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As filed with the Securities and Exchange Commission on January 12, 2001
File No. 333-18737
File No. 811-07989
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 9 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 11 [X]
METROPOLITAN WEST FUNDS
(Exact Name of Registrant as Specified on Charter)
11766 Wilshire Blvd., Suite 1580
Los Angeles, California 90025
(Address of Principal Executive Offices)
(310) 966-8900
(Registrant's Telephone Number)
Scott B. Dubchansky
11766 Wilshire Blvd., Suite 1580
Los Angeles, California 90025
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on ______________ pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[X] on March 30, 2001 pursuant to paragraph (a)(2) of Rule 485
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Please send Copy of Communications to:
DAVID A. HEARTH, ESQ. SANDRA L. ADAMS
Paul, Hastings, Janofsky & Walker LLP PFPC Inc.
345 California Street 3200 Horizon Drive
San Francisco, CA 94104-2635 King of Prussia, PA 19406
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METROPOLITAN WEST FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents*.
Part A - Combined Prospectus for
INTRINSIC VALUE EQUITY FUND
INTERNATIONAL VALUE FUND
Part B - Combined Statement of Additional Information for
INTRINSIC VALUE EQUITY FUND
INTERNATIONAL VALUE FUND
Part C - Registrant
Signature Page
*The prospectus and statement of additional information for the following funds
are not included in this filing:
METROPOLITAN WEST TOTAL RETURN BOND FUND - Class I Shares
METROPOLITAN WEST LOW DURATION BOND FUND - Class I Shares
METROPOLITAN WEST SHORT-TERM INVESTMENT FUND - Class I Shares
METROPOLITAN WEST TOTAL RETURN BOND FUND - Class M Shares
METROPOLITAN WEST LOW DURATION BOND FUND - Class M Shares
METROPOLITAN WEST SHORT-TERM INVESTMENT FUND - Class M Shares
METROPOLITAN WEST ALPHATRAK 500 FUND - Undesignated Shares
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MW FUNDS
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MW CAPITAL INTRINSIC VALUE EQUITY FUND
MW CAPITAL INTERNATIONAL VALUE FUND
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PROSPECTUS
MARCH 30, 2001
This prospectus contains essential information
for anyone considering an investment in these Funds.
Please read this document carefully and retain it
for future reference.
THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES
OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS.
IT IS A CRIMINAL OFFENSE TO STATE OR SUGGEST OTHERWISE.
------------------
METROPOLITAN WEST CAPITAL MANAGEMENT, LLC
------------------
For any additional information or questions regarding
information contained herein, please call (800) 241-4671
METROPOLITAN WEST FUNDS
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TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY AND FUND EXPENSES....................................1
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS -
INTRINSIC VALUE EQUITY FUND................................1
PERFORMANCE - INTRINSIC VALUE EQUITY FUND.......................2
FEES AND EXPENSES - INTRINSIC VALUE EQUITY FUND.................2
RISK/RETURN SUMMARY AND FUND EXPENSES....................................3
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS -
INTERNATIONAL VALUE FUND...................................3
PERFORMANCE - INTERNATIONAL VALUE FUND..........................4
FEES AND EXPENSES - INTERNATIONAL VALUE FUND....................4
FURTHER INFORMATION ABOUT INVESTMENT OBJECTIVES,
POLICIES AND RISKS..............................................5
ADVISER PERFORMANCE -- PREDECESSOR ACCOUNTS..............................7
ORGANIZATION AND MANAGEMENT.............................................11
HOW TO PURCHASE SHARES..................................................13
HOW TO REDEEM SHARES....................................................15
DIVIDENDS AND TAX STATUS................................................17
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RISK/RETURN SUMMARY AND FUND EXPENSES
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS - INTRINSIC VALUE EQUITY FUND
OBJECTIVE
The MW CAPITAL INTRINSIC VALUE EQUITY FUND (the "INTRINSIC VALUE FUND") seeks
long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Metropolitan West Capital Management, LLC (the "Subadviser ") seeks to identify
stocks of high-quality, growing businesses selling at a discount to what it
regards as their "intrinsic" values. The investment team believes it can add
value through superior stock selection, appropriate sector weightings and broad
diversification. This conservative "value" style is best suited for those
investors with a long-term investment horizon. There can be no assurance,
however, that the Subadviser's judgment about the higher potential value of an
equity security will ever be reflected in the market price of that security.
The intrinsic value approach is a type of "fundamental" analysis, which means
the Subadviser focuses on the underlying valuation of a company relative to its
prospects for growth, profitability and the capability of management. The
investment team evaluates each security as a business, not simply a stock market
vehicle. Team members assess the company much like a prudent businessperson
would when considering the purchase of the entire enterprise. The focus is
long-term and this conservative style is designed to foster capital preservation
and consistency of returns.
The Subadviser expects to emphasize investments in large capitalization
companies, but will also invest in some mid-capitalization companies (meaning a
stock market value of $2 billion to $15 billion).
PRINCIPAL INVESTMENT RISKS
By investing in stocks, the Fund may expose you to certain market risks that
could cause you to lose money, particularly a sudden decline in a holding's
share price or an overall decline in the stock market. As with any stock fund,
the value of your investment will fluctuate on a day-to-day basis with movements
in the stock market, as well as in response to activities of individual
companies.
Market risk is the risk that the price of a security will rise or fall because
of changing economic, political or market conditions, or because of a company's
individual situation. Additional market-related risks for this Fund include the
risk that:
- Value stocks fall out of favor (as has been the case during most of the
past several years)
- The market continues indefinitely to undervalue the stocks in the
Fund's portfolio
- The stocks in the Fund's portfolio turn out to be undervalued because
the Subadviser's initial evaluation of the stock was mistaken
- If the Fund's holdings reflect an overweighting of certain market
sectors compared to a general market index, the Fund's value may be
more volatile than that index.
WHO MAY WANT TO INVEST?
This Fund may be appropriate for investors who are:
- seeking long-term capital appreciation (without the need for
current income);
- willing to leave their money invested in the Fund for at least
three years;
- able to tolerate a loss in the value of their investment;
- not seeking absolute principal stability.
THE FUND ALONE DOES NOT PROVIDE
A BALANCED INVESTMENT PLAN.
1
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PERFORMANCE - INTRINSIC VALUE EQUITY FUND
The Fund is new and does not have a full calendar year of investment returns as
of the date of this prospectus.
FEES AND EXPENSES - INTRINSIC VALUE EQUITY FUND
As an investor in the Fund, you will pay the following expenses. The Fund has no
sales, redemption, exchange or account fees, although some institutions may
charge you a fee for shares you buy through them. Annual Fund operating expenses
are paid out of Fund assets, and are reflected in the share price.
ANNUAL FUND OPERATING EXPENSES
(FEES PAID FROM FUND ASSETS)
Management Fees (1)......................................... 0.70%
Rule 12b-1 Expenses (2)..................................... 0.00%
Other Expenses.............................................. 0.45%
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Total Annual Fund Operating Expenses................ 1.15%
=====
Fee Reduction and/or Expense Reimbursement (3) ............. 0.25%
Net Expenses........................................ 0.90%
(1) This includes a monthly fee payable by the Adviser to the Subadviser at
an annual rate of 0.55% for investment management services.
(2) The Fund has adopted a Rule 12b-1 plan but has not yet charged any fees
under the plan.
(3) The Adviser and Subadviser have contractually agreed to reduce their
fees and/or absorb expenses, and to pay a portion of the Fund's
distribution expenses, to limit the Fund's total annual operating
expenses (excluding interest, taxes and extraordinary expenses) to
0.90%. This contract has a one-year term, renewable at the end of each
fiscal year. Expense information is estimated.
EXAMPLE:
Use this table to compare fees and expenses of the Fund with those of other
funds. It illustrates the amount of fees and expenses you would pay assuming the
following:
- $10,000 initial investment in the Fund
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years
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$91 $340
2
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RISK/RETURN SUMMARY AND FUND EXPENSES
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS - INTERNATIONAL VALUE FUND
OBJECTIVE
The MW CAPITAL INTERNATIONAL VALUE FUND (the "INTERNATIONAL VALUE FUND") seeks
long-term capital appreciation with relatively low volatility.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will seek to achieve its investment objective by investing in a broad
array of foreign publicly traded and privately placed or non-listed securities
and American Depositary Receipts ("ADRs") traded in the United States. The Fund
may also invest in derivatives and other securities in an effort to hedge the
currency risks of foreign securities (but the Fund normally will not hedge those
risks).
The Subadviser will invest in a diversified group of politically stable
countries and emphasize those with stock markets it believes are generally
undervalued. The Fund will also be diversified among economic sectors and
specific industries.
Within these stock markets, the Subadviser seeks to identify stocks of foreign
companies that it believes are undervalued relative to prospects for growth,
profitability and capability of management. The Subadviser prefers that company
management exhibit efforts to enhance shareholder value.
The Subadviser also will emphasize companies it believes are sufficiently
seasoned to compete successfully internationally and with enough financial
strength to provide stability during adverse economic periods. The Subadviser
expects to emphasize investments in large capitalization companies, but will
also invest in some mid-capitalization companies (meaning a stock market value
of $2 billion to $15 billion).
PRINCIPAL INVESTMENT RISKS
By investing in stocks, the Fund may expose you to certain market risks that
could cause you to lose money, particularly a sudden decline in a holding's
share price or an overall decline in the stock market. As with any stock fund,
the value of your investment will fluctuate on a day-to-day basis with movements
in the stock market, as well as in response to activities of individual
companies.
Because foreign securities are normally denominated and traded in foreign
currencies, the value of the Fund's foreign investments may be influenced by
currency exchange rates and exchange control regulations. Even ADRs traded in
the U.S. may be affected by currency rates because of the effect on the
underlying company or security. There may be less information publicly available
about foreign issuers than U.S. issuers, and they are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the U.S. Foreign securities may be less liquid and more volatile
than comparable U.S. securities.
The Fund's investments in mid-cap stocks may expose shareholders to additional
risks. Medium-sized companies typically have more limited markets and financial
resources than larger companies, and their securities may trade less frequently
and in more limited volume than those of larger, more mature companies. As a
result, mid-cap stocks, and therefore the Fund, may fluctuate significantly more
in value than large-cap stocks and funds that focus exclusively on them.
WHO MAY WANT TO INVEST?
This Fund may be appropriate for investors who are:
- seeking long-term capital appreciation (without the need for
current income);
- willing to leave their money invested in the Fund for at least
three years;
- able to tolerate a loss in the value of their investment;
- not seeking absolute principal stability.
THE FUND ALONE DOES NOT PROVIDE
A BALANCED INVESTMENT PLAN.
3
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PERFORMANCE - INTERNATIONAL VALUE FUND
The Fund is new and does not have a full calendar year of investment returns as
of the date of this prospectus.
FEES AND EXPENSES - INTERNATIONAL VALUE FUND
As an investor in the Fund, you will pay the following expenses. The Fund has no
sales, redemption, exchange or account fees, although some institutions may
charge you a fee for shares you buy through them. Annual Fund operating expenses
are paid out of Fund assets, and are reflected in the share price.
ANNUAL FUND OPERATING EXPENSES -
(FEES PAID FROM FUND ASSETS)
Management Fees (1)........................................... 0.95%
Rule 12b-1 Expenses (2)....................................... 0.00%
Other Expenses................................................ 0.65%
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Total Annual Fund Operating Expenses.................. 1.60%
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Fee Reduction and/or Expense Reimbursement (3)................ 0.25%
Net Expenses.......................................... 1.35%
(1) This includes a monthly fee payable by the Adviser to the Subadviser at
an annual rate of 0.80% for investment management services.
(2) The Fund has adopted a Rule 12b-1 plan but has not yet charged any fees
under the plan.
(3) The Adviser and Subadviser have contractually agreed to reduce their
fees and/or absorb expenses, and to pay a portion of the Fund's
distribution expenses, to limit the Fund's total annual operating
expenses (excluding interest, taxes and extraordinary expenses) to
1.35%. This contract has a one- year term, renewable at the end of each
fiscal year. Expense information is estimated.
EXAMPLE:
Use this table to compare fees and expenses of the Fund with those of other
funds. It illustrates the amount of fees and expenses you would pay assuming the
following:
- $10,000 initial investment in the Fund
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years
------ -------
$137 $479
4
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FURTHER INFORMATION ABOUT
INVESTMENT OBJECTIVES, POLICIES AND RISKS
GENERAL
The Fund descriptions set forth in the Risk/Return Summary section of this
Prospectus are designed to help you choose the Fund that best fits your
investment objective. You may want to pursue more than one objective by
investing in more than one Fund. Each Fund's investment objective is a
fundamental policy, which cannot be changed without the approval of a majority
of the Fund's outstanding voting securities. There can be no assurance that any
objective will be met. In addition, each Fund may use certain types of
investments and investing techniques that are described in more detail in the
Statement of Additional Information.
"INTRINSIC" VALUE APPROACH
The Subadviser believes that not all value investing strategies are the same or
produce similar investment results. The Subadviser's "intrinsic" value approach
described earlier has other distinguishing features. For example, the Subadviser
currently places more emphasis on price-to-sales ratios (PSR) than conventional
price/earnings ratios because they have determined that PSR is a much better
valuation measure. Recent studies have shown that PSR may be one of the most
useful valuation methods available today; yet it is generally not well
understood and rarely used. The Subadviser continuously searches for "hidden
value" that it believes is not being recognized by the investment community.
Each Fund's Subadviser will often select investments for the Fund that are
considered to be unattractive by other investors or are unpopular with the
financial press.
Successful value investing requires an understanding that a cheap stock may not
be a good value or sound investment. The Subadviser seeks to buy only
well-managed businesses with improving fundamentals. This approach requires the
existence of one or more positive catalysts for change that will lead to added
shareholder value and a higher stock price. The ability and discipline to
identify fine companies selling at low prices with positive catalysts, and the
patience to let those investments mature, is the foundation of the Subadviser's
strategy.
PORTFOLIO TURNOVER
Portfolio securities are sold whenever the Subadviser believes it appropriate,
regardless of how long the securities have been held. Each Fund's investment
program emphasizes active portfolio management intended to accomplish a
long-term objective. The Subadviser does not expect portfolio turnover
significantly to exceed that of comparable funds. Portfolio turnover generally
involves some expense to the Funds, including brokerage commissions, dealer
markups and other transaction costs, and may result in the recognition of
capital gains that may be distributed to shareholders. Generally, portfolio
turnover over 100% is considered high and increases these costs.
RISKS OF INVESTING IN FOREIGN SECURITIES
Investments by the INTERNATIONAL VALUE FUND in foreign securities involve
certain risk considerations not typically associated with investing in
securities of U.S. issuers, including: (a) currency devaluations and other
currency exchange rate fluctuations; (b) political uncertainty and instability;
(c) more substantial government involvement in the economy; (d) higher rates of
inflation; (e) less government supervision and regulation of the securities
markets and participants in those markets; (f) controls on foreign investment
and limitations on repatriation of invested capital and on a Fund's ability to
exchange local currencies for U.S. dollars; (g) greater price volatility,
substantially less liquidity and significantly smaller capitalization of
securities markets; (h) absence of uniform accounting and auditing standards;
(i) generally higher commission expenses; (j) delay in settlement of securities
transactions; and (k) greater difficulty in enforcing shareholder rights and
remedies.
