipt of communications related to investments in the Equity
Fund, public shareholders must notify the Equity Fund of address changes.
Notice of a change in address may be sent to the Horace Mann Equity Fund, P.O.
Box 4657, Springfield, Illinois 62708-4657. Shareholders may also provide
notice of an address change by sending a telefacsimile (FAX) transmission to
(217) 535-7123 or by calling (217) 789-2500 or (800) 999-1030 (toll-free).
Ratings of Debt Obligations
<TABLE>
<CAPTION>
Standard &
Moody's Investors Poor's Ratings
Definition Service, Inc Group
- -------------------------------------------------------------------------------
<S> <C> <C>
Long-term Aaa AAA
Highest quality
High quality Aa AA
Upper medium grade A A
Medium grade Baa BBB
Low Grade Ba BB
Speculative B B
Submarginal Caa, Ca, C CCC, CC, C
Probably in default D D
- -------------------------------------------------------------------------------
<CAPTION>
Moody's S&P
<S> <C> <C>
Short-term MIG1/VMIG1 Best quality SP-1+ Very strong quality
MIG2/VMIG2 High quality SP-1 Strong quality
MIG3/VMIG3 Favorable quality SP-2 Satisfactory grade
MIG4/VMIG4 Adequate quality
SG Speculative grade SP-3 Speculative grade
Commercial paper P-1 Superior quality A-1+ Extremely strong quality
A-1 Strong quality
P-2 Strong quality A-2 Satisfactory quality
P-3 Acceptable quality A-3 Adequate quality
B Speculative quality
Not Prime C Doubtful quality
</TABLE>
C-32
<PAGE>
Statement of Additional Information.
A copy of the Statement of Additional Information providing more detailed
information about the Fund is available, without charge upon request. The
Table of Contents of this statement follows:
<TABLE>
<CAPTION>
Topic Page
- ----- ----
<S> <C>
The Trust And The Funds.................................................... B-1
Additional Investment Policies............................................. B-1
Equity Fund............................................................ B-1
Balanced Fund.......................................................... B-2
Income Fund............................................................ B-2
Short-term Investment Fund............................................. B-2
Small Cap Growth Fund.................................................. B-2
International Equity Fund.............................................. B-2
Socially Responsible Fund.............................................. B-2
Investment Restrictions.................................................... B-3
Description of Securities and Risks........................................ B-5
Income Fund--Benchmark..................................................... B-22
Management of The Funds.................................................... B-22
Investment Advisory Agreements............................................. B-24
Brokerage Allocation....................................................... B-26
Other Services............................................................. B-27
Voting Rights.............................................................. B-27
Purchase, Redemption And Pricing of Fund Shares............................ B-28
Tax Status................................................................. B-29
Control Persons And Principal Holders of Securities........................ B-30
General Information........................................................ B-32
Financial Statements....................................................... B-32
Appendix A: Description of Commercial Paper And Bond Ratings............... A-1
</TABLE>
C-33
<PAGE>
Horace Mann Life Insurance Company
P.O. Box 4657
Springfield IL 62708-4657
(800) 999-1030 (Toll Free)
Shareholders' Inquiries
For questions concerning investments in the Funds through HMLIC's annuity
contracts, call HMLIC's toll-free customer service number, (800) 999-1030.
Written questions should be sent by mail to Horace Mann Life Insurance Company
at P.O. Box 4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX)
transmission to (217) 535-7123.
Equity Fund public shareholders may contact the Equity Fund by calling (800)
999-1030 or (217) 789-2500. Written questions concerning a Equity Fund public
shareholder's account may be sent by mail to Horace Mann Equity Fund, P.O. Box
4657, Springfield, Illinois 62708-4657 or by telefacsimile (FAX) transmission
to (217) 535-7123.
Additional Information
Additional Information about the Fund's investments is available in the
Fund's annual and semi-annual report to Shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. The shareholder reports are incorporated by reference into this
Prospectus, which means that they are part of this Prospectus for legal
purposes.
The SAI contains more detailed information about the Fund and the Portfolios.
The current SAI has been filed with the Securities and Exchange Commission and
is incorporated by reference into this Prospectus, which means that it is part
of this Prospectus for legal purposes.
To receive, without charge, a copy of the annual and/or semi-annual reports
of the Horace Mann Family of Funds and/or a copy of the Statement of Additional
Information for the Horace Mann Mutual Funds, please complete the following
request form and mail it to the address indicated below, or send it by
telefacsimile (FAX) transmission to (217) 535-7123 or telephone (217) 789-2500
or (800) 999-1030 (toll-free).
Horace Mann Mutual Funds
P.O. Box 4657
Springfield, Illinois 62708-4657
Please provide free of charge the following information:
1999 Annual Report of the Horace Mann Mutual Funds
Statement of Additional Information dated May 1, 2000, as supplemented from
time to time, for the Horace Mann Mutual Funds.
Please mail the above documents to:
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Address)
- --------------------------------------------------------------------------------
(City/State/Zip)
Information about the Fund (including the SAI) can be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. Also, information on the
operation of the public reference room may be obtained by calling the
Commission at 1-800-SEC-0330. Reports and other information about the Fund are
available on the SEC's Internet site at http://www.sec.gov and copies of this
information may be obtained, upon payment of a duplicating fee, by writing the
Public Reference Section of the SEC Washington, D.C. 20549-0102.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Fund or its distributor. The Prospectus does not constitute
an offering by the Fund or its distributor in any jurisdiction in which such
offering may not lawfully be made.
Investment Company Act File No.: 811-07917
IA-004389(05/00)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
HORACE MANN MUTUAL FUNDS
May 1, 2000
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current Prospectus, dated May 1, 2000, as supplemented
from time to time. The financial statements for the Equity Fund, Balanced Fund,
Income Fund, Short-Term Investment Fund, Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund for the year ended December 31, 1999,
and the Report of Independent Auditors thereon, are incorporated herein by
reference from the Funds' Annual Report dated December 31, 1999. Copies of the
Prospectus and the Funds' financial statements may be obtained by writing to the
Horace Mann Mutual Funds, P.O. Box 4657, Springfield, Illinois 62708-4657, by
sending a telefacsimile (FAX) transmission to (217) 535-7123, or by telephoning
(217) 789-2500 or (800) 999-1030 (toll-free).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Trust and the Funds............................................. B-1
Additional Investment Policies...................................... B-1
Equity Fund.................................................... B-1
Balanced Fund.................................................. B-2
Income Fund.................................................... B-2
Short-Term Investment Fund..................................... B-2
Small Cap Growth Fund.......................................... B-2
International Equity Fund...................................... B-2
Socially Responsible Fund...................................... B-2
Investment Restrictions............................................. B-3
Description of Securities and Risks................................. B-5
Income Fund - Benchmark............................................. B-22
Management of the Funds............................................. B-22
Investment Advisory Agreements...................................... B-24
Brokerage Allocation................................................ B-26
Other Services...................................................... B-27
Voting Rights....................................................... B-27
Purchase, Redemption and Pricing of Fund Shares..................... B-28
Tax Status.......................................................... B-29
Control Persons and Principal Holders of Securities................. B-30
General Information................................................. B-32
Financial Statements................................................ B-32
Appendix A Description of Commercial Paper and Bond Ratings......... A-1
</TABLE>
<PAGE>
THE TRUST AND THE FUNDS
The Trust is an open-end, diversified management investment company organized as
a Delaware business trust under a Declaration of Trust dated November 7, 1996.
The Declaration of Trust permits the Trust to offer shares of separate funds.
All consideration received by the Trust for shares of any fund and all assets of
such fund belong to that fund and would be subject to liabilities related
thereto. The Trust reserves the right to create and issue shares of funds in
addition to the Funds described herein.
The Trust employs Wilshire Associates Incorporated (the "Adviser") to manage the
investment and reinvestment of the assets of the Funds and to continuously
review, supervise and administer the Funds' investment programs. The Adviser has
entered into agreements with Sanford Bernstein Co., Inc., Mellon Equity
Associates, LLP and Wellington Management Company, LLP to act as subadvisers for
the Equity Fund and the equity portion of the Balanced Fund, with Wellington
Management Company, LLP, Western Asset Management Company and Western Asset
Management Company Limited to act as the subadviser for the Income Fund, the
fixed income portion of the Balanced Fund; with Wellington Management Company,
LLP to act as the subadviser for the Short-Term Investment Fund, with BlackRock
Financial Management, Inc. to act as the subadviser for the Small Cap Growth
Fund and with Scudder Kemper Investments, Inc. to act as the subadviser for the
International Equity Fund and the Socially Responsible Fund. Under the fund of
funds structure the Adviser allocates the Balanced Fund's assets between the
Equity Fund and Income Fund.
The investment objectives and policies of each Fund are described in the
prospectus. Prospective purchasers should recognize that there are risks in the
ownership of any security and that there can be no assurance that the objectives
of the Funds will be realized.
Each Fund seeks to attain its objective by pursuing investment policies that
call for investments in certain types of securities and by employing various
investment strategies. These investment policies and strategies may be changed
without shareholder approval. However, each Fund will not, as a matter of
policy, change its investment policies without notice to its shareholders.
Each Fund has also adopted certain fundamental investment limitations that,
along with its objective, may be changed only with the approval of a "majority
of the outstanding shares of a Fund" as defined in the Investment Company Act of
1940 (the "1940 Act").
ADDITIONAL INVESTMENT POLICIES
The following is a discussion of additional investment policies not discussed in
the Trust's Prospectus.
Equity Fund. The portfolio investments of the Equity Fund are not concentrated
in any one industry or group of industries, but are varied according to what is
judged advantageous under varying economic conditions. While the portfolio is
diversified by investment in a cross-section of businesses and industries, the
Equity Fund follows a policy of flexibility. The Equity Fund does not invest in
companies for the purpose of exercising control of management. Moreover, the
Fund will not invest in securities subject to restrictions on disposition under
the Securities Act of 1933 (the "1933 Act") or purchase securities not freely
marketable.
It is the policy of the Equity Fund to purchase and hold securities believed to
have potential for long-term capital growth. Investment income is a secondary
consideration in the selection of portfolio securities. The Equity Fund does not
buy and sell for short-term trading profits. Therefore, portfolio changes
usually are accomplished gradually. However, Fund management is not restricted
and may effect short-term transactions when subsequent events make an investment
undesirable for long-term holding.
The Equity Fund may invest a portion of its assets in U.S. dollar-denominated
investment grade fixed-income securities. Debt securities must be rated within
the four highest ratings as determined by Moody's Investors Service, Inc.
("Moody's") or by Standard and Poor's Corporation ("S&P") except that up to 10%
of the Fund's assets may be invested in U.S. dollar-denominated foreign debt
securities within the three highest ratings as determined by Moody's or
S&P.
B-1
<PAGE>
For 1998 and 1999, the Equity Fund's portfolio turnover rates were 59.63% and
205.70%, respectively. The high portfolio turnover rate for 1999 was primarily
due to the transition to a multi-manager approach for the Equity Fund in March
of 1999. To a lesser extent, the higher portfolio turnover rate was due to the
extreme volatility in the market as portfolio managers used individual security
price fluctuations as opportunities to buy or sell. Although it is impossible to
predict with certainty the Equity Fund's ongoing portfolio turnover rate, the
subadviser expects that, under normal circumstances, it will be less than 100%
each year.
Balanced Fund. During 1998 and 1999, the Balanced Fund's portfolio turnover
rates were 63.69% and 155.53%, respectively. The annual turnover rates of the
common stock portion of the Balanced Fund's portfolio for 1998 and 1999 were
63.25% and 226.63%, respectively, and for the fixed income portion for 1998 and
1999 were 64.37% and 42.15%, respectively. The high portfolio turnover rate for
1999 was primarily due to the transition to a multi-manager approach for the
Equity Fund in March of 1999. To a lesser extent, the higher portfolio turnover
rate was due to the extreme volatility in the market as portfolio managers used
individual security price fluctuations as opportunities to buy or sell.
Although it is impossible to predict with certainty the Balanced Fund's ongoing
portfolio turnover rate, the subadvisers expect that, under normal
circumstances, it will be less than 100% each year. During periods of rapidly
changing interest rates, however, the turnover rate may be greater than 100%.
This results from the subadvisers' desire to optimize rates of return during
such periods.
Income Fund. As a matter of investment policy, the Income Fund will not invest
more than 10% of its net assets in illiquid securities or invest in restricted
securities, except securities eligible for resale under Rule 144A under the 1933
Act.
The Income Fund will not invest in common stocks directly, but may retain up to
25% of its total assets in common stocks acquired upon conversion of convertible
debt securities or preferred stock, or upon exercise of warrants acquired with
debt securities. Currently, the Fund intends to limit its investment in
derivatives pursuant to guidelines adopted by the Fund's Trustees.
The Income Fund may invest in repurchase and reverse repurchase agreements,
provided that the market value of the underlying security is at least 102% of
the price of the repurchase agreement.
Instead of holding its entire portfolio to maturity, the Income Fund will engage
in portfolio trading when trading will help achieve its investment objective.
Portfolio turnover is expected to be moderate.
During 1998 and 1999, the Income Fund's portfolio turnover rates were 46.60% and
33.09%, respectively. Although it is impossible to predict with certainty the
Income Fund's ongoing portfolio turnover rate, the subadvisers expect that under
normal circumstances it will be less than 100% each year. During periods of
rapidly changing interest rates, however, the turnover rate may be greater than
100%. This results from the subadviser's desire to optimize rates of return
during such periods.
Short-Term Investment Fund. The Short-Term Investment Fund will not invest in
securities subject to restriction on disposition under the 1933 Act nor purchase
securities not freely marketable. The Short-Term Investment Fund intends
generally to purchase securities that mature within one year, but will not
purchase securities with maturities that exceed two years except for securities
subject to repurchase agreements and reserve repurchase agreements. There is no
turnover information for the Short-Term Fund as it holds its securities for less
than one year.
Small Cap Growth Fund. During 1998 and 1999, the Small Cap Growth Fund's
portfolio turnover rate was 168.31% and 172.20%, respectively. Although it is
impossible to predict with certainty the Small Cap Growth Fund's turnover rate,
the subadviser expects that under normal circumstances it will be less than 150%
each year.
International Equity Fund. The International Equity Fund may engage in so-called
"strategic transactions" as described in the prospectus under the heading "Types
of Investments and Associated Risks" and below in the SAI under the heading of
"Description of Securities and Risks." During 1998 and 1999, the International
Equity Fund's portfolio turnover rate was 57.71% and 77.74%, respectively.
Although it is impossible to predict with certainty the International Equity
Fund's ongoing portfolio turnover rate, the subadviser expects that under normal
circumstances it will be less than 150% each year.
Socially Responsible Fund. The Socially Responsible Fund may engage in so-called
"strategic transactions" as described in the prospectus under the heading "Types
of Investments and Associated Risks" and below in the SAI under the heading of
"Description of Securities and Risks." During 1998 and 1999, the Socially
Responsible Fund's portfolio turnover rate was 41.63% and 60.46%, respectively.
Although it is impossible to predict with certainty the Socially
B-2
<PAGE>
Responsible Fund's ongoing portfolio turnover rate, the subadviser expects that
under normal circumstances it will be less than 150% each year.
INVESTMENT RESTRICTIONS
Each Fund operates under its respective fundamental investment
restrictions, set forth below, which, along with each Fund's objective, cannot
be changed without the approval of a "majority of the outstanding voting
securities." A "majority of the outstanding voting securities" of a Fund is
defined in the 1940 Act to mean the lesser of (i) 67% of the Fund's shares
present at a meeting where more than 50% of the outstanding shares are present
in person or by proxy or (ii) more than 50% of the Fund's outstanding shares.
The Equity Fund, Balanced Fund, Income Fund and Short-Term Investment Fund each
may not:
(1) purchase securities other than the securities in which a Fund is authorized
to invest;
(2) issue senior securities except that a Fund may borrow money or enter into
reverse repurchase agreements in an amount not to exceed 15% of its total
assets taken at market value and then only for short-term credits as may be
necessary for the clearance of transactions, and from banks as a temporary
measure for extraordinary or emergency purposes (moreover, in the event
that the asset coverage for such borrowings may fall below 300%, the Fund
will reduce, within three days, the amount of its borrowings in order to
provide for 300% asset coverage); a Fund will not borrow to increase income
(leveraging) but only to facilitate redemption requests that might
otherwise require untimely dispositions of the Fund's portfolio securities;
a Fund will repay all borrowings before making additional investments, and
interest paid on borrowings will reduce net income;
(3) make loans to other persons (except by the purchase of obligations in which
the Fund is authorized to invest); provided, however, that the Fund will
not enter into repurchase agreements if, as a result thereof, more than 10%
of the total assets of the Fund (taken at current value) would be subject
to repurchase agreements maturing in more than seven (7) days;
(4) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the Government of the United
States, its agencies or instrumentalities, or, for the Balanced Fund only,
any security issued by an investment company or series thereof) if, as a
result, (a) more than 5% of the Fund's total assets (taken at current
value) would be invested in the securities of that issuer, or (b) a Fund
would hold more than 10% of any class of securities of that issuer (for
this purpose, all debt obligations of an issuer maturing in less than one
year are treated as a single class of securities);
(5) write, or invest in, straddle or spread options or invest in interests in
oil, gas or other mineral exploration or development programs;
(6) purchase securities on margin or sell any securities short;
(7) invest in the securities of any issuer, any of whose officers, directors or
security holders is an officer of a Fund if at the time of or after such
purchase any officer or director of that Fund would own more than 1/2 of 1%
of the securities of that issuer or if that Fund's officers and directors
together would own more than 5% of the securities of that issuer;
(8) purchase any securities that would cause more than 25% of the value of a
Fund's total net assets at the time of 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. Treasury Bills, other obligations issued or
guaranteed by the federal government, its agencies and instrumentalities,
certificates of deposit, commercial paper and bankers' acceptances, or any
obligations of U.S. branches of foreign banks and foreign branches of U.S.
banks, except as these investments may be limited by the Treasury
regulations under section 817(h) of the Internal Revenue Code;
B-3
<PAGE>
(9) invest more than 5% of the value of the Fund's total assets at the time of
investment in the securities of any issuer or issuers which have records of
less than three years' continuous operation, including the operation of any
predecessor, but this limitation does not apply to securities issued or
guaranteed as to interest and principal by the United States Government or
its agencies or instrumentalities;
(10) mortgage, pledge or hypothecate its assets except in an amount up to 15%
(10% so long as the Fund's shares are registered for sale in certain
states) of the value of the Fund's total assets but only to secure
borrowings for temporary or emergency purposes;
(11) purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts;
(12) invest in companies for the purpose of exercising control; or
(13) invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets, and
except that during any period in which the Balanced Fund operates as a
"fund of funds" in accordance with the Prospectus and applicable law, the
Balanced Fund may purchase without limit shares of the Equity Fund, the
Income Fund, and any other mutual fund currently existing or hereafter
created whose investment adviser is the Balanced Fund's adviser or an
affiliate thereof, or the respective successors in interest of any such
mutual fund or adviser.
Dollar rolls are not considered borrowing and therefore are not subject to
investment restriction 2 above. For the purposes of investment restriction 9
above, the entity sponsoring a mortgage or asset backed security will be
considered the issuer. For the purposes of investment restriction 11 above,
commodities and commodity contracts are interpreted as physical commodities and
therefore financial futures contracts and related options will not be considered
commodities or commodity contracts under the restriction.
The Equity Fund and Short-Term Investment Fund each may not:
(14) underwrite the securities of other issuers, purchase securities subject to
restrictions on disposition under the 1933 Act (so-called "restricted
securities") or purchase securities not freely marketable.
The Balanced Fund and Income Fund each may not:
(15) Underwrite the securities of other issuers, invest more than 10% of its net
assets in illiquid securities or invest in securities subject to
restriction on disposition under the 1933 Act, except for securities
eligible for resale pursuant to Rule 144A under the 1933 Act.
The Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund each may not:
(1) act as an underwriter of securities, except insofar as it may be deemed an
underwriter for purposes of the 1933 Act on disposition of securities
acquired subject to legal or contractual restrictions on resale;
(2) purchase or sell real estate (although it may purchase securities secured
by real estate or interests therein, or securities issued by companies
which invest in real estate or interests therein), commodities, or
commodity contracts, except that it may enter into (a) futures and options
on futures and (b) forward currency contracts;
(3) make loans, but this restriction shall not prevent the Fund from (a) buying
a part of an issue of bonds, debentures, or other obligations, (b)
investing in repurchase agreements, or (c) lending portfolio securities,
provided that it may not lend securities if, as a result, the aggregate
value of all securities loaned would exceed 33 1/3% of its total assets
(taken at market value at the time of such loan);
(4) borrow, except that it may (a) borrow up to 33 1/3% of its total assets,
taken at market value at the time of such borrowing, as a temporary measure
for extraordinary or emergency purposes, but not to increase portfolio
income (the total of reverse repurchase agreements and such borrowings will
not exceed 33 1/3% of its total assets, and the Fund will not purchase
additional securities when its borrowings, less proceeds receivable from
sales of portfolio securities, exceed 5% of its total assets) and (b) enter
into transactions in options, futures, and options on futures;
B-4
<PAGE>
(5) invest in a security if 25% or more of its total assets (taken at market
value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; or
(6) issue any senior security except to the extent permitted under the 1940
Act.
The Small Cap Growth Fund, International Equity Fund and Socially Responsible
Funds are also subject to the following nonfundamental restrictions and
policies, which may be changed by the Board of Trustees. Each Fund may not:
(1) invest in companies for the purpose of exercising control or
management;
(2) purchase, except for securities acquired as part of a merger, consolidation
or acquisition of assets, more than 3% of the stock of another investment
company or purchase stock of other investment companies equal to more than
5% of the Fund's total assets (valued at time of purchase) in the case of
any one other investment company and 10% of such assets (valued at time of
purchase) in the case of all other investment companies in the aggregate;
(3) mortgage, pledge, or hypothecate its assets, except as may be necessary in
connection with permitted borrowings or in connection with options,
futures, and options on futures;
(4) purchase securities on margin (except for use of short-term credits as are
necessary for the clearance of transactions), or sell securities short
unless (i) the Fund owns or has the right to obtain securities equivalent
in kind and amount to those sold short at no added cost or (ii) the
securities sold are "when issued" or 'when distributed" securities which
the Fund expects to receive in a recapitalization, reorganization, or other
exchange for securities the Fund contemporaneously owns or has the right to
obtain and provided that transactions in options, futures, and options on
futures are not treated as short sales;
(5) invest more than 15% of its net assets (taken at market value at the time
of a particular investment) in illiquid securities, including repurchase
agreements maturing in more than seven days; and
(6) hedge by purchasing put and call options, futures contracts, or derivative
instruments on securities, in an aggregate amount equivalent to more than
10% of its total assets.
(7) For the Balanced Fund and Income Fund, the Board has adopted guidelines
regarding investment in derivatives (such as CMOs), which among other
things, establish certain minimum criteria for the types of derivative
securities that may be purchased. Under such guidelines, fixed income
derivatives purchased for the Funds must have low to moderate volatility
and must perform consistently across a wide range of interest rate
scenarios. They also must exhibit little excess interest rate risk
relative to Treasuries of comparable duration.
DESCRIPTION OF SECURITIES AND RISKS
This section should be read in conjunction with each Fund's description in the
Prospectus and each Fund's fundamental and nonfundamental investment
policies. Because the Balanced Fund invests in shares of the Equity Fund and
Income Fund, the Balanced Fund indirectly invests in the same investments as
listed for the Equity Fund and Income Fund.
Repurchase Agreements. Each Fund may invest in repurchase agreements. The Equity
Fund, Income Fund and Short-Term Investment Fund will not enter into repurchase
agreements if, as a result, more than 10 % of the Fund's total assets would be
subject to repurchase agreements maturing in more than seven days. Repurchase
agreements are agreements under which a Fund acquires ownership of an obligation
(debt instrument or time deposit) and the seller agrees, at the time of the
sale, to repurchase the obligation at a mutually agreed upon time and price,
thereby determining the yield during the purchaser's holding period. This
results in a fixed rate of return insulated from market fluctuations during such
period. If the seller of a repurchase agreement fails to repurchase this
obligation in accordance with the terms of the agreement, the investing Fund
will incur a loss to the extent that the proceeds on the sale are less than the
repurchase price. Repurchase agreements usually involve United States Government
or federal
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agency securities and, as utilized by the Funds, include only those securities
in which the Funds may otherwise invest. Repurchase agreements are for short
periods, most often less than 30 days and usually less than one week. The Funds
intend to enter into repurchase agreements only with domestic commercial and
savings banks and savings and loan associations with total assets of at least
one billion dollars, or with primary dealers in United States Government
securities. In addition, the Funds will not enter into repurchase agreements
unless (a) the agreement specifies that the securities purchased, and interest
accrued thereon, will have an aggregate value in excess of the price paid and
(b) the Funds take delivery of the underlying instruments pending repurchase. In
entering into a repurchase agreement, a Fund is exposed to the risk that the
other party to the agreement may be unable to keep its commitment to repurchase.
In that event, a Fund may incur disposition costs in connection with liquidating
the collateral (i.e., the underlying security). Moreover, if bankruptcy
proceedings are commenced with respect to the selling party, receipt of the
value of the collateral may be delayed or substantially limited and a loss may
be incurred if the collateral securing the repurchase agreement declines in
value during the bankruptcy proceedings. The Funds believe that these risks are
not material inasmuch as a Fund will evaluate the creditworthiness of all
entities with which it proposes to enter into repurchase agreements, and will
seek to assure that each such arrangement is adequately collateralized.
Reverse Repurchase Agreements and Other Borrowings. Each Fund is authorized to
borrow money and may invest in reverse repurchase agreements. If the securities
held by a Fund should decline in value while borrowings are outstanding, the net
asset value of the Fund's outstanding shares will decline in value by
proportionately more than the decline in value suffered by the Fund's
securities. Each Fund may borrow through reverse repurchase agreements under
which a Fund sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and price.
Reverse repurchase agreements involve the sale of money market securities held
by a Fund, with an agreement to repurchase the securities at an agreed upon
price, date and interest payment. If it employs reverse repurchase agreements, a
Fund will use the proceeds to purchase other money market securities and
instruments eligible for purchase by that Fund either maturing, or under an
agreement to resell, at a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. At the time it enters into a reverse
repurchase agreement, a Fund will maintain a segregated account with its
custodian containing cash, U.S. Government or other appropriate liquid high-
grade debt securities having a value at least equal to the repurchase price. A
Fund will generally utilize reverse repurchase agreements when the interest
income to be earned from the investment of the proceeds of the transactions is
greater than the interest expense incurred as a result of the reverse repurchase
transactions. Reverse repurchase agreements involve the risk that the market
value of securities purchased by the Fund with the proceeds of the transaction
may decline below the repurchase price of the securities that the Fund is
obligated to repurchase. As a matter of operating policy, the aggregate amount
of illiquid repurchase and reverse repurchase agreements will not exceed 10% of
any of the Funds' total net assets at the time of initiation. For the Small Cap
Growth Fund, International Equity Fund and Socially Responsible Fund, reverse
repurchase agreements, together with any other borrowings, will not exceed, in
the aggregate, 33 1/3% of the value of its total assets. In addition, whenever
borrowings exceed 5% of a Fund's total assets, these Funds will not make any
additional investments. For the Equity Fund, Balanced Fund, Income Fund and
Short-Term Investment Fund, repurchase agreements, together with other
borrowings, will not exceed 15% of a Fund's total assets taken at market value.
If the asset coverage for such borrowings falls below 300%, these Funds will
reduce, within three days, the amount of its borrowings to provide for 300%
asset coverage. The Equity Fund, Balanced Fund, Income Fund and Short-Term
Investment Fund will repay all borrowings before making additional investments.
High-Yield (High-Risk) Securities. To the extent a Fund can invest in high-yield
(high-risk) securities, the following sections are applicable. High-yield (high-
risk) securities (hereinafter referred to as 'lower-quality securities") include
(i) bonds rated as low as "C" by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P") or by Fitch Investors Service, Inc.
("Fitch"), or "CCC" by Duff & Phelps, Inc. ("D&P"); (ii) commercial paper rated
as low as "C" by S&P, "Not Prime" by Moody's, or "Fitch 4" by Fitch; and (iii)
unrated debt obligations of comparable quality. Lower-quality securities, while
generally offering higher yields than investment grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The special risk
considerations in connection with investments in these securities are discussed
below.
Effect of Interest Rates and Economic Changes. Interest-bearing securities
typically experience appreciation when interest rates decline and depreciation
when interest rates rise. The market values of lower-quality and comparable
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unrated securities tend to reflect individual corporate developments to a
greater extent than do higher-rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risks than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower-quality and comparable unrated securities may
experience financial stress and may not have sufficient funds to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than by issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a lower-quality or comparable unrated
security defaulted, a Fund might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also generally result in
increased volatility in the market prices of these securities and thus in a
Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will generally decrease in a rising interest rate market, and
accordingly, so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities in the
marketplace (discussed below in "Liquidity and Valuation"), a Fund may be forced
to liquidate these securities at a substantial discount. Any such liquidation
would force a Fund to sell the more liquid portion of its portfolio.
Payment Expectations. Lower-quality and comparable unrated securities typically
contain redemption, call or prepayment provisions which permit the issuer of
such securities containing such provisions to, at its discretion, redeem the
securities. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance them with
debt securities with a lower interest rate. To the extent an issuer is able to
refinance the securities, or otherwise redeem them, a Fund may have to replace
the securities with a lower-yielding security, which would result in a lower
return for a Fund.
Credit Ratings. Credit ratings issued by credit rating agencies are designed to
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in lower-quality and
comparable unrated obligations will be more dependent on the Subadvisers' credit
analysis than would be the case with investments in investment-grade debt
obligations. The Advisers employ their own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Subadvisers continually
monitor the investments in each Fund's portfolio and carefully evaluate whether
to dispose of or to retain lower-quality and comparable unrated securities whose
credit ratings or credit quality may have changed.
Liquidity and Valuation. A Fund may have difficulty disposing of certain lower-
quality and comparable unrated securities because there may be a thin trading
market for such securities. Because not all dealers maintain markets in all
lower-quality and comparable unrated securities, there is no established retail
secondary market for many of these securities. The Funds anticipate that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Fund's net asset value and ability to dispose of
particular securities, when necessary to meet a Fund's liquidity needs or in
response to a specific economic event, may be impacted. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing a Fund's
portfolio. Market quotations are generally available on many lower-quality and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perception, whether or not based on fundamental analysis, may decease the values
and liquidity of lower-quality and comparable unrated securities, especially in
a thinly traded market.
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Warrants. Each Fund may invest in warrants. Warrants are instruments that
provide the owner with the right to purchase a specified security, usually an
equity security such as common stock, at a specified price (usually representing
a premium over the applicable market value of the underlying equity security at
the time of the warrant's issuance) and usually during a specified period of
time. While warrants may be traded, there is often no secondary market for them.
Moreover, they are usually issued by the issuer of the security to which they
relate. The Funds will invest in publicly traded warrants only. Warrants do not
have any inherent value. To the extent that the market value of the security
that may be purchased upon exercise of the warrant rises above the exercise
price, the value of the warrant will tend to rise. To the extent that the
exercise price equals or exceeds the market value of such security, the warrants
will have little or no market value. If warrants remain unexercised at the end
of the specified exercise period, they lapse and the investing Fund's investment
in them will be lost. In view of the highly speculative nature of warrants, as a
matter of operating policy, the Equity Fund, International Equity Fund, Socially
Responsible Fund, Income Fund and Short-Term Investment Fund will not invest
more than 5% of their total net assets in warrants.
Rights Offerings. The Small Cap Fund may participate in rights offerings, which
are privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. Subscription rights normally have a short
life span to expiration. The purchase of rights involves the risk that the Fund
could lose the purchase value of a right if the right to subscribe to additional
shares is not exercised prior to the rights' expiration. Also, the purchase of
rights involves the risk that the effective price paid for the right added to
the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.
Convertible Preferred Stocks and Debt Securities. The Equity Fund, International
Equity Fund, Socially Responsible Fund, Income Fund and Short-Term Investment
Fund may invest in convertible preferred stock and debt securities. Certain
preferred stocks and debt securities include conversion features allowing the
holder to convert securities into another specified security (usually common
stock) of the same issuer at a specified conversion ratio (e.g., two shares of
preferred for one share of common stock) at some specified future date or
period. The market value of convertible securities generally includes a premium
that reflects the conversion right. That premium may be negligible or
substantial. To the extent that any preferred stock or debt security remains
unconverted after the expiration of the conversion period, the market value will
fall to the extent represented by that premium.
Preferred Equity Redemption Cumulative Stock. The Equity Fund, International
Equity Fund, Socially Responsible Fund, Income Fund and Short-Term Investment
Fund may invest in preferred equity redemption cumulative stock. Preferred
Equity Redemption Cumulative Stock (PERCS) is a form of convertible preferred
stock which automatically converts into shares of common stock on a
predetermined conversion date. PERCS pays a fixed annual dividend rate which is
higher than the annual dividend rate of the issuing company's common stock.
However, the terms of PERCS limit an investor's ability to participate in the
appreciation of the common stock (usually capped at approximately 40%).
Predetermined redemption dates and prices set by the company upon the issuance
of the securities provide the mechanism for limiting the price appreciation of
PERCS.
Adjustable Rate Mortgage Securities. The Equity Fund, International Equity Fund,
Socially Responsible Fund, Income Fund and Short-Term Investment Fund may invest
in adjustable rate mortgage securities. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for such
an instrument exceeds the sum of the interest accrued at the applicable mortgage
interest rate and the principal payment required at such point to amortize the
outstanding principal
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balance over the remaining term of the loan, the excess is utilized to reduce
the then-outstanding principal balance of the ARM.
Types of Credit Enhancement. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, these securities may contain elements of
credit support which fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to seek to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default seeks to ensure ultimate
payment of the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies, or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquencies or losses in excess of those
anticipated could adversely affect the return on an investment in a security. A
Fund will not pay any additional fees for credit support, although the existence
of credit support may increase the price of a security.
Foreign Securities. Investors should recognize that investing in foreign
securities involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. securities and
which may favorably or unfavorably affect a Fund's performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
U.S. and, at times, volatility of prices can be greater than in the U.S. Fixed
commissions on some foreign securities exchanges and bid-to-asked spreads in
foreign bond markets are generally higher than commissions or bid-to-asked
spreads on U.S. markets, although a Fund will endeavor to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities exchanges, brokers and
listed companies than in the U.S. It may be more difficult for a Fund's agents
to keep currently informed about corporate actions which may affect the prices
of portfolio securities. Communications between the U.S. and foreign countries
may be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Payment for securities without delivery may be required in certain
foreign markets. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of the Fund
seeks to mitigate the risks associated with the foregoing considerations through
continuous professional management.
Forward Foreign Currency Exchange Contracts. The Small Cap Growth Fund and
International Equity Fund may invest in foreign currencies. The Income Fund may
each enter into forward foreign currency exchange contracts to the extent of 15%
of the value of their respective total assets for hedging purposes. Forward
foreign currency exchange contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of Fund
securities but rather allow the Fund to establish a rate of exchange for a
future point in time. A Fund may use forward foreign currency exchange contracts
to hedge against movements in the value of foreign currencies (including the
"ECU" used in the European Community) relative to the U.S. dollar in connection
with specific Fund transactions or with respect to Fund positions.
The Small Cap Growth Fund may enter into forward foreign currency exchange
contracts when deemed advisable by its subadviser under two circumstances.
First, when entering into a contract for the purchase or sale of a security, the
Fund may enter into a forward foreign currency exchange contract for the amount
of the purchase or sale price to protect against variations, between the date
the security is purchased or sold and the date on which payment is made or
received,
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in the value of the foreign currency relative to the U.S. dollar or other
foreign currency. Second, when the Fund's adviser or subadviser anticipates that
a particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. With respect to any forward foreign currency contract, it
will not generally be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the
values of such securities resulting from market movements between the date the
forward contract is entered into and the date it matures. In addition, while
forward contracts may offer protection from losses resulting from declines in
the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. The Fund will
also incur costs in connection with forward foreign currency exchange contracts
and conversions of foreign currencies and U.S. dollars.
The Small Cap Growth Fund may also engage in proxy hedging transactions to
reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of Fund securities. Proxy hedging is often used when the
currency to which the Fund is exposed is difficult to hedge or to hedge against
the dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Fund's securities are, or are
expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. In addition, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. The Fund may also
cross hedge currencies by entering into forward contracts to sell one or more
currencies that are expected to decline in value relative to other currencies to
which the Fund has or in which the Fund expects to have Fund exposure. For
example, the Fund may hold both French government bonds and German government
bonds, and the subadviser may believe that French francs will deteriorate
against German marks. The Fund would sell French francs to reduce its exposure
to that currency and buy German marks. This strategy would be a hedge against a
decline in the value of French francs, although it would expose the Fund to
declines in the value of the German mark relative to the U.S. dollar. In
general, currency transactions are subject to risks different from those of
other Fund transactions, and can result in greater losses to the Fund than would
otherwise be incurred, even when the currency transactions are used for hedging
purposes. Because investments in foreign securities usually will involve
currencies of foreign countries and to the extent a Fund may hold foreign
currencies and forward contracts, futures contracts and options on foreign
currencies and foreign currency futures contracts, the value of the assets of
such Fund as measured in dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
the Fund may incur costs in connection with conversions between various
currencies. Although each Fund values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Fund at one rate, while offering a lesser rate or exchange should the Fund
desire to resell that currency to the dealer. Each Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into options or forward or futures contracts to purchase or sell foreign
currencies.
A separate account of the Fund consisting of liquid assets equal to the amount
of the Fund's assets that could be required to consummate forward contracts
entered into under the second circumstances, as set forth above, will be
established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Fund.
Strategic Transactions and Derivatives. The International Equity Fund and
Socially Responsible Fund may, but are not required to, utilize various other
investment strategies as described below to hedge various market risks (such as
interest rates and broad or specific equity or fixed-income market movements),
to manage the effective maturity or duration of fixed-income securities in such
Fund's portfolio, or to enhance potential gain. These strategies may be
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executed through the use of derivative contracts. Such strategies are generally
accepted as a part of modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Funds may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of fixed-income securities in a Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of a Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of a
Fund to utilize these Strategic Transactions successfully will depend on the
Subadviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks associated
with them, including possible default by the other party to the transaction,
illiquidity and, to the extent the Subadviser's view as to certain market
movements is incorrect, the risk that the use of such Strategic Transactions
could result in losses greater than if they had not been used. Use of put and
call options may result in losses to a Fund, force the sale or purchase of
portfolio securities at inopportune times or for prices higher than (in the case
of put options) or lower than (in the case of call options) current market
values, limit the amount of appreciation a Fund can realize on its investments
or cause the Fund to hold a security it might otherwise sell. The use of
currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain over-the-
counter options may have no markets. As a result, in certain markets, a Fund
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and 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 they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. To the extent consistent with their
investment objectives, the Small Cap Growth Fund, International Equity Fund and
Socially Responsible Fund may invest in options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instruments 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 Strategic
Transactions involving options require segregation of Fund assets in 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,
commodity, index, currency or other instrument at the exercise price. For
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instance, the Fund's purchase of a put option on a security 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 by giving the Fund
the right to sell such 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 underlying instrument at the exercise
price. A Fund's purchase of a call option on a security, financial future, index
currency or other instrument might be intended to protect the 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 such instrument. An
American-style put or call option may be exercised at any time during the option
period thereto. A Fund is authorized to purchase and sell exchange-listed
options and over-the-counter options ("OTC options"). Exchange-listed options
are issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
such options. The discussion below uses the OCC as an example, but is also
applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where 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 or
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. Among the possible reasons for the absence of a liquid option
market on an exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options for a particular class or series of options, in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally 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 cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contracts to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options (other than OTC currency options) that are subject to
a buy-back provision permitting the Fund to require the Counterparty to sell the
option back to the Fund at a formula price within seven days. The Funds expect
generally to enter into OTC options that have cash settlement provisions,
although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
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, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Subadviser 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 OTC
option will be satisfied. A Fund will engage in OTC 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 which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization
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("NRSRO") or, in the case of OTC currency transactions, are determined to be of
equivalent credit quality by the Adviser. The staff of the SEC currently takes
the position that OTC options purchased by a Fund, and portfolio securities
"covering" the amount of a Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any), are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its net assets in illiquid securities.
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 in its portfolio, or will
increase the Fund's income. The sale of put options can also provide income.
The Funds may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by a Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as 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 the Fund exposes the 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 the Fund to hold a security or
instrument which it might otherwise have sold.
The Funds may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities (including convertible securities) and
Eurodollar instruments (whether or not they hold the above securities in their
portfolios), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Funds will not sell put options if, as a result, more than 50% of a Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
When a Fund purchases a put option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked to market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of sale, the mean between the last bid and asked price.
If an option purchased by a Fund expires unexercised, the Fund realizes a loss
equal to the premium paid. If a Fund enters into a closing sale transaction on
an option purchased by it, the Fund will realize a gain if the premium received
by the Fund on the closing transaction is more than the premium paid to purchase
the option, or a loss if it is less. If an option written by a Fund expires on
the stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on securities
and indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the OCC may not at all times be adequate to handle
current trading volume; or one or more Exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of options)
would
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cease to exist, although outstanding options that had been issued by the OCC as
a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
General Characteristics of Futures. To the extent consistent with their
investment objectives, the Equity Fund, Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below.
The sale of a futures contract creates a firm obligation by a Fund, as seller,
to deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position.
The Funds' use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark-to- market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Funds.
If a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Funds will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of a Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the in-the-
money amount may be excluded in calculating the 5% limitation. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Options on Securities Indices and Other Financial Indices. The Funds also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing 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, they settle by cash
settlement, i.e., 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 OTC 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 making up 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.
Currency Transactions. The Funds may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from
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the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Funds may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from an NRSRO or are
determined to be of equivalent credit quality by the adviser.
The Funds' dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Funds will not enter into a transaction to hedge currency exposure to an
extent greater, after all transactions intended wholly or partially to offset
other transactions, than the aggregate market value (at the time of entering
into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross-hedging as described below.
The Funds may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a Fund has or in which the Fund expects to
have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Funds may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of a Fund's securities
denominated in correlated currencies. For example, if the Subadviser considers
that the Austrian schilling is correlated to the German Deutsche mark (the
"D-mark"), a Fund holds securities denominated in schillings; and if the
Subadviser believes that the value of schillings will decline against the U.S.
dollar, the Subadviser may enter into a commitment or option to sell D-marks and
buy dollars. 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, there is the risk that the
perceived correlation between various currencies may not be present, or may not
be present during the particular time that a Fund is engaging in proxy hedging.
If a Fund enters into a currency hedging transaction, the Fund will comply with
the asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are 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 negatively affected by government exchange controls, blockages and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations, and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of
currency futures contracts for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Funds may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component"
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transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of the Subadviser, it is in the best
interests of a 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 are normally entered into based on the
Subadviser'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 such risks or hinder achievement of
the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Funds may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Funds expect to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Funds intend to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on change in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specific index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Funds will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good-faith hedging purposes, the
Subadviser and the Funds believe such obligations do not constitute senior
securities under the Investment Company Act of 1940, as amended (the "1940
Act"), and, accordingly, will not treat them as being subject to the 1940 Act's
borrowing restrictions. The Funds will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Funds may have
contractual remedies pursuant to the agreements related to the transaction.
Eurodollar Instruments. The Funds may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowing. The Funds might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by (i) other complex foreign, political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Funds segregate liquid, high-
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either
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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, instruments or currency
required to be delivered, or, subject to any regulatory restrictions, an amount
of cash or liquid high-grade securities at least equal to the current amount of
the obligation must be segregated with the 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. For example, a call option
written by a Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high-grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires the Fund to segregate liquid high-grade assets
equal to the exercise price.
Except when the Funds enter into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates a Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high-grade assets equal to the amount of the Fund's obligation.
OTC options entered into by the Funds, including those on securities, currency,
financial instruments or indices and OCC-issued and exchange listed index
options, will generally provide for cash settlement. As a result, when a Fund
sells these instruments, it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non-cash-settled put, the same as an OCC-
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC 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.
In the case of a futures contract or an option thereon, the Funds must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Funds will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligations, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligations in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same as or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions 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 such time, assets equal to any remaining obligation would need to be
segregated.
The Funds' activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company. (See "TAX
STATUS").
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Variable and Floating Rate Instruments. The Income Fund and Small Cap Growth
Fund may invest in variable and floating rate instruments. With respect to
purchasable variable and floating rate instruments, the Subadvisers will
consider the earning power, cash flows and liquidity ratios of the issuers and
guarantors of such instruments and, if the instruments are subject to a demand
feature, will monitor their financial status to meet payment on demand. Such
instruments may include variable amount demand notes that permit the
indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The absence of an active secondary market with
respect to particular variable and floating rate instruments could make it
difficult for a Fund to dispose of a variable or floating rate note if the
issuer defaulted on its payment obligation or during periods that a Fund is not
entitled to exercise its demand rights, and a Fund could, for these or other
reasons, suffer a loss with respect to such instruments. In determining average-
weighted Fund maturity, an instrument will be deemed to have a maturity equal to
either the period remaining until the next interest rate adjustment or the time
a Fund involved can recover payment of principal as specified in the instrument,
depending on the type of instrument involved.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches
of U.S. Banks. The Short Term Investment Fund, Income Fund and Small Cap Growth
Fund may purchase bank obligations, such as certificates of deposit, bankers'
acceptances and time deposits, including instruments issued or supported by the
credit of U.S. or foreign banks or savings institutions having total assets at
the time of purchase in excess of $1 billion. The assets of a bank or savings
institution will be deemed to include the assets of its domestic and foreign
branches for purposes of the Fund's investment policies. Investments in short-
term bank obligations may include obligations of foreign banks and domestic
branches of foreign banks, and also foreign branches of domestic banks.
Mortgage-Backed Securities. The Small Cap Growth Fund and Income Fund may invest
in mortgage-backed securities. Mortgage-backed securities represent interests in
pools of mortgage loans made by lenders such as commercial banks and savings and
loan institutions. Pools of mortgage loans are assembled for sale to investors
by various government-related organizations. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-backed securities and among the securities that they issue.
Mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA-guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the United States and are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-backed securities issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Mortgage-backed securities differ from traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans generally may be prepaid at any time.
Since prepayment rates vary widely, it is not possible to accurately predict the
average maturity of a particular mortgage-backed pool; however, statistics
published by the Federal Housing Authority indicate that the average life of
mortgages with 25- to 30-year maturities (the type of mortgages backing the vast
majority of mortgage-backed securities) is approximately 12 years. Mortgage-
backed securities may decrease in value as a result of increases in interest
rates and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
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Collateralized Mortgage Obligations (CMOs) and Multiclass Pass-through
Securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities ("Mortgage Assets"). Multiclass pass-
through securities are equity interests held in a trust composed of Mortgage
Assets. Payments of principal and of interest on the Mortgage Assets, and any
reinvestment income thereon, provide the capital to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Interest is paid or accrued
on all classes of CMOs on a monthly, quarterly or semi-annual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to the individual class than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow to a particular CMO the lower the anticipated yield will be on that
class at the time of issuance relative to prevailing market yields on mortgage-
backed securities.
The Income Fund may invest in, among other things, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
Asset-Backed Securities. The Small Cap Growth Fund and Income Fund may invest in
asset-backed securities. Asset-backed securities are generally issued as pass-
through certificates, which represent undivided fractional ownership interests
in an underlying pool of assets, or as debt instruments, which are also known as
collateralized obligations, and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. Through the use
of trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables, are pooled and securitized. Asset-backed
securities generally do not have the benefit of the same security interest in
the related collateral as is the case with mortgage-backed securities. There is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, the security interest in the
underlying automobiles is often not transferred when the pool is created, with
the resulting possibility that the collateral could be resold. In general, these
types of loans are of shorter average life than mortgage loans and are less
likely to have substantial prepayments.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage-related securities. Like other fixed-income securities,
when interest rates rise, the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.
U.S. Government Obligations. Each Fund may invest in U.S. Government
obligations. U.S. Government obligations are direct obligations of the U.S.
Government and are supported by the full faith and credit of the U.S.
Government. U.S. Government agency securities are issued or guaranteed by U.S.
Government-sponsored enterprises and federal
B-19
<PAGE>
agencies. Some of these securities are backed by the full faith and credit of
the U.S. Government; others are backed by the agency's right to borrow a
specified amount from the U.S. Treasury; and still others, while not guaranteed
directly or indirectly by the U.S. Government, are backed with collateral in the
form of cash, Treasury securities or debt instruments that the lending
institution has acquired through its lending activities. Examples of the types
of U.S. Government obligations which the Funds may hold include U.S. Treasury
bills, Treasury instruments and Treasury bonds and the obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, the Farmers Home Administration, the Export-Import Bank
of the United States, the Small Business Administration, FNMA, GNMA, the General
Services Administration, the Student Loan Marketing Association, the Central
Bank for Cooperatives, FHLMC, the Federal Intermediate Credit Banks, the
Maritime Administration, the International Bank of Reconstruction and
Development (the "World Bank"), the Asian-American Development Bank and the
Inter-American Development Bank.
Supranational Organization Obligations. The Small Cap Growth Fund and Socially
Responsible Fund may purchase debt securities of supranational organizations
such as the European Coal and Steel Community, the European Economic Community
and the World Bank, which are chartered to promote economic development.
Lease Obligations. The Small Cap Growth Fund may hold participation certificates
in a lease, an installment purchase contract or a conditional sales contract
("Lease Obligations"). The Subadviser will monitor the credit standing of each
municipal borrower and each entity providing credit support and/or a put option
relating to lease obligations. In determining whether a lease obligation is
liquid, the Subadviser will consider, among other factors, the following: (i)
whether the lease can be canceled; (ii) the degree of assurance that assets
represented by the lease could be sold; (iii) the strength of the lessee's
general credit (e.g., its debt, administrative, economic, and financial
characteristics); (iv) the likelihood that the municipality would discontinue
appropriating funding for the lease property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an "event of nonappropriation"); (v) legal recourse in the event of failure to
appropriate; (vi) whether the security is backed by a credit enhancement such as
insurance; and (vii) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services other than those covered by
the lease obligation.
Municipal leases, like other municipal debt obligations, are subject to the risk
of non-payment. The ability of issuers of municipal leases to make timely lease
payments may be adversely impacted in general economic downturns and as relative
governmental cost burdens are allocated and reallocated among federal, state and
local governmental units. Such non-payment would result in a reduction of income
to the Fund, and could result in a reduction in the value of the municipal lease
experiencing non-payment and a potential decrease in the net asset value of the
Fund. Issuers of municipal securities might seek protection under the bankruptcy
laws. In the event of bankruptcy of such an issuer, the Fund could experience
delays and limitations with respect to the collection of principal and interest
on such municipal leases and the Fund may not, in all circumstances, be able to
collect all principal and interest to which it is entitled. To enforce its
rights in the event of a default in lease payments, the Fund might take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. When the lease contains a non-
appropriation clause, however, the failure to pay would not be a default and the
Fund would not have the right to take possession of the assets. Any income
derived from the Fund's ownership or operation of such assets may not be tax-
exempt. In addition, the Fund's intention to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended, may limit the
extent to which the Fund may exercise its rights by taking possession of such
assets, because as a regulated investment company the Fund is subject to certain
limitations on its investments and on the nature of its income.
Commercial Paper. The Small Cap Growth Fund, Socially Responsible Fund, Income
Fund and Short-Term Investment Fund may purchase commercial paper rated (at the
time of purchase) A-1 by S&P or Prime-1 by Moody's or, when deemed advisable by
the Fund's adviser or subadviser, "high quality" issues rated A-2 or Prime-2 by
S&P or Moody's, respectively. These ratings symbols are described in Appendix A.
Commercial paper purchasable by the Fund includes "Section 4(2) paper," a term
that includes debt obligations issued in reliance on the "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 is frequently sold (and resold) to institutional investors
such as the Fund through or with the assistance of investment dealers who make
a
B-20
<PAGE>
market in the Section 4(2) paper, thereby providing liquidity. Certain
transactions in Section 4(2) paper may qualify for the registration exemption
provided in Rule 144A under the Securities Act of 1933.
