STATEMENT OF ADDITIONAL INFORMATION
December 31, 1997
(as revised on January 22, 1998)
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AMERICAN SKANDIA ADVISOR FUNDS, INC.
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Table of Contents Page
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General Information and History...........................................................................................2
Investment Programs of the Funds..........................................................................................2
ASAF Founders International Small Capitalization Fund............................................................3
ASAF T. Rowe Price International Equity Fund....................................................................10
ASAF Janus Overseas Growth Fund.................................................................................19
ASAF Founders Small Capitalization Fund.........................................................................22
ASAF T. Rowe Price Small Company Value Fund.....................................................................30
ASAF Robertson Stephens Value + Growth Fund.....................................................................40
ASAF Janus Capital Growth Fund..................................................................................48
ASAF Lord Abbett Growth & Income Fund...........................................................................50
ASAF INVESCO Equity Income Fund.................................................................................50
ASAF American Century Strategic Balanced Fund...................................................................52
ASAF Federated High Yield Bond Fund.............................................................................59
ASAF Total Return Bond Fund.....................................................................................61
ASAF JPM Money Market Fund......................................................................................73
Fundamental Investment Restrictions......................................................................................74
Certain Risk Factors and Investment Methods..............................................................................76
Additional Performance Information.......................................................................................92
Management of the Company................................................................................................95
Investment Advisory & Administration Services............................................................................98
Fund Expenses...........................................................................................................101
Distribution Arrangements...............................................................................................103
Determination of Net Asset Value........................................................................................104
Additional Information on the Purchase and Redemption of Shares.........................................................105
Portfolio Transactions..................................................................................................106
Additional Tax Considerations...........................................................................................107
Capital Stock of the Company & Principal Holders of Securities..........................................................110
Other Information.......................................................................................................118
Financial Statements....................................................................................................119
Appendix................................................................................................................172
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This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the Company's current Prospectus, dated December 31,
1997. A copy of the Company's Prospectus may be obtained by writing to "American
Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston, Massachusetts 02266-8012
or by calling 1-800-SKANDIA.
GENERAL INFORMATION
American Skandia Advisor Funds, Inc. (the "Company") is an open-end
management investment company comprised of thirteen diversified investment
portfolios (each a "Fund" and together the "Funds"). The Company was established
as a Maryland corporation on March 5, 1997, and had no business history prior to
the Fund's commencement of operations on July 28, 1997. Five of the Funds --
ASAF T. Rowe Price International Equity Fund, ASAF Janus Capital Growth Fund,
ASAF INVESCO Equity Income Fund, ASAF Total Return Bond Fund and ASAF JPM Money
Market Fund (each a "Feeder Fund" and together the "Feeder Funds") -- invest all
of their investable assets in a corresponding portfolio (each a "Portfolio" and
together the "Portfolios") of American Skandia Master Trust (the "Trust"), an
open-end management investment company comprised of five diversified investment
portfolios. Each Portfolio of the Trust invests in securities in accordance with
an investment objective, investment policies and limitations identical to those
of its corresponding Feeder Fund. This "master/feeder" fund structure differs
from that of the other Funds of the Company and many other investment companies
which directly invest and manage their own portfolio of securities. Those Funds
of the Company which currently are not organized under a "master/feeder" fund
structure (the "Non-Feeder Funds") retain the right to invest their assets in a
corresponding Portfolio of the Trust in the future. For additional information
regarding the "master/feeder" fund structure, see the Company's Prospectus under
"Special Information on the 'Master Feeder' Fund Structure."
American Skandia Investment Services, Incorporated ("ASISI" or the
"Investment Manager") acts as the investment manager for both the Non-Feeder
Funds and the Portfolios. Currently, ASISI engages the following sub-advisors
("Sub-advisor(s)") for the investment management of each Non-Feeder Fund and
Portfolio: (a) ASAF Founders International Small Capitalization Fund: Founders
Asset Management, Inc.; (b) ASMT T. Rowe Price International Equity Portfolio:
Rowe Price-Fleming International, Inc.; (c) ASAF Janus Overseas Growth Fund:
Janus Capital Corporation; (d) ASAF Founders Small Capitalization Fund: Founders
Asset Management, Inc.; (e) ASAF T. Rowe Price Small Company Value Fund: T. Rowe
Price Associates, Inc.; (f) ASAF Robertson Stephens Value + Growth Fund:
Robertson, Stephens & Company Investment Management, L.P.; (g) ASMT Janus
Capital Growth Portfolio: Janus Capital Corporation; (h) ASAF Lord Abbett Growth
& Income Fund: Lord, Abbett & Co.; (i) ASMT INVESCO Equity Income Portfolio:
INVESCO Trust Company; (j) ASAF American Century Strategic Balanced Fund:
American Century Investment Management, Inc.; (k) ASAF Federated High Yield Bond
Fund: Federated Investment Counseling; (l) ASMT PIMCO Total Return Bond
Portfolio: Pacific Investment Management Company; and (m) ASMT JPM Money Market
Portfolio: J.P. Morgan Investment Management Inc.
INVESTMENT PROGRAMS OF THE FUNDS
The following information supplements, and should be read in conjunction
with, the discussion in the Prospectus of the investment objective and policies
of each Fund and Portfolio. The investment objective of each Fund or Portfolio
and supplemental information regarding its investment policies are described
below separately for each Fund or Portfolio.
The investment objective and, unless otherwise specified, the
investment policies and limitations of each Fund and Portfolio are not
"fundamental" policies and may be changed by the Directors of the Company or the
Trustees of the Trust, where applicable, without shareholder approval. Those
investment policies specifically labeled as "fundamental," including those
described in the "Fundamental Investment Restrictions" section of this SAI, may
not be changed without shareholder approval. Fundamental investment policies of
a Fund or Portfolio may be changed only with the approval of at least the lesser
of (1) 67% or more of the total units of beneficial interest ("shares") of the
Fund or Portfolio represented at a meeting at which more than 50% of the
outstanding shares of the Fund or Portfolio are represented, or (2) a majority
of the outstanding shares of the Fund or Portfolio.
Notwithstanding any other investment policy of a Fund, each Fund may invest
all of its investable assets (cash, securities, and receivables relating to
securities) in an open-end management investment company having substantially
the same investment objective, policies and limitations as the Fund. Those Funds
which currently invest all of their investable assets in such a manner, the
Feeder Funds, seek to meet their respective investment objectives by investing
all of their investable assets in a corresponding Portfolio of the Trust, which
in turn invests directly in a portfolio of securities in accordance with the
investment objective, policies and limitations of its Feeder Fund. The
investment objective, policies and limitations of each Feeder Fund are otherwise
identical to those of its corresponding Portfolio. As such, the following
discussion of the Feeder Funds, including references to the Directors of the
Company, apply equally to the Funds' corresponding Portfolios and the Trustees
of the Trust, respectively.
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or sell a
security at a specified price within a limited period of time. The Fund may
write ("sell") covered call options on any or all of its portfolio securities.
In addition, the Fund may purchase options on securities. The Fund may also
purchase put and call options on stock indices.
The Fund may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Fund's assets is
invested in securities with respect to which options may be written. The extent
of the Fund's option writing activities will vary from time to time depending
upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Fund purchases a security with respect to which it intends to
write an option, it is likely that the option will be written concurrently with
or shortly after purchase. The Fund will write an option on a particular
security only if the Sub-advisor believes that a liquid secondary market will
exist on an exchange for options of the same series, which will permit the Fund
to enter into a closing purchase transaction and close out its position. If the
Fund desires to sell a particular security on which it has written an option, it
will effect a closing purchase transaction prior to or concurrently with the
sale of the security.
The Fund may enter into closing purchase transactions to reduce the
percentage of its assets against which options are written, to realize a profit
on a previously written option, or to enable it to write another option on the
underlying security with either a different exercise price or expiration time or
both.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise prices of options may
be below, equal to or above the current market values of the underlying
securities at the times the options are written. From time to time for tax and
other reasons, the Fund may purchase an underlying security for delivery in
accordance with an exercise notice assigned to it, rather than delivering such
security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Fund
purchases put options on stock indices to protect the portfolio against decline
in value. The Fund purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. Any gain in the price of a call
option is likely to be offset by higher prices the Fund must pay in rising
markets, as cash reserves are invested. In declining markets, any increase in
the price of a put option is likely to be offset by lower prices of stocks owned
by the Fund.
The Fund may purchase only those put and call options that are listed on a
domestic exchange or quoted on the automatic quotation system of the National
Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on stock
exchanges are either broadly based, such as the Standard & Poor's 500 Stock
Index and 100 Stock Index, or involve stocks in a designated industry or group
of industries. The Fund may utilize either broadly based or market segment
indices in seeking a better correlation between the indices and the Fund.
Transactions in options are subject to limitations, established by each of
the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Fund may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this SAI, the Sub-advisor believes that these limitations will not affect the
purchase of stock index options by the Fund.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Fund. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Fund may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Fund will lose the right to appreciation of the
stock for the duration of the option. For an additional discussion of options on
stock indices and stocks and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Fund may enter into futures contracts (or options
thereon) for hedging purposes. U.S. futures contracts are traded on exchanges
which have been designated "contract markets" by the Commodity Futures Trading
Commission and must be executed through a futures commission merchant (an "FCM")
or brokerage firm which is a member of the relevant contract market. Although
futures contracts by their terms call for the delivery or acquisition of the
underlying commodities or a cash payment based on the value of the underlying
commodities, in most cases the contractual obligation is offset before the
delivery date of the contract by buying, in the case of a contractual obligation
to sell, or selling, in the case of a contractual obligation to buy, an
identical futures contract on a commodities exchange. Such a transaction cancels
the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example, if
the Fund held or considered purchasing equity securities and sought to protect
itself from fluctuations in prices without buying or selling those securities.
For example, if prices were expected to decrease, the Fund could sell equity
index futures contracts, thereby hoping to offset a potential decline in the
value of equity securities in the portfolio by a corresponding increase in the
value of the futures contract position held by the Fund and thereby prevent the
Fund's net asset value from declining as much as it otherwise would have. The
Fund also could protect against potential price declines by selling portfolio
securities and investing in money market instruments. However, since the futures
market is more liquid than the cash market, the use of futures contracts as an
investment technique would allow the Fund to maintain a defensive position
without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy equity securities on the cash market.
The Fund may also enter into interest rate and foreign currency futures
contracts. Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Fund may use futures and options thereon solely for bona
fide hedging or for other non-speculative purposes. As to long positions which
are used as part of the Fund's strategies and are incidental to its activities
in the underlying cash market, the "underlying commodity value" of the Fund's
futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other
dollar-denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant. The
"underlying commodity value" of a future is computed by multiplying the size of
the future by the daily settlement price of the future. For an option on a
future, that value is the underlying commodity value of the future underlying
the option.
Unlike the situation in which the Fund purchases or sells a security, no
price is paid or received by the Fund upon the purchase or sale of a futures
contract. Instead, the Fund is required to deposit in a segregated asset account
an amount of cash or qualifying securities (currently U.S. Treasury bills),
currently in a minimum amount of $15,000. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. However, since losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund may be
required to make additional payments during the term of a contract to its
broker. Such payments would be required, for example, where, during the term of
an interest rate futures contract purchased by the Fund, there was a general
increase in interest rates, thereby making the Fund's securities less valuable.
In all instances involving the purchase of financial futures contracts by the
Fund, an amount of cash together with such other securities as permitted by
applicable regulatory authorities to be utilized for such purpose, at least
equal to the market value of the future contracts, will be deposited in a
segregated account with the Fund's custodian to collateralize the position. At
any time prior to the expiration of a futures contract, the Fund may elect to
close its position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of three business days
for most types of securities, the futures markets can provide superior liquidity
to the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Fund to enter into new positions or close out existing positions. If the
secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Fund would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Fund's access to other assets held to
cover its futures positions also could be impaired. For an additional discussion
of futures contracts and certain risks involved therein, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Fund may purchase put and call options on
futures contracts. An option on a futures contract provides the holder with the
right to enter into a "long" position in the underlying futures contract, in the
case of a call option, or a "short" position in the underlying futures contract,
in the case of a put option, at a fixed exercise price to a stated expiration
date. Upon exercise of the option by the holder, a contract market clearing
house establishes a corresponding short position for the writer of the option,
in the case of a call option, or a corresponding long position, in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of futures contracts, such
as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Fund is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Fund would be able to buy a put option on a futures
contract to hedge the Fund against the risk of falling prices. For an additional
discussion of options on futures contracts and certain risks involved therein,
see this SAI and the Company's Prospectus under "Certain Risks Factors and
Investment Methods."
Options on Foreign Currencies. The Fund may buy and sell options on foreign
currencies for hedging purposes in a manner similar to that in which futures on
foreign currencies would be utilized. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated would
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remained constant. In order to protect against such diminutions
in the value of portfolio securities, the Fund could buy put options on the
foreign currency. If the value of the currency declines, the Fund would have the
right to sell such currency for a fixed amount in U.S. dollars and would thereby
offset, in whole or in part, the adverse effect on the Fund which otherwise
would have resulted. Conversely, when a rise is projected in the U.S. dollar
value of a currency in which securities to be acquired are denominated, thereby
increasing the cost of such securities, the Fund could buy call options thereon.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the Securities and Exchange Commission, as are other
securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of the
investment practices described above with respect to futures contracts, options
on futures contracts, and options on securities indices, securities, and foreign
currencies draws upon skills and experience which are different from those
needed to select the other instruments in which the Fund invests. Should
interest or exchange rates or the prices of securities or financial indices move
in an unexpected manner, the Fund may not achieve the desired benefits of
futures and options or may realize losses and thus be in a worse position than
if such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price fluctuation
limits with respect to options on currencies and negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in the foregoing instruments
will depend on the availability of liquid markets in the instruments. Markets in
a number of the instruments are relatively new and still developing and it is
impossible to predict the amount of trading interest that may exist in those
instruments in the future. Particular risks exist with respect to the use of
each of the foregoing instruments and could result in such adverse consequences
to the Fund as the possible loss of the entire premium paid for an option bought
by the Fund and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can be
given that the Fund will be able to use those instruments effectively for the
purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
nonbusiness 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) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Fund
generally conducts its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange currency market.
When the Fund purchases or sells a security denominated in a foreign currency,
it may enter into a forward foreign currency contract ("forward contract") for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction. A forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. In this manner, the
Fund may obtain protection against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date the security is purchased or sold and the
date upon which payment is made or received. Although such contracts tend to
minimize the risk of loss due to the decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result should the value of such currency increase. The Fund will not speculate
in forward contracts.
........Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. 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 buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Fund may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Fund's securities denominated in that currency. The Fund will
not enter into such forward contracts or maintain a net exposure to such
contracts where the fulfillment of the contracts would require the Fund to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency. Forward contracts may,
from time to time, be considered illiquid, in which case they would be subject
to the Fund's limitation on investing in illiquid securities.
.........At the consummation of a forward contract for delivery by the Fund of a
foreign currency, the Fund may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Fund chooses to
make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Fund assets into such currency.
Dealings in forward contracts by the Fund will be limited to the
transactions described above. Of course, the Fund is not required to enter into
such transactions with regard to its foreign currency-denominated securities and
will not do so unless deemed appropriate by the Sub-advisor. It also should be
realized that this method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
For an additional discussion of forward foreign currency contracts and certain
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Company's Prospectus, the Fund may
invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Fund from disposing of such a security at
the time desired or at a reasonable price. In addition, in order to resell a
restricted security, the Fund might have to bear the expense and incur the
delays associated with effecting registration. In purchasing illiquid
securities, the Fund does not intend to engage in underwriting activities,
except to the extent the Fund may be deemed to be a statutory underwriter under
the Securities Act in purchasing or selling such securities. Illiquid securities
will be purchased for investment purposes only and not for the purpose of
exercising control or management of other companies. For an additional
discussion of illiquid or restricted securities and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Directors of the Company have promulgated guidelines with respect to
illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Fund may invest in Rule 144A securities
which, as disclosed in the Company's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Fund could affect
adversely the marketability of the security. In such an instance, the Fund might
be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for securities
eligible for resale pursuant to Rule 144A under the 1933 Act, or any successor
to such rule, and that such securities are not subject to the Fund's limitations
on investing in securities that are not readily marketable. The Sub-advisor will
consider the following factors, among others, in making this determination: (1)
the unregistered nature of a Rule 144A security; (2) the frequency of trades and
quotes for the security; (3) the number of dealers willing to purchase or sell
the security and the number of additional potential purchasers; (4) dealer
undertakings to make a market in the security; and (5) the nature of the
security and the nature of market place trades (e.g., the time needed to dispose
of the security, the method of soliciting offers and the mechanics of
transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest up to
5% of its total assets in fixed-income securities which are unrated or are rated
below investment grade either at the time of purchase or as a result of
reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this SAI. The
lower the rating given a security by a rating service, the greater the credit
risk such rating service perceives to exist with respect to the security.
Increasing the amount of the Fund's assets invested in unrated or lower grade
securities, while intended to increase the yield produced by those assets, will
also increase the risk to which those assets are subject.
.........Market risk relates to the fact that the market values of debt
securities in which the Fund invests generally will be affected by changes in
the level of interest rates. An increase in interest rates will tend to reduce
the market values of such securities, whereas a decline in interest rates will
tend to increase their values. Medium and lower-rated securities (Baa or BBB and
lower) and non-rated securities of comparable quality tend to be subject to
wider fluctuations in yields and market values than higher rated securities and
may have speculative characteristics. In order to decrease the risk in investing
in debt securities, in no event will the Fund ever invest in a debt security
rated below B by Moody's or by S&P. Of course, relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that the securities in which they invest will decline in value, since
credit ratings represent evaluations of the safety of principal, dividend, and
interest payments on debt securities, and not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
.........Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Fund's investment objective may be more
dependent on the Sub-advisor's own credit analysis than is the case for funds
that do not invest in such securities. In addition, the share price and yield of
the Fund may fluctuate more than in the case of funds investing in higher
quality, shorter term securities. Moreover, a significant economic downturn or
major increase in interest rates may result in issuers of lower-rated securities
experiencing increased financial stress, which would adversely affect their
ability to service their principal, dividend, and interest obligations, meet
projected business goals, and obtain additional financing. In this regard, it
should be noted that while the market for high yield debt securities has been in
existence for many years and from time to time has experienced economic
downturns in recent years, this market has involved a significant increase in
the use of high yield debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield debt securities
market, particularly during periods of economic recession. Furthermore, expenses
incurred in recovering an investment in a defaulted security may adversely
affect the Fund's net asset value. Finally, while the Sub-advisor attempts to
limit purchases of medium and lower-rated securities to securities having an
established secondary market, the secondary market for such securities may be
less liquid than the market for higher quality securities. The reduced liquidity
of the secondary market for such securities may adversely affect the market
price of, and ability of the Fund to value, particular securities at certain
times, thereby making it difficult to make specific valuation determinations.
The Fund does not invest in any medium and lower-rated securities which present
special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an
additional discussion of certain risks involved in lower-rated securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
.........The Sub-advisor seeks to reduce the overall risks associated with
the Fund's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Fund will achieve its investment objective.
.........Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
respect to money market instruments eligible for investment by the Fund with
member banks of the Federal Reserve system, registered broker-dealers, and
registered government securities dealers. A repurchase agreement may be
considered a loan collateralized by securities. Repurchase agreements maturing
in more than seven days are considered illiquid and will be subject to the
Fund's limitation with respect to illiquid securities.
.........The Fund has not adopted any limits on the amounts of its total
assets that may be invested in repurchase agreements which mature in less than
seven days. The Fund may invest up to 15% of the market value of its net assets,
measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
.........Convertible Securities. The Fund may buy securities convertible
into common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Fund; consequently, warrant positions are generally accompanied
by cash positions equivalent to the required exercise amount.
.........Investment Policies Which May Be Changed Without Shareholder
Approval. The following limitations are not "fundamental" restrictions and may
be changed by the Directors of the Company without shareholder approval. The
Fund will not:
.........1........Invest more than 15% of the market value of its net
assets in securities which are not readily marketable, including repurchase
agreements maturing in over seven days;
.........2........Purchase securities of other investment companies except
in compliance with the Investment Company Act of 1940;
.........3........Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of transactions (and,
provided that margin payments and other deposits in connection with transactions
in options, futures and forward contracts shall not be deemed to constitute
purchasing securities on margin); or
.........4........Sell securities short.
.........In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Fund may depart from its basic investment
objective and assume a defensive position with up to 100% of its assets
temporarily invested in high quality corporate bonds or notes and government
issues, or held in cash.
.........If a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage beyond the specified
limit that results from a change in values or net assets will not be considered
a violation.
ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND:
Investment Objective: The investment objective of the Fund is to seek a total
return on its assets from long-term growth of capital and income principally
through investments in common stocks of established, non-U.S. companies.
Investments may be made solely for capital appreciation or solely for income or
any combination of both for the purpose of achieving a higher overall return.
Investment Policies:
.........The Sub-advisor regularly analyzes a broad range of international
equity and fixed-income markets in order to assess the degree of risk and level
of return that can be expected from each market. Based upon its current
assessment, the Sub-advisor believes long-term growth of capital may be achieved
by investing in marketable securities of non-U.S. companies which have the
potential for growth of capital. Of course, there can be no assurance that the
Sub-advisor's forecasts of expected return will be reflected in the actual
returns achieved by the Fund.
.........The Fund's share price will fluctuate with market, economic and
foreign exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Fund should not be relied upon as a complete
investment program, nor used to play short-term swings in the stock or foreign
exchange markets. The Fund is subject to risks unique to international
investing. Further, there is no assurance that the favorable trends discussed
below will continue, and the Fund cannot guarantee it will achieve its
objective.
.........It is the present intention of the Sub-advisor to invest in
companies based in (or governments of or within) the Far East (for example,
Japan, Hong Kong, Singapore, and Malaysia), Western Europe (for example, United
Kingdom, Germany, Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, and such other areas and countries as the Sub-advisor may
determine from time to time.
.........In determining the appropriate distribution of investments among
various countries and geographic regions, the Sub-advisor ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
.........In analyzing companies for investment, the Sub-advisor ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Fund invests normally will have a record of paying dividends, and will generally
be expected to increase the amounts of such dividends in future years as
earnings increase.
.........It is expected that the Fund's investments will ordinarily be
traded on exchanges located at least in the respective countries in which the
various issuers of such securities are principally based.
.........The Fund will invest in securities denominated in currencies
specified elsewhere herein.
.........It is contemplated that most foreign securities will be purchased
in over-the-counter markets or on stock exchanges located in the countries in
which the respective principal offices of the issuers of the various securities
are located, if that is the best available market.
.........The Fund may invest in investment funds which have been authorized
by the governments of certain countries specifically to permit foreign
investment in securities of companies listed and traded on the stock exchanges
in these respective countries. The Fund's investment in these funds is subject
to the provisions of the Investment Company Act of 1940 discussed below. If the
Fund invests in such investment funds, the Fund's shareholders will bear not
only their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Investment Manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the securities
of these investment funds may trade at a premium over their net asset value.
.........Apart from the matters described herein, the Fund is not aware at
this time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Fund as described in the
Company's Prospectus and this SAI. It should be noted, however, that this
situation could change at any time.
.........The Fund may invest in companies located in Eastern Europe. The
Fund will only invest in a company located in, or a government of, Eastern
Europe or Russia, if the Sub-advisor believes the potential return justifies the
risk. To the extent any securities issued by companies in Eastern Europe and
Russia are considered illiquid, the Fund will be required to include such
securities within its 15% restriction on investing in illiquid securities.
.........Risk Factors of Foreign Investing. There are special risks in
investing in the Fund. Certain of these risks are inherent in any international
mutual fund; others relate more to the countries in which the Fund will invest.
Many of the risks are more pronounced for investments in developing or emerging
countries. Although there is no universally accepted definition, a developing
country is generally considered to be a country which is in the initial stages
of its industrialization cycle with a per capita gross national product of less
than $8,000.
.........Investors should understand that all investments have a risk
factor. There can be no guarantee against loss resulting from an investment in
the Fund, and there can be no assurance that the Fund's investment policies will
be successful, or that its investment objective will be attained. The Fund is
designed for individual and institutional investors seeking to diversify beyond
the United States in an actively researched and managed portfolio, and is
intended for long-term investors who can accept the risks entailed in investment
in foreign securities. For a discussion of certain risks involved in foreign
investing see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
.........In addition to the investments described in the Company's
Prospectus, the Fund may invest in the following:
.........Writing Covered Call Options. The Fund may write (sell) "covered"
call options and purchase options to close out options previously written by the
Fund. In writing covered call options, the Fund expects to generate additional
premium income which should serve to enhance the Fund's total return and reduce
the effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in the Sub-advisor's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long term,
are deemed to be attractive investments for the Fund.
.........The Fund will write only covered call options. This means that the
Fund will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies.
.........Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely, retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligations as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call "pledged" as that term is used
in the Fund's policy which limits the pledging or mortgaging of its assets.
.........The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Sub-advisor,
in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
.........Call options written by the Fund will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
.........The Fund will effect closing transactions in order to realize a profit
on an outstanding call option, to prevent an underlying security or currency
from being called, or, to permit the sale of the underlying security or
currency. The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
.........The Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Fund's total assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
.........Writing Covered Put Options. Although the Fund has no current
intention in the foreseeable future of writing American or European style
covered put options and purchasing put options to close out options previously
written by the Fund, the Fund reserves the right to do so.
.........The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" options at all times while the
put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Fund. In addition,
the Fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
.........The Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Fund's total assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
.........Purchasing Put Options. The Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the right to sell
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use of
put options is provided in this SAI under "Certain Risk Factors and Investment
Methods."
.........The premium paid by the Fund when purchasing a put option will be
recorded as an asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of New
York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
.........Purchasing Call Options. The Fund may purchase American or
European style call options. As the holder of a call option, the Fund has the
right to purchase the underlying security or currency at the exercise price at
any time during the option period (American style) or at the expiration of the
option (European style). The Fund may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Fund may
purchase call options for the purpose of increasing its current return or
avoiding tax consequences which could reduce its current return. The Fund may
also purchase call options in order to acquire the underlying securities or
currencies. Examples of such uses of call options are provided in this SAI under
"Certain Risk Factors and Investment Methods."
.........The Fund may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
.........Dealer Options. The Fund may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the Fund
would look to a clearing corporation to exercise exchange-traded options, if the
Fund were to purchase a dealer option, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. While the Fund
will seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. Failure by the
dealer to perform would result in the loss of the premium paid by the Fund as
well as loss of the expected benefit of the transaction.
.........Futures Contracts:
..................Transactions in Futures. The Fund may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts"); however, the Fund has no current
intention of entering into interest rate futures. The Fund, however, reserves
the right to trade in financial futures of any kind.
..................Stock index futures contracts may be used to attempt to
provide a hedge for a portion of the Fund, as a cash management tool, or as an
efficient way for the Sub-advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The Fund may, however,
purchase or sell futures contracts with respect to any stock index whose
movements will, in its judgment, have a significant correlation with movements
in the prices of all or portions of the Fund's portfolio securities.
..................Interest rate or currency futures contracts may be used to
attempt to hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the effective
return on securities or currencies held or intended to be acquired by the Fund.
In this regard, the Fund could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
..................The Fund will enter into futures contracts which are
traded on national or foreign futures exchanges and are standardized as to
maturity date and underlying financial instrument. The principal financial
futures exchanges in the United States are the Board of Trade of the City of
Chicago, the Chicago Mercantile Exchange, the New York Futures Exchange, and the
Kansas City Board of Trade. Futures exchanges and trading in the United States
are regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are traded in London at the London International
Financial Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo
Stock Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Fund's
objectives in these areas. For a discussion of futures transactions and certain
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
..................Regulatory Limitations. The Fund will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
..................The Fund may not enter into futures contracts or options
thereon if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
on the Fund's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Fund after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
..................The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances involving the
purchase of futures contracts or call options thereon or the writing of put
options thereon by the Fund, an amount of cash, or other liquid assets, equal to
the market value of the futures contracts and options thereon (less any related
margin deposits), will be identified in an account with the Fund's custodian to
cover the position, or alternative cover will be employed.
..................In addition, CFTC regulations may impose limitations on
the Fund's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund would comply
with such new restrictions.
.........Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Fund may write or
purchase call and put options on stock indices. Such options would be used in a
manner similar to the use of options on futures contracts. From time to time, a
single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Fund and other mutual funds or portfolios of mutual funds
managed by the Sub-advisor or T. Rowe Price Associates, Inc. Such aggregated
orders would be allocated among the Fund and such other portfolios in a fair and
non-discriminatory manner. See this SAI and the Company's Prospectus under
"Certain Risk Factors and Investment Methods" for a description of certain risks
involved in options and futures contracts.
.........Additional Futures and Options Contracts. Although the Fund has no
current intention of engaging in financial futures or option transactions other
than those described above, it reserves the right to do so. Such futures or
options trading might involve risks which differ from those involved in the
futures and options described above.
.........Foreign Futures and Options. The Fund is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
.........Foreign Currency Transactions. The Fund will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. Second, when the Sub-advisor believes that the currency
of a particular foreign country may suffer or enjoy a substantial movement
against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Fund's securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above and immediately
below, the Fund will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's securities or other assets denominated in that currency. The
Fund, however, in order to avoid excess transactions and transaction costs, may
maintain a net exposure to forward contracts in excess of the value of the
Fund's securities or other assets to which the forward contracts relate
(including accrued interest to the maturity of the forward on such securities)
provided the excess amount is "covered" by liquid, high-grade debt securities,
denominated in any currency, at least equal at all times to the amount of such
excess. For these purposes "the securities or other assets to which the forward
contracts relate" may be securities or assets denominated in a single currency,
or where proxy forwards are used, securities denominated in more than one
currency. 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 Sub-advisor
believes that 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 the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
.........As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver. However, as noted, in order
to avoid excessive transactions and transaction costs, the Fund may use liquid,
high-grade debt securities denominated in any currency, to cover the amount by
which the value of a forward contract exceeds the value of the securities to
which it relates.
.........If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
.........The Fund's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
.........Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer. For an additional discussion
of certain risks involved in foreign investing, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
.........Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts. The Fund may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
.........Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund will
be required to distribute net gains on such transactions to shareholders even
though it may not have closed the transaction and received cash to pay such
distributions.
.........Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
.........Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
<PAGE>
.........In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts on
currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities or
securities indices and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income. In
order to avoid realizing excessive gains on securities or currencies held less
than three months, the Fund may be required to defer the closing out of option,
futures or foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains on
Section 1256 option, futures and foreign forward exchange contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes of the 30%
test.
.........Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this SAI under "Certain Risk Factors
and Investment Methods."
.........Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements through
which an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or a bank that
is a member of the Federal Reserve System. Any such dealer or bank will be on T.
Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a credit
rating with respect to its short-term debt of at least A1 by Standard & Poor's
Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by
T. Rowe Price. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
treated as illiquid securities. The Fund will only enter into repurchase
agreements where (i) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
.........Illiquid and Restricted Securities. The Fund may not invest in
illiquid securities including repurchase agreements which do not provide for
payment within seven days, if as a result, they would comprise more than 15% of
the value of the Fund's net assets.
.........Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in accordance with procedures prescribed by the
Directors of the Company. If through the appreciation of illiquid securities or
the depreciation of liquid securities, the Fund should be in a position where
more than 15% of the value of its net assets are invested in illiquid assets,
including restricted securities, the Fund will take appropriate steps to protect
liquidity.
<PAGE>
.........Notwithstanding the above, the Fund may purchase securities which while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as the
Fund, to trade in privately placed securities even though such securities are
not registered under the 1933 Act. The Sub-advisor, under the supervision of the
Directors of the Company, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the Fund's restriction of investing no
more than 15% of its assets in illiquid securities. A determination of whether a
Rule 144A security is liquid or not is a question of fact. In making this
determination, the Sub-advisor will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, the Sub-advisor could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, (4) and the nature of the security and of market
place trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the Fund's holdings of
illiquid securities would be reviewed to determine what, if any, steps are
required to assure that the Fund does not invest more than 15% of its assets in
illiquid securities. Investing in Rule 144A securities could have the effect of
increasing the amount of a Fund's assets invested in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
.........The Directors of the Company have promulgated guidelines with
respect to illiquid securities.
.........Lending of Portfolio Securities. For the purpose of realizing
additional income, the Fund may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. Securities loans are
made to broker-dealers, institutional investors, or other persons pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. The Fund will not have the right to vote
securities while they are being lent, but it will call a loan in anticipation of
any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
persons deemed by the Sub-advisor to be of good standing and will not be made
unless, in the judgment of the Sub-advisor, the consideration to be earned from
such loans would justify the risk.
.........Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Fund may make loans to, or borrow funds from, other
mutual funds sponsored or advised by the Sub-advisor or T. Rowe Price
Associates, Inc. The Fund has no current intention of engaging in these
practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Fund may
purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Fund's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Fund will cover its commitments with respect to these securities by maintaining
cash and/or other liquid assets with its custodian bank equal in value to these
commitments during the time between the purchase and the settlement. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date. For a discussion of these securities and the risks involved
therein, see this SAI under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
<PAGE>
1........Purchase additional securities when money borrowed exceeds 5% of
the Fund's total assets;
2........Invest in companies for the purpose of exercising management or
control;
3........Purchase illiquid securities if, as a result, more than 15% of
its net assets would be invested in such securities. Securities eligible for
resale under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
4........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
5........Invest in puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Company's Prospectus and this
SAI;
6........Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of portfolio securities
and (ii) the Fund may make margin deposits in connection with futures contracts
and other permissible investments;
7........Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as a security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging, or hypothecating may not exceed 33 1/3% of the Fund's
total assets at the time of borrowing or investment;
8........Effect short sales of securities;
9........Invest in warrants if, as a result thereof, more than 10% of
the value of the total assets of the Fund would be invested in warrants except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market; or
10.......Purchase a futures contract or an option thereon if, with
respect to positions in futures or options on futures which do not represent
bona fide hedging, the aggregate initial margin and premiums on such positions
would exceed 5% of the Fund's net assets.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment in
such securities. For tax purposes these portfolios may be known as Passive
Foreign Investment Companies. The Fund is subject to certain percentage
limitations under the Investment Company Act of 1940 relating to the purchase of
securities of investment companies, and may be subject to the limitation that no
more than 10% of the value of the Fund's total assets may be invested in such
securities.
ASAF JANUS OVERSEAS GROWTH FUND:
Investment Objective: The investment objective of the ASAF Janus Overseas
Growth Fund is to seek long-term growth of capital.
Investment Policies:
Futures, Options and Other Derivative Instruments. The Fund may enter
into futures contracts on securities, financial indices, and foreign currencies
and options on such contracts, and may invest in options on securities,
financial indices and foreign currencies, forward contracts and swaps. The Fund
will not enter into any futures contracts or options on futures contracts if the
aggregate amount of the Fund's commitments under outstanding futures contracts
positions and options on futures contracts written by the Fund would exceed the
market value of the total assets of the Fund (i.e., no leveraging). The Fund may
invest in forward currency contracts with stated values of up to the value of
the Fund's assets.
<PAGE>
The Fund may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in which
the Fund is permitted to invest directly. The Fund will effect such transactions
only with investment dealers and other financial institutions (such as
commercial banks or savings and loan institutions) deemed creditworthy by the
Sub-advisor, and only pursuant to procedures adopted by the Sub-advisor for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Fund in a negotiated transaction is illiquid, the value
of an option bought or the amount of the Fund's obligations under an option
written by the Fund, as the case may be, will be subject to the Fund's
limitation on illiquid investments. In the case of illiquid options, it may not
be possible for the Fund to effect an offsetting transaction at a time when the
Sub-advisor believes it would be advantageous for the Fund to do so. For a
description of these strategies and instruments and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and
fixed-income instruments are linked.
Swaps and Swap-Related Products. The Fund may enter into interest rate
swaps, caps and floors on either an asset-based or liability-based basis,
depending upon whether it is hedging its assets or its liabilities, and will
usually enter into interest rate swaps on a net basis (i.e., the two payment
streams are netted out, with the Fund receiving or paying, as the case may be,
only the net amount of the two payments). The net amount of the excess, if any,
of the Fund's obligations over its entitlement with respect to each interest
rate swap will be calculated on a daily basis and an amount of cash or other
liquid assets having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the custodian of the Fund.
If the Fund enters into an interest rate swap on other than a net basis, it
would maintain a segregated account in the full amount accrued on a daily basis
of its obligations with respect to the swap. The Fund will not enter into any
interest rate swap, cap or floor transaction unless the unsecured senior debt or
the claims-paying ability of the other party thereto is rated in one of the
three highest rating categories of at least one nationally recognized
statistical rating organization at the time of entering into such transaction.
The Sub-advisor will monitor the creditworthiness of all counterparties on an
ongoing basis. If there is a default by the other party to such a transaction,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Fund sells (i.e., writes) caps and floors, it will segregate cash or other
liquid assets having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of its obligations with respect to any caps or
floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Fund. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Fund or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the Fund
is contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Fund would risk the loss of the net
amount of the payments that it contractually is entitled to receive. The Fund
may buy and sell (i.e., write) caps and floors without limitation, subject to
the segregation requirement described above. For an additional discussion of
these strategies, see this SAI under "Certain Risk Factors and Investment
Methods."
Illiquid Investments. Subject to guidelines promulgated by the
Directors of the Company, the Fund may invest up to 15% of its net assets in
illiquid investments (i.e., securities that are not readily marketable). The
Sub-advisor will make liquidity determinations with respect to the Fund's
securities, including Rule 144A Securities, commercial paper and municipal lease
obligations. Under the guidelines established by the Directors, the Sub-advisor
will consider, among others, the following factors in determining whether a Rule
144A Security is liquid: 1) the frequency of trades and quoted prices for the
obligation; 2) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; 3) the willingness of dealers to
undertake to make a market in the security; and 4) the nature of the security
and the nature of marketplace trades, including the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the transfer.
In the case of commercial paper, the Sub-advisor will consider, among other
factors, whether the paper is traded flat or in default as to principal and
interest and any ratings of the paper by an NRSRO.
Zero-Coupon, Pay-In-Kind and Step Coupon Securities. The Fund may
invest up to 10% of its assets in zero-coupon, pay-in-kind and step coupon
securities. For a discussion of zero-coupon debt securities and the risks
involved therein, see this SAI under "Certain Risk Factors and Investment
Methods."
Pass-Through Securities. The Fund may invest in various types of
pass-through securities, such as mortgage-backed securities, asset-backed
securities and participation interests. A pass-through security is a share or
certificate of interest in a pool of debt obligations that have been repackaged
by an intermediary, such as a bank or broker-dealer. The purchaser of a
pass-through security receives an undivided interest in the underlying pool of
securities. The issuers of the underlying securities make interest and principal
payments to the intermediary which are passed through to purchasers, such as the
Fund. For an additional discussion of pass-through securities and certain risks
involved therein, see this SAI and the Company's Prospectus under "Certain Risk
Factors and Investment Methods."
Depositary Receipts. The Fund may invest in sponsored and unsponsored
American Depositary Receipts ("ADRs"), which are receipts issued by an American
bank or trust company evidencing ownership of underlying securities issued by a
foreign issuer. ADRs, in registered form, are designed for use in U.S.
securities markets. Unsponsored ADRs may be created without the participation of
the foreign issuer. Holders of these ADRs generally bear all the costs of the
ADR facility, whereas foreign issuers typically bear certain costs in a
sponsored ADR. The bank or trust company depositary of an unsponsored ADR may be
under no obligation to distribute shareholder communications received from the
foreign issuer or to pass through voting rights. The Fund may also invest in
European Depositary Receipts ("EDRs"), receipts issued by a European financial
institution evidencing an arrangement similar to that of ADRs, Global Depositary
Receipts ("GDRs") and in other similar instruments representing securities of
foreign companies. EDRs, in bearer form, are designed for use in European
securities markets. GDRs are securities convertible into equity securities of
foreign issuers.