RISKS OF USING CERTAIN DERIVATIVES
Participation in the options or futures markets by the INTERNATIONAL VALUE FUND
involves investment risks and transaction costs to which this Fund would not be
subject absent the use of these strategies. If the Subadviser's predictions of
movements in the direction of the securities or currency markets are inaccurate,
the adverse consequences to the Fund may leave the Fund in a worse position than
if such
5
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strategies were not used. Risks inherent in the use of options, futures
contracts and options on futures contracts include: (i) dependence on the
Subadviser's ability to predict correctly movements in the direction of interest
rates and securities prices; (ii) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices of
the securities being hedged; (iii) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; (iv)
the absence of a liquid secondary market for any particular instrument at any
time; (v) the possible need to defer closing out certain hedged positions to
avoid adverse tax consequences; and (vi) the possible inability of the Fund to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell the
security at a disadvantageous time, due to the requirement that the Fund
maintain "cover" or collateral securities in connection with futures
transactions and certain options. The Fund could lose the entire amount it
invests in futures. The loss from investing in other derivatives is potentially
unlimited. There also is no assurance that a liquid secondary market will exist
for futures contracts and options in which the Fund may invest.
DEFENSIVE INVESTMENTS
At the discretion of the Subadviser, each Fund may invest up to 100% of its
assets in cash equivalents for temporary defensive purposes. Such a stance may
help a Fund minimize or avoid losses during adverse market, economic or
political conditions. During such a period, a Fund may not achieve its
investment objective. For example, should the market advance during this period,
a Fund may not participate as much as it would have if it had been more fully
invested.
RISKS OF OTHER INVESTMENT TECHNIQUES
The Subadviser may cause the INTERNATIONAL VALUE FUND to sell a debt or equity
security short (that is, without owning it) and to borrow the same security from
a broker or other institution to complete the sale. The Subadviser may use short
sales when it believes a security is overvalued or as a partial hedge against a
position in a related security of the same issuer held by the Fund. The Fund
will not make total short sales exceeding 25% of the value of the Fund's assets.
If the value of the security sold short increases, the Fund would lose money
because it will need to replace the borrowed security by purchasing it at a
higher price. The potential loss is unlimited. (If the short sale was intended
as a hedge against another investment, the loss on the short sale may be fully
or partially offset by gains in that other investment.)
6
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ADVISER PERFORMANCE -- PREDECESSOR ACCOUNTS
INTRINSIC VALUE STOCK ASSETS
Set forth in the table below is certain performance data provided by the
Subadviser relating to a performance record of the Subadviser for investment
advisory accounts (the "Intrinsic Value Accounts"), during the period January 1,
1998 through December 31, 2000, utilizing the specific investment approach
specified for the INTRINSIC VALUE EQUITY FUND under the Fund's "Investment
Objective, Strategies and Risks." These performance data for the Subadviser are
not the performance results of any Fund in this Prospectus. The Intrinsic Value
Accounts constituted all of the accounts managed by the Subadviser that have an
identical or substantially similar investment objective or investment approach
as the INTRINSIC VALUE EQUITY FUND. The Intrinsic Value Accounts were not
subject to the same types of expenses to which the INTRINSIC VALUE FUND is
subject, nor to the diversification requirements, specific tax restrictions and
investment limitations imposed on the INTRINSIC VALUE FUND by the Investment
Company Act of 1940, as amended. The results presented are not intended to
predict or suggest the return to be experienced by the INTRINSIC VALUE FUND or
the return an investor might achieve by investing in the INTRINSIC VALUE FUND.
Investors should not rely on the following performance data as an indication of
future performance of the Subadviser or of the INTRINSIC VALUE FUND.
<TABLE>
<CAPTION>
TOTAL RETURN OF INTRINSIC VALUE ACCOUNTS
---------------------------------------- -------------------------------------- -------------------------------
JAN. 1, 1998-
DEC. 31, 2000
2000 -------------
(FULL YEAR) (ANNUALIZED)
-----------
<S> <C> <C>
Intrinsic Value Accounts
Performance Record.................. 9.04% 14.27%
Russell 1000 Value.................. 7.01% 9.93%
S&P BARRA Value..................... 6.08% 11.10%
S&P 500............................. -9.08% 12.25%
---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
Please read the following important notes concerning the Intrinsic Value
Accounts.
- The Subadviser is a registered investment advisor. Prior to December 23,
1999, the Subadviser was a dba of the equity division of Metropolitan West
Financial, a registered investment adviser.
7
<PAGE> 12
- The Composite consists of accounts that are managed with a view toward
conservative capital appreciation.
- The Composite includes all actual fully discretionary Intrinsic Value Equity
accounts (and for the periods prior to December 31, 1998, the equity plus cash
portion of all Intrinsic Value Balanced accounts) managed by the Subadviser
that meet the following criteria: Equity assets greater than $250,000 at time
of initial inclusion, no material client restrictions, managed for more than
one quarter and no material contributions to or withdrawals from the managed
portfolio. As of December 31, 2000, the Composite market value was $322.4
million representing 202 accounts and 19.2% of total firm assets.
- The Composite consists of both tax-exempt and taxable accounts. Any possible
tax liabilities incurred by the taxable accounts have not been reflected in
the performance returns.
- No leverage has been used in the accounts included in the Composite.
- Benchmarks: The S&P/BARRA Value Index represents U.S. companies with lower
price-to-book ratios. It is an unmanaged, market-value-weighted index. The
Russell 1000 Value Index measures the performance of the 1000 largest U.S.
companies that exhibit lower price-to-book ratios and lower forecasted growth
rates. The S&P 500 Stock Index consists of 500 stocks chosen for market size,
liquidity and industry group representation. It is an unmanaged,
market-value-weighted index.
- Results for the full historical period are calculated in U.S. dollars and
are time weighted with Composite results weighted using beginning-of-period
asset values.
- Except for "wrap" accounts (see next note), the performance results reflect
the deduction of brokerage commissions and (where indicated) investment
advisory fees. They do not reflect custodial fees if separately charged. All
performance results reflect the reinvestment of dividends and other earnings.
- An account's assets consist of cash, cash equivalents and equity securities.
Securities transactions are accounted for on the trade date. Account assets
include interest as earned and dividends receivable accrued as of the
ex-dividend date.
8
<PAGE> 13
- Contributions and withdrawals greater than 10% of the market value of
portfolios are not considered cash flows for the purposes of calculating
time-weighted performance returns. Such cash flows are deemed special assets
and are only considered as they are invested. The investment period may
typically be four to eight weeks. During periods in which cash flows exceed
10%, the percentage cash allocation at the beginning of the period is held
constant throughout the period.
Special Note Concerning Subadviser Investment Returns: Investors should note
that the Fund will compute and disclose its average annual compounded rate of
return using the standard formula set forth in SEC rules, which differs in
certain respects from returns for the Intrinsic Value Accounts noted above. The
SEC total return calculation method calls for computation and disclosure of an
average annual compounded rate of return for one, five and ten-year periods or
shorter periods from inception. The SEC formula provides a rate of return that
equates a hypothetical initial investment of $1,000 to an ending redeemable
value. The returns shown for the Intrinsic Value Accounts are net of advisory
fees in accordance with the SEC calculation formula, which requires that returns
shown for the Fund be net of advisory fees as well as all other applicable Fund
operating expenses.
9
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INTERNATIONAL VALUE STOCK ASSETS
10
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ORGANIZATION AND MANAGEMENT
THE ADVISER
Metropolitan West Asset Management, LLC, with principal offices at 11766
Wilshire Blvd., Suite 1580, Los Angeles, California 90025, acts as the
investment adviser to the Funds and generally administers the affairs of the
Trust. The Adviser's website is www.mwamllc.com. Subject to the direction and
control of the Board of Trustees, the Adviser supervises the activities of the
Subadviser in the purchase and sale of securities and other assets held in the
portfolios of the Funds. The Adviser is a registered investment adviser
organized in 1996. The Adviser managed approximately $__ billion of fixed-income
investments as of _____, 2001 on behalf of institutional clients and the Funds.
The Adviser is majority-owned by its key executives, with a minority ownership
stake held by Metropolitan West Financial, Inc. ("MWF"), a registered investment
adviser. MWF's affiliate, Metropolitan West Securities, Inc. ("MWS"), has
managed fixed-income investments since 1992. MWS managed approximately $__
billion for its clients as of _______, 2001.
THE SUBADVISER
Metropolitan West Capital Management, LLC, with principal offices at 610 Newport
Center, Suite 1000, Newport Beach, California 92660, acts as the investment
subadviser to the Funds. Subject to the direction and control of the Board of
Trustees and the Adviser, the Subadviser arranges for the purchase and sale of
securities and other assets held in the portfolios of the Funds. The Subadviser
is a registered investment adviser organized in 1999. The Subadviser managed
approximately $___ billion of securities as of _____, 2001 on behalf of
institutional clients and high-net worth individuals. The Subadviser is
affiliated with the Adviser. Like the Adviser, the Subadviser is majority-owned
by its key executives, with a minority stake held by MWF.
PORTFOLIO MANAGERS
The portfolio managers who have day-to-day responsibility for the management of
the Funds' portfolios are listed below, together with their biographical
information for the past five years.
HOWARD GLEICHER, CFA, holds a B.S. and an M.S. in Electrical Engineering from
Stanford University and an M.B.A. from Harvard Business School. He is
currently Chief Executive Officer and Chief Investment Officer of the
Subadviser. Prior to joining the Subadviser in ____ 19__, Mr. Gleicher was a
Vice President and Equity Portfolio Manager at Pacific Investment Management
Company (PIMCO) from ____ 19__ to ____ 19__ and Principal and Portfolio
Manager at Palley-Needelman Asset Management, Inc. from ____ 19__ to ____
19__. Mr. Gleicher has 12 years of investment experience.
GARY W. LISENBEE holds a B.A. in Accounting and an M.A. in Economics from
California State University, Fullerton and is currently the President of the
Subadviser. Prior to joining the Subadviser in _____ 19__, Mr. Lisenbee was a
Partner at Phelps Investment Management from ____ 19__ to ____ 19__, Senior Vice
President and Portfolio Manager at Van Deventer & Hoch from ____ 19__ to ____
19__ and Principal and Portfolio Manager at Palley-Needelman Asset Management,
Inc. from ____ 19__ to ____ 19__. Mr. Lisenbee has 25 years of investment
experience.
MANAGEMENT FEES AND OTHER EXPENSES
Advisory and Subadvisory Fees. Under the Investment Advisory Agreement relating
to the INTRINSIC VALUE EQUITY FUND, the Trust pays the Adviser a fee, computed
daily and payable monthly, at an annual rate of 0.70% of the Fund's average
daily net assets. Under a Subadvisory Agreement between the Adviser and the
Subadviser, the Adviser pays the Subadviser a fee, computed daily and payable
monthly, at an annual rate of 0.55% of the Fund's average daily net assets.
Under the Investment Advisory Agreement relating to the INTERNATIONAL VALUE
FUND, the Trust pays the Adviser a fee, computed daily and payable monthly, at
an annual rate of 0.95% of the Fund's average daily net assets. Under a
Subadvisory Agreement between the Adviser and the Subadviser, the Adviser pays
the Subadviser a fee, computed daily and payable monthly, at an annual rate of
0.80% of the Fund's average daily net assets.
The Investment Advisory Agreement and the Subadvisory Agreement permit the
Adviser and the Subadviser to recoup fees they did not charge and Fund expenses
they paid, provided that those amounts are recouped within three years of being
11
<PAGE> 16
reduced or paid. They may not recoup amounts that would make a Fund's total
expenses exceed the applicable limit.
Rule 12b-1 Fee. The Funds have a Share Marketing Plan or "12b-1 Plan" under
which they may finance activities primarily intended to sell shares, provided
the categories of expenses are approved in advance by the Board and the expenses
paid under the plan were incurred within the last 12 months and accrued while
the plan is in effect. Expenditures by a Fund under the plan may not exceed .25%
of its average net assets annually (all of which may be for service fees).
Currently, the Board of Trustees of the Funds is waiving all of these fees for
the Funds.
Compensation of Other Parties. Either of the Adviser and Subadviser may in its
discretion and out of its own funds compensate third parties for the sale and
marketing of the Funds and for providing services to shareholders. They may use
their own funds to sponsor seminars and educational programs on the Funds for
financial intermediaries and shareholders.
The Adviser and the Subadviser also manage individual investment advisory
accounts. They reduce the fees charged to individual advisory accounts by the
amount of the investment advisory fee charged to that portion of the client's
assets invested in any Fund.
The Investment Advisory Agreement and Subadvisory Agreement permit the Adviser
and Subadviser to allocate brokerage based on sales of shares of the Funds. No
such allocation has been made to date.
THE TRANSFER AGENT AND ADMINISTRATOR
PFPC Inc. ("PFPC") serves as transfer agent and administrator to the Trust
pursuant to a Services Agreement and also provides accounting and certain
custody services. The business address of PFPC is 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406.
THE DISTRIBUTOR
PFPC Distributors, Inc., 3200 Horizon Drive, King of Prussia, PA 19406, serves
as principal underwriter to the Trust pursuant to an Underwriting Agreement for
the limited purpose of acting as statutory underwriter to facilitate the
registration of shares of each Fund.
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<PAGE> 17
HOW TO PURCHASE SHARES
REGULAR PURCHASES
The minimum initial investment in each Fund is $5,000. For retirement plan
investments the initial minimum is $1,000. There are no minimums for subsequent
investments. The Trust and the Transfer Agent reserve the right to reject any
order and to waive its minimum investment requirement if you invest through
certain fund networks or other financial intermediaries. In such cases, the
minimums associated with the policies and programs of the fund network or
financial intermediary will apply. You may invest in any Fund by wiring the
amount to be invested to Metropolitan West Funds.
Wire to: Boston Safe Deposit & Trust
ABA No. 01-10-01234 for PFPC
Account No. 011835
Credit: (Name of Fund)
FBO: (Shareholder name and account number)
Your bank may impose a fee for investments by wire. The Fund or the Transfer
Agent will not be responsible for the consequences of delays, including delays
in the banking or Federal Reserve wire systems. Wires received after the close
of the New York Stock Exchange will be considered received by the next business
day.
To ensure proper credit, before wiring any funds you must call (800) 241-4671 to
notify us of the wire and to get an account number assigned if the wire is an
initial investment. Also, if the wire represents an initial investment, you must
mail an application form, by regular mail, to the Transfer Agent at the
following address:
MW Funds
c/o PFPC, Inc.
211 South Gulph Road
P.O. Box 61767
King of Prussia, Pennsylvania 19406
You may also purchase shares by sending a check payable to Metropolitan West
Funds, together with the application form to the address above.
Checks should be drawn on a U.S. bank and must be payable in U.S. dollars.
Shares of a Fund will be purchased for your account at the net asset value next
determined after receipt by the Transfer Agent, or an authorized sub-agent, of
your wire or check. If a check is not honored by your bank, you will be liable
for any loss sustained by the Fund, as well as a $20 service charge imposed by
the Transfer Agent. Forms for additional contributions by check or change of
address are provided on account statements.
The Trust will only accept a check when the Trust is the primary payee. Third
party checks will not be accepted for payment. The Trust may also accept orders
from selected brokers, dealers and other qualified institutions, with payment
made to the Fund at a later time. The Adviser is responsible for insuring that
such payment is made on a timely basis. You may be charged a fee if you buy or
sell Fund shares through a broker or agent.
Inquiries about your account should be directed to Metropolitan West Funds,
c/o PFPC Inc., P.O. Box 61767, King of Prussia, PA 19406.