Investment Grade Debt Obligations. The Equity Fund, Income Fund and Short-Term
Investment Fund may invest in "investment grade securities," which are
securities rated in the four highest rating categories of an NRSRO. It should be
noted that debt obligations rated in the lowest of the top four ratings (i.e.,
Baa by Moody's or BBB by S&P) are considered to have some speculative
characteristics and are more sensitive to economic change than higher rated
securities. See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
When-Issued Purchase and Forward Commitments. The Small Cap Growth Fund,
International Equity Fund, Socially Responsible Fund, and Income Fund may enter
into "when-issued" and "forward" commitments, including, for the Small Cap
Growth Fund only, "TBA" (to be announced) purchase commitments, to purchase or
sell securities at a fixed price at a future date. When a Fund agrees to
purchase securities on this basis, the custodian will set aside liquid assets
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside Fund 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 the Fund's commitments. It may be expected that the
market value of a Fund's net assets will fluctuate to a greater degree when it
sets aside Fund securities to cover such purchase commitments than when it sets
aside cash. Because a Fund's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or Fund securities to cover such purchase
commitments, each Fund expects that its forward commitments and commitments to
purchase when-issued or, in the case of the Small Cap Growth Fund, TBA
securities will not exceed 25% of the value of its total assets absent unusual
market conditions.
If deemed advisable as a matter of investment strategy, a Fund may dispose of or
renegotiate a commitment after it has been entered into and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, a Fund may realize a taxable capital
gain or loss. When a Fund engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in a Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous. The market value of
the securities underlying a commitment to purchase securities, and any
subsequent fluctuations in their market value, is taken into account when
determining the market value of each Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
Stand-By Commitments. The Small Cap Growth Fund may invest in stand-by
commitments. Under a stand-by commitment for a Municipal Obligation, a dealer
agrees to purchase at the Fund's option a specified Municipal Obligation at a
specified price. Stand-by commitments for Municipal Obligations may be
exercisable by the Fund at any time before the maturity of the underlying
Municipal Obligations and may be sold, transferred or assigned only with the
instruments involved. It is expected that such stand-by commitments will
generally be available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Fund may pay for such a
stand-by commitment either separately in cash or by paying a higher price for
Municipal Obligations which are acquired subject to the commitment for Municipal
Obligations (thus reducing the yield to maturity otherwise available for the
same securities). The total amount paid in either manner for outstanding stand-
by commitments for Municipal Obligations held by the Fund will not exceed 1/2 of
1% of the value of the Fund's total assets calculated immediately after each
stand-by commitment is acquired.
Stand-by commitments will only be entered into with dealers, banks and broker-
dealers which, in a subadviser's opinion, present minimal credit risks. The Fund
will acquire stand-by commitments solely to facilitate Fund liquidity and not to
exercise its rights thereunder for trading purposes. Stand-by commitments will
be valued at zero in determining net asset value. Accordingly, where the Fund
pays directly or indirectly for a stand-by commitment, its cost will be
reflected as an unrealized loss for the period during which the commitment is
held by the Fund and will be reflected as a realized gain or loss when the
commitment is exercised or expires.
Standard & Poor's Depository Receipts (SPDR's). The Socially Responsible Fund
may, consistent with its investment objectives, purchase Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs are American Stock Exchange-traded
securities that represent ownership in the SPDR Trust, a trust which has been
established to accumulate and hold a portfolio of common stocks that is intended
to track the price performance and dividend yield of the S&P 500. The trust is a
regulated investment company that is sponsored by a subsidiary of the American
Stock Exchange. SPDRs may be used for several reasons, including but not limited
to: facilitating the handling of cash flows or trading, or reducing costs.
B-21
<PAGE>
INCOME FUND - BENCHMARK
The Lehman Brothers Aggregate Bond Index covers the U.S. investment grade fixed
rate bond market, including government and corporate securities, agency mortgage
pass-through securities, and asset-backed securities. These major sectors are
subdivided into more specific indices that are calculated and reported on a
regular basis.
To qualify for inclusion in the Aggregate Index, a bond or security must meet
certain criteria:
. It must have at least one year to final maturity regardless of call
features. Asset-backed securities must have a remaining average life of at
least one year while mortgages must have a weighted average maturity (WAM)
of at least one year. There is no limit on final maturity; bonds with 50-
and 100-year maturities may be included in the Aggregate Index.
. It must have at least $100 million par amount outstanding. The amount
outstanding may differ from the original issue size due to various factors,
including reopenings, sinking schedules, partial calls, and prepayments.
. It must be rated investment grade (Baa3 or better) by Moody's (unless it is
a U.S. government or agency security, which are generally not formally
rated). If a Moody's rating is unavailable, then the Standard and Poor's
Corporation rating is used. If neither is available, then the Fitch
Investor's Service rating is used. This implies that the index may include
bonds that are split-rated. A bond rated Baa3 by Moody's and BB+ by S & P
would be included; however, if Moody's assigns a rating below investment
grade, the bond will be excluded even if the S & P or Fitch rating is BBB-
or better.
. It must be fixed rate, although it can carry a coupon that steps up or
changes according to a predetermined schedule. Adjustable or floating rate
securities with periodic coupon changes based on changes in market rates
are excluded. Stripped securities created from coupon securities are
excluded, while the underlying coupon security is included. Zero coupon
bonds may be included. Medium-term notes are included only if they were
underwritten issues and meet other eligibility criteria.
. It must be dollar-denominated and nonconvertible. All corporate and asset-
backed securities must be registered with the Securities and Exchange
Commission ("SEC").
. It must be publicly issued. Private placement securities including Rule
144A securities are excluded.
Generally speaking, the Aggregate Index does not include securities with
esoteric or one-of-a-kind features such as structured notes or range notes with
coupons that depend on movements in market rates.
MANAGEMENT OF THE FUNDS
A listing of the Trustees and Officers of the Trust, their birthdates,
their addresses, their principal occupations for the past five years and their
affiliation with other companies affiliated with Horace Mann Life Insurance
Company is presented below.
<TABLE>
<CAPTION>
Name, Birthdate and Address Position with Company Principal Occupations
- --------------------------- --------------------- ---------------------
<S> <C> <C>
*A. Thomas Arisman (12/20/46)/(1)/ Trustee Senior Vice President, Horace Mann Life
P.O. Box 4657 Insurance Company and Horace Mann Service
Springfield, IL 62708-4657 Corporation; Director and President,
Horace Mann Investors, Inc.; positions with
Horace Mann Educators Corporation and its
subsidiaries; former Trustee, Horace Mann Mutual
Funds (1996-1997); and former Director, Horace
Mann Growth Fund, Inc. (1989-1997), Horace Mann
Balanced Fund, Inc. (1989-1997), Horace Mann Income
Fund, Inc. (1989-1997) and Horace Mann Short-Term
Investment Fund, Inc. (1989-1997).
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
Name, Birthdate and Address Position with Company Principal Occupations
- --------------------------- --------------------- ---------------------
<S> <C> <C>
A.L. Gallop (9/5/25) Trustee Executive Director (Retired), Minnesota Education Association;
P.O. Box 4657 formerly Director, Horace Mann Educators Corporation (1968-
Springfield, IL 62708-4657 1983); and former Director Horace Mann Growth Fund, Inc.
(1957-1997), Horace Mann Balanced Fund, Inc. (1983-1997),
Horace Mann Income Fund, Inc. (1983-1997), and Horace
Mann Short-Term Investment Fund, Inc. (1983-1997).
Richard A. Holt (11/17/41)/(2)/ Trustee Senior Relationship Manager (Retired), Scudder Insurance
P.O. Box 4657 Asset Management.
Springfield, IL 62708-4657
Richard D. Lang (9/15/31)/(3)/ Trustee Executive Director (Retired), Vermont National Education
P.O. Box 4657 Association; formerly member of Horace Mann Educators
Springfield, IL 62708-4657 Corporation Educator Advisory Board; and former Director,
Horace Mann Growth Fund, Inc. (1997), Horace Mann
Balanced Fund, Inc. (1997), Horace Mann Income Fund, Inc.
(1997) and Horace Mann Short-Term Investment Fund, Inc.
(1997).
Harriet A. Russell (5/3/41) Trustee Member and Vice President, Cincinnati Board of Education; Director
P.O. Box 4657 and President, Greater Cincinnati School Employer Credit Union;
Springfield, IL 62708-4657 teacher (Retired), Walnut Hills High School; formerly Director,
Horace Mann Growth Fund (1974-1983 and 1992-1997),
Horace Mann Balanced Fund, Inc. (1992-1997), Horace Mann
Investment Fund, Inc. (1992-1997), and Horace Mann Short-
Term Investment Fund, Inc. (1992-1997).
*George J. Zock (11/13/50)/(1)/ Trustee and President Director, Executive Vice President, Horace Mann Life
P.O. Box 4657 Insurance Company and Horace Mann Service Corporation;
Springfield, IL 62708-4657 Director, Horace Mann Investors, Inc.; and positions with
Horace Mann Educators Corporation and its subsidiaries;
former Director, Horace Mann Growth Fund, Inc. (1995-1997),
Horace Mann Balanced Fund, Inc. (1995-1997), Horace Mann
Income Fund, Inc. (1995-1997), and Horace Mann Short-Term
Investment Fund, Inc. (1995-1997).
Ann M. Caparros (8/31/52) Secretary and Ethics Director, Vice President, and Corporate Secretary, Horace
P.O. Box 4657 Compliance Officer Mann Life Insurance Company and Horace Mann Service
Springfield, IL 62708-4657 Corporation; Secretary, Horace Mann Investors, Inc.; and
positions with Horace Mann Educators Corporation and its
subsidiaries; prior to March 1994, was associated with John
Dear Insurance Group and Affiliates serving as Vice President
and General Counsel.
William J. Kelly (9/7/46) Treasurer and Regulatory Treasurer, Horace Mann Investors, Inc.; Vice President, Horace
P.O. Box 4657 Compliance Officer Mann Life Insurance Company; and Vice President-Transfer
Springfield, IL 62708-4657 Agent, Horace Mann Service Corporation.
</TABLE>
___________________
* Interested person as defined by the 1940 Act by reason of a position as a
director of a broker-dealer or an officer of the Fund.
(1) Messrs. Arisman and Zock are employees and shareholders of an affiliate of
the Administrator of the Trust and, therefore, are considered an affiliate
of the Administrator.
B-23
<PAGE>
(2) From 1972-1997, Mr. Holt was an employee of Scudder Kemper Investments,
Inc. (and of its predecessor, Scudder, Stevens & Clark, Inc.), the
subadviser to the International Equity Fund and the Socially Responsible
Fund. Mr. Holt and his family participate in Scudder Kemper's medical and
benefit plans available to former employees. Mr. Holt does not have an
ongoing relationship with Scudder Kemper.
(3) Mr. Lang is a shareholder of an affiliate of the Administrator of the
Trust.
The Officers of the Trust receive remuneration from Horace Mann Service
Corporation. The Trust does not pay any remuneration to its officers. The Trust
pays each Independent Trustee who is not an officer, director, employee or
holder of 5% or more of the outstanding voting securities of the Administrator
or any of its affiliates a $1,000 annual retainer, $1,000 for each meeting of
the Trust, $200 for each committee meeting and $500 for each telephonic meeting.
For the fiscal year ended December 31, 1999, the Independent Trustees fees
totaled $23,200.
Compensation Table
The following table sets forth the compensation earned from the Trust for the
fiscal year ended December 31, 1999 by trustees entitled to receive compensation
from the Trust.
<TABLE>
<CAPTION>
Aggregate Pension Retirement Estimated Annual
Compensation Benefits Accrued as Benefits Upon Total Compensation
Trustee From the Trust Part of Fund Expenses Retirement from the Trust
------- -------------- --------------------- ---------- --------------
<S> <C> <C> <C> <C>
A.L. Gallop $5,800 N/A N/A $5,800
Richard A. Holt 5,800 N/A N/A 5,800
Richard D. Lang 5,800 N/A N/A 5,800
Harriet A. Russell 5,800 N/A N/A 5,800
</TABLE>
As of the date of this Statement of Additional Information, the Trustees and
Officers of the Trust held in the aggregate directly and beneficially less than
1% of the outstanding shares of Equity Fund. Trustees and Officers do not
directly own any shares of Balanced Fund, Income Fund, Short-Term Fund, Small
Cap Growth Fund, International Equity Fund or Socially Responsible Fund;
however, they may invest indirectly in the Equity Fund, Balanced Fund, Income
Fund, Short-Term Fund, Small Cap Growth Fund, International Equity Fund and/or
Socially Responsible Fund through annuity contracts issued by Horace Mann Life
Insurance Company and the 401(k) plan of Horace Mann Service Corporation of
which no one person beneficially owns more than 1%.
INVESTMENT ADVISORY AGREEMENTS
Investment Advisory Agreement. As stated in the Prospectus, the Trust employs
Wilshire Associates Incorporated (the "Adviser") to manage the investment and
reinvestment of the assets of the Funds and to continuously review, supervise
and administer the Funds' investment programs under an Investment Advisory
Agreement dated March 1, 1999 (the "Investment Advisory Agreement"). The Adviser
is controlled by Dennis A. Tito who beneficially owns a majority of the
outstanding shares of the Adviser. The Adviser's duties under the Investment
Advisory Agreement include recommending to the Board of Trustees one or more
unaffiliated subadvisers to provide a continuous investment program for each
Fund or a portion of such Fund's assets designated from time to time by the
Adviser, including investment, research, and management with respect to all
securities and investments and cash equivalents for the Fund or a designated
portion of such Fund's assets. The Adviser also reviews, monitors, and reports
to the Board of Trustees regarding the performance and investment procedures of
each subadviser and assists and consults with each subadviser in connection with
the Fund's continuous investment program. In addition, the Adviser maintains
books and records with respect to its services under the Investment Advisory
Agreement and furnishes the Board of Trustees with such periodic special reports
as the Board may request.
The Adviser selects investment subadvisers based on a continuing quantitative
and qualitative evaluation of their skills and proven abilities in managing
assets pursuant to a particular investment style. Short-term performance is not
by itself a significant factor in selecting or terminating investment
subadvisers, and therefore the Adviser does not anticipate frequent changes in
the investment subadvisers. These managers have been selected upon the basis of
a due diligence
B-24
<PAGE>
process which focuses upon, but is not limited to, the managers' philosophy and
process, people and organization, resources, and performance.
The Adviser monitors the performance of each investment subadviser of the Funds
and, to the extent it deems appropriate to achieve the Funds' investment
objective, reallocates assets among individual subadvisers or recommends that
the Funds employ or terminate particular investment subadvisers.
Each subadviser's fees will be paid by the Adviser out of the advisory fees that
it receives from each of the Funds. Fees paid to a subadviser of a Fund with
multiple subadvisers will depend upon the fee rate negotiated with the Adviser
and upon the percentage of the Fund's assets allocated to that subadviser by the
Adviser, which may vary from time to time. Thus, the basis for fees paid to any
such subadviser will not be constant, and the relative amounts of fees paid to
the various subadvisers of a Fund will fluctuate. These internal fluctuations,
however, will not affect the total advisory fees paid by a Fund, which will
remain fixed on the terms described above. The Adviser may, however, determine
in its discretion to waive a portion of its fee if internal fluctuations in the
fee to be paid to the subadvisers results in excess profit to the Adviser.
Because the Adviser will pay each subadviser's fees out of its own fees from the
Funds, there will not be any "duplication" of advisory fees paid by the Funds.
The Investment Advisory Agreement continues in effect for each Fund from year to
year for so long as its continuation is approved at least annually (a) by a
majority of the trustees who are not parties to such agreement or interested
persons of any such party except in their capacity as trustees of the Fund and
(b) by the shareholders of the Fund or the Board of Trustees. The agreement may
be terminated at any time upon 60 days' notice by either party; the Trust may so
terminate the agreement either by vote of the Board of Trustees or by a majority
vote of the outstanding voting shares of the subject Fund if the Adviser were
determined to have breached the agreement. The agreement would terminate
automatically upon assignment.
For the services provided and the expenses assumed pursuant to the Investment
Advisory Agreement, the Adviser would receive a fee based on each Fund's average
daily net assets, computed daily and payable monthly, at the following annual
rates:
<TABLE>
<CAPTION>
Fund Rate
---- ----
<S> <C>
Equity Fund........................... 0.400%
Balanced Fund......................... 0.400%*
Income Fund........................... 0.400%
Short-Term Investment Fund............ 0.125%
Small Cap Growth Fund................. 1.150%
International Equity Fund............. 0.850%
Socially Responsible Fund............. 0.700%
</TABLE>
__________________
* As discussed in the Prospectus, the Balanced Fund operates under a fund of
funds structure, primarily investing in shares of the Equity Fund and the
Income Fund. The Adviser will only receive directly from the Balanced Fund
a fee of 0.400% of the average daily net assets of the Balanced Fund that
are not invested in another Fund.
For the period ended December 31, 1998, the Equity Fund, Balanced Fund, Income
Fund, Short-Term Investment Fund, Small Cap Growth Fund, International Equity
Fund and Socially Responsible Fund paid Horace Mann Investors ("HM Investors"),
the former manager of the Funds, $3,119,207, $1,918,958, $51,426, $4,501,
$297,498, $83,098 and $195,348, respectively, for advisory and administrative
services under a Management Agreement with the Trust. From these amounts, HM
Investors paid the subadvisers for the subadvisory services provided to the
Funds $1,804,368, $1,076,027, $28,297, $4,501, $297,498, $83,098, and $195,348,
respectively, and HM Investors retained $1,314,839, $842,931, $23,129, $0, $0,
$0 and $0 for the Equity Fund, Balanced Fund, Income Fund, Short-Term Investment
Fund, Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund, respectively.
For the fiscal year ended December 31, 1999, the Equity Fund, Balanced Fund,
Income Fund, Short-Term Investment Fund, Small Cap Growth Fund, International
Equity Fund and Socially Responsible Fund paid HM Investors $4,090,113,
$2,608,543, $85,971, $6,444, $488,897, $167,442 and $450,371
B-25
<PAGE>
respectively, for its advisory and administrative services under a Management
Agreement with the Trust. From these amounts, HM Investors paid the subadvisers
for the subadvisory services provided to the Funds $2,524,097, $1,605,127,
$52,927, $1965, $397,591, $127,913, and $325,132 respectively, and HM
Investors retained $1,566,016, $1,003,416, $33,044, $4479, $91,306, $39,529 and
$125,239 for the Equity Fund, Balanced Fund, Income Fund, Short-Term Investment
Fund, Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund, respectively.
Subadvisers. Each of the Investment Subadvisory Agreements provides that neither
the subadviser nor any of its directors, officers, stockholders, agents or
employees shall have any liability to the Fund or any shareholder of the Fund
for any error of judgment, mistake of law, or any loss arising out of any
investment, or for any other act or omission in the performance by the
subadviser of its duties under the Agreement except for liability resulting from
willful misfeasance, bad faith, or negligence on its part in the performance of
its duties or from reckless disregard by it of its obligations and duties under
the Agreement. Each of the Investment Subadvisory Agreements continues for the
same term as the advisory agreement and is subject to the same requirements for
renewal.
Code of Ethics. The Trust, the Adviser and the Subadvisers have adopted Codes of
Ethics (the "Codes") which substantially comply with Rule 17j-l under the
Investment Company Act of 1940 (the "1940 Act"). The Codes permit personnel who
are subject to the Codes to make personal securities transactions, subject to
the requirements and restrictions set forth in such Codes. The Codes contain
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities and the interests of
investment advisory clients such as those of the Trust.
BROKERAGE ALLOCATION
The Investment Advisory Agreement and the Investment Subadvisory Agreements
authorize the Adviser and the subadvisers, respectively (collectively, the
"Advisers") (subject to the discretion and control of the Trust's Board of
Trustees), to select the brokers or dealers that will execute the purchases and
sales of portfolio securities and direct the Advisers to use their best efforts
to obtain the best available price and most favorable execution. Subject to
policies established by the Trustees of the Trust, the Advisers may also be
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if an Adviser determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage or research services provided, viewed in terms of either the
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and other clients.
In placing portfolio transactions, each of the Advisers will use its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain the best available price and most favorable execution. The
full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and other services in
addition to execution services. Such services may include factual and
statistical information or other items of supplementary research assistance.
Each of the Advisers considers such information useful in the performance of its
obligations under the advisory agreements, but is unable to determine the amount
by which such services may reduce its expenses. In addition, within the
parameters of achieving best price and execution, brokerage services may be used
to generate commission credits which are used to pay for pricing agent and
custodial services. See, "Other Services--Fund Pricing Agreements and Custodial
Agreement."
Each of the Advisers is authorized to consider for investment by a Fund
securities that may also be appropriate for other funds and/or clients served by
the Advisers. To assure fair treatment of each fund and all clients of the
Advisers in situations in which two or more clients' accounts participate
simultaneously in a buy or sell program involving the same security, such
transactions will be allocated among the Funds and clients in a manner deemed
equitable by the Advisers.
To the extent directed by management of the Funds in writing, the Adviser will
direct one or more Subadvisers to execute purchases and sales of portfolio
securities for a fund through brokers or dealers designated by management of the
Fund to the Adviser for the purpose of providing direct benefits to the Fund,
provided that the Subadviser determines that such brokers or dealers will
provide reasonable execution in view of such other benefits. Brokerage
commissions or transaction costs in such transactions may be higher, and the
Fund may receive less favorable prices, than those which a Subadviser could
obtain from another broker or dealer, in order to obtain such benefits for the
Fund.
The following table describes the brokerage fees paid by each Fund during its
three most recent fiscal years ended December 31.
B-26
<PAGE>
<TABLE>
<CAPTION>
Name of Fund 1997 1998 1999
------------ ---- ---- ----
<S> <C> <C> <C>
Equity Fund................... $807,563 $1,019,513 $1,747,779
Balanced Fund................. 364,698 398,985 638,139
Income Fund................... -- -- --
Short-Term Fund............... -- -- --
Small Cap Growth Fund......... 10,574 25,715 39,807
International Equity Fund..... 19,510 25,907 54,420
Socially Responsible Fund..... 6,429 33,889 64,990
</TABLE>
Where multiple brokers are deemed to be able to provide best execution,
brokerage commissions may be allocated to such brokers on the basis of their
ability to provide research. For the fiscal year ended December 31, 1999, the
Equity Fund and Balanced Fund paid commissions dollars to such brokers in the
amount of $94,947 and $96,511, respectively. Total brokerage fees paid during a
year will vary with turnover rates.
OTHER SERVICES
Fund Pricing Agreements. Effective January 1, 1997, the Trust entered into an
agreement with State Street Bank and Trust Company ("State Street"), a national
banking association located at 225 Franklin Street, Boston, Massachusetts 02110,
to calculate the daily net asset value per share for each Fund and to maintain
certain required accounting records.
The Equity and Balanced Funds may compensate State Street Bank for these
services directly or through a commission credit arrangement with Frank Russell
Securities, Inc. The Adviser places trades for the Equity and Balanced Funds
with Frank Russell Securities, Inc., subject to its obligation to obtain the
best available price and most favorable execution. HM Investors directly
compensates State Street for pricing and accounting services provided to the
Short-Term Investment Fund.
Custodial Agreement. State Street Bank also serves as custodian of the assets of
each Fund, including foreign securities through a subcustodian relationship.
Under the Custodial Agreement, State Street maintains each Fund's portfolio
securities, administers the purchases and sales of portfolio securities,
collects interest and dividends and other distributions made on portfolio
securities, and performs such other ministerial duties outlined in the Custodial
Agreement.
The Equity and Balanced Funds may compensate State Street for these services
directly or through a commission credit arrangement with Frank Russell
Securities, Inc. The Adviser places trades for the Equity and Balanced Funds
with Frank Russell Securities, Inc., subject to its obligation to obtain the
best available price and most favorable execution.
Transfer and Dividend Paying Agent. Horace Mann Service Corporation ("HMSC"),
One Horace Mann Plaza, Springfield, Illinois 62715-0001, acts as the transfer
agent and dividend disbursing agent for each Fund and is paid a fee based on the
number of accounts outstanding. HMSC is a wholly-owned subsidiary of Horace Mann
Educators Corporation ("HMEC"). "Horace Mann" is a registered service mark of
HMEC. Each Fund has been given limited permission to use that service mark in
its name, subject to HMEC's right to revoke that permission.
Independent Auditors. KPMG, LLP, 303 East Wacker Drive, Chicago, Illinois 60601,
serves as the Trust's independent auditors. KPMG, LLP performs an annual audit
of the financial statements of each Fund and provides accounting advice and
services related to Securities and Exchange Commission filings throughout the
year.
VOTING RIGHTS
Each Fund is authorized by the Declaration of Trust to issue an unlimited number
of shares. Shares of each Fund are of the same class with equal rights and
privileges. Each share is entitled to vote on all matters submitted to a vote of
shareholders. The shares of each Fund are fully paid and non-assessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each Fund have no pre-exemptive rights. The shares
B-27
<PAGE>
of each Fund have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of trustees can elect 100%
of the trustees if they choose to do so.
Each person with voting rights will be provided with reports and proxy materials
relating to the applicable Fund(s). To be entitled to vote, a shareholder
(either a public shareholder of the Equity Fund or an insurance company separate
account) must have been a shareholder on the record date. The number of Fund
shares for which a shareholder may vote is determined by dividing the value of
an interest in a Fund by the net asset value of one share of the Fund, as of the
same date.
As of March 31, 2000, Horace Mann Life Insurance Company Separate Account owned
approximately 82.1%, 96.4%, 96.0%, 86.8%, 91.7%, 83.8%, and 88.1% of the
outstanding shares of the Equity Fund, Balanced Fund, Income Fund, Short-Term
Investment Fund, Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund, respectively. Horace Mann Life Insurance Company Separate
Account B held approximately 3.4% of the Equity Fund. Horace Mann Life Insurance
Company Allegiance Separate Account A held approximately 1.0% of the Equity
Fund. Since these separate accounts' voting rights are passed through to
contract owners and participants, HMLIC itself does not exercise voting control.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Each Fund sells and redeems its shares at net asset value per share, without a
sales or redemption charge. No minimum purchase or redemption amounts apply. The
daily net asset value of each Fund's shares is determined by dividing the net
assets by the number of outstanding shares. Net assets are equal to the total
assets of the Fund less its liabilities. The price at which a purchase is
effected is based on the next calculated net asset value after the order is
received at the home office, One Horace Mann Plaza, Springfield, Illinois 62715-
0001. A security listed or traded on an exchange is valued at its last sales
price on the exchange where it is principally traded. In the absence of a
current quotation, the security is valued at the mean between the last bid and
asked prices on the exchange. Securities traded over-the-counter are valued at
the last current bid price. If there are no such bid and ask quotations, the
most recent bid quotation is used. Securities quoted on the National Association
of Securities Dealers Automatic Quotation (NASDAQ) System, for which there have
been sales, are valued at the most recent sale price reported on such system. If
there are no such sales, the value is the high or "inside" bid quotation.
Trading in securities on exchanges and over-the-counter markets in Europe and
the Far East is normally completed at various times prior to 3:00 p.m. Chicago
time, the current closing time of the New York Stock Exchange. Trading on
foreign exchanges may not take place on every date the New York Stock Exchange
is open. Conversely, trading in various foreign markets may take place on days
when the New York Stock Exchange is not open and on other days when the
International Equity Fund's net asset value is not calculated. Consequently,
calculation of the net asset value for the International Equity Fund may not
occur at the same time as determination of the most current market prices of the
securities included in the calculation; and the value of the net assets held by
the International Equity Fund may be significantly affected on days when shares
are not available for purchase or redemption. Foreign securities are converted
to United States dollars using exchange rates at the close of the New York Stock
Exchange. In the event market quotations would not be available, securities
would be valued at fair value as determined in good faith by the Board of
Trustees; no such securities were owned by the Funds as of December 31,
1999.
Debt securities that have a remaining maturity of 60 days or less are valued at
cost, plus or minus any amortized discount or premium. Under the amortized cost
method of valuation, the security is initially valued at cost. Then, the Fund
assumes a constant proportionate amortization in value until maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the security. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price that would be received upon
the sale of the security. When market quotations are not available, securities
are valued at fair value as determined in good faith by the Board of Trustees.
B-28
<PAGE>
TAX STATUS
It is intended that each of the Funds will qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended ("Code"). In order
to qualify as a regulated investment company under the Code, a Fund must, among
other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stocks, securities, or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in these stocks, securities or
foreign currencies; (b) distribute at least 90% of its net investment income
which includes short-term capital gains, and (c) diversify its holdings so that,
at the end of each fiscal quarter, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items, Government securities, the
securities of other regulated investment companies, and other securities limited
in respect of any one issuer to 5% of the Fund's total assets and to not more
than 10% of the voting securities of that issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than Government securities or the securities of other regulated
investment companies).
The Funds are investment vehicles for the variable contracts of Horace Mann Life
Insurance Company. The separate accounts which maintain the variable contracts
must satisfy quarterly diversification requirements under Section 817(h) of the
Code. These diversification requirements, which apply in addition to the
diversification requirements imposed on the Funds by the Investment Company Act
of 1940, place limitations on the investments of each Fund that can be made in
the securities of certain issuers. If Fund investments are not adequately
diversified under Section 817(h), the earnings of all variable contracts
invested, in whole or in part, in the Fund will be currently taxable to the
variable contract owners.
As a regulated investment company, a Fund is not subject to federal income tax
on its net investment income (including short-term capital gains) if it
distributes all net investment income to its shareholders. A Fund will not be
subject to federal income tax on any net capital gains (the excess of net long-
term capital gains or net short-term capital losses) that are distributed as
capital gain dividends. If, however, shares of a Fund are sold at a loss after
being held six months or less, such loss will be considered a long-term capital
loss to the extent of any capital gains distributions on such shares.
A Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of a Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain net income or
loss recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts and futures contracts on foreign
currency are marked to market, the gain or loss is generally ordinary under
Section 988 of the Code. In addition, the straddle rules of the Code would
require deferral of certain losses realized on positions of a straddle to the
extent that a Fund had unrealized gains in offsetting positions at year end.
Foreign exchange gains and losses realized by the International Equity Fund in
connection with certain transactions that involve foreign currency-denominated
debt securities, certain foreign currency options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing, and character of distributions to shareholders. For example,
if the Fund sold a foreign stock or bond and part of the gain or loss on the
sale was attributable to an increase or decrease in the value of a foreign
currency, then the currency gain or loss may be treated as ordinary income or
loss. If such transactions result in higher net ordinary income, the dividends
paid by the Fund will be increased; if the result of such transactions is lower
net ordinary income, a portion of dividends paid could be classified as a return
of capital.
The International Equity Fund may qualify for and make an election permitted
under the "pass through" provisions of Section 853 of the Code, which allows a
regulated investment company to have its foreign tax credit taken by its
shareholders instead of on its own tax return. To be eligible for this credit,
more than 50% of the value of the Fund's
B-29
<PAGE>
total assets at the close of its taxable year must consist of stock or other
securities in foreign corporations, and the Fund must have distributed at least
90% of its taxable income.
If the International Equity Fund makes this election, it may not take any
foreign tax credit, and may not take a deduction for foreign taxes paid.
However, the Fund is allowed to include the amount of foreign taxes paid in a
taxable year in its dividends-paid deduction. Each shareholder would then
include in its gross income, and treat as paid by it, its proportionate share of
the foreign taxes paid by the Fund.
Investment income derived from foreign securities may be subject to foreign
income taxes withheld at the source. Because the amount of a Fund's investments
in various countries will change from time to time, it is not possible to
determine the effective rate of such taxes in advance.
If the U.S. government were to impose any restrictions, through taxation or
other means, on foreign investments by U.S. investors such as those to be made
through the portfolio, the Board of Trustees of the Fund will promptly review
the policies of the International Equity Fund to determine whether significant
changes in its investments are appropriate.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the International Equity Fund is effectively connected will be
subject to U.S. federal income tax treatment that is different from that
described above and in the prospectus. Such investors may be subject to
nonresident alien withholding tax at the rate of 30% (or a lower rate under an
applicable tax treaty) on amounts treated as ordinary dividends from the Fund
and, unless an effective IRS Form W-8 or authorized substitute for Form W-8 is
on file, to 31% backup withholding on certain other payments from the Fund. Non-
U.S. investors should consult their tax advisers regarding such treatment and
the application of foreign taxes to an investment in the Fund.
The above discussion is only an abbreviated summary of the applicable provisions
of the Code and is not intended as tax advice.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth, as of March 31, 2000, the holdings of the
capital stock of each of the Funds known by the respective Fund to own, control
or hold with power to vote 5% or more of its outstanding securities. Since the
listed insurance company registered separate accounts' voting rights are passed
through to contract owners, the insurance companies themselves do not exercise
voting control over the shares held in those accounts.
<TABLE>
<CAPTION>
Type of Ownership Shares Owned % of Shares Outstanding
- --------------------------------------------------------------------------------- ------------ -----------------------
<S> <C> <C>
EQUITY FUND:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............. Record 22,094,594 82.1
BALANCED FUND:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............. Record 20,857,608 96.4
INCOME FUND:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
</TABLE>
B-30
<PAGE>
<TABLE>
<CAPTION>
Type of Ownership Shares Owned % of Shares Outstanding
- --------------------------------------------------------------------------------- ------------ -----------------------
<S> <C> <C>
(a) Horace Mann Life Insurance Company Separate Account............ Record 929,692 96.0
SHORT-TERM FUND:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............ Record 142,403 86.8
(b) Horace Mann Life Insurance Company (depositor)................. Record 10,000 6.1
(c) Horace Mann Service Corporation 401(k)......................... Record 11,613 7.1
SMALL CAP GROWTH FUND:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............ Record 3,616,087 88.1
(b) Horace Mann Service Corporation 401(k)......................... Record 387,333 9.4
INTERNATIONAL EQUITY FUND:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............ Record 2,026,917 83.8
(c) Horace Mann Service Corporation 401(k)......................... Record 290,837 12.0
</TABLE>
B-31
<PAGE>
<TABLE>
<CAPTION>
Type of Ownership Shares Owned % of Shares Outstanding
- --------------------------------------------------------------------------------- ------------ -----------------------
<S> <C> <C>
SOCIALLY RESPONSIBLE FUND:
Horace Mann Life Insurance Company
One Horace Mann Plaza
Springfield, Illinois 62715
(a) Horace Mann Life Insurance Company Separate Account............ Record 4,614,148 91.7
(b) Horace Mann Service Corporation 401(k)......................... Record 315,391 6.3
</TABLE>
Horace Mann Life Insurance Company is organized under the laws of the State of
Illinois and is a wholly-owned subsidiary of Allegiance Life Insurance Company,
an Illinois-domiciled life insurance company. One hundred percent of the stock
of Allegiance Life Insurance Company is held by Horace Mann Educators
Corporation, an insurance holding company incorporated in Delaware.
GENERAL INFORMATION
As a business trust, the Trust is not required to hold annual shareholder
meetings. However, special meetings may be called for purposes such as electing
or removing trustees, changing fundamental policies, or approving an investment
advisory contract. If requested to do so by the holders of at least 10% of the
Trust's outstanding shares, the Trust will call a special meeting for the
purpose of voting upon the question of removal of a trustee or trustees and will
assist in the communications with other shareholders as if the Trust were
subject to Section 16(C) of the Investment Company Act of 1940. All shares of
all series of the Trust are voted together in the election of trustees. On any
other matter submitted to a vote of shareholders, shares are voted in the
aggregate and not by the individual series, except that shares are voted by the
individual series when required by the Investment Company Act of 1940 or other
applicable law or when the Board of Trustees determines that the matter affects
only the interests of one or more series, in which case shareholders of the
unaffected series are not entitled to vote on such matters.
FINANCIAL STATEMENTS
The financial statements for the Equity Fund, Balanced Fund, Income Fund, Short-
Term Investment Fund, Small Cap Growth Fund, International Equity Fund and
Socially Responsible Fund for the year ended December 31, 1999, and the Report
of Independent Auditors thereon, are incorporated herein by reference from the
Funds' Annual Report dated December 31, 1999. A copy of the Annual Report must
be accompanied by or preceded by the Prospectus. Additional copies of the Annual
Report and/or the Reports of Independent Auditors may be obtained, upon request
and without charge, by contacting the offices of the Funds at P.O. Box 4657,
Springfield, Illinois 62708-4657, by sending a telefacsimile (FAX) transmission
to (217) 535-7123, or by telephoning (217) 789-2500 or (800) 999-1030 (toll-
free).
B-32
<PAGE>
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
Commercial Paper Ratings. Moody's Investors Service, Inc., employs the
designations "Prime-1", "Prime-2" and "Prime-3" to indicate commercial paper
having the highest capacity for timely repayment. Issuers rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by 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.
Issues rated Prime-2 have a strong capacity for repayment of short-term
promissory 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 alternate liquidity is maintained.
Standard & Poor's Corporation's ratings of commercial paper are graded into four
categories ranging from "A" for the highest quality obligations to "D" for the
lowest.
A - Issues assigned its highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2 - Capacity for timely payments on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
Corporate Debt Securities. Moody's Investors Service, Inc., rates the long-term
debt securities issued by various entities from "Aaa" to "D."
Aaa - Best quality. These securities carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large, or by an exceptionally stable, margin
and principal is secure. While the various protective elements are likely
to change, these changes are most unlikely to impair the fundamentally
strong position of such issues.
Aa - High quality by all standards. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities, fluctuation of protective elements may be of greater amplitude,
or there may be other elements present that make the long-term risks appear
somewhat greater.
A - Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest
are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Medium grade obligations. 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.
Standard & Poor's Corporation also rates the long-term securities debt of
various entities in categories ranging from "AAA" to "D" according to
quality.
A-1
<PAGE>
AAA - Highest grade. They possess the ultimate degree of protection as to
principal and interest. Marketwise, they move with interest rates and
provide the maximum safety on all counts.
Aa - High grade. Generally, these bonds differ from AAA issues only in a
small degree. Here, too, prices move with the long-term money market.
A - Have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Regarded as having adequate capacity to pay interest and repay
principal. These bonds normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal than for
debt in higher-rated categories.
A-2
<PAGE>
HORACE MANN MUTUAL FUNDS
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust and Certificate of Trust. (1)/
(b) By-Laws. (1)/
(c) Not applicable.
(d) Investment Advisory Contracts.
(i) Form of Investment Advisory Agreement with Wilshire
Associates Incorporated. (4)/
Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Scudder Kemper Investments,
Inc.(4)/
Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Wellington Management Company,
LLP.(4)/
Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and BlackRock, Inc.(4)/
Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Mellon Equity Associates,
LLP.(4)/
Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Western Asset Management
Company.*
Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Western Asset Management
Limited.*
Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Sanford C. Bernstein & Co.,
Inc.*
(e) Not applicable.
(f) Not applicable.
(g) (i) Custodian Services Agreement. (2)/
(h) (i) Transfer Agent Agreement. (2)/
(ii) Money Transfer Services Agreement. (2)/
(iii) Form of Administration Agreement with Horace Mann
Investors, Inc. (4)/
(iv) Form of Support Services Agreement with HMLIC.(4)/
C-1
<PAGE>
(i) Opinion and Consent of Vedder, Price, Kaufman & Kammholz.*
(j) Consent of KPMG LLP.*
(k) None.
(l) Investment Letter from initial investor to the Registrant. (1)/
(m) Not applicable.
(n) Not applicable.
(o) Codes of Ethics
(i) Horace Mann Mutual Funds*
(ii) Wilshire Associates Incorporated*
(iii) Scudder Kemper Investments, Inc.*
(iv) Wellington Management Company*
(v) BlackRock, Inc.*
(vi) Mellon Equity Associates, LLP.*
(vii) Western Asset and WAML*
(viii) Sanford C. Bernstein & Co., Inc.*
(p) (i) Power of Attorney for George J. Zock(5)/
(ii) Power of Attorney for A. Thomas Arisman(5)/
(iii) Power of Attorney for A. L. Gallop(5)/
(iv) Power of Attorney for Richard A. Holt(5)/
(v) Power of Attorney for Richard D. Lang(5)/
(vi) Power of Attorney for Harriet A. Russell(5)/
____________
(1)/ Incorporated by reference to the initial Registration Statement filed on
November 8, 1996.
(2)/ Incorporated by reference to Registrant's Pre-Effective Amendment No. 1
filed on or about February 20, 1997.
(3)/ Incorporated by reference to Registrant's Post-Effective Amendment No. 1
filed on Form N-1A on or about March 19, 1997.
(4)/ Incorporated by reference to Registrant's Post-Effective Amendment No. 4
filed on Form N-1A on or about February 26, 1999.
(5)/ Incorporated by reference to Registrant's Post-effective Amendment No. 7
filed on Form N-1A on or about March 1, 2000
* Filed herewith.
ITEM 24. Persons Controlled By or Under Common Control with Registrant
No person is directly controlled by Horace Mann Mutual Funds. Companies
under common control include Horace Mann Educators Corp. and its subsidiaries.
See Exhibit No. 19, incorporated by reference to Registrant's Post-Effective
Amendment No. 1 filed on or about February 20, 1997.
ITEM 25. Indemnification
Article V of Registrant's Declaration of Trust, provides for the
indemnification of Registrant's trustees, officers, employees and agents against
liabilities incurred by them in connection with the defense or disposition of
any action or proceeding in which they may be involved or with which they may be
threatened, while in office or thereafter, by reason of being or having been in
such office, except with respect to matters as to which it has been determined
that they
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<PAGE>
acted with willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office ("Disabling
Conduct").
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer, or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 26. Business and Other Connections of Investment Adviser
Effective March 1, 1999, Wilshire Associates Incorporated (the "Adviser")
is the investment adviser to the Registrant. The Adviser has entered into
investment subadvisory agreements with Sanford C. Bernstein & Co. Inc., Mellon
Equity Associates, LLP, Wellington Management Company, LLP, Scudder Kemper
Investments, Inc., BlackRock Financial Management, Inc., Western Asset
Management Company and Western Asset Management Limited.
BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
PROPOSED INVESTMENT ADVISER, WILSHIRE ASSOCIATES INCORPORATED, ("WILSHIRE").
WILSHIRE IS AN INVESTMENT ADVISER REGISTERED UNDER THE INVESTMENT ADVISERS ACT
OF 1940, AS AMENDED (THE "ADVISERS ACT").
The list required by this Item 26 of officers and partners of Wilshire,
together with information as to any business, profession, vocation or employment
of substantial nature engaged in by such officers and partners during the past
two fiscal years, is incorporated herein by reference to Schedules A and D of
Form ADV filed by Wilshire pursuant to the Advisers Act (SEC File No.801-36233).
BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
INVESTMENT SUBADVISER, SCUDDER KEMPER INVESTMENTS, INC. ("SCUDDER KEMPER").
SCUDDER KEMPER IS AN INVESTMENT ADVISER REGISTERED UNDER THE ADVISERS ACT.
The list required by this Item 26 of officers and partners of Scudder
Kemper, together with information as to any business, profession, vocation or
employment of substantial nature engaged in by such officers and partners during
the past two fiscal years, is incorporated herein by reference to Schedules A
and D of Form ADV filed by Scudder Kemper pursuant to the Advisers Act (SEC File
No. 801-252).
BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
INVESTMENT SUBADVISER, WELLINGTON MANAGEMENT COMPANY, LLP ("WELLINGTON").
WELLINGTON IS AN INVESTMENT ADVISER REGISTERED UNDER THE ADVISERS ACT.
The list required by this Item 26 of officers and partners of Wellington,
together with information as to any business, profession, vocation or employment
of substantial nature engaged in by such officers and partners during the past
two fiscal years, is incorporated herein by reference to Schedules B and D of
Form ADV filed by Wellington pursuant to the Advisers Act (SEC File No. 801-
15908).
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BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
INVESTMENT SUBADVISER, BLACKROCK FINANCIAL MANAGEMENT, INC. ("BLACKROCK").
BLACKROCK IS AN INVESTMENT ADVISER REGISTERED UNDER THE ADVISERS ACT.
The list required by this Item 26 of officers and partners of BlackRock,
together with information as to any business, profession, vocation or employment
of substantial nature engaged in by such officers and partners during the past
two fiscal years, is incorporated herein by reference to Schedules A and D of
Form ADV filed by BlackRock pursuant to the Advisers Act (SEC File No.
801-47711).
BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
PROPOSED INVESTMENT SUBADVISER, MELLON EQUITY ASSOCIATES, LLP ("MELLON EQUITY").
MELLON EQUITY IS AN INVESTMENT ADVISER REGISTERED UNDER THE ADVISERS ACT.
The list required by this Item 26 of officers and partners of Mellon
Equity, together with information as to any business, profession, vocation or
employment of substantial nature engaged in by such officers and partners during
the past two fiscal years, is incorporated herein by reference to Schedules A
and D of Form ADV filed by Mellon Equity pursuant to the Advisers Act (SEC File
No. 801-28692).
BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
PROPOSED INVESTMENT SUBADVISER, WESTERN ASSET MANAGEMENT COMPANY ("WESTERN
ASSET"). WESTERN ASSET IS AN INVESTMENT ADVISER REGISTERED UNDER THE ADVISERS
ACT.
The list required by this Item 26 of officers and partners of Western
Asset, together with information as to any business, profession, vocation or
employment of substantial nature engaged in by such officers and partners during
the past two fiscal years, is incorporated herein by reference to Schedules A
and D of Form ADV filed by Western Asset pursuant to the Advisers Act (SEC File
No. 801-8162).
BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
PROPOSED INVESTMENT SUBADVISER, WESTERN ASSET MANAGEMENT LIMITED ("WAML").
WESTERN ASSET IS AN INVESTMENT ADVISER REGISTERED UNDER THE ADVISERS
ACT.
The list required by this Item 26 of officers and partners of WAML,
together with information as to any business, profession, vocation or employment
of substantial nature engaged in by such officers and partners during the past
two fiscal years, is incorporated herein by reference to Schedules A and D of
Form ADV filed by WAML pursuant to the Advisers Act (SEC File No.
801-21068).
BUSINESS AND OTHER CONNECTIONS OF OFFICERS AND PARTNERS OF REGISTRANT'S
PROPOSED INVESTMENT SUBADVISER, SANFORD C. BERNSTEIN & CO., INC. ("BERNSTEIN").
BERNSTEIN IS AN INVESTMENT ADVISER REGISTERED UNDER THE ADVISERS ACT.
The list required by this Item 26 of officers and partners of Bernstein,
together with information as to any business, profession, vocation or employment
of substantial nature engaged in by such officers and partners during the past
two fiscal years, is incorporated by reference to Schedules A and D of Form ADV
filed by Bernstein pursuant to the Advisers Act (SEC File No. 801-10488).
ITEM 27. Principal Underwriters
Not applicable.
ITEM 28. Location of Accounts and Records
All such accounts, books and other documents are maintained (i) at the
offices of the Registrant, (ii) at the offices of Registrant's administrator,
Horace Mann Investors, Inc., One Horace Mann Plaza, Springfield, Illinois 62715,
(iii) at the offices of Registrant's investment adviser or subadvisers, Wilshire
Associates, Incorporated, 1299 Ocean Avenue, Santa Monica, California 90401-
1085, Wellington Management Company, LLP, 75 State Street, Boston,
Massachusetts 02109, Scudder Kemper Investments, Inc., Two International Place,
Boston, Massachusetts 02110, BlackRock Financial Management Inc., 1600 Market
Street, 27th Floor, Philadelphia, Pennsylvania 19103, Western Asset Management
Company, 117 E. Colorado Blvd., Pasedena, California 91105, Western Asset
Management Limited, 155 Bishopsquite, London EC2M 3&G England and Sanford C.
Bernstein & Co., Inc. 767 Fifth Avenue, New York, New York 10153, or (iv) at the
offices of Registrant's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
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ITEM 29. Management Services
Not applicable.
ITEM 30. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual
report to shareholders, upon request and without charge.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the registration statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Springfield and State of Illinois on
the 28th day of April, 2000.
HORACE MANN MUTUAL FUNDS
By: /s/ GEORGE J. ZOCK
-----------------------------------
George J. Zock, President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below on April 28, 2000 by the
following persons in the capacities indicated.
Signature Title
/s/ GEORGE J. ZOCK
- -------------------------
George J. Zock
/s/ WILLIAM J. KELLY Treasurer (Principal Financial and Accounting
- -------------------------
William J. Kelly Officer)
/s/ A. THOMAS ARISMAN Trustee
- -------------------------
A. Thomas Arisman
/s/ A. L. GALLOP* Trustee
- -------------------------
A. L. Gallop
/s/ RICHARD A. HOLT* Trustee
- -------------------------
Richard A. Holt
/s/ RICHARD D. LANG* Trustee
- -------------------------
Richard D. Lang
/s/ HARRIET A. RUSSELL* Trustee
- -------------------------
Harriet A. Russell
______________
* George J. Zock signs this document pursuant to powers of attorney filed
previously.
By: /s/George J. Zock
--------------------------------
George J. Zock, Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
(d) (vii) Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Western Asset Management Company.
(viii) Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Western Asset Management Limited.
(ix) Form of Investment Sub-Advisory Agreement between Wilshire
Associates Incorporated and Sanford C. Bernstein & Co., Inc.
(i) Opinion and Consent of Vedder, Price, Kaufman & Kammholz.
(j) Consent of KPMG LLP.
(o) Code of Ethics
(i) Horace Mann Mutual Funds
(ii) Wilshire Associates Incorporated
(iii) Scudder Kemper Investments, Inc.
(iv) Wellington Management Company
(v) BlackRock, Inc.
(vi) Mellon Equity Associates, LLP.
(vii) Western Asset and WAML
(viii) Sanford C. Bernstein & Co., Inc.
<PAGE>
Exhibit(d)(vii)
FORM OF
INVESTMENT SUB-ADVISORY AGREEMENT
This Investment Sub-Advisory Agreement ("Agreement") is made as of the 24/th/
day of March, 2000 by and between Wilshire Associates Incorporated, a California
corporation ("Adviser"), and Western Asset Management Company, a registered
investment adviser ("Sub-Adviser").
Whereas Adviser is the investment adviser of the Horace Mann Mutual Funds
(the "Fund"), an open-end diversified, management investment company
registered under the Investment Company Act of 1940, as amended ("1940
Act"), currently consisting of seven separate series or portfolios
(collectively, the "Fund Portfolios") including the Horace Mann Growth
Fund, the Horace Mann Income Fund, the Horace Mann Balanced Fund, the
Horace Mann Short-Term Investment Fund, the Horace Mann Socially
Responsible Fund, the Horace Mann International Equity Fund, and the Horace
Mann Small-Cap Growth Fund;
Whereas Adviser desires to retain Sub-Adviser to furnish investment
advisory services for the Fund Portfolio(s) as described in Exhibit 1 -
Fund Portfolio Listing, as may be amended from time to time, and Sub-
Adviser wishes to provide such services, upon the terms and conditions set
forth herein;
Now Therefore, in consideration of the mutual covenants herein contained,
the parties agree as follows:
1. Appointment Adviser hereby appoints Sub-Adviser to provide certain sub-
investment advisory services to each Fund Portfolio for the period and on the
terms set forth in this Agreement. Sub-Adviser hereby accepts such appointment
and agrees to furnish the services set forth for the compensation herein
provided.
2. Sub-Adviser Services Subject always to the supervision of the Fund's Board
of Trustees and Adviser, Sub-Adviser will furnish an investment program in
respect of, and make investment decisions for, such portion of the assets of
each Fund Portfolio as Adviser shall from time to time designate (each a
"Portfolio Segment") and place all orders for the purchase and sale of
securities on behalf of each Portfolio Segment. Within its Portfolio Segment,
Sub-Adviser will make all investment-related decisions for those investments
denominated in United States dollars, subject to any constraints outlined in
further guidance provided to Sub-Adviser by Adviser. For that portion of the
Portfolio Segment that is denominated in currencies other than United States
dollars and managed by its affiliate, Western Asset Management Company Limited.