Other Income-Producing Securities. Other types of income producing
securities that the Fund may purchase include, but are not limited to, the
following types of securities:
.........Variable and Floating Rate Obligations. These types of securities
are relatively long-term instruments that often carry demand features permitting
the holder to demand payment of principal at any time or at specified intervals
prior to maturity.
.........Standby Commitments. These instruments, which are similar to a
put, give the Fund the option to obligate a broker, dealer or bank to repurchase
a security held by that Fund at a specified price.
.........Tender Option Bonds. Tender option bonds are relatively long-term
bonds that are coupled with the agreement of a third party (such as a broker,
dealer or bank) to grant the holders of such securities the option to tender the
securities to the institution at periodic intervals.
.........Inverse Floaters. Inverse floaters are debt instruments whose
interest bears an inverse relationship to the interest rate on another security.
The Fund will not invest more than 5% of its assets in inverse floaters. The
Fund will purchase standby commitments, tender option bonds and instruments with
demand features primarily for the purpose of increasing the liquidity of the
Fund.
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are not "fundamental" restrictions and may be changed
by the Directors of the Company without shareholder approval:
1........The Fund will not (i) enter into any futures contracts and
related options for purposes other than bona fide hedging transactions within
the meaning of Commodity Futures Trading Commission ("CFTC") regulations if the
aggregate initial margin and premiums required to establish positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions will exceed 5% of the fair market value of the Fund's
net assets, after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into; and (ii) enter into any futures
contracts if the aggregate amount of the Fund's commitments under outstanding
futures contracts positions would exceed the market value of its total assets.
2........The Fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in futures, options,
swaps and forward contracts are not deemed to constitute selling securities
short.
3........The Fund does not currently intend to purchase securities on
margin, except that the Fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments and other
deposits in connection with transactions in futures, options, swaps and forward
contracts shall not be deemed to constitute purchasing securities on margin.
4........The Fund does not currently intend to purchase securities of other
investment companies, except in compliance with the 1940 Act.
5........The Fund may not mortgage or pledge any securities owned or
held by the Fund in amounts that exceed, in the aggregate, 15% of the Fund's net
asset value, provided that this limitation does not apply to reverse repurchase
agreements, deposits of assets to margin, guarantee positions in futures,
options, swaps or forward contracts, or the segregation of assets in connection
with such contracts.
6........The Fund does not currently intend to purchase any security or
enter into a repurchase agreement if, as a result, more than 15% of its net
assets would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the absence
of a readily available market. The Directors of the Company, or the Investment
Manager acting pursuant to authority delegated by the Directors of the Company,
may determine that a readily available market exists for securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A
Securities"), or any successor to such rule, and Section 4(2) commercial paper.
Accordingly, such securities may not be subject to the foregoing limitation.
7........The Fund may not invest in companies for the purpose of exercising
control of management.
ASAF FOUNDERS SMALL CAPITALIZATION FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth.
Investment Policies:
Options On Stock Indices and Stocks. An option is a right to buy or
sell a security at a specified price within a limited period of time. The Fund
may write ("sell") covered call options on any or all of its portfolio
securities. In addition, the Fund may purchase options on securities. The Fund
may also purchase put and call options on stock indices.
The Fund may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Fund's assets is
invested in securities with respect to which options may be written. The extent
of the Fund's option writing activities will vary from time to time depending
upon the Sub-advisor's evaluation of market, economic and monetary conditions.
When the Fund purchases a security with respect to which it intends to
write an option, it is likely that the option will be written concurrently with
or shortly after purchase. The Fund will write an option on a particular
security only if the Sub-advisor believes that a liquid secondary market will
exist on an exchange for options of the same series, which will permit the Fund
to enter into a closing purchase transaction and close out its position. If the
Fund desires to sell a particular security on which it has written an option, it
will effect a closing purchase transaction prior to or concurrently with the
sale of the security.
The Fund may enter into closing purchase transactions to reduce the
percentage of its assets against which options are written, to realize a profit
on a previously written option, or to enable it to write another option on the
underlying security with either a different exercise price or expiration time or
both.
Options written by the Fund will normally have expiration dates between
three and nine months from the date written. The exercise prices of options may
be below, equal to or above the current market values of the underlying
securities at the times the options are written. From time to time for tax and
other reasons, the Fund may purchase an underlying security for delivery in
accordance with an exercise notice assigned to it, rather than delivering such
security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Fund
purchases put options on stock indices to protect the portfolio against decline
in value. The Fund purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Fund. Any gain in the price of a call
option is likely to be offset by higher prices the Fund must pay in rising
markets, as cash reserves are invested. In declining markets, any increase in
the price of a put option is likely to be offset by lower prices of stocks owned
by the Fund.
The Fund may purchase only those put and call options that are listed
on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Fund may utilize either broadly based or market segment
indices in seeking a better correlation between the indices and the Fund.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Fund may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this SAI, the Sub-advisor believes that these limitations will not affect the
purchase of stock index options by the Fund.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Fund. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Fund may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Fund will lose the right to appreciation of the
stock for the duration of the option. For an additional discussion of options on
stock indices and stocks and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Fund may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission and must be executed through a futures commission merchant
(an "FCM") or brokerage firm which is a member of the relevant contract market.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a transaction
cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Fund held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Fund could
sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Fund and
thereby prevent the Fund's net asset value from declining as much as it
otherwise would have. The Fund also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Fund to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market had stabilized. At that time, the futures contracts could
be liquidated and the Fund could buy equity securities on the cash market.
The Fund may also enter into interest rate and foreign currency futures
contracts. Interest rate futures contracts currently are traded on a variety of
fixed-income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
The Fund will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Fund may use futures and options thereon solely for bona
fide hedging or for other non-speculative purposes. As to long positions which
are used as part of the Fund's strategies and are incidental to its activities
in the underlying cash market, the "underlying commodity value" of the Fund's
futures and options thereon must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other
dollar-denominated high-quality, short-term money instruments so set aside, plus
sums deposited on margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant. The
"underlying commodity value" of a future is computed by multiplying the size of
the future by the daily settlement price of the future. For an option on a
future, that value is the underlying commodity value of the future underlying
the option.
Unlike the situation in which the Fund purchases or sells a security,
no price is paid or received by the Fund upon the purchase or sale of a futures
contract. Instead, the Fund is required to deposit in a segregated asset account
an amount of cash or qualifying securities (currently U.S. Treasury bills),
currently in a minimum amount of $15,000. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. However, since losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund may be
required to make additional payments during the term of a contract to its
broker. Such payments would be required, for example, where, during the term of
an interest rate futures contract purchased by the Fund, there was a general
increase in interest rates, thereby making the Fund's securities less valuable.
In all instances involving the purchase of financial futures contracts by the
Fund, an amount of cash together with such other securities as permitted by
applicable regulatory authorities to be utilized for such purpose, at least
equal to the market value of the future contracts, will be deposited in a
segregated account with the Fund's custodian to collateralize the position. At
any time prior to the expiration of a futures contract, the Fund may elect to
close its position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Fund to enter into new positions or close out existing positions. If the
secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Fund would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Fund's access to other assets held to
cover its futures positions also could be impaired. For an additional discussion
of futures contracts and certain risks involved therein, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Fund may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Fund is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Fund would be able to buy a put option on a futures
contract to hedge its portfolio against the risk of falling prices. For an
additional discussion of options on futures contracts and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risks Factors
and Investment Methods."
Options on Foreign Currencies. The Fund may buy and sell options on
foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Fund could buy put
options on the foreign currency. If the value of the currency declines, the Fund
would have the right to sell such currency for a fixed amount in U.S. dollars
and would thereby offset, in whole or in part, the adverse effect on the Fund
which otherwise would have resulted. Conversely, when a rise is projected in the
U.S. dollar value of a currency in which securities to be acquired are
denominated, thereby increasing the cost of such securities, the Fund could buy
call options thereon. The purchase of such options could offset, at least
partially, the effects of the adverse movements in exchange rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the Securities and Exchange Commission, as are
other securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Fund invests. Should
interest or exchange rates or the prices of securities or financial indices move
in an unexpected manner, the Fund may not achieve the desired benefits of
futures and options or may realize losses and thus be in a worse position than
if such strategies had not been used. Unlike many exchange-traded futures
contracts and options on futures contracts, there are no daily price fluctuation
limits with respect to options on currencies and negotiated or over-the-counter
instruments, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Fund as the possible loss of the entire premium paid
for an option bought by the Fund and the possible need to defer closing out
positions in certain instruments to avoid adverse tax consequences. As a result,
no assurance can be given that the Fund will be able to use those instruments
effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in foreign markets during
nonbusiness 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) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The Fund
generally conducts its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange currency market.
When the Fund purchases or sells a security denominated in a foreign currency,
it may enter into a forward foreign currency contract ("forward contract") for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction. A forward contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. In this manner, the
Fund may obtain protection against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date the security is purchased or sold and the
date upon which payment is made or received. Although such contracts tend to
minimize the risk of loss due to the decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result should the value of such currency increase. The Fund will not speculate
in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. 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 buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Fund may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Fund's securities denominated in that currency. The Fund will
not enter into such forward contracts or maintain a net exposure to such
contracts where the fulfillment of the contracts would require the Fund to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency. Forward contracts may,
from time to time, be considered illiquid, in which case they would be subject
to the Fund's limitation on investing in illiquid securities.
At the consummation of a forward contract for delivery by the Fund of a
foreign currency, the Fund may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Fund chooses to
make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Fund assets into such currency.
Dealings in forward contracts by the Fund will be limited to the
transactions described above. Of course, the Fund is not required to enter into
such transactions with regard to its foreign currency-denominated securities and
will not do so unless deemed appropriate by the Sub-advisor. It also should be
realized that this method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
For an additional discussion of forward foreign currency contracts and certain
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Company's Prospectus, the Fund
may invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Fund from disposing of such a security at
the time desired or at a reasonable price. In addition, in order to resell a
restricted security, the Fund might have to bear the expense and incur the
delays associated with effecting registration. In purchasing illiquid
securities, the Fund does not intend to engage in underwriting activities,
except to the extent the Fund may be deemed to be a statutory underwriter under
the Securities Act in purchasing or selling such securities. Illiquid securities
will be purchased for investment purposes only and not for the purpose of
exercising control or management of other companies. For an additional
discussion of illiquid or restricted securities and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
<PAGE>
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Fund may invest in Rule 144A securities
which, as disclosed in the Company's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Fund could affect
adversely the marketability of the security. In such an instance, the Fund might
be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the Fund's
limitations on investing in securities that are not readily marketable. The
Sub-advisor will consider the following factors, among others, in making this
determination: (1) the unregistered nature of a Rule 144A security; (2) the
frequency of trades and quotes for the security; (3) the number of dealers
willing to purchase or sell the security and the number of additional potential
purchasers; (4) dealer undertakings to make a market in the security; and (5)
the nature of the security and the nature of market place trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest up
to 5% of its total assets in fixed-income securities which are unrated or are
rated below investment grade either at the time of purchase or as a result of
reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this SAI. The
lower the rating given a security by a rating service, the greater the credit
risk such rating service perceives to exist with respect to the security.
Increasing the amount of the Fund's assets invested in unrated or lower grade
securities, while intended to increase the yield produced by those assets, will
also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Fund invests generally will be affected by changes in
the level of interest rates. An increase in interest rates will tend to reduce
the market values of such securities, whereas a decline in interest rates will
tend to increase their values. Medium and lower-rated securities (Baa or BBB and
lower) and non-rated securities of comparable quality tend to be subject to
wider fluctuations in yields and market values than higher rated securities and
may have speculative characteristics. In order to decrease the risk in investing
in debt securities, in no event will the Fund ever invest in a debt security
rated below B by Moody's or by S&P. Of course, relying in part on ratings
assigned by credit agencies in making investments will not protect the Fund from
the risk that the securities in which they invest will decline in value, since
credit ratings represent evaluations of the safety of principal, dividend, and
interest payments on debt securities, and not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Fund's investment objective may be more
dependent on the Sub-advisor's own credit analysis than is the case for funds
that do not invest in such securities. In addition, the share price and yield of
the Fund may fluctuate more than in the case of funds investing in higher
quality, shorter term securities. Moreover, a significant economic downturn or
major increase in interest rates may result in issuers of lower-rated securities
experiencing increased financial stress, which would adversely affect their
ability to service their principal, dividend, and interest obligations, meet
projected business goals, and obtain additional financing. In this regard, it
should be noted that while the market for high yield debt securities has been in
existence for many years and from time to time has experienced economic
downturns in recent years, this market has involved a significant increase in
the use of high yield debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield debt securities
market, particularly during periods of economic recession. Furthermore, expenses
incurred in recovering an investment in a defaulted security may adversely
affect the Fund's net asset value. Finally, while the Sub-advisor attempts to
limit purchases of medium and lower-rated securities to securities having an
established secondary market, the secondary market for such securities may be
less liquid than the market for higher quality securities. The reduced liquidity
of the secondary market for such securities may adversely affect the market
price of, and ability of the Fund to value, particular securities at certain
times, thereby making it difficult to make specific valuation determinations.
The Fund does not invest in any medium and lower-rated securities which present
special tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For an
additional discussion of certain risks involved in lower-rated securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Fund's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Fund will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements with
respect to money market instruments eligible for investment by the Fund with
member banks of the Federal Reserve system, registered broker-dealers, and
registered government securities dealers. A repurchase agreement may be
considered a loan collateralized by securities. Repurchase agreements maturing
in more than seven days are considered illiquid and will be subject to the
Fund's limitation with respect to illiquid securities.
The Fund has not adopted any limits on the amounts of its total assets
that may be invested in repurchase agreements which mature in less than seven
days. The Fund may invest up to 15% of the market value of its net assets,
measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Fund may buy securities convertible into
common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Fund; consequently, warrant positions are generally accompanied
by cash positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest more than 15% of the market value of its net assets in
securities which are not readily marketable, including repurchase agreements
maturing in over seven days;
2........Purchase securities of other investment companies except in
compliance with the Investment Company Act of 1940;
3........Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of transactions (and,
provided that margin payments and other deposits in connection with transactions
in options, futures and forward contracts shall not be deemed to constitute
purchasing securities on margin); or
4........Sell securities short.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Fund may depart from its basic investment
objective and assume a defensive position with up to 100% of its assets
temporarily invested in high quality corporate bonds or notes and government
issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND:
Investment Objective: The investment objective of the Fund is to provide
long-term capital growth by investing primarily in small-capitalization stocks
that appear to be undervalued.
Investment Policies:
Although primarily all of the Fund's assets are invested in common
stocks, the Fund may invest in convertible securities, corporate debt securities
and preferred stocks. The fixed-income securities in which the Fund may invest
include, but are not limited to, those described below. See this SAI under
"Certain Risk Factors and Investment Methods," for an additional discussion of
debt obligations.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The Fund
may invest in U.S. banks, foreign branches of U.S. banks, U.S. branches of
foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Fund may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Lower-Rated Debt Securities. The Fund's investment program permits it
to purchase below investment grade securities, commonly referred to as "junk
bonds." Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will fluctuate
more widely than higher quality securities. Lower quality investments entail a
higher risk of default -- that is, the nonpayment of interest and principal by
the issuer than higher quality investments. Such securities are also subject to
special risks, discussed below. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
risk. There can, of course, be no assurance that the Fund will achieve its
investment objective.
<PAGE>
After purchase by the Fund, a debt security may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, the
Sub-advisor will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or their
rating systems, the Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Company's Prospectus.
Junk bonds are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments. Because
investment in low and lower-medium quality bonds involves greater investment
risk, to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on the Sub-advisor's credit analysis
than would be the case if the Fund was investing in higher quality bonds. For a
discussion of the special risks involved in low-rated bonds, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interests in a pool of mortgages. After purchase by the Fund, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require a sale of such
security by the Fund. However, the Sub-advisor will consider such event in its
determination of whether the Fund should continue to hold the security. To the
extent that the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in the Company's Prospectus. For a discussion of
mortgage-backed securities and certain risks involved therein, see this SAI and
the Company's Prospectus under "Certain Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities. For an additional
discussion of CMOs and certain risks involved therein, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code, POs may generate taxable income from the
current accrual of original issue discount, without a corresponding distribution
of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Fund will treat IOs and POs, other than government-issued IOs or
POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. The Sub-advisor will determine the
liquidity of these investments based on the following guidelines: the type of
issuer; type of collateral, including age and prepayment characteristics; rate
of interest on coupon relative to current market rates and the effect of the
rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue; and the number of dealers
who make a market in the IO or PO. The Fund will treat non-government-issued IOs
and POs not backed by fixed or adjustable rate mortgages as illiquid unless and
until the Securities and Exchange Commission modifies its position.
Asset-Backed Securities. The Fund may invest a portion of its assets in
debt obligations known as asset-backed securities. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
.........Automobile Receivable Securities. The Fund may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
.........Credit Card Receivable Securities. The Fund may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
.........Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Fund may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Writing Covered Call Options. The Fund may write (sell) American or
European style "covered" call options and purchase options to close out options
previously written by the Fund. In writing covered call options, the Fund
expects to generate additional premium income which should serve to enhance the
Fund's total return and reduce the effect of any price decline of the security
or currency involved in the option. Covered call options will generally be
written on securities or currencies which, in the Sub-advisor's opinion, are not
expected to have any major price increases or moves in the near future but
which, over the long term, are deemed to be attractive investments for the Fund.
The Fund will write only covered call options. This means that the Fund
will own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to or
less than the exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an account consisting of
cash or other liquid assets having a value equal to the fluctuating market value
of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, a fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call to be "pledged" as that term
is used in the Fund's policy which limits the pledging or mortgaging of its
assets.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Sub-advisor,
in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Fund's total assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Fund may write American or European
style covered put options and purchase options to close out options previously
written by the Fund.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" option at all times while the
put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Fund at a price lower than the current market price of the
security or currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Fund would also receive interest
on debt securities or currencies maintained to cover the exercise price of the
option, this technique could be used to enhance current return during periods of
market uncertainty. The risk in such a transaction would be that the market
price of the underlying security or currency would decline below the exercise
price less the premiums received. Such a decline could be substantial and result
in a significant loss to the Fund. In addition, the Fund, because it does not
own the specific securities or currencies which it may be required to purchase
in exercise of the put, cannot benefit from appreciation, if any, with respect
to such specific securities or currencies.
The Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Fund's total assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the right to sell
the underlying security or currency at the exercise price at any time during the
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use of
put options is provided in this SAI under "Certain Risk Factors and Investment
Methods."
The premium paid by the Fund when purchasing a put option will be
recorded as an asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Fund is computed (close of New
York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Fund may purchase American or European
style call options. As the holder of a call option, the Fund has the right to
purchase the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Fund may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. The Fund may purchase
call options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also purchase
call options in order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided in this SAI under "Certain
Risk Factors and Investment Methods."
The Fund may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer (Over-the-Counter) Options. The Fund may engage in transactions
involving dealer options. Certain risks are specific to dealer options. While
the Fund would look to a clearing corporation to exercise exchange-traded
options, if the Fund were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction. For a discussion of dealer options, see this SAI under "Certain
Risk Factors and Investment Methods."
Futures Contracts:
.........Transactions in Futures. The Fund may enter into futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"). The Fund may also enter into futures on commodities
related to the types of companies in which it invests, such as oil and gold
futures. Otherwise the nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
.........Stock index futures contracts may be used to attempt to hedge a
portion of the Fund, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to hedge
the Fund successfully, the Fund must sell futures contacts with respect to
indices or subindices whose movements will have a significant correlation with
movements in the prices of the Fund's securities.
.........Interest rate or currency futures contracts may be used to
attempt to hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the effective
return on securities or currencies held or intended to be acquired by the Fund.
In this regard, the Fund could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
.........The Fund will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Fund's objectives in these areas.
.........Regulatory Limitations. The Fund will engage in futures contracts
and options thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and regulations of
the CFTC.
.........The Fund may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
and premiums paid on those positions would exceed 5% of the net asset value of
the Fund after taking into account unrealized profits and unrealized losses on
any such contracts it has entered into; provided, however, that in the case of
an option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Directors of the Company without a shareholder vote and does not
limit the percentage of the Fund's assets at risk to 5%.
.........The Fund's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the Fund, an
amount of cash or other liquid assets equal to the market value of the futures
contracts and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the position, or
alternative cover (such as owning an offsetting position) will be employed.
Assets used as cover or held in an identified account cannot be sold while the
position in the corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large portion of the
Fund's assets to cover or identified accounts could impede portfolio management
or the Fund's ability to meet redemption requests or other current obligations.
.........If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund would comply
with such new restrictions.
Options on Futures Contracts. The Fund may purchase and sell options on
the same types of futures in which it may invest. As an alternative to writing
or purchasing call and put options on stock index futures, the Fund may write or
purchase call and put options on stock indices. Such options would be used in a
manner similar to the use of options on futures contracts. From time to time, a
single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Fund and other mutual funds or portfolios of mutual funds
managed by the Sub-advisor or Rowe Price-Fleming International, Inc. Such
aggregated orders would be allocated among the Fund and such other portfolios
managed by the Sub-advisor in a fair and non-discriminatory manner. See this SAI
and Company's Prospectus under "Certain Risk Factors and Investment Methods" for
a description of certain risks in options and future contracts.
Additional Futures and Options Contracts. Although the Fund has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Fund is permitted to invest in foreign
futures and options. For a description of foreign futures and options and
certain risks involved therein as well as certain risks involved in foreign
investing, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Foreign Securities. The Fund may invest in U.S. dollar-denominated and
non-U.S. dollar-denominated securities of foreign issuers. There are special
risks in foreign investing. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Fund will invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East. For an additional
discussion of certain risks involved in investing in foreign securities, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following: First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may desire to "lock
in" the U.S. dollar price of the security. Second, when the Sub-advisor believes
that one currency may experience a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Fund's securities denominated in such foreign currency.
Alternatively, where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a proxy currency
where such currency or currencies act as an effective proxy for other
currencies. In such a case, the Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts for
each currency held in the Fund. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
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 Sub-advisor believes that 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.
The Fund may enter into forward contracts for any other purpose
consistent with the Fund's investment objective and policies. However, the Fund
will not enter into a forward contract, or maintain exposure to any such
contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Fund's holdings of liquid assets and currency
available for cover of the forward contract(s). In determining the amount to be
delivered under a contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. For a discussion of certain risk factors
involved in foreign currency transactions, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
<PAGE>
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on currencies, which
will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund will
be required to distribute net gains on such transactions to shareholders even
though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts on
currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities or
securities indices and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income. In
order to avoid realizing excessive gains on securities or currencies held less
than three months, the Fund may be required to defer the closing out of option,
futures or foreign forward exchange contracts) beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains on
Section 1256 option, futures and foreign forward exchange contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes of the 30%
test.
Illiquid and Restricted Securities. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should be
in a position where more than 15% of the value of its net assets is invested in
illiquid assets, including restricted securities, the Fund will take appropriate
steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the Securities Act of 1933 (the "1933 Act"). This rule permits certain qualified
institutional buyers, such as the Fund, to trade in privately placed securities
even though such securities are not registered under the 1933 Act. The
Sub-advisor, under the supervision of the Directors of the Company, will
consider whether securities purchased under Rule 144A are illiquid and thus
subject to the Fund's restriction of investing no more than 15% of its net
assets in illiquid securities. A determination of whether a Rule 144A security
is liquid or not is a question of fact. In making this determination, the
Sub-advisor will consider the trading markets for the specific security taking
into account the unregistered nature of a Rule 144A security. In addition, the
Sub-advisor could consider the (1) frequency of trades and quotes, (2) number of
dealers and potential purchasers, (3) dealer undertakings to make a market, and
(4) the nature of the security and of marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if as a
result of changed conditions it is determined that a Rule 144A security is no
longer liquid, the Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 15% of its net assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine
the elements of futures contracts, options or other financial instruments with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments). Hybrid Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. For a discussion of
certain risks involved in investing in hybrid instruments see this SAI under
"Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Directors
of the Company, the Fund may enter into a repurchase agreement through which an
investor (such as the Fund) purchases a security (known as the "underlying
security") from a well-established securities dealer or a bank that is a member
of the Federal Reserve System. Any such dealer or bank will be on the
Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by the Sub-advisor. At that
time, the bank or securities dealer agrees to repurchase the underlying security
at the same price, plus specified interest. Repurchase agreements are generally
for a short period of time, often less than a week. Repurchase agreements which
do not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements where (i) the
underlying securities are of the type (excluding maturity limitations) which the
Fund's investment guidelines would allow it to purchase directly, (ii) the
market value of the underlying security, including interest accrued, will be at
all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book- entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying security and losses, including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Fund has no current
intention, in the foreseeable future, of engaging in reverse repurchase
agreements, the Fund reserves the right to do so. Reverse repurchase agreements
are ordinary repurchase agreements in which a fund is the seller of, rather than
the investor in, securities, and agrees to repurchase them at an agreed upon
time and price. Use of a reverse repurchase agreement may be preferable to a
regular sale and later repurchase of the securities because it avoids certain
market risks and transaction costs. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund.
Warrants. The Fund may acquire warrants. For a discussion of certain risks
involved therein, see this SAI under "Certain Risk Factor and Investment
Methods."
Lending of Portfolio Securities. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. The Fund will not have the right to vote
securities while they are being lent, but it will call a loan in anticipation of
any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
firms deemed by the Sub-advisor to be of good standing and will not be made
unless, in the judgment of the Sub-advisor, the consideration to be earned from
such loans would justify the risk.
<PAGE>
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Fund may make loans to, or borrow funds from, other
mutual funds sponsored or advised by the Sub-advisor or Rowe Price-Fleming
International, Inc. The Fund has no current intention of engaging in these
practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Fund may
purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Fund's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Fund will cover its commitments with respect to these securities by maintaining
cash and/or other liquid assets with its custodian bank equal in value to these
commitments during the time between the purchase and the settlement. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date. For a discussion of these securities and the risks involved
therein, see this SAI under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Purchase additional securities when money borrowed exceeds 5% of
its total assets;
2........Invest in companies for the purpose of exercising management or
control;
3........Purchase a futures contract or an option thereon if, with
respect to positions in futures or options on futures which do not represent
bona fide hedging, the aggregate initial margin and premiums on such options
would exceed 5% of the Fund's net asset value;
4........Purchase illiquid securities if, as a result, more than 15% of
its net assets would be invested in such securities. Securities eligible for
resale under Rule 144A of the 1933 Act may be subject to this 15% limitation;
5........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
6........Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of portfolio securities
and (ii) the Fund may make margin deposits in connection with futures contracts
or other permissible investments;
7........Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Fund's total
assets at the time of borrowing or investment;
8........Invest in puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Company's Prospectus and this
SAI;
9........Effect short sales of securities; or
10.......Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the Fund would be invested in warrants, except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market.
<PAGE>
ASAF ROBERTSON STEPHENS VALUE + GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek
capital appreciation.
Investment Policies:
Options. The Fund may purchase and sell put and call options on its
securities to enhance performance and to protect against changes in market
prices. There is no assurance that the Fund's use of put and call options will
achieve its desired objective, and the Fund's use of options may result in
losses to the Fund.
.........Writing Covered Call Options. The Fund may write covered call
options on its securities to realize a greater current return through the
receipt of premiums than it would realize on its securities alone. Such option
transactions may also be used as a limited form of hedging against a decline in
the price of securities owned by the Fund.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, the Fund gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Fund retains the risk of loss should the price of
such securities decline. If the option expires unexercised, the Fund realizes a
gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Fund realizes a gain or
loss equal to the difference between the Fund's cost for the underlying security
and the proceeds of sale (exercise price minus commissions) plus the amount of
the premium.
The Fund may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. The Fund may enter into
closing purchase transactions in order to free itself to sell the underlying
security or to write another call on the security, realize a profit on a
previously written call option, or protect a security from being called in an
unexpected market rise. Any profits from a closing purchase transaction may be
offset by a decline in the value of the underlying security. Conversely, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from a
closing purchase transaction is likely to be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Fund.
.........Writing Covered Put Options. The Fund may write covered put
options in order to enhance its current return. Such options transactions may
also be used as a limited form of hedging against an increase in the price of
securities that the Fund plans to purchase. A put option gives the holder the
right to sell, and obligates the writer to buy, a security at the exercise price
at any time before the expiration date. A put option is "covered" if the writer
segregates cash or other liquid assets equal to the price to be paid if the
option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Fund also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
The Fund may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
.........Purchasing Put and Call Options. The Fund may also purchase put
options to protect portfolio holdings against a decline in market value. This
protection lasts for the life of the put option because the Fund, as a holder of
the option, may sell the underlying security at the exercise price regardless of
any decline in its market price. In order for a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs that the Fund must
pay. These costs will reduce any profit the Fund might have realized had it sold
the underlying security instead of buying the put option.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund wants ultimately to buy. Such hedge protection
is provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the Fund might have
realized had it bought the underlying security at the time it purchased the call
option.
The Fund may also purchase put and call options to attempt to enhance
its current return.
.........Options on Foreign Securities. The Fund may purchase and sell
options on foreign securities if the Sub-advisor believes that the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Fund's investment objectives. It is expected
that risks related to such options will not differ materially from risks related
to options on U.S. securities. However, position limits and other rules of
foreign exchanges may differ from those in the U.S. In addition, options markets
in some countries, many of which are relatively new, may be less liquid than
comparable markets in the U.S.
For an additional discussion of options transactions and the risks
involved therein, see this SAI and the Company's Prospectus under "Certain Risk
Factors and Investment Methods."
Special Expiration Price Options. The Fund may purchase
over-the-counter ("OTC") puts and calls with respect to specified securities
("special expiration price options") pursuant to which the Fund in effect may
create a custom index relating to a particular industry or sector that the
Sub-advisor believes will increase or decrease in value generally as a group. In
exchange for a premium, the counterparty, whose performance is guaranteed by a
broker-dealer, agrees to purchase (or sell) a specified number of shares of a
particular stock at a specified price and further agrees to cancel the option at
a specified price that decreases straight line over the term of the option.
Thus, the value of the special expiration price option is comprised of the
market value of the applicable underlying security relative to the option
exercise price and the value of the remaining premium. However, if the value of
the underlying security increases (or decreases) by a prenegotiated amount, the
special expiration price option is canceled and becomes worthless. A portion of
the dividends during the term of the option are applied to reduce the exercise
price if the options are exercised. Brokerage commissions and other transaction
costs will reduce the Fund's profits if the special expiration price options are
exercised. The Fund will not purchase special expiration price options with
respect to more than 25% of the value of its net assets.
LEAPs and BOUNDs. The Fund may purchase certain long-term
exchange-traded equity options called Long-Term Equity Anticipation Securities
("LEAPs") and Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to
retain dividends on the underlying security while potentially participating in
the underlying securities' capital appreciation up to a fixed dollar amount. The
Fund will not purchase these options with respect to more than 25% of the value
of its net assets.
LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a specified
strike price, without receiving payments equivalent to any cash dividends
declared on the underlying securities. A LEAP holder will be entitled to receive
a specified number of shares of the underlying stock upon payment of the
exercise price, and therefore the LEAP will be exercisable at any time the price
of the underlying stock is above the strike price. However, if at expiration the
price of the underlying stock is at or below the strike price, the LEAP will
expire worthless.
BOUNDs are long-term options which are expected to have the same
economic characteristics as covered call options, [with the added benefits that
BOUNDs can be traded in a single transaction and are not subject to early
exercise]. Covered call writing is a strategy by which an investor sells a call
option while simultaneously owning the number of shares of the stock underlying
the call. BOUND holders are able to participate in a stock's price appreciation
up to but not exceeding a specified strike price while receiving payments
equivalent to any cash dividends declared on the underlying stock. At
expiration, a BOUND holder will receive a specified number of shares of the
underlying stock for each BOUND held if, on the last day of trading, the
underlying stock closes at or below the strike price. However, if at expiration
the underlying stock closes above the strike price, the BOUND holder will
receive a payment equal to a multiple of the BOUND's strike price for each BOUND
held. The terms of a BOUND are not adjusted because of cash distributions to the
shareholders of the underlying security. BOUNDs are subject to the position
limits for equity options imposed by the exchanges on which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that
of the corresponding LEAPs. For example, if at expiration the underlying stock
closes at or below the strike price, the LEAP will expire worthless, and the
holder of a corresponding BOUND will receive a specified number of shares of
stock from the writer of the BOUND. If, on the other hand, the LEAP is "in the
money" at expiration, the holder of the LEAP is entitled to receive a specified
number of shares of the underlying stock from the LEAP writer upon payment of
the strike price, and the holder of a BOUND on such stock is entitled to the
cash equivalent of a multiple of the strike price from the writer of the BOUND.
An investor holding both a LEAP and a corresponding BOUND, where the underlying
stock closes above the strike price at expiration, would be entitled to receive
a multiple of the strike price from the writer of the BOUND and, upon exercise
of the LEAP, would be obligated to pay the same amount to receive shares of the
underlying stock. LEAPs are American-style options (exercisable at any time
prior to expiration), whereas BOUNDs are European-style options (exercisable
only on the expiration date).
Futures Contracts.
.........Index Futures Contracts and Options. The Fund may buy and sell
futures contracts and related options for hedging purposes or to attempt to
increase investment return. The Fund currently expects that it will only
purchase and sell stock index futures contracts and related options. A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index. The Fund may purchase or sell futures
contracts with respect to any securities indices.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Fund enters into a futures contract to buy 100
units of the S&P 100 Index at a specified future date at a contract price of
$180 and the S&P 100 Index is at $184 on that future date, the Fund will gain
$400 (100 units x gain of $4). If the Fund enters into a futures contract to
sell 100 units of the stock index at a specified future date at a contract price
of $180 and the S&P 100 Index is at $182 on that future date, the Fund will lose
$200 (100 units x loss of $2).
In order to hedge its investments successfully using futures contracts
and related options, the Fund must invest in futures contracts with respect to
indices or sub-indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the Fund's securities.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on
index futures contracts, the Fund may purchase and sell call and put options on
the underlying indices themselves to the extent that such options are traded on
national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount." This
amount is equal to 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 the exercise, multiplied by
a fixed "index multiplier."
The Fund may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. The Fund may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options plus transaction
costs. The writing of a put or call option on an index involves risks similar to
those risks relating to the purchase or sale of index futures contracts.
.........Margin Payments. When the Fund purchases or sells a futures
contract, it is required to deposit with its custodian an amount of cash, U.S.
Treasury bills, or other permissible collateral equal to a small percentage of
the amount of the futures contract. This amount is known as "initial margin."
The nature of initial margin is different from that of margin in security
transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Fund upon termination of the contract,
assuming the Fund satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when the Fund sells a futures contract and the price of the
underlying index rises above the delivery price, the Fund's position declines in
value. The Fund then pays the broker a variation margin payment equal to the
difference between the delivery price of the futures contract and the value of
the index underlying the futures contract. Conversely, if the price of the
underlying index falls below the delivery price of the contract, the Fund's
futures position increases in value. The broker then must make a variation
margin payment equal to the difference between the delivery price of the futures
contract and the value of the index underlying the futures contract.
When the Fund terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Fund, and the Fund realizes a loss or a gain. Such closing transactions involve
additional commission costs.
For an additional discussion of futures contracts and related options
and the risks involved therein, see the Company's Prospectus and this SAI under
"Certain Risk Factors and Investment Methods."
Indexed Securities. The Fund may purchase securities whose prices are
indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a put option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
<PAGE>
Repurchase Agreements. The Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). Under
guidelines established by the Board of Directors of the Company, the Fund may
enter into repurchase agreements only with banks and securities dealers meeting
certain criteria as to credit-worthiness and financial condition. It is the
Sub-advisor's present intention that the Fund enter into repurchase agreements
only with respect to obligations of the U.S. government or its agencies or
instrumentalities or other high-quality, short-term debt obligations. Repurchase
agreements may be viewed as loans made by the Fund which are collateralized by
the securities subject to repurchase. The Sub-advisor will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. For a discussion of repurchase agreements and the
risks involved therein, see the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Securities Lending. The Fund may lend its securities, provided: (1) the
loan is secured continuously by collateral consisting of U.S. Government
securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (2) the Fund
may at any time call the loan and regain the securities loaned; (3) the Fund
will receive any interest or dividends paid on the loaned securities; and (4)
the aggregate market value of securities loaned will not at any time exceed
one-third (or such other limit as the Directors of the Company may establish) of
the total assets of the Fund. In addition, it is anticipated that the Fund may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan.
Before the Fund enters into a loan, the Sub-advisor considers all
relevant facts and circumstances, including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. The Fund will not lend portfolio
securities to borrowers affiliated with the Fund.
Short Sales. The Fund may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which the
Fund sells a security it does not own, in anticipation of a decline in the
market value of that security. To complete such a transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed by purchasing it at the market price at or prior
to the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or interest
that accrue during the period of the loan. To borrow the security, the Fund also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker (or by
the Fund's custodian in a special custody account), to the extent necessary to
meet margin requirements, until the short position is closed out. The Fund also
will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses the Fund may be required to pay in
connection with a short sale.
Foreign Investments. The Fund may invest in foreign securities,
securities denominated in or indexed to foreign currencies, and certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks. For a discussion of the risks involved in foreign
currency fluctuations and investing in foreign securities in general, see this
SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
The considerations associated with foreign investments generally are
intensified for investments in developing countries. For a discussion of the
risks involved therein, see this SAI and the Company's Prospectus under "Certain
Risk Factors and Investment Methods."
<PAGE>
Foreign Currency Transactions. The Fund may engage in currency exchange
transactions to protect against uncertainty in the level of future foreign
currency exchange rates and to increase current return. The Fund may engage in
both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables of the
Fund generally arising in connection with the purchase or sale of its portfolio
securities. The Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging, the Fund will attempt to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The Fund may purchase or sell a foreign currency on a spot (i.e., cash)
basis at the prevailing spot rate in connection with transaction hedging. The
Fund may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency futures
contracts.
For transaction hedging purposes, the Fund may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Fund the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Fund the
right to sell a currency at a specified exercise price until the expiration of
the option. A call option on a futures contract gives the Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Fund the right to purchase a
currency at the exercise price until the expiration of the option. The Fund will
engage in over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the Sub-advisor, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations.
When it engages in position hedging, the Fund enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Fund are denominated or are
quoted in their principle trading markets or an increase in the value of
currency for securities which the Fund expects to purchase. In connection with
position hedging, the Fund may purchase put or call options on foreign currency
and foreign currency futures contracts and buy or sell forward contracts and
foreign currency futures contracts. The Fund may also purchase or sell foreign
currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of the
Fund's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security or securities being hedged is less than the
amount of foreign currency the Fund is obligated to deliver and if a decision is
made to sell the security or securities and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security or securities
of the Fund if the market value of such security or securities exceeds the
amount of foreign currency the Fund is obligated to deliver.
To offset some of the costs to the Fund of hedging against fluctuations
in currency exchange rates, the Fund may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in the value of
such currency.
The Fund may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, by purchasing and selling options on
foreign currencies and on foreign currency futures contracts, and by purchasing
and selling foreign currency forward contracts.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the
New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Fund will normally purchase or
sell foreign currency futures contracts and related options only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a secondary market on an exchange or board of trade will exist
for any particular contract or option or at any particular time. In such event,
it may not be possible to close a futures or related option position and, in the
event of adverse price movements, the Fund would continue to be required to make
daily cash payments of variation margin on its futures positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when the Sub-advisor believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell 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.