The Trust does not consider the U.S. Postal Service or other independent
delivery service to be its agent. Therefore, deposit in the mail or other
service does not constitute receipt by the Transfer Agent.
BY PAYMENT IN KIND
In certain situations, Fund shares may be purchased by tendering payment in kind
in the form of securities. Any securities used to buy Fund shares must be
readily marketable, their acquisition consistent with the Fund's objective and
otherwise acceptable to the Adviser or Subadviser. Prior to making such a
purchase, you should call the Adviser or Subadviser to determine if the
securities you wish to use to make a purchase are appropriate.
BY AUTOMATIC INVESTMENT PLAN
Once an account has been opened, you can make additional purchases of shares of
the Funds through an Automatic Investment Plan. This Plan provides a convenient
method to have monies deducted directly from your bank account for investment
into the Funds. You can make automatic monthly, quarterly or annual purchases of
$100 or more into the Fund or Funds designated on the enclosed Account
Application. The Funds may alter, modify or terminate this Plan at any time. To
begin participating in this Plan, please complete the automatic investment plan
section found on the
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<PAGE> 18
Account Application or contact the Funds at (800) 241-4671.
PURCHASES THROUGH AN INVESTMENT BROKER OR DEALER
You may buy and sell shares of the Funds through certain brokers (and their
agents) that have made arrangements with the Funds to sell their shares. When
you place your order with such a broker or its authorized agent, your order is
treated as if you had placed it directly with the Funds' Transfer Agent, and you
will pay or receive the next price calculated by the Funds. The broker (or
agent) holds your shares in an omnibus account in the broker' (or agent') name,
and the broker (or agent) maintains your individual ownership records. The Funds
may pay the broker or its agent for maintaining these records as well as
providing other shareholder services. The broker (or its agent) may charge you a
fee for handling your order. The broker (or agent) is responsible for processing
your order correctly and promptly, keeping you advised regarding the status of
your individual account, confirming your transactions and ensuring that you
receive copies of the Funds' prospectus.
NET ASSET VALUE
The net asset value per share of each Fund is determined on each day the New
York Stock Exchange is open for trading, as of the close of regular trading on
the New York Stock Exchange (usually 4:00 p.m., Eastern time). The net asset
value per share is the value of the Fund's assets, less its liabilities, divided
by the number of shares of the Fund outstanding. The value of a Fund's portfolio
securities is determined on the basis of the market value of such securities or,
if market quotations are not readily available, at fair value under guidelines
established by the Trustees. Short-term investments maturing in less than 60
days are valued at amortized cost which the Board has determined to equal fair
value. The daily net asset value may not reflect the closing market price for
foreign stock exchanges in other time zones or for a futures contracts held by
the Funds because the markets for certain futures will close shortly after the
time net asset value is calculated. See "Net Asset Value" in the Statement of
Additional Information for further information.
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<PAGE> 19
HOW TO REDEEM SHARES
REGULAR REDEMPTIONS
You may redeem shares at any time by delivering instructions by regular mail to
the Transfer Agent or selected brokers, dealers and other qualified
institutions. If you would like to send a package via overnight mail services,
send to Metropolitan West Funds, c/o the Transfer Agent, the address is: 211
South Gulph Road, P.O. Box 61767, King of Prussia, Pennsylvania 19406.
The redemption request should identify the Fund and the account number, specify
the number of shares or dollar amount to be redeemed and be signed by all
registered owners exactly as the account is registered. Your request will not be
accepted unless it contains all required documents. The shares will be redeemed
at the net asset value next determined after receipt of the request by the
Transfer Agent or other agent of the Funds. A redemption of shares is a sale of
shares and you may realize a taxable gain or loss.
If the proceeds of any redemption (a) exceed $50,000, (b) are paid to a person
other than the owner of record, or (c) are sent to an address or bank account
other than shown on the Transfer Agent' records, the signature(s) on the
redemption request must be a medallion signature guarantee. A medallion
signature guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency, savings association, or other financial
institution which is participating in a medallion program recognized by the
Securities Transfer Association. The three recognized medallion programs are
Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges Medallion
Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program
(NYSE MSP).
Additional documentation may be required for the redemption of shares held in
corporate, partnership or fiduciary accounts. In case of any questions, please
contact the Funds in advance by calling (800) 241-4671.
Redemptions will be processed only on a day during which the New York Stock
Exchange is open for business. If you purchase shares by check or money order
and later decide to sell them, your proceeds from that redemption will be
withheld until the Funds are sure that your check has cleared. This could take
up to 15 calendar days after your purchase order.
EXCHANGES OF SHARES
You are permitted to exchange your shares in a Fund for shares of other Funds in
the Trust, provided that those shares may legally be sold in the state of your
residence and you have selected the appropriate box on the Account Application.
Shares subject to an exchange must have a current value of at least $1,000. An
exchange of shares is treated for federal income tax purposes as a redemption
(sale) of shares given in exchange by the shareholder and an exchanging
shareholder may, therefore, realize a taxable gain or loss in connection with
the exchange. Shares exchanged for shares of another Fund will be priced at
their respective net asset values.
SYSTEMATIC WITHDRAWAL PLAN
If you own or are purchasing shares of the Funds having a current value of at
least $10,000, you may participate in a Systematic Withdrawal Plan. This Plan
provides for automatic redemptions of at least $100 on a monthly, quarterly,
semi-annually or annual basis. You may establish this Plan by completing this
section on the Account Application or by calling the Funds at (800) 241-4671.
Notice of all changes concerning this Plan must be received by PFPC at least two
weeks prior to the next scheduled payment. Further information regarding this
Plan and its requirements can be obtained by contacting the Funds at (800)
241-4671.
TELEPHONE TRANSACTIONS
You may redeem shares by telephone and have the proceeds wired to the bank
account as stated on the Transfer Agent's records. You may also exchange shares
by telephone. In order to redeem or exchange shares by telephone, you must
select the appropriate box on the Account Application. In order to arrange for
telephone redemptions or exchanges or change payment instructions after an
account has been opened or to change the bank account or address designated to
receive redemption proceeds, a written request must be sent to the Trust. The
request must be signed by each shareholder of the account with the signature
guarantees as described above. Once this feature has been requested, shares may
be redeemed or exchanged by calling PFPC at (800) 241-4671 and
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<PAGE> 20
giving the account name, account number, and amount of the redemption or
exchange. Joint accounts require only one shareholder to call. If redemption
proceeds are to be mailed or wired to the shareholder's bank account, the bank
involved must be a commercial bank located within the United States.
If you redeem your shares by telephone and request wire payment, payment of the
redemption proceeds will normally be made in federal funds on the next business
day. The redemption order must be received by the Transfer Agent before the
relevant Fund's net asset value is calculated for the day. There may be a charge
of up to $10 for all wire redemptions. IF YOU EFFECT TRANSACTIONS VIA WIRE
TRANSFER YOU MAY BE REQUIRED TO PAY FEES, INCLUDING THE WIRE FEE AND OTHER FEES,
THAT WILL BE DEDUCTED DIRECTLY FROM REDEMPTION PROCEEDS.
The Funds reserve the right to reject any telephone redemption or exchange
request and the redemption or exchange privilege may be modified or terminated
at any time on 30-days' notice to shareholders. In an effort to prevent
unauthorized or fraudulent redemption or exchange requests by telephone, the
Trust and the Transfer Agent employ reasonably procedures specified by the Funds
to confirm that such instructions are genuine. Among the procedures used to
determine authenticity, if you are electing to redeem or exchange by telephone
you will be required to provide your account number or other identifying
information. All such telephone transactions will be tape recorded and you will
receive a confirmation in writing. The Trust may implement other procedures from
time to time. If reasonable procedures are not implemented, the Trust and/or the
Transfer Agent may be liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, the shareholder is liable for any loss for
unauthorized transactions. In periods of severe market or economic conditions,
the telephone redemption or exchange of shares may be difficult to implement and
you should redeem shares by writing to the Transfer Agent at the address listed
above. If for any other reason you are unable to redeem or exchange by
telephone, you should redeem or exchange shares by writing to the Transfer Agent
at the address listed above.
PAYMENTS
After the Transfer Agent has received the redemption request and all proper
documents, payment for shares tendered will generally be made within three
business days. Payment may be delayed or made partly in-kind with marketable
securities under unusual circumstances.
REDEMPTIONS OF SMALL ACCOUNTS
The Funds may redeem all of your shares at net asset value (calculated on the
preceding business day) if the balance of your account falls below $500 as a
result of a transfer or redemption (and not market fluctuations). The Funds will
notify you in writing and you will have 60 days to increase your account balance
before your shares are redeemed.
WITHHOLDINGS; REPORTING
The Funds may be required to withhold federal income tax, at a rate of 31%, from
proceeds of redemptions if you are subject to backup withholding. Failure to
provide a certified tax identification number at the time an account is opened
will cause tax to be withheld. The Funds also may be required to report
redemptions to the Internal Revenue Service (IRS).
REPORTS TO SHAREHOLDERS
Each Fund's fiscal year ends on March 31. Each Fund will issue to its
shareholders semi-annual and annual reports. In addition, you will receive
quarterly statements of the status of your account reflecting all transactions
having taken place within that quarter. In order to reduce duplicate mailings
and printing costs, the Trust will provide one annual or semi-annual report and
annual prospectus per household. Information regarding the tax status of income
dividends and capital gains distributions will be mailed to shareholders on or
before January 31st of each year. Account tax information will also be sent to
the IRS.
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<PAGE> 21
DIVIDENDS AND TAX STATUS
The Funds expect to declare and pay dividends annually.
Distributions from net realized short-term gains, if any, and distributions from
any net capital gains realized through October 31st of each year and not
previously paid out will be paid out after that date. Each Fund may also pay
supplemental distributions after the end of the Fund's fiscal year. Dividends
and distributions are paid in full and fractional shares of each Fund based on
the net asset value per share at the close of business on the ex-dividend date,
unless you request, in writing to the Trust, payment in cash. The Trust will
notify you after the close of its fiscal year of both the dollar amount and the
tax status of that year's distributions.
All dividends from net investment income together with distributions of
short-term capital gains will be taxable as ordinary income even though paid to
you in additional shares. Any net capital gains ("capital gains distributions")
distributed are taxable as the relevant type of capital gains regardless of the
length of time you have owned your shares. Dividends, interest and gains
received by a Fund may be subject to withholding and other taxes imposed by
foreign countries. Tax conventions between certain countries and the U.S. may
reduce or eliminate these foreign taxes.
Distributions will be taxable in the year in which they are received, except for
certain distributions received in January, which will be taxable as if received
the prior December. You will be informed annually of the amount and nature of
the Fund's distributions, including the portions, if any, that qualify for the
dividends-received deduction, are capital gain distributions and are a return of
capital.
Additional information about taxes is set forth in the Statement of Additional
Information. The foregoing discussion has been prepared by the management of the
Funds, and is not intended to be a complete description of all tax implications
of an investment in a Fund. You should consult your own advisors concerning the
application of federal, state and local tax laws to your particular situations.
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<PAGE> 22
For more information about Metropolitan West Funds the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
The Funds' annual and semiannual reports to shareholders contain detailed
information about the Funds' portfolios. The annual report includes a discussion
of the market conditions and investment strategies that significantly affected
the Funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Funds, including operations
and investment policies. It is incorporated by reference and is legally
considered a part of this Prospectus.
You can get free copies of the reports and the SAI, or request other information
and discuss your questions about the Funds, by contacting us at:
MW FUNDS
11766 WILSHIRE BOULEVARD, SUITE 1580
LOS ANGELES, CALIFORNIA 90025
(800) 241-4671
You can also review the Fund's reports and SAI at the Public Reference Room of
the Securities and Exchange Commission (SEC). Information on the operation of
the Public Reference Room may be obtained by calling the SEC at (202) 942-8090.
In addition, you can get text-only copies:
- For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at the following
E-mail address: [email protected].
- Free from the EDGAR Database on the SEC's Website at
http://www.sec.gov.
Investment Company Act File No. 811- 07989
Adviser:
Metropolitan West Asset Management, LLC
11766 Wilshire Boulevard, Suite 1580
Los Angeles, California 90025
www.mwamllc.com
Subadviser:
Metropolitan West Capital Management, LLC
611 Newport Center, Suite 1000
Newport Beach, California 92660
Transfer Agent:
PFPC Inc.
211 S. Gulph Road
P.O. Box 61767
King of Prussia, Pennsylvania 19406-0903
(800) 241-4671
Distributor:
PFPC Distributors, Inc.
3200 Horizon Drive
King of Prussia, Pennsylvania 19406-0903
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<PAGE> 23
Custodian:
The Bank of New York
One Wall Street
New York, New York 10286
Auditors:
[__________________] LLP
350 South Grand Avenue, Suite 200
Los Angeles, California 90071
Legal Counsel:
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, California 94104-2635
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<PAGE> 24
METROPOLITAN WEST FUNDS
dba MW FUNDS
STATEMENT OF ADDITIONAL INFORMATION
March 30, 2001
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the Prospectus dated March 30, 2001, as
supplemented from time to time. Copies of the Prospectus may be obtained at no
charge by writing to Metropolitan West Funds, 11766 Wilshire Boulevard, Suite
1580, Los Angeles, California 90025.
In this Statement of Additional Information, the MW Capital Intrinsic
Value Equity Fund (the "Domestic Fund") and the MW Capital International Value
Fund (the "International Fund") may be referred to collectively as the "Funds"
or individually as a "Fund." Metropolitan West Asset Management, LLC (the
"Adviser") is the investment adviser to the Funds. Metropolitan West Capital
Management, LLC (the "Subadviser") is the investment subadviser to the Funds.
Each Fund is a separate, diversified series of Metropolitan West
Funds (the "Trust"). The Trust has three other series or funds not included in
this Statement of Additional Information. The Trust also may do business as MW
Funds.
Copies of any available Annual and Semiannual Reports to shareholders
of the Funds are available, upon request, by calling (800) 241-4671, or by
writing to Metropolitan West Funds, 11766 Wilshire Blvd., Suite 1580, Los
Angeles, California 90025.
<PAGE> 25
TABLE OF CONTENTS
Page
THE TRUST.....................................................................1
INVESTMENT OBJECTIVES AND POLICIES............................................1
INVESTMENT RESTRICTIONS....................................................1
SECURITIES AND TECHNIQUES USED BY THE FUNDS...................................3
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS.....................3
COMMERCIAL PAPER...........................................................3
COMMON AND PREFERRED STOCK.................................................3
CONVERTIBLE SECURITIES.....................................................3
FOREIGN CURRENCY EXCHANGE TRANSACTIONS.....................................3
FOREIGN SECURITIES.........................................................5
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS....................5
FUTURES CONTRACTS..........................................................6
MONEY MARKET FUNDS.........................................................7
OPTIONS....................................................................7
OPTIONS ON FUTURES CONTRACTS...............................................9
OPTIONS ON STOCK INDICES...................................................9
OTHER INVESTMENT COMPANIES................................................10
PORTFOLIO TURNOVER........................................................11
REPURCHASE AGREEMENTS.....................................................11
RESTRICTED SECURITIES.....................................................12
SECURITIES LENDING........................................................12
TEMPORARY DEFENSIVE POSITION..............................................13
WARRANTS..................................................................13
MANAGEMENT...................................................................13
TRUSTEES AND OFFICERS.....................................................13
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................16
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................16
INVESTMENT ADVISORY SERVICES..............................................18
ADMINISTRATOR.............................................................18
CUSTODIAN AND TRANSFER AGENT..............................................19
DISTRIBUTOR...............................................................19
SHARE MARKETING PLAN......................................................19
NET ASSET VALUE..............................................................20
REDEMPTION IN KIND...........................................................21
DIVIDENDS AND TAX STATUS.....................................................21
PERFORMANCE INFORMATION......................................................24
FURTHER INFORMATION ABOUT THE TRUST..........................................26
ADDITIONAL INFORMATION.......................................................26
LEGAL OPINION.............................................................26
AUDITORS..................................................................27
LICENSE TO USE NAME.......................................................27
OTHER INFORMATION.........................................................27
FINANCIAL STATEMENTS.........................................................27
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<PAGE> 26
THE TRUST
The Trust was organized on December 9, 1996 as a Delaware business
trust. The Trust is a diversified open-end, management investment company
currently consisting of six separate series, each of which has separate assets
and liabilities, two of which are described in this Statement of Additional
Information. Each Fund has one class of shares of beneficial interest, with a
par value of $0.01 per share. The Trust's Board of Trustees decides matters of
general policy and reviews the activities of the Adviser and Subadviser. The
Trust's officers conduct and supervise the daily business operations of the
Trust. The Board of Trustees may, at its own discretion, create additional
series of shares and classes within series.