("WAMCL"), Sub-Adviser agrees to be responsible for all acts of WAMCL to the
same extent as it would be responsible hereunder if the Sub-Adviser acted
directly itself. Sub-Adviser agrees that the United States dollar-denominated
portion of the Portfolio Segment shall represent at least 85% of the Portfolio
Segment's market value. In the performance of its duties, Sub-Adviser will
satisfy its fiduciary duties to the Fund and each Fund Portfolio and will
monitor a Portfolio Segment's investments, and will comply with the provisions
of the Fund's Declaration of Trust and By-laws,
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as amended from time to time, and the stated investment objectives, policies and
restrictions of each Fund Portfolio as set forth in the prospectus and Statement
of Additional Information for each Fund Portfolio, as amended from time to time,
as well as any other objectives, policies or limitations as may be provided by
Adviser to Sub-Adviser in writing from time to time.
Sub-Adviser will provide reports at least quarterly to the Board of Trustees and
to Adviser. Sub-Adviser will make its officers and employees available to
Adviser and the Board of Trustees from time to time at reasonable times to
review investment policies of each Fund Portfolio with respect to each Portfolio
Segment and to consult with Adviser regarding the investment affairs of each
Portfolio Segment.
Sub-Adviser agrees that it:
(a) will use the same skill and care in providing such services as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities;
(b) will conform with all applicable provisions of the 1940 Act and rules
and regulations of the Securities and Exchange Commission in all material
respects and in addition will conduct its activities under this Agreement
in accordance with any applicable laws and regulations of any governmental
authority pertaining to its investment advisory activities, including all
portfolio diversification requirements necessary for each Portfolio Segment
to comply with subchapter M and Section 817(h) of the Internal Revenue Code
as if each were a regulated investment company thereunder;
(c) to the extent authorized by Adviser in writing, and to the extent
permitted by law, will execute purchases and sales of portfolio securities
and other investments for each Portfolio Segment through brokers or dealers
designated by management of the Fund to Adviser for the purpose of
providing direct benefits to the Fund, provided that Sub-Adviser determines
that such brokers or dealers will provide best execution in view of all
appropriate factors, and is hereby authorized as the agent of the Fund to
give instructions to the Fund's custodian as to deliveries of securities or
other investments and payments of cash of each Portfolio Segment to such
brokers or dealers for the account of the relevant Fund Portfolio. Adviser
and the Fund understand that the brokerage commissions or transaction costs
in such transactions may be higher than those which the Sub-Adviser could
obtain from another broker or dealer, in order to obtain such benefits for
the Fund.
(d) is authorized to and will select all other brokers or dealers that
will execute the purchases and sales of portfolio securities for each
Portfolio Segment and is hereby authorized as the agent of the Fund to give
instructions to the Fund's custodian as to deliveries of securities or
other investments and payments of cash of each Portfolio Segment for the
account of each Fund Portfolio. In making such selection, Sub-Adviser is
directed to use its best efforts to obtain best execution, which includes
most favorable net results and execution of a Portfolio Segment's orders,
taking into account all appropriate factors, including price, dealer spread
or commission, size and difficulty of the transaction
2
<PAGE>
and research or other services provided. With respect to transactions under
sub-paragraph (c) or this sub-paragraph (d), it is understood that Sub-
Adviser will not be deemed to have acted unlawfully, or to have breached a
fiduciary duty to the Fund or in respect of any Fund Portfolio, or be in
breach of any obligation owing to the Fund or in respect of any Fund
Portfolio under this Agreement, or otherwise, solely by reason of its
having caused a Fund Portfolio to pay a member of a securities exchange, a
broker or a dealer a commission for effecting a securities transaction of a
Fund Portfolio in excess of the amount of commission another member of an
exchange, broker or dealer would have charged if Sub-Adviser determined in
good faith that the commission paid was reasonable in relation to the
brokerage and research services provided by such member, broker, or dealer,
viewed in terms of that particular transaction or Sub-Adviser's overall
responsibilities with respect to its accounts, including the Fund, as to
which it exercises investment discretion;
(e) is authorized to consider for investment by each Portfolio Segment
securities that may also be appropriate for other funds and/or clients
served by Sub-Adviser. To assure fair treatment of each Portfolio Segment
and all other clients of Sub-Adviser in situations in which two or more
clients' accounts participate simultaneously in a buy or sell program
involving the same security, such transactions will be allocated among each
Portfolio Segment and other clients in a manner deemed equitable by Sub-
Adviser. Sub-Adviser is authorized to aggregate purchase and sale orders
for securities held (or to be held) in each Portfolio Segment with similar
orders being made on the same day for other client accounts or portfolios
managed by Sub-Adviser. When an order is so aggregated, the actual prices
applicable to the aggregated transaction will be averaged and each
Portfolio Segment and each other account or portfolio participating in the
aggregated transaction will be treated as having purchased or sold its
portion of the securities at such average price, and all transaction costs
incurred in effecting the aggregated transaction will be shared on a pro-
rata basis among the accounts or portfolios (including each Portfolio
Segment) participating in the transaction. Adviser and the Fund understand
that Sub-Adviser may not be able to aggregate transactions through brokers
or dealers designated by Adviser with transactions through brokers or
dealers selected by Sub-Adviser, in which event the prices paid or received
by each Portfolio Segment will not be so averaged and may be higher or
lower than those paid or received by other accounts or portfolios of Sub-
Adviser.;
(f) will report regularly to Adviser and to the Board of Trustees and will
make appropriate persons available for the purpose of reviewing with
representatives of Adviser and the Board of Trustees on a regular basis at
reasonable times the management of each Portfolio Segment, including
without limitation, review of the general investment strategies of each
Portfolio Segment, the performance of each Portfolio Segment in relation to
standard industry indices, interest rate considerations and general
conditions affecting the marketplace, and will provide various other
reports from time to time as reasonably requested by Adviser;
3
<PAGE>
(g) will prepare such books and records with respect to each Portfolio
Segment's securities transactions as requested by Adviser and will furnish
Adviser and the Fund's Board of Trustees such periodic and special reports
as the Board or Adviser may reasonably request;
(h) will vote all proxies with respect to securities in each Portfolio
Segment; and
(i) will act upon reasonable instructions from Adviser which, in the
reasonable determination of Sub-Adviser, are not inconsistent with Sub-
Adviser's fiduciary duties under this Agreement.
3. Expenses During the term of this Agreement, Sub-Adviser will provide the
office space, furnishings, equipment and personnel required to perform its
activities under this Agreement, and will pay all customary management expenses
incurred by it in connection with its activities under this Agreement, which
shall not include the cost of securities (including brokerage commissions, if
any) purchased for each Portfolio Segment.
4. Compensation For the services provided and the expenses assumed under this
Agreement, Adviser will pay Sub-Adviser, and Sub-Adviser agrees to accept as
full compensation therefor, a sub-advisory fee computed and paid as set forth
in Exhibit 2 - Fee Schedule.
5. Other Services Sub-Adviser will for all purposes herein be deemed to be an
independent contractor and will, unless otherwise expressly provided or
authorized, have no authority to act for or represent Adviser, the Fund or a
Fund Portfolio or otherwise be deemed an agent of Adviser, the Fund or a Fund
Portfolio. Adviser understands and has advised the Fund's Board of Trustees
that Sub-Adviser acts as an investment adviser or sub-investment adviser to
other investment companies and other advisory clients. Sub-Adviser understands
that during the term of this Agreement Adviser may retain one or more other sub-
advisers with respect to any portion of the assets of a Fund Portfolio other
than each Portfolio Segment.
6. Affiliated Broker Sub-Adviser or an affiliated person of Sub-Adviser may act
as broker for each Fund Portfolio in connection with the purchase or sale of
securities or other investments for each Portfolio Segment, subject to: (a) the
requirement that Sub-Adviser seek to obtain best execution as set forth above;
(b) the provisions of the Investment Advisers Act of 1940, as amended (the
"Advisers Act"); (c) the provisions of the Securities Exchange Act of 1934, as
amended; and (d) other applicable provisions of law. Subject to the
requirements of applicable law and any procedures adopted by the Fund's Board of
Trustees, Sub-Adviser or its affiliated persons may receive brokerage
commissions, fees or other remuneration from the Fund Portfolio or the Fund for
such services in addition to Sub-Adviser's fees for services under this
Agreement.
7. Representations of Sub-Adviser Sub-Adviser is registered with the Securities
and Exchange Commission under the Advisers Act. Sub-Adviser shall remain so
registered throughout the term of this Agreement and shall notify Adviser
immediately if Sub-Adviser ceases to be so registered
4
<PAGE>
as an investment adviser. Sub-Adviser: (a) is duly organized and validly
existing under the laws of the state of its organization with the power to own
and possess its assets and carry on its business as it is now being conducted,
(b) has the authority to enter into and perform the services contemplated by
this Agreement, (c) is not prohibited by the 1940 Act or the Advisers Act from
performing the services contemplated by this Agreement, (d) has met, and will
continue to seek to meet for the duration of this Agreement, any other
applicable federal or state requirements, and the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be met in order to
perform its services under this Agreement, and (e) will promptly notify Adviser
of the occurrence of any event that would disqualify it from serving as an
investment adviser to an investment company pursuant to Section 9(a) of the 1940
Act.
8. Books and Records Sub-Adviser will maintain, in the form and for the period
required by Rule 31a-2 under the 1940 Act, all records relating to each
Portfolio Segment's investments that are required to be maintained by the Fund
pursuant to the requirements of paragraphs (b)(5), (b)(6), (b)(7), (b)(9),
(b)(10) and (f) of Rule 31a-1 under the 1940 Act. Sub-Adviser agrees that all
books and records which it maintains for each Fund Portfolio or the Fund are the
property of the Fund and further agrees to surrender promptly to the Adviser or
the Fund any such books, records or information upon the Adviser's or the Fund's
request (provided, however, that Sub-Adviser may retain copies of such records).
All such books and records shall be made available, within five business days of
a written request, to the Fund's accountants or auditors during regular business
hours at Sub-Adviser's offices. Adviser and the Fund or either of their
authorized representative shall have the right to copy any records in the
possession of Sub-Adviser which pertain to each Fund Portfolio or the Fund.
Such books, records, information or reports shall be made available to properly
authorized government representatives consistent with state and federal law
and/or regulations. In the event of the termination of this Agreement, all such
books, records or other information shall be returned to Adviser or the Fund
(provided, however, that Sub-Adviser may retain copies of such records as
required by law).
Sub-Adviser agrees that it will not disclose or use any records or confidential
information obtained pursuant to this Agreement in any manner whatsoever except
as authorized in this Agreement or in writing by Adviser or the Fund, or if such
disclosure is required by federal or state regulatory authorities. Sub-Adviser
may disclose the investment performance of each Portfolio Segment, provided that
such disclosure does not reveal the identity of Adviser, each Fund Portfolio or
the Fund or the composition of each Portfolio Segment. Sub-Adviser may,
however, disclose that Adviser, the Fund and each Fund Portfolio are its
clients. Notwithstanding the foregoing, Sub-Adviser may disclose (i) the
investment performance of each Portfolio Segment to Fund officers and trustees
and other service providers of the Fund, and (ii) any investment performance
that is public information to any person.
9. Code of Ethics Sub-Adviser has adopted a written code of ethics complying
with the requirements of Rule 17j-1(b) and (c) under the 1940 Act and will
provide Adviser and the Fund with a copy of such code. Within 20 days of the
end of each calendar quarter during which this Agreement remains in effect, a
partner or a vice president of Sub-Adviser shall certify to Adviser or the Fund
that Sub-Adviser has complied with the requirements of Rule 17j-1 during the
5
<PAGE>
previous quarter and that there have been no violations of Sub-Adviser's code of
ethics or, if any violation has occurred that is material to the Fund, the
nature of such violation and of the action taken in response to such violation.
10. Limitation of Liability Neither Sub-Adviser nor any of its partners,
officers, stockholders, agents or employees shall have any liability to Adviser,
the Fund or any shareholder of the Fund for any error of judgment, mistake of
law, or loss arising out of any investment, or for any other act or omission in
the performance by Sub-Adviser of its duties hereunder, except for liability
resulting from willful misfeasance, bad faith, or negligence on Sub-Adviser's
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement, except to the extent otherwise
provided in Section 36(b) of the 1940 Act concerning loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services.
Sub-Adviser agrees to indemnify and defend Adviser, its officers, directors,
employees and any person who controls Adviser for any loss or expense (including
reasonable attorneys' fees) arising out of or in connection with any claim,
demand, action, suit or proceeding relating to any actual or alleged material
misstatement or omission in the Fund's registration statement, any proxy
statement, or any communication to current or prospective investors in each Fund
Portfolio, made by Sub-Adviser and provided to Adviser or the Fund by Sub-
Adviser.
11. Term and Termination This Agreement shall become effective with respect to
each Portfolio Segment on March 24, 2000, and shall remain in full force until
October 31, 2000, unless sooner terminated as hereinafter provided. This
Agreement shall continue in force from year to year thereafter with respect to
each Fund Portfolio, but only as long as such continuance is specifically
approved for each Fund Portfolio at least annually in the manner required by the
1940 Act and the rules and regulations thereunder; provided, however, that if
the continuation of this Agreement is not approved for a Fund Portfolio, Sub-
Adviser may continue to serve in such capacity for such Fund Portfolio in the
manner and to the extent permitted by the 1940 Act and the rules and regulations
thereunder.
This Agreement shall terminate as follows:
(a) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act) and may be terminated at any time
without the payment of any penalty by Adviser or by Sub-Adviser on sixty
days written notice to the other party. This Agreement may also be
terminated by the Fund with respect to any Fund Portfolio by action of the
Board of Trustees or by a vote of a majority of the outstanding voting
securities of such Fund Portfolio (as defined in the 1940 Act) on sixty
days written notice to Sub-Adviser by the Fund.
(b) This Agreement may be terminated with respect to any Fund Portfolios
at any time without payment of any penalty by Adviser, the Board of
Trustees or a vote of majority of the outstanding voting securities of such
Fund Portfolio in the event that Sub-Adviser or
6
<PAGE>
any officer or director of Sub-Adviser has taken any action which results
in a material breach of the covenants of Sub-Adviser under this Agreement.
(c) This Agreement shall automatically terminate with respect to a Fund
Portfolio in the event the Investment Management Agreement between Adviser
and the Fund with respect to that Fund Portfolio is terminated, assigned or
not renewed.
Termination of this Agreement shall not affect the right of Sub-Adviser to
receive payments of any unpaid balance of the compensation described in Section
4 earned prior to such termination.
12. Notice Any notice under this Agreement by a party shall be in writing,
addressed and delivered, mailed postage prepaid, or sent by facsimile
transmission with confirmation of receipt, to the other party at such address as
such other party may designate for the receipt of such notice.
13. Limitations on Liability All parties are expressly put on notice of the
Fund's Agreement and Declaration of Trust and all amendments thereto, and the
limitation of shareholder and trustee liability contained therein. The
obligations of the Fund entered into in the name or on behalf thereof by any of
its Trustees, representatives or agents are made not individually but only in
such capacities and are not binding upon any of the Trustees, officers, or
shareholders of the Fund individually but are binding upon only the assets and
property of the Fund, and persons dealing with the Fund must look solely to the
assets of the Fund and those assets belonging to each Fund Portfolio for the
enforcement of any claims.
14. Adviser Responsibility Adviser will provide Sub-Adviser with copies of the
Fund's Declaration of Trust, By-laws, prospectus, and Statement of Additional
Information and any amendment thereto, and any objectives, policies or
limitations not appearing therein as they may be relevant to Sub-Adviser's
performance under this Agreement; provided, however, that no changes or
modifications to the foregoing shall be binding on Sub-Adviser until it is
notified thereof.
15. Arbitration of Disputes Any claim or controversy arising out of or relating
to this Agreement which is not settled by agreement of the parties shall be
settled by arbitration in Santa Monica, California before a panel of three
arbitrators in accordance with the commercial arbitration rules of the American
Arbitration Association then in effect. The parties agree that the such
arbitration shall be the exclusive remedy hereunder, and each party expressly
waives any right it may have to seek redress in any other forum. Any arbitrator
acting hereunder shall be empowered to assess no remedy other than payment of
fees and out-of-pocket damages. Each party shall bear its own expenses of
arbitration, and the expenses of the arbitrators and of a transcript of any
arbitration proceeding shall be divided equally between the parties. Any
decision and award of the arbitrators shall be binding upon the parties, and
judgment thereon may be entered in the Superior Court of the State of California
or any other court having jurisdiction. If litigation is commenced to enforce
any such award, the prevailing party will be entitled to recover reasonable
attorneys' fees and costs.
7
<PAGE>
16. Miscellaneous This Agreement sets forth the entire understanding of the
parties with respect to the subject matter hereof and may be amended only by
written consent of both parties. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and shall inure to the benefit of
the parties and their respective successors.
17. Applicable Law This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 10 above which will be
construed in accordance with Delaware law) the laws of the state of California.
Adviser and Sub-Adviser have caused this Agreement to be executed as of the date
and year first above written.
WILSHIRE ASSOCIATES INCORPORATED WESTERN ASSET MANAGEMENT CO.
By______________________________ By_________________________________
Title___________________________ Title______________________________
8
<PAGE>
EXHIBIT 1
FUND PORTFOLIO LISTING
Horace Mann Income Fund
9
<PAGE>
EXHIBIT 2
FEE SCHEDULE
Adviser shall pay Sub-Adviser, promptly after receipt by Adviser of its advisory
fee from the Fund with respect to each Fund Portfolio each calendar month during
the term of this Agreement, a fee based on the average daily net assets of each
Portfolio Segment, at the following annual rates:
Income Fund:
- ------------
On assets under management 0.20 %
Sub-Adviser's fee shall be accrued daily at 1/365th of the annual rates set
forth above. For the purpose of accruing compensation, the net assets of each
Portfolio Segment will be determined in the manner and on the dates set forth in
the current prospectus of the Fund with respect to each Fund Portfolio and, on
days on which the net assets are not so determined, the net asset value
computation to be used will be as determined on the immediately preceding day on
which the net assets were determined. Upon the termination of this Agreement,
all compensation due through the date of termination will be calculated on a
pro-rata basis through the date of termination and paid within thirty business
days of the date of termination.
It is understood that Adviser shall compensate Sub-Adviser directly for
investment management services inclusive of fees associated with those services
provided by Sub-Adviser's affiliate, Western Asset Management Company Limited.
Sub-Adviser will in turn compensate its affiliate for services rendered to
Adviser as deemed appropriate by Sub-Adviser.
10
<PAGE>
Exhibit(d)(viii)
FORM OF
INVESTMENT SUB-ADVISORY AGREEMENT
This Investment Sub-Advisory Agreement ("Agreement") is made as of the 24th day
of March, 2000 by and between Wilshire Associates Incorporated, a California
corporation ("Adviser"), and Western Asset Management Company Limited, a
registered investment adviser ("Sub-Adviser").
Whereas Adviser is the investment adviser of the Horace Mann Mutual Funds
(the "Fund"), an open-end diversified, management investment company
registered under the Investment Company Act of 1940, as amended ("1940
Act"), currently consisting of seven separate series or portfolios
(collectively, the "Fund Portfolios") including the Horace Mann Growth
Fund, the Horace Mann Income Fund, the Horace Mann Balanced Fund, the
Horace Mann Short-Term Investment Fund, the Horace Mann Socially
Responsible Fund, the Horace Mann International Equity Fund, and the Horace
Mann Small-Cap Growth Fund;
Whereas Adviser desires to retain Sub-Adviser to furnish investment
advisory services for the Fund Portfolio(s) as described in Exhibit 1 -Fund
Portfolio Listing, as may be amended from time to time, and Sub-Adviser
wishes to provide such services, upon the terms and conditions set forth
herein;
Now Therefore, in consideration of the mutual covenants herein contained,
the parties agree as follows:
1. Appointment Adviser hereby appoints Sub-Adviser to provide certain sub-
investment advisory services to each Fund Portfolio for the period and on the
terms set forth in this Agreement. Sub-Adviser hereby accepts such appointment
and agrees to furnish the services set forth for the compensation herein
provided.
2. Sub-Adviser Services Subject always to the supervision of the Fund's Board
of Trustees and Adviser, Sub-Adviser will furnish an investment program in
respect of, and make investment decisions for, such portion of the assets of
each Fund Portfolio as Adviser shall from time to time designate (each a
"Portfolio Segment") and place all orders for the purchase and sale of
securities on behalf of each Portfolio Segment. Within its portion of the
Portfolio Segment also managed by its affiliate Western Asset Management
Company, Sub-Adviser will make all investment-related decisions for those
investments not denominated in United States dollars, subject to any constraints
outlined in further guidance provided to Sub-Adviser by Adviser. Sub-Adviser
agrees that the non-dollar portion of the Portfolio Segment shall not exceed 15%
of the Portfolio Segment's market value. In the performance of its duties, Sub-
Adviser will satisfy its fiduciary duties to the Fund and each Fund Portfolio
and will monitor a Portfolio Segment's investments, and will comply with the
provisions of the Fund's Declaration of Trust and By-laws, as amended from time
to time, and the stated investment objectives, policies and restrictions of each
Fund Portfolio as set forth in the prospectus and Statement of Additional
Information for each Fund
1
<PAGE>
Portfolio, as amended from time to time, as well as any other objectives,
policies or limitations as may be provided by Adviser to Sub-Adviser in writing
from time to time.
Sub-Adviser will provide reports at least quarterly to the Board of Trustees and
to Adviser. Sub-Adviser will make its officers and employees available to
Adviser and the Board of Trustees from time to time at reasonable times to
review investment policies of each Fund Portfolio with respect to each Portfolio
Segment and to consult with Adviser regarding the investment affairs of each
Portfolio Segment.
Sub-Adviser agrees that it:
(a) will use the same skill and care in providing such services as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities;
(b) will conform with all applicable provisions of the 1940 Act and rules
and regulations of the Securities and Exchange Commission in all material
respects and in addition will conduct its activities under this Agreement
in accordance with any applicable laws and regulations of any governmental
authority pertaining to its investment advisory activities, including all
portfolio diversification requirements necessary for each Portfolio Segment
to comply with subchapter M and Section 817(h) of the Internal Revenue Code
as if each were a regulated investment company thereunder;
(c) to the extent authorized by Adviser in writing, and to the extent
permitted by law, will execute purchases and sales of portfolio securities
and other investments for each Portfolio Segment through brokers or dealers
designated by management of the Fund to Adviser for the purpose of
providing direct benefits to the Fund, provided that Sub-Adviser determines
that such brokers or dealers will provide best execution in view of all
appropriate factors, and is hereby authorized as the agent of the Fund to
give instructions to the Fund's custodian as to deliveries of securities or
other investments and payments of cash of each Portfolio Segment to such
brokers or dealers for the account of the relevant Fund Portfolio. Adviser
and the Fund understand that the brokerage commissions or transaction costs
in such transactions may be higher than those which the Sub-Adviser could
obtain from another broker or dealer, in order to obtain such benefits for
the Fund.
(d) is authorized to and will select all other brokers or dealers that
will execute the purchases and sales of portfolio securities for each
Portfolio Segment and is hereby authorized as the agent of the Fund to give
instructions to the Fund's custodian as to deliveries of securities or
other investments and payments of cash of each Portfolio Segment for the
account of each Fund Portfolio. In making such selection, Sub-Adviser is
directed to use its best efforts to obtain best execution, which includes
most favorable net results and execution of a Portfolio Segment's orders,
taking into account all appropriate factors, including price, dealer spread
or commission, size and difficulty of the transaction and research or other
services provided. With respect to transactions under sub-paragraph (c) or
this sub-paragraph (d), it is understood that Sub-Adviser will not be
deemed to have
2
<PAGE>
acted unlawfully, or to have breached a fiduciary duty to the Fund or in
respect of any Fund Portfolio, or be in breach of any obligation owing to
the Fund or in respect of any Fund Portfolio under this Agreement, or
otherwise, solely by reason of its having caused a Fund Portfolio to pay a
member of a securities exchange, a broker or a dealer a commission for
effecting a securities transaction of a Fund Portfolio in excess of the
amount of commission another member of an exchange, broker or dealer would
have charged if Sub-Adviser determined in good faith that the commission
paid was reasonable in relation to the brokerage and research services
provided by such member, broker, or dealer, viewed in terms of that
particular transaction or Sub-Adviser's overall responsibilities with
respect to its accounts, including the Fund, as to which it exercises
investment discretion;
(e) is authorized to consider for investment by each Portfolio Segment
securities that may also be appropriate for other funds and/or clients
served by Sub-Adviser. To assure fair treatment of each Portfolio Segment
and all other clients of Sub-Adviser in situations in which two or more
clients' accounts participate simultaneously in a buy or sell program
involving the same security, such transactions will be allocated among each
Portfolio Segment and other clients in a manner deemed equitable by Sub-
Adviser. Sub-Adviser is authorized to aggregate purchase and sale orders
for securities held (or to be held) in each Portfolio Segment with similar
orders being made on the same day for other client accounts or portfolios
managed by Sub-Adviser. When an order is so aggregated, the actual prices
applicable to the aggregated transaction will be averaged and each
Portfolio Segment and each other account or portfolio participating in the
aggregated transaction will be treated as having purchased or sold its
portion of the securities at such average price, and all transaction costs
incurred in effecting the aggregated transaction will be shared on a pro-
rata basis among the accounts or portfolios (including each Portfolio
Segment) participating in the transaction. Adviser and the Fund understand
that Sub-Adviser may not be able to aggregate transactions through brokers
or dealers designated by Adviser with transactions through brokers or
dealers selected by Sub-Adviser, in which event the prices paid or received
by each Portfolio Segment will not be so averaged and may be higher or
lower than those paid or received by other accounts or portfolios of Sub-
Adviser.;
(f) will report regularly to Adviser and to the Board of Trustees and will
make appropriate persons available for the purpose of reviewing with
representatives of Adviser and the Board of Trustees on a regular basis at
reasonable times the management of each Portfolio Segment, including
without limitation, review of the general investment strategies of each
Portfolio Segment, the performance of each Portfolio Segment in relation to
standard industry indices, interest rate considerations and general
conditions affecting the marketplace, and will provide various other
reports from time to time as reasonably requested by Adviser;
(g) will prepare such books and records with respect to each Portfolio
Segment's securities transactions as requested by Adviser and will furnish
Adviser and the Fund's
3
<PAGE>
Board of Trustees such periodic and special reports as the Board or Adviser
may reasonably request;
(h) will vote all proxies with respect to securities in each Portfolio
Segment; and
(i) will act upon reasonable instructions from Adviser which, in the
reasonable determination of Sub-Adviser, are not inconsistent with Sub-
Adviser's fiduciary duties under this Agreement.
3. Expenses During the term of this Agreement, Sub-Adviser will provide the
office space, furnishings, equipment and personnel required to perform its
activities under this Agreement, and will pay all customary management expenses
incurred by it in connection with its activities under this Agreement, which
shall not include the cost of securities (including brokerage commissions, if
any) purchased for each Portfolio Segment.
4. Compensation For the services provided and the expenses assumed under this
Agreement, Adviser will pay Sub-Adviser, and Sub-Adviser agrees to accept as
full compensation therefor, a sub-advisory fee computed and paid as set forth
in Exhibit 2 - Fee Schedule.
5. Other Services Sub-Adviser will for all purposes herein be deemed to be an
independent contractor and will, unless otherwise expressly provided or
authorized, have no authority to act for or represent Adviser, the Fund or a
Fund Portfolio or otherwise be deemed an agent of Adviser, the Fund or a Fund
Portfolio. Adviser understands and has advised the Fund's Board of Trustees
that Sub-Adviser acts as an investment adviser or sub-investment adviser to
other investment companies and other advisory clients. Sub-Adviser understands
that during the term of this Agreement Adviser may retain one or more other sub-
advisers with respect to any portion of the assets of a Fund Portfolio other
than each Portfolio Segment.
6. Affiliated Broker Sub-Adviser or an affiliated person of Sub-Adviser may act
as broker for each Fund Portfolio in connection with the purchase or sale of
securities or other investments for each Portfolio Segment, subject to: (a) the
requirement that Sub-Adviser seek to obtain best execution as set forth above;
(b) the provisions of the Investment Advisers Act of 1940, as amended (the
"Advisers Act"); (c) the provisions of the Securities Exchange Act of 1934, as
amended; and (d) other applicable provisions of law. Subject to the
requirements of applicable law and any procedures adopted by the Fund's Board of
Trustees, Sub-Adviser or its affiliated persons may receive brokerage
commissions, fees or other remuneration from the Fund Portfolio or the Fund for
such services in addition to Sub-Adviser's fees for services under this
Agreement.
7. Representations of Sub-Adviser Sub-Adviser is registered with the Securities
and Exchange Commission under the Advisers Act. Sub-Adviser shall remain so
registered throughout the term of this Agreement and shall notify Adviser
immediately if Sub-Adviser ceases to be so registered as an investment adviser.
Sub-Adviser: (a) is duly organized and validly existing under the laws of the
state of its organization with the power to own and possess its assets and carry
on its business
4
<PAGE>
as it is now being conducted, (b) has the authority to enter into and perform
the services contemplated by this Agreement, (c) is not prohibited by the 1940
Act or the Advisers Act from performing the services contemplated by this
Agreement, (d) has met, and will continue to seek to meet for the duration of
this Agreement, any other applicable federal or state requirements, and the
applicable requirements of any regulatory or industry self-regulatory agency,
necessary to be met in order to perform its services under this Agreement, and
(e) will promptly notify Adviser of the occurrence of any event that would
disqualify it from serving as an investment adviser to an investment company
pursuant to Section 9(a) of the 1940 Act.
8. Books and Records Sub-Adviser will maintain, in the form and for the period
required by Rule 31a-2 under the 1940 Act, all records relating to each
Portfolio Segment's investments that are required to be maintained by the Fund
pursuant to the requirements of paragraphs (b)(5), (b)(6), (b)(7), (b)(9),
(b)(10) and (f) of Rule 31a-1 under the 1940 Act. Sub-Adviser agrees that all
books and records which it maintains for each Fund Portfolio or the Fund are the
property of the Fund and further agrees to surrender promptly to the Adviser or
the Fund any such books, records or information upon the Adviser's or the Fund's
request (provided, however, that Sub-Adviser may retain copies of such records).
All such books and records shall be made available, within five business days of
a written request, to the Fund's accountants or auditors during regular business
hours at Sub-Adviser's offices. Adviser and the Fund or either of their
authorized representative shall have the right to copy any records in the
possession of Sub-Adviser which pertain to each Fund Portfolio or the Fund.
Such books, records, information or reports shall be made available to properly
authorized government representatives consistent with state and federal law
and/or regulations. In the event of the termination of this Agreement, all such
books, records or other information shall be returned to Adviser or the Fund
(provided, however, that Sub-Adviser may retain copies of such records as
required by law).
Sub-Adviser agrees that it will not disclose or use any records or confidential
information obtained pursuant to this Agreement in any manner whatsoever except
as authorized in this Agreement or in writing by Adviser or the Fund, or if such
disclosure is required by federal or state regulatory authorities. Sub-Adviser
may disclose the investment performance of each Portfolio Segment, provided that
such disclosure does not reveal the identity of Adviser, each Fund Portfolio or
the Fund or the composition of each Portfolio Segment. Sub-Adviser may,
however, disclose that Adviser, the Fund and each Fund Portfolio are its
clients. Notwithstanding the foregoing, Sub-Adviser may disclose (i) the
investment performance of each Portfolio Segment to Fund officers and trustees
and other service providers of the Fund, and (ii) any investment performance
that is public information to any person.
9. Code of Ethics Sub-Adviser has adopted a written code of ethics complying
with the requirements of Rule 17j-1(b) and (c) under the 1940 Act and will
provide Adviser and the Fund with a copy of such code. Within 20 days of the
end of each calendar quarter during which this Agreement remains in effect, a
partner or a vice president of Sub-Adviser shall certify to Adviser or the Fund
that Sub-Adviser has complied with the requirements of Rule 17j-1 during the
previous quarter and that there have been no violations of Sub-Adviser's code of
ethics or, if any
5
<PAGE>
violation has occurred that is material to the Fund, the nature of such
violation and of the action taken in response to such violation.
10. Limitation of Liability Neither Sub-Adviser nor any of its partners,
officers, stockholders, agents or employees shall have any liability to Adviser,
the Fund or any shareholder of the Fund for any error of judgment, mistake of
law, or loss arising out of any investment, or for any other act or omission in
the performance by Sub-Adviser of its duties hereunder, except for liability
resulting from willful misfeasance, bad faith, or negligence on Sub-Adviser's
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement, except to the extent otherwise
provided in Section 36(b) of the 1940 Act concerning loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services.
Sub-Adviser agrees to indemnify and defend Adviser, its officers, directors,
employees and any person who controls Adviser for any loss or expense (including
reasonable attorneys' fees) arising out of or in connection with any claim,
demand, action, suit or proceeding relating to any actual or alleged material
misstatement or omission in the Fund's registration statement, any proxy
statement, or any communication to current or prospective investors in each Fund
Portfolio, made by Sub-Adviser and provided to Adviser or the Fund by Sub-
Adviser.
11. Term and Termination This Agreement shall become effective with respect to
each Portfolio Segment on March 24, 2000, and shall remain in full force until
October 31, 2000, unless sooner terminated as hereinafter provided. This
Agreement shall continue in force from year to year thereafter with respect to
each Fund Portfolio, but only as long as such continuance is specifically
approved for each Fund Portfolio at least annually in the manner required by the
1940 Act and the rules and regulations thereunder; provided, however, that if
the continuation of this Agreement is not approved for a Fund Portfolio, Sub-
Adviser may continue to serve in such capacity for such Fund Portfolio in the
manner and to the extent permitted by the 1940 Act and the rules and regulations
thereunder.
This Agreement shall terminate as follows:
(a) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act) and may be terminated at any time
without the payment of any penalty by Adviser or by Sub-Adviser on sixty
days written notice to the other party. This Agreement may also be
terminated by the Fund with respect to any Fund Portfolio by action of the
Board of Trustees or by a vote of a majority of the outstanding voting
securities of such Fund Portfolio (as defined in the 1940 Act) on sixty
days written notice to Sub-Adviser by the Fund.
(b) This Agreement may be terminated with respect to any Fund Portfolios
at any time without payment of any penalty by Adviser, the Board of
Trustees or a vote of majority of the outstanding voting securities of such
Fund Portfolio in the event that Sub-Adviser or
6
<PAGE>
any officer or director of Sub-Adviser has taken any action which results
in a material breach of the covenants of Sub-Adviser under this Agreement.
(c) This Agreement shall automatically terminate with respect to a Fund
Portfolio in the event the Investment Management Agreement between Adviser
and the Fund with respect to that Fund Portfolio is terminated, assigned or
not renewed.
Termination of this Agreement shall not affect the right of Sub-Adviser to
receive payments of any unpaid balance of the compensation described in Section
4 earned prior to such termination.
12. Notice Any notice under this Agreement by a party shall be in writing,
addressed and delivered, mailed postage prepaid, or sent by facsimile
transmission with confirmation of receipt, to the other party at such address as
such other party may designate for the receipt of such notice.
13. Limitations on Liability All parties are expressly put on notice of the
Fund's Agreement and Declaration of Trust and all amendments thereto, and the
limitation of shareholder and trustee liability contained therein. The
obligations of the Fund entered into in the name or on behalf thereof by any of
its Trustees, representatives or agents are made not individually but only in
such capacities and are not binding upon any of the Trustees, officers, or
shareholders of the Fund individually but are binding upon only the assets and
property of the Fund, and persons dealing with the Fund must look solely to the
assets of the Fund and those assets belonging to each Fund Portfolio for the
enforcement of any claims.
14. Adviser Responsibility Adviser will provide Sub-Adviser with copies of the
Fund's Declaration of Trust, By-laws, prospectus, and Statement of Additional
Information and any amendment thereto, and any objectives, policies or
limitations not appearing therein as they may be relevant to Sub-Adviser's
performance under this Agreement; provided, however, that no changes or
modifications to the foregoing shall be binding on Sub-Adviser until it is
notified thereof.
15. Arbitration of Disputes Any claim or controversy arising out of or
relating to this Agreement which is not settled by agreement of the parties
shall be settled by arbitration in Santa Monica, California before a panel of
three arbitrators in accordance with the commercial arbitration rules of the
American Arbitration Association then in effect. The parties agree that the such
arbitration shall be the exclusive remedy hereunder, and each party expressly
waives any right it may have to seek redress in any other forum. Any arbitrator
acting hereunder shall be empowered to assess no remedy other than payment of
fees and out-of-pocket damages. Each party shall bear its own expenses of
arbitration, and the expenses of the arbitrators and of a transcript of any
arbitration proceeding shall be divided equally between the parties. Any
decision and award of the arbitrators shall be binding upon the parties, and
judgment thereon may be entered in the Superior Court of the State of California
or any other court having jurisdiction. If litigation is commenced to enforce
any such award, the prevailing party will be entitled to recover reasonable
attorneys' fees and costs.
7
<PAGE>
16. Miscellaneous This Agreement sets forth the entire understanding of the
parties with respect to the subject matter hereof and may be amended only by
written consent of both parties. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and shall inure to the benefit of
the parties and their respective successors.
17. Applicable Law This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 10 above which will be
construed in accordance with Delaware law) the laws of the state of California.
Adviser and Sub-Adviser have caused this Agreement to be executed as of the date
and year first above written.
WILSHIRE ASSOCIATES INCORPORATED WESTERN ASSET MANAGEMENT CO. LIMITED
By______________________________ By_________________________________
Title___________________________ Title______________________________
8
<PAGE>
EXHIBIT 1
FUND PORTFOLIO LISTING
Horace Mann Income Fund
9
<PAGE>
EXHIBIT 2
FEE SCHEDULE
Adviser shall pay Sub-Adviser, promptly after receipt by Adviser of its advisory
fee from the Fund with respect to each Fund Portfolio each calendar month during
the term of this Agreement, a fee based on the average daily net assets of each
Portfolio Segment, at the following annual rates:
Income Fund:
- ------------
On assets under management 0.20 %
Sub-Adviser's fee shall be accrued daily at 1/365th of the annual rates set
forth above. For the purpose of accruing compensation, the net assets of each
Portfolio Segment will be determined in the manner and on the dates set forth in
the current prospectus of the Fund with respect to each Fund Portfolio and, on
days on which the net assets are not so determined, the net asset value
computation to be used will be as determined on the immediately preceding day on
which the net assets were determined. Upon the termination of this Agreement,
all compensation due through the date of termination will be calculated on a
pro-rata basis through the date of termination and paid within thirty business
days of the date of termination.
It is understood that Adviser shall compensate Sub-Adviser's affiliate, Western
Asset Management Company, directly for investment management services inclusive
of fees associated with those services provided by Sub-Adviser. Sub-Adviser
will in turn be compensated by its affiliate for services rendered to Adviser as
deemed appropriate by the affiliate.
10
<PAGE>
Exhibit (d)(ix)
FORM OF
INVESTMENT SUB-ADVISORY AGREEMENT
This Investment Sub-Advisory Agreement ("Agreement") is made as of the 15th day
of March, 2000 by and between Wilshire Associates Incorporated, a California
corporation ("Adviser") and Sanford C. Bernstein & Co., Inc., a New York
corporation ("Sub-Adviser").
Whereas Adviser is the investment adviser of the Horace Mann Mutual Funds
(the "Fund"), an open-end diversified, management investment company
registered under the Investment Company Act of 1940, as amended ("1940
Act"), currently consisting of seven separate series or portfolios
(collectively, the "Fund Portfolios") including the Horace Mann Growth
Fund, the Horace Mann Income Fund, the Horace Mann Balanced Fund, the
Horace Mann Short-Term Investment Fund, the Horace Mann Socially
Responsible Fund, the Horace Mann International Equity Fund, and the Horace
Mann Small-Cap Growth Fund;
Whereas Adviser desires to retain Sub-Adviser to furnish investment
advisory services for the Fund Portfolio(s) as described in Exhibit 1 -
Fund Portfolio Listing, as may be amended from time to time, and Sub-
Adviser wishes to provide such services, upon the terms and conditions set
forth herein;
Now Therefore, in consideration of the mutual covenants herein contained,
the parties agree as follows:
1. Appointment Adviser hereby appoints Sub-Adviser to provide certain sub-
investment advisory services to each Fund Portfolio for the period and on the
terms set forth in this Agreement. Sub-Adviser hereby accepts such appointment
and agrees to furnish the services set forth for the compensation herein
provided.
2. Sub-Adviser Services Subject always to the supervision of the Fund's Board
of Trustees and Adviser, Sub-Adviser will furnish an investment program in
respect of, and make investment decisions for, such portion of the assets of
each Fund Portfolio as Adviser shall from time to time designate (each a
"Portfolio Segment") and place all orders for the purchase and sale of
securities on behalf of each Portfolio Segment. In the performance of its
duties, Sub-Adviser will satisfy its fiduciary duties to the Fund and each Fund
Portfolio and will monitor each Portfolio Segment's investments, and will comply
with the provisions of the Fund's Declaration of Trust and By-laws, as amended
from time to time, and the stated investment objectives, policies and
restrictions of each Fund Portfolio as set forth in the prospectus and Statement
of Additional Information for each Fund Portfolio, as amended from time to time,
as well as any other objectives, policies or limitations as may be provided by
Adviser to Sub-Adviser in writing from time to time.
Sub-Adviser will provide reports at least quarterly to the Board of Trustees and
to Adviser. Sub-Adviser will make its officers and employees available to
Adviser and the Board of Trustees from time to time at reasonable times to
review investment policies of each Fund Portfolio with respect
1
<PAGE>
to each Portfolio Segment and to consult with Adviser regarding the investment
affairs of each Portfolio Segment.
Sub-Adviser agrees that it:
(a) will use the same skill and care in providing such services as it uses
in providing services to fiduciary accounts for which it has investment
responsibilities;
(b) will conform with all applicable provisions of the 1940 Act and rules
and regulations of the Securities and Exchange Commission in all material
respects and in addition will conduct its activities under this Agreement
in accordance with any applicable laws and regulations of any governmental
authority pertaining to its investment advisory activities, including all
portfolio diversification requirements necessary for each Portfolio Segment
to comply with subchapter M and Section 817(h) of the Internal Revenue Code
as if it were a regulated investment company thereunder;
(c) to the extent directed by Adviser in writing, will execute purchases
and sales of portfolio securities for each Portfolio Segment through
brokers or dealers designated by management of the Fund to Adviser for the
purpose of providing direct benefits to the Fund, provided that Sub-Advisor
determines that such brokers or dealers will provide best execution in view
of such other benefits, and is hereby authorized as the agent of the Fund
to give instructions to the Fund's custodian as to deliveries of securities
or other investments and payments of cash of each Portfolio Segment to such
brokers or dealers for the account of the relevant Fund Portfolio. Adviser
and the Fund understand that the brokerage commissions or transaction costs
in such transactions may be higher than those which the Sub-Adviser could
obtain from another broker or dealer, in order to obtain such benefits for
the Fund;
(d) is authorized to and will select all other brokers or dealers that
will execute the purchases and sales of portfolio securities for each
Portfolio Segment and is hereby authorized as the agent of the Fund to give
instructions to the Fund's custodian as to deliveries of securities or
other investments and payments of cash of each Portfolio Segment for the
account of each Fund Portfolio. In making such selection, Sub-Adviser is
directed to use its best efforts to obtain best execution, which includes
most favorable net results and execution of each Portfolio Segment's
orders, taking into account all appropriate factors, including price,
dealer spread or commission, size and difficulty of the transaction and
research or other services provided. With respect to transactions under
sub paragraph (c) or this paragraph (d), it is understood that Sub-Adviser
will not be deemed to have acted unlawfully, or to have breached a
fiduciary duty to the Fund or in respect of each Fund Portfolio, or be in
breach of any obligation owing to the Fund or in respect of each Fund
Portfolio under this Agreement, or otherwise, solely by reason of its
having caused a Fund Portfolio to pay a member of a securities exchange, a
broker or a dealer a commission for effecting a securities transaction of a
Fund Portfolio in excess of the amount of commission another member of an
exchange, broker or dealer would have
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charged if Sub-Adviser determined in good faith that the commission paid
was reasonable in relation to the brokerage and research services provided
by such member, broker, or dealer, viewed in terms of that particular
transaction or Sub-Adviser's overall responsibilities with respect to its
accounts, including the Fund, as to which it exercises investment
discretion;
(e) is authorized to consider for investment by each Portfolio Segment
securities that may also be appropriate for other funds and/or clients
served by Sub-Adviser. To assure fair treatment of each Portfolio Segment
and all other clients of Sub-Adviser in situations in which two or more
clients' accounts participate simultaneously in a buy or sell program
involving the same security, such transactions will be allocated among each
Portfolio Segment and other clients in a manner deemed equitable by Sub-
Adviser. Sub-Adviser is authorized to aggregate purchase and sale orders
for securities held (or to be held) in each Portfolio Segment with similar
orders being made on the same day for other eligible client accounts or
portfolios managed by Sub-Adviser. When an order is so aggregated, the
actual prices applicable to the aggregated transaction will be averaged and
each Portfolio Segment and each other account or portfolio participating in
the aggregated transaction will be treated as having purchased or sold its
portion of the securities at such average price, and all transaction costs
incurred in effecting the aggregated transaction will be shared on a pro-
rata basis among the accounts or portfolios (including the Portfolio
Segment) participating in the transaction. Adviser and the Fund understand
that Sub-Adviser may not be able to aggregate transactions through brokers
or dealers designated by Adviser with transactions through brokers or
dealers selected by Sub-Adviser, in which event the prices paid or received
by each Portfolio Segment will not be so averaged and may be higher or
lower than those paid or received by other accounts or portfolios of Sub-
Adviser;
(f) will report regularly to Adviser and to the Board of Trustees and will
make appropriate persons available for the purpose of reviewing with
representatives of Adviser and the Board of Trustees on a regular basis at
reasonable times the management of each Portfolio Segment, including
without limitation, review of the general investment strategies of each
Portfolio Segment, the performance of each Portfolio Segment in relation to
standard industry indices, interest rate considerations and general
conditions affecting the marketplace, and will provide various other
reports from time to time as reasonably requested by Adviser;
(g) will prepare such books and records with respect to each Portfolio
Segment's securities transactions as requested by Adviser and will furnish
Adviser and the Fund's Board of Trustees such periodic and special reports
as the Board or Adviser may reasonably request;
(h) will vote all proxies with respect to securities in each Portfolio
Segment; and
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(i) will act upon reasonable instructions from Adviser which, in the
reasonable determination of Sub-Adviser, are not inconsistent with Sub-
Adviser's fiduciary duties under this Agreement.
3. Expenses During the term of this Agreement, Sub-Adviser will provide the
office space, furnishings, equipment and personnel required to perform its
activities under this Agreement, and will pay all customary management expenses
incurred by it in connection with its activities under this Agreement, which
shall not include the cost of securities (including brokerage commissions, if
any) purchased for each Portfolio Segment.
4. Compensation For the services provided and the expenses assumed under this
Agreement, Adviser will pay Sub-Adviser, and Sub-Adviser agrees to accept as
full compensation therefor, a sub-advisory fee computed and paid as set forth in
Exhibit 2 - Fee Schedule.
5. Other Services Sub-Adviser will for all purposes herein be deemed to be an
independent contractor and will, unless otherwise expressly provided or
authorized, have no authority to act for or represent Adviser, the Fund or a
Fund Portfolio or otherwise be deemed an agent of Adviser, the Fund or a Fund
Portfolio. Adviser understands and has advised the Fund's Board of Trustees
that Sub-Adviser acts as an investment adviser or sub-investment adviser to
other investment companies and other advisory clients. Sub-Adviser understands
that during the term of this Agreement Adviser may retain one or more other sub-
advisers with respect to any portion of the assets of a Fund Portfolio other
than the Portfolio Segment.
6. Affiliated Broker In connection with the purchase or sale of securities or
other investments for each Portfolio Segment, Sub-Adviser may act as broker or
Sub-Adviser may allocate orders for purchase and sale transactions to any
broker-dealer affiliated with Sub-Adviser ("Affiliated Broker"), and may cause
each Portfolio or each Fund to compensate Sub-Adviser or Affiliated Broker for
effecting such transactions, subject to: (a) the requirement that Sub-Adviser
seek to obtain best execution as set forth above; (b) compliance with procedures
adopted by the Fund pursuant to Rule 17e-1 and Rule 10f-3 under the Investment
Company Act of 1940, as amended; (c) the provisions of the Investment Advisers
Act of 1940, as amended (the "Advisers Act"); (d) the provisions of the
Securities Exchange Act of 1934, as amended; and (e) other applicable provisions
of law. Subject to the requirements of applicable law and any procedures
adopted by the Fund's Board of Trustees, Sub-Adviser or its affiliated persons
may receive brokerage commissions, fees or other remuneration from the Fund
Portfolio or the Fund for such services in addition to Sub-Adviser's fees for
services under this Agreement.
Adviser of the Fund may revoke any or all of the consents and authorizations
given hereby at any time and without penalty by providing written notice to Sub-
Adviser.
7. Representations of Sub-Adviser Sub-Adviser is registered with the Securities
and Exchange Commission under the Advisers Act. Sub-Adviser shall remain so
registered throughout the term of this Agreement and shall notify Adviser
immediately if Sub-Adviser ceases to be so registered as an investment adviser.
Sub-Adviser: (a) is duly organized and validly existing under the laws of
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the state of its organization with the power to own and possess its assets and
carry on its business as it is now being conducted, (b) has the authority to
enter into and perform the services contemplated by this Agreement, (c) is not
prohibited by the 1940 Act or the Advisers Act from performing the services
contemplated by this Agreement, (d) has met, and will continue to seek to meet
for the duration of this Agreement, any other applicable federal or state
requirements, and the applicable requirements of any regulatory or industry
self-regulatory agency, necessary to be met in order to perform its services
under this Agreement, and (e) will promptly notify Adviser of the occurrence of
any event that would disqualify it from serving as an investment adviser to an
investment company pursuant to Section 9(a) of the 1940 Act. In addition, Sub-
Adviser represents that it has provided Adviser with copies of each of the
following documents: (i) Sub-Adviser's Form ADV as filed with the Securities
Exchange Commission; and (ii) separate lists of persons who Sub-Adviser wishes
to have authorized to give written and/or oral instructions to Custodians of
Fund assets for the Portfolio. Sub-Adviser will furnish Adviser from time to
time with copies, properly certified or otherwise authenticated, of all material
amendments of or supplements to the foregoing, if any. Such amendments or
supplements as to items (i) through (ii) will be provided within 30 days of the
time such materials became available to Sub-Adviser.
8. Books and Records Sub-Adviser will maintain, in the form and for the period
required by Rule 31a-2 under the 1940 Act, all records relating to each
Portfolio Segment's investments that are required to be maintained by the Fund
pursuant to the requirements of paragraphs (b)(5), (b)(6), (b)(7), (b)(9),
(b)(10) and (f) of Rule 31a-1 under the 1940 Act. Sub-Adviser agrees that all
books and records which it maintains in connection with its management of the
portfolio segments are the property of the Fund and further agrees to surrender
promptly to the Adviser or the Fund any such books, records or information upon
the Adviser's or the Fund's request (provided, however, that Sub-Adviser may
retain copies of such records). All such books and records shall be made
available, within five business days of a written request, to the Fund's
accountants or auditors during regular business hours at Sub-Adviser's offices.
Adviser and the Fund or either of their authorized representative shall have the
right to copy any records in the possession of Sub-Adviser which pertain to each
Fund Portfolio or the Fund. Such books, records, information or reports shall
be made available to properly authorized government representatives consistent
with state and federal law and/or regulations. In the event of the termination
of this Agreement, all such books, records or other information shall be
returned to Adviser or the Fund (provided, however, that Sub-Adviser may retain
copies of such records as required by law).
Sub-Adviser agrees that it will not disclose or use any records or confidential
information obtained pursuant to this Agreement in any manner whatsoever except
as authorized in this Agreement or in writing by Adviser or the Fund, or if such
disclosure is required by federal or state regulatory authorities. Sub-Adviser
may disclose the investment performance of each Portfolio Segment, provided that
such disclosure does not reveal the identity of Adviser, each Fund Portfolio or
the Fund or the composition of each Portfolio Segment. Sub-Adviser may,
however, disclose that Adviser, the Fund and each Fund Portfolio are its
clients.