Zero-Coupon Debt Securities and Pay-in-Kind Securities. The Fund may
invest in zero-coupon securities. Zero-coupon securities are debt obligations
which are generally issued at a discount from their value at maturity and are
payable in full at maturity, and which do not provide for current payments of
interest prior to maturity. Zero-coupon securities allow an issuer to avoid the
need to generate cash to meet current interest payments. For a discussion of
zero-coupon debt securities and the risks involved therein, see this SAI under
"Certain Risk Factors and Investment Methods."
Even though zero-coupon securities do not pay current interest in cash,
the Fund is nonetheless required to accrue interest income on them and to
distribute the amount of that interest at least annually to shareholders. Thus,
the Fund could be required at times to liquidate other investments in order to
satisfy its distribution requirement.
The Fund also may purchase pay-in-kind securities. Pay-in-kind
securities pay all or a portion of their interest or dividends in the form of
additional securities.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest in (a) securities which at the time of such investment
are not readily marketable, (b) securities restricted as to resale, and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Fund's net assets (taken at current value) would then be
invested in the aggregate in securities described in (a), (b), and (c) above;
2........Purchase or sell commodities or commodity contracts, except
that the Fund may purchase or sell financial futures contracts, options on
financial futures contracts, and futures contracts, forward contracts, and
options with respect to foreign currencies, and may enter into swap
transactions;
3........Invest in securities of other investment companies, except in
compliance with the 1940 Act;
4........Invest in real estate limited partnerships;
5........Acquire more than 10% of the voting securities of any issuer;
6........Purchase or sell real estate or interests in real estate,
including real estate mortgage loans, although it may purchase and sell
securities which are secured by real estate and securities of companies,
including limited partnership interests, that invest or deal in real estate and
it may purchase interests in real estate investment trusts. (For purposes of
this restriction, investments by the Fund in mortgage-backed securities and
other securities representing interests in mortgage pools shall not constitute
the purchase or sale of real estate or interests in real estate or real estate
mortgage loans.);
7........Make investments for the purpose of exercising control or
management;
8........Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs.
In addition, the Fund will only sell short securities that are traded
on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
ASAF JANUS CAPITAL GROWTH FUND:
Investment Objective: The investment objective of the Fund is to seek growth of
capital. Realization of income is not a significant investment consideration and
any income realized on the Fund's investments, therefore, will be incidental to
the Fund's objective.
Investment Policies:
Futures, Options and Other Derivative Instruments. The Fund may enter
into futures contracts on securities, financial indices, and foreign currencies
and options on such contracts, and may invest in options on securities,
financial indices and foreign currencies, forward contracts and swaps. The Fund
will not enter into any futures contracts or options on futures contracts if the
aggregate amount of the Fund's commitments under outstanding futures contract
positions and options on futures contracts written by the Fund would exceed the
market value of the total assets of the Fund (i.e., no leveraging). The Fund may
invest in forward currency contracts with stated values of up to the value of
the Fund's assets.
The Fund may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in which
the Fund is permitted to invest directly. The Fund will effect such transactions
only with investment dealers and other financial institutions (such as
commercial banks or savings and loan institutions) deemed creditworthy by the
Sub-advisor, and only pursuant to procedures adopted by the Sub-advisor for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Fund in a negotiated transaction is illiquid, the value
of an option bought or the amount of the Fund's obligations under an option
written by the Fund, as the case may be, will be subject to the Fund's
limitation on illiquid investments. In the case of illiquid options, it may not
be possible for the Fund to effect an offsetting transaction at a time when the
Sub-advisor believes it would be advantageous for the Fund to do so. For a
description of these strategies and instruments and certain risks involved
therein, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and
Floors. In addition to the strategies noted above, the Fund, in order to attempt
to protect the value of its investments from interest rate or currency exchange
rate fluctuations, may enter into interest rate swaps and may buy or sell
interest rate caps and floors. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its investments. The Fund also may enter into these transactions to protect
against any increase in the price of securities the Fund may consider buying at
a later date. The Fund does not intend to use these transactions as a
speculative investments. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments. The
exchange commitments can involve payments to be made in the same currency or in
different currencies. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a contractually
based principal amount from the party selling the interest rate floor.
The Fund may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending upon whether it is hedging
its assets or its liabilities, and will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or other liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian. If the Fund enters into an interest
rate swap on other than a net basis, the Fund would maintain a segregated
account in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. The Fund will not enter into any interest rate swap,
cap or floor transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in one of the three highest rating
categories of at least one nationally recognized statistical rating organization
at the time of entering into such transaction. The Sub-advisor will monitor the
creditworthiness of all counterparties on an ongoing basis. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Fund sells (i.e., writes) caps and floors, it will maintain in a segregated
account cash or other liquid assets having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's obligations
with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Fund. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Fund or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the Fund
is contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Fund would risk the loss of the net
amount of the payments that the Fund contractually is entitled to receive. The
Fund may buy and sell (i.e., write) caps and floors without limitation, subject
to the segregated account requirement described above. For an additional
discussion of these strategies, see this SAI under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Directors of the Company, the Fund may enter into
repurchase agreements. The Fund may also enter into reverse repurchase
agreements. For a description of these investment techniques, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are not "fundamental" investment restrictions and may
be changed by the Directors of the Company without shareholder approval.
The Fund will not:
1........Purchase a security if as a result, more than 15% of its net
assets in the aggregate, at market value, would be invested in securities which
cannot be readily resold because of legal or contractual restrictions on resale
or for which there is no readily available market, or repurchase agreements
maturing in more than seven days or securities used as a cover for written
over-the-counter options, if any. The Directors of the Company, the Investment
Manager or the Sub-advisor acting pursuant to authority delegated by the
Directors, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or
any successor to such rule, and therefore that such securities are not subject
to the foregoing limitation;
2........Enter into any futures contracts or options on futures
contracts for purposes other than bona fide hedging transactions (as defined by
the CFTC) if as a result the sum of the initial margin deposits and premium
required to establish positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions would exceed 5%
of the fair market value of the Fund's net assets;
3........Enter into any futures contracts if the aggregate amount of
the Fund's commitments under outstanding futures contracts positions of the Fund
would exceed the market value of the total assets of the Fund;
4........Sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in options, swaps and forward futures contracts
are not deemed to constitute selling securities short;
5........Mortgage or pledge any securities owned or held by the Fund in
amounts that exceed, in the aggregate, 15% of the Fund's net asset value,
provided that this limitation does not apply to reverse repurchase agreements or
in the case of assets deposited to margin or guarantee positions in futures,
options, swaps or forward contracts or placed in a segregated account in
connection with such contracts;
6........Invest in companies for the purpose of exercising management or
control;
7........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940; or
8........Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of portfolio securities
and (ii) the Fund may make margin deposits in connection with futures contracts
or other permissible investments.
ASAF LORD ABBETT GROWTH AND INCOME FUND:
Investment Objective: The investment objective of the Fund is long-term
growth of capital and income while attempting to avoid excessive fluctuations in
market value.
Investment Policies:
Covered Call Options. The Fund may write covered call options which are
traded on a national securities exchange with respect to its securities in an
attempt to increase income and to provide greater flexibility in the disposition
of securities. A "call option" is a contract sold for a price (the "premium")
giving its holder the right to buy a specific number of shares of stock at a
specific price prior to a specified date. A "covered call option" is a call
option issued on securities already owned by the writer of the call option for
delivery to the holder upon the exercise of the option. During the period of the
option, the Fund forgoes the opportunity to profit from any increase in the
market price of the underlying security above the exercise price of the option
(to the extent that the increase exceeds the net premium). The Fund may also
enter into "closing purchase transactions" in order to terminate its obligation
to deliver the underlying security (this may result in a short-term gain or
loss). A closing purchase transaction is the purchase of a call option (at a
cost which may be more or less than the premium received for writing the
original call option) on the same security with the same exercise price and call
period as the option previously written. If the Fund is unable to enter into a
closing purchase transaction, it may be required to hold a security that it
might otherwise have sold to protect against depreciation. The Sub-advisor does
not intend to have the Fund write covered call options with respect to
securities with an aggregate market value of more than 10% of the Fund's gross
assets at the time an option is written. For an additional discussion of call
options, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. The Fund may engage in the lending of its
securities. It is expected that no more that 5% of the Fund's gross assets will
be committed to securities lending. For a discussion of the Fund's limitations
on lending, see this SAI under "Fundamental Investment Restrictions."
Illiquid Securities. Subject to guidelines promulgated by the Directors
of the Company, the Fund may invest in illiquid securities. Investments in
illiquid securities are limited to a maximum of 15% of Fund net assets. Illiquid
securities for the purposes of this limitation do not include securities
eligible for resale pursuant to Rule 144A of the Securities Act of 1933 which
have been determined to be liquid by the Sub-advisor under the supervision of
the Directors of the Company. Examples of factors which the Sub-advisor may take
into account with respect to a Rule 144A security include the frequency of
trades and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, dealer
undertakings to make a market in the security, and the nature of the security
and the nature of the marketplace (e.g., the time period needed to dispose of
the security, the method of soliciting offers, and the mechanics of transfer).
For a discussion of illiquid and restricted securities and certain risks
involved therein see the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
ASAF INVESCO EQUITY INCOME FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income while following sound investment practices.
Investment Policies:
The Fund will pursue its objective by investing its assets in
securities which will provide a relatively high-yield and stable return and
which, over a period of years, may also provide capital appreciation. Capital
growth potential is an additional consideration in the selection of portfolio
securities. The Fund invests in common stocks, as well as convertible bonds and
preferred stocks.
In pursuing its investment objective, the Fund normally invests at
least 65% of its total assets in dividend paying common stocks. Up to 10% of the
Fund's assets may be invested in equity securities that do not pay regular
dividends. The remaining assets are invested in other income producing
securities, such as corporate bonds. Sometimes warrants are acquired when
offered with income-producing securities, but the warrants are disposed of at
the first favorable opportunity. Acquiring warrants involves a risk that the
Fund will lose the premium it pays to acquire warrants if the Fund does not
exercise a warrant before it expires. The major portion of the investment
portfolio normally consists of common stocks, convertible bonds and debentures,
and preferred stocks; however, there may also be substantial holdings of debt
securities, including non-investment grade and unrated debt securities.
Debt Securities. The debt securities in which the Fund invests are
generally subject to two kinds of risk, credit risk and market risk. The ratings
given a debt security by Moody's and Standard & Poor's ("S&P") provide a
generally useful guide as to such credit risk. The lower the rating given a debt
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of Fund
assets invested in unrated or lower grade (Ba or less by Moody's, BB or less by
S&P) debt securities, while intended to increase the yield produced by the
Fund's debt securities, will also increase the credit risk to which those debt
securities are subject.
Lower-rated debt securities and non-rated securities of comparable
quality tend to be subject to wider fluctuations in yields and market values
than higher rated debt securities and may have speculative characteristics.
Although the Fund may invest in debt securities assigned lower grade ratings by
S&P or Moody's, the Fund's investments have generally been limited to debt
securities rated B or higher by either S&P or Moody's. Debt securities rated
lower than B by either S&P or Moody's may be highly speculative. The Sub-advisor
intends to limit such portfolio investments to debt securities which are not
believed by the Sub-advisor to be highly speculative and which are rated at
least CCC or Caa, respectively, by S&P or Moody's. In addition, a significant
economic downturn or major increase in interest rates may well result in issuers
of lower-rated debt securities experiencing increased financial stress which
would adversely affect their ability to service their principal and interest
obligations, to meet projected business goals, and to obtain additional
financing. While the Sub-advisor attempts to limit purchases of lower-rated debt
securities to securities having an established retail secondary market, the
market for such securities may not be as liquid as the market for higher rated
debt securities. For an additional discussion of certain risks involved in
lower-rated or unrated securities, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. As discussed in the Company's Prospectus, the
Fund may enter into repurchase agreements with respect to debt instruments
eligible for investment by the Fund, with member banks of the Federal Reserve
System, registered broker-dealers, and registered government securities dealers.
A repurchase agreement may be considered a loan collateralized by securities.
The resale price reflects an agreed upon interest rate effective for the period
the instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement, and are held by the Fund's
Custodian Bank until repurchased. For an additional discussion of repurchase
agreements and certain risks involved therein, see this SAI under "Certain Risk
Factors and Investment Methods."
The Directors of the Company have promulgated guidelines with respect
to repurchase agreements.
Lending Portfolio Securities. The Fund may lend its securities to
qualified brokers, dealers, banks, or other financial institutions. While voting
rights may pass with the loaned securities, if a material event (e.g., proposed
merger, sale of assets, or liquidation) is to occur affecting an investment on
loan, the loan must be called and the securities voted. Loans of securities made
by the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange and the requirements of the
Investment Company Act of 1940 and the Rules of the Securities and Exchange
Commission thereunder.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest in companies for the purpose of exercising management or
control;
2........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3........Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of portfolio securities
and (ii) the Fund may make margin deposits in connection with futures contracts
or other permissible investments;
4........Effect short sales of securities; or
5........Purchase any security or enter into a repurchase agreement, if
as a result, more than 15% of its net assets would be invested in repurchase
agreements not entitling the holder to payment of principal and interest within
seven days and in securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market. The
Directors of the Company, or the Investment Manager or the Sub-advisor acting
pursuant to authority delegated by the Directors, may determine that a readily
available market exists for securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, or any successor to that rule, and therefore
that such securities are not subject to the foregoing limitation.
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND:
Investment Objective: The investment objective of the Fund is to seek
capital growth and current income.
Investment Policies:
In general, within the restrictions outlined herein, the Sub-advisor
has broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It will be the policy of the Sub-advisor to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held subject to the investment
restrictions described below. However, the Sub-advisor may invest the assets of
the Fund in varying amounts in other instruments and in senior securities, such
as bonds, debentures, preferred stocks and convertible issues, when such a
course is deemed appropriate in order to attempt to attain its financial
objectives. Senior securities that, in the opinion of the Sub-advisor, are
high-grade issues may also be purchased for defensive purposes.
The above statement of investment policy gives the Sub-advisor
authority to invest in securities other than common stocks and traditional debt
and convertible issues. The Sub-advisor may invest in master limited
partnerships (other than real estate partnerships) and royalty trusts which are
traded on domestic stock exchanges when such investments are deemed appropriate
for the attainment of the Fund's investment objectives.
The Sub-advisor will invest approximately 60% of the Fund in common
stocks and the balance in fixed income securities. Common stock investments are
described above. The fixed income assets will be invested primarily in
investment grade securities. The Fund may invest in securities of the United
States government and its agencies and instrumentalities, corporate, sovereign
government, municipal, mortgage-backed, and other asset-backed securities. It
can be expected that the Sub-advisor will invest from time to time in bonds and
preferred stock convertible into common stock.
Forward Currency Exchange Contracts. The Fund conducts its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward foreign currency exchange contracts to purchase or sell foreign
currencies.
The Fund expects to use forward contracts under two circumstances: (1)
when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Fund is purchasing or selling a security denominated in a foreign
currency, the Fund would be able to enter into a forward contract to do so; (2)
when the Sub-advisor believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, the Fund would be able
to enter into a forward contract to sell foreign currency for a fixed U.S.
dollar amount approximating the value of some or all of the Fund's securities
either denominated in, or whose value is tied to, such foreign currency.
As to the first circumstance, when the Fund enters into a trade for the
purchase or sale of a security denominated in a foreign currency, it may be
desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering
into forward contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the Fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar at
the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the Fund could enter into a foreign contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The Fund will place cash or high-grade liquid
securities in a separate account with its custodian in an amount sufficient to
cover its obligation under the contract. If the value of the securities placed
in the separate account declines, additional cash or securities will be placed
in the account on a daily basis so that the value of the account equals the
amount of the Fund's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The Sub-advisor does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the
Sub-advisor believes that it is important to have flexibility to enter into such
forward contracts when it determines that the Fund 's best interests may be
served.
Generally, the Fund will not enter into a forward contract with a term
of greater than one year. At the maturity of the forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate the obligation to deliver the foreign
currency by purchasing an "offsetting" forward contract with the same currency
trader obligating the Fund to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of the Fund's securities at the expiration of the forward contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the Fund is obligated to deliver. For an additional discussion
of forward currency exchange contracts and certain risks involved therein, see
this SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts. As described in the Company's Prospectus, the Fund
may enter into futures contracts. Unlike when the Fund purchases securities, no
purchase price for the underlying securities is paid by the Fund at the time it
purchases a futures contract. When a futures contract is entered into, both the
buyer and seller of the contract are required to deposit with a futures
commission merchant ("FCM") cash or high-grade debt securities in an amount
equal to a percentage of the contract's value, as set by the exchange on which
the contract is traded. This amount is known as "initial margin" and is held by
the Fund's custodian for the benefit of the FCM in the event of any default by
the Fund in the payment of any future obligations.
The value of a futures contract is adjusted daily to reflect the
fluctuation of the value of the underlying securities. This is a process known
as marking the contract to market. If the value of a party's position declines,
that party is required to make additional "variation margin" payments to the FCM
to settle the change in value. The party that has a gain is generally entitled
to receive all or a portion of this amount.
The Fund maintains from time to time a percentage of its assets in cash
or high-grade liquid securities to provide for redemptions or to hold for future
investment in securities consistent with the Fund's investment objectives. The
Fund may enter into index futures contracts as an efficient means to expose the
Fund's cash position to the domestic equity market. The Sub-advisor believes
that the purchase of futures contracts is an efficient means to effectively be
fully invested in equity securities.
The principal risks generally associated with the use of futures
include: (i) the possible absence of a liquid secondary market for any
particular instrument may make it difficult or impossible to close out a
position when desired (liquidity risk); (ii) the risk that the counter party to
the contract may fail to perform its obligations or the risk of bankruptcy of
the FCM holding margin deposits (counter-party risk); (iii) the risk that the
securities to which the futures contract relates may go down in value (market
risk); and (iv) adverse price movements in the underlying securities can result
in losses substantially greater than the value of the Fund's investment in that
instrument because only a fraction of a contract's value is required to be
deposited as initial margin (leverage risk); provided, however, that the Fund
may not purchase leveraged futures, so there is no leverage risk involved in the
Fund's use of futures.
A liquid secondary market is necessary to close out a contract. The
Fund may seek to manage liquidity risk by investing in exchange-traded futures.
Exchange-traded futures pose less risk that there will not be a liquid secondary
market than privately negotiated instruments. Through their clearing
corporations, the futures exchanges guarantee the performance of the contracts.
Futures contracts are generally settled within a day from the date they
are closed out, as compared to three days for most types of equity securities.
As a result, futures contracts can provide more liquidity than an investment in
the actual underlying securities. Nevertheless, there is no assurance that a
liquid secondary market will exist for any particular futures contract at any
particular time. Liquidity may also be influenced by an exchange-imposed daily
price fluctuation limit, which halts trading if a contract's price moves up or
down more than the established limit on any given day. On volatile trading days
when the price fluctuation limit is reached, it may be impossible for the Fund
to enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, the Fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until liquidity in the market is re-established. As a result, the
Fund's access to other assets held to cover its futures positions also could be
impaired until liquidity in the market is re-established.
The Fund manages counter-party risk by investing in exchange-traded
index futures. In the event of the bankruptcy of the FCM that holds margin on
behalf of the Fund, the Fund may be entitled to the return of margin owed to the
Fund only in proportion to the amount received by the FCM's other customers. The
Sub-advisor will attempt to minimize the risk by monitoring the creditworthiness
of the FCMs with which the Fund does business.
Portfolio Securities Lending. In order to realize additional income,
the Fund may lend its portfolio securities to persons not affiliated with it and
who are deemed to be creditworthy by the Sub-advisor. Such loans must be secured
continuously by cash collateral maintained on a current basis in an amount at
least equal to the market value of the securities loaned, or by irrevocable
letters of credit. During the existence of the loan, the Fund must continue to
receive the equivalent of the interest and dividends paid by the issuer on the
securities loaned and interest on the investment of the collateral. The Fund
must have the right to call the loan and obtain the securities loaned at any
time on three days' notice, including the right to call the loan to enable the
Fund to vote the securities. Such loans may not exceed one-third of the Fund's
total assets taken at market. Interest on loaned securities may not exceed 10%
of the annual gross income of the Fund (without offset for realized capital
gains).
Short Sales. The Fund may engage in short sales if, at the time of the
short sale, the Fund owns or has the right to acquire an equal amount of the
security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. To make delivery to the purchaser, the executing broker borrows the
securities being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If the Fund engages in a short sale, the collateral account will be
maintained by the Fund's custodian. While the short sale is open, the Fund will
maintain in a segregated custodial account an amount of securities convertible
into, or exchangeable for, such equivalent securities at no additional cost.
These securities would constitute the Fund's long position.
<PAGE>
The Fund may make a short sale, as described above, when it wants to
sell the security it owns at a current attractive price, but also wishes to
defer recognition of gain or loss for federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code. In such a case, any future losses in
the Fund's long position should be reduced by a gain in the short position. The
extent to which such gains or losses are reduced would depend upon the amount of
the security sold short relative to the amount the Fund owns. There will be
certain additional transaction costs associated with short sales, but the Fund
will endeavor to offset these costs with income from the investment of the cash
proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The Sub-advisor intends to purchase a given security whenever the
Sub-advisor believes it will contribute to the stated objective of the Fund,
even if the same security has only recently been sold. The Fund will sell a
given security, no matter for how long or for how short a period it has been
held, and no matter whether the sale is at a gain or at a loss, if the
Sub-advisor believes that it is not fulfilling its purpose, either because,
among other things, it did not live up to the Sub-advisor's expectations, or
because it may be replaced with another security holding greater promise, or
because it has reached its optimum potential, or because of a change in the
circumstances of a particular company or industry or in general economic
conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the equity
portion of the Fund may decrease or eliminate entirely its equity position and
increase its cash position, and when a rise in price levels is anticipated, it
may increase its equity position and decrease its cash position. However, it
should be expected that the Fund will, under most circumstances, be essentially
fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Fund's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Fund's annual portfolio turnover rate cannot
be anticipated and may be comparatively high. Since the Sub-advisor does not
take portfolio turnover rate into account in making investment decisions, (1)
the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates in
the past should not be considered as a representation of the rates which will be
attained in the future. For an additional discussion of portfolio turnover, see
this SAI and the Company's Prospectus under "Portfolio Transactions."
Interest Rate Futures Contracts and Related Options. The Fund may buy
and sell interest rate futures contracts relating to debt securities ("debt
futures," i.e., futures relating to debt securities, and "bond index futures,"
i.e., futures relating to indices on types or groups of bonds) and write and buy
put and call options relating to interest rate futures contracts.
The Fund will not purchase or sell futures contracts and options
thereon for speculative purposes but rather only for the purpose of hedging
against changes in the market value of its portfolio securities or changes in
the market value of securities that the Sub-advisor anticipates it may wish to
include in the Fund. The Fund may sell a future or write a call or purchase a
put on a future if the Sub-advisor anticipates that a general market or market
sector decline may adversely affect the market value of any or all of the Fund's
holdings. The Fund may buy a future or purchase a call or sell a put on a future
if the Sub-advisor anticipates a significant market advance in the type of
securities it intends to purchase for the Fund at a time when the Fund is not
invested in debt securities to the extent permitted by its investment policies.
The Fund may purchase a future or a call option thereon as a temporary
substitute for the purchase of individual securities which may then be purchased
in an orderly fashion. As securities are purchased, corresponding futures
positions would be terminated by offsetting sales.
The "sale" of a debt future means the acquisition by the Fund of an
obligation to deliver the related debt securities (i.e., those called for by the
contract) at a specified price on a specified date. The "purchase" of a debt
future means the acquisition by the Fund of an obligation to acquire the related
debt securities at a specified time on a specified date. The "sale" of a bond
index future means the acquisition by the Fund of an obligation to deliver an
amount of cash equal to a specified dollar amount times the difference between
the index value at the close of the last trading day of the future and the price
at which the future is originally struck. No physical delivery of the bonds
making up the index is expected to be made. The "purchase" of a bond index
future means the acquisition by the Fund of an obligation to take delivery of
such an amount of cash.
Unlike when the Fund purchases or sells a bond, no price is paid or
received by the Fund upon the purchase or sale of the future. Initially, the
Fund will be required to deposit an amount of cash or securities equal to a
varying specified percentage of the contract amount. This amount is known as
initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying debt securities or index
fluctuates, making the future more or less valuable, a process known as mark to
the market. Changes in variation margin are recorded by the Fund as unrealized
gains or losses. At any time prior to expiration of the future, the Fund may
elect to close the position by taking an opposite position that will operate to
terminate its position in the future. A final determination of variation margin
is then made; additional cash is required to be paid by or released to the Fund
and the Fund realizes a loss or a gain.
When the Fund writes an option on a futures contract it becomes
obligated, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the term of the
option. If the Fund has written a call, it becomes obligated to assume a "long"
position in a futures contract, which means that it is required to take delivery
of the underlying securities. If it has written a put, it is obligated to assume
a "short" position in a futures contract, which means that it is required to
deliver the underlying securities. When the Fund purchases an option on a
futures contract it acquires a right in return for the premium it pays to assume
a position in a futures contract.
If the Fund writes an option on a futures contract it will be required
to deposit initial and variation margin pursuant to requirements similar to
those applicable to futures contracts. Premiums received from the writing of an
option on a future are included in the initial margin deposit. For options sold,
the Fund will segregate cash or high-quality debt securities equal to the value
of securities underlying the option unless the option is otherwise covered. The
Fund will deposit in a segregated account with its custodian bank cash or other
liquid assets, in an amount equal to the fluctuating market value of long
futures contracts it has purchased less any margin deposited on its long
position. It may hold cash or acquire such other assets for the purpose of
making these deposits.
Changes in variation margin are recorded by the Fund as unrealized
gains or losses. Initial margin payments will be deposited in the Fund's
custodian bank in an account registered in the broker's name; access to the
assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of a futures contract or an option
thereon, the Fund may elect to close the position by taking an opposite position
that will operate to terminate its position in the futures contract or option. A
final determination of variation margin is made at that time; additional cash is
required to be paid by or released to it and it realizes a loss or gain.
Although futures contracts by their terms call for the actual delivery
or acquisition of the underlying securities or cash, in most cases the
contractual obligation is so fulfilled without having to make or take delivery.
The Sub-advisor does not intend to make or take delivery of the underlying
obligation. All transactions in futures contracts and options thereon are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the instruments are traded. Although the Sub-advisor intends to buy and
sell futures contracts only on exchanges where there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular future at any particular time. In such event, it may
not be possible to close a futures contract position.
Similar market liquidity risks occur with respect to options.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that the Fund
might not be fully invested at a time when the value of the securities in which
it invests is increasing is referred to as having a "long futures position." The
Fund must operate within certain restrictions as to long and short positions in
futures contracts and options thereon under a rule (CFTC Rule) adopted by the
CFTC under the Commodity Exchange Act (CEA) to be eligible for the exclusion
provided by the CFTC Rule from registration by the Fund with the CFTC as a
"commodity pool operator" (as defined under the CEA), and must represent to the
CFTC that it will operate within such restrictions. Under these restrictions the
Fund will not, as to any positions that do not qualify as "bona fide hedging"
under the CFTC Rule, whether long, short or a combination thereof, enter into
futures contracts and options thereon for which the aggregate initial margins
and premiums exceed 5% of the fair market value of the Fund's assets after
taking into account unrealized profits and losses on options the Fund has
entered into; in the case of an option that is "in-the-money" (as defined under
the CEA), the in-the-money amount may be excluded in computing such 5%. (In
general, a call option on a futures contract is in-the-money if the value of the
future exceeds the strike, i.e., exercise, price of the call; a put option on a
futures contract is in-the-money if the value of the futures contract that is
the subject of the put is exceeded by the strike price of the put.) As to its
long positions that are used as part of the Fund's strategy and are incidental
to the Fund's activities in the underlying cash market, the "underlying
commodity value" (see below) of the Fund's futures contract and options thereon
must not exceed the sum of (i) cash set aside in an identifiable manner, or
short-term U.S. debt obligations or other U.S. dollar-denominated, high-quality,
short-term money market instruments so set aside, plus any funds deposited as
margin; (ii) cash proceeds from existing investments due in 30 days; and (iii)
accrued profits held at the futures commission merchant.
There are described above the segregated accounts that the Fund must
maintain with its custodian bank as to its options and futures contracts
activities due to Securities and Exchange Commission requirements. The Fund
will, as to its long positions, be required to abide by the more restrictive of
these SEC and CFTC requirements. The underlying commodity value of a futures
contract is computed by multiplying the size (dollar amount) of the futures
contract by the daily settlement price of the futures contract. For an option on
a futures contract, that value is the underlying commodity value of the future
underlying the option.
Since futures contracts and options thereon can replicate movements in
the cash markets for the securities in which the Fund invests without the large
cash investments required for dealing in such markets, they may subject the Fund
to greater and more volatile risks than might otherwise be the case. The
principal risks related to the use of such instruments are (i) the offsetting
correlation between movements in the market price of the portfolio investments
(held or intended) being hedged and in the price of the futures contract or
option may be imperfect; (ii) possible lack of a liquid secondary market for
closing out futures or options positions; (iii) the need for additional
portfolio management skills and techniques; (iv) losses due to unanticipated
market price movements; and (v) the bankruptcy or failure of a futures
commission merchant holding margin deposits made by the Fund and the Fund's
inability to obtain repayment of all or part of such deposits. For a hedge to be
completely effective, the price change of the hedging instrument should equal
the price change of the security being hedged. Such equal price changes are not
always possible because the investment underlying the hedging instrument may not
be the same investment that is being hedged. The Sub-advisor will attempt to
create a closely correlated hedge, but hedging activity may not be completely
successful in eliminating market value fluctuation. The ordinary spreads between
prices in the cash and futures markets, due to the differences in the natures of
those markets, are subject to the following factors which may create
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest trends by the Sub-advisor may still not result in a successful
transaction. The Sub-advisor may be incorrect in its expectations as to the
extent of various interest rate movements or the time span within which the
movements take place.
The risk of imperfect correlation between movements in the price of a
bond index future and movements in the price of the securities that are the
subject of the hedge increases as the composition of the Fund diverges from the
securities included in the applicable index. The price of the bond index future
may move more than or less than the price of the securities being hedged. If the
price of the bond index future moves less than the price of the securities that
are the subject of the hedge, the hedge will not be fully effective, but if the
price of the securities being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the futures contract. If the price of the
futures contract moves more than the price of the security, the Fund will
experience either a loss or a gain on the futures contract that will not be
completely offset by movements in the price of the securities that are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of the securities being hedged and movements in the price of the
bond index futures, the Fund may buy or sell bond index futures in a greater
dollar amount than the dollar amount of securities being hedged if the
historical volatility of the prices of such securities being hedged is less than
the historical volatility of the bond index. It is also possible that, where the
Fund has sold futures contracts to hedge its securities against a decline in the
market, the market may advance and the value of securities held in the Fund may
decline. If this occurred, the Fund would lose money on the futures contract and
also experience a decline in value in its portfolio securities. However, while
this could occur for a brief period or to a very small degree, over time the
value of a portfolio of debt securities will tend to move in the same direction
as the market indices upon which the futures contracts are based.
Where bond index futures are purchased to hedge against a possible
increase in the price of bonds before the Fund is able to invest in securities
in an orderly fashion, it is possible that the market may decline instead; if
the Fund then concludes not to invest in securities at that time because of
concern as to possible further market decline or for other reasons, it will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities it had anticipated purchasing.
The risks of investment in options on bond indices may be greater than
options on securities. Because exercises of bond index options are settled in
cash, when the Fund writes a call on a bond index it cannot provide in advance
for its potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of its writing position by
holding a portfolio of bonds similar to those on which the underlying index is
based. However, the Fund cannot, as a practical matter, acquire and hold a
portfolio containing exactly the same securities as the underlying index and, as
a result, bears a risk that the value of the securities held will vary from the
value of the index. Even if the Fund could assemble a portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund, as the call writer, will
not learn that it has been assigned until the next business day at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security because there, the
writer's obligation is to deliver the underlying security, not to pay its value
as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value of the
exercise date; and by the time it learns that it has been assigned, the index
may have declined with a corresponding decline in the value of its portfolio.
This "timing risk" is an inherent limitation on the ability of index call
writers to cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Fund must pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest more than 15% of its assets in illiquid investments; or
2. .....Buy securities on margin or sell short (unless it owns, or by
virtue of its ownership of, other securities has the right to obtain securities
equivalent in kind and amount to the securities sold); however, the Fund may
make margin deposits in connection with the use of any financial instrument or
any transaction in securities permitted under its investment policies;
3. .....Invest for control or for management; or
4. .....Invest in the securities of other investment companies except in
compliance with the Investment Company Act of 1940. Duplicate fees may result
from such purchases.
<PAGE>
ASAF FEDERATED HIGH YIELD BOND FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income by investing primarily in fixed income securities. The fixed
income securities in which the Fund intends to invest are lower-rated corporate
debt obligations.
Investment Policies:
Corporate Debt Securities. The Fund invests primarily in corporate debt
securities. The corporate debt obligations in which the Fund intends to invest
are expected to be lower-rated. For a discussion of the special risks associated
with lower-rated securities, see the Company's Prospectus and this SAI under
"Certain Risk Factors and Investment Methods." Corporate debt obligations in
which the Fund invests may bear fixed, floating, floating and contingent, or
increasing rates of interest. They may involve equity features such as
conversion or exchange rights, warrants for the acquisition of common stock of
the same or a different issuer, participations based on revenues, sales or
profits, or the purchase of common stock in a unit transaction (where corporate
debt securities and common stock are offered as a unit).
U.S. Government Obligations. The types of U.S. government obligations in
which the Fund may invest include, but are not limited to, direct obligations of
the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities may be backed by: the full faith and credit
of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the
discretionary authority of the U.S. government to purchase certain obligations
of agencies or instrumentalities; or the credit of the agency or instrumentality
issuing the obligations. For an additional discussion of the types of U.S.
government obligations in which the Fund may invest, see the Company's
Prospectus under "Investment Objectives and Policies."
Restricted Securities. The Fund expects that any restricted securities
would be acquired either from institutional investors who originally acquired
the securities in private placements or directly from the issuers of the
securities in private placements. Restricted securities are generally subject to
legal or contractual delays on resale. Restricted securities and securities that
are not readily marketable may sell at a discount from the price they would
bring if freely marketable. For a discussion of illiquid and restricted
securities and certain risks involved therein, see the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
The Directors of the Company have promulgated guidelines with respect
to illiquid securities.
When-Issued and Delayed Delivery Transactions. The Fund may purchase
fixed-income securities on a when-issued or delayed delivery basis. The Fund may
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Fund's investment objective
and policies, not for investment leverage. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. Settlement dates may be a month or more after entering into these
transactions, and the market values of the securities purchased may vary from
the purchase prices. These transactions are made to secure what is considered to
be an advantageous price and yield for the Fund.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Fund sufficient to make payment for the
securities to be purchased are segregated at the trade date. These securities
are marked to market daily and will maintain until the transaction is settled.
For an additional discussion of when-issued securities and certain risks
involved therein, see this SAI under "Certain Risk Factors and Investment
Methods."
Repurchase Agreements. The Fund will require its custodian to take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could receive
less than the repurchase price on any sale of such securities. In the event that
such a defaulting seller filed for bankruptcy or became insolvent, disposition
of such securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for custody of the
Fund's portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are deemed by the Sub-advisor to be creditworthy, pursuant
to guidelines established by the Directors of the Company. For an additional
discussion of repurchase agreements and certain risks involved therein, see the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. In order to generate additional income,
the Fund may lend its securities to brokers/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
Sub-advisor has determined are creditworthy. The collateral received when the
Fund lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Fund. During the time portfolio securities are on loan, the
borrower pays the Fund any dividends or interest paid on such securities. Loans
are subject to termination at the option of the Fund or the borrower. The Fund
may pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or cash
equivalent collateral to the borrower or placing broker. The Fund does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements. When effecting reverse repurchase agreements, liquid
assets of the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date. These securities
are marked to market daily and are maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to ensure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. For a discussion of reverse repurchase agreements and certain risks
involved therein, see the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Portfolio Turnover. The Fund may experience greater portfolio turnover than
would be expected with a portfolio of higher-rated securities. For an additional
discussion of portfolio turnover, see this SAI and the Company's Prospectus
under "Portfolio Transactions."
Adverse Legislation. In 1989, legislation was enacted that required
federally insured savings and loan associations to divest their holdings of
lower-rated bonds by 1994. This legislation also created the Resolution Trust
Corporation (the "RTC"), which disposed of a substantial portion of lower-rated
bonds held by failed savings and loan associations. The reduction of the number
of institutions empowered to purchase and hold lower-rated bonds, and the
divestiture of bonds by these institutions and the RTC, have had an adverse
impact on the overall liquidity of the market for such bonds. Federal and state
legislatures and regulators have and may continue to propose new laws and
regulations designed to limit the number or type of institutions that may
purchase lower-rated bonds, reduce the tax benefits to issuers of such bonds, or
otherwise adversely impact the liquidity of such bonds. The Fund cannot predict
the likelihood that any of these proposals will be adopted, or their potential
impact on the liquidity of lower-rated bonds.
Foreign Securities. For a discussion of certain risks involved with
investing in foreign securities, including currency risks, see this SAI and the
Company's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restriction and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest more than 15% of the value of its net assets in
securities that are not readily marketable, including repurchase agreements
providing for settlement in more than seven days after notice. The Directors of
the Company, or the Investment Manager or the Sub-advisor acting pursuant to
authority delegated by the Directors, may determine that a readily available
market exists for certain securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, or any successor to such rule, and therefore
that such securities are not subject to the foregoing limitation;
2........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3........Purchase any securities on margin but may obtain such short-term
credits as may be necessary for the clearance of transactions;
4........Invest more than 10% of the value of its total assets in foreign
securities which are not publicly traded in the United States;
5........Make short sales of securities or maintain short positions,
unless: during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for securities of the
same issue as, and equal in amount to, the securities sold short; and not more
than 10% of the Fund's net assets (taken at current value) is held as collateral
for such sales at any one time; or
6. ......Purchase securities of a company for the purpose of exercising
control or management. However, the Fund may invest in up to 10% of the voting
securities of any one issuer and may exercise its voting powers consistent with
the best interests of the Fund. From time to time, the Fund, together with other
investment companies advised by subsidiaries or affiliates of the Sub-advisor,
may together buy and hold substantial amounts of a company's voting stock. All
such stock may be voted together. In some such cases, the Fund and the other
investment companies might collectively be considered to be in control of the
company in which they have invested. In some cases, directors, agents,
employees, officers, or others affiliated with or acting for the Fund, the
Sub-advisor, or affiliated companies might possibly become directors of
companies in which the Fund holds stock.
ASAF TOTAL RETURN BOND FUND:
Investment Objective: The investment objective of the Fund is to seek to
maximize total return, consistent with preservation of capital. The Sub-advisor
will seek to employ prudent investment management techniques, especially in
light of the broad range of investment instruments in which the Fund may invest.
Investment Policies:
Borrowing. The Fund may borrow for temporary administrative purposes.