As required by law, the Trust, the Adviser, the Subadviser, PFPC
Distributors, Inc., the distributor for shares of the Funds (the
"Distributor"), and the Trust's administrator each has adopted codes of ethics
concerning certain activities of officers, trustees or directors and
employees. Copies of these codes of ethics have been filed with the Securities
and Exchange Commission (the "SEC").
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described in the Prospectus.
The portfolio, and strategies with respect to the composition of each
Fund, are described in the Prospectus.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions (in addition to
those indicated in the Prospectus) as fundamental policies, which may not be
changed without the favorable vote of the holders of a "majority" of that
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"). Under the 1940 Act, the vote of the
holders of a "majority" of a Fund's outstanding voting securities means the
vote of the holders of the lesser of (i) 67% of the shares of the Fund
represented at a meeting at which the holders of more than 50% of its
outstanding shares are represented or (ii) more than 50% of the outstanding
shares.
Except as noted, no Fund may:
- Purchase any security, other than obligations of the U.S.
Government, its agencies, or instrumentalities ("U.S.
Government securities") or mutual funds, if as a result of
that purchase: (i) with respect to 75% of its total assets,
more than 5% of the Fund's total assets (determined at the
time of investment) would then be invested in securities of
a single issuer, or (ii) more than 25% of the Fund's total
assets (determined at the time of investment) would be
invested in one or more issuers having their principal
business activities in a single industry.
- Purchase securities on margin (but any Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions), provided that the deposit or payment by a
Fund of initial or maintenance margin in connection with
futures or options is not considered the purchase of a
security on margin, and, provided, further, that
transactions that do not result in the impermissible
creation of a senior security under Section 18 of the 1940
Act is not considered a purchase of a security on margin.
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<PAGE> 27
- Make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of collateral consisting of liquid securities
or such securities or securities convertible into or
exchangeable, without payment of any further consideration,
for securities of the same issuer as, and equal in amount
to, the securities sold short (short sale against-the-box),
and unless not more than 25% of the Fund's net assets (taken
at current value) is held as collateral for such sales at
any one time.
- Issue senior securities, borrow money or pledge its assets,
except that any Fund may borrow from a bank for temporary or
emergency purposes in amounts not exceeding 33% (taken at
the lower of cost or current value) of its total assets
(including the amount borrowed) and pledge its assets to
secure such borrowings. The Funds may borrow from banks or
enter into reverse repurchase agreements and pledge assets
in connection therewith, but only if immediately after each
borrowing there is asset coverage of at least 300%.
- Purchase any security (other than U.S. Government
securities) if as a result of that purchase, with respect to
75% of the Fund's total assets, the Fund would then hold
more than 10% of the outstanding voting securities of an
issuer.
- Act as an underwriter except to the extent that, in
connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal
securities laws.
- Make investments for the purpose of exercising control or
management.
- Participate on a joint or joint and several basis in any
trading account in securities, except to the extent the Fund
has received an exemptive order from the Securities and
Exchange Commission permitting such account.
- Invest in commodities, except that the Fund may invest in
futures contracts or options on futures contracts (a) for
bona fide hedging purposes within the meaning of regulations
of the Commodity Futures Trading Commission ("CFTC"), or (b)
for other than bona fide hedging purposes if, as a result
thereof, no more than 5% of that Fund's total assets (taken
at market value at the time of entering into the contract)
would be committed to initial deposits and premiums on open
futures contracts and options on such contracts (excluding
in-the-money amounts). (This exception is an operating
policy that may be changed without shareholder approval,
consistent with applicable regulations.)
In addition, the Trust has adopted the following non-fundamental
policies so that no Fund will: (a) invest in interests in oil, gas, or other
mineral leases or exploration of development programs, although it may invest
in the common stocks of companies that invest in or sponsor such programs; (b)
invest more than 15% of its net assets in illiquid securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended ("Securities Act"), that have been
determined to be liquid pursuant to procedures adopted by the Board of
Trustees; and (c) purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or other acquisition
of assets or except as disclosed in the Prospectus or this Statement of
Additional Information, but not more than 3% of the total outstanding stock of
such company would be owned by the Fund and its affiliates.
2
<PAGE> 28
SECURITIES AND TECHNIQUES USED BY THE FUNDS
The following provides more detailed information about securities and
techniques used by the Funds and the risks associated with them (in
alphabetical order).
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS
(International Fund Only)
American Depositary Receipts ("ADRs") are securities, typically
issued by a U.S. financial institution, that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer. European
Depositary Receipts ("EDRs"), which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), are securities, typically issued by a non-U.S.
financial institution, that evidence ownership interests in a security or a
pool of securities issued by either a U.S. or foreign issuer. ADRs, EDRs and
CDRs may be available for investment through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depositary, whereas an unsponsored
facility may be established by a depositary without participation by the
issuer of the receipt's underlying security. Holders of an unsponsored
depositary receipt generally bear all the costs of the unsponsored facility
and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer
of the deposited security or to pass voting rights through to the holders of
the receipts in respect to the deposited securities.
COMMERCIAL PAPER
Commercial paper is the term used to designate unsecured short-term
promissory notes issued by corporations and other entities. Maturities on
these issues vary from one to 270 days.
COMMON AND PREFERRED STOCK
Common stocks are generally more volatile than other securities.
Preferred stocks share some of the characteristics of both debt and equity
investments and are generally preferred over common stocks with respect to
dividends and in liquidation.
CONVERTIBLE SECURITIES
Convertible securities have characteristics similar to both fixed
income and equity securities. Because of the conversion feature, the market
value of convertible securities tends to move together with the market value
of the underlying stock. The value of convertible securities is also affected
by prevailing interest rates, the credit quality of the issuer, and any call
provisions. Convertible securities include both debt obligations and preferred
stock.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
(International Fund Only)
Because investments in foreign companies usually involve currencies
of foreign countries, the value of the assets of a Fund with investments in
foreign companies as measured in U.S. dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations. Although such Fund's assets are valued daily in terms of U.S.
dollars, the Fund does not intend to convert its
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holdings of foreign currencies into U.S. dollars on a daily basis. A Fund may
conduct its foreign currency exchange transactions on a spot basis or for
settlement on a future date (i.e., a "forward foreign currency" contract or
"forward" contract). A Fund may convert currency on a spot basis 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 the Fund at one rate, while offering a lesser
rate of exchange should the Fund desire to resell that currency to the dealer.
The Fund does not currently intend to speculate in foreign currency exchange
rates or forward contracts.
Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. A Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities
or other assets denominated in that currency or (2) the Fund designates liquid
assets in an amount not less than the value of the Fund's total assets
committed to the consummation of the contracts. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall
diversification strategies. However, the Subadviser believes it is important
to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.
At or before the maturity date of a forward contract that requires
the Fund to sell a currency, the Fund may either sell a portfolio security and
use the sale proceeds to make delivery of the currency or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency that it is obligated to deliver.
Similarly, the Fund may close out a forward contract requiring it to purchase
a specified currency by entering into a second contract entitling it to sell
the same amount of the same currency on the maturity date of the first
contract. The Fund would realize a gain or loss as a result of entering into
such an offsetting forward contract under either circumstance to the extent
the exchange rate between the currencies involved moved between the execution
dates of the first and second contracts.
The cost to the Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The
use of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the
same time they limit any potential gain that might result should the value of
the currencies increase.
Although the Fund values its assets daily in terms of U.S. dollars,
it does not intend to convert holdings of foreign currencies into U.S. dollars
on a daily basis. The Funds may convert foreign currency 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 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 of exchange
should the Fund desire to resell that currency to the dealer.
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FOREIGN SECURITIES
(International Fund Only)
The International Fund will invest in obligations or securities of
foreign issuers. Permissible investments also include obligations of foreign
branches of U.S. banks and of foreign banks, including certificates of deposit
and time deposits (including Eurodollar time deposits).
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, the value of securities
denominated in foreign currencies and of dividends and interest paid with
respect to those securities, will fluctuate based on the relative strength of
the U.S. dollar. In addition, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitation on the removal of funds or other assets of a
Fund, political or financial instability or diplomatic and other developments
which would affect such investments. Further, economies of particular
countries or areas of the world may differ favorably or unfavorably from the
economy of the U.S.
It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets
located outside the U.S. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the U.S., and
securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies. Foreign security trading practices, including those involving
securities settlement where a Fund's assets may be released prior to receipt
of payment, may expose a Fund to increased risk in the event of a failed trade
or the insolvency of a foreign broker-dealer. In addition, foreign brokerage
commissions are generally higher than commissions on securities traded in the
U.S. and may be non-negotiable. In general, there is less overall governmental
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the U.S.
The Fund may invest in foreign securities markets that impose
restrictions on transfer of the proceeds from that market to the United States
or to United States persons. Although securities subject to these transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities that are not subject to such restrictions.
Foreign issuers of securities or obligations are often subject to
accounting treatment and engage in business practices different from those
respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS
Each Fund may invest in forward commitments or commitments to
purchase securities on a when-issued basis. Forward commitments or purchases
of securities on a when-issued basis are transactions where the price of the
securities is fixed at the time of the commitment and delivery and payment
normally take place beyond conventional settlement time after the date of
commitment to purchase. The Funds will make commitments to
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<PAGE> 31
purchase obligations on a when-issued basis only with the intention of
actually acquiring the securities, but may sell them before the settlement
date. The when-issued securities are subject to market fluctuation, and no
interest accrues on the security to the purchaser during this period. The
payment obligation and the interest rate that will be received on the
securities are each fixed at the time the purchaser enters into the
commitment. Purchasing obligations on a when-issued basis is a form of
leveraging and can involve a risk that the yields available in the market when
the delivery takes place may actually be higher than those obtained in the
transaction itself. In that case, there could be an unrealized loss at the
time of delivery.
While awaiting delivery of securities purchased on a when-issued
basis, a Fund will establish a segregated account consisting of liquid
securities equal to the amount of the commitments to purchase securities on
such basis. If the value of these assets declines, the Fund will place
additional liquid assets in the account on a daily basis so that the value of
the assets in the account is equal to the amount of the commitments.
FUTURES CONTRACTS
(International Fund Only)
Subject to applicable laws, the Fund may enter into financial futures
contracts (for currencies, interest rates or securities indexes). The Fund
intends to use futures contracts for bona fide hedging purposes. Futures
contracts provide for the future sale by one party and purchase by another
party of a specified amount of a specified security at a specified future time
and at a specified price. A "sale" of a futures contract entails a contractual
obligation to deliver the underlying securities called for by the contract,
and a "purchase" of a futures contract entails a contractual obligation to
acquire such securities, in each case in accordance with the terms of the
contract. Futures contracts must be executed through a futures commission
merchant, or brokerage firm, which is a member of an appropriate exchange
designated as a "contract market" by the Commodity Futures Trading Commission
("CFTC").
When a Fund purchases or sells a futures contract, the Trust must
allocate assets of that Fund as an initial deposit on the contract. The
initial deposit may be as low as approximately 5 percent or less of the value
of the contract. The futures contract is marked to market daily thereafter and
the Fund may be required to pay or entitled to receive additional "variation
margin," based on decrease or increase in the value of the futures contract.
Futures contracts call for the actual delivery or acquisition of
securities, or in the case of futures contracts based on indices, the making
or acceptance of a cash settlement at a specified future time. However, the
contractual obligation is usually fulfilled before the date specified in the
contract by closing out the futures contract position through the purchase or
sale, on a commodities exchange, of an identical futures contract. Positions
in futures contracts may be closed out only if a liquid secondary market for
such contract is available, and there can be no assurance that such a liquid
secondary market will exist for any particular futures contract.
A Fund's ability to hedge effectively through transactions in futures
contracts depends on, among other factors, the Adviser's or Subadviser's
judgment as to the expected price movements in the securities underlying the
futures contracts. In addition, it is possible in some circumstances that a
Fund would have to sell securities from its portfolio to meet "variation
margin" requirements at a time when it may be disadvantageous to do so.
There are several risks associated with the use of futures contracts
and futures options as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the
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hedging vehicle and in the Fund securities being hedged. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities.
and creditworthiness of issuers. A decision as to whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures contract or a futures option
position, and that Fund would remain obligated to meet margin requirements
until the position is closed. In addition, many of the contracts discussed
above are relatively new instruments without a significant trading history. As
a result, there can be no assurance that an active secondary market will
develop or continue to exist.
MONEY MARKET FUNDS
A money market fund is an investment company that limits its
investments to high quality money market instruments with a weighted-average
maturity of 90 days or less. Each of the Funds may invest in money market
funds, but not more than 5 percent of its assets in any one money market fund
or more than 10 percent of its assets in other investment companies, including
money market funds. When a Fund invests in a money market fund, a shareholder
bears not only his or her proportionate share of the Fund's expenses, but also
indirectly his or her share of the expenses of the money market fund,
including management fees.
OPTIONS
The Funds may, for hedging purposes and in order to generate
additional income, write call options on a covered basis, provided that the
aggregate value of such options may not exceed 10 percent of a Fund's net
assets as of the time the Fund enters into such options.
The purchaser of a call option has the right to buy, and the writer
(in this case a Fund) of a call option has the obligation to sell, an
underlying security at a specified exercise price during a specified option
period. The advantage to a Fund of writing covered calls is that the Fund
receives a premium for writing the call, which is additional income. However,
if the security rises in value and the call is exercised, the Fund may not
participate fully in the market appreciation of the security.
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During the option period, a covered call option writer may be
assigned an exercise notice by the broker/dealer through whom such call option
was sold, requiring the writer to deliver the underlying security against
payment of the exercise price. This obligation is terminated upon the
expiration of the option period or at such earlier time at which the writer
effects a closing purchase transaction.
A closing purchase transaction is one in which a Fund, when obligated
as a writer of an option, terminates its obligation by purchasing an option of
the same series as the option previously written. A closing purchase
transaction cannot be effected with respect to an option once the Fund writing
the option has received an exercise notice for such option. Closing purchase
transactions will ordinarily be effected to realize a profit on an outstanding
call option, to prevent an underlying security from being called, to permit
the sale of the underlying security or to enable a Fund to write another call
option on the underlying security with either a different exercise price or
different expiration date or both. The Fund may realize a net gain or loss
from a closing purchase transaction depending upon whether the net amount of
the original premium received on the call option is more or less than the cost
of effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium
received from a sale of a different call option on the same underlying
security. Such a loss may also be wholly or partially offset by unrealized
appreciation in the market value of the underlying security. Conversely, a
gain resulting from a closing purchase transaction could be offset in whole or
in part by a decline in the market value of the underlying security.