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9. Code of Ethics Sub-Adviser has adopted a written code of ethics complying
with the requirements of Rule 17j-1(b) and (c) under the 1940 Act and will
provide Adviser and the Fund with a copy of such code. Within 20 days of the
end of each calendar quarter during which this Agreement remains in effect, the
president or a vice president of Sub-Adviser shall certify to Adviser or the
Fund that Sub-Adviser has complied with the requirements of Rule 17j-1 during
the previous quarter and that there have been no violations of Sub-Adviser's
code of ethics or, if any violation has occurred, the nature of such violation
and of the action taken in response to such violation.
10. Limitation of Liability Neither Sub-Adviser nor any of its directors,
officers, stockholders, agents or employees shall have any liability to Adviser,
the Fund or any shareholder of the Fund for any error of judgment, mistake of
law, or loss arising out of any investment, or for any other act or omission in
the performance by Sub-Adviser of its duties hereunder, except for liability
resulting from willful misfeasance, bad faith, or gross negligence on Sub-
Adviser's part in the performance of its duties or from reckless disregard by it
of its obligations and duties under this Agreement. Sub-Adviser specifically
acknowledges that the Fund is a third party beneficiary of this Agreement and
that the Fund is entitled to bring a lawsuit against the Sub-Adviser for breach
of this Agreement or any other duty in any court of competent jurisdiction.
Also Sub-Adviser acknowledges that the Fund is not subject to or bound by any of
the provisions of paragraph 15 of this Agreement.
Sub-Adviser agrees to indemnify and defend Adviser, its officers, directors,
employees and any person who controls Adviser for any loss or expense (including
reasonable attorneys' fees) arising out of or in connection with any claim,
demand, action, suit or proceeding relating to any actual or alleged material
misstatement or omission in the Fund's registration statement, any proxy
statement, or any communication to current or prospective investors in each Fund
Portfolio, if such material misstatement or omission was made in reliance upon
and in conformity with written information furnished by Sub-Adviser to Adviser
or the Fund.
11. Term and Termination This Agreement shall become effective with respect to
each Portfolio Segment on March 15, 2000, and shall remain in full force until
October 31, 2000, unless sooner terminated as hereinafter provided. This
Agreement shall continue in force from year to year thereafter with respect to
each Fund Portfolio, but only as long as such continuance is specifically
approved for each Fund Portfolio at least annually in the manner required by the
1940 Act and the rules and regulations thereunder; provided, however, that if
the continuation of this Agreement is not approved for a Fund Portfolio, Sub-
Adviser may continue to serve in such capacity for such Fund Portfolio in the
manner and to the extent permitted by the 1940 Act and the rules and regulations
thereunder.
This Agreement shall terminate as follows:
(a) This Agreement shall automatically terminate in the event of its
assignment (as defined in the 1940 Act) and may be terminated at any time
without the payment of any penalty by Adviser or by Sub-Adviser on sixty
days written notice to the other party. This
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Agreement may also be terminated by the Fund with respect to each Fund
Portfolio by action of the Board of Trustees or by a vote of a majority of
the outstanding voting securities of each Fund Portfolio (as defined in the
1940 Act) on sixty days written notice to Sub-Adviser by the Fund.
(b) This Agreement may be terminated with respect to each Fund Portfolio
at any time without payment of any penalty by Adviser, the Board of
Trustees or a vote of majority of the outstanding voting securities of such
Fund Portfolio in the event that Sub-Adviser or any officer or director of
Sub-Adviser has taken any action which results in a material breach of the
covenants of Sub-Adviser under this Agreement.
(c) This Agreement shall automatically terminate in the event the
Investment Management Agreement between Adviser and the Fund with respect
to a Fund Portfolio is terminated, assigned or not renewed.
Termination of this Agreement shall not affect the right of Sub-Adviser to
receive payments of any unpaid balance of the compensation described in Section
4 earned prior to such termination.
12. Notice Any notice under this Agreement by a party shall be in writing,
addressed and personally delivered, mailed postage prepaid, or sent by facsimile
transmission with confirmation of receipt, to the other party at such address as
such other party may designate for the receipt of such notice.
13. Limitations on Liability All parties are expressly put on notice of the
Fund's Agreement and Declaration of Trust and all amendments thereto, and the
limitation of shareholder and trustee liability contained therein. The
obligations of the Fund entered into in the name or on behalf thereof by any of
its Trustees, representatives or agents are made not individually but only in
such capacities and are not binding upon any of the Trustees, officers, or
shareholders of the Fund individually but are binding upon only the assets and
property of the Fund, and persons dealing with the Fund, with respect to a Fund
Portfolio, must look solely to the assets belonging to each Fund Portfolio for
the enforcement of any claims.
14. Adviser Responsibility Adviser will provide Sub-Adviser with copies of the
Fund's Declaration of Trust, By-laws, prospectus, and Statement of Additional
Information and any amendment thereto, and any objectives, policies or
limitations not appearing therein as they may be relevant to Sub-Adviser's
performance under this Agreement; provided, however, that no changes or
modifications to the foregoing shall be binding on Sub-Adviser until it is
notified thereof.
15. Arbitration of Disputes Any claim or controversy arising out of or relating
to this Agreement which is not settled by agreement of the parties shall be
settled by arbitration in Santa Monica, California before a panel of three
arbitrators in accordance with the commercial arbitration rules of the American
Arbitration Association then in effect. The parties agree that such arbitration
shall be the exclusive remedy hereunder, and each party expressly waives any
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<PAGE>
right it may have to seek redress in any other forum. Any arbitrator acting
hereunder shall be empowered to assess no remedy other than payment of fees and
out-of-pocket damages. Each party shall bear its own expenses of arbitration,
and the expenses of the arbitrators and of a transcript of any arbitration
proceeding shall be divided equally between the parties. Any decision and award
of the arbitrators shall be binding upon the parties, and judgment thereon may
be entered in the Superior Court of the State of California or any other court
having jurisdiction. If litigation is commenced to enforce any such award, the
prevailing party will be entitled to recover reasonable attorneys' fees and
costs.
16. Miscellaneous This Agreement sets forth the entire understanding of the
parties with respect to the subject matter hereof and may be amended only by
written consent of both parties. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and shall inure to the benefit of
the parties and their respective successors.
17. Applicable Law This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 10 above which will be
construed in accordance with Delaware law) the laws of the state of California.
Adviser and Sub-Adviser have caused this Agreement to be executed as of the date
and year first above written.
WILSHIRE ASSOCIATES INCORPORATED SANFORD C. BERNSTEIN & CO., INC.
By_______________________________ By_________________________________
Title____________________________ Title______________________________
By_______________________________ By_________________________________
Title____________________________ Title______________________________
8
<PAGE>
EXHIBIT 1
FUND PORTFOLIO LISTING
Horace Mann Growth Fund
9
<PAGE>
EXHIBIT 2
FEE SCHEDULE
Adviser shall pay Sub-Adviser, promptly after receipt by Adviser of its advisory
fee from the Fund with respect to each Fund Portfolio each calendar month during
the term of this Agreement, a fee based on the average daily net assets of each
Portfolio Segment, at the following annual rate:
0.20% of assets under management
Sub-Adviser's fee shall be accrued daily at 1/365th of the annual rate set forth
above. For the purpose of accruing compensation, the net assets of each
Portfolio Segment will be determined in the manner and on the dates set forth in
the current prospectus of the Fund with respect to each Fund Portfolio and, on
days on which the net assets are not so determined, the net asset value
computation to be used will be as determined on the immediately preceding day on
which the net assets were determined. Upon the termination of this Agreement,
all compensation due through the date of termination will be calculated on a
pro-rata basis through the date of termination and paid within thirty business
days of the date of termination.
Adviser and Sub-Adviser hereby acknowledge that as of February 16, 2000, the
value of the Portfolio Segments to be served under this Agreement was
approximately $307.5 million, representing approximately 40% of the Funds served
under this agreement.
The following conditions must be met to apply the fee schedule specified above:
2-1. The Target Policy Weighting for Sub-Adviser's Portfolio Segments will be at
least 40% of the Funds served under this Agreement. Adviser will maintain the
actual Portfolio Segment weighting to within 2% of the Target Policy Weighting,
a range designed to accommodate market movements.
2-2. Adviser may reduce the Target Policy Weighting below 40% if the resulting
value of the assets served under this Agreement after such reduction exceeds
$300 million.
If any of the above conditions is not met, the following annual rate will apply,
subject to the accrual process described above, for each day that the condition
is not met:
.600% of the first $10 million of assets under management;
.500% on the next $15 million of assets under management;
.400% on the next $25 million of assets under management;
.300% on the next $50 million of assets under management;
.250% on the next $50 million of assets under management;
.225% on the next $50 million of assets under management;
.200% on the next $50 million of assets under management;
.175% on the next $50 million of assets under management; and
.150% of assets under management thereafter.
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Exhibit I
April 28, 2000
Horace Mann Mutual Funds
One Horace Mann Plaza
Springfield, IL 62715
Ladies and Gentlemen:
Reference is made to Post-Effective Amendment No.8 to the Registration
Statement on Form N-1A under the Securities Act of 1933 being filed by Horace
Mann Mutual Funds, a Delaware business trust (the "Trust") in connection with
the public offering from time to time of units of beneficial interest, no par
value ("Shares") in the Equity Fund, Balanced Fund, Income Fund, Short-Term
Investment Fund, Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund (each, a "Fund" and collectively, the "Funds").
We are familiar with the Trust's organization and have counseled the Trust
regarding various legal matters. We have examined such Trust records and other
documents and certificates as we have considered necessary or appropriate for
the purposes of this opinion. In our examination of such materials, we have
assumed the genuineness of all signatures and the conformity to original
documents of all copies submitted to us.
Based upon the foregoing, and assuming that the Trust's Declaration of
Trust dated November 7, 1996, the Written Instrument Establishing and
Designating Growth Fund, Balance Fund, Income Fund and Short-Term Investment
Fund dated February 6, 1997, and the By-Laws of the Fund adopted December 20,
1996 are presently in full force and effect and have not been amended in any
respect and that the resolutions adopted by the Board of Trustees of the Trust
on December 20, 1996 and February 6, 1997 and the Written Consent dated March
10, 1997 relating to organizational matters, securities matters and the issuance
of shares are presently in full force and effect and have not been amended in
any respect, we advise you and opine that (a) the Trust is a validly existing
voluntary association with transferable shares under the laws of the State of
Delaware and is authorized to issue an unlimited number of Shares in the Funds;
and (b) presently and upon such further issuance of the Shares in accordance
with the Trust's Declaration of Trust and the receipt by the Trust of a purchase
price not less than the net asset value per Share and when the pertinent
provisions of the Securities Act of 1933 and such "blue sky" and securities laws
as may be applicable have been complied with, and assuming that the Trust
continues to validly exist as provided in (a) above, the Shares are and will be
legally issued and outstanding, fully paid and nonassessable.
This opinion is solely for the benefit of the Trust, the Trust's Board of
Trustees and the Trust's officers and may not be relied upon by any other person
without our prior written consent. We hereby consent to the use of this opinion
in connection with said Post-Effective Amendment.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
COK/RJM/MLW
<PAGE>
Exhibit J
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Horace Mann Mutual Funds:
We consent to the use of our report incorporated by reference herein and to the
references to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Services-Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG LLP
Chicago, Illinois
April 26, 2000
<PAGE>
Exhibit O(i)
HORACE MANN MUTUAL FUNDS
FORM OF CODE OF ETHICS
Adopted ______________, 2000
I. STATEMENT OF GENERAL POLICY. The Horace Mann Mutual Funds ("HMMF")
seeks to foster a reputation for integrity and professionalism. That reputation
is a vital business asset. The confidence and trust placed in us by investors
in HMMF is something that is highly valued and must be protected. As a result,
any activity that creates even the suspicion of misuse of material non-public
information by HMMF or any of its trustees, officers or employees, which gives
rise to or appears to give rise to any breach of fiduciary duty owed to HMMF, or
which creates any actual or potential conflict of interest between HMMF and any
of its employees or even the appearance of any conflict of interest must be
avoided and is prohibited. At the same time, HMMF believes that individual
investment activities by its officers and employees should not be unduly
prohibited or discouraged.
Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act") requires
that HMMF adopt a code of ethics containing provisions reasonably necessary to
prevent access persons (as defined therein) from engaging in any act, practice
or course of business prohibited by paragraph (b) of such Rule. Accordingly,
this Code of Ethics has been adopted to ensure that those who have knowledge of
the transactions by HMMF will not be able to act thereon to the disadvantage of
HMMF. The Code of Ethics does not purport comprehensively to cover all types of
conduct or transactions which may be prohibited or regulated by the laws and
regulations applicable to HMMF and persons connected with it.
II. DEFINITIONS. The following definitions shall govern the meaning of
key terms used throughout this Code of Ethics:
(a) "Access Persons" means any trustee, officer, or advisory person of
HMMF;
(b) "Advisory Person" means (i) any employee of HMMF, or of any
company in a control relationship to HMMF, who, in connection with his or her
regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a covered security by HMMF, or whose functions
relate to the making of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship to HMMF who obtains
information concerning recommendations made to HMMF with regard to the purchase
or sale of a covered security;*
- -------------------------
* A person does not become an "advisory person" simply by virtue of
normally assisting in the preparation of public reports, or receiving
public reports, but not receiving information about current
recommendations or trading; or by virtue of a single instance of
obtaining knowledge of current recommendations or trading activity, or
infrequently and inadvertently obtaining such knowledge.
<PAGE>
(c) "Beneficial Ownership" shall be interpreted in the same manner as
it would be in determining whether a person is subject to the provisions of
Section 16 of the Securities Exchange Act of 1934 ("1934 Act") and the rules and
regulations thereunder, except that the determination of direct or indirect
beneficial ownership shall apply to all securities which an access person has or
acquires;
(d) "Code of Ethics Compliance Officer" means the person appointed by
the Board of Trustees to fulfill the functions designated in this Code;
(e) "Control" means the power to exercise a controlling influence over
the management or policies of a company, unless such power is solely the result
of an official position with such company. Any person who owns beneficially,
either directly or through one or more controlled companies, more than 25% of
the voting securities of a company shall be presumed to control such company;
(f) "Covered Security" has the meaning set forth in Section 2(a)(36)
of the 1940 Act except that it shall not include shares of registered open-end
investment companies, direct obligations of the Government of the United States,
high quality short-term debt instruments (including repurchase agreements),
bankers' acceptances, bank certificates of deposit, and commercial paper;
(g) "End of the Calendar Quarter" means the last day of each third
calendar month beginning on January 1 of each year (March 31, June 30, September
30 and December 31);
(h) "Independent Trustee" means a trustee of HMMF who is not an
"interested person" of HMMF within the meaning of Section 2(a)(19) of the 1940
Act;
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933 ("1933 Act"), the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of Sections 13 or 15(d) of the 1934 Act;
(j) "Investment Personnel" means (i) any employee of HMMF (or any
company in a control relationship to HMMF) who, in connection with his or her
regular functions or duties, makes or participates in making recommendations
regarding the purchase or sale of securities by HMMF or (ii) any natural person
who controls HMMF and who obtains information concerning recommendations made to
HMMF regarding the purchase or sale of securities by HMMF;
(k) "Limited Offering" means an offering that is exempt from
registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) or
pursuant to Rule 504, Rule 505, or Rule 506 under the 1933 Act;
(l) "Purchase or Sale" includes the buying of an option to purchase or
sell a covered security; and
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(m) "Security being considered for purchase or sale" means when a
recommendation to purchase or sell a security has been made and communicated
and, with respect to the person making the recommendation, when such person
seriously considers making such recommendation.
III. SCOPE. Each investment adviser and sub-adviser to HMMF (each, an
"investment adviser") has adopted its own code of ethics, which imposes trading
restrictions and reporting requirements with respect to personal securities
transactions. HMMF has determined that the standards established by each
investment adviser may appropriately be applied to any access person of HMMF who
is also an access person of an investment adviser. Accordingly, any such person
who is subject to such investment adviser's code of ethics shall not be covered
by this Code so long as the trustees of HMMF have approved such investment
adviser's code in accordance with Rule 17j-1. With respect to any such person,
HMMF shall not be responsible for maintaining the records required by Rule 17j-1
or receiving or reviewing personal securities reports.
IV. PROHIBITED TRANSACTIONS. No access person shall purchase or sell,
directly or indirectly, any covered security in which he or she has, or by
reason of such transaction acquires, any direct or indirect beneficial ownership
and which to his or her actual knowledge at the time of such purchase or sale:
(a) is being or has been within the most recent fifteen days, considered for
purchase or sale by HMMF or (b) is being or has been within the most recent
fifteen days, purchased or sold by HMMF. In addition, investment personnel must
obtain prior approval from the Code of Ethics Compliance Officer before directly
or indirectly acquiring beneficial ownership in any securities in an initial
public offering or in a limited offering.
V. EXEMPTED TRANSACTIONS. The prohibitions of Section IV of this Code
shall not apply to:
(a) purchases or sales of securities which are not eligible for
purchase or sale by HMMF;
(b) purchases or sales which are non-volitional on the part of the
access person;
(c) purchases which are part of an automatic dividend reinvestment
plan;
(d) purchases effected upon the exercise of rights issued pro rata to
all holders of a class of securities, to the extent such rights were acquired
from the issuer, and sales of such rights so acquired; and
(e) purchases or sales which receive the prior approval of the Board
of Trustees of HMMF because they are only remotely potentially harmful to HMMF
because they would be very unlikely to affect a highly institutional market, or
because they clearly are not related economically to the securities to be
purchased, sold or held by HMMF.
VI. REPORTS. In order that management may be advised of the investment
activities of all people subject hereto and in order to comply with Rule 17j-1,
every access person is required
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<PAGE>
to file with the Code of Ethics Compliance Officer reports of every covered
security transaction in which he or she has or by reason of such transaction
acquires any direct or indirect beneficial ownership ("quarterly transaction
report"). Such reports shall be in the form as may be prescribed from time to
time by the Code of Ethics Compliance Officer.
Every quarterly transaction report shall be made not later than 10 calendar
days after the end of the calendar quarter in which the transactions to which
the report relates were effected, and shall contain the following information:
(a) the date of the transaction, the title, the interest rate and
maturity (if applicable), and the number of shares or other units, as
appropriate, and the principal amount of each security involved;
(b) the nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(c) the price at which the transaction was effected;
(d) the name of the broker, dealer or bank with or through whom the
transaction was effected; and
(e) the date the report is submitted by the access person.
In addition, no later than 10 days after a person becomes an access person
("initial holdings report") and annually thereafter ("annual holdings report"),
such access person must report the following: (i) the title, number of shares
and principal amount of each covered security in which the access person had any
direct or indirect beneficial ownership; (ii) the name of any broker, dealer or
bank with whom the access person maintained an account in which any securities
were held for the direct or indirect benefit of the access person; and (iii) the
date the report is submitted. An initial holdings report shall be made within
ten days after a person commences employment (or becomes an access person) and
shall be current as of the date the person became an access persons. An annual
holdings report shall be made within thirty days of each calendar year end and
must be current as of a date within thirty days of such report.
However, an access person shall not be required to make any report with
respect to transactions effected for, and covered securities held in, any
account over which such person does not have any direct or indirect influence,
or for transactions by the access person in his or her savings or demand deposit
accounts with banks or thrifts. Neither shall such report be required for
transactions in the following securities: shares of registered open-end
investment companies, direct obligations of the U.S. Government, high quality
short-term debt instruments (including repurchase agreements), bankers'
acceptances, bank certificates of deposit and commercial paper.
An independent trustee who would be required to make a report solely by
reason of being an independent trustee of HMMF, need not make: (i) an initial
or annual holdings report and (ii) a quarterly transaction report, unless the
Trustee knew or, in the ordinary course of fulfilling his or her
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<PAGE>
official duties as a Trustee, should have known that during the 15-day period
immediately before or after the Trustee's transaction in a covered security,
HMMF purchased or sold the covered security, or HMMF or its investment adviser
considered purchasing or selling the covered security.
The Code of Ethics Compliance Officer shall be responsible for notifying
access persons of their obligations under this Code, receiving and reviewing
reports of securities transactions, holdings and accounts against trading
activity of HMMF, and responding to all questions arising under this Code. The
Code of Ethics Compliance Officer shall not review his own reports and such
reports shall be submitted to a member of management senior to such person for
review. Questionable or violative transactions will be referred to the Audit
and Compliance Committee of the Board of Trustees. If no securities
transactions have been effected within a calendar quarter, a report representing
that fact must be filed within ten calendar days following the end of the
calendar quarter. Any submitted report may contain a statement that the report
shall not be construed as an admission by the person making such report that he
or she has any direct or indirect beneficial ownership in the security to which
the report relates. All such reports shall be treated confidentially, except
that they will be subject to review by the Securities and Exchange Commission.
Generally, following the principles set forth in Rule 16a-1(a)(2) under the
Securities Exchange Act of 1934, as amended from time to time, a direct or
indirect opportunity to profit or share in any profit derived from a transaction
in any class of security coupled with either the power to vote conferred by such
security or the power to dispose of (or direct the disposition of) such
security, will confer beneficial ownership. Such an opportunity may come about
through any contract, arrangement, understanding, relationship or otherwise.
Thus, a person is regarded as the beneficial owner of securities held by members
of his immediate family sharing the same household (immediate family members
include any child, grandchild, stepchild, spouse, sibling, parent, stepparent,
grandparent, and adoptive and certain in-law relationships). Similarly, a
general partner's proportionate interest in the portfolio securities held by a
general or limited partnership, a person's right to dividends that is separated
or separable from the underlying securities, and a person's right to acquire or
dispose of securities through the exercise or conversion of any derivative
security (such as an option or a warrant), whether or not presently exercisable,
will confer beneficial ownership, and holdings and transactions involving them
should be reported. Any other indirect interest in securities including
performance-related fees received for services rendered with regard to
securities as well as a person's interest in securities held by a trust may
confer beneficial ownership and thus require the reporting of any holdings and
transactions involving them. Any question concerning the interpretation of the
beneficial ownership rules should be directed to the Code of Ethics Compliance
Officer.
VII. SANCTIONS. When it is determined that there has been a violation,
HMMF may make a report to the Securities and Exchange Commission and/or take
such other action (including a letter of censure, suspension or dismissal) as
may be warranted by the circumstances. False statements made on a Report of
Securities Transactions or Report of Securities Holdings shall constitute just
cause for dismissal. In addition to the sanctions inherent in a failure to
adhere to the provisions of this Code of Ethics, no one will be permitted to
retain any benefit from any transaction which is found to violate the letter or
the spirit of this Code.
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<PAGE>
VIII. MISCELLANEOUS. HMMF shall submit this Code to the Board of Trustees
for approval within the time frames required by Rule 17j-1 of the 1940 Act. Any
material changes to this Code shall be submitted to such board within six months
of such change.
On an annual basis, HMMF shall provide a written report that summarizes
existing procedures concerning personal investing and any additional procedures
adopted during the year; describes any material issues arising under the code or
such procedures since the last report, including but not limited to any material
violations of the code or such procedures and any sanctions imposed in response
thereto; identifies material conflicts that arose during the year; and
identifies any recommended changes in restrictions or procedures based upon the
companies' experience under this Code, evolving industry practices or
developments in applicable law or regulations. Such report must include any
certification required by Rule 17j-1. HMMF shall maintain all records required
to be kept under Rule 17j-1.
IX. SUBMISSION. You are requested to sign a copy of this Code of Ethics,
and return it to the Code of Ethics Compliance Officer.
I have reviewed this Code of Ethics, and I represent that I will consult it
periodically and that I will manage my personal investment activities in
accordance with its terms and intent.
- ------------------------------------- -----------------------------------------
Date Signature
6
<PAGE>
Exhibit O(ii)
WILSHIRE ASSOCIATES INCORPORATED
INVESTMENT CONSULTING DIVISION
CODE OF CONDUCT
This Code of Conduct has been adopted by the Investment Consulting Division to
ensure that our consultants:
1. Make sound investment recommendations for the exclusive benefit of the
client and their fund beneficiaries.
2. Act independently of other Wilshire divisions.
The Code of Conduct is defined in four sections:
I. Compliance with Governing Laws and Regulations
A. Consultants shall be familiar with and comply with all federal and
state laws applicable to the investment process of their clients. This
includes, but is not limited to, ERISA and current SEC regulations.
B. Consultants shall comply with existing Wilshire policies concerning
personal and professional conduct.
C. Consultants shall act in accordance with the Code of Ethics and
Standards of Professional Conduct as adopted by the Association of
Investment Management and Research.
II. Investment Recommendations
A. Consultants shall fulfill their fiduciary responsibilities by making
investment recommendations for the sole interest of fund
beneficiaries.
B. Consultants shall make investment recommendations that are suitable
given the characteristics and risk tolerance of the investor.
C. Consultants shall exercise thoroughness and sound judgment in making
recommendations.
<PAGE>
D. Consultants shall disclose all relevant factors and known risks
pertaining to an investment recommendation.
E. Consultants shall deal fairly with all clients in making investment
recommendations.
III. Conflict of Interest
A. Consultants shall avoid any activity with an investment management
firm that is or could be perceived to be in conflict with the interest
of a consulting client.
B. Consultants shall not provide other Wilshire services to investment
management organizations. This includes marketing and client
servicing.
C. Consultants shall abide by reasonable procedures to ensure that
information as to activities of investment management organizations
with other divisions of Wilshire is not disseminated within the
Investment Consulting Division.
D. Consultants shall not recommend Wilshire Asset Management for
investment management services.
E. Wilshire shall disclose all potential conflicts of interest to
consulting clients.
F. Wilshire shall provide consulting clients with a list of all
investment management firms who are customers of other divisions
within Wilshire.
IV. Compensation and Gifts
A. Consultants will not receive compensation from Wilshire for activities
not directly related to services provided to consulting clients.
B. Consultants may not receive compensation from outside parties unless
approved by Wilshire's management and disclosed to their clients.
C. Consultants shall not accept gifts from any party where the value
exceeds $100.00
<PAGE>
Exhibit O(iii)
Scudder Kemper Investments, Inc.
Code of Ethics
January 1, 2000
<PAGE>
Contents
Preamble
Part 1: Conflicts of Interest
Part 2: Personal Investments
. Definitions
. Specific Rules and Regulations Applicable to Employees
. Specific Rules and Regulations Applicable to Access Persons
. Specific Rules and Regulations Applicable to Investment Personnel
. Specific Rules and Regulations Applicable to Portfolio Managers
. General
. Excessive Trading
. Disgorgement; Other Penalties
Part 3: Insider Trading
. Introduction
. General Guidelines
. Definitions
Part 4: Confidentiality
Part 5: Proprietary Rights of the Firm
Part 6: Gifts and Entertainment
. Overview
. General Guidelines
. Reporting and Supervision
Part 7: Fiduciary and Corporate Activities
. Executorships
. Trusteeships
. Custodianships for Minors
. Directorships and Consultant Positions in Business Corporations
. Public and Charitable Positions
. Outside Activities
. New Employees
. Written Approval
Part 8: External Communications
Part 9: Reporting Apparent Violations
Part 10: Condition of Employment or Service
<PAGE>
Form 1 Personal Transaction Report
Form 2 Personal Transaction Preclearance Form
Form 3 Special Transaction Preclearance Form
Form 4 Annual Acknowledgment of Obligations Under Code of Ethics
Form 5 Affiliated Persons Letter
Form 6 Report of Gifts and Entertainment
Form 7 Request for Approval of Fiduciary, Corporate or Other Outside Activity
Form 8 Annual Review of Personal Activities
Form 9 Personal Securities Holdings Form
<PAGE>
Exhibit O(iii)
SCUDDER KEMPER INVESTMENTS, INC. SP&P #16-1
Effective Date: 1/1/00
Distribution: General
STANDARD POLICY AND PROCEDURE MEMORANDUM #16-1
(Replaces SP&P #16-1 dtd 1/1/98, SP&P #16-2 dated 6/3/88,
SP&P #16-3 dated 3/15/89, SP&P #16-4 dated 5/18/88, SP&P #16-5 dated 4/29/91,
SP&P #16-6 dated 6/27/88, SP&P #16-8 dated 2/13/90, and SP&P #16-2 dated 3/1/95)
CODE OF ETHICS
Preamble
We will at all times conduct ourselves with integrity and distinction, putting
first the interests of our clients.
From the time of our Firm's inception, we have looked on our obligations to our
clients as fiduciary in nature. Our relationships were to be unencumbered in
fact or appearance by conflicts of interest, and the needs of our clients thus
represented a benchmark for assessing our own business decisions.
We believe and have always believed that our own long-term business interests
are best served by strict adherence to these principles. They are reflected in
the following internal policies and prescriptions and are implicit in the
judgment that our responsibilities exceed in scope and depth the literal
restrictions imposed by law on investor behavior (e.g., the prohibition on use
of inside information.).
The rules set forth in this Code have been adopted by Scudder Kemper
Investments, Inc. ("Scudder Kemper") and certain of its subsidiaries (the
"Covered Companies"), including Scudder Investor Services, Inc., Kemper
Distributors, Inc., Scudder Financial Services, Inc., Kemper Service
Corporation, Scudder Service Corporation, Scudder Trust Company, Scudder Fund
Accounting Corporation, and by Scudder Kemper-sponsored investment companies as
their codes of ethics applicable to Scudder Kemper-affiliated personnel.
<PAGE>
Part 1: Conflicts of Interest
This Code does not attempt to spell out all possible cases of conflicts of
interest and we believe that members of the organization should be conscious
that areas other than personal investment transactions may involve conflicts of
interest. One such area would be accepting favors from brokers or other vendors
or service providers. We are a natural object of cultivation by firms wishing to
do business with us and it is possible that this consideration could impair our
objectivity.
A conflict of interest could also occur in securities which have a thin market
or are being purchased or sold in volume by any client or clients. Likewise, the
purchase of stocks or bonds in anticipation of (1) an upwards change to "Buy" in
the price rating, (2) their being added to the Investment Universe with a "Buy"
rating, or (3) their being purchased by a large account or group of accounts
would clearly be in conflict with our clients' interest.
Other examples of such conflicts would include the purchase or sale of a
security by a member of the organization prior to initiating a similar
recommendation to a client. Analysts occupy a particularly visible position. It
follows that analysts should be particularly careful to avoid the appearance of
"jumping the gun" before recommending a change in the rating on one of the
stocks for which he or she is responsible.
Accordingly, all personnel are required to adhere to the following rules
governing their investment activities. These rules cannot cover all situations
which may involve a possible conflict of interest. If an employee becomes aware
of a personal interest that is, or might be, in conflict with the interest of a
client, that person should disclose the potential conflict to the Legal
Department for appropriate consideration, before any transaction is executed.
We are anxious to give every member of the Firm reasonable freedom with respect
to his/her own and family's investment activities. Furthermore, we believe that
we will be stronger and our product better if the members of the organization
have a personal interest in investing and the courage of their convictions with
respect to investment decisions. At the same time, in a profession such as ours,
it is possible to abuse the trust which has been placed in us and there could be
conflicts of interest between our clients and our personal investment
activities. In many cases such conflicts might be somewhat theoretical. On the
other hand, in a matter of this nature we must be almost as careful of
appearances as we are of the actual facts.
Our underlying philosophy has always been to avoid conflicts of interest
wherever possible and, where they unavoidably occur, to resolve them in favor of
the client. When a conflict does occur, an individual in an investment counsel
organization must recognize that the client's interests supercede the interests
of the Firm's employees and those of any members of the person's family whom he
or she may advise. This condition inevitably places some restriction on freedom
of investment for members of the organization and their families.
When any member of the organization thinks it possible that a personal
transaction can be misinterpreted as involving a conflict of interest, that
person is encouraged to write a short explanatory memorandum and attach it to
the confidential quarterly Personal Transaction Report (Form 1). Such a
memorandum should, of course, briefly document any discussion with and approval
by the Legal Department.
Personal Transaction Reports are reviewed by designees of the Ethics Committee,
who are responsible for determining whether violations have occurred, giving the
person involved an opportunity to supply additional information, and
recommending appropriate follow-up action including disciplinary measures for
late reports or other infractions.
<PAGE>
Part 2: Personal Investments
Definitions
(a) Access Person includes employees who have access to timely information
relating to investment management activities, research and/or client
portfolio holdings.
(b) Affiliated person letter (407 letter) is a letter from the compliance
department on behalf of Scudder Kemper Investments, Inc. authorizing
an employee to open a brokerage account and providing for the
direction of duplicate trade confirmations and account statements to
the compliance department. All access persons must apply for an
affiliated person letter for each personal account prior to making any
personal trades for the account. Employees who are not deemed access
persons will receive an affiliated person letter on request, but such
letter will NOT require the direction of duplicate trade confirmations
and account statements.
(c) Beneficial Interest. You will be considered to have a Beneficial
Interest in any investment that is (whether directly or indirectly)
held by you, or by others for your benefit (such as custodians,
trustees, executors, etc.); held by you as a trustee for members of
your immediate family (spouse, children, stepchildren, grandchildren,
parents, stepparents, grandparents, siblings, parents-in-law,
children-in-law, siblings-in-law); and held in the name of your
spouse, or minor children (including custodians under the Uniform
Gifts to Minors Act) or any relative of yours or of your spouse
(including an adult child) who is sharing your home, whether or not
you supervise such investments. You will also be considered to have a
Beneficial Interest in any investment as to which you have a contract,
understanding, relationship, agreement or other arrangement that gives
you, or any person described above, a present or future benefit
substantially equivalent to an ownership interest in that investment.
For example, you would be considered to have a Beneficial Interest in
the following:
. an investment held by a trust of which you are the settlor, if
you have the power to revoke the trust without obtaining the
consent of all the beneficiaries;
. an investment held by any partnership in which you are a partner;
. an investment held by an investment club of which you are a
member;
. an investment held by a personal holding company controlled by
you alone or jointly with others.
If you have any question as to whether you have a Beneficial Interest
in an investment, you should review it with the Legal Department.
(d) Covered Company is defined in the Preamble on page 1.
(e) Derivative includes options, futures contracts, options on futures
contracts, swaps, caps and the like, where the underlying instrument
is a Security, a securities index, a financial indicator, or a
precious metal.
(f) Employees includes all employees of each of the Covered Companies who
do not fall within the definition of Access Person, Investment
Personnel or Portfolio Manager.
(g) Initial Public Offering shall include initial offerings in equities.
<PAGE>
(h) Investment Personnel are traders, analysts, and other employees who
work directly with Portfolio Managers in an assistant capacity, as
well as those who in the course of their job regularly receive access
to client trading activity (this would generally include members of
the Investment Operations and Mutual Fund Accounting groups). As those
responsible for providing information or advice to Portfolio Managers
or otherwise helping to execute or implement the Portfolio Managers'
recommendations, Investment Personnel occupy a comparably sensitive
position, and thus additional rules outlined herein apply to such
individuals.
(i) Personal Account means an account through which an employee of a
Covered Company has a Beneficial Interest in any Security or
Derivative.
(j) Personal Transaction means an investment transaction in a Security or
Derivative in which an employee of a Covered Company has a Beneficial
Interest.
(k) Portfolio Managers are those employees of a Covered Company entrusted
with the direct responsibility and authority to make investment
decisions affecting a client. PIC Consultants are included in this
definition. In their capacities as fiduciaries, Portfolio Managers
occupy a more sensitive position than many members of the Scudder
Kemper organization because they are originating transactions for
their clients.
(l) Private Placement is defined as an offering of a security, which is
being acquired in connection with an offering not being made to "the
public" but to a limited number of investors and which has been deemed
not to require registration with the SEC.
(m) Reportable Transaction includes any transaction in a Security or
Derivative; provided that Reportable Transaction does not include any
transaction in (i) direct obligations of the US Government, or (ii)
open-end investment companies for which none of the Advisers serves as
investment adviser.
(n) Security includes without limitation stocks, bonds, debentures, notes,
bills and any interest commonly known as a security, and all rights or
contracts to purchase or sell a security.
(o) Scudder Kemper Funds means each registered investment company to which
an Adviser renders advisory services, other than funds sponsored by an
organization unaffiliated with Scudder Kemper.
(p) Waiver from preclearance exempts certain accounts from the
preclearance requirements. An access person may receive a certificate
of waiver from preclearance under the following circumstances:
(i) Account under the exclusive discretion of an access person's
spouse, where the spouse is employed by an investment firm where
the spouse is subject to comparable preclearance requirements;
(ii) The account is under the exclusive discretion of an outside money
manager; or
(iii) Any other situation where a waiver of preclearance is
appropriate.
A certificate of waiver from preclearance is available at the
discretion of the Ethics Committee. All accounts receiving certificate
of waiver from preclearance must apply for a 407 letter.
Transactions occurring in accounts which have obtained a
waiver from preclearance are not exempt from the quarterly
reporting requirement.
<PAGE>
Specific Rules and Restrictions Applicable to all Employees
The following rules and restrictions are applicable to all Employees
(including Access Persons, Investment Personnel and Portfolio Managers):
(a) Every Employee must file by the seventh day of the month following the
end of each quarter with the individual designated by the Ethics
Committee a confidential Personal Transaction Report for the
immediately preceding quarter (Form 1: Quarterly Personal Transaction
Report). Each report must set forth every Reportable Transaction for
any Personal Account in which the Employee has any Beneficial
Interest.
In filing the reports for accounts within these rules please note:
(i) You must file a report every quarter whether or not there were
any Reportable Transactions. All Reportable Transactions should
be listed if possible on a single form. For every Security listed
on the report, the information called for in each column must be
completed by all reporting individuals.
(ii) Reports must show sales, purchases, or other acquisitions, or
dispositions, including gifts, exercise of conversion rights and
the exercise or sale of subscription rights. Approved Personal
Transaction Preclearance Forms must be attached for all
applicable transactions. Reinvestment of dividends (but not
additional share purchases) through dividend reinvestment plans
of publicly held companies need be indicated only on the line
provided above PURCHASES on the reverse side of the report.
(iii) Quarterly reports on family and other accounts that are
fee-paying firm clients need merely list the Scudder Kemper
account number under Item #1 on Page 1 of the report; these
securities transactions do not have to be itemized.
(iv) Employees may not purchase securities issued as part of an
initial public offering until three business days after the
public offering date (i.e., the settlement date), and then only
at the prevailing market price. In addition, employees may not
participate in new issues of municipal bonds until a CUSIP number
has been identified.
(b) Employees are not permitted to serve on the boards of publicly traded
companies unless such service is approved in advance by the Ethics
Committee or its designee on the basis that it would be consistent
with the interests of the Firm. In the case of Investment Personnel
service on the board of a public company must be consistent with the
interests of the Fund with which the Investment Personnel is
associated as well as the shareholders of such Fund, and the
Investment Personnel must be isolated from participating in investment
decisions relating to that company. See Part 7: Fiduciary and
Corporate Activities for further detail on the approval process.
(c) For purposes of this Code, a prohibition or requirement applicable to
any given person applies also to transactions in securities for any of
that person's Personal Accounts, including transactions executed by
that person's spouse or relatives living in that person's household,
unless such account is specifically exempted from such requirement by
the Ethics Committee or its designee.
(d) Employees may not purchase or sell securities on the Restricted List
absent a special
<PAGE>
exception from the Legal Department. Employees may not disclose the
identities of issuers on the Restricted List to others outside the
firm. Please See Part 3: Insider Trading, which is incorporated by
reference.
Specific Rules and Restrictions Applicable to all Access Persons
(a) Access Persons are subject to each of the foregoing rules and
restrictions applicable to Employees.
(b) Access Persons may not purchase or sell a "private placement" security
without the prior written approval of the Ethics Committee or its
designee and, in the case of Portfolio Managers and research analysts,
the additional approval of their departmental reviewer (see Form 3:
Special Preclearance Form). Typically, a purchase of a private
placement will not be approved where any part of the offering is being
acquired by a client.
(c) All Access Persons must disclose promptly to the Ethics Committee or
its designee the existence of any Personal Account and must direct
their brokers to supply duplicate confirmations of all Reportable
Transactions and copies of periodic statements for all such accounts
to an individual designated by the Ethics Committee. (Use Form 5:
Affiliated Persons Letter.) These confirmations will be used to check
for conflicts of interest by comparing the information on the
confirmations against the Firm's pre-clearance records (see
sub-section (f) below) and quarterly Personal Transaction Reports.
(d) All Access Persons are required to "pre-clear" their personal
transactions with the Ethics Committee's designee. (Use Form 2:
Preclearance Form.) If circumstances are such that the Firm lacks the
ability to preclear a particular transaction, permission to execute
that transaction will not be granted. Submissions for request of trade
approval must be submitted no later than 3:30pm. If preclearance is
granted, the Access Person has until the end of the day preclearance
is granted to execute his or her trade. After such time the Access
Person must obtain preclearance again. (Limit orders which have been
precleared and placed within this time limit need not be precleared on
subsequent days so long as the terms of the order are not changed.)
Prior approval is not required for the exercise of rights, the
rounding out of fractional shares and receipt of stock dividends or
stock splits. Similarly, prior approval is not required for
transactions in shares of registered open-end investment companies
(except in the case of a Portfolio Manager who wishes to purchase or
sell shares of his/her Fund when the Fund is other than a money market
fund) and U.S. Government securities transactions.
(e) Access Persons may not purchase any Security where the investment
rating is upgraded to "Buy" (or any Security added to the Investment
Universe with a "Buy" rating until two weeks after the date of the
rating change or addition. (See SP&P #31-5 regarding Price Rating
System.).
(f) Access Persons may not sell any Security where the investment rating
is downgraded to "Unattractive" until two weeks after the date of the
rating change.
(g) Access Persons may not purchase securities that are added to the PIC
Universe until two weeks after the date of the addition.
(h) In the event that an Access Person desires to trade less than $10,000
of a Security that has a market capitalization of at least $5 billion,
pre-clearance will be granted absent
<PAGE>
special circumstances. (However, please note that even trades falling
within this de minimus exception must be pre-cleared with the Ethics
Committee or its designee.)
(i) No Access Person will receive approval to execute a securities
transaction when any client has a pending "buy" or "sell" order in
that same (or a related) Security until that order is executed or
withdrawn. Examples of related securities include options, warrants,
rights, convertible securities and American Depository Receipts, each
of which is considered "related" to the Security into which it can be
converted or exchanged.
(j) Within 10 days of the commencement of employment (or within 10 days of
obtaining Access Person status) all Access Persons must disclose all
holdings of securities and/or derivatives in which they have a
Beneficial Interest (and indicate which of those holdings are private
placements). Access Persons must file an initial report even if they
have no holdings. Holdings in direct obligations of the U.S.
Government and mutual (i.e., open-end) funds other than Scudder Kemper
Funds need not be listed.
(k) Access Persons shall submit an Annual Statement of Securities Holdings
as part of the annual ethics questionnaire. The Annual Statement of
Securities Holdings shall only include holdings that are not received
by the Legal Department in the form of duplicate statements.
Specific Rules and Restrictions Applicable to Investment Personnel
(a) Investment Personnel are subject to each of the foregoing rules and
restrictions applicable to Employees and Access Persons.
(b) Investment Personnel are prohibited from profiting from the buying and
selling, or selling and buying, of the same (or related) securities
within a 60 calendar-day period.
(c) Investment Personnel who hold a privately placed Security of an issuer
whose securities are being considered for purchase by a client must
disclose to their departmental reviewer that preexisting interest
where they are involved in the consideration of the investment by the
client (using Form 3: Special Transaction Preclearance Form). The
client's purchase of such securities must be approved by the relevant
departmental reviewer.
(d) Research analysts are required to obtain special preclearance (using
Form 3: Special Transaction Preclearance Form) and approval from their
supervisor prior to purchasing or selling a Security in an industry or
country he or she follows.
Specific Rules and Restrictions Applicable to Portfolio Managers
(a) Portfolio Managers are subject to each of the foregoing rules and
restrictions applicable to Employees, Access Persons and Investment
Personnel.
(b) Portfolio Managers may not buy or sell a Security within seven
calendar days before and after a portfolio that he or she manages
trades in that Security.
(c) When a Portfolio Manager wants to sell from his or her Personal
Account securities held by his or her clients, the Portfolio Manager
must receive prior written approval from the Ethics Committee or its
designee (Using Form 3) before acting for the Personal Account. The
Portfolio Manager must explain his or her reasons for selling the
securities.
(d) When a Portfolio Manager wants to purchase for a Personal Account a
Security eligible for purchase by one of his or her clients, the
Portfolio Manager must receive prior written
<PAGE>
approval from the Ethics Committee or its designee (Using Form 3)
before acting for the Personal Account. The Portfolio Manager must
explain his or her reasons for purchasing the securities.
(e) A Portfolio Manager may not engage in short sales other than "short
sales against the box" for which both Regular and Special Preclearance
are required.
- -
General
(a) Apart from these specific rules, purchases and sales should be
arranged in such a way as to avoid any conflict with clients in order
to implement the intent of this Code. Any attempt by an employee to do
indirectly what this Code is meant to prohibit will be deemed a direct
violation of the Code. If there is any doubt whether you may be in
conflict with clients, particularly with respect to securities with
thin markets, you should check before buying or selling with the
Ethics Committee or its designee.
(b) Hardship exceptions may be granted, in the sole discretion of the
Ethics Committee or its designee, with respect to certain provisions
of this Code in rare instances where unique circumstances exist.
(c) The Ethics Committee or its designee, on behalf of the Firm, will
report annually to each Scudder Kemper Fund's board of directors
concerning existing procedures and any material changes to those
procedures as well as any instances requiring significant remedial
action during the past year which relate to that Fund.
(d) Access Persons are permitted to maintain Margin Accounts. Nonetheless,
sales by Access Persons pursuant to margin calls must be precleared in
accordance with standard preclearance procedures.
Excessive Trading
The firm believes that it is appropriate for its members to participate in the
public securities markets as part of their overall personal investment programs.
As in other areas, however, this should be done in a way that creates no
potential conflicts with the interests of our clients or our firm. Further, it
is important that members recognize that otherwise appropriate trading, if
excessive (measured in terms of frequency, complexity of trading programs or
number of trades), or if conducted during work-time or using firm resources, can
give rise to conflicts of a different category such as by distracting time,
focus, and energy from our efforts on behalf of our clients or by exceeding a
reasonable standard of firm accommodation of members' basic personal needs.
Accordingly, personal trading rising to such dimension as to create this
possibility is not consistent with the Code of Ethics, should be avoided, and
will not be approved. This provision is consistent with Group policies and by
Zurich Basics, which sets out the Group's core values and basic principles.
Disgorgement; Other Penalties
Any profits realized from a transaction that was not precleared or from a
transaction that otherwise violates a provision of this Code will be disgorged
to an appropriate charity. The Ethics Committee, in its discretion, may waive
disgorgement in exceptional circumstances. The Ethics Committee also reserves
the right to impose other penalties for violations of the Code, including
requiring reversal of a trade, fines, suspension of trading privileges and,
under the most serious of violations, termination of employment.
<PAGE>
Part 3: Insider Trading
I. Introduction
Employees may not transact in a security while in possession of material,
nonpublic information relating to the issuer of the security. This prohibition
applies to trading on behalf of client accounts and personal accounts. In
addition, employees may not convey material, nonpublic information about public
traded issuers to others outside the company.
SP&P 16 - 11B sets forth the company policy on Insider Trading, and is
incorporated into the Code of Ethics by reference.
II. General guidelines
Employees may not transact in a security, on behalf of a client account or a
personal account, while in possession of material, nonpublic information
concerning the issuer of the security.
a. Employees who receive information which they believe may be material and
nonpublic are required to contact the Legal Department immediately. In such
circumstances, employees should not share the information with other
employees, including supervisors. Employees may not share material,
nonpublic information with others outside the firm.
b. Employees may not purchase or sell securities on the Restricted List absent
a special exception from the Legal Department. Employees may not disclose
the identities of issuers on the Restricted List to others outside the
firm.
c. Employees may not solicit material, nonpublic information from officers,
directors or employees of public issuers.
d. Employees may not knowingly transact in securities prior to trades made on
behalf of clients, or prior to the publication of research relating to the
security.
e. Employees may not cause nonpublic information about a security to be passed
across a firewall.
III. Definitions
Material information is information that a reasonable investor would find
relevant to making an investment decision. Any information which if announced to
the public, would likely cause a change in the price of a security, is likely to
be material.
The following types of information are likely to be material: earnings, mergers
and acquisitions, dividends and special dividends, product developments,
licenses, changes in management, major litigation or regulatory action, and/or
actions by prominent investors.
Nonpublic information is information that has not been disclosed to the public.
Information available in newspapers, magazines, radio, television, and/or news
services is generally public information. Restricted List is a document
disseminated by the Legal Department setting forth securities which employees
may not buy and/or sell for personal and client accounts.
A firewall is a procedure designed to prevent the misuse of material, nonpublic
information received by the firm in the course of its business. Employees with
questions concerning firewall procedures and their applicability should contact
the Legal Department for further guidance. SP&P 16 - 11C sets forth the company
policy on Firewall Procedures, and is incorporated into the Code of Ethics by
reference.
<PAGE>
Part 4: Confidentiality
Our obligation as fiduciaries to act at all times in our clients' best interests
requires that we share information concerning our clients -- including
particularly information concerning their identities, holdings and account
transactions -- with those outside the Firm only on a "need to know" basis.
Accordingly, no member of the organization may discuss with, or otherwise inform
others of, the identity of any client, or any actual or contemplated transaction
for the account of a client, except in the performance of employment duties or
in an official capacity and then only for the benefit of the client, and in no
event for a direct or indirect personal benefit.
Part 5: Proprietary Rights of the Firm
When a member of the organization leaves the firm, for whatever reason, certain
business principles and procedures should be observed. Some are obvious and
inherent in the basic ethical relationship between any person and his or her
firm. In our case, there are many additional constraints as a result of our
being a confidential fiduciary in a field involving special ethical, regulatory
and professional considerations.
By way of background, the firm does not wish to deter any individuals from
furthering their careers, if they think their situation can be improved with
another firm. But if any member of the organization does move on to another
firm, he or she does so subject to those constraints.
The collective efforts of everyone at Scudder Kemper have contributed over a
period of years to what our firm is today. This includes our recognized
reputation as professional investors with a high sense of personal integrity and
ethics. Many persons have contributed to the investment product we offer and
have participated in the development of our roster of existing and prospective
clients. The central principle is that the client has retained the firm, not any
individual. Members of the firm should also understand that our clients and our
employees are central to the value of the firm. Accordingly, while still an
employee, and for at least six months after the departure (unless a longer
period has been agreed to), departing members of the firm may not solicit
clients to retain, or other firm employees to join, another investment
management firm.
Any member of the organization must recognize that these elements of our
business are the property of the firm and its clients. In addition, the firm has
certain obligations not to disclose the confidential and proprietary information
of third party suppliers. None of such materials or information may be removed
from the firm or used in any way outside of Scudder Kemper either during or
after association with the firm.
In brief, the actions of anyone in the organization or of any departing member
of the organization are expected to be consistent with the spirit and intent of
this memorandum which reasserts the fact that no one of us can take away, use or
otherwise make available to a third party what belongs to the firm or its
supplier.
For example, the following items are representative of the property of the firm
or its suppliers and are not to be removed whether they are original documents,
copies, tapes or reproductions of any kind:
. Names, addresses, telephone numbers and other client contact and
correspondence procedures.
. Records and files of our clients' accounts including the computer
database.
<PAGE>
. Account operational procedures and instructions.
. Asset listings for clients and prospects including cost prices, dates
of acquisition and the like.
. All firm research memoranda, procedures and files, including drafts
thereof, as well as procedures, notes or tapes of research interviews,
discussions, annual reports and company releases, brokers' reports,
outside consultants' reports and any other material pertaining to
investments.
. All operating memoranda such as Standard Policy and Procedures
memoranda, operations manuals, procedures and memoranda, and
compliance checklists, manuals, procedures and memoranda.
. All computer software programs, databases and related documentation
pertaining to account or research operations, procedures or controls
including access to and use of such programs.