This borrowing may be unsecured. The Investment Company Act of 1940 requires the
Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of its
holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of the Fund.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
In addition to the above, the Fund may enter into reverse repurchase
agreements and mortgage dollar rolls. A reverse repurchase agreement involves
the sale of a portfolio-eligible security by the Fund, coupled with its
agreement to repurchase the instrument at a specified time and price. In a
"dollar roll" transaction the Fund sells a mortgage-related security (such as a
GNMA security) to a dealer and simultaneously agrees to repurchase a similar
security (but not the same security) in the future at a pre-determined price. A
"dollar roll" can be viewed, like a reverse repurchase agreement, as a
collateralized borrowing in which the Fund pledges a mortgage-related security
to a dealer to obtain cash. Unlike in the case of reverse repurchase agreements,
the dealer with which the Fund enters into a dollar roll transaction is not
obligated to return the same securities as those originally sold by the Fund,
but only securities which are "substantially identical." To be considered
"substantially identical," the securities returned to the Fund generally must:
(1) be collateralized by the same types of underlying mortgages; (2) be issued
by the same agency and be part of the same program; (3) have a similar original
stated maturity; (4) have identical net coupon rates; (5) have similar maturity:
(4) have identical net coupon rates; (5) have similar market yields (and
therefore price); and (6) satisfy "good delivery" requirements, meaning that the
aggregate principal amounts of the securities delivered and received back must
be within 2.5% of the initial amount delivered. The Fund's obligations under a
dollar roll agreement must be covered by cash or other liquid assets equal in
value to the securities subject to repurchase by the Fund, maintained in a
segregated account.
Both dollar roll and reverse repurchase agreements will be subject to
the Fund's limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% of the Fund's total assets.
Furthermore, because dollar roll transactions may be for terms ranging between
one and six months, dollar roll transactions may be deemed "illiquid" and
subject to the Fund's overall limitations on investments in illiquid securities.
Corporate Debt Securities. The Fund's investments in U.S. dollar- or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Fund, or,
if unrated, are in the Sub-advisor's opinion comparable in quality to corporate
debt securities in which the Fund may invest. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Among the corporate bonds in which the Fund may invest are convertible
securities. A convertible security is a bond, debenture, note, or other security
that entitles the holder to acquire common stock or other equity securities of
the same or a different issuer. A convertible security generally entitles the
holder to receive interest paid or accrued until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities.
Convertible securities rank senior to common stock in a corporation's capital
structure and, therefore, generally entail less risk than the corporation's
common stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed-income security.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the Fund
is called for redemption, the Fund will be required to permit the issuer to
redeem the security and convert it to underlying common stock, or will sell the
convertible security to a third party. The Fund generally would invest in
convertible securities for their favorable price characteristics and total
return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Fund (i.e., rated B or better by Moody's or S&P)
are described as "speculative" by both Moody's and S&P. Investment in
lower-rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as high risk and predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The market for these
securities is relatively new, and many of the outstanding high yield securities
have not endured a major business recession. A long-term track record on default
rates, such as that for investment grade corporate bonds, does not exist for
this market. Analysis of the creditworthiness of issuers of debt securities that
are high yield may be more complex than for issuers of higher quality debt
securities.
High yield, high risk securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The price of high yield securities have been found to be less
sensitive to interest-rate adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If an
issuer of high yield securities defaults, in addition to risking payment of all
or a portion of interest and principal, the Fund may incur additional expenses
to seek recovery. In the case of high yield securities structured as zero-coupon
or pay-in-kind securities, their market prices are affected to a greater extent
by interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield, high risk securities are
traded may be less liquid than the market for higher grade securities. Less
liquidity in the secondary trading market could adversely affect the price at
which the Fund could sell a high yield security, and could adversely affect the
daily net asset value of the shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield securities especially in a thinly-traded market. When
secondary markets for high yield securities are less liquid than the market for
higher grade securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is less reliable, objective
data available. The Sub-advisor seeks to minimize the risks of investing in all
securities through diversification, in-depth credit analysis and attention to
current developments in interest rates and market conditions. For an additional
discussion of certain risks involved in lower-rated debt securities, see this
SAI and the Company's Prospectus under "Certain Risk Factors and Investment
Objectives."
Participation on Creditors Committees. The Fund may from time to time
participate on committees formed by creditors to negotiate with the management
of financially troubled issuers of securities held by the Fund. Such
participation may subject the Fund to expenses such as legal fees and may make
the Fund an "insider" of the issuer for purposes of the federal securities laws,
and therefore may restrict the Fund's ability to trade in or acquire additional
positions in a particular security when it might otherwise desire to do so.
Participation by the Fund on such committees also may expose the Fund to
potential liabilities under the federal bankruptcy laws or other laws governing
the rights of creditors and debtors. The Fund will participate on such
committees only when the Sub-advisor believes that such participation is
necessary or desirable to enforce the Fund's rights as a creditor or to protect
the value of securities held by the Fund.
Mortgage-Related Securities. The Fund may invest in mortgage-backed
securities. Mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers, including mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations (see "Mortgage
Pass-Through Securities"). The Fund may also invest in debt securities which are
secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owned on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-though securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PC's") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-though pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such nongovernmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Company's and the Trust's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. The Fund may
buy mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Sub-advisor determines that the securities meet the Company's and
the Trust's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. The Fund will not purchase mortgage-related
securities or any other assets which in the Sub-advisor's opinion are illiquid
if, as a result, more than 15% of the value of the Fund's total assets will be
illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund's
industry concentration restrictions, set forth in this SAI under "Fundamental
Investment Restrictions," by virtue of the exclusion from that test available to
all U.S. Government securities. In the case of privately issued mortgage-related
securities, the Fund takes the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or the Department of Veterans Affairs. In the case of
private issue mortgage-related securities whose underlying assets are neither
U.S. Government securities nor U.S. Government-insured mortgages, to the extent
that real properties securing such assets may be located in the same
geographical region, the security may be subject to a greater risk of default
that other comparable securities in the event of adverse economic, political or
business developments that may affect such region and ultimately, the ability of
residential homeowners to make payments of principal and interest on the
underlying mortgages.
.........Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
.........CMOs are structured into multiple classes, each bearing a
different stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
or principal because of the sequential payments.
.........In a typical CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of the CMO bonds ("Bonds"). Proceeds of the
Bond offering are used to purchase mortgages or mortgage pass-through
certificates ("Collateral"). The Collateral is pledged to a third party trustee
as security for the Bonds. Principal and interest payments from the Collateral
are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B,
and C Bonds all bear current interest. Interest on the Series Z Bond is accrued
and added to principal and a like amount is paid as principal on the Series A,
B, or C Bond currently being paid off. When the Series A, B, and C Bonds are
paid in full, interest and principal on the Series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
.........FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
.........If collection of principal (including prepayments) on the
mortgage loans during any semiannual payment period is not sufficient to meet
FHLMC's minimum sinking fund obligation on the next sinking fund payment date,
FHLMC agrees to make up the deficiency from its general funds.
.........Criteria for the mortgage loans in the pool backing the FHLMC CMOs
are identical to those of FHLMC PCs. FHLMC has the right to substitute
collateral in the event of delinquencies and/or defaults.
..................For an additional discussion of mortgage-backed
securities and certain risks involved therein, see this SAI and the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
.........Other Mortgage-Related Securities. Other mortgage-related
securities include securities other than those described above that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property, including CMO residuals or stripped
mortgage-backed securities. Other mortgage-related securities may be equity or
debt securities issued by agencies or instrumentalities of the U.S. Government
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, homebuilders, mortgage banks, commercial banks,
investment banks, partnerships, trusts and special purpose entities of the
foregoing.
.........CMO Residuals. CMO residuals are derivative mortgage securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
.........The cash flow generated by the mortgage assets underlying a
series of CMOs is applied first to make required payments of principal and
interest on the CMOs and second to pay the related administrative expenses of
the issuer. The residual in a CMO structure generally represents the interest in
any excess cash flow remaining after making the foregoing payments. Each payment
of such excess cash flow to a holder of the related CMO residual represents
income and/or a return of capital. The amount of residual cash flow resulting
from a CMO will depend on, among other things, the characteristics of the
mortgage assets, the coupon rate of each class of CMO, prevailing interest
rates, the amount of administrative expenses and the prepayment experience on
the mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets, in
the same manner as an interest-only ("IO") class of stripped mortgage-backed
securities. See "Other Mortgage-Related Securities -- Stripped Mortgage-Backed
Securities." In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances the Fund may
fail to recoup fully its initial investment in a CMO residual.
.........CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Fund's limitations on investment in illiquid securities.
<PAGE>
.........Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
.........SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, which the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
.........Although SMBS are purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, these securities may be deemed
"illiquid" and subject to the Fund's limitations on investment in illiquid
securities.
.........Other Asset-Backed Securities. Similarly, the Sub-advisor expects
that other asset-backed securities (unrelated to mortgage loans) will be offered
to investors in the future. Several types of asset-backed securities may be
offered to investors, including Certificates for Automobile Receivables. For a
discussion of automobile receivables, see this SAI under "Certain Risk Factors
and Investment Methods." Consistent with the Fund's investment objectives and
policies, the Sub-advisor also may invest in other types of asset-backed
securities.
Foreign Securities. The Fund may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers (including
preferred or preference stock), certain foreign bank obligations (see "Bank
Obligations") and U.S. dollar- or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The Fund may invest up to 20%
of its assets in securities denominated in foreign currencies, and may invest
beyond this limit in U.S. dollar-denominated securities of foreign issuers. The
Fund may invest up to 10% of its assets in securities of issuers based in
emerging market countries. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. For a discussion of certain risks involved in
foreign investments in general, and the special risks of investing in developing
countries, see this SAI and the Company's Prospectus under "Certain Risk Factors
and Investment Methods."
The Fund also may purchase and sell foreign currency options and
foreign currency futures contracts and related options (see ""Derivative
Instruments"), and enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign exchange
rates in the purchase and sale of securities.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the tine of the contract. These contracts may be bought or sold to protect the
Fund against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or, to increase
exposure to a particular foreign currency. Open positions in forward contracts
are covered by the segregation with the Fund's custodian of cash or liquid
assets and are marked to market daily. Although such contracts are intended to
minimize the risk of loss due to a decline on the value of the hedged
currencies, at the same time, they tend to limit any potential gain which might
result should the value of such currencies increase.
Brady Bonds. The Fund may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented in a number of countries, including in Argentina, Bolivia,
Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,
Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil
has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan in the future.
Brady Bonds have been issued only recently, and accordingly do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one year's
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Fund may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Fund to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Funds invest include
certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Fund will not invest in fixed time deposits which (1) are
not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Fund will limit its investments in United States bank obligations
to obligations of United States bank (including foreign branches) which have
more than $1 billion in total assets at the time of investment and are member of
the Federal Reserve System, are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. The
Fund also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess $1 billion.
The Fund will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Fund may invest. Subject to the
Fund's limitation on concentration of no more than 25% of its assets in the
securities of issuers in particular industry, there is no limitation on the
amount of the Fund's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any United
States Government agency or instrumentality.
Derivative Instruments. In pursuing its individual objective, the Fund
may, as described in the Company's Prospectus, purchase and sell (write) both
put options and call options on securities, securities indices, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts ("future
options") for hedging purposes. The Fund also may enter into swap agreements
with respect to foreign currencies, interest rates and indices of securities. If
other types of financial instruments, including other types of options, futures
contracts, or futures options are traded in the future, the Fund may also use
those instruments, provided that the Directors of the Company determine that
their use is consistent with the Fund's investment objective, and provided that
their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Trust (i.e., that written call or
put options will be "covered" or "secured" and that futures and futures options
will be used only for hedging purposes).
Options on Securities and Indices. The Fund may purchase and sell both
put and call options on debt or other securities or indices in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Fund will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Fund. For a call option on an index,
the option is covered if the Fund maintains with its custodian cash or cash
equivalents equal to the contract value. A call option is also covered if the
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call
written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. A put option on a
security or an index is "covered" if the Fund maintains cash or cash equivalents
equal to the exercise price in a segregated account with its custodian. A put
option is also covered if the Fund holds a put on the same security or index as
the put written where the exercise price of the put held is (i) equal to or
greater than the exercise price of the put written, or (ii) less than the
exercise price of the put written, provided the difference is maintained by the
Fund in cash or cash equivalents in a segregated account with its custodian.
If an option written by the Fund expires, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by the Fund expires unexercised, the Fund realizes a capital
loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.
<PAGE>
The Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or if it is more, the Fund will realize a capital loss.
If the premium received from a closing sale transaction is more than the premium
paid to purchase the option, the Fund will realize a capital gain or, if it is
less, the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an
asset of the Fund. The premium received for a option written by the Fund is
recorded as a deferred credit. The value of an option purchased or written is
marked to market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices. For a discussion
of certain risks involved in options, see this SAI and the Company's Prospectus
under "Certain Risk Factors and Investment Methods."
Foreign Currency Options. The Fund may buy or sell put and call options
on foreign currencies either on exchanges or in the over-the-counter market. A
put option on a foreign currency gives the purchaser of the option the right to
sell a foreign currency at the exercise price until the option expires. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Fund to reduce foreign currency risk using
such options. Over-the-counter options differ from traded options in that they
are two-party contracts with price and other terms negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options.
Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate, foreign currency or index futures contracts, as specified in the
Company's Prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indices (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Company and the Fund avoid being deemed a "commodity
pool" or a "commodity pool operator," the Fund intends generally to limit its
use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Fund might use futures contracts to hedge against
anticipated changes in interest rates that might adversely affect either the
value of the Fund's securities or the price of the securities which the Fund
intends to purchase. The Fund's hedging activities may include sales of futures
contracts as an offset against the effect or expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce the Fund's exposure to interest rate fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Fund will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by the Fund is valued daily at the official settlement price of
the exchange on which it is traded. Each day the Fund pays or receives cash,
called "variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation margin does
not represent a borrowing or loan by the Fund but is instead a settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, the Fund will mark
to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options. In general, the
Funds intend to enter into positions in futures contracts and related options
only for "bona fide hedging" purposes. With respect to positions in futures and
related options that do not constitute bona fide hedging positions, the Fund
will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash or other liquid assets
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Fund may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held by the Fund.
When selling a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).
When selling a call option on a futures contract, the Fund will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to market on a daily basis) cash or other liquid
assets that equal the purchase price of the futures contract, less any margin on
deposit. Alternatively, the Fund may cover the position either by entering into
a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same or higher than the strike price of
the put option sold by the Fund.
<PAGE>
Swap Agreements. The Fund may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Company's Prospectus under "Investment
Objectives and Policies." The Fund's obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash or other liquid assets to
avoid any potential leveraging of the Fund's portfolio. The Fund will not enter
into a swap agreement with any single party if the net amount owned or to be
received under existing contracts with that party would exceed 5% of the Fund's
assets.
Whether the Fund's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of longer than seven days,
swap agreements may be considered to be illiquid. Moreover, the Fund bears the
risk of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. The
Sub-advisor will cause the Fund to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Fund's repurchase agreement guidelines. Certain
restrictions imposed on the Funds by the Internal Revenue Code may limit the
Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants." To be eligible,
natural persons and most other entities must have total assets exceeding $10
million; commodity pools and employee benefit plans must have assets exceeding
$5 million. In addition, an eligible swap transaction must meet three
conditions. First, the swap agreement may not be part of a fungible class of
agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and partnerships may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individual tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is related to another economic indicator or
financial market index. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by such an unrelated indicator. Indexed securities may include a
multiplier that multiplies the indexed element by a specified factor and,
therefore, the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Sub-advisor analyzes these
securities in its overall assessment of the effective duration of the Fund's
portfolio in an effort to monitor the Fund's interest rate risk.
Foreign Currency Exchange-Related Securities. The Fund may invest in
foreign currency warrants, principal exchange rate linked securities and
performance indexed paper. For a description of these instruments, see this SAI
under "Certain Risk Factor and Investment Methods."
Warrants to Purchase Securities. The Fund may invest in or acquire
warrants to purchase equity or fixed-income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit the Fund to buy additional bonds at the favorable
rate or to sell the warrants at a profit. If interest rates rise, the warrants
would generally expire with no value.
Lending Portfolio Securities. For the purpose of achieving income, the
Fund may lend its portfolio securities, provided (1) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned, (2) the Fund may at any time call the loan and obtain the
return of securities loaned, (3) the Fund will receive any interest or dividends
received on the loaned securities, and (4) the aggregate value of the securities
loaned will not at any time exceed one-third of the total assets of the Fund.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest more than 15% of the assets of the Fund (taken at
market value at the time of the investment) in "illiquid securities;" illiquid
securities being defined to include securities subject to legal or contractual
restrictions on resale (which may include private placements), repurchase
agreements maturing in more than seven days, certain options traded over the
counter that the Fund has purchased, securities being used to cover options the
Fund has written, securities for which market quotations are not readily
available, or other securities which legally or in the Sub-advisor's option may
be deemed illiquid;
2........Purchase securities for the Fund from, or sell portfolio
securities to, any of the officers and directors or trustees of the Company, the
Trust, the Investment Manager or the Sub-advisor;
3........Invest more than 5% of the assets of the Fund (taken at market
value at the time of investment) in any combination of interest only, principal
only, or inverse floating rate securities;
4........Invest in companies for the purpose of exercising management or
control;
5........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
6........Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of portfolio securities
and (ii) the Fund may make margin deposits in connection with futures contracts
or other permissible investments;
7........Purchase or sell oil, gas or other mineral programs;
8........Maintain a short position, or purchase, write or sell puts,
calls, straddles, spreads or combinations thereof, except as set forth in the
Company's Prospectus and this SAI for transactions in options, futures, and
options on futures transactions arising under swap agreements or other
derivative instruments; or
9........Pledge, mortgage or hypothecate its assets, except as may be
necessary in connection with permissible borrowings or investments; and then
such pledging, mortgaging or hypothecating may not exceed 33 1/3% of the Fund's
total assets at the time of borrowing or investment. The deposit of assets in
escrow in connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for future
contracts and commitments entered into under swap agreements or other derivative
instruments, will not be deemed to be pledges of the Portfolio's assets.
<PAGE>
ASAF JPM MONEY MARKET FUND:
Investment Objective: The investment objective of the Fund is to seek high
current income and maintain high levels of liquidity.
Investment Policies:
Bank Obligations. The Fund will not invest in bank obligations for which
any affiliate of the Sub-advisor is the ultimate obligor or accepting bank.
Asset-Backed Securities. The asset-backed securities in which the Fund
may invest are subject to the Fund's overall credit requirements. However,
asset-backed securities, in general, are subject to certain risks. Most of these
risks are related to limited interests in applicable collateral. For example,
credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested. For a
discussion of asset-backed securities and the risks involved therein see the
Company's Prospectus and this SAI under "Certain Risk Factors and Investment
Methods."
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Directors of the Company, the Fund
may invest in certain synthetic instruments. Such instruments generally involve
the deposit of asset-backed securities in a trust arrangement and the issuance
of certificates evidencing interests in the trust. The certificates are
generally sold in private placements in reliance on Rule 144A of the Securities
Act of 1933 (without registering the certificates under such Act).
Repurchase Agreements. Subject to guidelines promulgated by the
Directors of the Company, the Fund may enter into repurchase agreements. The
repurchase agreements into which the Fund may enter will usually be short, from
overnight to one week, and at no time will the Fund invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. For a discussion of
repurchase agreements and certain risks involved therein, see the Company's
Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Fund invests the proceeds of
borrowings under reverse repurchase agreements. The Fund will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Fund will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Fund may not enter into reverse repurchase agreements exceeding
in the aggregate one-third of the market value of its total assets, less
liabilities other than the obligations created by reverse repurchase agreements.
The Fund will establish and maintain with its custodian a separate account with
a segregated portfolio of securities in an amount at least equal to its purchase
obligations under its reverse repurchase agreements. If interest rates rise
during the term of a reverse repurchase agreement, such reverse repurchase
agreement may have a negative impact on the Fund's ability to maintain a net
asset value of $1.00 per share.
Foreign Securities. The Fund may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, see the Company's Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Subject to the Fund's restrictions on
lending, loans will be subject to termination by the Fund in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. The Fund may pay reasonable finders' and custodial fees in
connection with a loan. In making a loan, the Fund will consider all facts and
circumstances surrounding the making of the loan, including the creditworthiness
of the borrowing financial institution. The Fund will not make any loans in
excess of one year. The Fund will not lend its securities to any officer,
employee, Director or Trustee of the Company, the Trust, the Investment Manager,
any Sub-advisor of the Company or the Trust, or the Administrator unless
otherwise permitted by applicable law.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are not "fundamental" restrictions and may be changed by
the Directors of the Company without shareholder approval. The Fund will not:
1........Invest in companies for the purpose of exercising management or
control;
2........Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940;
3........Purchase securities on margin, make short sales of securities,
or maintain a short position, provided that this restriction shall not be deemed
to be applicable to the purchase or sale of when-issued securities or of
securities for delivery at a future date;
4........Acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with a duration of
over seven calendar days, if as a result thereof, more than 10% of the market
value of the Fund's total assets would be in investments which are illiquid;
5........Mortgage, pledge or hypothecate any assets, except as may be
necessary in connection with permissible borrowings or investments; and then
such mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Fund's
total assets at the time of borrowing or investment;
6........Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the Company's Prospectus
and this SAI; or
7........Purchase or sell interests in oil, gas or other mineral
exploration or development programs.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Investment Restrictions. Each Fund and Portfolio has adopted the following
fundamental investment restrictions which may not be changed without shareholder
approval.
1. Senior Securities. No Fund or Portfolio may issue senior securities,
except as permitted under the Investment Company Act of 1940 (the "1940 Act").
2. Borrowing. No Fund or Portfolio may borrow money, except that a Fund
or Portfolio may (i) borrow money for non-leveraging, temporary or emergency
purposes, and (ii) engage in reverse repurchase agreements and make other
investments or engage in other transactions, which may involve a borrowing, in a
manner consistent with the Fund or Portfolio's investment objective and
policies; provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Fund or Portfolio's assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. Subject to the above limitations, the Funds and
Portfolios may borrow from banks or other persons to the extent permitted by
applicable law.
3. Underwriting. No Fund or Portfolio may underwrite securities issued
by other persons, except to the extent that the Fund or Portfolio may be deemed
to be an underwriter (within the meaning of the Securities Act of 1933) in
connection with the purchase and sale of portfolio securities.
4. Real Estate. No Fund or Portfolio may purchase or sell real estate
unless acquired as a result of the ownership of securities or other instruments;
provided that this restriction shall not prohibit a Fund or Portfolio from
investing in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate business.
5. Commodities. No Fund or Portfolio may purchase or sell physical
commodities unless acquired as a result of the ownership of securities or
instruments; provided that this restriction shall not prohibit a Fund or
Portfolio from (i) engaging in permissible options and futures transactions and
forward foreign currency contracts in accordance with the Fund's or Portfolio's
investment policies, or (ii) investing in securities of any kind.
6. Lending. No Fund or Portfolio may make loans, except that a Fund or
Portfolio may (i) lend portfolio securities in accordance with the Fund or
Portfolio's investment policies in amounts up to 33 1/3% of the total assets of
the Fund or Portfolio taken at market value, (ii) purchase money market
securities and enter into repurchase agreements, and (iii) acquire publicly
distributed or privately placed debt securities and purchase debt.
7. Industry Concentration. No Fund or Portfolio may purchase any
security if, as a result, more than 25% of the value of the Fund or Portfolio's
assets would be invested in the securities of issuers having their principal
business activities in the same industry; provided that this restriction does
not apply to investments in obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities (or repurchase agreements
with respect thereto).
8. Diversification. No Fund or Portfolio may, with respect to 75% of
the value of its total assets, purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, (i) more than 5% of the value of the Fund's
or Portfolio's total assets would be invested in the securities of such issuer,
or (ii) more than 10% of the outstanding voting securities of such issuer would
be held by the Fund or Portfolio.
Notes to Investment Restrictions. The following notes should be read in
conjunction with the above fundamental investment restrictions. These notes are
not fundamental policies and may be changed without shareholder approval.
o Applicable to All Funds and Portfolios: If a restriction on a Fund's
or Portfolio's investments is adhered to at the time an investment is made, a
subsequent change in the percentage of Fund or Portfolio assets invested in
certain securities or other instruments, or change in average duration of the
Fund's or Portfolio's investment portfolio, resulting from changes in the value
of the Fund's or Portfolio's total assets, will not be considered a violation of
the restriction; provided, however, that the asset coverage requirement
applicable to borrowings shall be maintained in the manner contemplated by
applicable law.
o Applicable to All Funds and Portfolios: With respect to investment
restrictions (2) and (6), a Fund or Portfolio will not borrow or lend to any
other fund unless it applies for and receives an exemptive order from the
Securities and Exchange Commission (the "Commission"), if so required, or the
Commission issues rules permitting such transactions. There is no assurance the
Commission would grant any order requested by the Fund or Portfolio or
promulgate any rules allowing the transactions.
o Applicable Only to the ASAF Founders International Small
Capitalization Fund and the ASAF Founders Small Capitalization Fund: With
respect to investment restriction (7), the Funds use industry classifications
based, where applicable, on Bridge Information Systems, Reuters, the S&P Stock
Guide published by Standard & Poor's, information obtained from Bloomberg L.P.
and Moody's International, and/or the prospectus of the issuing company.
Selection of an appropriate industry classification resource will be made by the
Sub-advisor in the exercise of its reasonable discretion.
o Applicable Only to the ASAF T. Rowe Price International Equity Fund
(and corresponding Portfolio) and the ASAF T. Rowe Price Small Company Value
Fund: With respect to investment restrictions (2) and (6), the Fund and
Portfolio have no current intention of borrowing or lending to any other fund.
For purposes of investment restriction (6), the Fund and Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
<PAGE>
CERTAIN RISK FACTORS AND INVESTMENT METHODS
Some of the investment instruments, techniques and methods which may be
used by one or more of the Funds and the risks attendant thereto are described
below. Other risk factors and investment methods may be described in the
Company's Prospectus under "Investment Programs of the Funds" and "Certain Risk
Factors and Investment Methods," and in this SAI under "Investment Objectives
and Policies." The risk factors and investment methods described below only
apply to those Funds or Portfolios that may invest in such securities or use
such investment methods. The below references to the investment methods used by
the Feeder Funds apply equally to the Funds' corresponding Portfolios.
Debt Obligations. Yields on short, intermediate, and long-term
securities are dependent on a variety of factors, including, the general
conditions of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in prevailing
interest rates will generally reduce the value of debt investments, and a
decline in interest rates will generally increase the value of debt investments.
The ability of a Fund to achieve its investment objective is also dependent on
the continuing ability of the issuers of the debt securities in which a Fund
invests to meet their obligations for the payment of interest and principal when
due.
Special Risks Associated with Low-Rated and Comparable Unrated
Securities. Low-rated and comparable unrated securities, while generally
offering higher yields than investment-grade securities with similar maturities,
involve greater risks, including the possibility of default or bankruptcy. They
are regarded as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal. The special risk considerations in
connection with such investments are discussed below. See the Appendix of this
Statement for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated
and comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience
appreciation when interest rates decline and depreciation when interest rates
rise. The market values of low-rated and comparable unrated securities tend to
reflect individual corporate developments to a greater extent than do
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. Low-rated and comparable unrated securities also tend
to be more sensitive to economic conditions than are higher-rated securities.
During an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of low-rated and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, a Fund might incur
additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased fluctuation in the market
prices of low-rated and comparable unrated securities and thus in a Fund's net
asset value.
As previously stated, the value of such a security will
decrease in a rising interest rate market and accordingly, so will a Fund's net
asset value. If a Fund experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of some
high-yield securities (discussed below), a Fund may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce a Fund's
asset base over which expenses could be allocated and could result in a reduced
rate of return for a Fund.
Payment Expectations. Low-rated and comparable unrated
securities typically contain redemption, call, or prepayment provisions which
permit the issuer of securities containing such provisions to, at their
discretion, redeem the securities. During periods of falling interest rates,
issuers of high-yield securities are likely to redeem or prepay the securities
and refinance them with debt securities with a lower interest rate. To the
extent an issuer is able to refinance the securities, or otherwise redeem them,
a Fund may have to replace the securities with a lower-yielding security, which
would result in a lower return for a Fund.
Issuers of lower-rated securities are often highly leveraged,
so that their ability to service their debt obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
Such issuers may not have more traditional methods of financing available to
them and may be unable to repay outstanding obligations at maturity by
refinancing. The risk of loss due to default in payment of interest or repayment
of principal by such issuers is significantly greater because such securities
frequently are unsecured and subordinated to the prior payment of senior
indebtedness.
Credit Ratings. Credit ratings issued by credit-rating
agencies attempt to evaluate the safety of principal and interest payments of
rated securities. They do not, however, evaluate the market value risk of
low-rated and comparable unrated securities and, therefore, may not fully
reflect the true risks of an investment. In addition, credit-rating agencies may
or may not make timely changes in a rating to reflect changes in the economy or
in the condition of the issuer that affect the market value of the security.
Consequently, credit ratings may be used only as a preliminary indicator of
investment quality. Investments in low-rated and comparable unrated securities
will be more dependent on the applicable Sub-advisor's credit analysis than
would be the case with investments in investment-grade debt securities. Such
Sub-advisor may employ its own credit research and analysis, which could include
a study of existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history, and the current trend of earnings. The Sub-advisor continually monitors
the investments in a Fund and evaluates whether to dispose of or to retain
low-rated and comparable unrated securities whose credit ratings or credit
quality may have changed.
Liquidity and Valuation. A Fund may have difficulty disposing
of certain low-rated and comparable unrated securities because there may be a
thin trading market for such securities. There is no established retail
secondary market for many of these securities. A Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Fund's asset value and a Fund's ability to dispose of
particular securities, when necessary to meet a Fund's liquidity needs or in
response to a specific economic event, may be impacted. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing a portfolio.
Market quotations are generally available on many low-rated and comparable
unrated issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During periods
of thin trading, the spread between bid and asked prices is likely to increase
significantly. In addition, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
low-rated and comparable unrated securities, especially in a thinly-traded
market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder
(buyer) the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by purchasing an option identical to that previously sold.
When writing a call option, a Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, a Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the expiration
of its obligation as a writer. If a call option which a Fund has written
expires, the Fund will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call option is exercised,
a Fund will realize a gain or loss from the sale of the underlying security or
currency.
Writing (Selling) Put Options. A put option gives the
purchaser of the option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the exercise price
during the option period (American style) or at the expiration of the option
(European style). So long as the obligation of the writer continues, he may be
assigned an exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against delivery of
the underlying security or currency. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options.
Premium Received from Writing Call or Put Options. A Fund will
receive a premium from writing a put or call option, which increases such Fund's
return in the event the option expires unexercised or is closed out at a profit.
The amount of the premium will reflect, among other things, the relationship of
the market price of the underlying security to the exercise price of the option,
the term of the option and the volatility of the market price of the underlying
security. By writing a call option, a Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, a Fund assumes the risk that it
may be required to purchase the underlying security for an exercise price higher
than its then current market value, resulting in a potential capital loss if the
purchase price exceeds the market value plus the amount of the premium received,
unless the security subsequently appreciates in value.
Closing Transactions. A Fund may terminate an option that it
has written prior to its expiration by entering into a closing purchase
transaction in which it purchases an option having the same terms as the option
written. Closing transactions may be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency. A
Fund will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by such Fund.
Furthermore, effecting a closing transaction will permit a
Fund to write another call option on the underlying security or currency with
either a different exercise price or expiration date or both. If a Fund desires
to sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that a Fund will be able to effect
such closing transactions at a favorable price. If a Fund cannot enter into such
a transaction, it may be required to hold a security or currency that it might
otherwise have sold. When a Fund writes a covered call option, it runs the risk
of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price, as well as the risk of being
required to hold on to securities or currencies that are depreciating in value.
This could result in higher transaction costs. A Fund will pay transaction costs
in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a
Fund for the purpose of acquiring the underlying securities or currencies for
its portfolio. Utilized in this fashion, the purchase of call options enables a
Fund to acquire the securities or currencies at the exercise price of the call
option plus the premium paid. At times the net cost of acquiring securities or
currencies in this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to a Fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security or currency itself, a Fund is
partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option to
expire, incurring a loss only to the extent of the premium paid for the option.
<PAGE>
Purchasing Put Options. A Fund may purchase a put option on an
underlying security or currency owned by the Fund (a "protective put") as a
defensive technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided only during
the life of the put option when the Fund, as the holder of the put option, is
able to sell the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security or currency where a Sub-advisor
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
If a Fund purchases put options at a time when the Fund does
not own the underlying security or currency, the Fund seeks to benefit from a
decline in the market price of the underlying security or currency. If the put
option is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, a Fund will lose its entire investment
in the put option. In order for the purchase of a put option to be profitable,
the market price of the underlying security or currency must decline
sufficiently below the exercise price to cover the premium and transaction
costs.
Dealer Options. Exchange-traded options generally have a
continuous liquid market while dealer options have none. Consequently, a Fund
will generally be able to realize the value of a dealer option it has purchased
only by exercising it or reselling it to the dealer who issued it. Similarly,
when a Fund writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the option. While
a Fund will seek to enter into dealer options only with dealers who will agree
to and which are expected to be capable of entering into closing transactions
with the Fund, there can be no assurance that the Fund will be able to liquidate
a dealer option at a favorable price at any time prior to expiration. Until a
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event of
insolvency of the other party, a Fund may be unable to liquidate a dealer
option. With respect to options written by a Fund, the inability to enter into a
closing transaction may result in material losses to a Fund. For example, since
a Fund must maintain a secured position with respect to any call option on a
security it writes, a Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair a Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Commission has taken the position that
purchased dealer options and the assets used to secure the written dealer
options are illiquid securities. A Fund may treat the cover used for written OTC
options as liquid if the dealer agrees that the Fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to the
extent the maximum repurchase price under the formula exceeds the intrinsic
value of the option. To this extent, a Fund will treat dealer options as subject
to a Fund's limitation on unmarketable or illiquid securities. If the Commission
changes its position on the liquidity of dealer options, a Fund will change its
treatment of such instrument accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and
Put Options. During the option period, a Fund, as writer of a call option has,
in return for the premium received on the option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that a Fund may lose the premium it paid
plus transaction costs. If a Fund does not exercise the option and is unable to
close out the position prior to expiration of the option, it will lose its
entire investment.
An exchange-traded option position 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 a particular option at a particular time
and that a Fund can close out its position by effecting a closing transaction.
If a Fund is unable to effect a closing purchase transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Accordingly, a Fund may not be able to sell the underlying security at a time
when it might otherwise be advantageous to do so. Possible reasons for the
absence of a liquid secondary market include the following: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) inadequacy of the facilities of an exchange or the clearing
corporation to handle trading volume; and (v) a decision by one or more
exchanges to discontinue the trading of options or impose restrictions on
orders. In addition, the hours of trading for options may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Each exchange has established limitations governing the maximum number
of call options, whether or not covered, which may be written by a single
investor acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions.
Options on Stock Indices. Options on stock indices are similar to
options on specific securities except that, rather than the right to take or
make delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks.
Risk Factors of Options on Indices. Because the value of an index
option depends upon the movements in the level of the index rather than upon
movements in the price of a particular security, whether a Fund will realize a
gain or a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon a
Sub-advisor's ability to predict correctly movements in the direction of the
market generally or in the direction of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Fund would not be able to close out
options which it had written or purchased and, if restrictions on exercise were
imposed, might be unable to exercise an option it purchased, which would result
in substantial losses.
Price movements in portfolio securities will not correlate perfectly
with movements in the level of the index and therefore, a Fund bears the risk
that the price of the securities may not increase as much as the level of the
index. In this event, the Fund would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of a Fund's securities does not.
If this occurred, a Fund would experience a loss on the call which would not be
offset by an increase in the value of its securities and might also experience a
loss in the market value of its securities.
Unless a Fund has other liquid assets which are sufficient to satisfy
the exercise of a call on the index, the Fund will be required to liquidate
securities in order to satisfy the exercise. When a Fund has written a call on
an index, there is also the risk that the market may decline between the time
the Fund has the call exercised against it, at a price which is fixed as of the
closing level of the index on the date of exercise, and the time the Fund is
able to sell securities. As with options on securities, the Sub-advisor will not
learn that a call has been exercised until the day following the exercise date,
but, unlike a call on securities where a Fund would be able to deliver the
underlying security in settlement, a Fund may have to sell part of its
securities in order to make settlement in cash, and the price of such securities
might decline before they could be sold.
If a Fund exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money," the Fund will be
required to pay the difference between the closing index value and the exercise
price of the option (multiplied by the applicable multiplier) to the assigned
writer. Although a Fund may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
time for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
Trading in Futures. A futures contract provides for the future sale by
one party and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a stock index) at a specified price, date,
time and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short position.
Unlike when a Fund purchases or sells a security, no price would be
paid or received by a Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain a Fund's open positions in
futures contracts, a Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of cash, U.S.
government securities, suitable money market instruments, or other liquid
securities, known as "initial margin." A margin deposit is intended to ensure a
Fund's performance of the futures contract. The initial margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to a Fund.
These subsequent payments, called "variation margin," to and from the
futures broker are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." A Fund expects to
earn interest income on its margin deposits. Although certain futures contracts,
by their terms, require actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually closed out before
the delivery date. Closing out an open futures contract purchase or sale is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less than the original
sale price, a Fund realizes a gain; if it is more, a Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, a Fund realizes a gain; if it is less, a Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If a Fund is not able to enter into an offsetting transaction, a Fund will
continue to be required to maintain the margin deposits on the futures contract.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made. For example, one
contract in the Financial Times Stock Exchange 100 Index future is a contract to
buy 25 pounds sterling multiplied by the level of the UK Financial Times 100
Share Index on a given future date. Settlement of a stock index futures contract
may or may not be in the underlying security. If not in the underlying security,
then settlement will be made in cash, equivalent over time to the difference
between the contract price and the actual price of the underlying asset at the
time the stock index futures contract expires.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing out
is accomplished by effecting an offsetting transaction. A futures contract sale
is closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would immediately pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss. Commissions on financial futures contracts and
related options transactions may be higher than those which would apply to
purchases and sales of securities directly.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA
pass-through securities and $1,000,000 for the other designated futures
contracts. A public market exists in futures contracts covering a number of
indices, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Regulatory Matters Relating to Futures Contracts and Related Options.
The Staff of the Commission has taken the position that the purchase and sale of
futures contracts and the writing of related options may give rise to "senior
securities" for the purposes of the restrictions contained in Section 18 of the
1940 Act on investment companies' issuing senior securities. However, the Staff
has taken the position that no senior security will be created if a Fund
maintains in a segregated account an amount of cash or other liquid assets at
least equal to the amount of the Fund's obligation under the futures contract or
option. Each Fund will conduct its purchases and sales of any futures contracts
and writing of related options transactions in accordance with this requirement.
Certain Risks Relating to Futures Contracts and Related Options. There are
special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international policies and economic
events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement price at
the end of a trading session. Once the daily limit has been reached in a
particular type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, a Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying instrument and sold it after the decline. Furthermore, in the
case of a futures contract purchase, in order to be certain that a Fund has
sufficient assets to satisfy its obligations under a futures contract, a Fund
earmarks to the futures contract liquid assets equal in value to the current
value of the underlying instrument less the margin deposit.
Liquidity. A Fund may elect to close some or all of its
futures positions at any time prior to their expiration. A Fund would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. A Fund may close its positions by taking
opposite positions which would operate to terminate the Fund's position in the
futures contracts. Final determinations of variation margin would then be made,
additional cash would be required to be paid by or released to a Fund, and such
Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded. Although a Fund may
intend to purchase or sell futures contracts only on exchanges or boards of
trade where there appears to be an active market, there is no assurance that a
liquid market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, a Fund
would continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, a Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by a Fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. The Sub-advisor will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of a Fund's underlying
instruments sought to be hedged.