If a call option expires unexercised, a Fund will realize a
short-term capital gain in the amount of the premium on the option, less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security equal to the difference between (a) the cost of the
underlying security and (b) the proceeds of the sale of the security, plus the
amount of the premium on the option, less the commission paid.
The market value of a call option generally reflects the market price
of the underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
The Funds will write call options only on a covered basis, which
means that a Fund will own the underlying security subject to a call option at
all times during the option period. Unless a closing purchase transaction is
effected, the Fund would be required to continue to hold a security which it
might otherwise wish to sell, or deliver a security it would want to hold.
Options written by a Fund will normally have expiration dates between one and
nine months from the date written. The exercise price of a call option may be
below, equal to or above the current market value of the underlying security
at the time the option is written.
A Fund may also purchase put and call options. Put options are
purchased to hedge against a decline in the value of securities held in the
Fund's portfolio. If such a decline occurs, the put options will permit the
Fund to sell the securities underlying such options at the exercise price, or
to close out the options at a profit. The premium paid for a put or a call
option plus any transaction costs will reduce the benefit, if any, realized by
the Fund upon exercise of the option, and, unless the price of the underlying
security rises or declines sufficiently, the option may expire worthless to
the Fund. In addition, in the event that the price of the security in
connection with which an option was purchased moves in a direction favorable
to the Fund, the benefits realized by the Fund as a result of such favorable
movement will be reduced by the amount of the premium paid for the option and
related transaction costs.
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OPTIONS ON FUTURES CONTRACTS
(International Fund Only)
The International Fund may also, subject to any applicable laws,
purchase and write options on futures contracts for hedging purposes only. The
holder of a call option on a futures contract has the right to purchase the
futures contract, and the holder of a put option on a futures contract has the
right to sell the futures contract, in either case at a fixed exercise price
up to a stated expiration date or, in the case of certain options, on a stated
date. Options on futures contracts, like futures contracts, are traded on
contract markets.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities deliverable on
exercise of the futures contract. A Fund will receive an option premium when
it writes the call, and, if the price of the futures contract at expiration of
the option is below the option exercise price, the Fund will retain the full
amount of this option premium, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. Similarly,
the writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the securities deliverable upon exercise of the
futures contract. If a Fund writes an option on a futures contract and that
option is exercised, the Fund may incur a loss, which loss will be reduced by
the amount of the option premium received, less related transaction costs. A
Fund's ability to hedge effectively through transactions in options on futures
contracts depends on, among other factors, the degree of correlation between
changes in the value of securities held by the Fund and changes in the value
of its futures positions. This correlation cannot be expected to be exact, and
the Fund bears a risk that the value of the futures contract being hedged will
not move in the same amount, or even in the same direction, as the hedging
instrument. Thus it may be possible for a Fund to incur a loss on both the
hedging instrument and the futures contract being hedged.
The ability of a Fund to engage in options and futures strategies
depends also upon the availability of a liquid market for such instruments.
There can be no assurance that such a liquid market will exist for such
instruments.
Options on securities, futures contracts, options on futures
contracts, and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in
the United States; 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. 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 United States of
data on which to make trading decisions, (iii) delays in the Trust's ability
to act upon economic events occurring in foreign markets during non-business
hours in the United States, (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States, and (v) lesser trading volume.
OPTIONS ON STOCK INDICES
(International Fund Only)
The International Funds may engage in transactions involving options
on stock indices. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with changes in the market
values of the underlying common stocks. The Fund normally will not engage in
transactions in options on stock indices for speculative purposes but only to
protect appreciation attained, to offset capital losses and to
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<PAGE> 35
take advantage of the liquidity available in the option markets. The aggregate
premium paid on all options on stock indices will not exceed 10 percent of the
total assets of the Fund.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or
make delivery of the underlying stock at a specified price. A stock index
option gives the holder the right to receive a cash "exercise settlement
amount" equal to (i) the amount by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the stock index upon which the option is based being
greater than (in the case of a call) or less than (in the case of a put) the
exercise price of the option. The amount of cash received will be equal to
such difference between the closing price of the index and exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the option premium received, to make
delivery of this amount. Gain or loss to the Fund on transactions in stock
index options will depend on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than price movements
of individual securities.
As with stock options, the Fund may offset its position in stock
index options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the
stock included in the index. Some stock index options are based on a broad
market index such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indices are also based on an industry or market segment such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on stock
indices are currently traded on the following exchanges, among others: The
Chicago Board Options Exchange, New York Stock Exchange and American Stock
Exchange.
A Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the securities held by the Fund. Since the Fund will not
duplicate all of the components of an index, the correlation will not be
exact. Consequently, the Fund bears the risk that the prices of the securities
being hedged will not move in the same amount as the hedging instrument. It is
also possible that there may be a negative correlation between the index or
other securities underlying the hedging instrument and the hedged securities
which would result in a loss on both such securities and the hedging
instrument.
Positions in stock index options may be closed out only on an
exchange which provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular stock index option.
Thus, it may not be possible to close such an option. The inability to close
options positions could have an adverse impact on a Fund's ability to
effectively hedge its securities. The Fund will enter into an option position
only if there appears to the Adviser of such Fund, at the time of investment,
to be a liquid secondary market for such options.
OTHER INVESTMENT COMPANIES
Subject to applicable statutory and regulatory limitations, assets of
each Fund may be invested in shares of other investment companies (such as
mutual funds) and foreign investment trusts. Those investment companies and
investment trusts must invest in securities in which the Funds can invest in a
manner consistent
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<PAGE> 36
with the Funds' investment objectives. A Fund's purchase of investment company
securities may result in the duplication of management fees and expenses.
PORTFOLIO TURNOVER
The frequency of each Fund's portfolio transactions -- the portfolio
turnover rate -- will vary from year to year depending on market conditions.
Each Fund will engage in portfolio trading if the Subadviser believes a
transaction, net of costs (including custodial charges), will help it achieve
its investment objective.
Below are some basic principles with respect to portfolio turnover
rate:
- A 100% turnover rate indicates that the equivalent of all of
the Fund's assets have been sold and reinvested in a year;
- The amount of brokerage commissions will tend to increase as
the level of portfolio activity increases; and
- High portfolio turnover may result in the realization of
substantial net capital gains or losses.
- Because the Funds are new, portfolio turnover rate for each
Fund is not available as of the date of this Statement of
Additional Information.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. A Fund's repurchase
agreements will generally involve a short-term investment in a U.S. Government
security or other high-grade liquid debt security, with the seller (a primary
securities dealer recognized by the Federal Reserve Bank of New York or a
national member bank as defined in Section 3(d)(1) of the Federal Deposit
Insurance Act, as amended) of the underlying security agreeing to repurchase
it at a mutually agreed-upon time and price (including principal and
interest). The repurchase price is generally higher than the purchase price,
the difference being interest income to that Fund. Alternatively, the purchase
and repurchase prices may be the same, with interest at a stated rate due to a
Fund together with the repurchase price on the date of repurchase. In either
case, the income to a Fund is unrelated to the interest rate on the underlying
security.
Under each repurchase agreement, the seller is required to maintain
the value of the securities subject to the repurchase agreement at not less
than their repurchase price. The Adviser, acting under the supervision of the
Board, reviews on a periodic basis the suitability and creditworthiness, and
the value of the collateral, of those sellers with whom the Funds enter into
repurchase agreements to evaluate potential risk. All repurchase agreements
will be made pursuant to procedures adopted and regularly reviewed by the
Board.
The Funds generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Funds regard repurchase agreements
with maturities in excess of seven days as illiquid. A Fund may not invest
more than 15% of the value of its net assets in illiquid securities, including
repurchase agreements with maturities greater than seven days.
For purposes of the 1940 Act, a repurchase agreement is deemed to be
a collateralized loan from a Fund to the seller of the security subject to the
repurchase agreement. It is not clear whether a court would consider
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<PAGE> 37
the security acquired by a Fund subject to a repurchase agreement as being
owned by that Fund or as being collateral for a loan by that Fund to the
seller. If bankruptcy or insolvency proceedings are commenced with respect to
the seller of the security before its repurchase, a Fund may encounter delays
and incur costs before being able to sell the security. Delays may involve
loss of interest or a decline in price of the security. If a court
characterizes such a transaction as a loan and a Fund has not perfected a
security interest in the security, that Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor. As
such, a Fund would be at risk of losing some or all of the principal and
income involved in the transaction. As with any unsecured debt instrument
purchased for a Fund, the Adviser seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the seller of the
security.
Apart from the risk of bankruptcy or insolvency proceedings, a Fund
also runs the risk that the seller may fail to repurchase the security.
However, each Fund always requires collateral for any repurchase agreement to
which it is a party in the form of securities acceptable to it, the market
value of which is equal to at least 100% of the amount invested by the Fund
plus accrued interest, and each Fund makes payment against such securities
only upon physical delivery or evidence of book entry transfer to the account
of its custodian bank. If the market value of the security subject to the
repurchase agreement becomes less than the repurchase price (including
interest), a Fund, pursuant to its repurchase agreement, may require the
seller of the security to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price (including interest) at all times.
RESTRICTED SECURITIES
Restricted securities are securities that may not be sold to the
public without registration under the Securities Act of 1933 (the "1933 Act")
absent an exemption from registration. Many restricted securities are illiquid
but the Adviser or Subadviser may determine that at the time of investment
such securities are not illiquid (generally, an illiquid security is one that
cannot be disposed of within seven days in the ordinary course of business at
its full value), based on guidelines which are the responsibility of and are
periodically reviewed by the Board of Trustees. Under these guidelines, the
Adviser or Subadviser will consider the frequency of trades and quotes for the
security, the number of dealers in, and potential purchasers for, the
securities, dealer undertakings to make a market in the security, and the
nature of the security and of the marketplace trades. In purchasing such
restricted securities, the intention of the Adviser is to rely upon the
exemption from registration provided by Rule 144A promulgated under the 1933
Act. Restricted securities not determined to be liquid may be purchased
subject to each Fund's limitation on all illiquid securities (15 percent of
net assets of the Funds).
A Fund may purchase restricted securities that are not registered for
sale to the general public if it is determined that there is a dealer or
institutional market in the securities. In that case, the securities will not
be treated as illiquid for purposes of the Fund's investment limitation
described above. The Trustees will review these determinations. These
securities are known as "Rule 144A securities" because they are traded under
Rule 144A of the 1933 Act among qualified institutional buyers.
SECURITIES LENDING
Each Fund may lend securities pursuant to agreements requiring that
the loans be continuously secured by liquid securities, as collateral equal to
100% of the market value at all times of the securities lent. Such loans will
not be made if, as a result, the aggregate amount of all outstanding
securities loans for the Fund exceed 30 percent of a Fund's total assets. A
Fund will continue to receive interest on the securities lent while
simultaneously earning interest on the investment of the collateral. However,
a Fund will normally pay lending
12
<PAGE> 38
fees to such broker-dealers and related expenses from the interest earned on
invested collateral. There may be risks of delay in receiving additional
collateral or risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail
financially. However, loans are made only to borrowers deemed by the Adviser
to a Fund to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned currently from such securities loans
justifies the attendant risk. Any loan may be terminated by either party upon
reasonable notice to the other party. A Fund may use the Distributor or a
broker/dealer affiliate of an Adviser or Subadviser as a broker in these
transactions to the extent permitted under applicable law.
TEMPORARY DEFENSIVE POSITION
During periods of unusual economic or market conditions or for
temporary defensive purposes or liquidity, each Fund may invest without limit
in cash and in U.S. dollar-denominated high quality money market and
short-term instruments. These investments may result in a lower yield than
would be available from investments with a lower quality or longer term. A
temporary defensive position may also prevent a Fund from achieving its
investment objective.
WARRANTS
A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time. Each Fund may
invest up to 5% of its net assets in warrants. Included in this limitation may
be warrants not listed on the New York Stock Exchange or American Stock
Exchange.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust are:
<TABLE>
<CAPTION>
---------------------------------------------- --------------------------------- --------------------------------------------------
Name, Address and Age Position(s) Held with the Trust Principal Occupation During Past Five Years
---------------------------------------------- --------------------------------- --------------------------------------------------
<S> <C> <C>
Scott B. Dubchansky* (born 1960) Chairman, President Mr. Dubchansky has been the Chief Executive Officer
11766 Wilshire Blvd., Suite 1580 and Chief Executive Officer of the Adviser since
Los Angeles, CA 90025 August 1996. From August 1992 through August 1996.
Mr. Dubchansky was a Senior Vice President of
Donaldson Lufkin & Jenrette in the Fixed
Income division. Prior to August 1992,
Mr. Dubchansky was Senior Vice
President, fixed income sales at Kidder
Peabody and responsible for fixed income
sales to institutional clients.
---------------------------------------------- --------------------------------- --------------------------------------------------
</TABLE>
13
<PAGE> 39
<TABLE>
---------------------------------------------- --------------------------------- --------------------------------------------------
Name, Address and Age Position(s) Held with the Trust Principal Occupation During Past Five Years
---------------------------------------------- --------------------------------- --------------------------------------------------
<S> <C> <C>
Laird R. Landmann* (born 1964) Trustee Mr. Landmann has been a Managing Director and
11766 Wilshire Blvd., Suite 1580 portfolio manager with the Adviser since August
Los Angeles, CA 90025 1996. From November 1992 until July 1996 Mr.
Landmann was a principal and Co-Director
of Fixed Income with Hotchkis and Wiley
in Los Angeles. Before then, he was a
portfolio manager with PIMCO in Newport
Beach, California.
--------------------------------------------- --------------------------------- ----------------------------------------------------
Keith T. Holmes* (born 1952) Trustee Mr. Holmes has been a partner of the law firm King,
2121 Avenue of the Stars, Purtich, Holmes, Paterno & Berliner (and its
22nd Floor predecessor firm King, Purtich & Holmes) since
Los Angeles, CA 90067 1992. Mr. Holmes practices corporate finance and
real estate law. Mr. Holmes' firm has performed
legal services for the Adviser and its affiliates.
--------------------------------------------- --------------------------------- ----------------------------------------------------
Martin Luther King III (born 1957) Trustee Since 1980, Mr. King has been engaged as an
P.O. Box 50608 independent motivational lecturer. From January
Atlanta, GA 30314 1987 until November1993, Mr. King was County
Commissioner for Fulton County in Atlanta, Georgia.
--------------------------------------------- --------------------------------- ----------------------------------------------------
James M. Lippman (born 1957) Trustee Since 1990, Mr. Lippman has been the President of
11766 Wilshire Boulevard JRK Asset Management, Inc., a real estate firm
Los Angeles, CA 90025 that is primarily engaged in owning and operating
multi-family and hotel properties. From 1990 to
1993, Mr. Lippman was Managing Director of The
Signature Group, a real estate investment fund.
--------------------------------------------- --------------------------------- ----------------------------------------------------
Daniel D. Villanueva (born 1937) Trustee Mr. Villanueva is the Chairman and Managing
1999 Avenue of the Stars, Director of Bastion Capital Corporation
No. 2960 (investments).