. Presentation materials (including drafts, memoranda and other
materials related thereto) prepared for marketing purposes or client
meetings, including computer software programs and documentation of
third party suppliers.
. All information pertaining to investment counsel and fund prospects
including lists and contact logs.
. Account performance data for all accounts which have been or are under
the supervision of the firm.
. Internal analyses, management information reports and worksheets such
as marketing and business plans, profit margin studies, and
compensation reviews.
These examples are only illustrative and not intended as all inclusive. In
addition, you are reminded of our long and strong tradition of confidentiality
with respect to client affairs and the confidential information of third party
suppliers and the representations we make to our clients and our suppliers in
this regard.
In order to maintain the professional nature of the firm, we have an obligation
to protect vigorously the rights of our clients and the firm. The firm may
enforce these rights pursuant to appropriate judicial proceedings.
Alternatively, the firm, in its discretion, may initiate proceedings before the
American Arbitration Association in order to resolve any controversy or claim it
may have arising out of or relating to this policy, or breach of it, and
judgment on an award rendered by the arbitrator may be entered in any court
having jurisdiction.
Part 6: Gifts and Entertainment
I. Overview
It is appropriate for employees to maintain friendly but professional
relationships with persons with whom Scudder Kemper conducts its business. These
business counterparts may include persons who are associated with Scudder
Kemper's vendors, contractors, providers of service, and members of the
investment community. It is appropriate for employees to give and/or receive
gifts, business meals and/or entertainment from such business counterparts,
provided that they are not excessive in value or frequency. The good judgment of
our employees and their supervisors is of paramount importance in ensuring
compliance with this provision.
<PAGE>
SP&P 16 - 11A sets forth the company policy on Gifts and Entertainment, and is
incorporated into the Code of Ethics by reference.
II. General Guidelines
(a) Employees may not accept gifts that are excessive in value or
frequency.
(b) The following types of transactions should be approved by a supervisor
using Form 6 (The Scudder Kemper Gift Form; See Section III):
i. Gifts valued in excess of $100;
ii. Business meals valued in excess of $200; and
iii. Entertainment valued in excess of $300.
(c) Invitations which involve the payment of substantial expenses
generally should be avoided (See SP&P 16-2A). Under most circumstances
lodging and transportation charges should be considered the obligation
of Scudder Kemper.
(a) The frequency of invitations should also be taken into account,
especially entertainment. Employees generally should not accept
more than three invitations a year from any single individual,
group or organization, subject to approval from a supervisor.
(a) When analysts and product leaders accept broker invitations to
research and investment meetings, an effort should be made to use
firms on our "Approved List" or those which are bona fide
candidates for the list. It is not good business practice to
accept assistance and invitations from firms with which we are
not likely to do business.
(a) Employees may not accept gifts of cash. Employees may not accept
gifts of favorable rates on financial transactions such as loans
or brokerage commissions.
III. Reporting and Supervision
As described above, gifts valued at over $100 and the other items outlined in
II(b) hereof, must be approved by a supervisor. The supervisor must have a
corporate title of Managing Director or Senior Vice President, and must be in
the same department as the employee receiving the gift. The Scudder Kemper Gift
Form (Form 6) must be completed within ten days of receipt of the gift.
Completed gift forms are sent to Carol Beckett, at 345 Park Avenue, NY, NY
10154. In addition, gifts subject to Form 6 must be reported on the Quarterly
Personal Transaction Report.
Part 7: Fiduciary and Corporate Activities
In many fiduciary and corporate activities, members of the organization are, or
will become, engaged in responsible duties involving the expenditure of time and
the application of information and experience which properly belong to the firm
or are derived from the Scudder Kemper relationship. With certain exceptions
referred to below, any compensation or profits from these activities are,
accordingly, considered to be Scudder Kemper's income.
The Ethics Committee must give written approval to all existing or prospective
relationships and activities as described below, and no new relationship should
be initiated without written authorization on Form 7: Request For Approval of
Fiduciary, Corporate or Other Outside Activity. In those
<PAGE>
instances when approval of a prospective fiduciary relationship, e.g., executor
or trustee, has been given and the individual subsequently is in a position to
qualify and act in the fiduciary capacity, that person is required to reapply
for approval if the character of the activity changes. The same procedures
should be followed as those for the approval of any fiduciary activity except
that reference should be made to the earlier obtained approval under "Salient
Facts" on the approval form.
Executorships
The duties of an executor are often arduous, time consuming and, to a
considerable extent, foreign to our business. As a general rule, Scudder Kemper
wishes to discourage acceptance of executorships by members of the organization.
However, business considerations or family relationships may make it desirable
to accept executorships under certain wills. In these instances follow the
procedures set forth in SP&P #16-15, Acting As Executor Under A Client's Will.
In all cases, it is necessary for the individual to have the written
authorization of the firm to act as an executor.
When members of the organization accept executorships under clients' wills, the
organization has consistently held to the belief that these individuals are
acting for Scudder Kemper and that fees received for executors' services
rendered while associated with the firm are exclusively Scudder Kemper income.
In such instances, the firm will indemnify the individual, and the individual
will be required at the time of qualifying as executor to make a written
assignment to the firm of any executor's fees due under such executorship.
Copies of this assignment and Scudder Kemper's authorization to act as executor
are to be filed in the client's file.
Generally speaking, it is not desirable for members of the organization to
accept executorships under the wills of non-clients. Normally, however,
authorization will be given in the case of executorships for members of an
individual's immediate family assuming that arrangements for the anticipated
work load can be made without undue interference with the individual's
responsibilities to Scudder Kemper. (For example, this may require the
employment of an agent to handle the large amount of detail which is usually
involved.) In such a case, the firm would expect the individual to retain the
commission. There may be other exceptions which will be determined by the facts
of each case. All such existing or prospective relationships should be reported
in writing.
Trusteeships
It is often desirable for members of the organization to act individually as
trustees for clients' trusts. Such relationships are not inconsistent with the
nature of our business. As a general rule, Scudder Kemper does not accept
trustee's commissions where it acts as investment counsel. As in the case of
executorships, all trusteeships must have the written approval of the firm.
It is our standard practice to indemnify those individuals who act as trustees
for clients' trusts at the request of the firm. In this connection, the
individual member of the organization acting as a trustee will be asked to agree
not to claim or accept trustee's commissions for acting. This applies to trusts
which employ Scudder Kemper as investment counsel or those which are invested in
one or more of the Funds administered by Scudder Kemper.
It is recognized that individuals may be asked to serve as trustees of trusts
which do not employ Scudder Kemper. As in the case of executorships, the firm
will normally authorize individuals to act as trustees for trusts of their
immediate family. Other non-client trusteeships can conflict with our clients'
interests so that acceptance of such trusteeships will be authorized only in
unusual circumstances.
<PAGE>
Custodianships for Minors
It is expected that most custodianships will be for minors of an individual's
immediate family. These will be considered as automatically authorized and do
not require written approval of the firm. However, the written approval of
Scudder Kemper is required for all other custodianships for minors.
Directorships and Consultant Positions in Business Corporations
Occasionally, members of the organization are asked to serve as directors or
consultants in business organizations. As a general policy, Scudder Kemper
considers it inadvisable for such individuals to serve in these capacities. No
such position may be accepted without the written authorization of the Ethics
Committee or its designee. In the exceptional instances where such authorization
is granted, the fees or other income resulting from such a relationship are to
be turned over to Scudder Kemper (unless the firm decides otherwise) to
compensate it for the resources made available. Scudder Kemper reserves the
right to require that any member of the organization relinquish any outside
business connection when it believes that such connection is unduly time
consuming or conflicts with the interests of the firm or its clients.
Public and Charitable Positions
Scudder Kemper has consistently encouraged members of the organization to take
part in community activities and to take an active role in public and charitable
organizations. The firm expects that when accepting such duties, members of the
organization will consider possible conflicts of interest with our business as
well as the demands that such positions make upon their time. Several examples
of possible conflicts might be helpful.
When agreeing to serve in a public or charitable position, a member of the
organization should clarify in advance in writing that he or she will not
provide free continuous investment advice and management. This should be made
particularly clear where Investment Committee responsibilities are considered.
Serving without compensation on the Investment Committee of a charity which
might appropriately employ Scudder Kemper would ordinarily not be in our best
interest and prior written approval is required.
Another example of a possible conflict which should be avoided arises when a
charity is involved in fund raising. Our work gives us access to detailed
knowledge of each client's capacity to contribute and is compounded by the close
relationship which should exist between consultant and client. For any member of
the organization in the course of a charitable solicitation to take advantage of
this confidential relationship -- or even to seem to do so -- would be
unprofessional. Even under the best circumstances, the solicitation of a client
by a member of the organization is awkward and discouraged.
Members of the organization should also make it clear in writing to the public
or charitable organization that they will not participate in any search or
selection process for a future investment adviser. It is expected that the
participation of a member of the Scudder Kemper organization in a charitable
organization will not preclude the firm from being a candidate for employment as
investment counsel to that organization.
Outside Activities
The foregoing does not cover all situations in which a member of the
organization may be in a position to realize financial gain which should be
treated as belonging to Scudder Kemper. It is expected that opportunities for
substantial compensation or profit from sources outside of the firm
<PAGE>
may, for example, be offered to a member of the organization by reason of his
association with the firm or because of his investment and financial skill or
experience. Scudder Kemper reserves the right to decide if such compensation or
profit should be accepted and, if accepted, whether or not it should be turned
over to Scudder Kemper. All such cases must be reported promptly in writing for
Ethics Committee review and before they are operative.
New Employees
It is desirable that any fiduciary or corporate activities of a prospective
employee be reviewed by Scudder Kemper prior to the conclusion of arrangements
for employment. However, if such activities have not been reported prior to
employment, they should be reported in writing as promptly as possible
thereafter. It is recognized that there may be justification for treating such
activities which ante-date the individual's association with the firm on a
different basis than might otherwise apply. However, Scudder Kemper reserves the
right to make what it considers an appropriate determination in each case. It
also reserves the right to require that any employee give up any fiduciary or
corporate activity which it finds in conflict with the best interests of the
firm or any of its clients.
Written Approval
Where written approval is required, Form 7 should be filed with the Ethics
Committee. A separate form should be filed for each trust, executorship and the
like. Note that once an activity has been approved, no additional requests for
approval need be filed unless the character of the activity changes, e.g., if a
member of the organization has obtained approval to be named as a prospective
executor or trustee, that individual should submit a new request to qualify and
serve in this capacity by resubmitting a new Form 7 for review.
Part 8: External Communications
In our sales, marketing, client reporting and corporate communications
activities, the Firm's products, services, capabilities, and past and potential
accomplishments must be presented fairly, accurately and clearly. All marketing
materials must be reviewed by the Global Compliance Group in accordance with
SP&P #12-7. All press interviews must be cleared in advance by Public Relations.
Reports to clients, including client account valuation and performance data,
must be fair.
Part 9: Reporting Apparent Violations
Scudder Kemper believes that maintaining a strong compliance culture is in the
best interest of the firm and its clients, in that it helps both to maintain
client and employee confidence, and to avoid the costs (both reputational and
monetary) associated with compliance violations. While reducing compliance
violations to a minimum is our goal, realistically speaking, violations may
occur from time to time in an organization as large as ours. When violations
occur, it is important that they be dealt with immediately by the appropriate
members of the organization. We encourage all Scudder Kemper employees to report
apparent compliance violations to the Legal Department. Violations that go
unreported have the potential to cause far more damage than violations that are
taken care of immediately upon discovery.
It is extremely important that apparent compliance violations be reported
through the appropriate
<PAGE>
channels. The Legal Department should be contacted in all cases except cases
involving potential violations of Human Resources policies, which should be
reported directly to Human Resources. While resolving apparent compliance
violations should virtually always involve the management of the business unit
involved, it is not necessarily appropriate (nor is it required) that an
employee report apparent violations to his or her manager, as well as to the
Legal Department.
Reports of apparent compliance violations will be treated confidentially to the
fullest extent possible. In no event will the firm tolerate retaliation against
persons who report apparent compliance violations. We realize that employees may
lack the training to distinguish actual from apparent compliance violations, and
accordingly, the fact that a reported incident proves, after investigation, not
to have involved a compliance violation will not result in any sanction against
the reporter, provided that the report was made in good faith.
Part 10: Condition of Employment or Service
Compliance with the Code of Ethics is a condition of employment or continued
affiliation with Scudder Kemper and the Scudder Kemper Funds, and conduct not in
accordance shall constitute grounds for actions including termination of
employment or removal from office.
Employees must certify annually that they have read and agree to comply in all
respects with this Code of Ethics and that they have disclosed or reported all
personal transactions it requires to be disclosed or reported. (See Form 4:
Annual Acknowledgement of Obligations Under Code of Ethics). In addition, each
year every member of the organization is required to file with the Legal
Department a complete list of all fiduciary, corporate, and other relationships
of the nature described in Part 7 above. The report is titled Form 8: Annual
Review of Personal Activities and is attached to this memorandum.
<PAGE>
Exhibit O(iv)
Code of Ethics
Page 1
Wellington Management Company, llp
Wellington Trust Company, na
Wellington Management International
Wellington International Management Company Pte Ltd.
Code of Ethics
- ------------------ ------------------------------------------------------------
Summary Wellington Management Company, llp and its affiliates have a
fiduciary duty to investment company and investment
counseling clients which requires each employee to act
solely for the benefit of clients. Also, each employee has a
duty to act in the best interest of the firm. In addition to
the various laws and regulations covering the firm's
activities, it is clearly in the firm's best interest as a
professional investment advisory organization to avoid
potential conflicts of interest or even the appearance of
such conflicts with respect to the conduct of the firm's
employees. Wellington Management's personal trading and
conduct must recognize that the firm's clients always come
first, that the firm must avoid any actual or potential
abuse of our positions of trust and responsibility, and that
the firm must never take inappropriate advantage of its
positions. While it is not possible to anticipate all
instances of potential conflict, the standard is clear.
In light of the firm's professional and legal
responsibilities, we believe it is appropriate to restate
and periodically distribute the firm's Code of Ethics to all
employees. It is Wellington Management's aim to be as
flexible as possible in its internal procedures, while
simultaneously protecting the organization and its clients
from the damage that could arise from a situation involving
a real or apparent conflict of interest. While it is not
possible to specifically define and prescribe rules
regarding all possible cases in which conflicts might arise,
this Code of Ethics is designed to set forth the policy
regarding employee conduct in those situations in which
conflicts are most likely to develop. If an employee has any
doubt as to the propriety of any activity, he or she should
consult the President or Regulatory Affairs Department.
The Code reflects the requirements of United States law,
Rule 17j-1 of the Investment Company Act of 1940, as amended
on October 29, 1999, as well as the recommendations issued
by an industry study group in 1994, which were strongly
supported by the SEC. The term "Employee" includes all
employees and Partners.
<PAGE>
Code of Ethics
Page 2
- ------------------ ------------------------------------------------------------
Policy on Personal Essentially, this policy requires that all personal
Securities securities transactions (including acquisitions or
Transactions dispositions other than through a purchase or sale) by all
Employees must be cleared prior to execution. The only
exceptions to this policy of prior clearance are noted
below.
- ------------------ ------------------------------------------------------------
Definition of The following transactions by Employees are considered
"Personal "personal" under applicable SEC rules and therefore subject
Securities to this statement of policy:
Transactions"
1
Transactions for an Employee's own account, including IRA's.
2
Transactions for an account in which an Employee has
indirect beneficial ownership, unless the Employee has no
direct or indirect influence or control over the account.
Accounts involving family (including husband, wife, minor
children or other dependent relatives), or accounts in which
an Employee has a beneficial interest (such as a trust of
which the Employee is an income or principal beneficiary)
are included within the meaning of "indirect beneficial
interest".
If an Employee has a substantial measure of influence or
control over an account, but neither the Employee nor the
Employee's family has any direct or indirect beneficial
interest (e.g., a trust for which the Employee is a trustee
but not a direct or indirect beneficiary), the rules
relating to personal securities transactions are not
considered to be directly applicable. Therefore, prior
clearance and subsequent reporting of such transactions are
not required. In all transactions involving such an account
an Employee should, however, conform to the spirit of these
rules and avoid any activity which might appear to conflict
with the investment company or counseling clients or with
respect to the Employee's position within Wellington
Management. In this regard, please note "Other Conflicts of
Interest", found later in this Code of Ethics, which does
apply to such situations.
- ------------------ ------------------------------------------------------------
Preclearance Except as specifically exempted in this section, all
Required ----------------------------------------------------
Employees must clear personal securities transactions prior
-----------------------------------------------------------
to execution. This includes bonds, stocks (including closed
------------
end funds), convertibles, preferreds, options on securities,
warrants, rights, etc. for domestic and foreign securities,
whether publicly traded or privately placed. The only
exceptions to this requirement are automatic dividend
<PAGE>
Code of Ethics
Page 3
- ------------------ ------------------------------------------------------------
reinvestment and stock purchase plan acquisitions,
broad-based stock index and U.S. government securities
futures and options on such futures, transactions in
open-end mutual funds, U.S. Government securities,
commercial paper, or non-volitional transactions.
Non-volitional transactions include gifts to an Employee
over which the Employee has no control of the timing or
transactions which result from corporate action applicable
to all similar security holders (such as splits, tender
offers, mergers, stock dividends, etc.). Please note,
however, that most of these transactions must be reported
even though they do not have to be precleared. See the
following section on reporting obligations.
Clearance for transactions must be obtained by contacting
the Director of Global Equity Trading or those personnel
designated by him for this purpose. Requests for clearance
and approval for transactions may be communicated orally or
via email. The Trading Department will maintain a log of all
requests for approval as coded confidential records of the
firm. Private placements (including both securities and
partnership interests) are subject to special clearance by
the Director of Regulatory Affairs, Director of Enterprise
Risk Management or the General Counsel, and the clearance
will remain in effect for a reasonable period thereafter,
not to exceed 90 days.
Clearance for personal securities transactions for publicly
traded securities will be in effect for one trading day
only. This "one trading day" policy is interpreted as
follows:
. If clearance is granted at a time when the principal
market in which the security trades is open, clearance
is effective for the remainder of that trading day
until the opening of that market on the following day.
. If clearance is granted at a time when the principal
market in which the security trades is closed,
clearance is effective for the next trading day until
the opening of that market on the following day.
- ------------------ ------------------------------------------------------------
Filing of Reports Records of personal securities transactions by Employees
will be maintained. All Employees are subject to the
following reporting requirements:
1
Duplicate All Employees must require their securities brokers to send
Brokerage duplicate confirmations of their securities transactions to
Confirmations the Regulatory Affairs Department. Brokerage firms are
accustomed to providing this service. Please contact
Regulatory Affairs to obtain a form letter to request this
service. Each employee must return to the Regulatory Affairs
Department a completed form for each brokerage account that
is used for personal securities transactions of the
<PAGE>
Code of Ethics
Page 4
- ------------------ ------------------------------------------------------------
Employee. Employees should not send the completed forms to
---
their brokers directly. The form must be completed and
returned to the Regulatory Affairs Department prior to any
transactions being placed with the broker. The Regulatory
Affairs Department will process the request in order to
assure delivery of the confirms directly to the Department
and to preserve the confidentiality of this information.
When possible, the transaction confirmation filing
requirement will be satisfied by electronic filings from
securities depositories.
2 SEC rules require that a quarterly record of all personal
Filing of securities transactions submitted by each person subject to
Quarterly the Code's requirements and that this record be available
Report of all for inspection. To comply with these rules, every Employee
"Personal must file a quarterly personal securities transaction report
Securities within 10 calendar days after the end of each calendar
Transactions" quarter. Reports are filed electronically utilizing the
firm's proprietary Personal Securities Transaction Reporting
System (PSTRS) accessible to all Employees via the
Wellington Management Intranet.
At the end of each calendar quarter, Employees will be
notified of the filing requirement. Employees are
responsible for submitting the quarterly report within the
deadline established in the notice.
Transactions during the quarter indicated on brokerage
confirmations or electronic filings are displayed on the
Employee's reporting screen and must be affirmed if they are
accurate. Holdings not acquired through a broker submitting
confirmations must be entered manually. All Employees are
required to submit a quarterly report, even if there were no
reportable transactions during the quarter.
Employees must also provide information on any new brokerage
account established during the quarter including the name of
the broker, dealer or bank and the date the account was
established.
IMPORTANT NOTE: The quarterly report must include the
--------------
required information for all "personal securities
transactions" as defined above, except transactions in
open-end mutual funds, money market securities, U.S.
Government securities, and futures and options on futures on
U.S. government securities. Non-volitional transactions and
those resulting from corporate actions must also be reported
even though preclearance is not required and the nature of
the transaction must be clearly specified in the report.
<PAGE>
Code of Ethics
Page 5
- ------------------ ------------------------------------------------------------
3
Certification As part of the quarterly reporting process on PSTRS,
of Compliance Employees are required to confirm their compliance with the
provisions of this Code of Ethics.
- ------------------ ------------------------------------------------------------
4
Filing of Personal Annually, all Employees must file a schedule indicating
Holding Report their personal securities holdings as of December 31 of each
year by the following January 30. SEC Rules require that
this report include the title, number of shares and
principal amount of each security held in an Employee's
personal account, and the name of any broker, dealer or bank
with whom the Employee maintains an account. "Securities"
for purposes of this report are those which must be reported
as indicated in the prior paragraph. Newly hired Employees
are required to file a holding report within ten (10) days
of joining the firm. Employees may indicate securities held
in a brokerage account by attaching an account statement,
but are not required to do so, since these statements
contain additional information not required by the holding
report.
- ------------------ ------------------------------------------------------------
5
Review of Reports All reports filed in accordance with this section will be
maintained and kept confidential by the Regulatory Affairs
Department. Reports will be reviewed by the Director of
Regulatory Affairs or personnel designated by her for this
purpose.
- ------------------ ------------------------------------------------------------
Restrictions on While all personal securities transactions must be cleared
"Personal prior to execution, the following guidelines indicate which
Securities will be prohibited, discouraged, Transactions" or subject to
transactions nearly automatic clearance. The clearance of personal
securities transactions may also depend upon other
circumstances, including the timing of the proposed
transaction relative to transactions by our investment
counseling or investment company clients; the nature of the
securities and the parties involved in the transaction; and
the percentage of securities involved in the transaction
relative to ownership by clients. The word "clients" refers
collectively to investment company clients and counseling
clients. Employees are expected to be particularly sensitive
to meeting the spirit as well as the letter of these
restrictions.
Please note that these restrictions apply in the case of
debt securities to the specific issue and in the case of
common stock, not only to the common stock, but to any
equity-related security of the same issuer including
preferred stock, options, warrants, and convertible bonds.
Also, a gift or transfer from you (an Employee) to a third
party shall be subject to these restrictions, unless the
donee or transferee represents that he or she has no present
intention of selling the donated security.
<PAGE>
Code of Ethics
Page 6
- ------------------ ------------------------------------------------------------
1
No Employee may engage in personal transactions involving
any securities which are:
. being bought or sold on behalf of clients until one
trading day after such buying or selling is completed
or canceled. In addition, no Portfolio Manager may
engage in a personal transaction involving any security
for 7 days prior to, and 7 days following, a
transaction in the same security for a client account
managed by that Portfolio Manager without a special
exemption. See "Exemptive Procedures" below. Portfolio
Managers include all designated portfolio managers and
others who have direct authority to make investment
decisions to buy or sell securities, such as investment
team members and analysts involved in Research Equity
portfolios. All Employees who are considered Portfolio
Managers will be so notified by the Regulatory Affairs
Department.
. the subject of a new or changed action recommendation
from a research analyst until 10 business days
following the issuance of such recommendation;
. the subject of a reiterated but unchanged
recommendation from a research analyst until 2 business
days following reissuance of the recommendation
. actively contemplated for transactions on behalf of
clients, even though no buy or sell orders have been
placed. This restriction applies from the moment that
an Employee has been informed in any fashion that any
Portfolio Manager intends to purchase or sell a
specific security. This is a particularly sensitive
area and one in which each Employee must exercise
caution to avoid actions which, to his or her
knowledge, are in conflict or in competition with the
interests of clients.
2
The Code of Ethics strongly discourages short term trading
by Employees. In addition, no Employee may take a "short
term trading" profit in a security, which means the sale of
a security at a gain (or closing of a short position at a
gain) within 60 days of its purchase, without a special
exemption. See "Exemptive Procedures". The 60 day
prohibition does not apply to transactions resulting in a
loss, nor to futures or options on futures on broad-based
securities indexes or U.S. government securities.
<PAGE>
Code of Ethics
Page 7
- ------------------ ------------------------------------------------------------
3
No Employee engaged in equity or bond trading may engage
in personal transactions involving any equity securities of
any company whose primary business is that of a
broker/dealer.
4
Subject to preclearance, Employees may engage in short
sales, options, and margin transactions, but such
transactions are strongly discouraged, particularly due to
the 60 day short term profit-taking prohibition. Any
Employee engaging in such transactions should also recognize
the danger of being "frozen" or subject to a forced close
out because of the general restrictions which apply to
personal transactions as noted above. In specific case of
hardship an exception may be granted by the Director of
Regulatory Affairs or her designee upon approval of the
Ethics Committee with respect to an otherwise "frozen"
transaction.
5
No Employee may engage in personal transactions involving
the purchase of any security on an initial public offering.
This restriction also includes new issues resulting from
spin-offs, municipal securities and thrift conversions,
although in limited cases the purchase of such securities in
an offering may be approved by the Director of Regulatory
Affairs or her designee upon determining that approval would
not violate any policy reflected in this Code. This
restriction does not apply to open-end mutual funds, U. S.
government issues or money market investments.
6
Employees may not purchase securities in private placements
unless approval of the Director of Regulatory Affairs,
Director of Enterprise Risk Management or the General
Counsel has been obtained. This approval will be based upon
a determination that the investment opportunity need not be
reserved for clients, that the Employee is not being offered
the investment opportunity due to his or her employment with
Wellington Management and other relevant factors on a
case-by-case basis. If the Employee has portfolio management
or securities analysis responsibilities and is granted
approval to purchase a private placement, he or she must
disclose the privately placed holding later if asked to
evaluate the issuer of the security. An independent review
of the Employee's analytical work or decision to purchase
the security for a client account will then be performed by
another investment professional with no personal interest in
the transaction.
<PAGE>
Code of Ethics
Page 8
- ------------------ ------------------------------------------------------------
Gifts and Other Employees should not seek, accept or offer any gifts or
Sensitive Payments favors of more than minimal value or any preferential
treatment in dealings with any client, broker/dealer,
portfolio company, financial institution or any other
organization with whom the firm transacts business.
Occasional participation in lunches, dinners, cocktail
parties, sporting activities or similar gatherings conducted
for business purposes are not prohibited. However, for both
the Employee's protection and that of the firm it is
extremely important that even the appearance of a possible
conflict of interest be avoided. Extreme caution is to be
exercised in any instance in which business related travel
and lodgings are paid for other than by Wellington
Management, and prior approval must be obtained from the
Regulatory Affairs Department.
Any question as to the propriety of such situations should
be discussed with the Regulatory Affairs Department and any
incident in which an Employee is encouraged to violate these
provisions should be reported immediately. An explanation of
all extraordinary travel, lodging and related meals and
entertainment is to be reported in a brief memorandum to the
Director of Regulatory Affairs.
Employees must not participate individually or on behalf of
the firm, a subsidiary, or any client, directly or
indirectly, in any of the following transactions:
1
Use of the firm's funds for political purposes.
2
Payment or receipt of bribes, kickbacks, or payment or
receipt of any other amount with an understanding that part
or all of such amount will be refunded or delivered to a
third party in violation of any law applicable to the
transaction.
3
Payments to government officials or employees (other than
disbursements in the ordinary course of business for such
legal purposes as payment of taxes).
4
Payment of compensation or fees in a manner the purpose of
which is to assist the recipient to evade taxes, federal or
state law, or other valid charges or restrictions applicable
to such payment.
<PAGE>
Code of Ethics
Page 9
- ------------------ ------------------------------------------------------------
5
Use of the funds or assets of the firm or any subsidiary for
any other unlawful or improper purpose.
- ------------------ ------------------------------------------------------------
Other Conflicts of Employees should also be aware that areas other than
Interest personal securities transactions or gifts and sensitive
payments may involve conflicts of interest. The following
should be regarded as examples of situations involving real
or potential conflicts rather than a complete list of
situations to avoid.
"Inside Specific reference is made to the firm's policy on the use
Information" of "inside information" which applies to personal securities
transactions as well as to client transactions.
Use of Information Information acquired in connection with employment by the
organization may not be used in any way which might be
contrary to or in competition with the interests of clients.
Employees are reminded that certain clients have
specifically required their relationship with us to be
treated confidentially.
Disclosure of Information regarding actual or contemplated investment
Information decisions, research priorities or client interests should
not be disclosed to persons outside our organization and in
no way can be used for personal gain.
Outside All outside relationships such as directorships or
Activities trusteeships of any kind or membership in investment
organizations (e.g., an investment club) must be cleared by
the Director of Regulatory Affairs prior to the acceptance
of such a position. As a general matter, directorships in
unaffiliated public companies or companies which may
reasonably be expected to become public companies will not
be authorized because of the potential for conflicts which
may impede our freedom to act in the best interests of
clients. Service with charitable organizations generally
will be authorized, subject to considerations related to
time required during working hours and use of proprietary
information.
Exemptive The Director of Regulatory Affairs, the Director of
Procedure Enterprise Risk Management, the General Counsel or the
Ethics Committee can grant exemptions from the personal
trading restrictions in this Code upon determining that the
transaction for which an exemption is requested would not
result in a conflict of interest or violate any other policy
embodied in this Code. Factors to be considered may include:
the size and holding period of the Employee's position in
the security, the market capitalization of the issuer, the
liquidity of the security, the reason for the Employee's
requested
<PAGE>
Code of Ethics
Page 10
- ------------------ ------------------------------------------------------------
transaction, the amount and timing of client trading in the
same or a related security, and other relevant factors.
Any Employee wishing an exemption should submit a written
request to the Director of Regulatory Affairs setting forth
the pertinent facts and reasons why the employee believes
that the exemption should be granted. Employees are
cautioned that exemptions are intended to be exceptions, and
repetitive exemptive applications by an Employee will not be
well received.
Records of the approval of exemptions and the reasons for
granting exemptions will be maintained by the Regulatory
Affairs Department.
Compliance with Adherence to the Code of Ethics is considered a basic
The Code of Ethics condition of employment with our organization. The Ethics
Committee monitors compliance with the Code and reviews
violations of the Code to determine what action or sanctions
are appropriate.
Violations of the provisions regarding personal trading will
presumptively be subject to being reversed in the case of a
violative purchase, and to disgorgement of any profit
realized from the position (net of transaction costs and
capital gains taxes payable with respect to the transaction)
by payment of the profit to any client disadvantaged by the
transaction, or to a charitable organization, as determined
by the Ethics Committee, unless the Employee establishes to
the satisfaction of the Ethics Committee that under the
particular circumstances disgorgement would be an
unreasonable remedy for the violation.
Violations of the Code of Ethics may also adversely affect
an Employee's career with Wellington Management with respect
to such matters as compensation and advancement.
Employees must recognize that a serious violation of the
Code of Ethics or related policies may result, at a minimum,
in immediate dismissal. Since many provisions of the Code of
Ethics also reflect provisions of the U.S. securities laws,
Employees should be aware that violations could also lead to
regulatory enforcement action resulting in suspension or
expulsion from the securities business, fines and penalties,
and imprisonment.
Again, Wellington Management would like to emphasize the
importance of obtaining prior clearance of all personal
securities transactions, avoiding prohibited
<PAGE>
Code of Ethics
Page 11
- ------------------ ------------------------------------------------------------
transactions, filing all required reports promptly and
avoiding other situations which might involve even an
apparent conflict of interest. Questions regarding
interpretation of this policy or questions related to
specific situations should be directed to the Regulatory
Affairs Department or Ethics Committee.
Revised: March 1, 2000
<PAGE>
EXHIBIT 0(V)
EMPLOYEE INVESTMENT TRANSACTION POLICY
--------------------------------------
For
BlackRock, Inc.
And
ITS AFFILIATED COMPANIES
Effective March 1, 2000
<PAGE>
EMPLOYEE INVESTMENT TRANSACTION POLICY
--------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF CONTENTS........................................................................................ i
I. PREAMBLE........................................................................................ 1
A. General Principles........................................................................ 1
B. The General Scope Of The Policy's Application To Personal Investment Transactions......... 3
C. The Organization Of This Policy........................................................... 3
D. Questions................................................................................. 4
II. PERSONAL INVESTMENT TRANSACTIONS................................................................ 4
A. In General................................................................................ 4
B. Reporting Obligations..................................................................... 4
1. Use Of Broker-Dealers And Futures Commission Merchants............................... 4
2. Initial Report....................................................................... 4
3. New Accounts......................................................................... 5
4. Timely Reporting Of Investment Transactions.......................................... 6
5. Related Accounts..................................................................... 6
6. Exemptions From Reporting............................................................ 6
C. Prohibited Or Restricted Investment Transactions.......................................... 7
1. Initial Public Offerings............................................................. 7
2. Private Placements................................................................... 7
D. Investment Transactions Requiring Prior Notification...................................... 7
1. Prior Notification Procedure......................................................... 8
2. Exemptions From Prior Notification................................................... 8
(a) Transactions Exempt From Prior Notification..................................... 9
(b) Securities Exempt From Prior Notification....................................... 9
(c) Futures Contracts Exempt From Prior Notification................................ 9
E. Ban On Short-Term Trading Profits......................................................... 10
</TABLE>
<PAGE>
<TABLE>
<S> <C>
F. Blackout Periods.......................................................................... 10
1. Specific Blackout Periods............................................................ 10
2. Exemptions From Blackout Restrictions................................................ 11
III. INSIDE INFORMATION AND SERVICE AS A DIRECTOR.................................................... 11
A. Inside Information........................................................................ 11
B. Service As A Director..................................................................... 12
IV. EXEMPTIONS...................................................................................... 12
V. COMPLIANCE...................................................................................... 13
A. Certifications............................................................................ 13
1. Upon Receipt Of This Policy.......................................................... 13
2. Annual Certificate Of Compliance..................................................... 13
B. Supervisory Procedures.................................................................... 14
1. The Compliance Committee............................................................. 14
2. The Compliance Officer............................................................... 14
3. Post-Trade Monitoring And Investigations............................................. 14
4. Remedial Actions..................................................................... 15
5. Reports Of Violations Requiring Significant Remedial Action.......................... 15
6. Annual Reports....................................................................... 15
VI. EFFECTIVE DATE.................................................................................. 16
</TABLE>
Appendices
- ----------
I Definitions Of Capitalized Terms
II Acknowledgment Of Receipt Of The Policy
III Annual Certification Of Compliance With The Policy
IV Initial Report Of Accounts
V Request For Duplicate Broker Reports
VI Investment Transaction Prior Notification Form
VII Fully Discretionary Account Form
- ii -
<PAGE>
EMPLOYEE INVESTMENT TRANSACTION POLICY
--------------------------------------
for BlackRock, Inc. and
its Affiliated Companies
I. PREAMBLE
A. General Principles
This Employee Investment Transaction Policy (the "Policy") is based on the
principle that you, as an officer, director or other Advisory Employee of an
Advisor affiliated with BlackRock, Inc. ("BlackRock"), owe a fiduciary duty of
undivided loyalty to the registered investment companies, institutional
investment clients, personal trusts and estates, guardianships, employee benefit
trusts, and other Advisory Clients which that Advisor serves./1/ Accordingly,
you must avoid transactions, activities, and relationships that might interfere
or appear to interfere with making decisions in the best interests of those
Advisory Clients.
At all times, you must observe the following general principles:
____________________
/1/ This Policy uses a number of capitalized terms, e.g., Advisor, Advisory
Client, Advisory Employee, Beneficial Ownership, Exempt Security, Fixed Income
Security, Fully Discretionary Account, Futures Contract, Immediate Family,
Investment Transaction, Personal Account, Portfolio Employee, Portfolio Manager,
Related Account, and Security. The first time a capitalized term is used, a
definition is stated in the text or in a footnote. The full definitions of
these capitalized terms are set forth in Appendix I. To understand your
responsibilities under the Policy, it is important that you review and
understand all of the definitions of capitalized terms in Appendix I. As
indicated in Appendix I:
The term "Advisor" means any entity affiliated with BlackRock, whether now
in existence or formed after the date hereof, that is registered as (i) an
investment advisor under the Investment Advisers Act of 1940, as amended,
or (ii) a broker-dealer under the Securities Exchange Act of 1934, as
amended, other than any such investment advisor or broker-dealer that has
adopted its own employee investment transaction policy.
The term "Advisory Client" means a registered investment company, an
institutional investment client, a personal trust or estate, a
guardianship, an employee benefit trust, or another client with which the
Advisor by which you are employed or with which you are associated has an
investment management, advisory or sub-advisory contract or relationship.
The term "Advisory Employee" means an officer, director, or employee of an
Advisor, or any other person identified as a "control person" on the Form
ADV or the Form BD filed by the Advisor with the U.S. Securities and
Exchange Commission, (1) who, in connection with his or her regular
functions or duties, generates, participates in, or obtains information
regarding that Advisor's purchase or sale of a Security by or on behalf of
an Advisory Client; (2) whose regular functions or duties relate to the
making of any recommendations with respect to such purchases or sales; (3)
who obtains information or exercises influence concerning investment
recommendations made to an Advisory Client of that Advisor; or (4) who has
line oversight or management responsibilities over employees described in
(1), (2) or (3), above.
<PAGE>
1. You must place the interests of Advisory Clients first. As a fiduciary
you must scrupulously avoid serving your own personal interests ahead
of the interests of Advisory Clients. You must adhere to this general
fiduciary principle as well as comply with the Policy's specific
provisions. Technical compliance with the Policy will not
automatically insulate from scrutiny any Investment Transaction/2/
that indicates an abuse of your fiduciary duties or that creates an
appearance of such abuse.
Your fiduciary obligation applies not only to your personal Investment
Transactions but also to actions taken on behalf of Advisory Clients.
In particular, you may not cause an Advisory Client to take action, or
not to take action, for your personal benefit rather than for the
benefit of the Advisory Client. For example, you would violate this
Policy if you caused an Advisory Client to purchase a Security you
owned for the purpose of increasing the value of that Security. If you
are a Portfolio Employee,/3/ you would also violate this Policy if you
_______________________
/2/ For purposes of this Policy, the term "Investment Transaction" means any
transaction in a Security or Futures Contract in which you have, or by reason of
the transaction will acquire, a Beneficial Ownership interest.
As a general matter, the term "Security" means any stock, note, bond,
debenture or other evidence of indebtedness (including any loan participation or
assignment), limited partnership interest or investment contract other than an
Exempt Security (as defined above). The term "Security" includes an option on a
Security, an index of Securities, a currency or a basket of currencies,
including such an option traded on the Chicago Board of Options Exchange or on
the New York, American, Pacific or Philadelphia Stock Exchanges as well as such
an option traded in the over-the-counter market. The term "Security" does not
include a physical commodity or a Futures Contract.
The term "Futures Contract" includes (a) a futures contract and an option
on a futures contract traded on a U.S. or foreign board of trade, such as the
Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile
Exchange, or the London International Financial Futures Exchange (a "Publicly-
Traded Futures Contract"), as well as (b) a forward contract, a "swap", a "cap",
a "collar", a "floor" and an over-the-counter option (other than an option on a
foreign currency, an option on a basket of currencies, an option on a Security
or an option on an index of Securities) (a "Privately-Traded Futures Contract").
As a general matter, you are considered to have a "Beneficial Ownership"
interest in a Security or Futures Contract if you have the opportunity, directly
or indirectly, to profit or share in any profit derived from a transaction in
that Security or Futures Contract. You are presumed to have a Beneficial
Ownership interest in any Security or Futures Contract held, individually or
jointly, by you and/or by a member of your Immediate Family (as defined below).
In addition, unless specifically excepted by the Compliance Officer based on a
showing that your interest or control is sufficiently attenuated to avoid the
possibility of a conflict, you will be considered to have a Beneficial Ownership
interest in a Security held by: (1) a joint account to which you are a party,
(2) a partnership in which you are a general partner, (3) a limited liability
company in which you are a manager-member, (4) a trust in which you or a member
of your Immediate Family has an interest or (5) an investment club in which you
are a member.
See Appendix I for more complete definitions of the terms "Beneficial
Ownership," "Futures Contract," and "Security."
The term "Portfolio Employee" means a Portfolio Manager or an Advisory
Employee who provides information or advice to a Portfolio Manager, who helps
execute a Portfolio Manager's decisions, or who directly supervises a Portfolio
Manager. The term "Portfolio Manager" means any employee of an Advisor who has
the
-2-
<PAGE>
made a personal investment in a Security that might be an appropriate
investment for an Advisory Client without first considering the
Security as an investment for the Advisory Client.
2. You must conduct all of your personal Investment Transactions in full
compliance with this Policy, the BlackRock, Inc. Insider Trading
Policy, the PNC Code of Ethics, and the other policies of PNC Bank
Corp. ("PNC") and BlackRock (including the policies that prohibit
insider trading or that restrict trading in PNC Securities). BlackRock
encourages you and your family to develop personal investment
programs. However, those investment programs must remain within
boundaries reasonably necessary to insure that appropriate safeguards
exist to protect the interests of our Advisory Clients and to avoid
even the appearance of unfairness or impropriety. Doubtful situations
should be resolved in favor of our Advisory Clients and against your
personal Investment Transactions.
3. You must not take inappropriate advantage of your position. The
receipt of investment opportunities, perquisites, gifts or gratuities
from persons seeking to do business, directly or indirectly, with
BlackRock, an affiliate, or an Advisory Client could call into
question the independence of your business judgment. Doubtful
situations should be resolved against your personal interests.
B. The General Scope Of The Policy's Application To Personal Investment
Transactions
Rule 17j-1 under the Investment Company Act of 1940, as amended, requires
reporting of all personal Investment Transactions in Securities (other than
certain "Exempt Securities") by Advisory Employees, whether or not they are
Securities that might be purchased or sold by or on behalf of an Advisory
Client. This Policy implements that reporting requirement.
However, since a primary purpose of the Policy is to avoid conflicts of
interest arising from personal Investment Transactions in Securities and other
instruments that are held or might be acquired on behalf of Advisory Clients,
this Policy only places restrictions on personal Investment Transactions in such
investments. This Policy also requires reporting and restricts personal
Investment Transactions in certain Futures Contracts which, although they are
not Securities, are instruments that Advisors buy and sell for Advisory Clients.
Although this Policy applies to all officers, directors and other Advisory
Employees of BlackRock, the Policy recognizes that Portfolio Managers, and the
other Portfolio Employees who provide them with advice and who execute their
decisions, occupy more sensitive positions than other Advisory Employees, and
that it is appropriate to subject their personal Investment Transactions to
greater restrictions.
C. The Organization Of This Policy
The remainder of this Policy is divided into four main topics. Section II
concerns personal investment transactions. Section III describes restrictions
that apply to Advisory
______________________
(..continued)
authority, whether sole or shared or only from time to time, to make
investment decisions or to direct trades affecting an Advisory Client.
-3-
<PAGE>
Employees who receive inside information or seek to serve on a board of
directors or similar governing body. Section IV outlines the procedure for
seeking case-by-case exemptions from the Policy's requirements. Section V
summarizes the methods for ensuring compliance under this Policy. In addition,
the following Appendices are also a part of this Policy:
I. Definitions Of Capitalized Terms
II. Acknowledgment Of Receipt Of The Policy
III. Annual Certification Of Compliance With The Policy
IV. Initial Report Of Accounts
V. Request For Duplicate Broker Reports
VI. Investment Transaction Prior Notification Form
VII. Fully Discretionary Account Form
D. Questions
Questions regarding this Policy should be addressed to the Compliance
Officer. If you have any question regarding the interpretation of this Policy or
its application to a potential Investment Transaction, you should consult the
Compliance Officer before you execute that transaction.
II. PERSONAL INVESTMENT TRANSACTIONS
A. In General
Subject to the limited exceptions described below, you are required to
report all Investment Transactions in Securities and Futures Contracts made by
you, a member of your Immediate Family, a trust or an investment club in which
you have an interest, or on behalf of any account in which you have an interest
or which you direct./4/ In addition, you must provide prior notification of
certain Investment Transactions in Securities and Futures Contracts that an
Advisor holds or may acquire on behalf of an Advisory Client. (The exercise of
an option is an Investment Transaction for purposes of these requirements.) The
details of these reporting and prior notification requirements are described
below.
B. Reporting Obligations
1. Use Of Broker-Dealers And Futures Commission Merchants
You must use a registered broker-dealer or futures commission merchant to
engage in any purchase or sale of a publicly traded Security or Futures
Contract. This requirement also applies to any purchase or sale of a Security
or Futures Contract in which you have, or by reason
/4/ The term "Immediate Family" means any of the following persons who reside
in your household or who depend on you for basic living support: your spouse,
any child, stepchild, grandchild, parent, stepparent, grandparent, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including any adoptive relationships.
-4-
<PAGE>
of the Investment Transaction will acquire, a Beneficial Ownership interest.
Thus, as a general matter, any Securities or Futures Contract transactions by
members of your Immediate Family will need to be made through a registered
broker-dealer or futures commission merchant.
2. Initial Report
Within 10 days of commencing employment or within 10 days of any event that
causes you to become subject to this Policy, you must supply to the Compliance
Officer copies of the most recent statements for each and every Personal Account
and Related Account that holds or is likely to hold a Security or Futures
Contract in which you have a Beneficial Ownership interest, as well as copies of
confirmations for any and all transactions subsequent to the effective dates of
those statements./5/ These documents should be supplied to the Compliance
Officer by attaching them to the form attached hereto as Appendix IV.
On that same form you should supply the name of any registered broker-
dealer and/or futures commission merchant and the number for any Personal
Account and Related Account that holds or is likely to hold a Security or
Futures Contract in which you have a Beneficial Ownership interest for which you
cannot supply the most recent account statement. You must also certify, where
indicated on the form, that the contents of the form and the documents attached
thereto disclose all such Personal Accounts and Related Accounts.
In addition, you must also supply, where indicated on the form, the
following information for each Security or Futures Contract in which you have a
Beneficial Ownership interest, to the extent that this information is not
available from the statements attached to the form:
1. A description of the Security or Futures Contract, including its
name or title;
_____________________
/5/ The term "Personal Account" means the following accounts that hold or are
likely to hold a Security or Futures Contract in which you have a Beneficial
Ownership interest:
. any account in your individual name;
. any joint or tenant-in-common account in which you have an interest or
are a participant;
. any account for which you act as trustee, executor, or custodian; and
. any account over which you have investment discretion or have the
power (whether or not exercised) to direct the acquisition or
disposition of Securities or Futures Contracts (other than an Advisory
Client's account that you manage or over which you have investment
discretion), including the accounts of any individual or entity that
is managed or controlled directly or indirectly by or through you,
such as the account of an investment club to which you belong. There
is a presumption that you can control accounts held by members of your
Immediate Family sharing the same household. This presumption may be
rebutted only by convincing evidence.
The term "Related Account" means any account, other than a Personal Account,
that holds a Security or Futures Contract in which you have a direct or indirect
Beneficial Ownership interest (other than an account over which you have no
investment discretion and cannot otherwise exercise control) and any account
(other than an Advisory Client's account) of any individual or entity to whom
you give advice or make recommendations with regard to the acquisition or
disposition of Securities or Futures Contracts (whether or not such advice is
acted upon).
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2. The quantity (e.g., in terms of numbers of shares, units or
contracts) and value (in dollars) of the Security or Futures
Contract; and
3. The custodian of the Security or Futures Contract.
3. New Accounts
Upon the opening of a new Personal Account or a Related Account that holds
or is likely to hold a Security or a Futures Contract in which you have a
Beneficial Ownership interest, you must give written notice to the Compliance
Officer of the name of the registered broker-dealer or futures commission
merchant for that account, the identifying number for that Personal Account or
Related Account and the date that the account was established.
4. Timely Reporting Of Investment Transactions
You must cause each broker-dealer or futures commission merchant that
maintains a Personal Account or a Related Account that holds a Security or a
Futures Contract in which you have a Beneficial Ownership interest to provide to
the Compliance Officer, on a timely basis, duplicate copies of confirmations of
all transactions in that account and of periodic statements for that account
("Duplicate Broker Reports"). A form for that purpose is attached hereto as
Appendix V.
In addition, you must report to the Compliance Officer, on a timely basis, any
transaction in a Security or Futures Contract in which you have or acquired a
Beneficial Ownership interest that was made without the use of a registered
broker-dealer or futures commission merchant.
5. Related Accounts
The reporting obligations described above also apply to any Related Account
(as defined in Appendix I) and to any Investment Transaction in a Related
Account.
It is important that you recognize that the definitions of "Personal
Account," "Related Account" and "Beneficial Ownership" in Appendix I probably
will require you to provide, or to arrange for the broker-dealer or futures
commission merchant to furnish, copies of reports for any account used by or for
a member of your Immediate Family or a trust in which you or a member of your
Immediate Family has an interest, as well as for any other accounts in which you
may have the opportunity, directly or indirectly, to profit or share in the
profit derived from any Investment Transaction in that account, including the
account of any investment club to which you belong.
6. Exemptions From Reporting
You need not report Investment Transactions in any account, including a
Fully Discretionary Account,/6/ over which neither you nor an Immediate Family
Member has or had any
___________________
/6/ The term "Fully Discretionary Account" means a Personal Account or Related
Account managed or held by a broker-dealer, futures commission merchant,
investment advisor or trustee as to which neither you nor an Immediate Family
Member: (a) exercises any investment discretion; (b) suggests or receives
notice of transactions prior to their execution; and (c) you do not otherwise
has any direct or indirect influence or control. In addition, to qualify as a
Fully Discretionary Account, the individual broker, registered representative or
merchant responsible for that account must not be responsible for nor receive
advance notice of any purchase or sale of a Security or Futures Contract on
behalf of an Advisory Client. To qualify an account as a Fully Discretionary
Account, the
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direct or indirect influence or control. For example, Investment Transactions in
the account of your spouse in an employee benefit plan would not have to be
reported if neither you nor your spouse has any influence or control over those
Investment Transactions.
You also need not report Investment Transactions in Exempt Securities nor
need you furnish, or require a broker-dealer or futures commission merchant to
furnish, copies of confirmations or periodic statements for accounts that hold
only Exempt Securities./7/ This includes accounts that only hold U.S. Government
securities, money market interests, or shares in registered open-end investment
companies (i.e., mutual funds). This exemption from reporting will end
immediately, however, at such time as there is an Investment Transaction in that
account in a Security that is not an Exempt Security.
C. Prohibited Or Restricted Investment Transactions
1. Initial Public Offerings
As an Advisory Employee, you may not acquire Beneficial Ownership of any
Security in an initial public offering, except that, with the approval of the
Compliance Committee and the General Counsel of BlackRock, you may acquire
Beneficial Ownership of a Security in an initial public offering directed or
sponsored by BlackRock. For purposes of this Policy, an initial public offering
shall not include the purchase of a Security in an initial public offering by
(i) a savings bank to its depositors, (ii) a mutual insurance company to its
- --
policyholders, (iii) an issuer of debt securities (other than debt securities
---
convertible into common or preferred stock) or (iv) with respect to an Advisory
--
Employee employed by BlackRock International, Ltd. a building society to its
depositors.
2. Private Placements
If you are a Portfolio Employee, you may not acquire Beneficial Ownership
of any Security in a private placement, or subsequently sell that interest,
unless you have received the prior written approval of the Compliance Officer
and of any supervisor designated by the Compliance Officer. Approval will not be
given unless a determination is made that the investment opportunity should not
be reserved for one or more Advisory Clients, and that the opportunity to invest
has not been offered to you by virtue of your position with an Advisor.
__________________
(..continued)
Compliance Officer must receive and approve a written notice, in the form
attached hereto as Appendix VIII, that the account meets the foregoing
qualifications as a Fully Discretionary Account.