Successful use of futures contracts by a Fund for hedging
purposes is also subject to a Sub-advisor's ability to correctly predict
movements in the direction of the market. It is possible that, when a Fund has
sold futures to hedge its portfolio against a decline in the market, the index,
indices, or underlying instruments on which the futures are written might
advance and the value of the underlying instruments held in the Fund's portfolio
might decline. If this were to occur, a Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments. However,
while this might occur to a certain degree, the Sub-advisor may believe that
over time the value of a Fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It is also possible
that if a Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In addition, in such
situations, if a Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). A Fund might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
<PAGE>
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price movements in the
futures contracts and the portion of the portfolio being hedged, the price
movements of futures contracts might not correlate perfectly with price
movements in the underlying instruments due to certain market distortions.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements in the futures
market are less onerous than margin requirements in the securities markets, and
as a result the futures market might attract more speculators than the
securities markets do. Increased participation by speculators in the futures
market might also cause temporary price distortions. Due to the possibility of
price distortion in the futures market and also because of the imperfect
correlation between price movements in the underlying instruments and movements
in the prices of futures contracts, even a correct forecast of general market
trends by the Sub-advisor might not result in a successful hedging transaction
over a very short time period.
Certain Risks of Options on Futures Contracts. A Fund may seek to close
out an option position by writing or buying an offsetting option covering the
same index, underlying instruments, or contract and having the same exercise
price and expiration date. The ability to establish and close out positions on
such options will be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options, or underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
Foreign Futures and Options. Participation in foreign futures and
foreign options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic exchange regulates activities of any foreign boards
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the Commodity Futures Trading
Commission's ("CFTC") regulations and the rules of the National Futures
Association and any domestic exchange, including the right to use reparations
proceedings before the Commission and arbitration proceedings provided by the
National Futures Association or any domestic futures exchange. In particular,
funds received from customers for foreign futures or foreign options
transactions may not be provided the same protections as funds received in
respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time an order is placed and the time it is liquidated,
offset or exercised.
Foreign Currency Futures Contracts and Related Options. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the interbank market
conducted directly between currency traders (usually large, commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades.
Depending on the applicable investment policies and restrictions
applicable to a Fund, a Fund may generally enter into forward foreign currency
exchange contracts under two circumstances. First, when a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transactions, the Fund may be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date the security is
purchased or sold and the date on which payment is made or received.
Second, when a Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of a Fund's securities denominated in such foreign currency.
Alternatively, where appropriate, a Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a proxy currency
where such currencies or currency act as an effective proxy for other
currencies. In such a case, a Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the Fund's
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in a Fund. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for a Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency a Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency a Fund is obligated to deliver. However, as noted, in order to
avoid excessive transactions and transaction costs, a Fund may use liquid assets
denominated in any currency to cover the amount by which the value of a forward
contract exceeds the value of the securities to which it relates.
If a Fund retains the portfolio security to which the foreign currency
hedging transaction related and engages in an offsetting forward contract
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between a Fund's entering into a forward contract for the sale
of a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, a Fund will suffer a
loss to the extent of the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
As noted above, a currency futures contract sale creates an obligation
by a Fund, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a special price. A currency futures
contract purchase creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. Although the terms of currency futures contracts specify actual delivery
or receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. Unlike a currency futures contract, which requires the parties
to buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
Interest Rate Swaps and Interest Rate Caps and Floors. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The exchange commitments can involve payments
to be made in the same currency or in different currencies. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from the
party selling the interest rate floor.
Hybrid Instruments. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument. The risks of investing in hybrid instruments reflect a combination
of the risks from investing in securities, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of futures
and forward contracts in this Statement for a discussion of these risks.
Further, the prices of the hybrid instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
hybrid instruments could take place in an over-the-counter market or in a
private transaction between a Fund and the seller of the hybrid instrument, the
creditworthiness of the other party to the transaction would be a risk factor
which a Fund would have to consider. Hybrid instruments also may not be subject
to the regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the Commission, which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental regulatory
authority.
Foreign Currency Exchange-Related Securities. Certain Funds may invest
in foreign currency warrants, principal exchange rate linked securities and
performance indexed paper.
Foreign Currency Warrants. Foreign currency warrants are
warrants which entitle the holder to receive from their issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt offerings by
major corporate issuers in an attempt to reduce the foreign currency exchange
risk which, from the point of view of prospective purchasers of the securities,
is inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange
rate linked securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar. "Reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the spot exchange rate two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Zero-Coupon Securities. Zero-coupon securities pay no cash income and
are sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity.
Zero-coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero-coupon securities which are
convertible into common stock offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero-coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks, as they usually are issued with maturities of 15 years
or less and are issued with options and/or redemption features exercisable by
the holder of the obligation entitling the holder to redeem the obligation and
receive a defined cash payment.
Zero-coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including Treasury
Income Growth Receipts ("TIGRSTM") and Certificate of Accrual on Treasuries
("CATSTM"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as a Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities.
The U.S. Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program, a
Fund will be able to have its beneficial ownership of zero-coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities that the Treasury sells
itself.
When-Issued Securities. The price of when-issued securities, which may
be expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within 90 days of the purchase.
During the period between purchase and settlement, no payment is made by a Fund
to the issuer and no interest accrues to such Fund. Forward commitments involve
a risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of decline in value
of a Fund's other assets. While when-issued securities may be sold prior to the
settlement date, a Fund intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
Mortgage-Backed Securities. Principal and interest payments made on the
mortgages in an underlying mortgage pool are passed through to a Fund.
Unscheduled prepayments of principal shorten the securities' weighted average
life and may lower their total return. (When a mortgage in the underlying
mortgage pool is prepaid, an unscheduled principal prepayment is passed through
to a Fund. This principal is returned to a Fund at par. As a result, if a
mortgage security were trading at a premium, its total return would be lowered
by prepayments, and if a mortgage security were trading at a discount, its total
return would be increased by prepayments.) The value of these securities also
may change because of changes in the market's perception of the creditworthiness
of the federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
Asset-backed securities may be classified as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support" below.
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support"), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
Methods of Allocating Cash Flows. While many asset-backed
securities are issued with only one class of security, many asset-backed
securities are issued in more than one class, each with different payment terms.
Multiple class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support."
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with a class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those described above
may be issued in the future. A Fund may invest in such asset-backed securities
if such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors on underlying assets to
make payments, such securities may contain elements of credit support. Such
credit support falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that scheduled payments on the
underlying pool are made in a timely fashion. Protection against ultimate
default ensures ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction or through a combination of such
approaches. Examples of asset-backed securities with credit support arising out
of the structure of the transaction include "senior-subordinated securities"
(multiple class asset-backed securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have "reserve funds" (where
cash or investments, sometimes funded from a portion of the initial payments on
the underlying assets, are held in reserve against future losses) or that have
been "over collateralized" (where the scheduled payments on, or the principal
amount of, the underlying assets substantially exceeds that required to make
payment of the asset-backed securities and pay any servicing or other fees). The
degree of credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security. Additionally, if a letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized.
Automobile Receivable Securities. Asset-backed securities may
be backed by receivables from motor vehicle installment sales contracts or
installment loans secured by motor vehicles ("Automobile Receivable
Securities"). Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile Contracts only by
filing a financing statement and by having the servicer of the Automobile
Contracts, which is usually the originator of the Automobile Contracts, take
custody thereof. In such circumstances, if the servicer of the Automobile
Contracts were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that such party could
acquire an interest in the Automobile Contracts superior to that of the holders
of Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not amended
to reflect the assignment of the seller's security interest for the benefit of
the holders of the Automobile Receivable Securities. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition, various state and
federal securities laws give the motor vehicle owner the right to assert against
the holder of the owner's Automobile Contract certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. Asset-backed securities may
be backed by receivables from revolving credit card agreements ("Credit Card
Receivable Securities"). Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and reduce the yield of the Credit Card Receivable
Security.
Credit card holders are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such holder the
right to set off certain amounts against balances owed on the credit card,
thereby reducing amounts paid on Accounts. In addition, unlike most other
asset-backed securities, Accounts are unsecured obligations of the cardholder.
Warrants. Warrants basically are options to purchase equity securities
at a specific price valid for a specific period of time. They do not represent
ownership of the securities but only the right to buy them. Investments in
warrants are speculative in that warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the corporation
issuing them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
Certain Risks of Foreign Investing:
Currency Fluctuations. Investment in securities denominated in
foreign currencies involves certain risks. A change in the value of any such
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of a Fund's assets denominated in that currency. Such changes
will also affect a Fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of a Fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens), the value of a Fund's securities
denominated in that currency would be expected to decline.
Investment and Repatriation Restrictions. Foreign investment
in the securities markets of certain foreign countries is restricted or
controlled in varying degrees. These restrictions may at times limit or preclude
investment in certain of such countries and may increase the cost and expenses
of a Fund. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the form
of prior governmental approval, limits on the amount or type of securities held
by foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by these
or other countries in which a Fund invests. In addition, the repatriation of
both investment income and capital from several foreign countries is restricted
and controlled under certain regulations, including in some cases the need for
certain government consents.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and a Fund's securities may be less liquid and
more volatile than securities of comparable U.S. companies. Equity securities
may trade at price/earnings multiples higher than comparable U.S. securities and
such levels may not be sustainable. Commissions on foreign stock exchanges,
which may be fixed, may generally be higher than negotiated commissions on U.S.
exchanges, although a Fund will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies
of certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest or regulation,
in their respective economies. Action by these governments could have a
significant effect on market prices of securities and payment of dividends. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and economic
conditions of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon the
securities markets of such countries.
<PAGE>
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and ratings
that are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
Taxes. The dividends and interest payable on certain of a
Fund's foreign securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders. A shareholder otherwise subject to U.S. federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Fund.
Costs. Investors should understand that the expense ratio of a
Fund investing primarily in foreign securities can be expected to be higher than
investment companies investing in domestic securities since the cost of
maintaining the custody of foreign securities and the rate of advisory fees paid
by a Fund are higher.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of a Fund,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of a Fund's assets invested in such countries and these authorities may not
qualify as a foreign custodian under the 1940 Act and exemptive relief from such
Act may be required. All of these considerations are among the factors which
could cause significant risks and uncertainties to investment in Eastern Europe
and Russia.
Latin America. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets. Persistent levels of
inflation or in some cases, hyperinflation, have led to high interest rates,
extreme measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries has
lessened, there is no guarantee it will remain at lower levels. In addition, of
developing countries, a number of Latin American countries are also among the
largest debtors. There have been moratoria on, and reschedulings of, repayment
with respect to these debts. Such events can restrict the flexibility of these
debtor nations in the international markets and result in the imposition of
onerous conditions on their economies.
Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U.S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. Certain Latin American countries also may
restrict the free conversion of their currency into foreign currencies,
including the U.S. dollar. There is no significant foreign exchange market for
certain currencies and it would, as a result, be difficult for a Fund to engage
in foreign currency transactions designed to protect the value of the Fund's
interests in securities denominated in such currencies.
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
ASAF JPM MONEY MARKET FUND (the "Money Market Fund"):
In accordance with regulations prescribed by the Commission, the
Company is required to compute the Money Market Fund's current annualized yield
for a seven-day period in accordance with a specified formula, which does not
take into consideration any realized or unrealized gains or losses on its
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) in the value of a hypothetical
account having a balance of one share of the Money Market Fund at the beginning
of such seven-day period, dividing such net change in account value by the value
of the account at the beginning of the period to determine the base period
return and annualizing this quotient on a 365-day basis.
The Commission also permits the Company to disclose the effective yield
of the Money Market Fund for the same seven-day period, which is the Fund's
yield determined on a compounded basis. The effective yield is calculated by
compounding the unannualized base period return by adding one to the base period
return, raising the sum to a power equal to 365 divided by 7, and subtracting
one from the result.
The yield on amounts held in the Money Market Fund normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Fund's actual yield is affected by changes in interest
rates on money market securities, the average portfolio maturity of the
corresponding Portfolio in which the Money Market Fund invests, the types and
quality of portfolio securities held by such Portfolio, and the Fund's and
Portfolio's operating expenses.
The current yield and effective yield calculations for each class of
shares of the ASAF JPM Money Market Fund are shown below for the seven day
period ended October 31, 1997:
<TABLE>
<CAPTION>
Class A Class B Class C Class X
<S> <C> <C> <C> <C>
Current Yield 3.19% 2.69% 2.69% 2.69%
Effective Yield 3.24% 2.72% 2.72% 2.72%
</TABLE>
ALL OTHER FUNDS:
Standardized Average Annual Total Return Quotations. "Total return" is
one of the primary methods used to measure performance and represents the
percentage change in value of a class of a Fund, or of a hypothetical investment
in a class of a Fund, over any period up to the lifetime of the class. Average
annual total return quotations for Class A, B, C and X shares are computed by
finding the average annual compounded rates of return that would cause a
hypothetical investment made on the first day of a designated period to equal
the ending redeemable value of such hypothetical investment on the last day of
the designated period in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000
initial payment made at the beginning of the designated period (or fractional
portion thereof)
The computation above assumes that the maximum sales charge applicable
to a class of Fund shares is deducted from the initial $1,000 payment, and that
all dividends and distributions made by a Fund are reinvested at net asset value
("NAV") during the designated period. The average annual total return quotation
is determined to the nearest 1/100 of 1%.
Total return percentages for periods longer than one year will usually
be accompanied by total return percentages for each year within the period
and/or by the average annual compounded total return for the period. The income
and capital components of a given return may be separated and portrayed in a
variety of ways in order to illustrate their relative significance. Performance
may also be portrayed in terms of cash or investment values, without
percentages. Past performance cannot guarantee any particular future result. In
determining the average annual total return (calculated as provided above),
recurring fees, if any, that are charged to all shareholder accounts are taken
into consideration. For any account fees that vary with the size of the account,
the account fee used for purposes of the above computation is assumed to be the
fee that would be charged to the mean account size of a class of the Fund.
In addition, with respect to the Class X shares, a standardized return
will reflect the impact of the 2.5% bonus shares. The impact of the bonus shares
on total return is particularly pronounced for shorter periods for which total
return is measured, such as one and three years. You should take this into
consideration in any comparison of total return between the Funds and other
mutual funds. For a discussion of the Class X bonus shares, see the Company's
Prospectus under "How to Buy Shares."
The total return of each class of shares of each Fund other than the
JPM Money Market Fund, computed as of October 31, 1997, that had commenced
operations prior to that date is shown below:
<TABLE>
<CAPTION>
Total Return (for the
period from July 28,
1997, commencement of
operations, until
October 31, 1997,
without annualization)
Class A Class B Class C Class X
<S> <C> <C> <C> <C>
ASAF Founders International Small Capitalization Fund (6.27%) (7.41%) (2.39%) (5.14%)
ASAF T. Rowe Price International Equity Fund (12.88%) (13.90%) (9.32%) (11.55%)
ASAF Founders Small Capitalization Fund (5.60%) (6.66%) (1.59%) (4.22%)
ASAF T. Rowe Price Small Company Value Fund (0.66%) (1.60%) 3.50% 1.01%
ASAF Janus Capital Growth Fund (3.14%) (4.10%) 0.90% (1.45%)
ASAF INVESCO Equity Income Fund (0.57%) (1.50%) 3.60% 1.11%
ASAF American Century Strategic Balanced Fund (5.13%) (6.38%) (1.20%) (3.91%)
ASAF Federated High Yield Bond Fund (4.44%) (6.29%) (1.35%) (3.76%)
ASAF Total Return Bond Fund (1.99%) (4.10%) 0.93% (1.51%)
</TABLE>
Standardized Yield Quotations. The yield of a class of Fund shares is
computed by dividing the class's net investment income per share during a base
period of 30 days, or one month, by the maximum offering price per share of the
class on the last day of such base period in accordance with the following
formula:
YIELD = 2 [ (a - b + 1)6 - 1 ]
cd
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Where: a = net investment income earned during the period attributable to the subject class
b = net expenses accrued for the period attributable to the subject class
c = the average daily number of shares of the subject class outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share of the subject
class
</TABLE>
Net investment income will be determined in accordance with rules
established by the Commission. The price per share of Class A shares will
include the maximum sales charge imposed on purchases of Class A shares which
decreases with the amount of shares purchased.
The yield for each class of shares of the ASAF Federated High Yield
Fund and ASAF Total Return Bond Fund for the 30 day period ended October 31,
1997 is shown below:
<TABLE>
<CAPTION>
Class A Class B Class C Class X
<S> <C> <C> <C> <C>
ASAF Federated High Yield Bond Fund 4.37% 4.05% 3.41% 3.58%
ASAF Total Return Bond Fund 4.92% 5.25% 4.70% 4.63%
</TABLE>
Non-Standardized Performance. In order to more completely represent a
Fund's performance or more accurately compare such performance to other measures
of investment return, a Fund also may include in advertisements, sales
literature and shareholder reports other total return performance data
("Non-Standardized Return"). Non-Standardized Return may be quoted for the same
or different periods as those for which standardized return is quoted; it may
consist of an aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof. Non-Standardized Return may or
may not take sales charges into account; performance data calculated without
taking the effect of sales charges into account will be higher than data
including the effect of such charges. Non-standardized performance will be
advertised only if the standard performance data for the same period, as well as
for the required periods, is also presented.
Each Fund may also publish its distribution rate and/or its effective
distribution rate. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized, by the current NAV per share.
A Fund's effective distribution rate is computed by dividing the distribution
rate by the ratio used to annualize the most recent monthly distribution and
reinvesting the resulting amount for a full year on the basis of such ratio. The
effective distribution rate will be higher than the distribution rate because of
the compounding effect of the assumed reinvestment. Unlike a Fund's yield, which
is computed from the yields to maturity of all debt obligations held by the
Fund, the distribution rate is based on a Fund's last monthly distribution. A
Fund's monthly distribution tends to be relatively stable and may be more or
less than the amount of net investment income and short-term capital gain
actually earned by the Fund during the month (see the Company's Prospectus under
"Dividends, Capital Gains and Taxes").
Other data that may be advertised or published about each Fund include
the average portfolio quality, the average portfolio maturity and the average
portfolio duration.
Comparative Information. From time to time, the Funds may advertise
their performance compared to similar funds using certain unmanaged indices,
reporting services and publications. Descriptions of some of the indices which
may be used are listed below:
o The Standard & Poor's 500 Composite Stock Price Index is a
well-diversified list of 500 large capitalization companies representing the
U.S. Stock Market.
o The Standard and Poor's Small Cap 600 index is designed to represent
price movements in the small cap U.S. equity market. It contains companies
chosen by the Standard & Poor's Index Committee for their size, industry
characteristics, and liquidity. None of the companies in the S&P 600 overlap
with the S&P 500 or the S&P 400 (MidCap Index). The S&P 600 is weighted by
market capitalization.
o The NASDAQ Composite OTC Price Index is a market value-weighted and
unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks.
o The Lehman Government Bond Index is a measure of the market value of
all public obligations of the U.S. Treasury; all publicly issued debt of all
agencies of the U.S. Government and all quasi-federal corporations; and all
corporate debt guaranteed by the U.S. Government. Mortgage backed securities,
bonds and foreign targeted issues are not included in the Lehman Government
Index.
o The Lehman Government/Corporate Bond Index is a measure of the market
value of approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an issue must
have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or its equivalent or higher ("investment grade") by
a nationally recognized rating agency.
o The Russell 2000 Index represents the bottom two thirds of the
largest 3000 publicly traded companies domiciled in the U.S. Russell uses total
market capitalization to determine the companies that are included in the Index.
Only common stocks are included in the Index.
o The Russell 2500 Index is a market value-weighted, unmanaged index
showing total return (i.e., principal changes with income) in the aggregate
market value of 2,500 stocks of publicly traded companies domiciled in the
United States. The Index includes stocks traded on the New York Stock Exchange
and the American Stock Exchange as well as in the over-the-counter market.
o The Morgan Stanley Capital International EAFE Index (the "EAFE
Index") is an unmanaged index, which includes over 1,000 companies representing
the stock markets of Europe, Australia, New Zealand and the Far East. The EAFE
Index is typically shown weighted by the market capitalization. However, EAFE is
also available weighted by Gross Domestic Product ("GDP"). These weights are
modified on July 1st of each year to reflect the prior year's GDP.
o The Lehman Brothers High Yield BB Index is a measure of the market
value of public debt issues with a minimum par value of $100 million and rated
Ba1-Ba3 by Moody's. All bonds within the index are U.S. dollar denominated,
non-convertible and have at least one year remaining to maturity.
Each Fund's investment performance may be advertised in various
financial publications, newspapers, magazines, including: Across the Board,
Advertising Age, Adviser's Magazine, Adweek, Agent, American Banker, American
Agent and Broker, Associated Press, Barron's, Best's Review, Bloomberg, Broker
World, Business Daily, Business Insurance, Business Marketing, Business Month,
Business News Features, Business Week, Business Wire, California Broker,
Changing Times, Consumer Reports, Consumer Digest, Crain's, Dow Jones News
Service, Economist, Entrepreneur, Entrepreneurial Woman, Financial Planning,
Financial Services Week, Financial Times, Financial World, Forbes, Fortune,
Hartford Courant, Inc., Independent Business, Institutional Investor, Insurance
Forum, Insurance Advocate Independent, Insurance Review Investor's, Insurance
Times, Insurance Week, Insurance Product News, Insurance Sales, Investment
Dealers Digest, Investment Advisor, Journal of Commerce, Journal of Accountancy,
Journal of the American Society of CLU & ChFC, Kiplinger's Personal Finance,
Knight-Ridder, Life Association News, Life Insurance Selling, Life Times,
LIMRA's MarketFacts, Lipper Analytical Services, Inc., MarketFacts, Medical
Economics, Money, Morningstar, Inc., Nation's Business, National Underwriter,
New Choices, New England Business, New York Times, Pension World, Pensions &
Investments, Professional Insurance Agents, Professional Agent, Registered
Representative, Reuter's, Rough Notes, Round the Table, Service, Success, The
Standard, The Boston Globe, The Washington Post, Tillinghast, Time, U.S. News &
World Report, U.S. Banker, United Press International, USA Today, Value Line,
The Wall Street Journal, Wiesenberger Investment and Working Woman.
From time to time the Company may publish the sales of shares of one or
more of the Funds on a gross or net basis and for various periods of time, and
compare such sales with sales similarly reported by other investment companies.
<TABLE>
<CAPTION>
MANAGEMENT OF THE COMPANY
The following table sets forth information concerning the officers and
Directors of the Company, including their addresses and principal business
occupations for the last five years:
Name, Age and Address:(1) Position Held with the Company:(2) Principal Occupation:(3)
<S> <C> <C> <C>
Gordon C. Boronow (44)* Vice President & Director President & Chief Operating Officer:
American Skandia Life Assurance
Corporation
Jan R. Carendi (52)* President, Principal Executive Officer Senior Executive Vice President &
and Director Member of Corporate Management Group:
Skandia Insurance Company Ltd.
David E. A. Carson (63) Director Until January, 1998, President,
People's Bank Chairman & Chief Executive Officer:
850 Main Street People's Bank
Bridgeport, CT 06604
Commencing January, 1998, Chairman &
Chief Executive Officer: People's Bank
Richard G. Davy, Jr. (49) Controller Vice President, Operations: American
Skandia Investment Services,
Incorporated (January 1997 to present)
Controller: American Skandia
Investment Services, Incorporated
(September 1994 to January 1997)
Self-employed Consultant (December 1991
to September 1994)
Eric C. Freed (34) Secretary Securities Counsel: American Skandia
Investment Holding Corporation
(December 1996 to present)
Attorney, Senior Attorney and Special
Counsel: U.S. Securities and Exchange
Commission (March 1991 to November 1996)
Julian A. Lerner (73) Director Semi-retired since 1995; Senior Vice
12850 Spurling Road President & Portfolio Manager of AIM
Suite 208 Charter Fund and AIM Summit Fund from
Dallas, TX 75230 1986 to 1995
Thomas M. Mazzaferro (44)* Treasurer and Director Executive Vice President & Chief
Financial Officer: American Skandia
Life Assurance Corporation
Thomas M. O'Brien (47) Director Vice Chairman: North Fork Bank (January
North Fork Bank 1997 to present)
275 Broad Hollow Road
Melville, NY 11747 President & Chief Executive Officer:
North Side Savings Bank (December 1984
to December 1996)
F. Don Schwartz (62) Director Management Consultant
1101 Penn Grant Road (April 1985 to present)
Lancaster, PA 17602
</TABLE>
* Indicates a Director of the Company who is an "interested person" within
the meaning set forth in the 1940 Act.
(1) Unless otherwise indicated, the address of each officer and director listed
above is One Corporate Drive, Shelton, Connecticut 06484.
(2) All of the officers and Directors of the Company listed above serve in
similar capacities for the Trust and/or American Skandia Trust, both of which
are also investment companies managed by the Investment Manager.
(3) Unless otherwise indicated, each officer and director listed above has held
his principal occupation for at least the last five years. In addition to the
principal occupations noted above, the following officers and Directors of the
Company hold the following positions with American Skandia Life Assurance
Corporation ("ASLAC"), American Skandia Investment Services, Incorporated
("ASISI"), American Skandia Marketing, Incorporated ("ASM"), American Skandia
Information Services and Technology Corporation ("ASIST") or American Skandia
Investment Holding Corporation ("ASIHC"): Mr. Boronow also serves as Executive
Vice President, Chief Operating Officer and a Director of ASIHC, and a Director
of ASLAC, ASISI, ASM and ASIST; Mr. Carendi also serves as Chairman, President,
Chief Executive Officer and a Director of ASIHC, and Chief Executive Officer and
a Director of ASLAC, ASISI, ASM and ASIST; Mr. Davy also serves as a Director of
ASISI; Mr. Mazzaferro also serves as Executive Vice President, Chief Financial
Officer and a Director of ASIHC, a Director of ASLAC, President, Chief Financial
Officer and a Director of ASISI, and Executive Vice President and Chief
Financial Officer of ASM and ASIST.
The Company's Articles of Incorporation provides that the Directors,
officers and employees of the Company may be indemnified by the Company to the
fullest extent permitted by federal and state law, including Maryland law.
Neither the Articles of Incorporation nor the By-laws of the Company authorize
the Company to indemnify any director or officer against any liability to which
he or she would otherwise be subject by reason of or for willful misfeasance,
bad faith, gross negligence or reckless disregard of such person's duties.
The officers and Directors of the Company who are "interested persons"
within the meaning of the 1940 Act do not receive compensation directly from the
Company for serving in the capacities described above. Those officers and
Directors of the Company, however, who are affiliated with the Investment
Manager may receive remuneration indirectly from the Company for services
provided in their respective capacities with the Investment Manager. Each of the
non-interested Directors is expected to receive for his service on the Board of
Directors an annual and "per-meeting" fee, plus reimbursement for reasonable
out-of-pocket expenses incurred in connection with attendance at Board meetings.
The following table sets forth information concerning the compensation
anticipated to be paid by the Company to the Directors in the current fiscal
year. Neither the Company nor any investment company in the Fund Complex offers
any pension or retirement benefits to its directors or trustees.
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the
Name of Director: from the Company:(1) Company and Fund Complex:(2)
<S> <C> <C>
Gordon C. Boronow $ 0 $ 0
Jan R. Carendi $ 0 $ 0
David E.A. Carson $20,000 $72,000
Julian A. Lerner $20,000 $72,000
Thomas M. Mazzaferro $ 0 $ 0
Thomas M. O'Brien $20,000 $72,000
F. Don Schwartz $20,000 $72,000
</TABLE>
(1) The amount indicated estimates the compensation anticipated to be paid to
the Directors of the Company for the Company's fiscal year ending October 31,
1998.
(2) As of the date of this SAI, the "Fund Complex" consisted of the Company, the
Trust and American Skandia Trust. The amount indicated estimates the
compensation anticipated to be paid to the Directors by the Fund Complex for the
twelve month period ending October 31, 1998.
The Directors and Officers of the Company owned, in the aggregate, the
following percentages of the shares of the following classes of the Company as
of December 24, 1997: ASAF Founders International Small Capitalization Fund,
Class A Share - 3.4%; ASAF T. Rowe Price International Equity Fund, Class A
Shares - 1.4%; ASAF T. Rowe Price Small Company Value Fund, Class A Share -
2.5%; ASAF Total Return Bond Fund, Class A Share - 1.1%. The Directors of the
Company own, in the aggregate, less than 1% of the shares of each class not
listed above.
INVESTMENT ADVISORY & ADMINISTRATION SERVICES
THE INVESTMENT MANAGER:
American Skandia Investment Services, Incorporated ("ASISI," as
previously defined) acts as investment manager to each Non-Feeder Fund and
Portfolio pursuant to separate investment management agreements with the Company
and the Trust, respectively (the "Management Agreements"). Unlike the Non-Feeder
Funds, each of the Feeder Funds invests all of its respective investable assets
in a corresponding Portfolio of the Trust and thus does not require an
investment manager.
ASISI, a Connecticut corporation organized in 1991, is registered as an
investment adviser with the Commission and is a wholly-owned subsidiary of
American Skandia Investment Holding Corporation, whose indirect parent is
Skandia Insurance Company Ltd. ("Skandia"). Skandia is a Swedish company that
owns, directly or indirectly, a number of insurance companies in many countries.
The predecessor to Skandia commenced operations in 1855. In addition to serving
as investment manager to the Company and the Trust, ASISI currently serves as
the investment manager to American Skandia Trust, an open-end management
investment company whose shares are made available to life insurance companies
writing variable annuity contracts and variable life insurance policies. Shares
of American Skandia Trust also may be offered directly to qualified pension and
retirement plans. For a list of those officers and Directors of the Company who
also serve in similar capacities for the Investment Manager, see this SAI under
"Management of the Company."
The Management Agreements provide, in substance, that the Investment
Manager will furnish each Non-Feeder Fund and Portfolio with investment advice
and investment management and administrative services subject to the supervision
of the Directors of the Company or the Trustees of the Trust, where applicable,
and in conformity with the stated investment objective, policies and limitations
of the applicable Fund or Portfolio. The Investment Manager is responsible for
providing, at its expense, such personnel as is required by each Non-Feeder Fund
or Portfolio for the proper conduct of its affairs and may engage a sub-advisor
to conduct the investment program of the Fund or Portfolio pursuant to the
Investment Manager's obligations under the Management Agreements. The Investment
Manager, not the Funds or Portfolios, is responsible for the expenses of
conducting the investment programs of the Funds and Portfolios.
The Management Agreements provide further that neither the Investment
Manager nor its personnel shall be liable for any act or omission in the course
of, or connected with, rendering services under the agreements, or for any
losses that may be sustained in the purchase, holding or sale of any security on
behalf of the Funds or Portfolios, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the agreements.
The Management Agreements also permit the Investment Manager to render services
to others.
Under the terms of the Management Agreements, each Non-Feeder Fund and
Portfolio has agreed to pay ASISI an investment management fee, which is accrued
daily and paid monthly, equal on an annual basis to a stated percentage of the
respective Fund or Portfolio's average daily NAV. The Investment Manager, not
any Fund or Portfolio, is responsible for the payment of the sub-advisory fees
to the Sub-advisors. For a discussion of the fees payable to the Investment
Manager and the Sub-advisors, as well as any applicable voluntary fee waiver
arrangements, see the Company's Prospectus under "Expense Information" and
"Management of the Funds."
<PAGE>
<TABLE>
<CAPTION>
The investment management fee paid for each Fund and Portfolio for the
fiscal period from commencement of operations until October 31, 1997 was as
follows:
Investment
Name of Fund Management Fee
<S> <C>
ASAF Founders International Small Capitalization Fund $520
ASMT T. Rowe Price International Equity Portfolio $4,658
ASAF Janus Overseas Growth Fund $0
ASAF Founders Small Capitalization Fund $577
ASAF T. Rowe Price Small Company Value Fund $1,530
ASAF Robertson Stephens Value + Growth Fund $0
ASMT Janus Capital Growth Portfolio $10,500
ASAF Lord Abbett Growth and Income Fund $0
ASMT INVESCO Equity Income Portfolio $4,791
ASAF American Century Strategic Balanced Fund $1,513
ASAF Federated High Yield Bond Fund $1,022
ASMT PIMCO Total Return Bond Portfolio $4,456
ASMT JPM Money Market Portfolio $1,134
</TABLE>
Fees for the Portfolios are based upon the total assets of each
Portfolio, which include assets other than those of the Feeder Funds. The
Portfolios commenced operations in June 1997, while the Non-Feeder Funds
commenced operations on July 28, 1997. As discussed in this SAI under "Fund
Expenses" and in the Company's Prospectus under "Expense Information," the
Investment Manager has voluntarily agreed to reimburse the other expenses of
each Fund so that each Fund's total expenses do not exceed specified levels.
During the fiscal period, the amounts of these reimbursements exceeded the
investment management fees included in the above table.
Each Management Agreement will continue in effect from year to year,
provided it is approved at least annually by a vote of the majority of the
Directors or Trustees, where applicable, who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting specifically
called for the purpose of voting on such approval. Each Management Agreement may
be terminated without penalty on 60 days' written notice by vote of a majority
of the Directors or Trustees, where applicable, or by the Investment Manager, or
by holders of a majority of the applicable Fund or Portfolio's outstanding
shares, and will automatically terminate in the event of its "assignment" (as
that term is defined in the 1940 Act).
THE SUB-ADVISORS:
ASISI currently engages the following Sub-advisors to conduct the
investment programs of each Non-Feeder Fund and Portfolio pursuant to separate
sub-advisory agreements with the Investment Manager (the "Sub-Advisory
Agreements"): (a) Founders Asset Management, Inc. for the ASAF Founders
International Small Capitalization Fund and the ASAF Founders Small
Capitalization Fund; (b) Rowe Price-Fleming International, Inc. for the ASMT T.
Rowe Price International Equity Portfolio; (c) Janus Capital Corporation for the
ASAF Janus Overseas Growth Fund and the ASMT Janus Capital Growth Portfolio; (d)
T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price Small Company Value
Fund; (e) Robertson, Stephens & Company Investment Management, L.P. for the ASAF
Robertson Stephens Value + Growth Fund; (f) Lord, Abbett & Co. for the ASAF Lord
Abbett Growth and Income Fund; (g) INVESCO Trust Company for the ASMT INVESCO
Equity Income Portfolio; (h) American Century Investment Management, Inc.
(formerly known as, "Investors Research Corporation") for the ASAF American
Century Strategic Balanced Fund; (i) Federated Investment Counseling for the
ASAF Federated High Yield Bond Fund; (j) Pacific Investment Management Company
for the ASMT PIMCO Total Return Bond Portfolio; (k) J.P. Morgan Investment
Management Inc. for the ASMT JPM Money Market Portfolio.
The Sub-Advisory Agreements provide that the Sub-advisors will
formulate and implement a continuous investment program for each Non-Feeder Fund
or Portfolio in accordance with the Fund or Portfolio's investment objective,
policies and limitations and any investment guidelines established by the
Investment Manager. Each Sub-advisor will, subject to the supervision and
control of the Investment Manager, determine in its discretion which issuers and
securities will be purchased, held, sold or exchanged by the Fund or Portfolio,
and will place orders with and give instructions to brokers and dealers to cause
the execution of such transactions. The Sub-advisors are required to furnish the
Investment Manager with periodic reports concerning the transactions and
performance of the Fund or Portfolio. Each Sub-advisor is required to furnish at
its own expense all investment facilities necessary to perform its obligations
under the Sub-Advisory Agreement. Nothing in the Sub-advisory Agreements
prevents the Investment Manager from engaging other sub-advisors to provide
investment advice and other services to a Fund or Portfolio, or from providing
such services itself.
The sub-advisory fee paid by the Investment Manager for each Fund and
Portfolio for the fiscal period from commencement of operations until October
31, 1997 was as follows:
<TABLE>
<CAPTION>
Name of Fund Sub-advisory Fee
<S> <C>
ASAF Founders International Small Capitalization Fund $284
ASMT T. Rowe Price International Equity Portfolio $2,329
ASAF Janus Overseas Growth Fund $0
ASAF Founders Small Capitalization Fund $320
ASAF T. Rowe Price Small Company Value Fund $917
ASAF Robertson Stephens Value + Growth Fund $0
ASMT Janus Capital Growth Portfolio $4,725
ASAF Lord Abbett Growth and Income Fund $0
ASMT INVESCO Equity Income Portfolio $2,235
ASAF American Century Strategic Balanced Fund $839
ASAF Federated High Yield Bond Fund $365
ASMT PIMCO Total Return Bond Portfolio $1,714
ASMT JPM Money Market Portfolio $204
</TABLE>
Fees for the Portfolios are based upon the total assets of each
Portfolio, which include assets other than those of the Feeder Funds. The
Portfolios commenced operations in June 1997, while the Non-Feeder Funds
commenced operations on July 28, 1997.
<PAGE>
Each Sub-Advisory Agreement will continue in effect from year to year,
provided it is approved at least annually by a vote of the majority of the
Directors or Trustees, where applicable, who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting specifically
called for the purpose of voting on such approval. Each Sub-Advisory Agreement
may be terminated without penalty at any time by the Investment Manager or the
Sub-advisor upon 60 days' written notice, and will automatically terminate in
the event of its "assignment" (as that term is defined in the 1940 Act) or upon
termination of the Management Agreement with respect to that particular Fund or
Portfolio (provided that the Sub-advisor has received notice of such
termination).
THE ADMINISTRATOR:
PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington,
Delaware 19809, a Delaware corporation which is an indirect wholly-owned
subsidiary of PNC Financial Corp., serves as the administrator for both the
Company and the Trust. Pursuant to administration agreements between the
Administrator and the Company and the Trust, respectively (the "Administration
Agreements"), the Administrator has agreed to provide certain fund accounting
and administrative services to the Company and the Trust, including, among other
services, accounting relating to the Company and the Trust and the investment
transactions of the foregoing; computing daily NAVs; monitoring the investments
and income of the Company and the Trust for compliance with applicable tax laws;
preparing for execution and filing federal and state tax returns, and annual and
semi-annual shareholder reports; preparing monthly financial statements
including a schedule of investments; assisting in the preparation of
registration statements and other filings related to the registration of shares;
coordinating contractual relationships and communications between the Investment
Manager and the Company's and the Trust's custodians; preparing and maintaining
the Company's and the Trust's books of account, records of securities
transactions, and all other books and records in accordance with applicable
laws, rules and regulations (including, but not limited to, those records
required to be kept pursuant to the 1940 Act); and performing such other duties
related to the administration of the Company and the Trust as may be agreed upon
in writing by the parties to the respective Administration Agreements.
Under the terms of the Administration Agreements, the Administrator
shall be obligated to exercise care and diligence in the performance of its
duties, to act in good faith and to use its best efforts, within reasonable
limits, in performing services to be provided for under the agreements. The
Administrator shall be liable for any damages arising out of its failure to
perform its duties under the Administration Agreements to the extent such
damages arise out of its willful misfeasance, bad faith, gross negligence or
reckless disregard of such duties. Any person, even though also an officer,
director, partner, employee or agent of the Administrator, who may be or become
an officer, director, trustee, employee or agent of the Company or the Trust,
shall be deemed when rendering services to the Company or the Trust or acting on
any business of the Company or the Trust (other than services or business in
connection with the Administrator's duties under the Administration Agreements)
to be rendering such services to or acting solely for the Company or the Trust
and not as an officer, director, partner, employee or agent or one under the
control or direction of the Administrator even though paid by them. The
Administration Agreements shall continue until terminated by either party on 60
days' prior written notice to the other party.
Compensation for the services and facilities provided by the
Administrator under the Administration Agreements includes payment of the
Administrator's "out-of-pocket" expenses. Such reimbursable "out-of-pocket"
expenses include, but are not limited to, postage and mailing, telephone, telex,
Federal Express, outside independent pricing service charges and record
retention/storage. For the period from commencement of operations until October
31, 1997, the Company paid the Administrator $16,898, and the Trust paid the
Administrator $25,353.