Los Angeles, CA 90067
--------------------------------------------- --------------------------------- ----------------------------------------------------
</TABLE>
14
<PAGE> 40
<TABLE>
---------------------------------------------- --------------------------------- --------------------------------------------------
Name, Address and Age Position(s) Held with the Trust Principal Occupation During Past Five Years
---------------------------------------------- --------------------------------- --------------------------------------------------
<S> <C> <C>
Lara Mulpagano (born 1969) Secretary and Treasurer Since 1996, Ms. Mulpagano has been a Vice President
11766 Wilshire Blvd., Suite 1580 and Assistant Portfolio Manager for the Adviser.
Los Angeles, CA 90025 From 1993 to 1996, she was an Assistant Portfolio
Manager for the fixed-income department of
Hotchkis & Wiley. From 1991 to 1993, she was a
research assistant at Pacific Investment Management
Company (PIMCO).
--------------------------------------------- --------------------------------- ----------------------------------------------------
Arlana Williams (born 1972) Assistant Treasurer Since 1998, Ms. Williams has been a mutual fund
11766 Wilshire Blvd., Suite 1580 manager for and Principal Accounting the
Los Angeles, CA 90025 Adviser. From 1995 to 1997, she was a Senior and
Financial Officer Accountant with Ernst & Young
LLP. From 1994 to 1995, she was an accountant with
Coopers & Lybrand LLP.
--------------------------------------------- --------------------------------- ----------------------------------------------------
James E. Menvielle (born 1972) Assistant Treasurer Since 1998, Mr. Menvielle has been the Assistant
11766 Wilshire Blvd., Suite 1580 Controller for the Adviser. From 1995 to 1998, he
Los Angeles, CA 90025 was a Senior Accountant with Deloitte & Touche LLP.
--------------------------------------------- --------------------------------- ----------------------------------------------------
* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Adviser.
</TABLE>
The Trust does not pay salaries to any of its officers or fees to any
of its Trustees who are affiliated with the Adviser. Disinterested Trustees
received an annual retainer of $6,000, and $1,500 for each meeting of the
Board of Trustees attended for the fiscal year ended March 31, 2000. The same
fees will be paid for the fiscal year ended March 31, 2001. Mr. Holmes will
also be compensated according to this schedule. Mr. Holmes is not a
disinterested Trustee because he provides legal services to the Adviser and
its affiliates.
The total compensation paid by the Trust to each Trustee during the
fiscal year ended March 31, 2000 is set forth below:
<TABLE>
<CAPTION>
----------------------------------------------- -------------------------------------------------
Total Compensation from the Trust and the Funds
Name of Trustee Paid to Trustees
----------------------------------------------- -------------------------------------------------
<S> <C>
Scott B. Dubchansky None
----------------------------------------------- -------------------------------------------------
Laird R. Landmann None
----------------------------------------------- -------------------------------------------------
Keith T. Holmes... $12,000
----------------------------------------------- -------------------------------------------------
Martin Luther King III $12,000
----------------------------------------------- -------------------------------------------------
</TABLE>
15
<PAGE> 41
<TABLE>
<CAPTION>
----------------------------------------------- -------------------------------------------------
Total Compensation from the Trust and the Funds
Name of Trustee Paid to Trustees
----------------------------------------------- -------------------------------------------------
<S> <C>
James M. Lippman.. $12,000
----------------------------------------------- -------------------------------------------------
Daniel D. Villanueva $12,000
----------------------------------------------- -------------------------------------------------
</TABLE>
For information as to ownership of shares by officers and Trustees of
the Trust, see below under "CONTROL PERSONS AND PRINCIPAL HOLDERS OF
SECURITIES."
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The Adviser, the Subadviser and their affiliates own substantially
all of the Funds' outstanding shares as a result of their initial investment
in the Funds. For a period of several months following commencement of
operations of each Fund, a control person of or affiliate of the Fund (such as
the Subadviser) is expected to own 25 percent or more of its outstanding
shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Subadvisory Agreement states that in connection with
its duties to arrange for the purchase and sale of securities held in the
portfolio of each Fund by placing purchase and sale orders for that Fund, the
Subadviser shall select such broker-dealers ("brokers") as shall, in the
Subadviser's judgment, implement the policy of the Trust to achieve "best
execution", i.e., prompt and efficient execution at the most favorable
securities price. In making such selection, the Subadviser is authorized in
the Agreement to consider the reliability, integrity and financial condition
of the broker.
The Subadviser is also authorized by the Agreement to consider
whether the broker provides brokerage and/or research services to the Funds
and/or other accounts of the Subadviser. The Agreement states that the
commissions paid to brokers may be higher than another broker would have
charged if a good faith determination is made by the Subadviser that the
commission is reasonable in relation to the services provided, viewed in terms
of either that particular transaction or the Subadviser's overall
responsibilities as to the accounts as to which it exercises investment
discretion and that the Subadviser shall use its judgment in determining that
the amount of commissions paid are reasonable in relation to the value of
brokerage and research services provided and need not place or attempt to
place a specific dollar value on such services or on the portion of commission
rates reflecting such services. The Agreement provides that to demonstrate
that such determinations were in good faith, and to show the overall
reasonableness of commissions paid, the Subadviser shall be prepared to show
that commissions paid (i) were for purposes contemplated by the Agreement;
(ii) were for products or services which provide lawful and appropriate
assistance to the Subadviser's decision-making process; and (iii) were within
a reasonable range as compared to the rates charged by brokers to other
institutional investors as such rates may become known from available
information. The Subadviser is also authorized to consider sales of shares of
each Fund and/or of any other investment companies for which the Subadviser
acts as Subadviser as a factor in the selection of brokers to execute
brokerage and principal transactions, subject to the requirements of "best
execution," as defined above.
The research services discussed above may be in written form or
through direct contact with individuals and may include information as to
particular companies and securities as well as market, economic, or
institutional areas and information assisting the Trust in the valuation of
the Funds' investments. The research
16
<PAGE> 42
which the Subadviser may receive for the Funds' brokerage commissions, whether
or not useful to a Fund, may be useful to the Subadviser in managing the
accounts of the Subadviser's other advisory clients. Similarly, the research
received for the commissions of such accounts may be useful to any Fund.
Investment decisions for the Funds are made independently from those
of other client accounts of the Subadviser or its affiliates, and suitability
is always a paramount consideration. Nevertheless, it is possible that at
times the same securities will be acceptable for one or more Funds and for one
or more of such client accounts. The Subadviser and its personnel may have
interests in one or more of those client accounts, either through direct
investment or because of management fees based on gains in the account. The
Subadviser has adopted allocation procedures to ensure the fair allocation of
securities and prices between the Funds and the Subadviser's various other
accounts. These procedures emphasize the desirability of bunching trades and
price averaging (see below) to achieve objective fairness among clients
advised by the same portfolio manager or portfolio team. Where trades cannot
be bunched, the procedures specify alternatives designed to ensure that buy
and sell opportunities are allocated fairly and that, over time, all clients
are treated equitably. The Subadviser's trade allocation procedures also seek
to ensure reasonable efficiency in client transactions, and they provide
portfolio managers with reasonable flexibility to use allocation methodologies
that are appropriate to their investment discipline on client accounts.
To the extent any of the Subadviser's client accounts and a Fund seek
to acquire the same security at the same general time (especially if that
security is thinly traded or is a small-cap stock), that Fund may not be able
to acquire as large a portion of such security as it desires, or it may have
to pay a higher price or obtain a lower yield for such security. Similarly, a
Fund may not be able to obtain as high a price for, or as large an execution
of, an order to sell any particular security at the same time. If one or more
of such client accounts simultaneously purchases or sells the same security
that a Fund is purchasing or selling, each day's transactions in such security
generally will be allocated between that Fund and all such client accounts in
a manner deemed equitable by the Subadviser, taking into account the
respective sizes of the accounts, the amount being purchased or sold and other
factors deemed relevant by the Subadviser. In many cases, a Fund's
transactions are bunched with the transactions for other client accounts. It
is recognized that in some cases this system could have a detrimental effect
on the price or value of the security insofar as that Fund is concerned. In
other cases, however, it is believed that the ability of the Fund to
participate in volume transactions may produce better executions for that
Fund.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Subadviser may place orders for a Fund with broker/dealers who have agreed to
defray certain Trust expenses such as custodian fees.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission although the price of the security usually includes a profit
to the dealer. Money market instruments usually trade on a "net" basis as
well. On occasion, certain money market instruments may be purchased by the
Funds directly from an issuer in which case no commissions or discounts are
paid. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount.
17
<PAGE> 43
INVESTMENT ADVISORY SERVICES
The Adviser, Metropolitan West Asset Management, LLC, with principal
offices at 11766 Wilshire Boulevard, Suite 1580, Los Angeles, California
90025, is a registered investment adviser organized as a California limited
liability company in 1996. The Subadviser, Metropolitan West Capital
Management, LLC, with principal offices at 610 Newport Center, Suite 150,
Newport Beach, California 92660, is a registered investment adviser organized
as a California limited liability corporation in 1999.
Under the Investment Advisory Agreement relating to the Funds, the
Adviser provides the Funds with investment management services. As
compensation for these services, each Fund pays management fees at an
annualized rate of its average daily assets, as described in the Prospectus.
Those investment management responsibilities include overall responsibility
for the Funds and supervision of the Subadviser's portfolio management
activities.
Under the Investment Subadvisory Agreement, the Subadviser provides
the Funds with investment management services including arranging for the
purchase and sale of securities and other portfolio assets. The Adviser pays
the Subadviser's fee at an annualized rate of the Fund's average daily assets,
as described in the Prospectus.
The Advisory Agreements are in effect with respect to each Fund for
two years after the Fund's commencement of public operations and then continue
for each Fund for periods not exceeding one year so long as such continuation
is approved at least annually by (1) the Board or the vote of a majority of
the outstanding shares of that Fund, and (2) a majority of the Trustees who
are not interested persons of any party to the relevant Advisory Agreement, in
each case by a vote cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreements may be terminated at any
time, without penalty, by a Fund or the Adviser or Subadviser upon 60 days'
written notice, and are automatically terminated in the event of an assignment
as defined in the 1940 Act.
The Subadviser has agreed in an Operating Expenses Agreement to limit
each Fund's expenses as described in the Prospectus. The operating expenses
limited by the Agreement do not include 12b-1 fees, litigation and other
extraordinary expenses. That Agreement has a one-year term, renewable at the
end of each fiscal year. Each Fund has agreed to reimburse the Subadviser, for
a period of up to three years, for any such payments to the extent that the
Fund's operating expenses are otherwise below its expense cap. This obligation
will not be recorded as a liability on the books of the Fund to the extent
that the total operating expenses of the Fund are at or above the expense cap.
However, if the total operating expenses of a Fund fall below the expense cap,
the reimbursement to the Subadviser (up to the cap) will be accrued by the
Fund as a liability if the Subadviser seeks to recoup those amounts and the
independent Trustees have approved that reimbursement. Certain officers and
trustees of the Funds are also officers and directors of the Adviser. All
officers serve without direct compensation from the Funds.
ADMINISTRATOR
The Funds have a Services Agreement with PFPC Inc. ("PFPC" or the
"Administrator"), with offices at 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406. The Services Agreement provides that the Administrator
will prepare and coordinate reports and other materials supplied to the
Trustees; prepare and/or supervise the preparation and filing of all
securities filings, periodic financial reports, prospectuses, statements of
additional information, marketing materials, tax returns, shareholder reports
and other regulatory reports or
18
<PAGE> 44
filings required of the Funds; prepare all required filings necessary to
maintain the Funds' qualifications and/or registrations to sell shares in all
states where each Fund currently does, or intends to do, business; coordinate
the preparation, printing and mailing of all materials (e.g., Annual Reports)
required to be sent to shareholders; coordinate the preparation and payment of
Fund-related expenses; monitor and oversee the activities of the Funds'
servicing agents (i.e., transfer agent, custodian, fund accountants, etc.);
review and adjust as necessary each Fund's daily expense accruals; and perform
such additional services as may be agreed upon by the Funds and the
Administrator. For its services, the Administrator receives an annual fee of
.15% of the first $50 million of the Trust's average daily net assets, .10 % of
the next $50 million and .05% over $100 million, subject to a minimum annual fee
of $55,000 (and $12,000 for each additional series after the first). Because the
Trust has three other operating series, those other assets are included in
calculating these fees.
CUSTODIAN AND TRANSFER AGENT
PFPC also serves as the coordinator for custody services provided by
the custodian for the Funds under a the Services Agreement. The Bank of New
York, One Wall Street, New York, New York 10286, serves as the Funds'
custodian under a separate Custody Agreement. The Administrator also serves as
the transfer agent for the Funds under the Services Agreement.
DISTRIBUTOR
PFPC Distributors, Inc. (the "Distributor"), 3200 Horizon Drive, King
of Prussia, Pennsylvania 19406, a broker-dealer affiliated with the
Administrator, acts as each Fund's principal underwriter in a continuous
public offering of the Fund's shares. After its initial term of two years, the
Underwriting Agreement between the Funds, the Adviser and the Distributor
continues in effect for periods not exceeding one year if approved at least
annually by (i) the Board of Trustees or the vote of a majority of the
outstanding shares of each Fund (as defined in the 1940 Act) and (ii) a
majority of the Trustees who are not parties to such agreement or interested
persons of any such party, in each case cast in person at a meeting called for
the purpose of voting on such approval. The Underwriting Agreement may be
terminated without penalty by the parties thereto upon 60 days' written
notice, and is automatically terminated in the event of its assignment as
defined in the 1940 Act.
SHARE MARKETING PLAN
The Trust has adopted a Share Marketing Plan (or Rule 12b-1 Plan)
(the "12b-1 Plan") with respect to the Funds pursuant to Rule 12b-1 under the
1940 Act. PFPC Distributors, Inc. serves as the distribution coordinator under
the 12b-1 Plan and, as such, receives for disbursement any fees paid by the
Funds pursuant to the 12b-1 Plan.
On April 1, 1997, the Board of Trustees of the Trust, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the 12b-1
Plan or in any agreement related to the 12b-1 Plan (the "Independent
Trustees") adopted the 12b-1 Plan for the Trust.
Under the 12b-1 Plan, each Fund pays distribution fees to the
Distributor at an annual rate of up to 0.25% of the Fund's aggregate average
daily net assets to reimburse expenses in connection with the promotion and
distribution of the shares. The Funds will waive all Rule 12b-1 fees until
further notice to shareholders.
19
<PAGE> 45
The 12b-1 Plan provides that the Distributor may use the Rule 12b-1
distribution fees received from a Fund only to pay for the distribution and
shareholder servicing expenses of the Fund. Distribution fees are accrued
daily and paid monthly, and are charged as expense of the shares as accrued.
A Fund's shares are not obligated under the 12b-1 Plan to pay any
distribution expense in excess of the distribution fee. Thus, if the 12b-1
Plan were terminated or otherwise not continued, no amounts (other than
current amounts accrued but not yet paid) would be owed to the Distributor.
The 12b-1 Plan provides that it shall continue in effect from year to
year provided that a majority of the Board of Trustees of the Trust, including
a majority of the Independent Trustees, vote annually to continue the 12b-1
Plan. The 12b-1 Plan (and any distribution agreement between the Trust, the
Distributor or the Adviser and a selling agent) may be terminated without
penalty upon at least 60-days' notice by the Distributor or the Adviser, or by
the Trust by vote of a majority of the Independent Trustees, or by vote of a
majority of the outstanding shares (as defined in the 1940 Act).