/7/ The term "Exempt Security" means any Security (as defined in Appendix I)
not included within the definition of Security in SEC Rule 17j-1(e)(5) under the
Investment Company Act of 1940, as amended, including:
1. A direct obligation of the Government of the United States;
2. Shares of registered open-end investment companies (i.e., mutual
funds); and
3. High quality short-term debt instruments, including, but not limited
to, bankers' acceptances, bank certificates of deposit, commercial
paper and repurchase agreements.
See Appendix I for a more complete definition of "Exempt Security."
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If you have acquired Beneficial Ownership of Securities in a private
placement, you must disclose that investment to your supervisor when you play a
part in any consideration of any investment by an Advisory Client in the issuer
of the Securities, and any decision to make such an investment must be
independently reviewed by a Portfolio Manager who does not have a Beneficial
Ownership interest in any Securities of the issuer.
D. Investment Transactions Requiring Prior Notification
You must give prior notification to the Compliance Officer of any
Investment Transaction in Securities or Futures Contracts in a Personal Account
or Related Account, or in which you otherwise have or will acquire a Beneficial
Ownership interest, unless that Investment Transaction, Security or Futures
Contract falls into one of the following categories that are identified as
"exempt from prior notification." The purpose of prior notification is to permit
the Compliance Officer and the Compliance Committee to take reasonable steps to
investigate whether that Investment Transaction is in accordance with this
Policy. Satisfaction of the prior notification requirement does not, however,
constitute approval or authorization of any Investment Transaction for which you
have given prior notification. As a result, the primary responsibility for
compliance with this Policy rests with you.
1. Prior Notification Procedure
Prior notification must be given by completing and submitting to the
Compliance Officer a copy of the prior notification form attached hereto as
Appendix VII. No Investment Transaction requiring prior notification may be
executed prior to notice by the Compliance Officer that the prior notification
process has been completed. The time and date of that notice will be reflected
on the prior notification form. Unless otherwise specified, an Investment
Transaction requiring prior notification must be placed and executed by the end
of trading in New York City or, in the case of Advisory Employees employed by
BlackRock International, Ltd., by the end of trading in the United Kingdom on
the day of notice from the Compliance Officer that the prior notification
process has been completed. If a proposed Investment Transaction is not
executed (with the exception of a limit order) within the time specified, you
must repeat the prior notification process before executing the transaction. A
notice from a Compliance Officer that the prior notification process has been
completed is no longer effective if you discover, prior to executing your
Investment Transaction, that the information on your prior notification form is
no longer accurate, or if the Compliance Officer revokes his or her notice for
any other reason.
The Compliance Officer may undertake such investigation as he or she
considers necessary to investigate whether an Investment Transaction for which
prior notification has been sought complies with the terms of this Policy and is
consistent with the general principles described at the beginning of this
Policy.
As part of that investigation, the Compliance Officer or a designee of the
Compliance Officer will determine whether there is a pending buy or sell order
in the same equity Security or Futures Contract, or a Related Security, on
behalf of an Advisory Client./8/ If such an order exists, the Compliance
Officer will not provide notice that the prior notification process has been
completed until the Advisory Client's order is executed or withdrawn.
____________________
/8/ The term "Related Security" means, as to any Security, any instrument
related in value to that Security, including, but not limited to, any option or
warrant to purchase or sell that Security, and any Security convertible into or
exchangeable for that Security.
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2. Exemptions From Prior Notification
Prior notification will not be required for the following Investment
Transactions, Securities and Futures Contracts. They are exempt only from the
Policy's prior notification requirement, and, unless otherwise indicated, remain
subject to the Policy's other requirements, including its reporting
requirements.
(a) Transactions Exempt From Prior Notification
Prior notification is not required for any of the following Investment
Transactions:
1. Any Investment Transaction in a Fully Discretionary Account that has
been approved as such by the Compliance Officer.
2. Purchases of Securities under dividend reinvestment plans.
3. Purchases of Securities by an exercise of rights issued to the holders
of a class of Securities pro rata, to the extent those rights are
issued with respect to Securities of which you have Beneficial
Ownership.
4. Acquisitions or dispositions of Securities as the result of a stock
dividend, stock split, reverse stock split, merger, consolidation,
spin-off or other similar corporate distribution or reorganization
applicable to all holders of a class of Securities of which you have
Beneficial Ownership.
5. Purchases of common stock of PNC Bank Corp. under the Employee Stock
Purchase Plan.
6. With respect to Advisory Employees who are employed by BlackRock
International, Inc., automatic investments by direct debit into a
personal equity plan (PEP), or similar type of plan in Exempt
Securities if the pre-notification process was completed for the first
such investment.
7. Investment Transactions made by a person who serves on the Board of
Directors of an Advisor and is not involved with the Advisory
operations of such Advisor nor engages in the type of activities
described under (1) (2) or (3) under the term Advisory Employee as
defined in Appendix I.
(b) Securities Exempt From Prior Notification
Prior notification is not required for an Investment Transaction in an
Exempt Security, as defined in Appendix I, e.g., U.S. Government securities,
shares in registered open-end investment companies (i.e., mutual funds) and
"high quality short-term debt instruments" (as defined in Appendix I).
(c) Futures Contracts Exempt From Prior Notification
Prior notification is not required for an Investment Transaction in the
following Futures Contracts:
1. Currency futures.
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2. U.S. Treasury futures.
3. Eurodollar futures.
4. Physical commodity futures (e.g., contracts for future delivery of
----
grain, livestock, fiber or metals).
5. Futures contracts to acquire Fixed Income Securities issued by a U.S.
Government agency, a foreign government, or an international or
supranational agency.
6. Futures contracts on the Standard and Poor's 500 (S&P 500) or the Dow
Jones Industrial Average or NASDAQ 100 stock indexes.
7. For Advisory Employees who are employed by BlackRock International,
Ltd., futures contracts on the Financial Times Stock Exchange 100
(FTSE) Index.
E. Ban On Short-Term Trading Profits
You may not profit from the purchase and sale, or the sale and purchase,
within 60 calendar days, of the same Securities and/or Related Security. Any
such short-term trade must be reversed or unwound, or if that is not practical,
the profits must be disgorged and distributed in a manner determined by the
Compliance Committee.
This short-term trading ban does not apply to Investment Transactions in
Exempt Securities (as defined in Appendix I) or in Futures Contracts. This ban
also does not apply to a purchase or sale in connection with a Transaction
Exempt From Prior Notification (as described above in Section II.D.2.(a)), a
transaction in a Fully Discretionary Account or a transaction exempt from the
"blackout" periods pursuant to Section II.F.2 below.
You are considered to profit from a short-term trade if Securities of which
you have Beneficial Ownership (including Securities held by Immediate Family
members) are sold for more than their purchase price, even though the Securities
purchased and the Securities sold are held of record or beneficially by
different persons or entities.
F. Blackout Periods
Your ability to engage in certain Investment Transactions may be prohibited
or restricted during the "blackout" periods described below:
1. Specific Blackout Periods
a. You may not purchase or sell a Security, a Related Security,
or Futures Contract at a time when you intend or know of
another's intention to purchase or sell that same Security, a
Related Security, or Futures Contract, on behalf of an
Advisory Client of any Advisor (the "Specific Knowledge
Blackout Period").
b. In addition, if you are a Portfolio Employee, you may not
purchase or sell a Security, a Related Security or a Futures
Contract which you are actively considering or which you have
actively considered and rejected for purchase or sale for an
Advisory Client within the previous 15 calendar days (the
"15-Day Blackout Period") unless
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the Compliance Officer, after consultation with your
supervisor, has approved your Investment Transaction./9/
c. Finally, if you are a Portfolio Manager, you may not
purchase or sell a Security, a Related Security, or Futures
Contract within 7 calendar days before or after a
transaction in that Security, a Related Security, or Futures
Contract, by an Advisory Client for which you are
responsible (the "7-Day Blackout Period").
For Portfolio Employees or Portfolio Managers, the Compliance Officer will
not give such notice until any applicable 15-Day Blackout Period or 7-Day
Blackout Period has expired or any required approvals or exemptions have been
obtained. An Investment Transaction that violates one of these Blackout
restrictions must be reversed or unwound, or if that is not practical, the
profits must be disgorged and distributed in a manner determined by the
Compliance Committee.
2. Exemptions From Blackout Restrictions
The foregoing blackout period restrictions do not apply to Investment
Transactions in:
a. Exempt Securities, as defined in Appendix I.
b. Securities of a company listed on the Standard & Poor's 100 (S & P
100) Index.
c. A Futures Contract Exempt From Prior Notification under this Policy
(as described above).
d. A Fully Discretionary Account.
e. With respect to Advisory Employees who are employed by BlackRock
International, Ltd., securities of a company listed on the Financial
Times Stock Exchange 100 (FTSE 100).
III. INSIDE INFORMATION AND SERVICE AS A DIRECTOR
A. Inside Information
As an employee of a subsidiary of PNC and BlackRock, Inc., you must comply
with the PNC Insider Trading Policy and the BlackRock, Inc. Insider Trading
Policy. A copy of the PNC Insider Trading Policy is included in Section E of
the PNC Code of Ethics. A copy of the BlackRock, Inc. Insider Trading Policy
was furnished to all employees at the time of its adoption and is furnished to
all new employees at the commencement of their employment. In addition, as an
Advisory Employee, you must notify the General Counsel of BlackRock if you
receive or expect to receive material non-public information about an entity
that issues securities. The General Counsel will determine the restrictions, if
any, that will apply to your communications and activities while in possession
of that information. In general, those restrictions will include:
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/9/ SEC Rule 17j-1 places restrictions on the purchase or sale of any "security
held or to be acquired" by a registered investment company. Rule 17j-1(e)(6)
defines a "security held or to be acquired" by a registered investment company
as including any security which, within the most recent 15 days, "is being or
has been considered by such company or its investment adviser for purchase by
such company."
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<PAGE>
1. An undertaking not to trade, either on your own behalf or on
behalf of an Advisory Client, in the securities of the entity
about which you have material non-public information.
2. An undertaking not to disclose material non-public information
to other Advisory Employees.
3. An undertaking not to participate in discussions with or
decisions by other Advisory Employees relating to the entity
about which you have material non-public information.
The General Counsel, in cooperation with the Compliance Officer, will maintain a
"restricted list" of entities about which Advisory Employees may have material
non-public information. This "restricted list" will be available to the
Compliance Officer when he or she conducts investigations or reviews related to
the Prior Notification Procedure described previously in Section II(D)(1) or the
Post-Trade Monitoring process described below in Section V(B)(3).
B. Service As A Director
You may not serve on the board of directors or other governing board of any
entity unless you have received the prior written approval of the General
Counsel of PNC, to the extent such approval is required under the terms of the
PNC Code of Ethics, and the General Counsel of BlackRock. If permitted to serve
on a governing board, an Advisory Employee will be isolated from those Advisory
Employees who make investment decisions regarding the securities of that entity,
through a "Chinese wall" or other procedures determined by the General Counsel
of BlackRock. In general, the "Chinese wall" or other procedures will include:
1. An undertaking not to trade or to cause a trade on behalf of an
Advisory Client in the securities of the entity on whose board
you serve.
2. An undertaking not to disclose material non-public information
about that entity to other Advisory Employees.
3. An undertaking not to participate in discussions with or
decisions by other Advisory Employees relating to the entity on
whose board you serve.
Any entity on whose board an Advisory Employee serves will be included on the
"restricted list" referenced in subsection A, above.
IV. EXEMPTIONS
The Compliance Committee, in its discretion, may grant case-by-case
exceptions to any of the foregoing requirements, restrictions or prohibitions,
except that the Compliance Committee may not exempt any Investment Transaction
in a Security (other than an Exempt Security) or a Futures Contract from the
Policy's reporting requirements. Exemptions from the Policy's prior notification
requirements and from the Policy's restrictions on acquisitions in initial
public offerings, short-term trading and trading during blackout periods will
require a determination by
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the Compliance Committee that the exempted transaction does not involve a
realistic possibility of violating the general principles described at the
beginning of this Policy. An application for a case-by-case exemption, in
accordance with this paragraph, should be made in writing to the Compliance
Officer, who will promptly forward that written request to the members of the
Compliance Committee.
V. COMPLIANCE
A. Certifications
1. Upon Receipt Of This Policy
Upon commencement of your employment or the effective date of this Policy,
whichever occurs later, you will be required to acknowledge receipt of your copy
of this Policy by completing and returning to the Compliance Officer a copy of
the form attached hereto as Appendix II. By that acknowledgment, you will also
agree:
1. To read the Policy, to make a reasonable effort to understand its
provisions, and to ask the Compliance Officer questions about
those provisions you find confusing or difficult to understand.
2. To comply with the Policy, including its general principles, its
reporting requirements, its prohibitions, its prior notification
requirements, its short-term trading and blackout restrictions.
3. To advise the members of your Immediate Family about the
existence of the Policy, its applicability to their personal
Investment Transactions, and your responsibility to assure that
their personal Investment Transactions comply with the Policy.
4. To cooperate fully with any investigation or inquiry by or on
behalf of the Compliance Officer or the Compliance Committee to
determine your compliance with the provisions of the Policy.
In addition, your acknowledgment will recognize that any failure to comply with
the Policy and to honor the commitments made by your acknowledgment may result
in disciplinary action, including dismissal.
2. Annual Certificate Of Compliance
You are required to certify on an annual basis, on a copy of the form
attached hereto as Appendix III, that you have complied with each provision of
your initial acknowledgment (see above). In particular, your annual
certification will require that you certify that you have read and that you
understand the Policy, that you recognize that you are subject to its
provisions, that you complied with the requirements of the Policy during the
year just ended, and that you have disclosed, reported, or caused to be reported
all Investment Transactions required to be disclosed or reported pursuant to the
requirements of the Policy and that you have disclosed, reported or caused to be
reported all Personal Accounts and Related Accounts that hold or are likely to
hold a Security or Futures Contract in which you have a Beneficial Ownership
interest. In addition, you will be required to confirm the accuracy of the
record of information on file with the Advisor with respect to such Personal
Accounts and Related Accounts.
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B. Supervisory Procedures
1. The Compliance Committee
The Policy will be implemented, monitored and reviewed by the Compliance
Committee. The initial members of the Compliance Committee will be appointed by
the management committee of BlackRock. The Compliance Committee, by a simple
majority of its members, may appoint new members of the Committee, may replace
existing members of the Committee, and may fill vacancies on the Committee.
Among other responsibilities, the Compliance Committee will consider requests
for case-by-case exemptions (described above) and will conduct investigations
(described below) of any actual or suspected violations of the Policy. The
Compliance Committee will determine what remedial actions, if any, should be
taken by an Advisor in response to a violation of the Policy. The Compliance
Committee will also provide reports (described below) regarding significant
violations of the Policy and the procedures to implement the Policy. The
Compliance Committee may recommend changes to those procedures or to the Policy
to the management of the Advisors. Finally, the Compliance Committee will
designate one person to act as Compliance Officer for all Advisors.
2. The Compliance Officer
The Compliance Officer designated by the Compliance Committee will be
responsible for the day-to-day administration of the Policy for all Advisors,
subject to the direction and control of the Compliance Committee. Based on
information supplied by the management of each Advisor, the Compliance Officer
will forward a copy of the Policy to each Advisory Employee subject to the
Policy and will notify each such person of his or her designation as an Advisory
Employee, Portfolio Employee or Portfolio Manager. The Compliance Officer will
also be responsible for administration of the reporting and prior notification
functions described in the Policy, and will maintain the reports required by
those functions. In addition, the Compliance Officer will attempt to answer any
questions from an Advisory Employee regarding the interpretation or
administration of the Policy. When necessary or desirable, the Compliance
Officer will consult with the Compliance Committee about such questions. The
Compliance Officer may designate one or more Assistant Compliance Officers to
whom the Compliance Officer may delegate any of the duties described in this
paragraph or in the succeeding paragraph, and who shall be empowered to act on
the Compliance Officer's behalf when the Compliance Officer is absent or
unavailable.
3. Post-Trade Monitoring And Investigations
The Compliance Officer will review the Duplicate Broker Reports and other
information supplied for each Advisory Employee so that the Compliance Officer
can detect and prevent potential violations of the Policy. This information may
also be disclosed to the Advisor's auditors, attorneys and regulators. If, based
on his or her review of information supplied for an Advisory Employee, or based
on other information, the Compliance Officer suspects that the Policy may have
been violated, the Compliance Officer will perform such investigations and make
such inquiries as he or she considers necessary. You should expect that, as a
matter of course, the Compliance Officer will make inquiries regarding any
personal Investment Transaction in a Security or Futures Contract that occurs on
the same day as a transaction in the same Security or Futures Contract on behalf
of an Advisory Client. If the Compliance Officer reaches a preliminary
conclusion that an Advisory Employee may have violated this Policy, the
Compliance Officer will report that preliminary conclusion in a timely manner to
the Compliance Committee and will furnish to the Committee all information that
relates to the Compliance Officer's preliminary conclusion. The Compliance
Officer may also report his or her preliminary conclusion and the information
relating to that preliminary conclusion to the Advisor's auditors, attorneys and
regulators.
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Promptly after receiving the Compliance Officer's report of a possible
violation of the Policy, the Compliance Committee, with the aid and assistance
of the Compliance Officer, will conduct an appropriate investigation to
determine whether the Policy has been violated and will determine what remedial
action should be taken by the Advisor in response to any such violation(s). For
purposes of these determinations, a majority of the Compliance Committee will
constitute a quorum and action taken by a simple majority of that quorum will
constitute action by the Committee.
4. Remedial Actions
The remedial actions that may be recommended by the Compliance Committee
may include, but are not limited to, disgorgement of profits, imposition of a
fine, censure, demotion, suspension or dismissal. As part of any sanction, e.g.,
for violation of the Policy's restrictions on short-term trading or trading
during blackout periods, you may be required to reverse or unwind a transaction
and to forfeit any profit or to absorb any loss from the transaction. If an
Investment Transaction may not be reversed or unwound, you may be required to
disgorge any profits associated with the transaction, which profits will be
distributed in a manner prescribed by the Compliance Committee in the exercise
of its discretion. Profits derived from Investment Transactions in violation of
this Policy may not be offset by any losses from Investment Transactions in
violation of this Policy. Finally, evidence suggesting violations of criminal
laws will be reported to the appropriate authorities, as required by applicable
law.
In determining what, if any, remedial action is appropriate in response to
a violation of the Policy, the Compliance Committee will consider, among other
factors, the gravity of your violation, the frequency of your violations,
whether any violation caused harm or the potential of harm to any Advisory
Client, whether you knew or should have known that your Investment Transaction
violated the Policy, whether you engaged in an Investment Transaction with a
view to making a profit on the anticipated market action of a transaction by an
Advisory Client, your efforts to cooperate with the Compliance Officer's
investigation, and your efforts to correct any conduct that led to a violation.
In rare instances, the Compliance Committee may find that, for equitable
reasons, no remedial action should be taken.
5. Reports Of Violations Requiring Significant Remedial Action
In a timely manner, and not less frequently than annually, the Compliance
Committee will report to the management committee of BlackRock, and to the
directors or trustees of each investment company that is an Advisory Client, any
known Policy violation requiring significant remedial action (as defined below)
and the disposition of that violation. For this purpose, a significant remedial
action means any action that has a significant financial effect on the violator.
Evidence suggesting violations of criminal laws will be reported to the
appropriate authorities, as required by applicable law.
6. Annual Reports
The Compliance Committee will furnish an annual report to the management
committee of BlackRock, and to the directors or trustees of each investment
company that is an Advisory Client, that, at a minimum, will:
1. Summarize existing procedures and restrictions concerning personal
investing by Advisory Employees and any changes in those procedures
and restrictions that were made during the previous year;
2. Summarize any violations of the Policy that resulted in significant
remedial action during the previous year; and
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3. Describe any changes in existing procedures or restrictions that the
Compliance Committee recommends based upon its experience under the
Policy, evolving industry practices, or developments in applicable
laws or regulations.
VI. EFFECTIVE DATE
The provisions of this Policy will take effect on October 1, 1998.
Amendments to this Policy will take effect at the time such amendments are
promulgated and distributed to the Advisory Employees governed by this Policy.
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APPENDIX I
Definitions Of Capitalized Terms
The following definitions apply to the capitalized terms used in the
Policy:
Advisor
The term "Advisor" means any entity affiliated with BlackRock, whether now
in existence or formed after the date hereof, that is registered as (i) an
investment advisor under the Investment Advisers Act of 1940, as amended, or
(ii) a broker-dealer under the Securities Exchange Act of 1934, as amended,
other than any such investment advisor or broker-dealer that has adopted its own
employee investment transaction policy.
Advisory Client
The term "Advisory Client" means a registered investment company, an
institutional investment client, a personal trust or estate, a guardianship, an
employee benefit trust, or another client with which the Advisor by which you
are employed or with which you are associated has an investment management,
advisory or sub-advisory contract or relationship.
Advisory Employee
The term "Advisory Employee" means an officer, director, or employee of an
Advisor, or any other person identified as a "control person" on the Form ADV or
the Form BD filed by the Advisor with the U.S. Securities and Exchange
Commission, (1) who, in connection with his or her regular functions or duties,
generates, participates in, or obtains information regarding that Advisor's
purchase or sale of a Security by or on behalf of an Advisory Client; (2) whose
regular functions or duties relate to the making of any recommendations with
respect to such purchases or sales; or (3) who obtains information or exercises
influence concerning investment recommendations made to an Advisory Client of
that Advisor or who has line oversight or management responsibilities over
employees who obtain such information or who exercise such influence.
Beneficial Ownership
As a general matter, you are considered to have a "Beneficial Ownership"
interest in a Security or Futures Contract if you have the opportunity, directly
or indirectly, to profit or share in any profit derived from a transaction in
that Security. You are presumed to have a Beneficial Ownership interest in any
Security or Futures Contract held, individually or jointly, by you and/or by a
member of your Immediate Family (as defined below). In addition, unless
specifically excepted by the Compliance Officer based on a showing that your
interest or control is sufficiently attenuated to avoid the possibility of a
conflict, you will be considered to have a Beneficial Ownership interest in a
Security or Futures Contract held by: (1) a joint account to which you are a
party, (2) a partnership in which you are a general partner, (3) a limited
liability company in which you are a manager-member, or (4) a trust in which you
or a member of your Immediate Family has a vested interest. Although you may
have a Beneficial Ownership interest in a Security or Futures Contract held in a
Fully Discretionary Account (as defined below), the application of this Policy
to such a Security or Futures Contract may be modified by the special exemptions
provided for Fully Discretionary Accounts.
As a technical matter, the term "Beneficial Ownership" for purposes of this
Policy will be interpreted in the same manner as it would be under SEC Rule 16a-
1(a)(2) in determining whether
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a person has beneficial ownership of a security for purposes of Section 16 of
the Securities Exchange Act of 1934 and the rules and regulations thereunder.
BlackRock
The term "BlackRock" means BlackRock, Inc.
Compliance Committee
The term "Compliance Committee" means the committee of persons who have
responsibility for implementing, monitoring and reviewing the Policy, in
accordance with Section V(B)(1) of the Policy.
Compliance Officer
The term "Compliance Officer" means the person designated by the Compliance
Committee as responsible for the day-to-day administration of the Policy in
accordance with Section V(B)(2) of the Policy.
Duplicate Broker Reports
The term "Duplicate Broker Reports" means duplicate copies of confirmations
of transactions in your Personal or Related Accounts and of periodic statements
for those accounts.
Exempt Security
The term "Exempt Security" means any Security (as defined below) not
included within the definition of Security in SEC Rule 17j-1(e)(5) under the
Investment Company Act of 1940, as amended, including:
1. A direct obligation of the Government of the United States;
2. Shares of registered open-end investment companies; and
3. High quality short-term debt instruments, including, but not limited to,
bankers' acceptances, bank certificates of deposit, commercial paper and
repurchase agreements. For these purposes, a "high quality short-term
debt instrument" means any instrument having a maturity at issuance of
less than 366 days and which is rated in one of the highest two rating
categories by a Nationally Recognized Statistical Rating Organization,
or which is unrated but is of comparable quality.
4. For Advisory Employees employed by BlackRock International, Ltd., shares
of authorized unit trusts, open-ended investment companies (OEIC's) and
direct obligations of the Government of the United Kingdom.
Fixed Income Securities
For purposes of this Policy, the term "Fixed Income Securities" means fixed
income Securities issued by agencies or instrumentalities of, or unconditionally
guaranteed by, the Government of the United States, corporate debt Securities,
mortgage-backed and other asset-backed Securities, fixed income Securities
issued by state or local governments or the political subdivisions thereof,
structured notes and loan participations, foreign government debt Securities,
and debt Securities of international agencies or supranational agencies. For
purposes of this
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Policy, the term "Fixed Income Securities" will not be interpreted to include
U.S. Government Securities or any other Exempt Security (as defined above).
Fully Discretionary Account
The term "Fully Discretionary Account" means a Personal Account or Related
Account (as defined below) managed or held by a broker-dealer, futures
commission merchant, investment advisor or trustee as to which neither you nor
an Immediate Family Member (as defined below): (a) exercises any investment
discretion; (b) suggests or receives notice of transactions prior to their
execution; and (c) otherwise has any direct or indirect influence or control. In
addition, to qualify as a Fully Discretionary Account, the individual broker,
registered representative or merchant responsible for that account must not be
responsible for nor receive advance notice of any purchase or sale of a Security
or Futures Contract on behalf of an Advisory Client. To qualify an account as a
Fully Discretionary Account, the Compliance Officer must receive and approve a
written notice, in the form attached hereto as Appendix VIII, that the account
meets the foregoing qualifications as a Fully Discretionary Account.
Futures Contract
The term "Futures Contract" includes (a) a futures contract and an option
on a futures contract traded on a U.S. or foreign board of trade, such as the
Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile
Exchange, or the London International Financial Futures Exchange (a "Publicly-
Traded Futures Contract"), as well as (b) a forward contract, a "swap", a "cap",
a "collar", a "floor" and an over-the-counter option (other than an option on a
foreign currency, an option on a basket of currencies, an option on a Security
or an option on an index of Securities, which fall within the definition of
"Security") (a "Privately-Traded Futures Contract"). You should consult with the
Compliance Officer if you have any doubt about whether a particular Investment
Transaction you contemplate involves a Futures Contract. For purposes of this
definition, a Publicly-Traded Futures Contract is defined by its expiration
month, i.e., a Publicly-Traded Futures Contract on a U.S. Treasury Bond that
expires in June is treated as a separate Publicly-Traded Futures Contract, when
compared to a Publicly-Traded Futures Contract on a U.S. Treasury Bond that
expires in July.
Immediate Family
The term "Immediate Family" means any of the following persons who reside
in your household or who depend on you for basic living support: your spouse,
any child, stepchild, grandchild, parent, stepparent, grandparent, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including any adoptive relationships.
Investment Transaction
For purposes of this Policy, the term "Investment Transaction" means any
transaction in a Security or Futures Contract in which you have, or by reason of
the transaction will acquire, a Beneficial Ownership interest. The exercise of
an option to acquire a Security or Futures Contract is an Investment Transaction
in that Security or Futures Contract.
Personal Account
The term "Personal Account" means the following accounts that hold or are
likely to hold a Security or Futures Contract in which you have a Beneficial
Ownership interest:
. any account in your individual name;
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. any joint or tenant-in-common account in which you have an interest or
are a participant;
. any account for which you act as trustee, executor, or custodian; and
. any account over which you have investment discretion or have the power
(whether or not exercised) to direct the acquisition or disposition of
Securities or Futures Contracts (other than an Advisory Client's account
that you manage or over which you have investment discretion), including
the accounts of any individual or entity that is managed or controlled
directly or indirectly by or through you. There is a presumption that
you can control accounts held by members of your Immediate Family
sharing the same household. This presumption may be rebutted only by
convincing evidence.
Policy
The term "Policy" means this Employee Investment Transaction Policy.
Portfolio Employee
The term "Portfolio Employee" means a Portfolio Manager or an Advisory
Employee who provides information or advice to a Portfolio Manager, who helps
execute a Portfolio Manager's decisions, or who directly supervises a Portfolio
Manager.
Portfolio Manager
The term "Portfolio Manager" means any employee of an Advisor who has the
authority, whether sole or shared or only from time to time, to make investment
decisions or to direct trades affecting an Advisory Client.
Related Account
The term "Related Account" means any account, other than a Personal
Account, that holds a Security or Futures Contract in which you have a direct or
indirect Beneficial Ownership interest (other than an account over which you
have no investment discretion and cannot otherwise exercise control) and any
account (other than an Advisory Client's account) of any individual or entity to
whom you give advice or make recommendations with regard to the acquisition or
disposition of Securities or Futures Contracts (whether or not such advice is
acted upon).
Related Security
The term "Related Security" means, as to any Security, any instrument
related in value to that Security, including, but not limited to, any option or
warrant to purchase or sell that Security, and any Security convertible into or
exchangeable for that Security. For example, the purchase and exercise of an
option to acquire a Security is subject to the same restrictions that would
apply to the purchase of the Security itself.
Security
As a general matter, the term "Security" means any stock, note, bond,
debenture or other evidence of indebtedness (including any loan participation or
assignment), limited partnership interest, or investment contract, other than an
Exempt Security (as defined above). The term "Security" includes an option on a
Security, an index of Securities, a currency or a basket of
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<PAGE>
currencies, including such an option traded on the Chicago Board of Options
Exchange or on the New York, American, Pacific or Philadelphia Stock Exchanges
as well as such an option traded in the over-the-counter market. The term
"Security" does not include a physical commodity or a Futures Contract. The term
"Security" may include an interest in a limited liability company (LLC) or in a
private investment fund.
As a technical matter, the term "Security" has the meaning set forth in
Section 2(a)(36) of the Investment Company Act of 1940, which defines a Security
to mean:
Any note, stock, treasury stock, bond debenture, evidence of indebtedness,
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in
oil, gas, or other mineral rights, any put, call, straddle, option, or
privilege on any security (including a certificate of deposit) or on any
group or index of securities (including any interest therein or based on
the value thereof), or any put, call, straddle, option, or privilege
entered into on a national securities exchange relating to foreign
currency, or, in general, any interest or instrument commonly known as a
"security", or any certificate of interest or instrument commonly known as
a "security", or any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, warrant or right to
subscribe to or purchase any of the foregoing,
except that the term "Security" does not include any Security that is an Exempt
Security (as defined above), a Futures Contract (as defined above), or a
physical commodity (such as foreign exchange or a precious metal).
<PAGE>
Exhibit O(vi)
CONFIDENTIAL INFORMATION AND
SECURITIES TRADING POLICY
CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/25/00
<PAGE>
CONTENTS
Page
INTRODUCTION ............................................................... 1
PART I
APPLICABLE TO ALL ASSOCIATES
Section One
Confidential Information.................................................... 2
- -Types of Confidential Information.......................................... 2
- -Rules for Protecting Confidential Information.............................. 3
- -Supplemental Procedures.................................................... 4
Section Two
Insider Trading and Tipping................................................. 5
- -Legal Prohibitions......................................................... 5
- -Mellon's Policy............................................................ 6
Section Three
Restrictions on the Flow of Information
Within Mellon (the "Chinese Wall").......................................... 7
- -Rules for Maintaining the Chinese Wall..................................... 7
- -Reporting Receipt of Material Nonpublic Information........................ 8
- -Functions "Above the Wall"................................................. 9
- -Supplemental Procedures.................................................... 9
Section Four
Restrictions on Transactions in Mellon Securities...........................10
CONFIDENTIAL INFORMATION AND SECURITES TRADING POLICY-019 4/25/00
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- -Beneficial Ownership.......................................................11
Section Five
Restrictions on Transactions in Other Securities............................12
Section Six
Classification of Associates................................................14
- -Insider Risk Associate.....................................................14
- -Investment Associate.......................................................15
- -Other Associate............................................................15
PART II
APPLICABLE TO INSIDER
RISK ASSOCIATES ONLY........................................................16
- -Prohibition on Investments in Securities of Financial
Services Organizations....................................................16
- -Conflict of Interest.......................................................17
- -Preclearance for Personal Securities Transactions..........................17
- -Personal Securities Transactions Reports...................................19
- -Confidential Treatment.....................................................19
PART III
APPLICABLE TO INVESTMENT
ASSOCIATES ONLY.............................................................20
- -Special Standards of Conduct for Investment Associates.....................20
- -Preclearance for Personal Securities Transactions..........................21
- -Personal Securities Transactions Reports...................................23
CONFIDENTIAL INFORMATION AND SECURITES TRADING POLICY-019 4/25/00
<PAGE>
- -Confidential Treatment.....................................................24
PART IV
APPLICABLE TO OTHER
ASSOCIATES ONLY.............................................................25
- -Preclearance for Personal Securities Transactions..........................25
- -Personal Securities Transactions Reports...................................25
- -Restrictions on Transactions in Other Securities...........................25
- -Confidential Treatment.....................................................26
PART V
APPLICABLE TO NONMANAGEMENT
BOARD MEMBERS...............................................................27
- -Nonmanagement Board Member.................................................27
- -Standards of Conduct for Nonmanagement Board Member........................27
- -Preclearance for Personal Securities Transactions..........................28
- -Personal Securities Transactions Reports...................................29
- -Confidential Treatment.....................................................29
GLOSSARY
Definitions.................................................................30
INDEX OF EXHIBITS...........................................................33
CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/25/00
<PAGE>
INTRODUCTION
Mellon Bank Corporation ("Mellon") and its associates, and the registered
investment companies for which The Dreyfus Corporation ("Dreyfus") and/or Mellon
serves as investment adviser, sub-investment adviser or administrator, are
subject to certain laws and regulations governing the use of confidential
information and personal securities trading. Mellon has developed this
Confidential Information and Securities Trading Policy (the "Policy") to
establish specific standards to promote compliance with applicable laws.
Further, the Policy is intended to protect Mellon's business secrets and
proprietary information as well as that of its customers and any entity for
which it acts in a fiduciary capacity.
The Policy set forth procedures and limitations which govern the personal
securities transactions of every Mellon associate and certain other individuals
associated with the registered investment companies for which Dreyfus and/or
Mellon serves as investment adviser, sub-investment adviser or administrator.
The Policy is designed to reinforce Mellon's reputation for integrity by
avoiding even the appearance of impropriety in the conduct of Mellon's business.
Associates should be aware that they may be held personally liable for any
improper or illegal acts committed during the course of their employment, and
that "ignorance of the law" is not a defense. Associates may be subject to civil
penalties such as fines, regulatory sanctions including suspensions, as well as
criminal penalties.
Associates outside the United States are also subject to applicable laws of
foreign jurisdictions, which may differ substantially from U.S. law and which
may subject such associates to additional requirements. Such associates must
comply with applicable requirements of pertinent foreign laws as well as with
the provisions of the Policy. To the extent any particular portion of the Policy
is inconsistent with foreign law, associates should consult the General Counsel
or the Manager of Corporate Compliance.
Any provision of this Policy may be waived or exempted at the discretion of the
Manager of Corporate Compliance. Any such waiver or exemption will be evidenced
in writing and maintained in the Risk Management and Compliance Department.
Associates must read the Policies and must comply with them.
Failure to comply with the provisions of the Policies may
result in the imposition of serious sanctions, including but
not limited to disgorgement of profits, dismissal,
substantial personal liability and referral to law
enforcement agencies or other regulatory agencies.
Associates should retain the Policies in their records for
future reference. Any questions regarding the Policies
should be referred to the Manager of Corporate Compliance or
his/her designee.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/25/00
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PART I - APPLICABLE TO ALL ASSOCIATES
SECTION ONE
CONFIDENTIAL INFORMATION
As an associate you may receive information about Mellon, its customers and
other parties that, for various reasons, should be treated as confidential. All
associates are expected to strictly comply with measures necessary to preserve
the confidentiality of information.
Types of Confidential Information - Although it is impossible to provide an
exhaustive list of information that should remain confidential, the following
are examples of the general types of confidential information that associates
might receive in the ordinary course of carrying out their job responsibilities.
. Information Obtained from Business Relations - An associate might receive
confidential information regarding customers or other parties with whom
Mellon has business relationships. If released, such information could have
a significant effect on their operations, their business reputations or the
market price of their securities. Disclosing such information could expose
both the associate and Mellon to liability for damages.
. Mellon Financial Information - An associate might receive financial
information regarding Mellon before such information has been disclosed to
the public. It is the policy of Mellon to disclose all material corporate
information to the public in such a manner that all those who are
interested in Mellon and its securities have equal access to the
information. Disclosing such information to unauthorized persons could
subject both the associate and Mellon to liability under the federal
securities laws.
. Mellon Proprietary Information - Certain nonfinancial information developed
by Mellon - such as business plans, customer lists, methods of doing
business, computer software, source codes, databases and related
documentation - constitutes valuable Mellon proprietary information.
Disclosure of such information to unauthorized persons could harm, or
reduce a benefit to, Mellon and could result in liability for both the
associate and Mellon.
. Mellon Examination Information - Banks and certain other Mellon
subsidiaries are periodically examined by regulatory agencies. Certain
reports made by those regulatory agencies are the property of those
agencies and are strictly confidential. Giving information from these
reports to anyone not officially connected with Mellon is a criminal
offense.
. Portfolio Management Information - Portfolio management information
relating to investment accounts or funds managed by Mellon or Dreyfus,
including investment decisions or strategies developed for the benefit of
investment companies advised by Dreyfus, is for the benefit of such account
or fund. Disclosure or exploitation of such information by an associate in
an unauthorized manner may cause detriment to such accounts or funds and
may subject the associate to liability under the federal securities laws.
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Rules for Protecting Confidential Information - The following are some
basic rules to follow to protect confidential information.
. Limited Communication to Outsiders - Confidential information should not be
communicated to anyone outside Mellon, except to the extent they need to
know the information in order to provide necessary services to Mellon.
. Limited Communication to Insiders - Confidential information should not be
communicated to other associates, except to the extent they need to know
the information to fulfill their job responsibilities and their knowledge
of the information is not likely to result in misuse or a conflict of
interest. In this regard, Mellon has established specific restrictions with
respect to material nonpublic information in order to separate and insulate
different functional areas and personnel within Mellon. Please refer to
Section Three, "Restrictions on The Flow of Information Within Mellon" (The
"Chinese Wall").
. Corporate Use Only - Confidential information should be used only for
Corporate purposes. Under no circumstances may an associate use it,
directly or indirectly, for personal gain or for the benefit of any outside
party who is not entitled to such information.
. Other Customers - Where appropriate, customers should be made aware that
associates will not disclose to them other customers' confidential
information or use the confidential information of one customer for the
benefit of another.
. Notification of Confidentiality - When confidential information is
communicated to any person, either inside or outside Mellon, they should be
informed of the information's confidential nature and the limitations on
its further communication.
. Prevention of Eavesdropping - Confidential matters should not be discussed
in public or in places, such as in building lobbies, restaurants or
elevators, where unauthorized persons may overhear. Precautions, such as
locking materials in desk drawers overnight, stamping material
"Confidential" and delivering materials in sealed envelopes, should be
taken with written materials to ensure they are not read by unauthorized
persons.
. Data Protection - Data stored on personal computers and diskettes should be
properly secured to ensure they are not accessed by unauthorized persons.
Access to computer files should be granted only on a need-to-know basis. At
a minimum, associates should comply with applicable Mellon policies on
electronic data security.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/25/00
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. Confidentiality Agreements - Confidentiality agreements to which Mellon is
a party must be complied with in addition to, but not in lieu of, this
Policy. Confidentiality agreements that deviate from commonly used forms
should be reviewed in advance by the Legal Department.
. Contact with the Public - All contacts with institutional shareholders or
securities analysts about Mellon must be made through the Investor
Relations Division of the Finance Department. All contacts with the media
and all speeches or other public statements made on behalf of Mellon or
about Mellon's businesses must be cleared in advance by Corporate Affairs.
In speeches and statements not made on behalf of Mellon, care should be
taken to avoid any implication that Mellon endorses the views expressed.
Supplemental Procedures - Mellon entities, departments, divisions and
groups should establish their own supplemental procedures for protecting
confidential information, as appropriate. These procedures may include:
. establishing records retention and destruction policies;
. using code names;
. limiting the staffing of confidential matters (for example, limiting the
size of working groups and the use of temporary employees, messengers and
word processors); and
. requiring written confidentiality agreements from certain associates.
Any supplemental procedures should be used only to protect confidential
information and not to circumvent appropriate reporting and recordkeeping
requirements.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/25/00
<PAGE>
SECTION TWO
INSIDER TRADING AND TIPPING
Legal Prohibitions - Federal securities laws generally prohibit the trading
of securities while in possession of "material nonpublic" information
regarding the issuer of those securities (insider trading). Any person who
passes along the material nonpublic information upon which a trade is based
(tipping) may also be liable.
"Material" - Information is material if there is a substantial likelihood
that a reasonable investor would consider it important in deciding whether
to buy, sell or hold securities. Obviously, information that would affect
the market price of a security would be material. Examples of information
that might be material include:
. a proposal or agreement for a merger, acquisition or divestiture, or for
the sale or purchase of substantial assets;
. tender offers, which are often material for the party making the tender
offer as well as for the issuer of the securities for which the tender
offer is made;
. dividend declarations or changes;
. extraordinary borrowings or liquidity problems;
. defaults under agreements or actions by creditors, customers or suppliers
relating to a company's credit standing;
. earnings and other financial information, such as large or unusual
write-offs, write-downs, profits or losses;
. pending discoveries or developments, such as new products, sources of
materials, patents, processes, inventions or discoveries of mineral
deposits;
. a proposal or agreement concerning a financial restructuring;
. a proposal to issue or redeem securities, or a development with respect to
a pending issuance or redemption of securities;
. a significant expansion or contraction of operations;
. information about major contracts or increases or decreases in orders;
. the institution of, or a development in, litigation or a regulatory
proceeding;
. developments regarding a company's senior management;
. information about a company received from a director of that company; and
. information regarding a company's possible noncompliance with environmental
protection laws.
This list is not exhaustive. All relevant circumstances must be considered
when determining whether an item of information is material.
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"Nonpublic" - Information about a company is nonpublic if it is not
generally available to the investing public. Information received under
circumstances indicating that it is not yet in general circulation and
which may be attributable, directly or indirectly, to the company or its
insiders is likely to be deemed nonpublic information.
If an associate can refer to some public source to show that the
information is generally available (that is, available not from inside
sources only) and that enough time has passed to allow wide dissemination
of the information, the information is likely to be deemed public. While
information appearing in widely accessible sources - such as newspapers -
becomes public very soon after publication, information appearing in less
accessible sources - such as regulatory filings - may take up to several
days to be deemed public. Similarly, highly complex information might take
longer to become public than would information that is easily understood by
the average investor.
Mellon's Policy - Associates who possess material nonpublic information
about a company - whether that company is Mellon, another Mellon entity, a
Mellon customer or supplier, or other company - may not trade in that
company's securities, either for their own accounts or for any account over
which they exercise investment discretion. In addition, associates may not
recommend trading in those securities and may not pass the information
along to others, except to associates who need to know the information in
order to perform their job responsibilities with Mellon. These prohibitions
remain in effect until the information has become public.
Associates who have investment responsibilities should take appropriate
steps to avoid receiving material nonpublic information. Receiving such
information could create severe limitations on their ability to carry out
their responsibilities to Mellon's fiduciary customers.
Associates managing the work of consultants and temporary employees who
have access to the types of confidential information described in this
Policy are responsible for ensuring that consultants and temporary
employees are aware of Mellon's policy and the consequences of
noncompliance.
Questions regarding Mellon's policy on material nonpublic information, or
specific information that might be subject to it, should be referred to the
General Counsel.
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<PAGE>
SECTION THREE
RESTRICTIONS ON THE FLOW OF
INFORMATION WITHIN MELLON
(THE "CHINESE WALL")
As a diversified financial services organization, Mellon faces unique
challenges in complying with the prohibitions on insider trading and
tipping of material nonpublic information and misuse of confidential
information. This is because one Mellon unit might have material nonpublic
information about a company while other Mellon units may have a desire, or
even a fiduciary duty, to buy or sell that company's securities or
recommend such purchases or sales to customers. To engage in such
broad-ranging financial services activities without violating laws or
breaching Mellon's fiduciary duties, Mellon has established a "Chinese
Wall" policy applicable to all associates. The "Chinese Wall" separates the
Mellon units or individuals that are likely to receive material nonpublic
information (Potential Insider Functions) from the Mellon units or
individuals that either trade in securities - for Mellon's account or for
the accounts of others - or provide investment advice (Investment
Functions).
Examples of Potential Insider Functions - Potential Insider Functions
include, among others, certain commercial lending, corporate finance, and
credit policy areas. Insider Risk Associates (see Section Six, "Insider
Risk Associates") should consider themselves to be in Potential Insider
Functions unless their particular job responsibilities clearly indicate
otherwise.
Examples of Investment Functions - Investment Functions include, among
others, securities sales and trading, investment management and advisory
services, investment research and various trust or fiduciary functions.
Rules for Maintaining the "Chinese Wall" - Without the prior approval of
the General Counsel, material nonpublic information obtained by anyone in a
Potential Insider Function should not be communicated to anyone in an
Investment Function. To reduce the risk of material nonpublic information
being communicated, communications between these associates in these
functions must be limited to the maximum extent consistent with valid
business needs.
Particular rules -
. File Restrictions - Associates in Investment Functions must not have access
to commercial credit files, corporate finance files, or any other Potential
Insider Function files that might contain material nonpublic information.
All such files that contain material nonpublic information should be marked
as "Confidential" and, if feasible, segregated from nonconfidential files.
. Electronic Data - Associates in Investment Functions must not have access
to personal computer or word processing files of associates in Potential
Insider Functions.
. Meetings - Associates in Investment Functions must not attend meetings
between customers and associates in Potential Insider Functions unless
appropriate steps have been taken to ensure that material nonpublic
information will not be disclosed or discussed.
. Committee Service - Without the prior approval of the General Counsel,
associates other than those "Above the Wall" (see page 9) must not serve
simultaneously on a committee having responsibility for any Investment
Function and a committee having responsibility for any Potential Insider
Function.
. Information Requests - Requests for nonmaterial information or public
information
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CONFIDENTIAL INFORMATION AND SECURITES TRADING POLICY-019 04/24/00
<PAGE>
across the "Chinese Wall" should be made in writing to an appropriate
associate in the applicable area. Associates sending or receiving such a
request should resolve any questions regarding the materiality or nonpublic
nature of the requested information by consulting their department head,
who will contact the General Counsel, as appropriate.
. Information Backflow - Associates should take care to avoid inadvertent
backflow of information that may be interpreted as the prohibited
communication of material nonpublic information. For example, the mere fact
that someone in a Potential Insider Function, such as a mergers and
acquisitions specialist, requests information from an associate in an
Investment Function could give the latter person a clue as to possible
material developments affecting a customer.
. Customers - Associates in Investment Functions must not state or imply to
customers that associates making decisions or recommendations will have the
benefit of information from Mellon's Potential Insider Functions. When
appropriate, associates should inform customers of Mellon's "Chinese Wall"
policy.
. Conflicts of Interest - Associates should not receive or pass on any
information that would create an undue risk of Mellon or any associate
having a conflict of interest or breaching a fiduciary obligation.
Reporting Receipt of Material Nonpublic Information - Associates in
Investment Functions who receive any suspected material nonpublic
information must report such receipt promptly to their department or entity
head. A department or entity head who receives information believed to be
material and nonpublic should report the matter promptly to the General
Counsel. If the General Counsel determines that the information is material
and nonpublic, the affected department or entity will:
. immediately suspend all trading in the securities of the issuer to which
the information applies, as well as all recommendations with respect to
such securities. The suspension will remain in effect as long as the
information remains both material and nonpublic.
. notify the General Counsel before resuming transactions or recommendations
in the affected securities. The General Counsel will advise as to possible
further steps, including ascertaining the validity and nonpublic nature of
the information with the issuer of the securities; requesting the issuer of
the securities, or other appropriate parties, to disseminate the
information promptly to the public if the information is valid and
nonpublic; and publishing the information.
In certain circumstances, the department or entity head may be able to
demonstrate conclusively that the receipt of the material nonpublic
information has been confined to an individual or small group of
individuals and that measures other than those described above will
comparably reduce the likelihood of trading on the basis of the
information. These measures might include temporarily relieving individuals
of responsibility for any Investment Functions and preventing any contact
between those individuals and associates in Investment Functions. In these
circumstances, the department head, with the approval of the General
Counsel, may take those measures rather than the measures described above.
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Functions "Above the Wall" - Some functions at Mellon are deemed to be
"Above the Wall." For example, members of senior management, Auditing, Risk
Management and Compliance, and the Legal Department will typically need to
have access to information on both sides of the "Chinese Wall" to carry out
their job responsibilities. These individuals cannot rely on the procedural
safeguards of the "Chinese Wall" and, therefore, need to be particularly
careful to avoid any improper use or dissemination of material nonpublic
information.
Supplemental Procedures - As appropriate, certain Mellon departments or
areas, such as Mellon Trust, should establish their own procedures to
reduce the possibility of information being communicated to associates who
should not have access to that information.
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SECTION FOUR
RESTRICTIONS ON TRANSACTIONS
IN MELLON SECURITIES
Associates who engage in transactions involving Mellon securities should be
aware of their unique responsibilities with respect to such transactions
arising from the employment relationship and should be sensitive to even
the appearance of impropriety.
The following restrictions apply to all transactions in Mellon's publicly
traded securities occurring in the associate's own account and in all other
accounts over which the associate could be expected to exercise influence
or control (see provisions under "Beneficial Ownership" below for a more
complete discussion of the accounts to which these restrictions apply).
These restrictions are to be followed in addition to any restrictions that
apply to particular officers or directors (such as restrictions under
Section 16 of the Securities Exchange Act of 1934).
. Short Sales - Short sales of Mellon securities by associates are
prohibited.
. Sales Within 60 Days of Purchase - Sales of Mellon securities within 60
days of acquisition are prohibited. For purposes of the 60-day holding
period, securities will be deemed to be equivalent if one is convertible
into the other, if one entails a right to purchase or sell the other, or if
the value of one is expressly dependent on the value of the other (e.g.,
derivative securities).
In cases of extreme hardship, associates (other than senior management) may
obtain permission to dispose of Mellon securities acquired within 60 days
of the proposed transaction, provided the transaction is pre-cleared with
the Manager of Corporate Compliance and any profits earned are disgorged in
accordance with procedures established by senior management. The Manager of
Corporate Compliance reserves the right to suspend the 60-day holding
period restriction in the event of severe market disruption.
. Margin Transactions - Purchases on margin of Mellon's publicly traded
securities by associates is prohibited. Margining Mellon securities in
connection with a cashless exercise of an employee stock option through the
Human Resources Department is exempt from this restriction. Further, Mellon
securities may be used to collateralize loans or the acquisition of
securities other than those issued by Mellon.
. Option Transactions - Option transactions involving Mellon's publicly
traded securities are prohibited. Transactions under Mellon's Long-Term
Incentive Plan or other associate option plans are exempt from this
restriction.
. Major Mellon Events - Associates who have knowledge of major Mellon events
that have not yet been announced are prohibited from buying and selling
Mellon's publicly traded securities before such public announcements, even
if the associate believes the event does not constitute material nonpublic
information.
. Mellon Blackout Period - Associates are prohibited from buying or selling
Mellon's publicly traded securities during a blackout period, which begins
the 16th day of the last month of each calendar quarter and ends three
business days after Mellon publicly announces the financial results for
that quarter. In cases of extreme hardship, associates (other than senior
management) may request permission from the Manager of Corporate Compliance
to dispose of Mellon securities during the blackout period.
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Beneficial Ownership - The provisions discussed above apply to transactions
in the associate's own name and to all other accounts over which the
associate could be expected to exercise influence or control, including:
. accounts of a spouse, minor children or relatives to whom substantial
support is contributed;
. accounts of any other member of the associate's household (e.g., a relative
living in the same home);
. trust accounts for which the associate acts as trustee or otherwise
exercises any type of guidance or influence;
. Corporate accounts controlled, directly or indirectly, by the associate;
. arrangements similar to trust accounts that are established for bona fide
financial purposes and benefit the associate; and
. any other account for which the associate is the beneficial owner (see
Glossary for a more complete legal definition of "beneficial owner").