FUND EXPENSES
Each Non-Feeder Fund and Portfolio pays its own expenses including,
without limitation: (i) expenses of maintaining the Fund or Portfolio and
continuing its existence; (ii) registration of the Fund or Portfolio under the
1940 Act; (iii) auditing, accounting and legal expenses; (iv) taxes and
interest; (v) governmental fees; (vi) expenses of issue, sale, repurchase and
redemption of Fund shares; (vii) expenses of registering and qualifying the Fund
or Portfolio and its shares under federal and state securities laws and of
preparing and printing prospectuses for such purposes and for distributing the
same to shareholders and investors; (viii) fees and expenses of registering and
maintaining registrations of the Fund or Portfolio and of the Fund's principal
underwriter as a broker-dealer or agent under state securities laws; (ix)
expenses of reports and notices to shareholders and of meetings of shareholders
and proxy solicitations therefor; (x) expenses of reports to governmental
officers and commissions; (xi) insurance expenses; (xii) association membership
dues; (xiii) fees, expenses and disbursements of custodians for all services to
the Fund or Portfolio; (xiv) fees, expenses and disbursements of transfer
agents, dividend disbursing agents, shareholder servicing agents and registrars
for all services to the Fund or Portfolio; (xv) expenses for servicing
shareholder accounts; (xvi) any direct charges to shareholders approved by the
Directors of the Company or the Trustees of the Trust, where applicable; (xvii)
compensation and expenses of Directors of the Company or the Trustees of the
Trust, where applicable, who are not "interested persons" of the Fund or
Portfolio, respectively; and (xviii) such nonrecurring items as may arise,
including expenses incurred in connection with litigation, proceedings and
claims and the obligation of the Company and the Trust to indemnify its
directors, trustees and officers with respect thereto. Expenses incurred by the
Company or the Trust not directly attributable to any specific Non-Feeder Fund
or Portfolio are allocated on the basis of the net assets of the respective
Non-Feeder Funds and Portfolios.
The Investment Manager has voluntarily agreed until February 28, 1999
to reimburse each Fund for its respective operating expenses (and, in the case
of the Feeder Funds, the Feeder Fund's pro rata share of operating expenses of
the Fund's corresponding Portfolio), exclusive of taxes, interest, brokerage
commissions, distribution fees and extraordinary expenses, but inclusive of the
management fee, which in the aggregate exceed specified percentages of the
Fund's average net assets as follows:
ASAF Founders International Small Capitalization Fund: 1.60%
ASAF T. Rowe Price International Equity Fund: 1.60%
ASAF Janus Overseas Growth Fund: 1.60%
ASAF Founders Small Capitalization Fund: 1.20%
ASAF T. Rowe Price Small Company Value Fund: 1.25%
ASAF Robertson Stephens Value + Growth Fund: 1.30%
ASAF Janus Capital Growth Fund: 1.20%
ASAF Lord Abbett Growth & Income Fund: 1.10%
ASAF INVESCO Equity Income Fund: 1.05%
ASAF American Century Strategic Balanced Fund: 1.10%
ASAF Federated High Yield Bond Fund: 1.00%
ASAF Total Return Bond Fund: 0.90%
ASAF JPM Money Market Fund: 1.00%
The Investment Manager may terminate the above voluntary agreements at
any time after October 31, 1998. Voluntary payments of Fund expenses by the
Investment Manager may be made subject to reimbursement by the Fund, at the
Investment Manager's discretion, within the two year period following such
payment to the extent permissible under applicable law and provided that the
Fund is able to effect such reimbursement and remain in compliance with
applicable expense limitations.
<PAGE>
DISTRIBUTION ARRANGEMENTS
THE DISTRIBUTOR:
American Skandia Marketing, Incorporated ("ASM" or the "Distributor"),
located at One Corporate Drive, Shelton, Connecticut 06484, serves as the
principal underwriter and distributor for each Fund pursuant to an underwriting
agreement initially approved by the Directors of the Company (the "Underwriting
Agreement"). The Distributor is a registered broker-dealer and member of the
National Association of Securities Dealers, Inc. ("NASD"). The Distributor is an
"affiliated person" (within the meaning of the 1940 Act) of the Company, the
Trust and the Investment Manager, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation.
Shares of each Fund will be continuously offered and will be sold by
selected broker-dealers who have executed selling agreements with the
Distributor. The Distributor bears all the expenses of providing services
pursuant to the Underwriting Agreement. Each Fund bears the expenses of
registering its shares with the Commission and with applicable state regulatory
authorities. The Underwriting Agreement continues in effect for two years from
initial approval and for successive one-year periods thereafter, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Directors of the Company, including a majority of the Directors who are not
parties to the Underwriting Agreement or "interested persons" of any such party
(as defined in the 1940 Act); or (ii) by the vote of a "majority of the
outstanding voting securities" of a Fund (as defined in the 1940 Act). In the
event that the Underwriting Agreement terminates, all obligations of the
Distributor thereunder shall cease, including the Distributor's undertaking to
purchase Class X Bonus Shares. For information regarding Class X Bonus Shares
and the Distributor's undertaking, see the Company's Prospectus under "How to
Buy Shares: Purchase of Class X Shares." The Distributor is not obligated to
sell any specific amount of shares of any Fund.
THE DISTRIBUTION PLANS:
The Company has adopted separate Distribution and Service plans
(commonly referred to as "12b-1 Plans") for Class A, B, C and X shares of each
Fund (the "Class A Plan," "Class B Plan," "Class C Plan" and "Class X Plan,"
individually, and collectively, the "Plans") pursuant to appropriate resolutions
of the Directors of the Company and in accordance with the requirements of Rule
12b-1 under the 1940 Act and the requirements of the applicable rules of the
NASD regarding asset based sales charges. The Plans permit the payment of
certain fees to the Distributor for its services and costs in distributing Fund
shares and providing for services to shareholder accounts. The Distributor has
assigned its right to receive any distribution and service fees under the Class
B Plan and the Class X Plan, as well as any contingent deferred sales charge for
Class B and Class X shares, to an unaffiliated third party that finances the
sale of Class B and Class X shares. Under the terms of the Plans, the
Distributor provides to each Fund, for review by the Directors of the Company, a
quarterly written report of the amounts expended under the respective Plans and
the purpose for which such expenditures were made. The Directors of the Company
will review such levels of compensation the Plans provide in considering the
continued appropriateness of the Plans.
The Plans were adopted by a majority vote of the Directors of the
Company, including at least a majority of Directors who are not "interested
persons" of the Funds (as defined in the 1940 Act) and who do not have any
direct or indirect financial interest in the operation of the Plans, cast in
person at a meeting called for the purpose of voting on the Plans. In approving
the Plans, the Directors of the Company identified and considered a number of
potential benefits which the Plans may provide, including, but not limited to,
the adequate provision for the costs of implementing effective distribution
activities in the competitive environment and the availability to shareholders
of services provided by representatives who have knowledge of the shareholders'
particular circumstances and goals. With respect to the Class X Plan, the
Directors considered the possible increase in investor interest and consequent
increase in portfolio assets resulting from the use of the fees payable under
such plan, in part, to facilitate the Distributor's purchase of additional
shares for Class X investors as a bonus. The Directors of the Company believe
that there is a reasonable likelihood that the Plans will benefit each Fund and
its current and future shareholders in the manner contemplated.
The Plans, pursuant to their terms, remain in effect from year to year
provided such continuance is approved annually by vote of the Directors in the
manner described above. The Plans may not be amended to increase materially the
amount to be spent for distribution without approval of the shareholders of each
class of a Fund affected thereby entitled to vote thereon under the 1940 Act,
and material amendments to the Plans must also be approved by the Directors of
the Company in the manner described above. A Plan may be terminated at any time,
without payment of a penalty, by vote of the majority of the Directors of the
Company who are not interested persons of the Fund and have no direct or
indirect financial interest in the operations of the Plan, or by a vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
each class of a Fund affected thereby entitled to vote thereon under the 1940
Act. A Plan will automatically terminate in the event of its "assignment" (as
defined in the 1940 Act).
DETERMINATION OF NET ASSET VALUE
The net asset value ("NAV") per share of each Fund is determined in the
manner described in the Company's Prospectus. Each Fund will determine the NAV
of its shares on each day that the New York Stock Exchange (the "NYSE") is open
for business. The Directors of the Company and the Trustees of the Trust have
each established procedures for valuing the assets of the Funds and Portfolios,
respectively. In general, these valuations are based on market value with
special provisions for: securities not listed on an exchange or securities
market; securities for which recent market quotations are not readily available;
short-term obligations; and open short positions and options written on
securities.
Securities held by each Non-Feeder Fund and Portfolio, other than the
ASMT JPM Money Market Portfolio (the "Money Market Portfolio"), will be valued
as follows: portfolio securities which are traded on stock exchanges are valued
at the last sale price on the principal exchange as of the close of business on
the day the securities are being valued, or, lacking any sales on that day, at
the mean between the bid and asked prices. Securities traded in the
over-the-counter market that are included in the National Market System are
valued at the mean between the bid and asked prices which may be based on
valuations furnished by a pricing service or from independent securities
dealers. Otherwise, over-the-counter securities are valued at the mean between
the bid and asked prices or yield equivalent as obtained from one or more
dealers that make markets in the securities. Portfolio securities which are
traded both in the over-the-counter market and on an exchange are valued
according to the broadest and most representative market, and it is expected
that for debt securities this ordinarily will be the over-the-counter market.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under procedures or
guidelines established by the Directors of the Company and the Trustees of the
Trust, where applicable.
The NAV per share of the Money Market Portfolio is determined by using
the amortized cost method of valuing portfolio instruments. Under the amortized
cost method of valuation, an instrument is valued at cost and the interest
payable at maturity upon the instrument is accrued as income, on a daily basis,
over the remaining life of the instrument. Neither the amount of daily income
nor the NAV is affected by unrealized appreciation or depreciation of the
Portfolio's investments assuming the instrument's obligation is paid in full on
maturity. In periods of declining interest rates, the indicated daily yield on
shares of the Portfolio computed using amortized cost may tend to be higher than
a similar computation made using a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the indicated daily yield on
shares of the Portfolio computed using amortized cost may tend to be lower than
a similar computation made using a method of valuation based upon market prices
and estimates. In addition, short-term obligations with remaining maturities of
less than 60 days that are held by any Fund or Portfolio are valued at amortized
cost.
The amortized method of valuation is intended to permit the Money
Market Portfolio to maintain a constant NAV per share of $1.00. No assurances
can be given that this can be attained. The Directors of the Company and the
Trustees of the Trust, where applicable, periodically review the extent of any
deviation from the $1.00 per share value that would occur if a method of
valuation based on market prices and estimates were used. In the event such a
deviation would exceed one-half of one percent, the Directors of the Company and
the Trustees of the Trust, where applicable, will promptly consider any action
that reasonably should be initiated to eliminate or reduce material dilution or
other unfair results to shareholders. Such action may include selling portfolio
securities prior to maturity, not declaring earned income dividends, valuing
portfolio securities on the basis of current market prices, if available, or, if
not available, at fair market value as determined in good faith by the Directors
of the Company or the Trustees of the Trust, where applicable, and (considered
highly unlikely by management of the Company and the Trust) redemption of shares
in kind (i.e., with portfolio securities).
A Fund's maximum offering price per Class A share is determined by
adding the maximum sales charge to the NAV per share. Class B, C and X shares
are offered at NAV without the imposition of an initial sales charge.
ADDITIONAL INFORMATION ON THE
PURCHASE AND REDEMPTION OF SHARES
RIGHTS OF ACCUMULATION:
Each Fund offers to all qualifying investors certain "rights of
accumulation" under which investors are permitted to purchase Class A shares of
any Fund at the price applicable to the total of (a) the then current purchase
amount plus (b) an amount equal to the then current NAV of the purchaser's
holdings of all shares of any Fund of the Company. Acceptance of the purchase
order is subject to confirmation of qualification. A qualifying investor's
rights of accumulation may be amended or terminated at any time as to subsequent
purchases.
LETTER OF INTENT:
Any person may qualify for a reduced sales charge on purchases of Class
A shares made within a thirteen-month period pursuant to a Letter of Intent
("LOI"). In computing the total amount purchased for purposes of determining the
applicable sales commission, the offering price of shares currently held in the
Funds which were purchased within 90 days from the date of acceptance of the LOI
may be used as a credit toward Fund shares to be purchased under the LOI. Class
A, B, C and X shares acquired through the reinvestment of distributions do not
constitute purchases for purposes of the LOI. During the term of an LOI, Boston
Financial Data Services, Inc., the Company's transfer agent (the "Transfer
Agent"), will hold shares in escrow to secure payment of the higher sales charge
applicable for shares actually purchased if the amount indicated on the LOI is
not purchased. Dividends and capital gains will be paid on all escrowed shares
and these shares will be released when the amount indicated on the LOI has been
purchased. An LOI does not obligate the investor to buy or the Fund to sell the
indicated amount of the LOI. If the specified amount of the LOI is not
purchased, the shareholder shall remit to the Transfer Agent an amount equal to
the difference between the sales charge paid and the sales charge that would
have been paid had the aggregate purchases been made at a single time. If the
Class A shareholder does (not within twenty days after a written request by the
Transfer Agent) pay such difference in sales charge, the Transfer Agent will
redeem an appropriate number of escrowed shares in order to realize such
difference. Additional information about the terms of the LOI are available from
your registered representative.
SPECIAL REDEMPTIONS:
Although it would not normally do so, each Fund has the right to pay
the redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Directors of the Company. When the shareholder
sells portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining NAV. The Funds have 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 from any one account during any 90-day
period up to the lesser of $250,000 or 1% of the NAV of the applicable Fund or
Portfolio at the beginning of such period.
SUSPENSION OF REDEMPTIONS:
A Fund may not suspend a shareholder's right of redemption or postpone
payment for a redemption for more than seven days, unless the New York Stock
Exchange ("NYSE") is closed for other than customary weekends or holidays, or
trading on the NYSE is restricted, or for any period during which an emergency
exists as a result of which (1) disposal by a Fund or Portfolio of securities
owned by it is not reasonably practicable, or (2) it is not reasonably
practicable for a Fund to fairly determine the value of its assets, or for such
other periods as the Commission may permit for the protection of investors.
For further information regarding the purchase and redemption of Fund
shares, see "How to Buy Shares" and "How to Redeem Shares," respectively, in the
Company's Prospectus.
<PAGE>
PORTFOLIO TRANSACTIONS
BROKERAGE ALLOCATION:
Subject to the supervision of the Directors of the Company and the
Trustees of the Trust, where applicable, decisions to buy and sell securities
for the Company and the Trust are made for each Non-Feeder Fund and Portfolio by
its respective Sub-advisor. Each Sub-advisor is authorized to allocate the
orders placed by it on behalf of the applicable Fund or Portfolio to brokers who
also provide research or statistical material or other services to the
Sub-advisor or the Fund or Portfolio for the use of the applicable Fund or
Portfolio and other accounts as to which the Sub-advisor exercises investment
discretion. Such allocation shall be in such amounts and proportions as the
Sub-advisor shall determine. The Sub-advisor will report on allocations of
brokerage either to the Investment Manager, which will report on such
allocations to the Directors of the Company or the Trustees of the Trust, where
applicable, or, if requested, directly to the Directors or Trustees. These
reports will indicate the brokers to whom such allocations have been made and
the basis therefor. The Sub-advisor may consider sale of shares of the Funds, or
may consider or follow recommendations of the Investment Manager that take such
sales into account, as factors in the selection of brokers to effect portfolio
transactions for a Fund or Portfolio, subject to the requirements of best net
price available and most favorable execution. In this regard, the Investment
Manager may direct certain of the Sub-advisors to try to effect a portion of
their Fund or Portfolio's investment transactions through broker-dealers that
sell shares of the Fund (or corresponding Fund, in the case of the Portfolios),
to the extent consistent with best net price available and most favorable
execution.
Subject to the rules promulgated by the Commission, as well as other
regulatory requirements, a Sub-advisor also may allocate orders to brokers or
dealers affiliated with the Sub-advisor or the Investment Manager. Such
allocation shall be in amounts and proportions as the Sub-advisor shall
determine. The Sub-advisor will report on these allocations of brokerage either
to the Investment Manager, which will report on such allocations to the
Directors of the Company or the Trustees of the Trust, where applicable, or, if
requested, directly to the Directors or Trustees.
In selecting a broker to effect each particular transaction, each
Sub-advisor will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Subject to such policies and procedures as the Directors of
the Company and the Trustees of the Trust may determine, a Sub-advisor shall not
be deemed to have acted unlawfully or to have breached any duty solely by reason
of its having caused a Fund or Portfolio to pay a broker that provides research
services to the Sub-advisor an amount of commission for effecting an investment
transaction in excess of the amount of commission another broker would have
charged for effecting that transaction, if the Sub-advisor determines in good
faith that such amount of commission was reasonable in relation to the value of
the research service provided by such broker viewed in terms of either that
particular transaction or the Sub-advisor's ongoing responsibilities with
respect to the Fund or Portfolio and other accounts as to which the Sub-advisor
exercises investment discretion. Accordingly, the amount of the brokerage
commission in any transaction may be greater than that available from other
brokers if the difference is reasonably justified by other aspects of the
services offered. For the period from commencement of operations until October
31, 1997, aggregate brokerage commissions of __ and __ were paid in relation to
brokerage transactions of the Company and the Trust, respectively.
During the period ending October 31, 1997, brokerage commissions were
paid to certain affiliates of Rowe Price-Fleming International, Inc. by the ASMT
T. Rowe Price International Equity Portfolio in the amount of __. For that
period, __% of the total brokerage commissions paid by this Portfolio were paid
to the affiliated brokers, with respect to transactions representing __% of the
Portfolio's total dollar amount of transactions involving the payment of
commissions.
ALLOCATION OF INVESTMENTS:
The Sub-advisors of the Non-Feeder Funds and Portfolios have other
advisory clients, some of which have similar investment objectives to one or
more of the Funds or Portfolios for which advisory services are being provided.
In addition, a Sub-advisor may be engaged to provide advisory services for more
than one Fund or Portfolio. There will be times when a Sub-advisor may recommend
purchases and/or sales of the same securities for a Fund or Portfolio and the
Sub-advisor's other clients. In such circumstances, it will be the policy of
each Sub-advisor to allocate purchases and sales among a Fund or Portfolio and
its other clients, including other Funds or Portfolios for which the Sub-advisor
provides advisory services, in a manner which the Sub-advisor deems equitable,
taking into consideration such factors as size of account, concentration of
holdings, investment objectives, tax status, cash availability, purchase costs,
holding period and other pertinent factors relative to each account.
PORTFOLIO TURNOVER:
Each Non-Feeder Fund and Portfolio may sell its portfolio securities,
regardless of the length of time that they have been held, if the Sub-advisor
and/or the Investment Manager determines that such a disposition is in the
Fund's or Portfolio's best interest. Portfolio turnover rates may increase as a
result of the need for a Fund or Portfolio to effect significant amounts of
purchases or redemptions of portfolio securities due to economic, market, or
other factors that are not within the Sub-advisor's or Investment Manager's
control. A high rate of portfolio turnover (generally in excess of 100%)
involves correspondingly higher brokerage commission expenses and other
transaction costs, which must be ultimately borne by a Fund's shareholders.
Trading in fixed income securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. High
portfolio turnover rates may also generate larger taxable income and taxable
capital gains than would result from lower portfolio turnover rates and may
create higher tax liability for a Fund's shareholders. Although it is not
possible to predict future portfolio turnover rates accurately, and such rates
may vary from year to year, it is anticipated that portfolio turnover rates for
the ASMT T. Rowe Price International Equity Portfolio, ASAF T. Rowe Price Small
Company Value Fund, ASAF Lord Abbett Growth and Income Fund, ASMT INVESCO Equity
Income Portfolio and the ASAF Federated High Yield Bond Fund will not exceed
100% under normal market conditions. The portfolio turnover rates for the ASAF
Founders International Small Capitalization Fund, ASAF Janus Overseas Growth
Fund, ASAF Founders Small Capitalization Fund, ASAF Robertson Stephens Value +
Growth Fund, ASMT Janus Capital Growth Portfolio, ASAF American Century
Strategic Balanced Fund and ASMT PIMCO Total Return Bond Portfolio are not
anticipated to exceed 150%, 200%, 150%, 250%, 200%, 150% and 350%, respectively,
under normal market conditions. A 100% portfolio turnover rate would occur if
all of the securities in a portfolio of investments were replaced during a given
period. For additional information regarding portfolio turnover, see the
Company's Prospectus under "Portfolio Transactions."
ADDITIONAL TAX CONSIDERATIONS
Federal Income Tax Consequences. Each Fund is treated as a separate
entity for federal income tax purposes. Each Fund has qualified and elected or
intends to qualify and elect to be treated as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and intends to continue to so qualify in the future. As a regulated
investment company, a Fund must, among other things, (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
stock and securities, gains from the sale or other disposition of stock,
securities or foreign currency and other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or foreign currency; (b) for its
taxable year ending October 31, 1997, derive less than 30% of its gross income
from the sale or other disposition of stock, securities, options, futures or
forward contracts (other than options, futures or forward contracts on foreign
currencies) held less than three months, or foreign currencies (or options,
futures or forward contracts on foreign currencies), but only if such currencies
(or options, futures or forward contracts on foreign currencies) are not
directly related to a Fund's principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities); and
(c) diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the value of the Fund's total assets is represented by
cash, cash items, 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 total assets, and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies). As a regulated investment company, a Fund (as opposed to
its shareholders) will not be subject to federal income taxes on the net
investment income and capital gain that it distributes to its shareholders,
provided that at least 90% of its net investment income and realized net
short-term capital gain in excess of net long-term capital loss for the taxable
year is distributed in accordance with the Code's timing requirements (the
"Distribution Requirement"). For additional information regarding the Funds'
treatment as regulated investment companies under the Code, and certain
consequences if such treatment is not accorded any Fund, see the Company's
Prospectus under "Dividends, Capital Gains and Taxes."
<PAGE>
Each Fund will be subject to a 4% non-deductible federal excise tax on
a portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. Each
Fund intends to avoid liability for such tax by satisfying such distribution
requirements.
Each of the Feeder Funds will invest all of its investable assets in a
corresponding Portfolio of the Trust. Each such Fund will be deemed to own a
proportionate share of its corresponding Portfolio's assets and income for the
purpose of determining whether the Fund qualifies as a regulated investment
company. Accordingly, each Portfolio intends to conduct its operations so that
its corresponding Fund will be able to satisfy applicable tax requirements.
If a Fund or Portfolio acquires stock in certain non-U.S. corporations
("passive foreign investment companies" or "PFICs") that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gains) or at least 50% of whose average assets
produce or are held for the production of such passive income, that Fund (or, in
the case of a Portfolio, its corresponding Fund indirectly through its interest
in the Portfolio) could be subject to federal income tax and additional interest
charges on "excess distributions" received from such companies or gain from the
sale of stock in such companies, even if the Fund distributes its share of the
PFIC income as a taxable dividend to its shareholders. A certain election
(treating the PFIC as a "qualified electing fund") filed with the Fund's federal
income tax return may, if available, ameliorate these adverse tax consequences,
but any such election would require the applicable Fund to recognize ordinary
taxable income and net capital gain of the PFIC without the corresponding
receipt of cash which may need to be distributed by the Fund to satisfy the
Distribution Requirement.
Pursuant to proposed regulations, open-end regulated investment
companies such as the Funds would be entitled to avoid the tax consequences
described in the previous paragraph by electing to mark-to-market their stock in
certain PFICs. Marking to market in this context means recognizing as gain for
each taxable year the excess, as of the end of that year, of the fair market
value of each PFIC's stock over the owner's adjusted basis in that stock
(including mark to market gains of a prior year for which an election was in
effect).
Gains and losses realized by a Fund (directly, or through its interest
in a Portfolio) in connection with certain transactions involving foreign
currency-denominated debt securities, certain foreign currency futures and
options, foreign currency forward contracts, foreign currencies themselves, or
payables or receivables denominated in a foreign currency are generally treated
as ordinary income and loss.
Some Funds, or, in certain cases, the Portfolio in which a Fund may
invest its assets, may be subject to withholding and other taxes imposed by
foreign countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. A Fund, more than 50% of the value of whose total assets at the close of
a taxable year (held directly or indirectly through a corresponding Portfolio)
consists of stock or securities in foreign corporations, may elect to
"pass-through" these foreign taxes to its shareholders, in which case each
shareholder will be required to include its pro rata portion thereof in its
gross income but, if it itemizes deductions, will be able to deduct or (subject
to various limitations) will be able to claim a credit for its portion of such
taxes, in computing its federal income tax liability.
Each Fund or Portfolio that invests in zero coupon securities or in
other securities with original issue discount (or securities with market
discount, if the Fund or Portfolio elects to include market discount in income
currently) must accrue such discount income currently even if no corresponding
payment is received. However, because income subject to a Fund's Distribution
Requirement includes such accrued discount, to satisfy that requirement, a Fund
may have to dispose of its (or, as the case may be, its corresponding
Portfolio's) securities under disadvantageous circumstances, or borrow, to
generate the needed cash.
Forward currency contracts, options and futures contracts entered into
by a Fund or Portfolio may create "straddles" for federal income tax purposes
with other such contracts or with securities positions, and this may affect the
character and timing of gains or losses realized by the Fund (or, in the case of
a Portfolio, by its corresponding Fund) on such contracts, options or
securities. Certain straddles treated as short sales for tax purposes may also
result in the loss of the holding period of securities included in the straddles
for purposes of the 30% of gross income test described above, and therefore, a
Fund's or Portfolio's ability to enter into forward currency contracts, options
and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by a Fund
or Portfolio at the end of each taxable year will be required to be
"marked-to-market" for federal income tax purposes -- i.e., treated as having
been sold at market value. For options and futures contracts, 60% of any gain or
loss recognized on these deemed sales and on actual dispositions will be treated
as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss regardless of how long the Fund or Portfolio has
held such options or futures. However, gain or loss recognized on certain
foreign currency contracts will be treated as ordinary income or loss.
If a Fund or Portfolio satisfies certain requirements, any increase in
value of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the offsetting hedging position
during the period of the hedge for purposes of determining whether the Fund (or,
in the case of a Portfolio, its corresponding Fund) satisfies the 30% gross
income test above. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. Each Fund or
Portfolio will consider whether it should seek to satisfy those requirements to
enable the Fund (or, in the case of a Portfolio, its corresponding Fund) to
qualify for this treatment for hedging transactions.
To maintain a constant $1.00 per share NAV, the Directors of the ASAF
JPM Money Market Fund (the "Money Market Fund") may direct that the number of
outstanding shares be reduced pro rata. If this adjustment is made, it will
reflect the lower market value of portfolio securities and not realized losses.
The adjustment may result in a shareholder having more dividend income than net
income in his account for a period. When the number of outstanding shares of the
Money Market Fund is reduced, the shareholder's basis in the shares of the Fund
may be adjusted to reflect the difference between taxable income and net
dividends actually distributed. This difference may be realized as a capital
loss when the shares are liquidated.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Company's Prospectus whether taken in shares or in cash. These
distributions will be treated as dividends, but will qualify for the 70%
dividends-received deduction for the Fund's corporate shareholders only to the
extent designated in a notice to the Fund's shareholders as being attributable
to dividends received by the Fund. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in a Fund's shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
At the time of an investor's purchase of shares of a Fund (other than
the Money Market Fund), a portion of the purchase price is often attributable to
realized or unrealized appreciation in the Fund's portfolio or undistributed
taxable income of the Fund. Consequently, subsequent distributions from such
appreciation or income may be taxable to such investor even if the NAV of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption of shares of a Fund, other than the Money Market Fund
(including an exchange for other Fund shares), a shareholder may realize a
taxable gain or loss. Such gain or loss will be capital if the shares are
capital assets in the shareholder's hands and will be long-term or short-term
capital gain or loss, depending upon the shareholder's holding period for the
shares. A sales charge paid in purchasing shares of a Fund ("load charge")
cannot be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent shares of the same or another Fund are subsequently acquired without
payment of a load charge pursuant to a reinvestment or exchange privilege. Such
disregarded load charge will result in an increase in the shareholder's tax
basis in the Fund shares subsequently acquired. Also, any loss realized on a
redemption or exchange of shares of a Fund will be disallowed to the extent the
shares disposed of are replaced with shares of the same Fund within a period of
61 days beginning 30 days before and ending 30 days after such disposition. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. If Fund shares are redeemed or exchanged at a loss after being
held for six months or less, the loss will treated as long-term, instead of
short-term, capital loss to the extent of any capital gains distributions
received on those shares.
Each shareholder will be required to furnish its social security or
taxpayer identification number and certify that such number is correct and that
the shareholder is not subject to back-up withholding for failure to report
income to the Internal Revenue Service ("IRS"). Failure to comply with
applicable IRS regulations, including the certification procedures described
above, may result in the Fund being required to collect back-up withholding at a
31% rate on taxable distributions and redemptions to the shareholder.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to shareholder
accounts maintained as qualified retirement plans. Shareholders should consult
their tax advisers for more information.
The foregoing discussion relates solely to federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) generally. The discussion does
not address special tax rules applicable to certain classes of investors, such
as tax-exempt entities, insurance companies, and financial institutions.
A foreign shareholder (i.e., a nonresident alien individual, foreign
trust or estate, foreign corporation or foreign partnership) not engaged in a
U.S. trade or business with which its investment in a Fund is effectively
connected will be subject to federal income tax treatment that is different from
that described above. These investors may be subject to U.S. withholding tax at
the rate of 30% (or a lower rate under an applicable tax treaty) on amounts
treated as ordinary dividends from a Fund and, unless an effective IRS Form W-8
or authorized substitute is on file, to backup withholding at the rate of 31% on
certain other payments from the Fund. Distributions treated as long term capital
gains to foreign shareholders will not be subject to federal income tax unless
the distributions are effectively connected with the shareholder's U.S. trade or
business or, in the case of a non-resident alien individual, the shareholder is
present in the U.S. for more than 182 days during the taxable year and certain
other conditions are met. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in any Fund.
State and Local Tax Consequences. Each Fund may be subject to state or
local taxes in jurisdictions in which such Fund may be deemed to be doing
business. In addition, in those states or localities which have income tax laws,
the treatment of such Fund and its shareholders under such laws may differ from
their treatment under federal income tax laws, and investment in such Fund may
have different tax consequences for shareholders than would direct investment in
such Fund's (or, in the case of a Feeder Fund, its corresponding Portfolio's)
portfolio securities. Shareholders should consult their own tax advisers with
respect to any state or local taxes.
CAPITAL STOCK OF THE COMPANY &
PRINCIPAL HOLDERS OF SECURITIES
The Company is an open-end management investment company organized
under the laws of Maryland on March 5, 1997. The Company currently has thirteen
separate series of shares of beneficial interest, each of which is divided into
Class A, B, C and X shares. The Directors of the Company are authorized to
establish, from time to time and without shareholder approval, additional series
or classes of shares.
The shares of the Funds are entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series vote together in the election and selection of
directors. Shares of a Fund vote together as a class on matters that affect the
Fund in substantially the same manner. Matters pertaining only to one or more
Funds will be voted upon only by those Funds. As to matters affecting a single
class, shares of such class will vote separately. Shares of the Funds do not
have cumulative voting rights. The Company and the Funds do not intend to hold
annual meetings of shareholders unless required to do so by the 1940 Act or the
Maryland statutes under which the Company is organized. Although Directors are
not elected annually by the shareholders, shareholders have under certain
circumstances the right to remove one or more Directors. If required by
applicable law, a meeting will be held to vote on the removal of a Director or
Directors of the Company if requested in writing by the holders of not less than
10% of the Company's outstanding shares. Each Fund's shares when issued are
fully paid, non-assessable and freely transferable, and have no preference,
preemptive or similar rights.
<PAGE>
The following table lists persons owning more than 5% of any class of the
Fund's outstanding shares as of December 24, 1997.