All distribution fees paid by the Funds under the 12b-1 Plan will be
paid in accordance with Conduct Rule 2830 of NASD Regulation, Inc., as such
Rule may change from time to time. Pursuant to the 12b-1 Plan, the Board of
Trustees will review at least quarterly a written report of the distribution
expenses on behalf of each Fund. In addition, as long as the 12b-1 Plan
remains in effect, the selection and nomination of Trustees who are not
interested persons (as defined in the 1940 Act) of the Trust shall be made by
the Trustees then in office who are not interested persons of the Trust.
NET ASSET VALUE
As stated in the Prospectus, the net asset value per share of each
Fund's shares will be determined at the close of the New York Stock Exchange
(the "NYSE") (generally 4:00 p.m. New York time, but the NYSE sometimes closes
earlier) on each day that the NYSE is open for trading. The NYSE annually
announces the days on which it will not be open for trading; the most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement. Also, no Fund is
required to compute its net asset value on any day on which no order to
purchase or redeem its shares is received. The daily net asset value may not
reflect the closing market price for all futures contracts held by the Funds
because the markets for certain futures close shortly after the time net asset
value is calculated.
Securities that are traded on a national securities exchange will be
valued at the last sale price or, if there was no sale on such day, at the
average of readily available closing bid and asked prices on such exchange.
The Funds receive pricing information from Interactive Data Corporation
("IDC") and other independent pricing vendors. IDC and others, including
Merrill Lynch, Bloomberg and Muller, are regarded as some of the more common
sources of readily available pricing information. Prices provided by IDC and
other private vendors also may be based on quotations from one or more market
makers.
Debt securities which mature in less than 60 days are valued at
amortized cost (unless the Board of Trustees determines that this method does
not represent fair value), if their original maturity was 60 days or less or
by amortizing the value as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days.
20
<PAGE> 46
Trading in securities listed on foreign securities exchanges or
over-the-counter markets is normally completed before the close of regular
trading on the NYSE. In addition, foreign securities trading may not take
place on all business days in New York and may occur on days on which the NYSE
is not open. In addition, foreign currency exchange rates are generally
determined prior to the close of trading on the NYSE. Events affecting the
value of foreign securities and currencies will not be reflected in the
determination of net asset value unless the Board of Trustees determines that
the particular event would materially affect net asset value, in which case an
adjustment will be made. Investments quoted in foreign currency are valued
daily in U.S. dollars on the basis of the foreign currency exchange rate
prevailing at the time of valuation. Foreign currency exchange transactions
conducted on a spot basis are valued at the spot rate prevailing in the
foreign exchange market.
Securities and other assets that cannot be valued as described above
will be valued at their fair value as determined by the Adviser under
guidelines established by and under the general supervision and responsibility
of the Board of Trustees.
REDEMPTION IN KIND
If the Board of Trustees determines that it would be detrimental to
the best interests of the remaining shareholders of any Fund to make payment
wholly in cash, the Fund may pay the redemption price in part by a
distribution in kind of readily marketable securities from the portfolio of
that Fund, in lieu of cash. The Trust has elected to be governed by Rule 18f-1
under the 1940 Act pursuant to which each Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or one percent of the net asset
value of the Fund during any 90-day period for any one shareholder. Should
redemptions by any shareholder exceed such limitation the Fund will have the
option of redeeming the excess in cash or in kind. If shares are redeemed in
kind, the redeeming shareholder would incur brokerage costs in converting the
assets into cash.
DIVIDENDS AND TAX STATUS
Each Fund has elected and intends to continue to qualify to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code (the "Code). Each Fund is taxed as a separate entity under
Subchapter M and must qualify on a separate basis. Qualification as a
regulated investment company requires, among other things, that (a) at least
90% of a Fund's annual gross income, without offset for losses from the sale
or other disposition of securities, be derived from interest, dividends,
payments with respect to securities loans, and gains from the sale or other
disposition of securities, foreign currencies or options (including forward
contracts) thereon; and (b) a Fund diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities,
securities of other regulated investment companies and other securities
limited in respect of any one issuer to an amount not greater than 5% of the
Fund's assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities). In
addition, in order to qualify as a regulated investment company a Fund must
distribute to its shareholders at least 90% of its net investment income,
other than net capital gains, earned in each year. As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that
it distributes to shareholders in accordance with the timing requirements of
the Code.
A Fund must pay an excise tax to the extent it does not distribute to
its shareholders during each calendar year at least 98% of its ordinary income
for that calendar year, 98% of its capital gains over capital
21
<PAGE> 47
losses for the one-year period ending October 31 in such calendar year, and all
undistributed ordinary income and capital gains for the preceding respective
one-year period. The Funds intend to meet these distribution requirements to
avoid excise tax liability. If the net asset value of shares of a Fund should,
by reason of a distribution of realized capital gains, be reduced below a
shareholder's cost, such distribution would to that extent be a return of
capital to that shareholder even though taxable to the shareholder, and a sale
of shares by a shareholder at net asset value at that time would establish a
capital loss for Federal income tax purposes.
The Taxpayer Relief Act (the "Relief Act") reduced the maximum tax on
long-term capital gains from 28% to 20% for taxpayers in all brackets except
for those in the 15% bracket, whose maximum rate will be 10% on those gains.
Certain provisions of the Relief Act have since been changed and further
changes not described in this Statement of Additional Information are
possible.
Corporate shareholders are eligible to deduct 70% of dividends
received from domestic corporations. The Funds pass through this benefit to
their corporate shareholders subject to limitations under Section 854 of the
Code. The dividends-received deduction is allowed to a corporate shareholder
only if the shareholder satisfies a 46-day holding period for the
dividend-paying stock (or a 91-day period for certain dividends on preferred
stock). The 46-day (91-day) holding period generally does not include any time
in which the shareholder is protected from the risk of loss otherwise inherent
in the ownership of an equity interest. The Relief Act provided that the
taxpayer must satisfy the holding period requirement with respect to each
dividend. This determination is made by looking at the 90-day (180-day) period
starting 45 days (90 days) before the ex-date. The 46 days (91 days) do not
have to be consecutive and do not include any day in which risk of loss is
diminished.
A Fund must satisfy the above holding period requirements in order to
pass through this benefit to its corporate shareholders. In addition, a
corporate shareholder of a Fund must also satisfy the holding period
requirement with respect to its Fund Shares. In determining the extent to
which a Fund's dividends may be eligible for the 70% dividends-received
deduction by corporate shareholders, interest income, capital gain net income,
gain or loss from Section 1256 contracts (described below), dividend income
from foreign corporations and income from other sources will not constitute
qualified dividends. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
The use of hedging strategies, such as entering into futures
contracts and forward contracts and purchasing options, involves complex rules
that will determine the character and timing of recognition of the income
received in connection therewith by the Funds. Income from foreign currencies
(except certain gains therefrom that may be excluded by future regulations)
and income from transactions in options, futures contracts and forward
contracts derived by a Fund with respect to its business of investing in
securities or foreign currencies will qualify as permissible income under
Subchapter M of the Code.
For accounting purposes, when a Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by a Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by a
Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect
the amount, character and timing of a Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized
on disposition of the offsetting
22
<PAGE> 48
position; that the Fund's holding period in certain straddle positions not begin
until the straddle is terminated (possibly resulting in the gain not being
treated as long-term capital gain); and that losses recognized with respect to
certain straddle positions, which would otherwise constitute short-term capital
losses, be treated as long-term losses. Different elections are available to a
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by a Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have
been sold at market value. Sixty percent of any net gain or loss recognized on
these deemed sales and 60% of any net gain or loss realized from any actual
sales of Section 1256 Contracts will be treated as long-term capital gain or
loss, and the balance will be treated as short-term gain or loss.
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. A Fund may
invest in the stock of foreign investment companies that may be treated as
"passive foreign investment companies" ("PFICs") under the Code. Certain other
foreign corporations, not operated as investment companies, may nevertheless
satisfy the PFIC definition. A portion of the income and gains that a Fund
derives from PFIC stock may be subject to a non-deductible federal income tax
at the Fund level. In some cases, a Fund may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or
not such income is actually distributed by the PFIC. Each Fund will endeavor
to limit its exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Because it is not always possible
to identify a foreign issuer as a PFIC in advance of making the investment, a
Fund may incur the PFIC tax in some instances.
ADDITIONAL INFORMATION RELATING TO FOREIGN INVESTMENTS. Special tax
considerations apply with respect to a Fund's foreign investments. Investment
income received by a Fund from sources within foreign countries may be subject
to foreign taxes. The Funds do not expect to be able to pass through to
shareholders foreign tax credits or deductions with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Funds to a reduced rate of tax or an exemption
from tax on such income. The Funds intend to qualify for treaty reduced rates
where available. It is not possible, however, to determine a Fund's effective
rate of foreign tax in advance since the amount of the Fund's assets to be
invested within various countries is not known.
Foreign exchange gains and losses realized by a Fund will generally
be treated as ordinary income and losses. Use of foreign currencies for
non-hedging purposes may be limited in order to avoid a tax on the applicable
Fund. Occasionally, a Fund may invest in stock of foreign issuers deemed to be
"passive foreign investment companies" for U.S. tax purposes. Any Fund making
such an investment may be liable for U.S. income taxes on certain
distributions and realized capital gains from stock of such issuers. Any Fund
making such an investment also may elect to mark to market its investments in
"passive foreign investment companies" on the last day of each taxable year,
which may cause the Fund to recognize ordinary income prior to the receipt of
cash payments with respect to those investments. In order to distribute that
income and avoid a tax on the Fund, such a Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold.
Under Section 988 of the Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time a Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or loss.
Similarly, gains or losses on forward foreign currency
23
<PAGE> 49
exchange contracts (other than forward foreign currency exchange contracts that
are governed by Section 1256 of the Code and for which no election is made) or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition are also treated as
ordinary gain or loss. These gains and losses, referred to as "Section 988"
gains or losses, increase or decrease the amount of a Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the Fund's net capital gain. If a
Fund's Section 988 losses exceed other investment company taxable income during
a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing the basis of each shareholder's shares.
FOREIGN SHAREHOLDERS. Taxable dividends and certain other payments to
persons who are not citizens or residents of the United States or U.S.
entities ("Non-U.S. Persons") are generally subject to U.S. tax withholding at
a rate of 30%, although the 30% rate may be reduced to the extent provided by
an applicable tax treaty. The Funds intend to withhold tax payments at the
rate of 30% (or the lower treaty rate) on taxable dividends and other payments
to Non-U.S. Persons that are subject to such withholding. Any amounts withheld
in excess of a person's actual tax liability may be recovered by that person
by filing a claim for refund with the U.S. Internal Revenue Service within the
time period appropriate for such claims. Distributions received from the Funds
by Non-U.S. Persons also may be subject to tax under the laws of their own
jurisdictions.
BACKUP WITHHOLDING. The Funds or any securities dealer effecting a
redemption of the Funds' shares by a shareholder will be required to file
information reports with the IRS with respect to distributions and payments
made to the shareholder. In addition, the Funds will be required to withhold
federal income tax at the rate of 31% on taxable dividends, redemptions and
other payments made to accounts of individual or other non-exempt shareholders
(including a Non-U.S. Person) who have not furnished their correct taxpayer
identification numbers and made certain required certifications on the Account
Application Form or with respect to which a Fund or the securities dealer has
been notified by the IRS that the number furnished is incorrect or that the
account is otherwise subject to withholding. Backup withholding will not,
however be applied to payments that have been subject to 30% withholding.
MISCELLANEOUS. Any loss realized on a sale, redemption or exchange of
shares of a Fund by a shareholder will be disallowed to the extent the shares
are replaced within a 61-day period (beginning 30 days before the disposition
of shares). Shares received in connection with the payment of a dividend by a
Fund constitute a replacement of shares.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in a Fund. Paul, Hastings Janofsky & Walker LLP
has expressed no opinion in respect thereof. Shareholders are advised to
consult with their own tax advisers concerning the application of federal,
state, local, and foreign taxes to an investment in a Fund.
PERFORMANCE INFORMATION
TOTAL RETURN: Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:
P(1 + T) to the nth power = ERV
24
<PAGE> 50
where P equals a hypothetical initial payment of $1000; T equals average
annual total return; n equals the number of years; and ERV equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.
Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for publication.
Average annual total return, or "T" in the above formula, is computed by
finding the average annual compounded rates of return over the period that
would equate the initial amount invested to the ending redeemable value.
Average annual total return assumes the reinvestment of all dividends and
distributions.
YIELD: Annualized yield quotations used in a Fund's advertising and
promotional materials are calculated by dividing the Fund's income for a
specified 30-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
YIELD = 2 [ (a-b + 1) to the 6th power - 1]
------
cd
where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the
last day of the period.
Except as noted below, in determining net investment income earned
during the period ("a" in the above formula), a Fund calculates interest
earned on each debt obligation held by it during the period by (1) computing
the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
period or, if the obligation was purchased during the period, the purchase
price plus accrued interest; (2) dividing the yield to maturity by 360; and
(3) multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest). Once interest earned is calculated in
this fashion for each debt obligation held by the Fund, net investment income
is then determined by totaling all such interest earned.
OTHER INFORMATION: Each Fund's performance data quoted in advertising
and other promotional materials represents past performance and is not
intended to predict or indicate future results. The return and principal value
of an investment in a Fund will fluctuate, and an investor's redemption
proceeds may be more or less than the original investment amount. In
advertising and promotional materials a Fund may compare its performance with
data published by Lipper Analytical Services, Inc. ("Lipper"), Morningstar
("Morningstar") or CDA Investment Technologies, Inc. ("CDA"). The Fund also
may refer in such materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper
or CDA. Advertising and promotional materials also may refer to discussions of
the Fund and comparative mutual fund data and ratings reported in independent
periodicals including, but not limited to, The Wall Street Journal, Money
magazine, Forbes, Business Week, Financial World and Barron's. The Funds also
may quote or refer to other portfolio or performance statistics that are
intended to reflect historical volatility and other performance information,
including the following: (1) Beta (the covariance of a share in relation to
the rest of the market, with volatility equal to the market having a beta of
1); (2) R-squared (R2 reflects the degree to which the Fund's movements are
explained by movements in its benchmark index. R2 can range from 0 to 1 with 1
meaning that
25
<PAGE> 51
all movements of a fund are explained by movements of the index); (3) Alpha
(alpha measures the Fund's return relative to an unmanaged portfolio index and
is a general measure of the relative value a portfolio manager has contributed.
A value greater than 0 indicates a positive contribution); and (4) Correlation
coefficient (correlation coefficient provides a measure of how closely the
returns of one variable [the fund] moves with another [the index]. It ranges
from -1 to +1, with +1, indicating a perfect positive correlation, occurring
only when the returns of the two variables move exactly at the same time, in the
same direction, and in the same relative magnitude).
FURTHER INFORMATION ABOUT THE TRUST
The Declaration of Trust for the Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest and
to divide or combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interest in each Fund.
Each share represents an interest in a Fund proportionately equal to the
interest of each other share. Upon the Trust's liquidation, all shareholders
would share pro rata in the net assets of the Fund in question available for
distribution to shareholders. If they deem it advisable and in the best
interest of shareholders, the Board of Trustees may create additional classes
of shares. Each of such classes has or will have a different designation.
Income and operating expenses not specifically attributable to a particular
Fund are allocated fairly among the Funds by the Trustees, generally on the
basis of the relative net assets of each Fund.