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SECTION FIVE
RESTRICTIONS ON TRANSACTIONS
IN OTHER SECURITIES
Purchases or sales by an associate of the securities of issuers with which
Mellon does business, or other third party issuers, could result in
liability on the part of such associate. Associates should be sensitive to
even the appearance of impropriety in connection with their personal
securities transactions. Associates should refer to the provisions under
"Beneficial Ownership" (Section Four, "Restrictions on Transactions in
Mellon Securities"), which are equally applicable to the following
provisions.
The Mellon Code of Conduct contains certain restrictions on investments in
parties that do business with Mellon. Associates should refer to the Code
of Conduct and comply with such restrictions in addition to the
restrictions and reporting requirements set forth below.
The following restrictions apply to all securities transactions by
associates:
. Credit or Advisory Relationship - Associate may not buy or sell securities
of a company if they are considering granting, renewing or denying any
credit facility to that company or acting as an adviser to that company
with respect to its securities. In addition, lending associates who have
assigned responsibilities in a specific industry group are not permitted to
trade securities in that industry. This prohibition does not apply to
transactions in securities issued by open-end investment companies.
. Customer Transactions - Trading for customers and Mellon accounts should
always take precedence over associates' transactions for their own or
related accounts.
. Front Running - Associates may not engage in "front running," that is, the
purchase or sale of securities for their own accounts on the basis of their
knowledge of Mellon's trading positions or plans.
. Initial Public Offerings - Mellon prohibits its associates from acquiring
any securities in an initial public offering ("IPO").
. Margin Transactions - Margin trading is a highly leveraged and relatively
risky method of investing that can create particular problems for financial
services employees. For this reason, all associates are urged to avoid
margin trading.
Prior to establishing a margin account, the associate must obtain the
written permission of the Manager of Corporate Compliance. Any associate
having a margin account prior to the effective date of this Policy must
notify the Manager of Corporate Compliance of the existence of such
account.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 4/25/00
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All associates having margin accounts, other than described below, must
designate the Manager of Corporate Compliance as an interested party on
that account. Associates must ensure that the Manager of Corporate
Compliance promptly receives copies of all trade confirmations and
statements relating to the account directly from the broker. If requested
by a brokerage firm, please contact the Manager of Corporate Compliance to
obtain a letter (sometimes referred to as a "407 letter") granting
permission to maintain a margin account. Trade confirmations and statements
are not required on margin accounts established at Dreyfus Investment
Services Corporation for the sole purpose of cashless exercises of employee
stock options. In addition, products may be offered by a broker/dealer
that, because of their characteristics, are considered margin accounts but
have been determined by the Manager of Corporate Compliance to be outside
the scope of this Policy (e.g., a Cash Management Account which provides
overdraft protection for the customer). Any questions regarding the
establishment, use and reporting of margin accounts should be directed to
the Manager of Corporate Compliance. Examples of an instruction letter to a
broker are shown in Exhibits B1 and B2.
. Material Nonpublic Information - Associates possessing material
nonpublic information regarding any issuer of securities must refrain from
purchasing or selling securities of that issuer until the information
becomes public or is no longer considered material.
. Naked Options, Excessive Trading - Mellon discourages all associates
from engaging in short-term or speculative trading, in trading naked
options, in trading that could be deemed excessive or in trading that could
interfere with an associate's job responsibilities.
. Private Placements - Associates are prohibited from acquiring any
security in a private placement unless they obtain the prior written
approval of the Preclearance Compliance Officer (applicable only to
Investment Associates), the Manager of Corporate Compliance and the
associate's department head. Approval must be given by all appropriate
aforementioned persons for the acquisition to be considered approved. After
receipt of the necessary approvals and the acquisition, associates are
required to disclose that investment when they participate in any
subsequent consideration of an investment in the issuer for an advised
account. Final decision to acquire such securities for an advised account
will be subject to independent review.
. Scalping - Associates may not engage in "scalping," that is, the
purchase or sale of securities for their own or Mellon's accounts on the
basis of knowledge of customers' trading positions or plans or Mellon's
forthcoming investment recommendations.
. Short-Term Trading - Associates are discouraged from purchasing and
selling, or from selling and purchasing, the same (or equivalent)
securities within 60 calendar days. With respect to Investment Associates
only, any profits realized on such short-term trades must be disgorged in
accordance with procedures established by senior management.
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SECTION SIX
CLASSIFICATION OF ASSOCIATES
Associates are engaged in a wide variety of activities for Mellon. In light
of the nature of their activities and the impact of federal and state laws
and the regulations thereunder, the Policy imposes different requirements
and limitations on associates based on the nature of their activities for
Mellon. To assist the associates in complying with the requirements and
limitations imposed on them in light of their activities, associates are
classified into one of three categories: Insider Risk Associate, Investment
Associate and Other Associate. Appropriate requirements and limitations are
specified in the Policy based upon the associate's classification.
Insider Risk Associate -
You are considered to be an Insider Risk Associate if you are:
. employed in any of the following departments or functional areas, however
named, of a Mellon entity other than Dreyfus (see Glossary for definition
of "Dreyfus"):
- Auditing - International
- Capital Markets - Leasing
- Corporate Affairs - Legal
- Credit Policy - Mellon Business Credit
- Credit Recovery - Middle Market
- Credit Review - Portfolio and Funds Management
- Domestic Corporate Banking - Risk Management and Compliance
- Finance - Strategic Planning
- Institutional Banking - Wholesale, Administration and Operations
. a member of the Mellon Senior Management Committee, provided that those
members of the Mellon Senior Management Committee who have management
responsibility for fiduciary activities or who routinely have access to
information about customers' securities transactions are considered to be
Investment Associates and are subject to those provisions of the Policy
pertaining to Investment Associates;
. employed by a broker/dealer subsidiary of a Mellon entity other than
Dreyfus;
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. an associate in the Stock Transfer business unit and have been specifically
designated as an Insider Risk Associate by the Manager of Corporate
Compliance; or
. an associate specifically designated as an Insider Risk Associate by the
Manager of Corporate Compliance.
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Investment Associate -
You are considered to be an Investment Associate if you are:
. a member of Mellon's Senior Management Committee who, as part of his/her
usual duties, has management responsibility for fiduciary activities or
routinely has access to information about customers' securities
transactions;
. a Dreyfus associate;
. an associate of a Mellon entity registered under the Investment Advisers
Act of 1940;
. employed in the trust area of Mellon and:
- have the title of Vice President, First Vice President or Senior Vice
President; or
- have access to material, confidential information regarding securities
transactions by or on behalf of Mellon customers; or
. an associate specifically designated as an Investment Associate by the
Manager of Corporate Compliance.
Other Associate -
You are considered to be an Other Associate if you are an associate of
Mellon Bank Corporation or any of its direct or indirect subsidiaries who
is not either an Insider Risk Associate or an Investment Associate.
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PART II - APPLICABLE TO INSIDER
RISK ASSOCIATES ONLY
Prohibition on Investments in Securities of Financial Services
Organizations
You are prohibited from acquiring any security issued by a financial
services organization if you are:
. a member of the Mellon Senior Management Committee. For purposes of this
restriction only, this prohibition also applies to those members of the
Mellon Senior Management Committee who are considered Investment
Associates.
. employed in any of the following departments of a Mellon entity other
than Dreyfus (see Glossary for definition of "Dreyfus"):
- Strategic Planning - Finance
- Institutional Banking - Legal
. an associate specifically designated by the Manager of Corporate
Compliance and informed that this prohibition is applicable to you.
Financial Services Organizations - The term "security issued by a financial
services organization" includes any security issued by:
Commercial Banks Bank Holding Companies
- (other than Mellon) - (other than Mellon)
- Thrifts - Savings and Loan Associations
- Insurance Companies - Broker/Dealers
- Investment Advisory Companies - Transfer Agents
- Shareholder Servicing Companies - Other Depository Institutions
The term "securities issued by a financial services organization" does not
include securities issued by mutual funds, variable annuities or insurance
policies. Further, for purposes of determining whether a company is a
financial services organization, subsidiaries and parent companies are
treated as separate issuers.
Effective Date - The foregoing restrictions will be effective upon adoption
of this Policy. Securities of financial services organizations properly
acquired before the later of the effective date of this Policy or the date
of hire may be maintained or disposed of at the owner's discretion.
Additional securities of a financial services organization acquired through
the reinvestment of the dividends paid by such financial services
organization through a dividend reinvestment program (DRIP) are not subject
to this prohibition, provided your election to participate in the DRIP
predates the later of the effective date of this Policy or date of hire.
Optional cash purchases through a DRIP are subject to this prohibition.
Within 30 days of the later of the effective date of this Policy or date of
becoming subject to this prohibition, all holdings of securities of
financial services organizations must be disclosed in writing to the
Manager of Corporate Compliance. Periodically,
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you will be asked to file an updated disclosure of all your holdings of
securities of financial services organizations.
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Conflict of Interest - No Insider Risk Associate may engage in or recommend
any securities transaction that places, or appears to place, his or her own
interests above those of any customer to whom investment services are
rendered, including mutual funds and managed accounts, or above the
interests of Mellon.
Preclearance for Personal Securities Transactions - All Insider Risk
Associates must notify the Manager of Corporate Compliance in writing and
receive preclearance before they engage in any purchase or sale of a
security. Insider Risk Associates should refer to the provisions under
"Beneficial Ownership" (Section Four, "Restrictions on Transactions in
Mellon Securities"), which are equally applicable to these provisions.
Exemptions from Requirement to Preclear - Preclearance is not required for
the following transactions:
. purchases or sales of Exempt Securities (see Glossary);
. purchases or sales of municipal bonds;
. purchases or sales effected in any account over which an associate has
no direct or indirect control over the investment decision-making process
(e.g., nondiscretionary trading accounts). Nondiscretionary trading
accounts may only be maintained, without being subject to preclearance
procedures, when the Manager of Corporate Compliance, after a thorough
review, is satisfied that the account is truly nondiscretionary;
. transactions that are non-volitional on the part of an associate (such
as stock dividends);
. the sale of stock received upon the exercise of an associate stock
option if the sale is part of a "netting of shares" or "cashless exercise"
administered by the Human Resources Department (for which the Human
Resources Department will forward information to the Manager of Corporate
Compliance);
. the automatic reinvestment of dividends under a DRIP (preclearance is
required for optional cash purchases under a DRIP);
. purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of securities, to the extent such rights
were acquired from such issuer;
. sales of rights acquired from an issuer, as described above; and/or
. those situations where the Manager of Corporate Compliance determines,
after taking into consideration the particular facts and circumstances,
that prior approval is not necessary.
Requests for Preclearance - All requests for preclearance for a securities
transaction shall be submitted to the Manager of Corporate Compliance by
completing a Preclearance Request Form (see Exhibit C1).
The Manager of Corporate Compliance will notify the Insider Risk Associate
whether the request is approved or denied, without disclosing the reason
for such approval or denial.
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Notifications may be given in writing or verbally by the Manager of
Corporate Compliance to the Insider Risk Associate. A record of such
notification will be maintained by the Manager of Corporate Compliance.
However, it shall be the responsibility of the Insider Risk Associate to
obtain a written record of the Manager of Corporate Compliance's
notification within 24 hours of such notification. The Insider Risk
Associate should retain a copy of this written record.
As there could be many reasons for preclearance being granted or denied,
Insider Risk Associates should not infer from the preclearance response
anything regarding the security for which preclearance was requested.
Although making a preclearance request does not obligate an Insider Risk
Associate to do the transaction, it should be noted that:
. preclearance authorization will expire at the end of the third business
day after it is received (the day authorization is granted is considered
the first business day);
. preclearance requests should not be made for a transaction that the
Insider Risk Associate does not intend to make; and
. Insider Risk Associates should not discuss with anyone else, inside or
outside Mellon, the response they received to a preclearance request.
Every Insider Risk Associate must follow these procedures or risk serious
sanctions, including dismissal. If you have any questions about these
procedures you should consult the Manager of Corporate Compliance.
Interpretive issues that arise under these procedures shall be decided by,
and are subject to the discretion of, the Manager of Corporate Compliance.
Restricted List - The Manager of Corporate Compliance will maintain a list
(the "Restricted List") of companies whose securities are deemed
appropriate for implementation of trading restrictions for Insider Risk
Associates. Restricted List(s) will not be distributed outside of the Risk
Management and Compliance Department. From time to time, such trading
restrictions may be appropriate to protect Mellon and its Insider Risk
Associates from potential violations, or the appearance of violations, of
securities laws. The inclusion of a company on the Restricted List provides
no indication of the advisability of an investment in the company's
securities or the existence of material nonpublic information on the
company. Nevertheless, the contents of the Restricted List will be treated
as confidential information to avoid unwarranted inferences.
To assist the Manager of Corporate Compliance in identifying companies that
may be appropriate for inclusion on the Restricted List, the department
heads of sections in which Insider Risk Associates are employed will inform
the Manager of Corporate Compliance in writing of any companies they
believe should be included on the Restricted List, based upon facts known
or readily available to such department heads. Although the reasons for
inclusion on the Restricted List may vary, they could typically include the
following:
. Mellon is involved as a lender, investor or adviser in a merger,
acquisition or financial restructuring involving the company;
. Mellon is involved as a selling shareholder in a public distribution of
the company's securities;
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. Mellon is involved as an agent in the distribution of the company's
securities;
. Mellon has received material nonpublic information on the company;
. Mellon is considering the exercise of significant creditors' rights
against the company; or
. The company is a Mellon borrower in Credit Recovery.
Department heads of sections in which Insider Risk Associates are employed
are also responsible for notifying the Manager of Corporate Compliance in
writing of any change in circumstances making it appropriate to remove a
company from the Restricted List.
Personal Securities Transactions Reports
. Brokerage Accounts - All Insider Risk Associates are required to
instruct their brokers to submit directly to the Manager of Corporate
Compliance copies of all trade confirmations and statements relating to
their account. An example of an instruction letter to a broker is contained
in Exhibit B1.
. Report of Transactions in Mellon Securities - Insider Risk Associates
must also report in writing to the Manager of Corporate Compliance within
ten calendar days whenever they purchase or sell Mellon securities if the
transaction was not through a brokerage account as described above.
Purchases and sales of Mellon securities include the following:
DRIP Optional Cash Purchases - Optional cash purchases under Mellon's
Dividend Reinvestment and Common Stock Purchase Plan (the "Mellon DRIP").
Stock Options - The sale of stock received upon the exercise of an
associate stock option unless the sale is part of a "netting of shares" or
"cashless exercise" administered by the Human Resources Department (for
which the Human Resources Department will forward information to the
Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under the DRIP,
changes in elections under Mellon's Retirement Savings Plan, the receipt of
stock under Mellon's Restricted Stock Award Plan and the receipt or
exercise of options under Mellon's Long-Term Profit Incentive Plan are not
considered purchases or sales for the purpose of this reporting
requirement.
An example of a written report to the Manager of Corporate Compliance is
contained in Exhibit A.
Confidential Treatment
The Manager of Corporate Compliance will use his or her best efforts to
assure that all requests for preclearance, all personal securities
transaction reports and all reports of securities holdings are treated as
"Personal and Confidential." However, such documents will be available for
inspection by appropriate regulatory agencies and by other parties within
and outside Mellon as are necessary to evaluate compliance with or
sanctions under this Policy.
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PART III - APPLICABLE TO
INVESTMENT ASSOCIATES ONLY
Because of their particular responsibilities, Investment Associates are
subject to different preclearance and personal securities reporting
requirements as discussed below.
Special Standards of Conduct for Investment Associates
Conflict of Interest - No Investment Associate may recommend a securities
transaction for a Mellon customer to whom a fiduciary duty is owed, or for
Mellon, without disclosing any interest he or she has in such securities or
issuer (other than an interest in publicly traded securities where the
total investment is equal to or less than $25,000), including:
. any direct or indirect beneficial ownership of any securities of such
issuer;
. any contemplated transaction by the Investment Associate in such
securities;
. any position with such issuer or its affiliates; and
. any present or proposed business relationship between such issuer or its
affiliates and the Investment Associate or any party in which the
Investment Associate has a beneficial ownership interest (see "Beneficial
Ownership" in Section Four, "Restrictions On Transactions in Mellon
Securities").
Portfolio Information - No Investment Associate may divulge the current
portfolio positions, or current or anticipated portfolio transactions,
programs or studies, of Mellon or any Mellon customer to anyone unless it
is properly within his or her job responsibilities to do so.
Material Nonpublic Information - No Investment Associate may engage in or
recommend a securities transaction, for his or her own benefit or for the
benefit of others, including Mellon or its customers, while in possession
of material nonpublic information regarding such securities. No Investment
Associate may communicate material nonpublic information to others unless
it is properly within his or her job responsibilities to do so.
Short-Term Trading - Any Investment Associate who purchases and sells, or
sells and purchases, the same (or equivalent) securities within any
60-calendar-day period is required to disgorge all profits realized on such
transaction in accordance with procedures established by senior management.
For this purpose, securities will be deemed to be equivalent if one is
convertible into the other, if one entails a right to purchase or sell the
other, or if the value of one is expressly dependent on the value of the
other (e.g., derivative securities).
Additional Restrictions For Dreyfus Associates and Associates of Mellon
Entities Registered Under The Investment Advisers Act of 1940 ONLY ("40 Act
Associates")
. Outside Activities - No 40 Act associate may serve on the board of
directors/trustees or as a general partner of any publicly traded company
(other than Mellon) without the prior approval of the Manager of Corporate
Compliance.
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. Gifts - All 40 Act associates are prohibited from accepting gifts from
outside companies, or their representatives, with an exception for gifts of
(1) a de minimis value and (2) an occasional meal, a ticket to a sporting
event or the theater, or comparable entertainment for the 40 Act associate
and, if appropriate, a guest, which is neither so frequent nor extensive as
to raise any question of impropriety. A gift shall be considered de minimis
if it does not exceed an annual amount per person fixed periodically by the
National Association of Securities Dealers, which is currently $100 per
person.
. Blackout Period - 40 Act associates will not be given clearance to
execute a transaction in any security that is being considered for
purchase or sale by an affiliated investment company, managed account or
trust, for which a pending buy or sell order for such affiliated account
is pending, and for two business days after the transaction in such
security for such affiliated account has been effected. This provision
does not apply to transactions effected or contemplated by index funds.
In addition, portfolio managers for the investment companies are
prohibited from buying or selling a security within seven calendar days
before and after such investment company trades in that security. Any
violation of the foregoing will require the violator to disgorge all
profit realized with respect to such transaction.
Preclearance for Personal Securities Transactions - All Investment
Associates must notify the Preclearance Compliance Officer (see Glossary)
in writing and receive preclearance before they engage in any purchase or
sale of a security.
Exemptions from Requirement to Preclear - Preclearance is not required
for the following transactions:
. purchases or sales of "Exempt Securities" (see Glossary);
. purchases or sales effected in any account over which an associate has
no direct or indirect control over the investment decision-making process
(i.e., nondiscretionary trading accounts). Nondiscretionary trading
accounts may only be maintained, without being subject to preclearance
procedures, when the Preclearance Compliance Officer, after a thorough
review, is satisfied that the account is truly nondiscretionary;
. transactions which are non-volitional on the part of an associate
(such as stock dividends);
. the sale of stock received upon the exercise of an associate stock
option if the sale is part of a "netting of shares" or "cashless
exercise" administered by the Human Resources Department (for which the
Human Resources Department will forward information to the manager of
Corporate Compliance);
. purchases which are part of an automatic reinvestment of dividends
under a DRIP (Preclearance is required for optional cash purchases under
a DRIP);
. purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of securities, to the extent such rights
were acquired from such issuer;
. sales of rights acquired from an issuer, as described above; and/or
. those situations where the Preclearance Compliance Officer determines,
after taking into consideration the particular facts and circumstances,
that prior approval is not necessary.
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Requests for Preclearance - All requests for preclearance for a securities
transaction shall be submitted to the Preclearance Compliance Officer by
completing a Preclearance Request Form. (Investment Associates other than
Dreyfus associates are to use the Preclearance Request Form shown as
Exhibit C1. Dreyfus associates are to use the Preclearance Request Form
shown as Exhibit C2.)
The Preclearance Compliance Officer will notify the Investment Associate
whether the request is approved or denied without disclosing the reason for
such approval or denial.
Notifications may be given in writing or verbally by the Preclearance
Compliance Officer to the Investment Associate. A record of such
notification will be maintained by the Preclearance Compliance Officer.
However, it shall be the responsibility of the Investment Associate to
obtain a written record of the Preclearance Compliance Officer's
notification within 24 hours of such notification. The Investment Associate
should retain a copy of this written record.
As there could be many reasons for preclearance being granted or denied,
Investment Associates should not infer from the preclearance response
anything regarding the security for which preclearance was requested.
Although making a preclearance request does not obligate an Investment
Associate to do the transaction, it should be noted that:
. preclearance authorization will expire at the end of the day on which
preclearance is given;
. preclearance requests should not be made for a transaction that the
Investment Associate does not intend to make; and
. Investment Associates should not discuss with anyone else, inside or
outside Mellon, the response the Investment Associate received to a
preclearance request.
Every Investment Associate must follow these procedures or risk serious
sanctions, including dismissal. If you have any questions about these
procedures, consult the Preclearance Compliance Officer. Interpretive
issues that arise under these procedures shall be decided by, and are
subject to the discretion of, the Manager of Corporate Compliance.
Restricted List - Each Preclearance Compliance Officer will maintain a list
(the "Restricted List") of companies whose securities are deemed
appropriate for implementation of trading restrictions for Investment
Associates in their area. From time to time, such trading restrictions may
be appropriate to protect Mellon and its Investment Associates from
potential violations, or the appearance of violations, of securities laws.
The inclusion of a company on the Restricted List provides no indication of
the advisability of an investment in the company's securities or the
existence of material nonpublic information on the company. Nevertheless,
the contents of the Restricted List will be treated as confidential
information in order to avoid unwarranted inferences.
In order to assist the Preclearance Compliance Officer in identifying
companies that may be appropriate for inclusion on the Restricted List, the
head of the entity/department/area in which Investment Associates are
employed will inform the appropriate Preclearance Compliance Officer in
writing of any companies that they believe should be included on the
Restricted List based upon facts known or readily available to such
department heads.
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Personal Securities Transactions Reports
. Brokerage Accounts - All Investment Associates are required to instruct
their brokers to submit directly to the Manager of Corporate Compliance
copies of all trade confirmations and statements relating to their account.
Examples of instruction letters to a broker are contained in Exhibits B1
and B2.
. Report of Transactions in Mellon Securities - Investment Associates must
also report in writing to the Manager of Corporate Compliance within ten
calendar days whenever they purchase or sell Mellon securities if the
transaction was not through a brokerage account as described above.
Purchases and sales of Mellon securities include the following:
DRIP Optional Cash Purchases - Optional cash purchases under Mellon's
Dividend Reinvestment and Common Stock Purchase Plan (the "Mellon DRIP").
Stock Options - The sale of stock received upon the exercise of an
associate stock option unless the sale is part of a "netting of shares" or
"cashless exercise" administered by the Human Resources Department (for
which the Human Resources Department will forward information to the
Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under the DRIP,
changes in elections under Mellon's Retirement Savings Plan, the receipt of
stock under Mellon's Restricted Stock Award Plan, and the receipt or
exercise of options under Mellon's Long-Term Profit Incentive Plan are not
considered purchases or sales for the purpose of this reporting
requirement.
An example of a written report to the Manager of Corporate Compliance is
contained in Exhibit A.
. Statement of Securities Holdings - Within ten days of receiving this
Policy and on an annual basis thereafter, all Investment Associates must
submit to the Manager of Corporate Compliance a statement of all securities
in which they presently have any direct or indirect beneficial ownership
other than Exempt Securities, as defined in the Glossary. Investment
Associates should refer to "Beneficial Ownership" in Section Four,
"Restrictions on Transactions in Mellon Securities," which is also
applicable to Investment Associates. Such statements should be in the
format shown in Exhibit D. The annual report must be submitted by January
31 and must report all securities holdings other than Exempt Securities.
The annual statement of securities holdings contains an acknowledgment that
the Investment Associate has read and complied with this Policy.
. Special Requirement with Respect to Affiliated Investment Companies -The
portfolio managers, research analysts and other Investment Associates
specifically designated by the Manager of Corporate Compliance are required
within ten calendar days of receiving this Policy (and by no later than ten
calendar days after the end of each calendar quarter) to report every
transaction in the securities issued by an affiliated investment company
occurring in an account in which the Investment Associate has a beneficial
ownership interest. The quarterly reporting requirement may be satisfied by
notifying the Manager of Corporate Compliance of the name of the investment
company, account name and account number for which such quarterly reports
must be submitted.
29
<PAGE>
Confidential Treatment
The Preclearance Compliance Officer will use his or her best efforts to
assure that all requests for preclearance, all personal securities
transaction reports and all reports of securities holdings are treated as
"Personal and Confidential." However, such documents will be available for
inspection by appropriate regulatory agencies, and by other parties within
and outside Mellon as are necessary to evaluate compliance with or
sanctions under this Policy. Documents received from Dreyfus associates are
also available for inspection by the boards of directors of Dreyfus and by
the boards of directors (or trustees or managing general partners, as
applicable) of the investment companies managed or administered by Dreyfus.
30
<PAGE>
PART IV - APPLICABLE TO
OTHER ASSOCIATES ONLY
Preclearance for Personal Securities Transactions - Except for private
placements, Other Associates are permitted to engage in personal securities
transactions without obtaining prior approval from the Manager of Corporate
Compliance (for preclearance of private placements, use the Preclearance
Request Form shown as Exhibit C1.)
Personal Securities Transactions Reports - Other Associates are not
required to report their personal securities transactions other than margin
transactions and transactions involving Mellon securities as discussed
below. Other Associates are required to instruct their brokers to submit
directly to the Manager of Corporate Compliance copies of all confirmations
and statements pertaining to margin accounts. Examples of an instruction
letter to a broker are shown in Exhibit B1.
Report of Transactions in Mellon Securities - Other Associates must report
in writing to the Manager of Corporate Compliance within ten calendar days
whenever they purchase or sell Mellon securities. Purchases and sales of
Mellon securities include the following:
. DRIP Optional Cash Purchases - Optional cash purchases under Mellon's
Dividend Reinvestment and Common Stock Purchase Plan (the "Mellon DRIP").
. Stock Options - The sale of stock received upon the exercise of an
associate stock option unless the sale is part of a "netting of shares" or
"cashless exercise" administered by the Human Resources Department (for
which the Human Resources Department will forward information to the
Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under the DRIP,
changes in elections under Mellon's Retirement Savings Plan, the receipt of
stock under Mellon's Restricted Stock Award Plan and the receipt or
exercise of options under Mellon's Long-Term Profit Incentive Plan are not
considered purchases or sales for the purpose of this reporting
requirement.
An example of a written report to the Manager of Corporate Compliance is
contained in Exhibit A.
Restrictions on Transactions in Other Securities
Margin Transactions - Prior to establishing a margin account, Other
Associates must obtain the written permission of the Manager of Corporate
Compliance. Other Associates having a margin account prior to the effective
date of this Policy must notify the Manager of Corporate Compliance of the
existence of such account.
31
<PAGE>
All associates having margin accounts, other than described below, must
designate the Manager of Corporate Compliance as an interested party on
each account. Associates must ensure that the Manager of Corporate
Compliance promptly receives copies of all trade confirmations and
statements relating to the accounts directly from the broker. If requested
by a brokerage firm, please contact the Manager of Corporate Compliance to
obtain a letter (sometimes referred to as a "407 letter") granting
permission to maintain a margin account. Trade confirmations and statements
are not required on margin accounts established at Dreyfus Investment
Services Corporation for the sole purpose of cashless exercises of Mellon
employee stock options. In addition, products may be offered by a
broker/dealer that, because of their characteristics, are considered margin
accounts but have been determined by the Manager of Corporate Compliance to
be outside the scope of this Policy (e.g., a Cash Management account which
provides overdraft protection for the customer). Any questions regarding
the establishment, use and reporting of margin accounts should be directed
to the Manager of Corporate Compliance. An example of an instruction letter
to a broker is shown in Exhibit B1.
Private Placements - Other Associates are prohibited from acquiring any
security in a private placement unless they obtain the prior written
approval of the Manager of Corporate Compliance and the Associate's
department head. Approval must be given by both of the aforementioned
persons for the acquisition to be considered approved.
As there could be many reasons for preclearance being granted or denied,
Other Associates should not infer from the preclearance response anything
regarding the security for which preclearance was requested.
Although making a preclearance request does not obligate an Other Associate
to do the transaction, it should be noted that:
. preclearance authorization will expire at the end of the third business
day after it is received (the day authorization is granted is considered
the first business day);
. preclearance requests should not be made for a transaction that the
Other Associate does not intend to make; and
. Other Associates should not discuss with anyone else, inside or outside
Mellon, the response they received to a preclearance request.
Every Other Associate must follow these procedures or risk serious
sanctions, including dismissal. If you have any questions about these
procedures you should consult the Manager of Corporate Compliance.
Interpretive issues that arise under these procedures shall be decided by,
and are subject to the discretion of, the Manager of Corporate Compliance.
Confidential Treatment
The Manager of Corporate Compliance will use his or her best efforts to
assure that all requests for preclearance, all personal securities
transaction reports and all reports of securities holdings are treated as
"Personal and Confidential." However, such documents will be available for
inspection by appropriate regulatory agencies and other parties within and
outside Mellon as are necessary to evaluate compliance with or sanctions
under this Policy.
32
<PAGE>
PART V - APPLICABLE TO
NONMANAGEMENT BOARD MEMBER
Nonmanagement Board Member -
You are considered to be a Nonmanagement Board Member if you are:
. a director of Dreyfus who is not also an officer or employee of
Dreyfus ("Dreyfus Board Member"); or
. a director, trustee or managing general partner of any investment
company who is not also an officer or employee of Dreyfus ("Mutual Fund
Board Member").
The term "Independent" Mutual Fund Board Member means those Mutual Fund
Board Members who are not deemed "interested persons" of an investment
company, as defined by the Investment Company Act of 1940, as amended.
Standards of Conduct for Nonmanagement Board Member
Outside Activities - Nonmanagement Board Members are prohibited from:
. accepting nomination or serving as a director, trustee or managing
general partner of an investment company not advised by Dreyfus, without
the express prior approval of the board of directors of Dreyfus and the
board of directors/trustees or managing general partners of the pertinent
Dreyfus-managed fund(s) for which a Nonmanagement Board Member serves as a
director, trustee or managing general partner;
. accepting employment with or acting as a consultant to any person
acting as a registered investment adviser to an investment company without
the express prior approval of the board of directors of Dreyfus;
. owning Mellon securities if the Nonmanagement Board Member is an
"Independent" Mutual Fund Board Member, (since that would destroy his or
her "independent" status); and/or
. buying or selling Mellon's publicly traded securities during a
blackout period, which begins the 16th day of the last month of each
calendar quarter and ends three business days after Mellon publicly
announces the financial results for that quarter.
Insider Trading and Tipping - The provisions set forth in Section Two,
"Insider Trading and Tipping," are applicable to Nonmanagement Board
Members.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
Conflict of Interest - No Nonmanagement Board Member may recommend a
securities transaction for Mellon, Dreyfus or any Dreyfus-managed fund
without disclosing any interest he or she has in such securities or issuer
thereof (other than an interest in publicly traded securities where the
total investment is less than or equal to $25,000), including:
. any direct or indirect beneficial ownership of any securities of such
issuer;
. any contemplated transaction by the Nonmanagement Board Member in such
securities;
. any position with such issuer or its affiliates; and
. any present or proposed business relationship between such issuer or
its affiliates and the Nonmanagement Board Member or any party in which the
Nonmanagement Board Member has a beneficial ownership interest (see
"Beneficial Ownership", Section Four, "Restrictions on Transaction in
Mellon Securities").
Portfolio Information - No Nonmanagement Board Member may divulge the
current portfolio positions, or current or anticipated portfolio
transactions, programs or studies, of Mellon, Dreyfus or any
Dreyfus-managed fund, to anyone unless it is properly within his or her
responsibilities as a Nonmanagement Board Member to do so.
Material Nonpublic Information - No Nonmanagement Board Member may engage
in or recommend any securities transaction, for his or her own benefit or
for the benefit of others, including Mellon, Dreyfus or any Dreyfus-managed
fund, while in possession of material nonpublic information. No
Nonmanagement Board Member may communicate material nonpublic information
to others unless it is properly within his or her responsibilities as a
Nonmanagement Board Member to do so.
Preclearance for Personal Securities Transactions -
Nonmanagement Board Members are permitted to engage in personal securities
transactions without obtaining prior approval from the Preclearance
Compliance Officer.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
Personal Security Transactions Reports -
. "Independent" Mutual Fund Board Members - Any "Independent" Mutual
Fund Board Members, as defined above, who effects a securities transaction
where he or she knew, or in the ordinary course of fulfilling his or her
official duties should have known, that during the 15-day period
immediately preceding or after the date of such transaction, the same
security was purchased or sold, or was being considered for purchase or
sale by Dreyfus (including any investment company or other account managed
by Dreyfus), are required to report such personal securities transaction.
In the event a personal securities transaction report is required, it must
be submitted to the Preclearance Compliance Officer not later than ten days
after the end of the calendar quarter in which the transaction to which the
report relates was effected. The report must include the date of the
transaction, the title and number of shares or principal amount of the
security, the nature of the transaction (e.g., purchase, sale or any other
type of acquisition or disposition), the price at which the transaction was
effected and the name of the broker or other entity with or through whom
the transaction was effected. This reporting requirement can be satisfied
by sending a copy of the confirmation statement regarding such transactions
to the Preclearance Compliance Officer within the time period specified.
Notwithstanding the foregoing, personal securities transaction reports are
not required with respect to any securities transaction described in
"Exemption from the Requirement to Preclear" in Part III.
. Dreyfus Board Members and "Interested" Mutual Fund Board Members -
Dreyfus Board Members and Mutual Fund Board Members who are "interested
persons" of an investment company, as defined by the Investment Company Act
of 1940, are required to report their personal securities transactions.
Personal securities transaction reports are required with respect to any
securities transaction other than those described in "Exemptions from
Requirement to Preclear" on Page 21. Personal securities transaction
reports are required to be submitted to the Preclearance Compliance Officer
not later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected. The report must
include the date of the transaction, the title and number of shares or
principal amount of the security, the nature of the transaction (e.g.,
purchase, sale or any other type of acquisition or disposition), the price
at which the transaction was effected and the name of the broker or other
entity with or through whom the transaction was effected. This reporting
requirement can be satisfied by sending a copy of the confirmation
statement regarding such transactions to the Preclearance Compliance
Officer within the time period specified.
Confidential Treatment
The Preclearance Compliance Officer will use his or her best efforts to
assure that all personal securities transaction reports are treated as
"Personal and Confidential." However, such documents will be available for
inspection by appropriate regulatory agencies and other parties within and
outside Mellon as are necessary to evaluate compliance with or sanctions
under this Policy.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
GLOSSARY
DEFINITIONS
. approval - written consent or written notice of nonobjection.
. associate - any employee of Mellon Bank Corporation or its direct or
indirect subsidiaries; does not include outside consultants or temporary
help.
. beneficial ownership - securities owned of record or held in the
associate's name are generally considered to be beneficially owned by the
associate.
Securities held in the name of any other person are deemed to be
beneficially owned by the associate if by reason of any contract,
understanding, relationship, agreement or other arrangement, the associate
obtains therefrom benefits substantially equivalent to those of ownership,
including the power to vote, or to direct the disposition of, such
securities. Beneficial ownership includes securities held by others for the
associate's benefit (regardless of record ownership), e.g. securities held
for the associate or members of the associate's immediate family, defined
below, by agents, custodians, brokers, trustees, executors or other
administrators; securities owned by the associate, but which have not been
transferred into the associate's name on the books of the company;
securities which the associate has pledged; or securities owned by a
corporation that should be regarded as the associate's personal holding
corporation. As a natural person, beneficial ownership is deemed to include
securities held in the name or for the benefit of the associate's immediate
family, which includes the associate's spouse, the associate's minor
children and stepchildren and the associate's relatives or the relatives of
the associate's spouse who are sharing the associate's home, unless because
of countervailing circumstances, the associate does not enjoy benefits
substantially equivalent to those of ownership. Benefits substantially
equivalent to ownership include, for example, application of the income
derived from such securities to maintain a common home, meeting expenses
that such person otherwise would meet from other sources, and the ability
to exercise a controlling influence over the purchase, sale or voting of
such securities. An associate is also deemed the beneficial owner of
securities held in the name of some other person, even though the associate
does not obtain benefits of ownership, if the associate can vest or revest
title in himself at once, or at some future time.
In addition, a person will be deemed the beneficial owner of a security if
he has the right to acquire beneficial ownership of such security at any
time (within 60 days) including but not limited to any right to acquire:
(1) through the exercise of any option, warrant or right; (2) through the
conversion of a security; or (3) pursuant to the power to revoke a trust,
nondiscretionary account or similar arrangement.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
With respect to ownership of securities held in trust, beneficial ownership
includes ownership of securities as a trustee in instances where either the
associate as trustee or a member of the associate's "immediate family" has
a vested interest in the income or corpus of the trust, the ownership by
the associate of a vested beneficial interest in the trust and the
ownership of securities as a settlor of a trust in which the associate as
the settlor has the power to revoke the trust without obtaining the consent
of the beneficiaries. Certain exemptions to these trust beneficial
ownership rules exist, including an exemption for instances where
beneficial ownership is imposed solely by reason of the associate being
settlor or beneficiary of the securities held in trust and the ownership,
acquisition and disposition of such securities by the trust is made without
the associate's prior approval as settlor or beneficiary. "Immediate
family" of an associate as trustee means the associate's son or daughter
(including any legally adopted children) or any descendant of either, the
associate's stepson or stepdaughter, the associate's father or mother or
any ancestor of either, the associate's stepfather or stepmother and his
spouse.
To the extent that stockholders of a company use it as a personal trading
or investment medium and the company has no other substantial business,
stockholders are regarded as beneficial owners, to the extent of their
respective interests, of the stock thus invested or traded in. A general
partner in a partnership is considered to have indirect beneficial
ownership in the securities held by the partnership to the extent of his
pro rata interest in the partnership. Indirect beneficial ownership is not,
however, considered to exist solely by reason of an indirect interest in
portfolio securities held by any holding company registered under the
Public Utility Holding Company Act of 1935, a pension or retirement plan
holding securities of an issuer whose employees generally are beneficiaries
of the plan and a business trust with over 25 beneficiaries.
Any person who, directly or indirectly, creates or uses a trust, proxy,
power of attorney, pooling arrangement or any other contract, arrangement
or device with the purpose or effect of divesting such person of beneficial
ownership as part of a plan or scheme to evade the reporting requirements
of the Securities Exchange Act of 1934 shall be deemed the beneficial owner
of such security.
The final determination of beneficial ownership is a question to be
determined in light of the facts of a particular case. Thus, while the
associate may include security holdings of other members of his family, the
associate may nonetheless disclaim beneficial ownership of such securities.
. "Chinese Wall" Policy - procedures designed to restrict the flow of
information within Mellon from units or individuals who are likely to
receive material nonpublic information to units or individuals who trade in
securities or provide investment advice. (see pages 12-14).
. Corporation - Mellon Bank Corporation.
. Dreyfus - The Dreyfus Corporation and its subsidiaries.
. Dreyfus associate - any employee of Dreyfus; does not include outside
consultants or temporary help.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
. Exempt Securities - Exempt Securities are defined as:
- securities issued or guaranteed by the United States
government or agencies or instrumentalities;
- bankers' acceptances;
- bank certificates of deposit and time deposits;
- commercial paper;
- repurchase agreements; and
- securities issued by open-end investment companies.
. General Counsel - General Counsel of Mellon Bank Corporation
or any person to whom relevant authority is delegated by the
General Counsel.
. index fund - an investment company which seeks to mirror the
performance of the general market by investing in the same stocks
(and in the same proportion) as a broad-based market index.
. initial public offering (IPO) - the first offering of a
company's securities to the public.
. investment company - a company that issues securities that
represent an undivided interest in the net assets held by the
company. Mutual funds are investment companies that issue and
sell redeemable securities representing an undivided interest in
the net assets of the company.
. Manager of Corporate Compliance - - the associate within the
Risk Management and Compliance Department of Mellon Bank
Corporation who is responsible for administering the Confidential
Information and Securities Trading Policy, or any person to whom
relevant authority is delegated by the Manager of Corporate
Compliance.
. Mellon - Mellon Bank Corporation and all of its direct and
indirect subsidiaries.
. naked option - an option sold by the investor which
obligates him or her to sell a security which he or she does not
own.
. nondiscretionary trading account - an account over which the
associated person has no direct or indirect control over the
investment decision-making process.
. option - a security which gives the investor the right but
not the obligation to buy or sell a specific security at a
specified price within a specified time.
. Preclearance Compliance Officer - a person designated by the
Manager of Corporate Compliance, to administer, among other
things, associates' preclearance request for a specific business
unit.
. private placement - an offering of securities that is exempt
from registration under the Securities Act of 1933 because it
does not constitute a public offering.
. Senior Management Committee - the Senior Management
Committee of Mellon Bank Corporation.
. short sale - the sale of a security that is not owned by the
seller at the time of the trade.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
INDEX OF EXHIBITS
EXHIBIT A Sample Report to Manager of Corporate Compliance
EXHIBIT B Sample Instruction Letter to Broker
EXHIBIT C Preclearance Request Form
EXHIBIT D Personal Securities Holdings Form
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
EXHIBIT A
Sample Report to Manager of Corporate Compliance
Mellon Interoffice
Memorandum
Date: From: Associate
To: Manager, Corporate Compliance Dept:
Aim #:
Aim #: 151-4342 Phone:
Fax:
Re: Report of Securities Trade
Type of Associate: Insider Risk
Investment
Other
Type of Security: Mellon Bank Corporation
Mellon Bank Corporation - optional cash
purchases under Dividend Reinvestment
and Common Stock Purchase Plan Mellon
Bank Corporation - exercise of an
employee stock option
Attached is a copy of the confirmation slip for a securities
trade I engaged in on _____________________, 19xx.
or
On _____________________, 19xx, I (purchased/sold)
_______________________ shares of ___________________________
through (broker). I will arrange to have a copy of the
confirmation slip for this trade delivered to you as soon as
possible.
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
EXHIBIT B1
For Non-Dreyfus Associates
Date
Broker ABC
Street Address
City, State ZIP
Re: John Smith & Mary Smith
Account No. xxxxxxxxxxxxx
In connection with my existing brokerage accounts at your firm noted above,
please be advised that the Risk Management and Compliance Department of
Mellon Bank should be noted as an "Interested Party" with respect to my
accounts. They should, therefore, be sent copies of all trade confirmations
and account statements relating to my account.
Please send the requested documentation ensuring the account holder's name
appears on all correspondence to:
Manager, Corporate Compliance
Mellon Bank
P.O. Box 3130
Pittsburgh, PA 15230-3130
Thank you for your cooperation in this request.
Sincerely yours,
Associate
cc: Manager, Corporate Compliance (151-4342)
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
EXHIBIT B2
For Dreyfus Associates
Date
Broker ABC
Street Address
City, State ZIP
Re: John Smith & Mary Smith
Account No. xxxxxxxxxxxxx
In connection with my existing brokerage accounts at your firm noted above,
please be advised that the Risk Management and Compliance Department of
Dreyfus Corporation should be noted as an "Interested Party" with respect
to my accounts. They should, therefore, be sent copies of all trade
confirmations and account statements relating to my account.
Please send the requested documentation ensuring the account holder's name
appears on all correspondence to:
Compliance Officer at The Dreyfus Corporation
200 Park Avenue
Legal Department
New York, NY 10166
Thank you for your cooperation in this request.
Sincerely yours,
Associate
cc: Dreyfus Compliance
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
EXHIBIT C1
PRECLEARANCE REQUEST FORM Non Dreyfus
Associates
================================================================================
To: Manager, Corporate Compliance 151-4342 (All Insider and Other Associates)
Designated Preclearance Compliance Officer (All Investment Associates
---------------------------------------------------------------------
excluding Dreyfus)
------------------
Associate Name: Title: Date:
Phone #: AIM #: Social Security #: Department:
================================================================================
ACCOUNT INFORMATION
- -------------------
Account Name: Account Number: Name of Broker/Bank:
Relationship to registered owner(s) (if other than associate)
I hereby request approval to execute the following trade in the above account:
================================================================================
TRANSACTION DETAIL
- ------------------
Buy: Sell: Security/Contract: No. of Shares:
If sale, date Margin Transaction: Initial Public Offering: Private Placement:
acquired: [_]Yes [_]Yes [_]Yes
================================================================================
DISCLOSURE STATEMENT
- --------------------
I hereby represent that, to the best of my knowledge, neither I nor the
registered account holder is (1) attempting to benefit personally from any
existing business relationship between the issuer and Mellon or any
Mellon-related fund or affiliate; (2) engaging in any manipulative or deceptive
trading activity; (3) in possession of any material non-public information
concerning the security to which is request relates.
Associate Signature: Date:
================================================================================
COMPLIANCE OFFICER USE ONLY
- ---------------------------
Approved: Disapproved: Authorized Signatory: Date:
Comments:
Note: This preclearance will lapse at the end of the day on , 19 .
---------- ----
If you decide not to effect the trade, please notify me.
- --------------------------------------------------------
Date: By:
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
EXHIBIT C2
PRECLEARANCE REQUEST FORM Dreyfus Associates Only
================================================================================
To: Dreyfus Compliance Officer
- --- --------------------------
Associate Name: Title: Date:
Phone #: AIM #: Social Security #: Department:
================================================================================
ACCOUNT INFORMATION
- -------------------
Account Name: Account Number: Name of Broker/Bank:
Relationship to registered owner(s) (if other than associate)
I hereby request approval to execute the following trade in the above account:
================================================================================
TRANSACTION DETAIL
- ------------------
Buy: Sell: Security/Contract: Symbol:
Amount: Current Market Price: If sale, date acquired: Margin Transaction:
Is this a New Issue? Is this a Private Placement?
[_]Yes [_]No [_]Yes [_]No
Reason for Transaction, identify source:
================================================================================
DISCLOSURE STATEMENT
- --------------------
I hereby represent that, to the best of my knowledge, neither I nor the
registered account holder is (1) attempting to benefit personally from any
existing business relationship between the issuer and Mellon or any
Mellon-related fund or affiliate; (2) engaging in any manipulative or deceptive
trading activity; (3) in possession of any material non-public information
concerning the security to which is request relates.
Associate Signature: Date:
================================================================================
COMPLIANCE OFFICER USE ONLY
- ---------------------------
Approved: Disapproved: Authorized Signatory: Date:
Comments:
Note: This preclearance will lapse at the end of the day on , 19 .
---------- ----
If you decide not to effect the trade, please notify me.
- -------------------------------------------------------
Date: By:
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CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
EXHIBIT D1
Return to: Manager, Corporate Compliance
Mellon Bank
P.O. Box 3130
Pittsburgh, PA 15230-3130
STATEMENT OF SECURITY HOLDINGS
As of
1. List of all securities in which you, your immediate family, any other
member of your immediate household, or any trust or estate of which you or
your spouse is a trustee or fiduciary or beneficiary, or of which your
minor child is a beneficiary, or any person for whom you direct or effect
transactions under a power of attorney or otherwise, maintain a beneficial
ownership - (see Glossary in Policy). If none, write NONE. Securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, bankers' acceptances, bank certificates of deposit and
time deposits, commercial paper, repurchase agreements and shares of
registered investment companies need not be listed. If your list is
extensive, please attach a copy of the most recent statement from your
broker(s), rather than list them on this form.
- --------------------------------------------------------------------------------
Name of Security Type of Security Amount of Shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. List the names and addresses of any broker/dealers holding accounts in
which you have a beneficial interest, including the name of your registered
representative (if applicable), the account registration and the relevant
account numbers. If none, write NONE.
- -------------------------------------------------------------------------------
Broker/ Address Name of Account Account
Dealer Registered Registration Number(s)
Representative
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
I certify that the statements made by me on this form are true, complete
and correct to the best of my knowledge and belief, and are made in good
faith. I acknowledge I have read, understood and complied with the
Confidential Information and Securities Trading Policy.
Date: Printed Name:
Signature:
45
CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
EXHIBIT D2
Return to: Compliance Officer at the Dreyfus Corporation
200 Park Avenue
Legal Department
New York, NY 10166
STATEMENT OF SECURITY HOLDINGS
As of
1. List of all securities in which you, your immediate family, any other
member of your immediate household, or any trust or estate of which you or
your spouse is a trustee or fiduciary or beneficiary, or of which your
minor child is a beneficiary, or any person for whom you direct or effect
transactions under a power of attorney or otherwise, maintain a beneficial
interest. If none, write NONE. Securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, bankers' acceptances, bank
certificates of deposit and time deposits, commercial paper, repurchase
agreements and shares of registered investment companies need not be
listed. If your list is extensive, please attach a copy of the most recent
statement from your broker(s), rather than list them on this form.
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Name of Security Type of Security Amount of Shares
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2. List the names and addresses of any broker/dealers holding accounts in
which you have a beneficial interest, including the name of your registered
representative (if applicable), the account registration and the relevant
account numbers. If none, write NONE.
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Broker/ Address Name of Account Account
Dealer Registered Registration Number(s)
Representative
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I certify that the statements made by me on this form are true, complete
and correct to the best of my knowledge and belief, and are made in good
faith. I acknowledge I have read, understood and complied with the
Confidential Information and Securities Trading Policy.
Date: Printed Name:
Signature:
46
CONFIDENTIAL INFORMATION AND SECURITIES TRADING POLICY-019 04/24/00
<PAGE>
Exhibit O(vii)
CODE OF ETHICS
ARROYO SECO, INC.
PACIFIC AMERICAN INCOME SHARES
WESTERN ASSET MANAGEMENT COMPANY
LM INSTITUTIONAL FUND ADVISORS I
A. STATEMENT OF GENERAL PRINCIPLES
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1. All Access Persons that are affiliated with Western Asset are
fiduciaries to the Accounts and Funds managed by the Companies. All
Access Persons are also fiduciaries to Fund shareholders. Accordingly,
Access Persons shall place the interests of the Accounts and Funds
first.
2. Access Persons must scrupulously avoid serving their personal
interests ahead of the interests of the Accounts and Funds. Each
Access Person shall handle his or her activities and personal
securities transactions in such a manner as to avoid any actual or
potential conflict of interest or any abuse of his or her position
of trust and responsibility. No Access Person shall take
inappropriate advantage of his or her position.
3. All Access Persons shall act in accordance with both the letter and the
spirit of this Code. Technical compliance with the Code's procedures will
not automatically insulate from scrutiny activity that may indicate an
abuse of fiduciary duties.
4. It will be considered a violation of this Code to do indirectly that
which is prohibited directly. For example, it will be considered a
violation of this Code to do indirectly through options, futures or
other derivatives that which is prohibited directly through
transactions in securities themselves.
5. This Code is to be interpreted consistent with the Securities and
Exchange Commission's rules governing codes of ethics.
6. Directors of the Funds (who are not employees of Western Asset) will be
subject to the Reporting requirements outlined in Section D.5., but will
not be subject to the Pre-Clearance requirements of Section B or the
Prohibited Transaction requirements of Section C.
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B. PRE-CLEARANCE
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1. Except for the transactions set forth in Section D below, any Securities
Transaction which an Access Person has a direct or indirect Beneficial
Interest must be pre-cleared with a Pre-Clearance Officer.
2. Pre-Clearance Procedures - Prior to entering an order for a Securities
------------------------
Transaction that requires pre-clearance, the Access Person must complete,
in writing, a Trade Authorization Request form and submit the completed
form to a Pre-Clearance Officer. Proposed Securities Transactions of a
Pre-Clearance Officer that require pre-clearance must be submitted to
another Pre-Clearance Officer. In the event an Access Person is unable to
complete a Trade Authorization Request form, the Access Person requesting
Pre-Clearance may designate someone else to complete the Form on his or
her behalf in order to obtain proper authorization.