<TABLE>
<CAPTION>
American Skandia Advisor Funds, Inc., - Report of 5% or Greater Owners
As of December 24, 1997
Fund and Share Class Owner Name Address Percent
Ownership
<S> <C> <C> <C>
ASAF Founders International Small State Street Bank & Trust Co. 1824 Oak Road 8.88%
Capitalization Fund Class A Cust for the IRA Rollover of North Brunswick, NJ 08902-2535
Edythe J. Doerr
State Street Bank & Trust Co. 41 Sandown Road 6.83%
Cust for the IRA of Myron E. Audubon, PA 19403-1982
Jennings
State Street Bank & Trust Co. 110 Race Hill Road 8.18%
Cust for the IRA of Berthann Guilford, CT 06437-1011
Jones
ASAF Founders International Small Cap Vernice B. Ruiz 6722 Casa Blanca 14.11%
Fund Class B Houston, TX 77088-2139
Nell T. Haddock 10645 No. Tatum Blvd. 5.54%
Suite 200
Box 288
Phoenix, AZ 85001-0288
Linda Tomkiewicz 314 Arch Street 6.73%
Delran, NJ 08075-1108
Donaldson Lufkin Jenrette P.O. Box 2052 8.34%
Securities Corporation Inc. Jersey City, NJ 07303-2052
ASAF Founders International Small Cap State Street Bank & Trust Co. 437 Benjamins Road 5.70%
Fund Class C Cust for the IRA of William E. Santa Rosa, CA 95409-3115
Dean
State Street Bank & Trust Co. 437 Benjamin Road 11.82%
Cust. For the IRA of Deloris Santa Rosa, CA 95409-3115
D. Dean
State Street Bank & Trust Co. 3770 Black Creek Drive 8.93%
Cust. For the IRA Rollover of Hudsonville, MI 49426-9036
Eugene D. Vander Ark
Tawny J. Pace 869 Lucas Lane 8.94%
Oldsmar, FL 34677-4222
Craig B. Satterlee 181 Blue Sky Drive 8.09%
Marietta, GA 30068-3812
Antonio Narvaez Jr TTEE 868 N. Sacremento Avenue 7.04%
Antonio Narvaez Jr Char Chicago, IL 60622-4363
Remainder Annuity Trust DTD
7-22-97
ASAF Founders International Small Cap State Street Bank & Trust Co. 3936 Cloverfield Circle 9.77%
Fund Class X Cust for the IRA Rollover of Liverpool, NY 13090-3104
James J. Layhew
ASAF T. Rowe Price International Equity Jeanne L. Odell TTEE 2249 Country Club Loop 16.92%
Fund Class A Country Hills Investments Westminster, CO 80234-2637
Ann W. Greenfield 7277 NW 64TH Terrace 6.28%
Parkland, FL 33067-4751
ASAF T. Rowe Price International Equity N/A N/A N/A
Fund Class B
ASAF T. Rowe Price International Equity Craig B. Satterlee 181 Blue Sky Drive 9.80%
Fund Class C Marietta, GA 30068-3812
Donaldson Lufkin Jenrette P.O. Box 2052 7.37%
Securities Corporation Inc. Jersey City, NJ 07303-2052
ASAF T. Rowe Price International Equity N/A N/A N/A
Fund Class X
ASAF Janus Overseas Growth Fund N/A N/A N/A
Class A, B, C and X
ASAF Founders Small Capitalization Fund State Street Bank & Trust Co. 2534 W. Avenue J 6.69%
Class A Cust for the IRA Rollover of San Angelo, TX 76901-3745
Frank C. Gould
Wedbush Morgan Securities Inc. P.O. Box 30014 6.33%
FBO A/C 8501-2423 Los Angeles, CA 90030-0014
Jeanne L. Odell TTEE 2249 Country Club Loop 21.46%
Country Hills Investments Westminster, CO 80234-2637
Wedbush Morgan Securities 1000 Wilshire Boulevard 8.27%
A/C 3735-1153 Los Angeles, CA 90017-2457
ASAF Founders Small Cap Fund Brian J. Doering 3868 39th Street 5.42%
Class B San Diego, CA 92105-2420
Terrell Phillips 1044 SW 44th, Suite 505 6.05%
Delaware Charter IRA SEP Oklahoma City, OK 73109-3609
Marvin P. Burnett & 6250 S. Elmire Circle E. 7.96%
Alison G. Burnett ATIC Englewood, CO 80111-5606
ASAF Founders Small Cap Fund State Street Bank & Trust Co. 437 Benjamins Road 5.05%
Class C Cust for the IRA of William E. Santa Rosa, CA 95409-3115
Dean
State Street Bank & Trust Co. 437 Benjamins Road 10.37%
Cust for the IRA of Deloris D. Santa Rosa, CA 95409-3115
Dean
Bill Bellis RR 4 Box 243-E 7.89%
Betty Bellis JT WROS Savannah, TN 38372-9804
Craig B. Satterlee 181 Blue Sky Drive 7.15%
Marietta, GA 30068-3812
Raymond James & Assoc. Inc. 880 Carillon Parkway 8.55%
CSDN Donald A. Worley IRA P.O. Box 12749
Acct#71390924 St. Petersburg, FL 33733-2749
ASAF Founders Small Cap Fund State Street Bank & Trust Co. 3936 Cloverfield Circle 7.41%
Class X Cust. For the IRA of Liverpool, NY 13090-3104
Rollover of James J. Layhew
ASAF T. Rowe Price Small Co. Value Fund Jeanne L. Odell TTEE 2249 Country Club Loop
Class A Country Hills Investments Westminster, CO 80234-2637
ASAF T. Rowe Price Small Co. Value Fund N/A N/A N/A
Class B
ASAF T. Rowe Price Small Co. Value Fund State Street Bank & Trust Co. 3770 Black Creek Drive 6.75%
Class C Cust for the IRA Rollover of Hudsonville, MI 49426-9036
Eugene D. Vander Ark
Curtis B. Bruce 11276 Meadow Glen Way E 6.00%
Catherine Bruce JT WROS Escondido, CA 92026-7009
ASAF T. Rowe Price Small Co. Value Fund State Street Bank & Trust Co. P.O. Box 27 6.00%
Class X Cust for the IRA of Kenneth L. Thomas, OK 73669-0027
Ballard
ASAF Robertson Stephens Value + Growth
Fund Class A, B, C, & X N/A N/A N/A
ASAF Janus Capital Growth Fund State Street Bank & Trust Co. 2534 W. Avenue J 5.83%
Class A Cust for the IRA Rollover of San Angelo, TX 76901-3745
Frank C. Gould
Jeanne L. Odell TTEE 2249 Country Club Loop 5.06%
Country Hills Investments Westminster, CO 80234-2637
ASAF Janus Capital Growth Fund N/A N/A N/A
Class B
ASAF Janus Capital Growth Fund N/A N/A N/A
Class C
ASAF Janus Capital Growth Fund N/A N/A N/A
Class X
ASAF Lord Abbett Growth and Income
Fund Class A, B, C & X N/A N/A N/A
ASAF INVESCO Equity Income Fund Jeanne L. Odell TTEE 2249 Country Club Loop 7.75%
Class A Country Hills Investments Westminster, CO 80234-2637
ASAF INVESCO Equity Income Fund Eva G. Seltzer 114 Hayes Mill Road, Apt. D105 5.55%
Class B Atco, NJ 08004-2464
Margaret B. Davis 705 West Lee 5.15%
Weatherford, TX 76086-4121
ASAF INVESCO Equity Income Fund State Street Bank & Trust Co. 3770 Black Creek Drive 5.70%
Class C Cust. For the IRA Rollover of Hudsonville, MI 49426-9036
Eugene D. Vander Ark
Craig B. Satterlee 181 Blue Sky Drive 7.78%
Marietta, GA 30068-3812
ASAF INVESCO Equity Income Fund State Street Bank & Trust Co. P.O. Box 27 6.54%
Class X Cust for the IRA Rollover of Shaver Lake, CA 93664-0027
Stanley E. Daniels
ASAF American Century Strategic Jeanne L. Odell TTEE 2249 Country Club Loop 37.49%
Balanced Fund Class A Country Hills Investments Westminster, CO 80234-2637
Michael E. English 2637 Eudora Street 11.30%
Denver, CO 80207-3216
ASAF American Century Strategic Jane F. Barry 149 E. Side Drive. #229 5.97%
Balanced Fund Class B Concord, NH 03301-5465
ASAF American Century Strategic State Street Bank & Trust Co. 437 Benjamins Road 7.39%
Balanced Fund Class C Cust. For the IRA of Santa Rosa, CA 95409-3115
Deloris D. Dean
Tawny J. Pace 869 Lucas Lane 8.50%
Oldsmar, FL 34677-4222
Michael Thomas O'Cal 4742 Santa Rosita Court 5.79%
Santa Rosa, CA 95405-8203
State Street Bank & Trust Co. 20 Mayfair Court 5.06%
Cust for the IRA of Helen B. Little Silver, NJ 07739-1237
Mosolgo
State Street Bank & Trust Co. 424 Washington Avenue 9.31%
Cust for the IRA of Julia A. Wilmette, IL 60091-1966
Mayes
Raymond James & Assoc Inc CSDN 880 Carillon Parkway 5.62%
Gerald Sparer IRA P.O. Box 12749
Acct# 88372328 St. Petersburg, FL 33733-2749
Donaldson Lufkin Jenrette P.O. Box 2052 9.77%
Securities Corporation Inc. Jersey City, NJ 07303-2052
ASAF American Century Strategic State Street Bank & Trust Co. 9 Oyster Bateau Court 9.07%
Balanced Fund Class X Cust for the IRA of David W. Hilton Head, SC 29926-2683
Hodges
State Street Bank & Trust Co. 83 Bond Street 5.45%
Cust. for the IRA of Norwood, MA 02062-2063
George M. Donelan
State Street Bank & Trust Co. 7088 Anderson Road 9.60%
Cust for the IRA of Betty L. Montague, MI 49437-9787
Johnson
State Street Bank & Trust Co. 1620 Ridgeview Circle 8.19%
Cust for the IRA of Bonnie C. Monument, CO 80132-9533
Wendelburg
ASAF Federated High Yield Bond Fund State Street Bank & Trust Co. 5644 Edgewater Boulevard 5.33%
Class A Cust for the IRA Rollover of Minneapolis, MN 55417-2627
Bonnie J. Daly
State Street Bank & Trust Co. 2534 W. Avenue J 6.90%
Cust for the IRA Rollover of San Angelo, TX 76901-3745
Frank C. Gould
Ethelann G. Stillinger TTEE P.O. Box 142 9.89%
Robert H. Stillinger Rev Liv Table Rock, NE 68447-0142
Trust
FBO Robert H. Stillinger
U/A DTD 10/13/93
Gary W. Brown 710 N. Railroad Street 5.27%
Palmyra, PA 17078-1128
State Street Bank & Trust Co. 19240 Starrwood Drive 6.00%
Cust for the IRA of Ruby E. Monument, CO 80132-9711
Hamilton
Dain Bosworth Custodian 371 South 20TH 6.52%
Leonard H. McCain Brighton, CO 80601-2521
A/C #5468-5662
Individual Retirement Account
Wedbush Morgan Securities 1000 Wilshire Boulevard 6.22%
A/C 3559-8655 Los Angeles, CA 90017-2457
ASAF Federated High Yield Bond Fund Marlys A. Brinklow 6 Taos Circle 5.19%
Class B Fountain, CO 80817-2104
John R. Owen 113 Stagecoach Drive 6.17%
Angela Tyler-Owen JT WROS Madison, AL 35757-8817
Hyman Novarr 1250 Farmington Avenue 6.41%
W. Hartford, CT 06107-2608
ASAF Federated High Yield Bond Fund INDE & Co CUST 4401 Rockside Road 5.19%
Class C FBO EBIRA # 17-119-5 Independence, OH 44131-2144
c/o Independence Bank
INDE & Co. CUST 4401 Rockside Road 10.38%
FBO BWIRA # 17-123-9 Independence, OH 44131-2144
c/o Independence Bank
INDE & Co. CUST 4401 Rockside Road 5.05%
FBO JCKIRA # 17-031-3 Independence, OH 44131-2144
c/o Independence Bank
INDE & Co. CUST 4401 Rockside Road 5.54%
FBO BCLPSP # 15-020-1 Independence, OH 44131-2144
c/o Independence Bank
INDE & Co. CUST 4401 Rockside Road 6.09%
FBO JSTIRA # 17-091-8 Independence, OH 44131-2144
c/o Independence Bank
INDE & Co. CUST 4401 Rockside Road 16.96%
FBO BNRIRA # 17-083-1 Independence, OH 44131-2144
c/o Independence Bank
INDE & Co. CUST 4401 Rockside Road 7.20%
FBO TFERPT # 15-035-6 Independence, OH 44131-2144
c/o Independence Bank
ASAF Federated High Yield Bond Fund State Street Bank & Trust Co. 221 Hager Road 8.84%
Class X Cust for the 403B of Joan Rochester, NY 14616-3137
Nageldinger
Everen Clearing Corp Cust 7943 W. Friend Drive 13.50%
FBO John S. Wells IRA Littleton, CO 80128-5544
A/C 8205-9670
ASAF Total Return Bond Fund State Street Bank & Trust Co. 5644 Edgewater Boulevard 12.76%
Class A Cust for the IRA Rollover of Minneapolis, MN 55417-2627
Bonnie J. Daly
State Street Bank & Trust Co. 2534 W. Avenue J 16.52%
Cust for the IRA Rollover of San Angelo, TX 76901-3745
Frank C. Gould
Joseph Jacuzzo 18 Main Street 6.13%
Phyllis Mary Jacuzzo JT WROS Perry, NY 14530-1311
Donaldson Lufkin Jenrette P.O. Box 2052 9.42%
Securities Corporation Inc Jersey City, NJ 07303-2052
ASAF Total Return Bond Fund Joseph & Pauline Grosso TTEE 2555 PGA Blvd. Lot 142 7.42%
Class B Joseph & Pauline Grosso Palm Beach Gardens, FL
Living Trust DTD 33410-2945
Lorraine Taylor 4739 W 149th Street 5.68%%
Ann Irmer TTEES Midlothian, IL 60445-3183
The Irmer Family Revoc Living
Trust DTD 2/3/97
Harriet Hinckley Eliason & 2558 S 900 E 10.57%
King Hinckley TTEES Salt Lake City, UT 84106-2235
Parnell Hinckley Trust
U/A DTD 10-18-73
So Yee Chu Fong 151 Tremont Street Unit 9E 10.52%
Flora Man Yee Wong TTEES Boston, MA 02111-1145
Shok Wan Cheng Trust
U/A DTD 7-8-97
Martha Messina 2890 Montessouri Street 6.25%
Marie Maiorca JT WROS Las Vegas, NV 89117-3052
Angela Desmoni
Donaldson Lufkin Jenrette P.O. Box 2052 5.21%
Securities Corporation Inc. Jersey City, NJ 07303-2052
ASAF Total Return Bond Fund State Street Bank & Trust Co. 3770 Black Creek Drive 9.90%
Class C Cust. For the IRA Rollover of Hudsonville, MI 49426-9036
Eugene D. Vander Ark
State Street Bank & Trust Co. 82 Wood Creek Drive 11.76%
Cust for the 403-B of Pittsford, NY 14534-4416
Pamela A. Fogarty
State Street Bank & Trust Co. 380 W. Sicamore Lane 16.48%
Cust for the IRA of Louisville, CO 80027-2238
Andrea M. Aschoff
Craig B. Satterlee 181 Blue Sky Drive 8.65%
Marietta, GA 30068-3812
ASAF Total Return Bond Fund Jesse T. Espinola TTEE 127 Belvidere Avenue 6.99%
Class X Warren OB-GYN Associates MPPP Washington, NJ 07882-1402
DTD 1-1-87
FBO Jesse T. Espinola
State Street Bank & Trust Co. 7088 Anderson Road 8.89%
Cust for the IRA of Montague, MI 49437-9787
Betty L. Johnson
State Street Bank & Trust Co. 51 Shoshoni Drive 10.35%
Cust for the IRA Rollover of Sherwood, AR 72120-2538
Jayanna McCulloch
ASAF JPM Money Market Fund Carole D. Haupert 225 Ashwood Lane NW 5.36%
Class A New Philadelphia, OH 44663-3743
Margaret W. Burdick 34 Bloomer Road 5.54%
Thomas W. Burdick JT WROS Ridgefield, CT 06877-6006
State Street Bank & Trust Co. 5658 Swaying Palm Lane 32.07%
Cust. For the IRA Rollover of Boynton Beach, FL 33437-4224
Edward Gerard
Michael Wanas & Mark Fellanto 10 Peach Street 6.43%
TTEES Paterson, NJ 07503-3010
Promar Precision Engine
Rebuilders Inc 401K Profit
SHAR PL
Patricia A. Scheib 315 A Queensdale Drive 5.04%
York, PA 17403-4368
Peter T. Russo 11 Jerome Avenue 6.30%
W. Newton, MA 02165-1108
Donaldson Lufkin Jenrette P.O. Box 2052 6.18%
Securities Corporation Inc. Jersey City, NJ 07303-2052
ASAF JPM Money Market Fund Elba R. Bishop 749 Roosevelt Street 14.86%
Class B June Bishop JT WROS Springfield, CO 81073-1436
Karen S. Cusick 400 Chesterfield Ctr., Ste. 305 11.12%
c/o Clark Financial Servs Group Chesterfield, MO 63017-4800
Marilyn A. Scannell 9 Evergreen Avenue 8.27%
Roger V. Scannell JT WROS Kennebunk, ME 04043-2504
Kenneth M. Walker 7201 Archibald Ave., Ste. 4-286 12.34%
Alta Loma, CA 91701-6403
ASAF JPM Money Market Fund Lynn Harris 6417 High Country Trail 18.82%
Class C Lavern Harris JT WROS Arlington, TX 76016-5519
Harold Delmastro 11 Munster Place 6.73%
Angela Delmastro JT WROS Wayne, NJ 07470-4126
State Street Bank & Trust Co. P.O. Box 1005 10.54%
Cust for the IRA Rollover of Chesapeake Beach, MD 20732-1005
Phillip Constantino
State Street Bank & Trust Co. 1021 Devon Drive 11.33%
Cust for the IRA Rollover of Exton, PA 19341
Nicholas G. Spyropoulos
Bill Bellis RR 4 Box 243-E 11.56%
Betty Bellis JT WROS Savannah, TN 38372-9804
William L. Robinson 5458 Wagon Master Drive 8.66%
Grace C. Robinson TEN COMM Colorado Springs, CO 80917-2235
Antonio Narvaez Jr TTEE 868 N. Sacremento Avenue 5.98%
Antonio Narvaez Jr Char Chicago, IL 60622-4363
Remainder Annuity Trust
DTD 7-22-97
ASAF JPM Money Market Fund State Street Bank & Trust Co. 124 Franklin Street 21.96%
Class X Cust for the IRA Rollover of Melrose, MA 02176-1821
Robert L. Goodwin Jr.
State Street Bank & Trust Co. 1620 Ridgeview Circle 9.55%
Cust for the IRA of Bonnie C. Monument, CO 80132-9533
Wendelburg
Martin D. Desousa & 502 Delaware Avenue 22.56%
Timothy J. Desousa TTEES Palmerton, PA 18071-1917
Desousa's Oil & Service Corp.
Pension Plan Dated 12-12-97
</TABLE>
OTHER INFORMATION
REPORTS TO SHAREHOLDERS:
Shareholders of each Fund are provided unaudited semi-annual financial
statements, as well as year-end financial statements audited by the Company's
independent public accountants. Each Fund's financial statements show the
investments owned by the Fund or its corresponding Portfolio, where applicable,
and the market values thereof. Additionally, each Fund's financial statements
provide other information about the Fund and its operations, including in the
case of the Feeder Funds, the Fund's beneficial interest in its corresponding
Portfolio.
DOMESTIC AND FOREIGN CUSTODIANS:
PNC Bank, located at Airport Business Center, International Court 2,
200 Stevens Drive, Philadelphia, Pennsylvania 19113, serves as custodian for all
domestic cash and securities holdings of the Funds and Portfolios investing
primarily in domestic securities. Morgan Stanley Trust Company, located at One
Pierrepont Plaza, Brooklyn, New York 11201, serves as custodian for all cash and
securities holdings of the ASAF Founders International Small Capitalization
Fund, the ASAF T. Rowe Price International Equity Fund (and corresponding
Portfolio) and the ASAF Janus Overseas Growth Fund, and co-custodian for all
foreign securities holdings of the Funds and Portfolios which invest primarily
in domestic securities.
TRANSFER AGENT:
Boston Financial Data Services, Inc. (the "Transfer Agent," as previously
defined), located at Two Heritage Drive, Quincy, Massachusetts 02171, serves as
the transfer agent for the Company.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P., located at 2400 Eleven Penn Center,
Philadelphia, Pennsylvania 19103, has been selected as the independent certified
public accountants of the Company, providing audit services and assistance and
consultation with respect to the preparation of filings with the Commission.
REGISTRATION STATEMENT:
This SAI and the Company's Prospectus do not contain all the
information included in the Company's Registration Statement filed with the
Commission under the Securities Act of 1933 with respect to the securities
offered by the Prospectus. The Registration Statement, including the exhibits
filed therewith, may be examined at the Commission's offices in Washington, D.C.
The Commission maintains a Website (http: / / www.sec.gov) that contains this
SAI, material incorporated by reference, and other information regarding the
Funds and Portfolios.
FINANCIAL STATEMENTS
An audited statement of assets and liabilities of each Fund as of the
date of initial capital contribution, together with the notes thereto and the
report of Coopers & Lybrand L.L.P., are attached to this SAI.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
American Skandia Advisor Funds, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the American Skandia Advisor Funds,
Inc. (the "Company"), comprising, respectively, ASAF T. Rowe Price International
Equity Fund, ASAF Janus Capital Growth Fund, ASAF INVESCO Equity Income Fund,
ASAF Total Return Bond Fund, ASAF JPM Money Market Fund, ASAF Founders
International Small Capitalization Fund, ASAF Founders Small Capitalization
Fund, ASAF T. Rowe Price Small Company Value Fund, ASAF American Century
Strategic Balanced Fund, and ASAF Federated High Yield Bond Fund as of October
31, 1997, and their related statements of operations, changes in net assets and
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1997, by correspondence with custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the aforementioned funds of the American Skandia Advisor Funds, Inc. as
of October 31, 1997, and the results of their operations, the changes in their
net assets and their financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 12, 1997
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
SCHEDULES OF INVESTMENTS
OCTOBER 31, 1997
ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND
ASAF FOUNDERS SMALL CAPITALIZATION FUND
ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND
ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND
ASAF FEDERATED HIGH YIELD BOND FUND
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
- -------------------------------------------------------
ASAF FOUNDERS INTERNATIONAL
SMALL CAPITALIZATION FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
FOREIGN STOCK -- 54.2%
CANADA -- 5.8%
Cinar Films, Inc. Cl-B* 500 $ 19,438
Gulf Canada Resources
Ltd.* 2,000 16,750
--------
36,188
--------
CHILE -- 2.9%
Compania Cervecerias
Unidas SA [ADR] 750 18,281
--------
FINLAND -- 2.6%
Raision Tehtaat Oy* 150 16,256
--------
FRANCE -- 2.6%
Coflexip SA [ADR] 300 16,500
--------
GERMANY -- 2.4%
Porsche AG Pfd. 10 14,787
--------
HONG KONG -- 2.9%
Asia Satellite
Telecommunications
Holdings Ltd. [ADR] 775 18,116
--------
INDONESIA -- 3.0%
Gulf Indonesia
Resources Ltd. 900 18,900
--------
IRELAND -- 2.8%
Ryanair Holdings PLC SP
[ADR]* 700 17,500
--------
ITALY -- 2.9%
Industrie Natuzzi SPA
[ADR] 800 17,900
--------
MEXICO -- 2.9%
Grupo Iusacell [ADR]* 1,000 18,000
--------
NETHERLANDS -- 2.7%
Hunter Douglas NV 400 16,489
--------
NEW ZEALAND -- 2.8%
Tranz Rail Holdings
[ADR] 1,250 16,875
--------
NORWAY -- 2.8%
Petroleum Geo Services
[ADR] 250 17,312
--------
PANAMA -- 2.9%
Banco Latinoamericano
de Exportaciones SA
Cl-E 450 17,888
--------
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
SINGAPORE -- 2.9%
Creative Technology
Ltd. 700 $ 17,806
--------
SPAIN -- 2.8%
Tele Pizza SA* 250 17,181
--------
UNITED KINGDOM -- 6.5%
J.D. Wetherspoon PLC 750 20,311
JBA Holdings PLC 1,250 20,070
--------
40,381
--------
TOTAL FOREIGN STOCK
(Cost $345,159) 336,360
--------
COMMON STOCK -- 5.7%
APPAREL MANUFACTURERS -- 2.8%
Tefron Ltd.* 900 17,269
--------
TELECOMMUNICATIONS -- 2.9%
Cellular Communications
International, Inc.* 450 18,000
--------
TOTAL COMMON STOCK
(Cost $36,552) 35,269
--------
TOTAL INVESTMENTS -- 59.9%
(Cost $381,711) 371,629
OTHER ASSETS LESS
LIABILITIES -- 40.1% 249,177
--------
NET ASSETS -- 100.0% $620,806
========
</TABLE>
Foreign currency exchange contracts outstanding at October 31, 1997:
<TABLE>
<CAPTION>
SETTLEMENT CONTRACTS TO IN EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE RECEIVE FOR AT VALUE APPRECIATION
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/97 Buy GBP 12,273 $20,367 $20,580 $213
11/97 Buy GBP 11,858 19,676 19,883 207
------- ------- ----
$40,043 $40,463 $420
======= ======= ====
</TABLE>
- --------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
<PAGE>
- -------------------------------------------------------
ASAF FOUNDERS
SMALL CAPITALIZATION FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 20.1%
BEVERAGES -- 0.3%
Beringer Wine Estates
Holdings, Inc.* 75 $ 2,325
--------
BUSINESS SERVICES -- 1.0%
Pre-Paid Legal
Services, Inc. 300 9,075
--------
COMPUTER SERVICES & SOFTWARE -- 7.8%
Aspen Technology, Inc. 300 11,287
Avant Corp.* 300 7,875
CDW Computers Centers,
Inc.* 200 12,400
Checkfree Corp.* 250 6,750
Documentum, Inc.* 325 9,709
Electronic Arts, Inc.* 200 6,775
HNC Software, Inc.* 300 11,100
Transaction Systems
Architects, Inc.* 100 3,913
--------
69,809
--------
CONSUMER PRODUCTS & SERVICES -- 0.1%
Vestcom International,
Inc. 50 906
--------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.8%
Concord EFS, Inc.* 300 8,906
Sanmina Corp.* 100 7,475
--------
16,381
--------
FOOD -- 1.1%
JP Foodservice, Inc.* 300 9,581
--------
HEALTHCARE
SERVICES -- 1.7%
Capital Senior Living
Corp. 475 7,956
FPA Medical Management,
Inc.* 300 7,238
--------
15,194
--------
HOTELS & MOTELS -- 1.2%
Capstar Hotel Co. 300 10,631
--------
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 1.6%
Henry Schein, Inc.* 300 $ 9,863
Transition Systems,
Inc. 200 4,050
--------
13,913
--------
PHARMACEUTICALS -- 0.7%
R.P. Scherer Corp.* 100 5,888
--------
RESTAURANTS -- 0.9%
CKE Restaurants, Inc. 200 7,988
--------
RETAIL & MERCHANDISING -- 1.2%
Stage Stores, Inc.* 300 10,950
--------
TELECOMMUNICATIONS -- 0.7%
Echostar Communications
Corp. 150 2,850
REMEC, Inc.* 25 634
Smartalk Teleservices,
Inc.* 125 2,695
--------
6,179
--------
TOTAL COMMON STOCK
(Cost $180,836) 178,820
--------
SHORT-TERM INVESTMENTS -- 8.2%
Temporary Investment
Cash Fund 36,602 36,602
Temporary Investment
Fund 36,603 36,603
--------
(Cost $73,205) 73,205
--------
TOTAL INVESTMENTS -- 28.3%
(Cost $254,041) 252,025
OTHER ASSETS LESS
LIABILITIES -- 71.7% 637,058
--------
NET ASSETS -- 100.0% $889,083
========
</TABLE>
- -------------------------------------------------------
* Non-income producing securities.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
- -------------------------------------------------------
ASAF T. ROWE PRICE
SMALL COMPANY VALUE FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 83.2%
AIRLINES -- 1.1%
Midwest Express
Holdings, Inc.* 900 $ 28,912
--------
AUTOMOTIVE PARTS -- 2.3%
Modine Manufacturing
Co. 900 30,656
TBC Corp.* 2,600 26,650
--------
57,306
--------
BUILDING MATERIALS -- 7.1%
Giant Cement Holding,
Inc.* 900 21,825
Gibraltar Steel Corp.* 900 21,262
Holophane Corp.* 1,200 27,300
Juno Lighting, Inc. 1,300 23,400
Lone Star Technologies,
Inc.* 500 19,094
Republic Group, Inc. 1,000 18,750
Skyline Corp. 700 20,300
Thomas Industries, Inc. 900 27,000
--------
178,931
--------
BUSINESS SERVICES -- 1.0%
Grey Advertising, Inc. 70 24,045
--------
CHEMICALS -- 2.3%
Furon Co. 900 34,312
Schulman (A.), Inc. 1,000 22,500
--------
56,812
--------
CLOTHING & APPAREL -- 0.9%
Unitog Co. 900 22,275
--------
COMPUTER HARDWARE -- 1.2%
Analogic Corp. 800 29,600
--------
COMPUTER SERVICES & SOFTWARE -- 1.9%
Analysts International
Corp. 700 31,587
Pioneer Standard
Electronics, Inc. 1,000 16,375
--------
47,962
--------
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
CONSUMER PRODUCTS & SERVICES -- 1.1%
American Safety Razor
Co. 700 $ 11,550
Culp, Inc. 900 17,100
--------
28,650
--------
CONTAINERS & PACKAGING -- 2.1%
Aptargroup, Inc. 400 21,975
First Brands Corp. 1,200 30,600
--------
52,575
--------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.7%
Electro Rental Corp.* 1,500 54,562
Landauer, Inc. 600 15,150
Littelfuse, Inc.* 1,000 30,625
Nichols Research Corp.* 1,200 29,400
Scotsman Industries,
Inc. 500 13,219
--------
142,956
--------
ENTERTAINMENT & LEISURE -- 0.6%
Carmike Cinemas, Inc.* 500 16,250
--------
ENVIRONMENTAL SERVICES -- 0.2%
International
Technology Corp. 600 5,475
--------
EQUIPMENT
SERVICES -- 4.2%
Cort Business Services
Corp.* 600 21,825
Rival Co. 1,300 20,150
Unifirst Corp. 1,200 30,150
VWR Scientific
Products, Inc.* 1,500 33,000
--------
105,125
--------
FINANCIAL -- BANK & TRUST -- 4.6%
Commercial Federal
Savings & Loan Corp. 300 14,550
Community First Bank
Corp. 700 33,425
First Republic Bank 900 25,425
Silicon Valley
Bancshares* 400 21,850
Sirrom Capital Corp. 400 20,150
--------
115,400
--------
</TABLE>
<PAGE>
- -------------------------------------------------------
ASAF T. ROWE PRICE
SMALL COMPANY VALUE FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
FINANCIAL
SERVICES -- 4.2%
Amresco, Inc.* 800 $ 25,100
First Financial Fund,
Inc. 1,000 22,062
McGrath Rentcorp 1,500 36,562
Medallion Financial
Corp. 1,000 21,000
--------
104,724
--------
FOOD -- 0.2%
Suiza Foods Corp.* 100 5,037
--------
INSURANCE -- 5.2%
FBL Financial Group,
Inc. Cl-A 900 35,663
Harleysville Group,
Inc. 700 17,850
Phoenix Resources Corp.
Cl-A 700 21,350
Poe & Brown, Inc. 1,000 41,250
Presidential Life Corp. 700 13,913
--------
130,026
--------
LUMBER & WOOD PRODUCTS -- 0.8%
Deltic Timber Corp. 700 19,731
--------
MACHINERY & EQUIPMENT -- 4.9%
Alamo Group, Inc. 700 14,700
Carbo Ceramics, Inc. 900 29,813
Greenfield Industries,
Inc. 400 15,150
Smith (A.O.) Corp. 700 29,006
Woodward Governor Co. 1,000 34,250
--------
122,919
--------
MEDICAL SUPPLIES & EQUIPMENT -- 1.8%
Lunar Corp. 1,600 30,500
Owens & Minor, Inc. 1,000 14,000
--------
44,500
--------
METALS & MINING -- 5.6%
Cambior, Inc. 1,200 9,450
Dayton Mining Corp.* 2,100 5,250
Golden Star Resources
Ltd.* 1,500 6,750
Layne Christensen, Inc. 900 17,888
Material Sciences
Corp.* 1,400 20,825
Myers Industries, Inc. 1,200 21,075
Penn Virginia Corp. 900 25,650
Prime Resources Group,
Inc. 2,600 17,225
TriMas Corp. 600 17,550
--------
141,663
--------
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
OFFICE EQUIPMENT -- 1.7%
Aaron Rents, Inc. Cl-A* 500 $ 8,687
Aaron Rents, Inc. Cl-B* 900 15,188
IDEX Corp.* 600 20,175
--------
44,050
--------
OIL & GAS -- 3.2%
Cross Timbers Oil Co. 1,500 40,031
Devon Energy Corp. 300 13,425
Rutherford-Moran Oil
Corp.* 1,100 26,950
--------
80,406
--------
PAPER & FOREST PRODUCTS -- 1.8%
CSS Industries, Inc.* 800 28,300
Mosinee Paper 600 16,950
--------
45,250
--------
PERSONAL SERVICES -- 1.0%
Matthews International
Corp. 600 25,500
--------
</TABLE>
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
REAL ESTATE -- 6.3%
Allied Capital
Commercial Corp.
[REIT] 1,000 $ 27,875
Apartment Investment &
Management Co. Cl-A
[REIT] 700 24,806
CCA Prison Realty Trust
[REIT] 500 17,250
Glenborough Realty
Trust, Inc. [REIT] 400 10,250
Innkeepers USA Trust
[REIT] 1,200 20,025
National Health
Investors, Inc.
[REIT] 600 23,513
Post Properties, Inc
[REIT] 400 14,475
Sun Communities, Inc.
[REIT] 600 20,925
------------
159,119
------------
RESTAURANTS -- 3.0%
Consolidated Products,
Inc.* 1,300 25,025
Ruby Tuesday, Inc. 1,300 35,344
Sbarro, Inc. 600 15,863
------------
76,232
------------
RETAIL & MERCHANDISING -- 5.0%
Carson Pirie Scott &
Co. 400 19,275
Casey's General Stores,
Inc. 900 21,712
Compucom Systems, Inc.* 2,200 20,763
Fabri-Centers of
America, Inc. Cl-B* 1,500 30,469
Hancock Fabrics, Inc. 1,200 16,275
Stein Mart, Inc.* 600 17,550
------------
126,044
------------
TELECOMMUNICATIONS -- 1.5%
Aliant Communications,
Inc. 1,000 25,625
Mosiax, Inc. 1,200 11,100
------------
36,725
------------
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
UTILITIES -- 0.7%
United Water
Resources, Inc. 1,000 $ 16,563
------------
TOTAL COMMON STOCK
(Cost $2,122,380) 2,090,763
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
------
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 20.3%
Federal Home Loan
Mortgage Corp.
5.41%, 11/12/97 $ 50 $ 49,917
5.41%, 11/13/97 76 75,863
5.51%, 11/13/97 191 190,649
5.40%, 11/28/97 88 87,644
5.42%, 11/28/97 60 59,756
------------
463,829
------------
Federal National Mortgage
Association
5.47%, 11/06/97 46 45,965
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $509,794) 509,794
------------
U.S. TREASURY OBLIGATIONS -- 1.6%
U.S. Treasury Bills
4.30%, 11/06/97 27 26,984
4.87%, 12/18/97 13 12,917
------------
(Cost $39,901) 39,901
------------
TOTAL INVESTMENTS -- 105.1%
(Cost $2,672,075) 2,640,458
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (5.1%) (127,352)
------------
NET ASSETS -- 100.0% $2,513,106
============
</TABLE>
- -------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
AMERICAN SKANDIA ADVISOR FUNDS, INC.
<PAGE>
- -------------------------------------------------------
ASAF AMERICAN CENTURY
STRATEGIC BALANCED FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 48.4%
ADVERTISING -- 1.7%
Outdoor Systems, Inc. 700 $ 21,525
--------
AEROSPACE -- 0.5%
BE Aerospace, Inc. 200 5,625
--------
BROADCASTING -- 1.6%
Clear Channel
Communications, Inc. 300 19,800
--------
COMPUTER HARDWARE -- 2.6%
Compaq Computer Corp. 200 12,750
International Business
Machines Corp. 200 19,612
--------
32,362
--------
COMPUTER SERVICES & SOFTWARE -- 4.7%
BMC Software, Inc.* 200 12,075
Cisco Systems, Inc.* 200 16,406
Compuware Corp. 300 19,837
Oracle Corp. 100 3,578
Sun Microsystems, Inc. 200 6,850
--------
58,746
--------
CONGLOMERATES -- 3.3%
Philip Morris Companies,
Inc. 100 3,962
Tyco International Ltd. 1,000 37,750
--------
41,712
--------
CONSUMER PRODUCTS & SERVICES -- 5.3%
Avon Products, Inc. 200 13,100
Gillette Co. 100 8,906
Procter & Gamble Co. 200 13,600
Samsonite Corp. 400 18,550
Sunbeam Oster Corp. 100 4,531
U.S. Industries, Inc. 300 8,063
--------
66,750
--------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.1%
Altera Corp. 200 8,875
Electronics for Imaging,
Inc.* 200 9,350
<CAPTION>
- ------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
General Electric Co. 400 $ 25,825
KLA Instruments Corp. 200 8,788
Philips Electronics NV
[ADR] 300 23,513
--------
76,351
--------
ENVIRONMENTAL SERVICES -- 0.9%
USA Waste Services, Inc. 300 11,100
--------
FINANCIAL -- BANK & TRUST -- 2.6%
BankAmerica Corp. 200 14,300
Charter One Financial,
Inc. 105 6,103
Citicorp 100 12,506
--------
32,909
--------
FINANCIAL SERVICES -- 0.4%
Fannie Mae 100 4,844
--------
HEALTHCARE SERVICES -- 0.2%
Oxford Health Plans, Inc. 100 2,581
--------
INSURANCE -- 2.4%
Conseco, Inc. 400 17,450
SunAmerica, Inc. 350 12,578
--------
30,028
--------
OIL & GAS -- 5.6%
Diamond Offshore
Drilling, Inc. 200 12,450
Evi, Inc. 200 12,838
Falcon Drilling Co., Inc. 600 21,825
Global Marine, Inc. 200 6,225
Input-Output, Inc. 600 16,088
--------
69,426
--------
PHARMACEUTICALS -- 8.8%
Bristol-Meyers Squibb Co. 200 17,550
Cardinal Health, Inc. 100 7,425
Lilly (Eli) & Co. 400 26,750
Merck & Co., Inc. 100 8,925
Pfizer, Inc. 300 21,225
Warner-Lambert Co. 200 28,638
--------
110,513
--------
</TABLE>
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
=======================================================
ASAF AMERICAN CENTURY
STRATEGIC BALANCED FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
SEMI-CONDUCTORS -- 1.7%
Intel Corp. 200 $ 15,400
Motorola, Inc. 100 6,175
--------
21,575
--------
TOTAL COMMON STOCK
(Cost $614,751) 605,847
--------
FOREIGN STOCK -- 0.8%
BEVERAGES
Panamerican Beverages,
Inc. Cl-A -- (MXP)
(Cost $10,780) 300 9,356
--------
PAR
(000)
------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 16.0%
Federal Home Loan Bank
5.50%, 11/03/97
(Cost $199,939) $200 199,939
--------
U.S. TREASURY OBLIGATIONS -- 24.1%
U.S. Treasury Notes
6.00%, 07/31/02 100 100,890
5.875%, 09/30/02 200 200,874
--------
(Cost $298,652) 301,764
--------
SHARES
------
SHORT-TERM INVESTMENTS -- 2.5%
Temporary Investment Cash
Fund 15,716 15,716
Temporary Investment Fund 15,717 15,717
--------
(Cost $31,433) 31,433
--------
TOTAL INVESTMENTS -- 91.8%
(Cost $1,155,555) 1,148,339
OTHER ASSETS LESS LIABILITIES -- 8.2% 102,989
--------
NET ASSETS -- 100.0% $ 1,251,328
========
</TABLE>
- -------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
ASAP FEDERATED
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------
PAR
(000) VALUE
- -----------------------------------------------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 80.8%
AUTOMOTIVE PARTS -- 1.4%
Lear Corp. Sub. Notes
9.50%, 07/15/06 $ 50 $ 54,750
----------
BROADCASTING -- 8.0%
Chancellor Media Corp.
Sr. Sub. Notes 144A
8.75%, 06/15/07 50 50,375
Fox Liberty Networks
LLC, Sr. Notes [STEP]
144A
9.553%, 08/15/07 75 47,625
Frontiervision Holdings
[STEP] 144A
11.005%, 09/15/07 75 51,375
Outdoor Systems, Inc.
Sr. Sub. Notes
8.875%, 06/15/07 50 51,750
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%, 05/15/06 50 54,500
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%, 09/30/05 50 52,625
----------
308,250
----------
BUILDING MATERIALS -- 1.4%
American Builders Sr.
Sub. Notes 144A
10.625%, 05/15/07 50 52,250
----------
CHEMICALS -- 2.7%
ISP Holdings, Inc. Sr.
Notes Cl-B
9.00%, 10/15/03 50 52,125
Polymer Group Holdings
Sr. Sub. Notes 144A
9.00%, 07/01/07 50 50,250
----------
102,375
----------
</TABLE>
<PAGE>
- -------------------------------------------------------
ASAF FEDERATED
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------
PAR
(000) VALUE
- -----------------------------------------------------
<S> <C> <C>
CLOTHING & APPAREL -- 2.7%
Dyersburg Corp. Sr. Sub.
Notes 144A
9.75%, 09/01/07 $ 50 $ 51,750
Pillowtex Corp. Sr. Sub.
Notes
10.00%, 11/15/06 50 52,875
----------
104,625
----------
CONSUMER PRODUCTS & SERVICES -- 2.6%
NBTY, Inc. Sr. Sub.
Notes 144A
8.625%, 09/15/07 50 49,250
Simmons Co. Sr. Sub.
Notes 10.75%, 04/15/06 50 51,750
----------
101,000
----------
COMPUTER SERVICES & SOFTWARE -- 1.4%
DecisionOne Corp. Sr.
Sub. Notes
9.75%, 08/01/07 50 51,750
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.8%
Amphenol Corp. Sr. Sub.
Notes
9.875%, 05/15/07 50 52,750
Fairchild Semiconductor
Sr. Sub. Notes 144A
10.125%, 03/15/07 50 53,000
----------
105,750
----------
ENTERTAINMENT & LEISURE -- 2.7%
Livent, Inc.
Sr. Notes 144A
9.375%, 10/15/04 50 50,625
Six Flags Theme Parks
Sr. Sub. Notes Cl-A
[STEP]
9.746%, 06/15/05 50 53,000
----------
103,625
----------
ENVIROMENTAL SERVICES -- 1.3%
Allied Waste Industries
Sr. Disc. Notes Cl-A
[STEP]
9.753%, 06/01/07 75 51,375
----------
<CAPTION>
- -----------------------------------------------------
PAR
(000) VALUE
- -----------------------------------------------------
<S> <C> <C>
FARMING & AGRICULTURE -- 1.4%
Dimon, Inc. Sr. Notes
8.875%, 06/01/06 $ 50 $ 53,625
----------
FINANCIAL -- BANK & TRUST -- 1.4%
First Nationwide
Holdings Sr. Notes
12.25%, 05/15/01 50 55,000
----------
FOOD -- 6.7%
Ameriserve Food
Distributor Sr. Notes
144A
8.875%, 10/15/06 50 50,250
Aurora Foods, Inc. Cl-B
Sr. Sub. Notes
9.875%, 02/15/07 50 51,750
Community Distributors
Sr. Notes 144A
10.25%, 10/15/04 50 50,250
Jitney-Jungle Stores Sr.
Sub. Notes 144A
10.375%, 09/15/07 50 52,250
Stater Bros. Holdings
Sr. Sub. Notes 144A
9.00%, 07/01/04 50 51,125
----------
255,625
----------
FURNITURE -- 1.3%
Falcon Building Products
Sr. Sub. Notes [STEP]
10.077%, 06/15/07 75 48,375
----------
HEALTHCARE SERVICES -- 1.3%
Tenet Healthcare Corp.
Sr. Sub. Notes
8.00%, 01/15/05 50 50,750
----------
INDUSTRIAL PRODUCTS -- 2.7%
MMI Products, Inc. Sr.
Sub. Notes Cl-B
11.25%, 04/15/07 50 54,750
Playtex Products, Inc.
Cl-B Sr. Notes
8.875%, 07/15/04 50 50,125
----------
104,875
----------
</TABLE>
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------
PAR
(000) VALUE
- -----------------------------------------------------
<S> <C> <C>
MACHINERY & EQUIPMENT -- 1.4%
Clark Materials Handling
Sr. Notes
10.75%, 11/15/06 $ 50 $ 52,750
----------
METALS & MINING -- 1.4%
Ryerson Tull, Inc. Notes
8.50%, 07/15/01 50 51,875
----------
OIL & GAS -- 2.7%
Abraxas Petroleum Corp.
Sr. Notes Cl-B
11.50%, 11/01/04 50 55,000
Forcenergy, Inc. Sr.
Sub. Notes
8.50%, 02/15/07 50 49,750
----------
104,750
----------
PAPER & FOREST PRODUCTS -- 1.3%
Buckeye Cellulose Corp.
Sr. Sub. Notes
9.25%, 09/15/08 50 51,250
----------
PRINTING & PUBLISHING -- 2.7%
Garden State Newspaper
Sr. Sub. Notes 144A
8.75%, 10/01/09 50 49,750
Hollinger International
Publishing Co. Notes
9.25%, 03/15/07 50 51,750
----------
101,500
----------
TELECOMMUNICATIONS -- 25.5%
Cablevision Systems
Corp. Sr. Sub. Debs.
9.875%, 02/15/13 50 53,625
Call-Net Enterprises,
Inc. Sr. Disc. Notes
[STEP]
8.787%, 08/15/07 75 50,625
Comcast Cellular Sr.
Notes 144A
9.50%, 05/01/07 50 52,000
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
11.520%, 03/15/04 75 60,375
Hermes Europe Railtel
Sr. Notes 144A
11.50%, 08/15/07 50 54,750
Intermedia
Communications Sr.
Notes 144A
8.875%, 11/01/07 50 49,125
International Cabletel,
Inc. Sr. Notes [STEP]
10.118%, 10/15/03 75 70,219
McLeod, Inc. [STEP] 144A
9.497%, 03/01/07 75 52,125
Metronet Communications
Sr. Disc. Notes [STEP]
144A
10.696%, 11/01/07 75 44,625
Nextel Communications,
Inc. Sr. Disc.