Rule 18f-2 under the Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities
of an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of the series of the Trust affected by the matter. Under Rule 18f-2, a series
is presumed to be affected by a matter, unless the interests of each series in
the matter are identical or the matter does not affect any interest of such
series. Under Rule 18f-2 the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Fund only if approved by a majority of its outstanding
shares. However, the rule also provides that the ratification of independent
public accountants, the approval of principal underwriting contracts and the
election of directors may be effectively acted upon by the shareholders of the
Trust voting without regard to Fund.
The Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.
The Trust's custodian is responsible for holding the Funds' assets.
Subcustodians provide custodial services for assets of the Trust held outside
the U.S. The Trust's independent accountants examine the Trust's financial
statements and assist in the preparation of certain reports to the Securities
and Exchange Commission.
ADDITIONAL INFORMATION
LEGAL OPINION
The validity of the shares offered by the Prospectus has been passed
upon by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San
Francisco, California 94104.
26
<PAGE> 52
AUDITORS
The annual financial statements of the Funds will be audited by
[_______________ ] LLP, 350 South Grand Avenue, Suite 200, Los Angeles,
California 90071-3462, independent public accountant for the Funds.
LICENSE TO USE NAME
Metropolitan West Securities, Inc. and the Adviser have granted the
Trust and each Fund the right to use the designation "Metropolitan West" in
its name, and have reserved the right to withdraw their consent to the use of
that designation under certain conditions, including the termination of the
Adviser as the Funds' investment adviser. They have also reserved the right to
license others to use this designation, including any other investment
company.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information,
together, do not contain all of the information set forth in the Registration
Statement of Metropolitan West Funds filed with the Securities and Exchange
Commission. Certain information is omitted in accordance with rules and
regulations of the Commission. The Registration Statement may be inspected at
the Public Reference Room of the Commission at Room 1024, 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, and copies thereof may be
obtained from the Commission at prescribed rates. It is also available on the
SEC's Internet Web site at http://www.sec.gov. Statements contained in the
Prospectus or this SAI as to the contents of any contract or other document
referred to herein or in the Prospectus are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Trust's registration statement, each such
statement being qualified in all respects by that reference.
FINANCIAL STATEMENTS
The Funds have not completed a fiscal period of operations as of the
date of this Statement of Additional Information.
27
<PAGE> 53
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE> 54
METROPOLITAN WEST FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 23. Exhibits
(a) Agreement and Declaration of Trust dated December 9,
1996 (incorporated by reference to Registrant's
initial Registration Statement on Form N-1A filed on
December 24, 1996 [the "Registration Statement"]).
(b) By-Laws dated December 9, 1996 (incorporated by
reference to Registrant Statement filed on December
24, 1996).
(c) Instruments Defining Rights of Security Holders (not
applicable).
(d)(1) Investment Management Agreement as revised March 27,
2000 (incorporated by reference to Post-Effective
Amendment No. 8 filed on July 26, 2000).
(d)(2) Form of Amended Investment Management Agreement
between Metropolitan West Funds and Metropolitan West
Asset Management, LLC - to be filed by further
Post-Effective Amendment.
(d)(3) Form of Sub-Advisory Agreement between Metropolitan
West Asset Management, LLC and Metropolitan West
Capital Management, LLC - to be filed by further
Post-Effective Amendment.
(e) Underwriting Agreement between Metropolitan West
Funds and PFPC Distributors, Inc. dated November 13,
2000 is filed herewith.
(f) Bonus or Profit Sharing Contracts (not applicable).
(g)(1) Custody Agreement between Metropolitan West Funds and
The Bank of New York (incorporated by reference to
Pre-Effective Amendment No. 2).
(h)(1) Services Agreement dated March 31, 1999 between
Metropolitan West Funds and PFPC Inc. (incorporated
by reference to Post-Effective Amendment No. 8 filed
on July 26, 2000).
(h)(2) Amendment to Services Agreement dated February 28,
2000 (incorporated by reference to Post-Effective
Amendment No. 8 filed on July 26, 2000).
(h)(3) Form of Amendment to Services Agreement dated
November 13, 2000 is filed herewith.
(h)(4) Operating Expenses Agreement as amended March 27,
2000 (incorporated by reference to Post-Effective
Amendment No. 8 filed July 26, 2000).
(i)(1) For TOTAL RETURN BOND FUND and LOW DURATION BOND
FUND: Consent and Opinion of Counsel as to legality
of shares (incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement filed
on March 18, 1997 ["Pre-Effective Amendment No. 1"]).
(i)(2) For ALPHATRAK 500 FUND: Consent and Opinion of
Counsel as to legality of shares (incorporated by
reference to Post-Effective Amendment No. 4).
<PAGE> 55
(i)(3) For TOTAL RETURN BOND FUND and LOW DURATION BOND
FUND: Consent and Opinion of Counsel as to legality
of Class I shares (incorporated by reference to
Post-Effective Amendment No. 8 filed on July 26,
2000).
(i)(4) For INTRINSIC VALUE EQUITY and INTERNATIONAL VALUE
FUNDS: Consent and Opinion of Counsel as to legality
of shares - to be filed by further Post-Effective
Amendment.
(j) Consent of Independent Public Accountants - Not
Applicable.
(k) Omitted Financial Statements (not applicable).
(l) Initial Capital Agreements (incorporated by reference
to Pre-Effective Amendment No. 2).
(m) Share Marketing Plan (Rule 12b-1 Plan), as amended
March 31, 2000 (incorporated by reference to
Post-Effective Amendment No. 8 filed July 26, 2000).
(n) Financial Data Schedules (not applicable).
(o) Rule 18f-3 Plan (incorporated by reference to
Post-Effective Amendment No. 7).
(p)(1) Metropolitan West Funds Code of Ethics (incorporated
by reference to Post-Effective Amendment No. 8 filed
July 26, 2000).
(p)(2) Metropolitan West Asset Management Employee Policy
Compliance (incorporated by reference to
Post-Effective Amendment No. 8 filed July 26, 2000).
(p)(3) Code of Ethics for Metropolitan West Capital
Management, LLC - to be filed by further
Post-Effective Amendment.
Item 24. Persons Controlled by or Under Common Control with Registrant.
Metropolitan West Asset Management, LLC, a California limited liability
company, is the investment adviser for each series of the Registrant (the
"Adviser"). Metropolitan West Financial, Inc., a California corporation ("MWF"),
is a member of the Adviser. Also members of the Adviser are Scott B. Dubchansky,
Tad Rivelle and Laird R. Landmann.
Metropolitan West Capital Management, LLC, a California limited
liability company (the "Subadviser), is the investment subadviser to the
Intrinsic Value Equity Fund and International Value Fund. MWF is a member of the
Subadviser. Also members are Gary W. Lisenbee and Howard Gleicher.
Persons holding more than a five percent beneficial interest in MWF
include Paul C. Chow, Terry M. Crow, Edward E. Curiel, Thomas W. Hayes, Richard
S. Hollander, Russell S. Gould and Roland R. Moos. MWF is registered with the
Securities and Exchange Commission as an investment adviser.
Item 25. Indemnification
Article VII of the Agreement and Declaration of Trust empowers the
Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VII of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses, judgments, fines, settlement and
other amounts actually and reasonable incurred in connection with such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best interests of the Trust. Indemnification will not be
provided in certain
<PAGE> 56
circumstances, however, including instances of willful misfeasance, bad faith,
gross negligence, and reckless disregard of the duties involved in the conduct
of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the 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 of 1933 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 of 1933 and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser.
Information about Scott B. Dubchansky, Tad Rivelle and Laird R.
Landmann is set forth in Part A under "Organization and Management -- Portfolio
Managers."
Information about Gary W. Lisenbee and Howard Gleicher is set forth in
Part A under "Organization and Management - Portfolio Managers".
Item 27. Principal Underwriter
(a) PFPC Distributors, Inc. (the "Distributor") acts as principal
underwriter for the following investment companies as of January 2,
2001:
International Dollar Reserve Fund I, Ltd.
Provident Institutional Funds Trust
Columbia Common Stock Fund, Inc.
Columbia Growth Fund, Inc.
Columbia International Stock Fund, Inc.
Columbia Special Fund, Inc.
Columbia Small Cap Fund, Inc.
Columbia Real Estate Equity Fund, Inc.
Columbia Balanced Fund, Inc.
Columbia Daily Income Company
Columbia U.S. Government Securities Fund, Inc.
Columbia Fixed Income Securities Fund, Inc.
Columbia Municipal Bond Fund, Inc.
Columbia High Yield Fund, Inc.
Columbia National Municipal Bond Fund, Inc.
Columbia Strategic Value Fund, Inc.
Columbia Technology Fund, Inc.
GAMNA Series Funds, Inc.
WT Investment Trust
Kalmar Pooled Investment Trust
The RBB Fund, Inc.
Robertson Stephens Investment Trust
HT Insight Funds, Inc.
Harris Insight Funds Trust
Hilliard -Lyons Research Trust
Warburg Pincus Trust
ABN AMRO Funds
AFBA 5 Star Funds
Alleghany Funds
BT Insurance Funds Trust
<PAGE> 57
Deutsche Asset Management VIT Funds
First Choice Funds Trust
Forward Funds, Inc.
Hillview Investment Trust II
IAA Trust Asset Allocation Fund, Inc.
IAA Trust Growth Fund, Inc.
IAA Trust Tax Exempt Bond Fund
IAA Trust Taxable Fixed Income Series Fund, Inc.
IBJ Funds Trust
Light Index Funds, Inc.
LKCM Funds
Matthews International Funds
MCM Funds
Metropolitan West Funds
New Covenant Funds, Inc.
Pictet Funds
Smith Breeden Series Funds
Smith Breeden Trust
Stratton Growth Funds, Inc.
Stratton Monthly Dividend REIT Shares, Inc.
The Stratton Funds, Inc.
The Galaxy Fund
The Galaxy VIP Funds
Galaxy Fund II
The Govett Funds, Inc.
Trainer, Wortham First Mutual Funds
Undiscovered Managers Funds
Wilshire Target Funds, Inc.
Weiss, Peck & Greer Funds Trust
Weiss, Peck & Greer International Fund
WPG Growth and Income Fund
WPG Tudor Fund
RWB/WPG U.S. Large Stock Fund
Tomorrow Funds Retirement Trust
The BlackRock Funds, Inc. (Distributed by BlackRock
Distributors, Inc. a wholly owned subsidiary of PFPC
Distributors, Inc.)
Northern Funds Trust and Northern Institutional Funds Trust
(Distributed by Northern Funds Distributors, LLC. a wholly
owned subsidiary of PFPC Distributors, Inc.)
The Offit Investment Fund, Inc. (Distributed by Offit Funds
Distributor, Inc. a wholly owned subsidiary of PFPC
Distributors, Inc.)
The Offit Variable Insurance Fund, Inc. (Distributed by Offit
Funds Distributor, Inc. a wholly owned subsidiary of PFPC
Distributors, Inc.)
ABN AMRO Funds (Distributed by ABN AMRO Distribution Services
(USA), Inc., a wholly owned subsidiary of PFPC Distributors,
Inc.)
PFPC Distributors, Inc. is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers. PFPC Distributors, Inc. is located at 3200 Horizon Drive,
King of Prussia, Pennsylvania 19406.
(b) The following is a list of the executive officers, directors, and
partners of PFPC Distributors, Inc.:
<PAGE> 58
<TABLE>
<CAPTION>
Name Business Address Positions and Offices with Positions and Offices
PFPC Distributors with Registrant
<S> <C> <C> <C>
Rita G. Adler 400 Bellevue Parkway Chief Compliance Officer None
Wilmington, DE 19809
Lisa M. Colon 3200 Horizon Drive Vice President None
King of Prussia, PA 19406
Douglas D. Castagna 400 Bellevue Parkway Controller and Assistant None
Wilmington, DE 19806 Treasurer
Robert F. Crouse 400 Bellevue Parkway Director None
Wilmington, DE 19806
Bruno S. DiStefano 3200 Horizon Drive Vice President None
King of Prussia, PA 19406
Gary M. Gardner 400 Bellevue Parkway Director, President & Chief None
Wilmington, DE 19806 Executive Officer
Joseph T. Gramlich 400 Bellevue Parkway Director, Chairman of the None
Wilmington, DE 19806 Board of Directors
Elizabeth T. Holtsbery 4400 Computer Drive Vice President None
Westborough, MA 01581
Francis Koudelka 4400 Computer Drive Director, Vice President None
Westborough, MA 01581
Susan K. Moscaritolo 4400 Computer Drive Vice President None
Westborough, MA 01581
Christine P. Ritch 4400 Computer Drive Chief Legal Officer, None
Westborough, MA 01581 Secretary and Clerk
Bradley A. Stearns 4400 Computer Drive Assistant Secretary and None
Westborough, MA 01581 Assistant Clerk
Craig D. Stokarski 400 Bellevue Parkway Treasurer and Financial and None
Wilmington, DE 19809 Operations Principal
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 will be kept by the
Registrant's Transfer Agent, PFPC Inc., 3200 Horizon Drive, King Prussia, PA
19406, except those records relating to portfolio transactions and the basic
organizational and Trust documents of the Registrant (see Subsections (2)(iii),
(4), (5), (6), (7), (9), (10) and (11) of Rule 31a-1(b)), which will be kept by
the Registrant at 11766 Wilshire Boulevard, Suite 1580, Los Angeles, California
90025
Item 29. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 30. Undertakings.
Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act of 1940, as amended, which requires the prompt convening
of a meeting of shareholders to elect trustees to fill existing vacancies in the
Registrant's Board of Trustees in the event that less than a majority of the
Trustees have been elected to such position by shareholders. Registrant has also
undertaken promptly to call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee or Trustees when requested in
writing to do so by the record holders of not less than 10 percent of the
Registrant's outstanding shares and to assist its shareholders in communicating
with other shareholders in accordance with the requirements of Section 16(c) of
the Investment Company Act of 1940, as amended.
<PAGE> 59
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, and State of California on the 12th
day of January, 2001.
Metropolitan West Funds
By: /s/ Scott B. Dubchansky*
---------------------------------
Scott B. Dubchansky
Chairman of the Board of Trustees,
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<S> <C> <C>
/s/ Scott B. Dubchansky* Chairman of the Board of Trustees, January 12, 2001
------------------------------ President and Principal Executive Officer
Scott B. Dubchansky
/s/ Arlana Williams * Assistant Treasurer and January 12, 2001
------------------------------ Principal Accounting and Financial Officer
Arlana Williams
/s/ Keith T. Holmes* Trustee January 12, 2001
------------------------------
Keith T. Holmes
/s/ Laird R. Landmann* Trustee January 12, 2001
------------------------------
Laird R. Landmann
/s/ Martin Luther King III* Trustee January 12, 2001
------------------------------
Martin Luther King III
/s/ Daniel D. Villanueva* Trustee January 12, 2001
------------------------------
Daniel D. Villanueva
/s/ James M. Lippman* Trustee January 12, 2001
------------------------------
James M. Lippman
*by s/s David A Hearth
------------------------------
David A. Hearth, Attorney-in-Fact
pursuant to Power of Attorney
previously filed
</TABLE>
<PAGE> 60
METROPOLITAN WEST FUNDS
INDEX OF EXHIBITS
Item 23. Exhibits
(e) Underwriting Agreement between Metropolitan West Funds and PFPC
Distributors, Inc.
(h)(3) Form of Amendment to Services Agreement dated November 13, 2000