3. Length of Trade Authorization Approval - The authorization provided by
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the Pre-Clearance Officer is effective until the earlier of (1) its
revocation, (2) the close of business on the trading day after the
authorization is granted, or (3) the Access Person learns that the
information in the Trade Authorization Request Form is not accurate. If
the order for the Securities Transaction is not placed within that
period, a new authorization must be obtained before the Securities
Transaction is placed. If a Securities Transaction is placed but has not
been executed before the authorization expires (e.g. a limit order), no
new authorization is necessary unless the person placing the order amends
it in any way.
C. PROHIBITED TRANSACTIONS
-----------------------
1. Always Prohibited Securities Transactions - The following Securities
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Transactions are prohibited and will not be authorized under any
circumstances:
a. Inside Information - Any transaction in a Security by an individual who
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possesses material nonpublic information regarding the Security or the
issuer of the Security;
b. Market Manipulation - Transactions intended to raise, lower, or
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maintain the price of any Security or to create a false appearance of
active trading;
c. Others - Any other transaction deemed by the Pre-Clearance Officer to
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involve a conflict of interest, possible diversions of corporate
opportunity, or an appearance of impropriety.
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2. Generally Prohibited Securities Transactions - Unless exempted by Section
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D, the following Securities Transactions are prohibited and will not be
authorized by the Pre-Clearance Officer absent exceptional circumstances.
The prohibitions apply only to the categories of Access Persons specified.
a. Initial Public Offerings (Investment Persons Only) - Investment Persons
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shall not acquire any securities in an initial public offering.
b. Private Placements (Investment Persons Only) - Investment Persons shall
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not acquire any securities in a private placement without written prior
approval from the Code of Ethics Committee. This prior approval shall
take into account among other factors, whether the investment
opportunity should be reserved for the Funds or Accounts, and whether
the opportunity is being offered to the Investment Person by virtue of
his or relationship with the Companies. An Investment Person who has
been authorized to acquire securities in a private placement shall
disclose that investment when he or she plays a part in any subsequent
consideration by the Fund, Accounts or the Adviser of an investment in
the issuer. In such circumstances, the decision to purchase securities
of the issuer shall be subject to an independent review by persons with
no personal interest in the issuer.
c. One-Day Blackout Period - No Access Person shall execute a personal
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securities transaction in a security on any day during which an Account
or Fund has placed or executed a purchase or sell order on the same
security.
d. Seven-Day Blackout Period (Portfolio Managers Only) - Portfolio
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Managers may not purchase or sell securities for their own account
within seven calendar days of a purchase or sale of the same Securities
(or Equivalent Securities) by an Account or Fund managed by that
Portfolio Manager.
e. 60-Day Blackout Period (Investment Persons Only) - Investment Personnel
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may not (for their own beneficial interest) purchase a Security within
60 days of the sale of the same Security; nor may an Investment Person
sell a Security within 60 days of a purchase of the same Security if at
any time during the 60 days the security was held by an Account or Fund
managed by the Companies.
D. EXEMPTIONS
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1. Exemption from Pre-Clearance and Treatment as a Prohibited Transaction -
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The following Securities Transactions are exempt from the pre-clearance
requirements of Section B and the prohibited transaction restrictions of
Section C.
a. Mutual Funds - Any purchase or sale of a Security issued by any
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registered open-end investment company;
b. No Knowledge - Securities Transactions where the Access Person has no
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knowledge of the transaction before it is completed (for example a
transaction effected by a Trustee of a blind trust or discretionary
trades involving an investment partnership or investment club, in
connection with which the Access Person is neither consulted nor
advised of the trade before it is executed);
c. Certain Corporate Actions - Any acquisition of Securities, through
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stock dividends, dividend reinvestments, stock splits, reverse stock
splits, mergers, consolidations, spin-offs, exercise of rights or other
similar corporate reorganizations or distributions generally applicable
to all holders of the same class of Securities;
d. Options-Related Activity - Any acquisition or disposition of a security
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in connection with an option-related Securities Transaction that has
been previously approved. For example, if an Access Person receives
approval to write a covered call, and the call is later exercised, the
provisions of Section B and C are not applicable to the sale of the
underlying security.
e. Commodities, Futures and Options on Futures - Any Securities
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Transaction involving commodities, futures (including currency futures
and futures on securities comprising part of a broad-based, publicly
traded market based index of stocks) and options on futures.
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f. Miscellaneous - Any transaction in the following:
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. Bankers Acceptances,
. Bank Certificates of Deposit,
. Commercial Paper,
. Repurchase Agreements,
. Securities that are direct obligations of the U.S. Government,
. Other securities as may from time to time be designated in writing
by the Code of Ethics Committee on the grounds that the risk of
abuse is minimal or non-existent.
The Securities listed above are not exempt from the reporting requirements
set forth in Section E.
2. Exemption from Treatment as a Prohibited Transaction - The following
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Securities Transactions are exempt from the prohibited transaction
restrictions of Section C.
a. Options on Broad-Based Indices - The prohibitions in Section C are not
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applicable to any Securities Transaction involving options on certain
broad-based indices designated by the Code of Ethics Committee. The
broad-based indices designated may be changed from time-to-time and
presently consist of the S&P 500, the S&P 100, NASDAQ 100, Nikkei 300,
NYSE Composite and Wilshire Small Cap indices.
b. Sovereign debt of Non-U.S. Governments - The prohibitions in Section C
--------------------------------------
are not applicable to any Securities Transactions involving Sovereign
debt of Non-U.S. governments with an issue size greater than $1 billion
and issued in either the home currency or U.S. dollars.
E. REPORTING
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1. Initial Reports - All Access Persons (except Disinterested Fund
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Directors), within ten (10) days of being designated an Access Person,
must disclose all Covered Securities in which they have a direct or
indirect Beneficial Interest. Such report must include the title, number
of shares and principal amount of each Covered Security. Access Persons
must also report all brokerage accounts in which they have a direct or
indirect Beneficial Interest. Initial reports must be signed and dated by
the Access Person.
2. Monthly Reports - All employees of the companies shall submit to the
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Compliance Department, within 10 days after month end, a report of all
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Securities Transactions during the previous month. The report shall state
the title and number of shares, the principal amount of the security
involved, the interest rate and maturity date if applicable, the date and
nature of the transaction, the price at which the transaction was effected
and the name of the broker, dealer or bank with or through whom the
transaction was effected. The report shall also include the date it was
submitted by the employee. Access Persons who have reported Securities
Transactions through duplicate copies of broker confirmations and
statements are not required to file a monthly report. In addition, all
employees of the companies shall submit a report of any securities account
established during the month for the direct or indirect benefit of the
employee. The report shall include the name of the broker, dealer or bank
with whom the employee established the account, the date the account was
established and the date the report was submitted to the Compliance
Department.
3. Annual Reports - All Access Person shall provide annually a list of all
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Covered Securities in which they have a direct or indirect Beneficial
Interest. The list shall include the title, number of shares and principal
amount of each Covered Security. In addition, each Access Person must
report to the Compliance Department the account number, account name and
brokerage firm of each Securities account in which the Access Person has a
direct or indirect Beneficial Interest. The information in the annual
report must be current as of a date no more than 30 days before the report
is submitted. Annually all Access Persons shall certify that they have
complied with the requirements of this Code and that they have disclosed
or reported all Securities Transactions required to be disclosed or
reported pursuant to the requirements of this Code.
4. Confirmations and Statements - All Access Persons must arrange for the
----------------------------
Compliance Department to receive directly from any broker, dealer or bank
duplicate copies of confirmations for Securities Transactions and periodic
statements for each brokerage account in which the Access Person has a
direct or indirect Beneficial Interest. The foregoing does not apply to
transactions and holdings in registered open-end investment companies.
5. Directors Reports (for Directors of Pacific American Income Shares and LM
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Institutional Fund Advisors I):
a. Disinterested Directors - Access Persons who are Disinterested
-----------------------
Directors are not required to make a report regarding Securities
Transactions except where such director knew or, in the ordinary course
of fulfilling his or her official duties as a director of Pacific
American Income Shares or LM Institutional Fund Advisors I, should have
known that during the 15-day period immediately preceding or after
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<PAGE>
the date of the transaction in a security by the director, such
security is or was purchased or sold by the relevant Fund or such
purchase or sale is or was considered by the relevant Fund or its
Advisers.
b. Interested Directors - Access Persons who are Interested Directors are
--------------------
required to make the following reports:
i. Initial Reports (See Paragraph E.1.)
ii. Quarterly Reports: No later than 10 days after the end of each
calendar quarter the following information must be reported:
- Transaction Report for Covered Securities including: Date of
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each transaction, full security description, number of shares
and principal amount, nature of transaction, price at which
transaction effected, broker, dealer or bank through which
transaction affected, date report is submitted.
- Account Report including: Any new account established by the
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Director in which any securities were held during the quarter
for the direct or indirect benefit of the Director. Such report
to also include the name of the broker, dealer or bank with whom
the Director established the account, the date the account was
established and the date the report is submitted.
iii. Annual Reports (See Paragraph E.3.)
F. FIDUCIARY DUTIES
----------------
1. Confidentiality - Access Persons are prohibited from revealing information
---------------
relating to the investment intentions, activities or portfolios of the
Accounts or Funds, except to persons whose responsibilities require
knowledge of the information.
2. Gifts: On occasion, because of their position with Western Asset, Access
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Persons may be offered, or may receive without notice, gifts from clients,
vendors or other persons not affiliated with the firm. Acceptance of
extraordinary or extravagant gifts is not permissible. Any such gifts must
be declined or returned in order to protect the reputation of the firm.
Gifts of nominal value (i.e., gifts whose reasonable value is no more than
$100 per year), and customary business meals, entertainment (e.g. sporting
events), and promotional items (e.g. pens, mugs, T-shirts) may be
accepted. If an Access Person receives any gift that might be prohibited
under this Code, the Access Person must immediately inform the Compliance
Department. An Access Person may not personally give any gift with a value
in excess of $100 per year to persons associated with securities or
financial
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organizations, including clients of the firm.
3. Service as a Director: No Investment Person may serve on the board of
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directors of any publicly traded company without prior written
authorization from the Code of Ethics Committee. If the Committee
authorizes board service, it shall do so subject to appropriate
safeguards, including in most cases "Chinese Walls" or other procedures to
isolate the Investment Person from the making of investment decisions
related to the company on whose board the Investment Person serves.
4. Remedies and Sanctions: If the Code of Ethics Committee determines that an
----------------------
employee of the Companies has committed a violation of the Code, the
Committee may impose sanctions and take other actions as it deems
appropriate.
G. DEFINITIONS
-----------
1. "Access Persons" means (a) all interested directors and officers of Arroyo
--------------
Seco, Inc., Pacific American Income Shares, Western Asset Management
Company and LM Institutional Fund Advisors I (the Companies); (b) all
employees of the Companies who, in connection with their regular functions
or duties, make, participate in, or obtain information, regarding the
purchase or sale of a security by an Account or Fund; (c) any natural
person in a control relationship to the Companies who obtains information
concerning recommendations made to an Account or Fund with regard to the
purchase or sale of a security and such other persons as the Compliance
Department shall designate.
2. "Account" means any portfolio managed by Western Asset Management Company.
--------
3. "Beneficial Interest" means the opportunity, directly or indirectly,
-------------------
through any contract, arrangement, understanding, relationship or
otherwise, to profit, or share in any profit derived from, a transaction
in the subject Securities. An Access Person is deemed to have a
Beneficial Interest in the following:
a. any Security owned individually by the Access Person;
b. any Security owned jointly by the Access Person with others (for
example, joint accounts, spousal accounts, UTMA accounts, partnerships,
trusts and controlling interests in corporations); and
c. any Security in which a member of the Access Person's Immediate Family
has a Beneficial Interest if the Security is held in an account over
which the Access Person has decision making authority (for example, the
Access Person acts as trustee, executor, or guardian). In addition, an
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Access Person is presumed to have a Beneficial Interest in any Security
in which a member of the Access Person's Immediate Family has a
Beneficial Interest if the Immediate Family member resides in the same
household as the Access Person. This presumption may be rebutted if the
Access Person is able to provide the Compliance Department with
satisfactory assurances that the Access Person has no material
Beneficial Interest in the Security and exercises no control over
investment decisions made regarding the Security. Access Persons may
use the form attached (Certification of No Beneficial Interest) in
connection with such requests
4. "Companies" means Arroyo Seco Inc., Pacific American Income Shares,
---------
Western Asset Management Company and LM Institutional Fund Advisors I.
5. "Covered Security" means any security defined below except covered
----------------
security does not include direct obligations of the U.S. Government,
bankers acceptances, bank certificates of deposit, commercial paper and
high quality short-term debt instruments including repurchase
agreements and shares issued by open-end Funds.
6. "Fund" means any investment company registered under the Investment
----
Company Act of 1940 managed by Western Asset Management Company.
7. "Immediate Family" of an Access Person means any of the following
----------------
persons who reside in the same household as the Access Person:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
8. "Director" means a director of Pacific American Income Shares or LM
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Institutional Fund Advisors I.
9. "Investment Person" means each Portfolio Manager (as defined below) and
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any Access Person who, in connection with his or her regular functions
or duties provides information and advice to a Portfolio Manager or who
helps execute a Portfolio Manager's decisions.
10. "Portfolio Manager" means a person who has or shares principal
-----------------
day-to-day responsibility for managing an Account or Fund.
11. "Pre-Clearance Officer" means the persons designated as Pre-Clearance
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Officers by the Code of Ethics Committee.
12. "Security" means any security (as that term is defined under the
--------
Investment Company Act of 1940) and any financial instrument related to
a security, including options on securities, futures contracts, options
on futures contracts and any other derivative.
13. "Securities Transaction" means a purchase or sale of Securities in
----------------------
which an Access Person or a member of his or her Immediate Family has
or acquires a Beneficial Interest.
14. "Western Asset Code of Ethics Committee" ("Code of Ethics Committee")
--------------------------------------
Members of the Western Asset Code of Ethics Committee shall be
designated by the Western Asset Executive Committee.
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<PAGE>
Exhibit O(viii)
CODE OF ETHICS
of
SANFORD C. BERNSTEIN & CO., INC.
Effective April, 2000
<PAGE>
TABLE OF CONTENTS
GENERAL PRINCIPLES..........................................................1
PERSONAL TRADING RULES......................................................2
You May Trade Only at Bernstein........................................2
General Statement of Policy.......................................2
Outside Accounts Must Be Transferred To Bernstein.................3
Initial Disclosure Upon Commencing Employment.....................3
Outside Trades Permitted Only in Very Limited Circumstances.......4
Heightened Disclosure Requirements For Outside Accounts...........5
Pre-Approval Required For All Trades By All Staff Members..............6
General Statement of Policy.......................................6
Steps in the Pre-Approval Process.................................6
Step One: Order Ticket / Memo Request..........................7
Step Two: Approval by Your Supervisor or Other
Authorized Person....................................7
Step Three: Approval of Trading Desk..........................8
Exception: Trades in Authorized Outside Accounts.....8
Our Trading Desk Will Not Permit You to Trade Ahead of Clients....9
General Statement of Policy....................................9
Limited Exception..............................................9
Other Reasons For Trading Desk Disapproval.......................10
Prohibition Against Insider Trading...................................11
Restrictions On Participating In:
IPOs.............................................................12
Private Securities Transactions and Other
Investment Opportunities of Limited Availability.................12
No Short-Term Trading.................................................13
Special Restrictions For:
Decisionmakers...................................................14
Others with Access to Decisions..................................14
<PAGE>
Contrary Trading Restrictions For Members of:
Investment Policy Groups.........................................15
Global Equity Portfolio Management Department....................15
(Including All Domestic and International Equity Portfolio
Management Groups and Investment Management Trading)....15
Investment Management Research Department........................15
(Including All Domestic and International Equity
Research Departments)...................................15
Fixed Income Department..........................................15
Other Special Restrictions For:
Investment Management Research Analysts..........................16
Investment Management Research Associates........................16
Fixed Income Staff Performing Research...........................16
Special Restrictions For:
Institutional Research Analysts..................................17
Institutional Research Associates................................17
Other Special Restrictions Imposed By Your Department.................18
OTHER CONDUCT RULES........................................................19
Gifts.................................................................19
Gifts Received By Staff Members..................................19
Entertaining Clients.............................................19
Gifts Given By Staff Members.....................................20
Compensation to Certain Employees of Others......................20
Financial Interest....................................................21
Awarding Contracts....................................................21
Outside Directorships & Officerships and Other Outside Activities.....22
No Recommendation or Sale of Products Other Than Bernstein Products...22
<PAGE>
Proprietary Information...............................................23
Identity of Companies on Our Restricted Lists....................23
Clients' Proprietary Information.................................23
Our Research.....................................................23
Other............................................................23
Rumors................................................................24
Communication With Clients & the Public...............................24
Reportable Events Involving Staff Members.............................25
ADMINISTRATION.............................................................26
Annual Report and Certification.......................................26
Ongoing Supervisory Oversight.........................................26
Education & Training..................................................26
Reporting of Violations...............................................26
SANCTIONS..................................................................27
OVERSIGHT BY BOARD OF DIRECTORS............................................28
Establishment and Oversight of This Code..............................28
Our Annual Report and Certification to the Board......................28
RECORD-KEEPING.............................................................29
The Legal Department is Responsible For:..............................29
The Brokerage Operations Department is Responsible For:...............30
<PAGE>
GENERAL PRINCIPLES
This Code of Ethics is based on the following general principles that will
govern your conduct while a member of the Bernstein staff:
. You must place the interests of our clients first;
. You must conduct your personal securities and commodities transactions
and perform your job duties in keeping with this Code of Ethics and in
a manner so as to avoid any actual or potential conflicts of interest
or any abuse of your position of trust and responsibility;
. You must not take inappropriate advantage of your position with our
firm;
. You must comply with all applicable laws, rules and regulations, and
make a good faith effort to comply with the spirit and intent of all
such laws, rules and regulations; and
. You must comply with all other policies and procedures of our firm,
such as those in our Compliance Manual and in Bernstein & You, our
employee handbook.
For purposes of this Code, we use the term "client" to include all
institutional brokerage, investment advisory and investment management clients
of Bernstein, including each portfolio of the Sanford C. Bernstein Fund, Inc.
and any other investment company for which we provide investment management
services.
When we refer to "you" in this Code and "your" obligations to abide by this
Code's personal trading restrictions, we also mean any other person, including
your spouse or other family member, whose investment decisions you control or
influence.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
1
<PAGE>
PERSONAL TRADING RULES
You May Trade Only at Bernstein
- -------------------------------
General Statement of Policy
In order to monitor adherence to the trading rules described in this Code
of Ethics, we require you to maintain at Bernstein all of your securities
accounts and the accounts that you control, and we restrict you from controlling
or influencing any securities or commodities trades outside Bernstein without
our special permission. This means, for example:
. Your securities (including options) accounts must be here;
. The securities accounts of your spouse and other immediate family
members sharing your household must be here if you control the
selection of investments for those accounts;
. You must obtain approval from the firm to maintain a commodities
account with a futures commission merchant;
. You may not control or influence any securities or commodities trade
outside Bernstein without our permission;
. Your IRA or 401(k) account must be here if you can control the
selection of particular stocks for the account;
. You may not trade securities "online;"
. You may not participate directly or indirectly in any investment club
in which members pool their funds and invest;
. If you have a financial interest in a trust, and you control the
selection of securities for the trust, the trust account must be here;
and
. The accounts of charities must be here if you control the selection of
investments for those accounts.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
2
<PAGE>
PERSONAL TRADING RULES - You May Trade Only at Bernstein (continued)
Outside Accounts Must Be Transferred To Bernstein
Beginning on your first day as our staff member, you may not control or
influence the trading of securities or commodities in any outside account. You
must transfer to us all outside accounts as soon as possible unless we give you
permission to maintain the accounts outside Bernstein (as explained on the next
page). You can obtain from the Legal Department the forms for transferring
accounts and for opening accounts at Bernstein.
Initial Disclosure Upon Commencing Employment
In order for us to monitor and facilitate your transfer of accounts to us
and to otherwise help us to implement this Code, you must report to us within 10
days of joining our firm the information described below. The Personnel
Department will provide you with the forms for making this report.
. Information about all securities and commodities accounts you control
or influence (including accounts with brokers, dealers, banks or
mutual fund companies). You will need to attach the most recent
account statements.
. Information about stock certificates you hold.
. Information about all private placements, limited partnership
interests and other private investments that you control or influence.
. Information about all positions you hold as an employee, officer or
director of any business organization outside Bernstein.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
3
<PAGE>
PERSONAL TRADING RULES - You May Trade Only at Bernstein (continued)
Outside Trades Permitted Only in Very Limited Circumstances
We may, in our sole discretion, approve the following requests to execute
trades outside Bernstein:
. You want to trade commodities (such as futures). Since we do not
provide those services, we might allow you to maintain an outside
account for this type of trading, but you will need to obtain our
permission before each trade in accordance with procedures established
by the Legal Department.
. You want to maintain elsewhere a managed account (also known as a
discretionary account) in which an investment manager or other
fiduciary has the authority to make trading decisions on your behalf.
In reviewing your request to maintain an outside managed account, we
might ask for written confirmation that you have no power to choose or
recommend securities to trade for the account. Requests of this type
from principals or shareholders of Bernstein are generally denied.
. You want to hold or trade mutual funds outside Bernstein. If you hold
the mutual fund account directly with a mutual fund company and
without utilizing the services of a broker, you will simply need to
report the account to our Legal Department on a form that we will
supply to you. If you hold the mutual funds in a brokerage account, we
may approve your request if you agree not to trade anything other than
mutual funds in the account.
. You have stock options granted to you by a former employer under an
employee stock option plan. The employer may have a program in place
to facilitate your exercise of options through a broker other than
Bernstein, and you want to participate in that program.
. You have a dividend reinvestment plan that you opened directly with an
issuer and not through a brokerage account. You want to maintain that
plan. You may simply need to report the plan to our Legal Department
on a form that we will supply to you. However, you will need to seek
our permission before selling the securities.
. You have a 401(k) plan through your former employer. You have the
ability to choose certain funds for investment, for example a
"balanced fund," or a "growth fund." You do not have the ability to
choose a "self-directed" option or otherwise to choose particular
securities in which to invest.
. You want to purchase Treasury Notes, Treasury Bonds or Treasury Bills
directly from (or sell directly to) the Federal Reserve Bank, or you
want to hold certificates of deposit ("CDs") at a bank. These do not
fall within the definition of "securities" for purposes of this Code.
. You want to participate in a private placement. You will need to seek
our approval in accordance with the policy described on page 12 of
this Code. If and when the issuer later becomes a public company, you
will need to transfer your investment to a brokerage account at
Bernstein if you wish to sell it.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
4
<PAGE>
PERSONAL TRADING RULES - You May Trade Only at Bernstein (continued)
Heightened Disclosure Requirements for Outside Accounts
For any securities or commodities accounts we give you permission to
maintain, control or influence outside of Bernstein, you must arrange for a copy
of the confirmation of each transaction and a copy of each monthly statement to
be provided promptly to our Legal Department. (The only exception is for mutual
funds held directly with a mutual fund company and not purchased utilizing the
services of a broker). Whenever possible, you must arrange for these copies to
be sent directly by the other firm where the account is held.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
5
<PAGE>
PERSONAL TRADING RULES (continued)
Pre-Approval Required For All Trades By All Staff Members
- ---------------------------------------------------------
General Statement of Policy
Each time you want to place a securities or commodities trade in an account
you control or influence (whether at Bernstein or outside of Bernstein as
permitted by the Legal Department), you will first need to obtain our permission
in accordance with the three-step set of procedures described below. These
procedures do not apply to:
. trades in open-end mutual fund shares;
. non-volitional trading (for example: stocks splits or dividend
reinvestment plans); or
. trades in managed accounts in which Bernstein or another investment
manager is selecting securities or commodities to trade.
We will disapprove your trade in our sole discretion if we believe that it
would violate this Code, that the frequency or nature of your trading activity
may distract you from your job responsibilities, or that the trade may otherwise
be inappropriate or may raise the appearance of a possible conflict of interest.
Steps in the Pre-Approval Process
You will need to take three steps in order to place a typical trade. The
three steps are summarized in the chart below, and each step is explained on the
following pages. Other pre-approval requirements will apply if you are seeking
to trade options or if you are seeking to participate in an investment
opportunity of limited availability.
Step One: Step Two:
- -------- --------
Complete Step Three: Obtain Approval by
Order Ticket/ ---------- Supervisor or Other
Memo Request Obtain Approval of Authorized Person
[GRAPHIC] Trading Desk
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
6
<PAGE>
PERSONAL TRADING RULES - Pre-Approval Required for All Trades by All Staff
Members (continued)
Step One: Order Ticket / Memo Request
Before placing a securities trade at Bernstein, you will need to fill out a
trade order ticket. You can obtain these tickets from the Legal Department or
the trading desk. From time to time, we will distribute instructions for filling
out the trade order ticket.
Before placing a securities or commodities trade outside Bernstein (in the
limited circumstances where outside trading is permitted), you will need to
describe the proposed trade in a written memo. You can obtain a form of
memoranda from the Legal Department.
Step Two: Approval by Your Supervisor or Other Authorized Person
You must take your trade order ticket (or your memo, in the case of trades
in authorized outside accounts) to your supervisor or other person authorized to
approve trades. The Legal Department will maintain and distribute periodically a
current list of supervisors and other persons who have authority to approve
personal trades. That person must place his or her initials and the date on the
order ticket (or memo) to document the appropriate approval.
Approval to conduct a personal trade will remain effective only for the day
in which it is granted. If you fail or decline to complete the trade that day
for any reason (including that the trading desk holds your order pending a
client transaction), you must obtain a new approval to place the trade on
another day.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
7
<PAGE>
PERSONAL TRADING RULES - Pre-Approval Required for All Trades by All Staff
Members (continued)
Step Three: Approval of Trading Desk
After you have obtained approval from your supervisor or other authorized
person to place a trade, you will still need to obtain the approval of our
trading desk. From time to time, we will distribute procedures for obtaining
trading desk approval. The trading desk, if it approves your proposed
transaction, will place the trade for you, and we will send you a confirmation
in the mail.
Exception: Trades in Authorized Outside Accounts
The only exception is for trades in authorized outside accounts such as
commodities accounts. For these outside trades, you will need to bring your memo
(reflecting the approval of your supervisor or other authorized person) to the
Legal Department before you place the trade outside. The Legal Department will
obtain any additional approvals required and will retain a copy of your
memorandum.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
8
<PAGE>
PERSONAL TRADING RULES - Pre-Approval Required for All Trades by All Staff
Members (continued)
Our Trading Desk Will Not Permit You to Trade Ahead of Clients
General Statement of Policy
In order to minimize the potential for conflicts of interest between you
and our clients, our trading desks will not permit you to trade under the
following circumstances:
. Related client orders are pending; or
. A large volume of client orders is forthcoming (e.g., the security is
listed as a "priority purchase," "priority sale," "trim" or
"established tax trade").
Under certain circumstances, your trade might be delayed for several days or
even weeks until the pending or anticipated client orders are completed.
Limited Exception
Our trading desk may grant you an exception under the circumstances set
forth below. This exception will not be available to you if you are a member of
the Fixed Income Department (with respect to fixed income trades), or if you are
a member of an equity IPG or any Equity Portfolio Management Department,
including Investment Management Trading (with respect to equity trades).
. Your trade involves a relatively insignificant number of shares,
typically less than 500 shares or securities convertible into less than 500
shares, or less than 25 bonds or securities convertible into less than 25
bonds;
AND
. The security you are seeking to buy is not part of a large buy program
for client accounts, or the security you are seeking to sell is not part of
a large sell program for client accounts;
AND
. Clients are waiting for a better price before trading. For equities,
pending client orders typically must be awaiting prices that differ from
the market price by at least a 1/2 point. For fixed income securities,
pending client orders typically must be awaiting prices that differ from
the market price by at least 10 basis points in yield.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
9
<PAGE>
PERSONAL TRADING RULES - Pre-Approval Required for All Trades by All Staff
Members (continued)
Other Reasons for Trading Desk Disapproval
In addition, our trading desks will not permit you to trade if, for
example:
. Our firm has agreed to participate in the underwriting for new
securities of an issuer and your order is for securities of that issuer.
. Our Institutional Research Department is initiating research coverage
of a company or has reached a research recommendation about the company
that has not yet been disseminated, and you want to trade securities
related to that company.
. Our Institutional Research Department has just disseminated a research
report initiating coverage of a company or changing a recommendation
regarding a company, and you want to trade securities related to that
company. Our trading desks will not execute for you any personal trades
relating to that company until 48 hours following the dissemination of our
research.
. You want to buy a security that our firm has purchased for clients. It
is a security that our firm still would want to purchase for clients but
cannot do so because of regulatory or policy restrictions limiting the
ownership interest in an issuer that we can acquire for ourselves or our
clients.
Moreover, our trading desks may from time to time establish rules for
employee personal trading designed to ensure that we do not divert to our
employees the resources needed to serve our clients. For example, our trading
desk may prohibit personal trading by staff members during certain times of the
day during which the desk tends to be particularly busy with client trades.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
10
<PAGE>
PERSONAL TRADING RULES (continued)
Prohibition Against Insider Trading
- -----------------------------------
The securities laws and our policies prohibit persons or entities from
acting on inside information, in other words information that is "material" and
"nonpublic." Information may be material and nonpublic if there is a substantial
likelihood that a reasonable investor would consider the information important
in making his or her investment decision and the information is not generally
available to ordinary investors in the marketplace. The information may come
from the company itself, or may come from other sources such as investment
bankers.
. You may not trade while in possession of inside information. This is
true regardless of how you learned about the information.
. If you believe that you have received inside information, you must
immediately cease contact with the source and consult an attorney in
the Legal Department. You must not communicate the inside information
to your supervisor, to anyone in the Portfolio Management Department,
or to anyone other than attorneys in the Legal Department. The Legal
Department will determine whether and to what extent we should impose
trading restrictions on you and/or us. Also, you should speak with the
Legal Department if you believe that other staff members have
communicated or traded upon inside information. The Legal Department,
to the extent practicable, will keep your identity confidential in any
resulting investigation.
. While in possession of inside information, you may not recommend the
purchase or sale of a security to our firm or to any other individual
or entity. You also may not make any comment that could be construed
as a recommendation to purchase or sell the security, or take any
other action with respect to that security.
. In the course of our syndicate activities, meaning where the Firm has
agreed to participate in an underwriting, we may come into possession
of inside information regarding a company issuing or planning to issue
securities. On those occasions, the Syndicate Department must
establish a "Chinese Wall," which is the name given to procedures
designed to prevent the disclosure of such information to other
departments of our Firm. Our Compliance Manual sets forth our Chinese
Wall procedures. If you are a member of the Syndicate Department or
are otherwise instructed by the Legal Department to create a Chinese
Wall, you must familiarize yourself with these procedures.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
11
<PAGE>
PERSONAL TRADING RULES (continued)
Restrictions On Participating In:
- --------------------------------
[X] IPOs
[X] Private Securities Transactions and Other Investment Opportunities of
Limited Availability
You must obtain the approval of your supervisor and the Legal
Department before you directly or indirectly participate in either of the
following activities:
. Initial Public Offerings. In order to ensure our firm's compliance
------------------------
with NASD rules, we prohibit our staff members from directly or indirectly
acquiring an interest in an IPO except under very limited circumstances.
For example, if you hold a passbook savings account at a savings & loan,
our Legal Department might permit you (subject to certain conditions) to
participate as an account holder in a conversion of the savings & loan to a
public company, so long as our firm is not participating in the conversion.
. Limited Offerings. This includes any private securities transaction or
-----------------
other investment opportunity of limited availability, including new
offerings or other investments not registered with the SEC (for example
private real estate limited partnerships, investments in family-owned
businesses and hedge fund investments). In responding to these requests, we
will consider, among other things, whether your investment is passive,
whether the investment opportunity should be reserved for our clients, and
whether the opportunity is being offered to you by virtue of your position
here.
You can obtain from the Legal Department forms for requesting approval. The
Legal Department and your supervisor will approve or disapprove your request in
their discretion.
Bernstein Principals and Shareholders should consult their Principals'
Agreement and Shareholders' Agreement respectively for additional restrictions.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
12
<PAGE>
PERSONAL TRADING RULES (continued)
No Short-Term Trading
- ---------------------
. You may not buy a security if you have sold the same or equivalent
security within the prior thirty (30) calendar days.
. You may not sell a security if you have bought the same or equivalent
security within the prior thirty (30) calendar days.
. This rule does not apply to Treasuries or derivatives on Treasuries,
although even for this limited category of securities you may not
trade on an intra-day basis.
. Exemptions from this rule will be granted only in rare instances, such
as in cases of financial hardship. To obtain an exemption, you must
make a written request for approval from your supervisor and the Legal
Department.
. If you profit from a short-term trade in violation of this section,
you will be required to disgorge your profits to charity.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
13
<PAGE>
PERSONAL TRADING RULES (continued)
Special Restrictions For:
- -------------------------
[X] Decisionmakers
[X] Others with Access to Decisions
> Investment Management. You may not trade in a security if you
----------------------
participate in, or have reason to know about, our firm's consideration of
the security for the accounts of our investment management clients. This
restriction will continue throughout the implementation of any resulting
major buy or sell program. The following examples illustrate this policy:
> You are seriously considering recommending a security to our
applicable investment policy group ("IPG") for purchase or sale for
clients' accounts, or you are a member of an IPG where discussions of such
a recommendation are taking place. You may not trade in the security. You
may trade, if otherwise consistent with this Code, only after the IPG has
considered and rejected your recommendation, or after the IPG has accepted
your recommendation and client orders have been completed.
> You know (for example, because you overheard a conversation) that
our firm intends in the reasonably foreseeable future to place orders to
purchase a security for our clients' accounts. You may not purchase the
security. You may trade, if otherwise consistent with this Code, only after
we have decided not to purchase the security for clients, or after all
client orders have been filled.
Moreover, you must disclose to the chairperson of the applicable IPG any of
your direct or indirect holdings in a security when you are participating
in our firm's determination of whether to buy or sell the security for our
clients.
> Institutional Services. You may not trade in a security if you have
-----------------------
reason to know that our firm is intending to recommend the security to
clients of our institutional services business, or that any of those
clients are intending in the reasonably foreseeable future to place orders
in the security. The following examples illustrate this policy:
> You become aware of a forthcoming research recommendation of an
institutional research analyst prior to its dissemination (whether with
respect to initiating coverage or to changing a previously-issued
recommendation). You may not trade in that security until 48 hours after
the research report has been disseminated.
> You learn that a client of our institutional services business
intends to place an order to purchase a security. You may not trade in the
security until the client's orders have been filled.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
14
<PAGE>
PERSONAL TRADING RULES (continued)
Contrary Trading Restrictions For Members Of:
- ---------------------------------------------
[X] Investment Policy Groups
[X] Global Equity Portfolio Management Department
(Including All Domestic and International Equity Portfolio Management
Groups and Investment Management Trading)
[X] Investment Management Research Department (Including All Domestic and
International Equity Research Departments)
[X] Fixed Income Department
. General Statement of Policy. If you work in one of these areas, you
----------------------------
may not make any trades that are contrary to the action our firm is
taking, or is contemplating taking in the reasonably foreseeable
future, for our managed accounts in that area. There is only one
exception - if we are holding a stock for clients solely for purposes
of diversification to control the portfolio's tracking error versus
its benchmark index, then the contrary trading policy would not
restrict you from selling the stock.
. Illustrations of Policy. For example, if our firm is buying or holding
------------------------
a fixed income security for clients' accounts, then you may not sell
the security if you are a member of the fixed income department or you
serve as a member of an investment policy group that encompasses fixed
income securities. Similarly, if our firm has just completed a sell
program for an equity security, you may not buy the security if you
are a member of the Global Equity Portfolio Management Department or
Investment Management Research Department, or if you serve as a member
of an investment policy group that encompasses equity securities.
Generally, staff member purchases more than seven (7) days after we
have completed our sell program for clients will not be considered
contrary trading under this policy.
. Exemptions. To obtain an exemption from this policy, you will need the
-----------
written approval of your supervisor and the Legal Department, which
may consider such factors as the length of your holding period, the
size of your holding in absolute terms and relative to your other
holdings, and the reasons for the proposed trade.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
15
<PAGE>
PERSONAL TRADING RULES (continued)
Other Special Restrictions For:
- ------------------------------
[X] Investment Management Research Analysts
[X] Investment Management Research Associates
[X] Fixed Income Staff Performing Research
. If you are a staff member in one of these positions, you must sell all
holdings in a security upon your initiation of research coverage of
that security or before otherwise recommending the security for
purchase for managed accounts. The Director of Investment Management
Research, or the Chief Investment Officer or Director of Global Fixed
Income Investments (as applicable), may grant discretionary exceptions
to this policy (in consultation with the Legal Department) based on
factors including:
> the length of time since your last purchase of the
security,
> your intent regarding future holding of the security,
> reasons for your original purchase,
> the liquidity, capitalization and volatility of the
security, and
> the size of your holding (in both absolute terms and
relative to your overall portfolio).
We might condition an exception on your agreement to hold the security
until our clients have sold it.
. You may not trade options of any kind in securities you cover.
. You may not "short" securities you cover.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
16
<PAGE>
PERSONAL TRADING RULES (continued)
Special Restrictions For:
- -------------------------
|X| Institutional Research Analysts
|X| Institutional Research Associates
. You must sell all holdings in a security upon your initiation of
research coverage of that security. In other words, you may not
recommend purchase of a security that you hold. The applicable
Director of Institutional Research may grant discretionary exceptions
to this policy (in consultation with the Legal Department) based on
factors including:
* the length of time since your last purchase of the security,
* your intent regarding future holding of the security,
* reasons for your original purchase,
* the liquidity, capitalization and volatility of the
security, and
* the size of your holding (in both absolute terms and
relative to your overall portfolio).
The Director might condition an exception on your agreement to hold the
security until we have disseminated to our institutional clients a
recommendation that the security is rated "underperform." The Director also
might grant limited exceptions for new employees with respect to securities
purchased before joining us.
. With respect to securities you cover, you may purchase only securities
that you rate "outperform," and you may sell only securities that you
rate "underperform." You may neither buy nor sell securities that you
rate "marketperform." To obtain an exemption from this policy, you
will need the written approval of your supervisor and the Legal
Department, which might consider such factors as the length of your
holding period, the size of your holding in absolute terms and
relative to your other holdings, and the reasons for the proposed
trade.
. You may not trade options of any kind in securities you cover.
. You may not "short" securities you cover.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
17
<PAGE>
PERSONAL TRADING RULES (continued)
Other Special Restrictions Imposed By Your Department
- -----------------------------------------------------
From time to time, any department in our firm may establish rules for
personal trading that cover staff members in that department and that take into
consideration the particular functions and duties of those staff members. Any
personal trading rules issued by your department managers will be in addition to
the rules in this Code.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
18
<PAGE>
OTHER CONDUCT RULES
Gifts
- -----
The following policies do not apply to personal gifts between staff
members, or to personal gifts between a staff member and a family member or
personal friend that are given or received outside of a business related
setting.
Gifts Received By Staff Members
You may not accept any gift (including gifts of tickets to sporting events
or theatre where the person providing the entertainment is not present) other
than gifts of nominal value (under $100) from any one person in any one year.
Under no circumstances may you accept a gift of cash.
Entertaining Clients
You may engage in normal and customary business entertainment (such as
business meals, sporting events and shows) provided that you are present for the
event.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
19
<PAGE>
OTHER CONDUCT RULES--Gifts (continued)
Gifts Given By Staff Members
You may not give or permit to be given anything of value, including
gratuities, in excess of $100 per individual per year to any person where such
payment or gratuity is in relation to the business of the recipient's employer.
This limit applies, for example, to a gift of tickets to an event if you will
not be accompanying the recipient to the event. The maximum is $50 if the
recipient is a principal, officer or employee of the NYSE or its subsidiaries.
You may give gifts of securities to charity, and we permit you to choose
the securities you wish to give from any type of securities account. Please note
the following regarding the charity's subsequent sale of those securities. If
the charity's account is a managed account held at Bernstein, and the charity
wishes to sell the gifted security, then the charity's account will compete
equally (for allocation purposes) with the managed accounts of our other
clients. If the charity's account is one for which you have the power to control
the choice of securities to trade (and thus the charity's account is a brokerage
account held at Bernstein), then the charity will be required to wait for client
orders to be completed before selling the securities that it received from you.
Compensation to Certain Employees of Others
Bernstein is permitted by applicable regulations to pay for services of up
to $200 per person per year to certain specified operations persons with the
prior written consent of a Senior Vice President or Vice President of
Operations. Such permitted recipients include a telephone clerk on the New York
Stock Exchange floor who provides courtesy telephone relief to the Firm's floor
clerk or handles orders for the Firm. Please refer to the Firm's Compliance
Manual for detailed procedures regarding compensation of this type.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
20
<PAGE>
OTHER CONDUCT RULES (continued)
Financial Interest
- ------------------
You may not act on the firm's behalf in any transaction involving persons
or entities with whom you or your family has any significant connection or
financial interest without prior written approval from our Board of Directors.
You should direct to the office of the General Counsel any requests for approval
from the Board of Directors. For purposes of this policy, your family includes
parents, parents-in-law, spouse, siblings, siblings-in-law, children,
children-in-law, or a person to whom you provide material support.
Awarding Contracts
- ------------------
We must award orders, contracts and commitments to suppliers strictly based
on merit and without favoritism. The Legal Department must review and approve
all contracts for goods or services before execution, and an authorized Firm
officer must sign each contract. The officer signing the contract must provide a
copy of the final, signed version to the Legal Department for retention.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
21
<PAGE>
OTHER CONDUCT RULES (continued)
Outside Directorships & Officerships and Other Outside Activities
Whether or not in connection with your duties and responsibilities at
Bernstein, you may not accept the following without prior written approval from
the Board of Directors:
. A directorship or officership of any company or organization (other
than a charitable organization), regardless of whether you receive
compensation, or
. Outside employment or remuneration from any source for any services
performed (for example, consulting fees or finder's fees).
You must submit any requests for such approval in writing to the General
Counsel. In a rare instance in which we grant your request to serve as a board
member of a public company, we may require that you be isolated from making any
decisions for our clients with respect to investing in that company.
You may not use the firm's name in connection with any outside activity
without prior written approval from our Board of Directors. You must submit any
request for approval in writing to the General Counsel.
No Recommendation or Sale of Products Other Than Bernstein Products
- -------------------------------------------------------------------
You may not recommend to clients that they participate in any
securities transaction (including any private transaction) other than a
Bernstein product. And, you may not receive "selling" or other compensation in
connection with any securities transaction (including any private transaction)
other than a Bernstein product.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
22
<PAGE>
OTHER CONDUCT RULES (continued)
Proprietary Information
- -----------------------
Identity of Companies on Our Restricted Lists
Our firm maintains lists of securities relating to companies for which we
have agreed to participate in an underwriting, or about which we intend to
publish a research recommendation. You may not disclose outside our Firm the
identity of securities on these lists, since the fact that we have listed a
security may signal the market that we know of a significant development which
may affect the price of the security.
Clients' Proprietary Information
You must never disclose confidential business or personal information,
including names of clients, client account balances, financial information
obtained from a client, or anticipated changes in the management or financial
condition of a client, outside the normal and necessary course of the firm's
business. This policy does not preclude you from sharing information about a
client with his or her lawyers, accountants or other advisors upon the client's
request.
Our Research
Our firm gathers and develops information that we use to service our
clients. For example, our Institutional Research Analysts publish "Black Book"
reports. You may not disclose this information outside the firm except as
required to perform your job duties. Also, any material marked "Not for External
Distribution," including research prepared by investment management research
analysts, should not be distributed outside the firm.
Other
During the course of your employment, you may have access to information
relating to our business, including information that provides our firm with a
competitive advantage. This confidential information may include, for example,
information relating to our investment strategies, our investment management
processes or systems, our existing or anticipated corporate activity, our
financial condition or performance, or compensation paid to our staff. You may
not disclose confidential information to anyone outside Bernstein except in the
course of the proper exercise of your job duties.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
23
<PAGE>
OTHER CONDUCT RULES (continued)
Rumors
- ------
New York Stock Exchange rules, as well as our policy, prohibit the
circulation of rumors concerning the affairs of any company, as well as the
affairs of other NYSE member organizations, since rumors can influence
securities prices. If a rumor comes to your attention, you must contact the
Legal Department immediately and refrain from spreading the rumor.
Communication With Clients & The Public
- ---------------------------------------
Our Compliance Manual sets forth our policies and procedures regarding our
communications with clients or other members of the public, with which you must
comply. Also, you must comply with sections of our Compliance Manual governing
our review of incoming and outgoing correspondence of certain staff members. In
addition, when communicating with clients or the public, truthfulness and good
taste are always required.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
24
<PAGE>
OTHER CONDUCT RULES (continued)
Reportable Events Involving Staff Members
- -----------------------------------------
We are required to notify regulatory authorities in the event that a staff
member is involved in or is the subject of a "reportable event," for the most
part when a staff member faces actual or potential disciplinary action or finds
him or herself in some other kind of legal or regulatory trouble. While we are
likely to become aware of certain types of reportable events in the course of
our supervision of staff members, we may not necessarily be aware of all
reportable events without your disclosure. In order to facilitate our firm's
compliance with these requirements, you are required to notify the Legal
Department immediately in the event you, or a person under your supervision,
comes under scrutiny by our firm or any outside person or entity or engages in
conduct warranting a higher level of supervisory oversight by our firm. For
example, you must notify the our Legal Department if you, or a person under your
supervision:
. violates a law or regulation, or any agreement with or rule or
standard of any government agency, self-regulatory organization or
business or professional organization;
. is the subject of any customer complaint;
. is named as a defendant or respondent in any proceeding;
. is denied registration or membership or is disciplined by any
regulatory or self-regulatory organization;
. makes any false or misleading statement, or omits a fact required to
be disclosed, in connection with any matter involving a regulatory
agency, whether in connection with an application, report, proceeding
or otherwise;
. is arrested, or is charged with, convicted of, pleads guilty to, or
pleads no contest to, any criminal offense (other than minor traffic
violations);
. has any association with an entity or person which was disciplined,
suspended, expelled or had its registration denied or revoked by any
agency, jurisdiction or organization, or which was convicted of, or
pleaded no contest to, any criminal offense;
. makes a compromise with creditors, files a bankruptcy petition or is
the subject of an involuntary bankruptcy petition;
. is or may become the subject of any internal disciplinary action;
. violates rules of our firm including this Code.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
25
<PAGE>
ADMINISTRATION
Annual Report and Certification
- -------------------------------
Annually, we will require you to certify on a form provided by the Legal
Department that you have read and understand this Code and have complied with
all applicable requirements. On the same form, we will require you to certify
the accuracy of our records regarding any accounts or investments you control or
influence outside of Bernstein and any outside business activities.
Ongoing Supervisory Oversight
- -----------------------------
The Legal Department and your department manager will receive information
about your personal trading and will investigate any aberrational trading
activity, trades that appear to violate this Code, or trades that otherwise
raise the appearance of impropriety. In addition to our procedures for
monitoring securities and commodities transactions and holdings, we also will,
in connection with our supervisory responsibilities, endeavor to monitor your
conduct to ensure compliance with other conduct rules in this Code.
Education & Training
- --------------------
We will periodically hold education and training programs in order to,
among other things, highlight the requirements of this Code. You are required to
attend the programs that we hold for you. In addition, if you are a "registered"
staff member, you are responsible for your compliance with continuing education
requirements of the regulatory authorities.
Reporting of Violations
- -----------------------
All departments must promptly report to the Legal Department any violations
of this Code. All departments should consult with the Legal Department before
imposing any sanctions for violations.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
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SANCTIONS
To ensure compliance with the letter and spirit of this Code and with all
applicable laws, we reserve the right in our sole and absolute discretion to:
. Cancel any trade with or without notice to you at your expense;
. Require you to forfeit any profit you have made;
. In the case of an approved outside account, instruct you to cancel the
trade at your expense; and/or
. Suspend or revoke your trading privileges at any time for violations
of the letter or spirit of this Code or any applicable law, in addition
to any other disciplinary action or sanction.
If we discover a violation of this Code, we will respond appropriately,
which may include sanctions such as a letter of censure and/or a fine, or
suspension or termination of employment. Certain violations of this Code may
also expose a staff member (as well as the Firm) to regulatory disclosure
requirements, criminal prosecution and claims for damages.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
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OVERSIGHT BY BOARD OF DIRECTORS
Establishment and Oversight of This Code
- ----------------------------------------
The Board of Directors has approved this Code of Ethics and is responsible
for overseeing its operation, including but not limited to approving any
amendments to this Code as may be necessary or appropriate in light of any
violations of this Code and changing circumstances. In approving this Code of
Ethics, our Board of Directors has determined that:
. Personal investing by our staff members does not conflict with the
interests of our clients provided that our staff members comply with
the policies, procedures and restrictions set forth in this Code; and
. In light of the nature of our business, this Code contains provisions
reasonably necessary to prevent conflicts of interest between our
staff members and our clients.
Our Annual Report and Certification to the Board
- ------------------------------------------------
At least once a year, we will provide the Boards of Directors of the
Sanford C. Bernstein Fund, Inc. and any other registered investment companies
for which we provide investment management services with a written report
describing any issues arising under this Code of Ethics or related procedures
since the last report, including, but not limited to:
. Information about material violations of the Code or procedures, or
violations that are material in the aggregate;
. Sanctions imposed in response to those violations;
. Information about any other significant conflicts of interest that arose
involving our personal investment policies;
. Procedures initiated or changes made to this Code since the last
report; and
. Amendments and modifications to the Code that we propose to make.
In connection with the annual report, we will also certify to each investment
company's Board of Directors that we have adopted and implemented such
procedures as we believe are reasonably necessary to prevent violations of this
Code of Ethics.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
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RECORD-KEEPING
The Legal Department Is Responsible For:
- ---------------------------------------
. Maintaining (or causing another department to maintain) copies of the
initial holdings reports and annual certifications for at least five years
after the end of the calendar year in which the report is made, the first
two years in an easily accessible place.
. Maintaining the original of each staff member memorandum requesting
permission to conduct a trade in an outside account, each of which reflects
the initials of the supervisor or other authorized person who approved the
trade and the date of that approval, for at least five years after the end
of the calendar year in which the memorandum was approved, the first two in
an easily accessible place.
. Maintaining copies of each broker trade confirmation for each
transaction in approved outside accounts, if any, and a copy of each
monthly or quarterly statement for those accounts, for at least five years
after the end of the calendar year in which the information is provided,
the first two years in an easily accessible place.
. Maintaining (or causing another department to maintain) records of all
persons, currently or within the past five years, required to make reports
of holdings and/or account activity, and of the persons responsible for
reviewing those reports, in an easily accessible place.
. Maintaining records of all approvals of, and the rationale supporting,
participations in IPOs, private placements and other investment
opportunities of limited availability, for at least five years after the
end of the calendar year in which the approval is granted.
. Maintaining in an easily accessible place a current copy of this Code of
Ethics and a copy of each Code of Ethics effective for the preceding five-
year period.
. Maintaining records of any violations of this Code and sanctions for
such violations in an easily accessible place for at least five years after
the end of the calendar year in which the violations occurred.
. Maintaining copies of our reports to Boards of Directors regarding this
Code for at least five years after the end of the calendar year in which
they are made, the first two years in an easily accessible place.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
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RECORD-KEEPING (continued)
The Brokerage Operations Department Is Responsible For:
- -------------------------------------------------------
. Maintaining records of all trade order tickets for the trades at
Bernstein in accounts controlled by staff members, each of which reflects
the initials of the supervisor or other authorized officer who approved the
trade and the date of that approval, for at least five years after the end
of the calendar year in which the trade was effected, the first two years
in an easily accessible place.
. Maintaining copies of all brokerage statements for accounts at Bernstein
controlled by staff members for at least five years after the end of the
calendar month to which they pertain, the first two years in an easily
accessible place.
It is your responsibility to read and understand this Code. Please direct any
questions about this Code to your supervisor or to the Legal Department.
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