Notes [STEP] 144A
11.267%, 09/15/07 75 42,937
Paging Network, Inc. Sr.
Sub. Notes
10.00%, 10/15/08 50 51,250
Pegasus Communications
Sr. Notes 144A
9.625%, 10/15/05 50 50,375
Qwest Communications
International Sr.
Disc. Notes [STEP]
9.236%, 10/15/07 75 48,375
Rogers Cablesystems Sr.
Notes
10.00%, 03/15/05 50 54,500
Source Media, Inc. Sr.
Secured Notes 144A
12.00%, 11/01/04 50 50,250
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
9.065%, 07/01/07 75 59,250
Telesystem International
Sr. Disc. Notes [STEP]
11.831%, 11/01/07 50 26,750
</TABLE>
<PAGE>
- -------------------------------------------------------
ASAF FEDERATED
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------
PAR
(000) VALUE
- -----------------------------------------------------
<S> <C> <C>
Telewest PLC Debs.
[STEP]
10.583%, 10/01/07 $ 75 $ 56,625
Viacom, Inc. Sub. Debs.
8.00%, 07/07/06 50 49,500
----------
977,281
----------
TRANSPORTATION -- 4.0%
Allied Holdings Sr.
Notes 144A
9.625%, 10/01/07 50 51,250
Ameritruck Distribution
Sr. Sub. Notes
12.25%, 11/15/05 50 53,000
Stena AB Sr. Notes
8.75%, 06/15/07 50 50,375
----------
154,625
----------
TOTAL CORPORATE OBLIGATIONS
(Cost $3,122,878) 3,098,031
----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 33.7%
Student Loan Marketing
Association
5.63%, 11/03/97
(Cost $1,294,595) 1,295 1,294,595
----------
TOTAL INVESTMENTS -- 114.5%
(Cost $4,417,473) 4,392,626
LIABILITES IN EXCESS OF OTHER
ASSETS -- (14.5%) (556,167)
----------
NET ASSETS -- 100.0% $ 3,836,459
==========
</TABLE>
- -------------------------------------------------------
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 30.2% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
DEFINITION OF ABBREVIATIONS
- -------------------------------------------------------
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
SECURITY DESCRIPTIONS:
<TABLE>
<S> <C> <C>
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
STEP -- Stepped Coupon Bond (Rates shown are the
effective yields at purchase date.)
COUNTRIES/CURRENCIES:
GBP -- United Kingdom/British Pound
MXP -- Mexico/Mexican Peso
</TABLE>
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
OCTOBER 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF T.
ROWE PRICE ASAF INVESCO ASAF TOTAL ASAF JPM
INTERNATIONAL ASAF JANUS EQUITY RETURN MONEY
EQUITY CAPITAL GROWTH INCOME BOND MARKET
FUND FUND FUND FUND FUND
========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in Corresponding
Portfolios of American Skandia
Master Trust $ 1,554,547 $4,341,577 $3,302,881 $1,180,008 $1,549,626
Receivable for Fund Shares Sold 72,365 309,545 500,856 56,002 176,021
Deferred Organization Costs 62,074 62,074 62,074 62,074 62,074
Prepaid Expenses 16,861 16,862 16,861 16,862 16,861
---------- ---------- ---------- ---------- ----------
Total Assets 1,705,847 4,730,058 3,882,672 1,314,946 1,804,582
---------- ---------- ---------- ---------- ----------
LIABILITIES:
Payable for Investments Purchased
in Corresponding Portfolios of
American Skandia Master Trust 72,365 309,545 500,856 56,002 176,021
Payable to Investment Manager 58,494 44,211 56,470 62,853 50,608
Payable For:
Distribution Fees 708 2,015 1,342 495 917
Accrued Expenses 13,099 23,938 15,407 11,887 17,930
Accrued Dividends -- -- -- 32 575
---------- ---------- ---------- ---------- ----------
Total Liabilities 144,666 379,709 574,075 131,269 246,051
---------- ---------- ---------- ---------- ----------
NET ASSETS $ 1,561,181 $4,350,349 $3,308,597 $1,183,677 $1,558,531
========== ========== ========== ========== ==========
COMPONENTS OF NET ASSETS
Capital Stock (40 Million Shares
Authorized, $.001 Par Value Per Share) $ 171 $ 419 $ 317 $ 116 $ 1,558
Additional Paid-In Capital 1,626,481 4,450,123 3,302,372 1,169,070 1,556,948
Undistributed Net Investment Income -- 7,214 7,857 2,363 --
Accumulated Net Realized Gain
(Loss) on Investments -- (38,807) (13,204) 288 25
Net Unrealized Appreciation
(Depreciation) on Investments (65,471) (68,600) 11,255 11,840 --
---------- ---------- ---------- ---------- ----------
NET ASSETS $ 1,561,181 $4,350,349 $3,308,597 $1,183,677 $1,558,531
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF T.
ROWE PRICE ASAF INVESCO ASAF TOTAL ASAF JPM
INTERNATIONAL ASAF JANUS EQUITY RETURN MONEY
EQUITY CAPITAL GROWTH INCOME BOND MARKET
FUND FUND FUND FUND FUND
========== ========== ========== ========== ========
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Class A: Net Assets $ 217,613 $ 706,248 $ 471,489 $ 61,228 $307,020
-------- ---------- ---------- -------- --------
Shares Outstanding 24,367 61,945 45,136 5,957 307,013
-------- ---------- ---------- -------- --------
Net Asset Value and Redemption
Price Per Share $ 8.93 $ 11.40 $ 10.45 $ 10.28 $ 1.00
======== ========== ========== ======== ========
Divided by (1 - Maximum
Sales Charge) 95% 95% 95% 95 3/4% 95%
-------- ---------- ---------- -------- --------
Offering Price Per Share* $ 9.40 $ 12.00 $ 11.00 $ 10.74 $ 1.05
======== ========== ========== ======== ========
Class B: Net Assets $ 389,532 $1,718,239 $1,407,565 $547,245 $353,587
-------- ---------- ---------- -------- --------
Shares Outstanding 42,527 168,580 134,663 53,862 353,584
-------- ---------- ---------- -------- --------
Net Asset Value, Offering and
Redemption Price Per Share $ 9.16 $ 10.19 $ 10.45 $ 10.16 $ 1.00
======== ========== ========== ======== ========
Class C: Net Assets $ 198,033 $ 451,731 $ 255,047 $164,940 $331,509
-------- ---------- ---------- -------- --------
Shares Outstanding 21,624 44,352 24,377 16,234 331,503
-------- ---------- ---------- -------- --------
Net Asset Value, Offering and
Redemption Price Per Share $ 9.16 $ 10.19 $ 10.46 $ 10.16 $ 1.00
======== ========== ========== ======== ========
Class X: Net Assets $ 756,003 $1,474,131 $1,174,496 $410,264 $566,415
-------- ---------- ---------- -------- --------
Shares Outstanding 82,390 144,484 112,383 40,334 566,406
-------- ---------- ---------- -------- --------
Net Asset Value, Offering and
Redemption Price Per Share $ 9.18 $ 10.20 $ 10.45 $ 10.17 $ 1.00
======== ========== ========== ======== ========
</TABLE>
* On sales of $50,000 or more, the offering price of Class A shares is reduced.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
OCTOBER 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF FOUNDERS
INTERNATIONAL ASAF FOUNDERS ASAF T. ROWE ASAF AMERICAN
SMALL SMALL PRICE SMALL CENTURY STRATEGIC ASAF FEDERATED
CAPITALIZATION CAPITALIZATION COMPANY VALUE BALANCED HIGH YIELD BOND
FUND FUND FUND FUND FUND
======== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in Securities
at Value (A) $371,629 $ 252,025 $ 2,640,458 $ 1,148,339 $ 4,392,626
Cash 274,407 675,427 1,816 -- --
Receivable For:
Dividends and Interest 440 237 858 2,841 50,472
Fund Shares Sold 28,621 34,340 164,488 91,481 259,813
Deferred Organization Costs 65,504 65,504 65,504 65,504 65,504
Prepaid Expenses 16,861 16,861 16,751 16,861 16,932
Unrealized Appreciation
on Foreign Currency
Exchange Contracts 420 -- -- -- --
-------- -------- ---------- ---------- ----------
Total Assets 757,882 1,044,394 2,889,875 1,325,026 4,785,347
-------- -------- ---------- ---------- ----------
LIABILITIES:
Cash Overdraft -- -- -- -- 11,265
Payable to Investment Manager 69,792 69,458 61,401 54,095 69,208
Payable For:
Securities Purchased 57,276 75,826 300,018 -- 856,379
Distribution Fees 315 450 1,098 725 1,000
Accrued Expenses 9,693 9,577 14,252 18,878 10,826
Accrued Dividends -- -- -- -- 210
-------- -------- ---------- ---------- ----------
Total Liabilities 137,076 155,311 376,769 73,698 948,888
-------- -------- ---------- ---------- ----------
NET ASSETS $620,806 $ 889,083 $ 2,513,106 $ 1,251,328 $ 3,836,459
======== ======== ========== ========== ==========
COMPONENTS OF NET ASSETS
Capital Stock
(40 Million Shares Authorized,
$.001 Par Value Per Share) $ 63 $ 89 $ 241 $ 125 $ 387
Additional Paid-In Capital 630,425 891,010 2,544,097 1,257,177 3,865,102
Undistributed Net
Investment Income 819 -- 422 2,252 --
Accumulated Net Realized Loss
on Investments (287) -- (37) (1,010) (4,183)
Net Unrealized Depreciation
on Investments (10,214) (2,016) (31,617) (7,216) (24,847)
-------- -------- ---------- ---------- ----------
NET ASSETS $620,806 $ 889,083 $ 2,513,106 $ 1,251,328 $ 3,836,459
======== ======== ========== ========== ==========
(A) Investments at Cost $381,711 $ 254,041 $ 2,672,075 $ 1,155,555 $ 4,417,473
======== ======== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF FOUNDERS
INTERNATIONAL ASAF FOUNDERS ASAF T. ROWE ASAF AMERICAN
SMALL SMALL PRICE SMALL CENTURY STRATEGIC ASAF FEDERATED
CAPITALIZATION CAPITALIZATION COMPANY VALUE BALANCED HIGH YIELD BOND
FUND FUND FUND FUND FUND
======== ======== ========== ======== ==========
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Class A: Net Assets $106,130 $192,625 $ 383,129 $ 256,937 $ 2,154,283
---------- -------- ---------- -------- ----------
Shares Outstanding 10,754 19,369 36,628 25,713 217,045
---------- -------- ---------- -------- ----------
Net Asset Value and
Redemption Price
Per Share $ 9.87 $ 9.94 $ 10.46 $ 9.99 $ 9.93
========== ======== ========== ======== ==========
Divided by
(1 - Maximum
Sales Charge) 95% 95% 95% 95% 95 3/4%
---------- -------- ---------- -------- ----------
Offering Price Per
Share* $ 10.39 $ 10.46 $ 11.01 $ 10.52 $ 10.37
========== ======== ========== ======== ==========
Class B: Net Assets $229,911 $353,330 $ 1,154,678 $ 381,263 $ 919,855
---------- -------- ---------- -------- ----------
Shares Outstanding 23,338 35,569 110,634 38,280 92,647
---------- -------- ---------- -------- ----------
Net Asset Value, Offering
and Redemption Price
Per Share $ 9.85 $ 9.93 $ 10.44 $ 9.96 $ 9.93
========== ======== ========== ======== ==========
Class C: Net Assets $ 78,777 $ 73,511 $ 335,291 $ 215,307 $ 206,161
---------- -------- ---------- -------- ----------
Shares Outstanding 7,992 7,397 32,093 21,576 20,764
---------- -------- ---------- -------- ----------
Net Asset Value, Offering
and Redemption Price
Per Share $ 9.86 $ 9.94 $ 10.45 $ 9.98 $ 9.93
========== ======== ========== ======== ==========
Class X: Net Assets $205,988 $269,617 $ 640,008 $ 397,821 $ 556,160
---------- -------- ---------- -------- ----------
Shares Outstanding 20,943 27,154 61,282 39,956 56,021
---------- -------- ---------- -------- ----------
Net Asset Value, Offering
and Redemption Price
Per Share $ 9.84 $ 9.93 $ 10.44 $ 9.96 $ 9.93
========== ======== ========== ======== ==========
</TABLE>
* On sales of $50,000 or more, the offering price of Class A shares is reduced.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
FOR THE PERIOD ENDED OCTOBER 31, 1997
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF
T. ROWE PRICE ASAF INVESCO
INTERNATIONAL ASAF JANUS EQUITY ASAF TOTAL ASAF JPM
EQUITY CAPITAL GROWTH INCOME RETURN BOND MONEY MARKET
FUND(1) FUND(1) FUND(2) FUND(2) FUND(3)
======== ======== ======== ======== ========
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Investment Income from Corresponding
Portfolios of American Skandia
Master Trust
Interest $ 1,244 $ 5,249 $ 5,732 $ 4,907 $ 8,266
Dividends 1,525 8,607 5,883 -- --
Foreign Taxes Withheld (199) -- -- -- --
-------- -------- ------- ------- -------
Total Investment Income 2,570 13,856 11,615 4,907 8,266
Expenses from Corresponding
Portfolios of American Skandia
Master Trust (4,835) (5,702) (3,680) (1,812) (6,082)
-------- -------- ------- ------- -------
Net Investment Income (Loss)
from Corresponding Portfolios
of American Skandia Master
Trust (2,265) 8,154 7,935 3,095 2,184
-------- -------- ------- ------- -------
EXPENSES:
Shareholder Servicing Fees 3,517 3,017 3,297 3,557 3,418
Administration and Accounting Fees 1,500 1,500 1,500 1,500 1,500
Distribution Fees -- Class A 118 357 199 46 195
Distribution Fees -- Class B 267 1,064 718 274 364
Distribution Fees -- Class C 122 273 136 74 319
Distribution Fees -- Class X 516 1,125 677 379 598
Professional Fees 3,109 7,212 3,735 2,445 4,771
Organization Costs 2,539 2,539 2,539 2,539 2,539
Directors' Fees and Expenses 3,421 8,376 4,518 2,705 5,273
Registration Fees 25,943 25,611 25,912 25,970 25,873
Printing Expenses 4,110 9,738 5,200 3,200 6,218
Miscellaneous Expenses 831 2,000 1,061 631 1,262
-------- -------- ------- ------- -------
Total Expenses 45,993 62,812 49,492 43,320 52,330
-------- -------- ------- ------- -------
Less: Reimbursement of Expenses
by Investment Manager (47,976) (61,872) (49,414) (43,617) (55,266)
-------- -------- ------- ------- -------
Net Investment Income (Loss) (282) 7,214 7,857 3,392 5,120
-------- -------- ------- ------- -------
</TABLE>
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF
T. ROWE PRICE ASAF INVESCO
INTERNATIONAL ASAF JANUS EQUITY ASAF TOTAL ASAF JPM
EQUITY CAPITAL GROWTH INCOME RETURN BOND MONEY MARKET
FUND(1) FUND(1) FUND(2) FUND(2) FUND(3)
======== ======== ======== ======== ========
<S> <C> <C> <C> <C> <C>
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS FROM CORRESPONDING
PORTFOLIOS OF AMERICAN SKANDIA MASTER
TRUST:
Net Realized Gain (Loss) on:
Securities 91 (38,807) (13,204) 288 25
Foreign Currency Transactions (674) -- -- -- --
-------- -------- ------- ------- -------
Net Realized Gain (Loss) on
Investments (583) (38,807) (13,204) 288 25
-------- -------- ------- ------- -------
Net Change in Unrealized
Appreciation (Depreciation) on:
Securities (64,782) (68,600) 11,255 11,840 --
Translation of Assets and
Liabilities Denominated in
Foreign Currencies (689) -- -- -- --
-------- -------- ------- ------- -------
Net Change in Unrealized
Appreciation (Depreciation) on
Investments (65,471) (68,600) 11,255 11,840 --
-------- -------- ------- ------- -------
Net Gain (Loss) on Investments (66,054) (107,407) (1,949) 12,128 25
-------- -------- ------- ------- -------
Net Increase (Decrease) in Net
Assets Resulting from Operations $ (66,336) $ (100,193) $ 5,908 $ 15,520 $ 5,145
======== ======== ======= ======= =======
</TABLE>
(1) Commenced operations on June 10, 1997.
(2) Commenced operations on June 18, 1997.
(3) Commenced operations on June 19, 1997.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
FOR THE PERIOD ENDED OCTOBER 31, 1997 (1)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF FOUNDERS
INTERNATIONAL ASAF FOUNDERS ASAF T. ROWE ASAF AMERICAN
SMALL SMALL PRICE SMALL CENTURY STRATEGIC ASAF FEDERATED
CAPITALIZATION CAPITALIZATION COMPANY VALUE BALANCED HIGH YIELD BOND
FUND FUND FUND FUND FUND
======== ======== ======== ======== ========
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 1,984 $ 314 $ 2,461 $ 4,733 $ 8,473
Dividends -- -- 1,223 477 --
------- ------- ------- ------- -------
Total Investment Income 1,984 314 3,684 5,210 8,473
------- ------- ------- ------- -------
EXPENSES:
Advisory Fees 520 577 1,530 1,513 1,022
Shareholder Servicing Fees 3,580 3,546 3,331 3,465 3,158
Administration and
Accounting Fees 1,878 1,878 1,881 1,885 1,876
Custodian Fees 628 338 916 516 660
Distribution Fees -- Class A 63 78 179 565 353
Distribution Fees -- Class B 161 312 659 221 408
Distribution Fees -- Class C 55 47 214 148 134
Distribution Fees -- Class X 131 127 298 178 210
Professional Fees 3,055 2,943 6,669 9,925 3,104
Organization Costs 2,702 2,702 2,702 2,702 2,702
Directors' Fees and Expenses 1,300 1,459 3,551 5,052 2,097
Registration Fees 25,995 25,974 25,942 25,911 25,757
Printing Expenses 1,130 1,692 3,537 5,462 2,007
Miscellaneous Expenses 739 771 1,807 2,408 917
------- ------- ------- ------- -------
Total Expenses 41,937 42,444 53,216 59,951 44,405
Less: Reimbursement of
Expenses by Investment
Manager (40,772) (41,113) (49,954) (56,993) (41,843)
------- ------- ------- ------- -------
Net Expenses 1,165 1,331 3,262 2,958 2,562
------- ------- ------- ------- -------
Net Investment Income (Loss) 819 (1,017) 422 2,252 5,911
------- ------- ------- ------- -------
</TABLE>
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF FOUNDERS
INTERNATIONAL ASAF FOUNDERS ASAF T. ROWE ASAF AMERICAN
SMALL SMALL PRICE SMALL CENTURY STRATEGIC ASAF FEDERATED
CAPITALIZATION CAPITALIZATION COMPANY VALUE BALANCED HIGH YIELD BOND
FUND FUND FUND FUND FUND
======== ======== ======== ======== ========
<S> <C> <C> <C> <C> <C>
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS:
Net Realized Loss on:
Securities -- -- (37) (1,010) (4,183)
Foreign Currency
Transactions (287) -- -- -- --
------- ------- ------- ------- -------
Net Realized Loss (287) -- (37) (1,010) (4,183)
------- ------- ------- ------- -------
Net Change in Unrealized
Depreciation on:
Securities (10,082) (2,016) (31,617) (7,216) (24,847)
Translation of Assets and
Liabilities Denominated
in Foreign Currencies (132) -- -- -- --
------- ------- ------- ------- -------
Net Change in Unrealized
Depreciation (10,214) (2,016) (31,617) (7,216) (24,847)
------- ------- ------- ------- -------
Net Loss on Investments (10,501) (2,016) (31,654) (8,226) (29,030)
------- ------- ------- ------- -------
Net Decrease in Net Assets
Resulting from Operations $ (9,682) $ (3,033) $ (31,232) $ (5,974) $ (23,119)
======= ======= ======= ======= =======
</TABLE>
(1) Commenced operations on July 28, 1997.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
FOR THE PERIOD ENDED OCTOBER 31, 1997
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF T.
ROWE PRICE ASAF INVESCO
INTERNATIONAL ASAF JANUS EQUITY ASAF TOTAL ASAF JPM
EQUITY CAPITAL GROWTH INCOME RETURN BOND MONEY MARKET
FUND(1) FUND(1) FUND(2) FUND(2) FUND(3)
========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income (Loss) $ (282) $ 7,214 $ 7,857 $ 3,392 $ 5,120
Net Realized Gain (Loss)
on Investments (583) (38,807) (13,204) 288 25
Net Change in Unrealized
Appreciation (Depreciation)
on Investments (65,471) (68,600) 11,255 11,840 --
---------- ---------- ---------- ---------- ----------
Net Increase (Decrease) in
Net Assets Resulting from
Operations (66,336) (100,193) 5,908 15,520 5,145
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From Net Investment Income:
Class A -- -- -- (136) (1,356)
Class B -- -- -- (360) (1,080)
Class C -- -- -- (103) (908)
Class X -- -- -- (430) (1,776)
---------- ---------- ---------- ---------- ----------
Total Distributions -- -- -- (1,029) (5,120)
---------- ---------- ---------- ---------- ----------
CAPITAL SHARE TRANSACTIONS (NOTE
4):
Net Increase in Net Assets from
Capital Share Transactions 1,617,517 4,440,542 3,292,689 1,159,186 1,548,506
---------- ---------- ---------- ---------- ----------
Net Increase in Net Assets 1,551,181 4,340,349 3,298,597 1,173,677 1,548,531
NET ASSETS:
Beginning of Period 10,000 10,000 10,000 10,000 10,000
---------- ---------- ---------- ---------- ----------
End of Period $ 1,561,181 $4,350,349 $3,308,597 $1,183,677 $1,558,531
========== ========== ========== ========== ==========
</TABLE>
(1) Commenced operations on June 10, 1997.
(2) Commenced operations on June 18, 1997.
(3) Commenced operations on June 19, 1997.
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASAF FOUNDERS
INTERNATIONAL ASAF FOUNDERS ASAF T. ROWE ASAF AMERICAN ASAF FEDERATED
SMALL SMALL PRICE SMALL CENTURY STRATEGIC HIGH YIELD
CAPITALIZATION CAPITALIZATION COMPANY VALUE BALANCED BOND
FUND(4) FUND(4) FUND(4) FUND(4) FUND(4)
======== ======== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income (Loss) $ 819 $ (1,017) $ 422 $ 2,252 $ 5,911
Net Realized Loss on
Investments (287) -- (37) (1,010) (4,183)
Net Change in Unrealized
Depreciation on Investments (10,214) (2,016) (31,617) (7,216) (24,847)
-------- -------- ---------- ---------- ----------
Net Decrease in Net Assets
Resulting from Operations (9,682) (3,033) (31,232) (5,974) (23,119)
-------- -------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From Net Investment Income:
Class A -- -- -- -- (3,360)
Class B -- -- -- -- (1,321)
Class C -- -- -- -- (470)
Class X -- -- -- -- (760)
-------- -------- ---------- ---------- ----------
Total Distributions -- -- -- -- (5,911)
-------- -------- ---------- ---------- ----------
CAPITAL SHARE TRANSACTIONS (NOTE
4):
Net Increase in Net Assets from
Capital Share Transactions 620,488 882,116 2,534,338 1,247,302 3,855,489
-------- -------- ---------- ---------- ----------
Net Increase in Net Assets 610,806 879,083 2,503,106 1,241,328 3,826,459
NET ASSETS:
Beginning of Period 10,000 10,000 10,000 10,000 10,000
-------- -------- ---------- ---------- ----------
End of Period $620,806 $889,083 $ 2,513,106 $ 1,251,328 $3,836,459
======== ======== ========== ========== ==========
</TABLE>
(4) Commenced operations on July 28, 1997.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per Share Data (For a Share Outstanding from
July 28, 1997* through October 31, 1997)
<TABLE>
<CAPTION>
Increase (Decrease) from
Net Investment Operations
Asset ------------------------------------ Net
Value Net Net Total Asset
Beginning Investment Realized from Less Distributions Value
of Income & Unrealized Investment From Net End of
Period (Loss) Gain (Loss) Operations Investment Income Period
--------- ---------- ------------ ---------- ------------------ ------
<S> <C> <C> <C> <C> <C> <C>
ASAF T. ROWE PRICE
INTERNATIONAL EQUITY FUND:
===============================
Class A $ 9.74 $ 0.01 $(0.82) $ (0.81) $ -- $ 8.93
Class B 10.00 (0.01) (0.83) (0.84) -- 9.16
Class C 10.00 (0.01) (0.83) (0.84) -- 9.16
Class X 10.00 (0.01) (0.81) (0.82) -- 9.18
ASAF JANUS
CAPITAL GROWTH FUND:
===============================
Class A $ 11.18 $ 0.09 $ 0.13 $ 0.22 $ -- $11.40
Class B 10.00 0.06 0.13 0.19 -- 10.19
Class C 10.00 0.05 0.14 0.19 -- 10.19
Class X 10.00 0.05 0.15 0.20 -- 10.20
ASAF INVESCO
EQUITY INCOME FUND:
===============================
Class A $ 9.98 $ 0.14 $ 0.33 $ 0.47 $ -- $10.45
Class B 10.00 0.10 0.35 0.45 -- 10.45
Class C 10.00 0.10 0.36 0.46 -- 10.46
Class X 10.00 0.11 0.34 0.45 -- 10.45
ASAF TOTAL
RETURN BOND FUND:
===============================
Class A $ 10.07 $ 0.15 $ 0.09 $ 0.24 $ (0.03) $10.28
Class B 10.00 0.10 0.09 0.19 (0.03) 10.16
Class C 10.00 0.10 0.09 0.19 (0.03) 10.16
Class X 10.00 0.09 0.10 0.19 (0.02) 10.17
ASAF JPM
MONEY MARKET FUND:
===============================
Class A $ 1.00 $0.009 $ -- $ 0.009 $ (0.009) $ 1.00
Class B 1.00 0.007 -- 0.007 (0.007) 1.00
Class C 1.00 0.007 -- 0.007 (0.007) 1.00
Class X 1.00 0.008 -- 0.008 (0.008) 1.00
<CAPTION>
Ratio of
Net
Supplemental Data Ratios of Expenses to Investment
-------------------- Average Net Assets** Income
Net Assets ---------------------------------- (Loss) to
at End of After Before Average
Total Period Expense Expense Net
Return(2) (in 000's) Reimbursement(1) Reimbursement(1) Assets(1)
----- ---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
ASAF T. ROWE PRICE
INTERNATIONAL EQUITY FUND:
===============================
Class A (8.32)% $ 218 2.10% 51.87% 0.07%
Class B (8.40)% 390 2.60% 38.12% (0.51)%
Class C (8.40)% 198 2.60% 33.95% (0.53)%
Class X (8.20)% 756 2.60% 46.77% (0.28)%
ASAF JANUS
CAPITAL GROWTH FUND:
===============================
Class A 1.97% $ 706 1.70% 26.77% 2.72%
Class B 1.90% 1,718 2.20% 16.45% 2.27%
Class C 1.90% 452 2.20% 15.78% 1.95%
Class X 2.00% 1,474 2.20% 24.39% 2.05%
ASAF INVESCO
EQUITY INCOME FUND:
===============================
Class A 4.71% $ 471 1.55% 29.14% 4.81%
Class B 4.50% 1,408 2.05% 19.54% 3.68%
Class C 4.60% 255 2.05% 20.89% 3.82%
Class X 4.50% 1,174 2.05% 36.25% 4.05%
ASAF TOTAL
RETURN BOND FUND:
===============================
Class A 2.39% $ 61 1.40% 66.92% 4.42%
Class B 1.90% 547 1.90% 39.35% 4.13%
Class C 1.93% 165 1.90% 33.68% 4.32%
Class X 1.94% 410 1.90% 67.46% 3.94%
ASAF JPM
MONEY MARKET FUND:
===============================
Class A 0.92% $ 307 1.50% 31.53% 3.34%
Class B 0.75% 354 2.00% 37.83% 2.98%
Class C 0.71% 332 2.00% 24.34% 2.85%
Class X 0.77% 566 2.00% 39.71% 2.97%
</TABLE>
(1) Annualized
(2) Total return for Class X shares does not reflect the payment of bonus
shares.
* Date of initial shares sold subsequent to the effective date of the Funds'
registration statement under The Securities Act of 1933.
** Represents the combined ratios for the respective fund and its respective
pro rata share of its Master Portfolio.
Per share data has been calculated based on the average daily number of shares
outstanding throughout the period.
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) from
Investment Operations
Net ------------------------------------ Net
Asset Net Net Total Asset
Value Investment Realized from Less Distributions Value
Beginning income & Unrealized Investment From Net End of
of Period (Loss) Gain (Loss) Operations Investment Income Period
--------- ---------- ------------ ---------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASAF FOUNDERS INTERNATIONAL
SMALL CAPITALIZATION FUND:
=========================
Class A $ 10.00 $ 0.05 $(0.18) $(0.13) $ -- $ 9.87
Class B 10.00 0.04 (0.19) (0.15) -- 9.85
Class C 10.00 0.04 (0.18) (0.14) -- 9.86
Class X 10.00 0.04 (0.20) (0.16) -- 9.84
ASAF FOUNDERS
SMALL CAPITALIZATION FUND:
=========================
Class A $ 10.00 $(0.03) $(0.03) $(0.06) $ -- $ 9.94
Class B 10.00 (0.04) (0.03) (0.07) -- 9.93
Class C 10.00 (0.04) (0.02) (0.06) -- 9.94
Class X 10.00 (0.04) (0.03) (0.07) -- 9.93
ASAF T. ROWE PRICE
SMALL COMPANY VALUE FUND:
=========================
Class A $ 10.00 $ 0.02 $ 0.44 $ 0.46 $ -- $ 10.46
Class B 10.00 -- 0.44 0.44 -- 10.44
Class C 10.00 -- 0.45 0.45 -- 10.45
Class X 10.00 -- 0.44 0.44 -- 10.44
ASAF AMERICAN CENTURY
STRATEGIC BALANCED FUND:
=========================
Class A $ 10.00 $ 0.04 $(0.05) $(0.01) $ -- $ 9.99
Class B 10.00 0.02 (0.06) (0.04) -- 9.96
Class C 10.00 0.02 (0.04) (0.02) -- 9.98
Class X 10.00 0.02 (0.06) (0.04) -- 9.96
ASAF FEDERATED
HIGH YIELD BOND FUND:
=========================
Class A $ 10.00 $ 0.05 $(0.07) $(0.02) $(0.05) $ 9.93
Class B 10.00 0.04 (0.07) (0.03) (0.04) 9.93
Class C 10.00 0.03 (0.07) (0.04) (0.03) 9.93
Class X 10.00 0.04 (0.07) (0.03) (0.04) 9.93
<CAPTION>
Ratio of
Net
Supplemental Data Ratios of Expenses to Investment
------------------------------------------ Average Net Assets Income
Net Assets Average ---------------------------------- (Loss) to
at End of Portfolio Commission After Before Average
Total Period Turnover Rate Expense Expense Net
Return(2) (in 000's) Rate Paid Reimbursement(1) Reimbursement(1) Assets(1)
----- ---------- -------- ---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASAF FOUNDERS INTERNATIONAL
SMALL CAPITALIZATION FUND:
=========================
Class A (1.30)% $ 106 -- $ 0.0590 2.10% 136.49% 2.03%
Class B (1.50)% 230 -- 0.0590 2.60% 90.64% 1.62%
Class C (1.40)% 79 -- 0.0590 2.60% 55.02% 1.72%
Class X (1.60)% 206 -- 0.0590 2.60% 54.45% 1.58%
ASAF FOUNDERS
SMALL CAPITALIZATION FUND:
=========================
Class A (0.60)% $ 193 -- $ 0.0529 1.70% 105.48% (1.16)%
Class B (0.70)% 353 -- 0.0529 2.20% 57.99% (1.73)%
Class C (0.60)% 74 -- 0.0529 2.20% 42.48% (1.73)%
Class X (0.70)% 270 -- 0.0529 2.20% 47.29% (1.70)%
ASAF T. ROWE PRICE
SMALL COMPANY VALUE FUND:
=========================
Class A 4.60% $ 383 -- $ 0.0412 1.75% 54.47% 0.69%
Class B 4.40% 1,155 -- 0.0412 2.25% 30.14% 0.17%
Class C 4.50% 335 -- 0.0412 2.25% 33.60% 0.02%
Class X 4.40% 640 -- 0.0412 2.25% 22.43% 0.19%
ASAF AMERICAN CENTURY
STRATEGIC BALANCED FUND:
=========================
Class A (0.10)% $ 257 2% $ 0.0186 1.60% 37.87% 1.56%
Class B (0.40)% 381 2% 0.0186 2.10% 29.90% 0.79%
Class C (0.20)% 215 2% 0.0186 2.10% 38.96% 0.78%
Class X (0.40)% 398 2% 0.0186 2.10% 26.66% 1.07%
ASAF FEDERATED
HIGH YIELD BOND FUND:
=========================
Class A (0.23)% $2,154 11% $ N/A 1.50% 30.49% 4.76%
Class B (0.30)% 920 11% N/A 2.00% 30.22% 3.15%
Class C (0.36)% 206 11% N/A 2.00% 29.26% 3.55%
Class X (0.25)% 556 11% N/A 2.00% 30.95% 3.65%
</TABLE>
(1) Annualized
(2) Total return for Class X shares does not reflect the payment of bonus
shares.
Per share data has been calculated based on the average daily number of shares
outstanding throughout the period.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
OCTOBER 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
================================================================================
American Skandia Advisor Funds, Inc. (the "Company") is an open-end
management investment company, registered under the Investment Company Act of
1940, as amended. The Company was organized on March 5, 1997 as a Maryland
Corporation. The Company operates as a series company and, at October 31, 1997,
consisted of ten diversified investment portfolios (each a "Fund" and
collectively the "Funds"). Five of the Funds -- ASAF T. Rowe Price International
Equity Fund ("International Equity"), ASAF Janus Capital Growth Fund ("Capital
Growth"), ASAF INVESCO Equity Income Fund ("Equity Income"), ASAF Total Return
Bond Fund ("Total Return Bond"), and ASAF JPM Money Market Fund ("Money Market")
(each a "Feeder Fund" and collectively the "Feeder Funds") -- invest all of
their investable assets in a corresponding portfolio of American Skandia Master
Trust (each a "Portfolio" and collectively the "Portfolios"), an open-end
management investment company comprised of five diversified investment
portfolios. The value of each Feeder Fund's investment in each Portfolio,
included in the accompanying Statements of Assets and Liabilities, reflects each
Feeder Fund's beneficial interest in the net assets of that Portfolio. At
October 31, 1997, the Feeder Funds held the following percentage interests in
their corresponding Portfolios.
<TABLE>
<S> <C>
ASMT T. Rowe Price International Equity Portfolio 44.4%
ASMT Janus Capital Growth Portfolio 54.4%
ASMT INVESCO Equity Income Portfolio 50.8%
ASMT PIMCO Total Return Bond Portfolio 23.5%
ASMT JPM Money Market Portfolio 77.7%
</TABLE>
The financial statements of each Portfolio, including the Schedules of
Investments, are included elsewhere within this report and should be read in
conjunction with each Feeder Fund's financial statements.
The remaining five Funds of the Company -- ASAF Founders International
Small Capitalization Fund ("International Small Cap"), ASAF Founders Small
Capitalization Fund ("Small Cap"), ASAF T. Rowe Price Small Company Value Fund
("Small Company Value"), ASAF American Century Strategic Balanced Fund
("Strategic Balanced"), and ASAF Federated High Yield Bond Fund ("High Yield
Bond") (each a "Non-Feeder Fund" and collectively the "Non-Feeder
Funds") -- directly invest and manage their own portfolio of securities.
2. SIGNIFICANT ACCOUNTING POLICIES
================================================================================
The following is a summary of significant accounting policies followed by
the Funds, in conformity with generally accepted accounting principles, in the
preparation of their financial statements. The preparation of financial
statements requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
SECURITY VALUATION
FEEDER FUNDS -- The value of each Feeder Fund's beneficial interest in the
Portfolio in which it invests is determined by the Fund's percentage ownership
in the Portfolio, multiplied by the Portfolio's net assets.
<PAGE>
Valuation of securities held by the Portfolios is discussed in Note 2 to the
financial statements of American Skandia Master Trust.
NON-FEEDER FUNDS -- Securities are valued at the close of trading on the New
York Stock Exchange. Equity securities are valued at the last reported sales
price on the securities exchange on which they are primarily traded, or at the
last reported sales price on the NASDAQ National Securities Market. Securities
not listed on an exchange or securities market, or securities in which there
were no transactions, are valued at the average of the most recent bid and asked
prices.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service. Debt
securities which mature in 60 days or less are valued at cost (or market value
60 days prior to maturity), adjusted for amortization to maturity of any premium
or discount. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith by, or at the direction of,
the Board of Directors. As of October 31, 1997, there were no securities valued
by the Board of Directors.
FOREIGN CURRENCY TRANSLATION
NON-FEEDER FUNDS -- Securities and other assets and liabilities denominated in
foreign currencies are converted each business day into U.S. dollars based on
the prevailing rates of exchange. Purchases and sales of portfolio securities
and income and expenses are converted into U.S. dollars on the respective dates
of such transactions.
Gains and losses resulting from changes in exchange rates applicable to
foreign securities are not reported separately from gains and losses arising
from movements in securities prices.
Net realized foreign exchange gains and losses include gains and losses
from sales and maturities of foreign currency exchange contracts, gains and
losses realized between the trade and settlement dates of foreign securities
transactions, and the difference between the amount of net investment income
accrued on foreign securities and the U.S. dollar amount actually received. Net
unrealized foreign exchange gains and losses include gains and losses from
changes in the value of assets and liabilities other than portfolio securities,
resulting from changes in exchange rates.
FOREIGN CURRENCY EXCHANGE CONTRACTS
NON-FEEDER FUNDS -- A foreign currency exchange contract ("FCEC") is a
commitment to purchase or sell a specified amount of a foreign currency at a
specified future date, in exchange for either a specified amount of another
foreign currency or U.S. dollars.
FCECs are valued at the forward exchange rates applicable to the underlying
currencies, and changes in market value are recorded as unrealized gains and
losses until the contract settlement date.
Risks could arise from entering into FCECs if the counterparties to the
contracts were unable to meet the terms of their contracts. In addition, the use
of FCECs may not only hedge against losses on securities denominated in foreign
currency, but may also reduce potential gains on securities from favorable
movements in exchange rates.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
REPURCHASE AGREEMENTS
NON-FEEDER FUNDS -- A repurchase agreement is a commitment to purchase
government securities from a seller who agrees to repurchase the securities at
an agreed on price and date. The excess of the resale price over the purchase
price determines the yield on the transaction. Under the terms of the agreement,
the market value, including accrued interest, of the government securities will
be at least equal to their repurchase price. Repurchase agreements are recorded
at cost, which, combined with accrued interest, approximates market value.
Repurchase agreements entail a risk of loss in the event that the seller
defaults on its obligation to repurchase the securities. In such case, the Fund
may be delayed or prevented from exercising its right to dispose of the
securities.
DEFERRED ORGANIZATION COSTS
ALL FUNDS -- The Company bears all costs in connection with its organization.
All such costs are amortized on a straight-line basis over a five-year period
beginning on the date of the commencement of operations.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
FEEDER FUNDS -- The Feeder Funds record their proportionate share of investment
operations, including net investment income and realized and unrealized gains
and losses, from the corresponding Portfolios in which they invest. The Feeder
Funds receive daily allocations of investment operations from their
corresponding Portfolios based on the value of their investments in their
respective Portfolios.
NON-FEEDER FUNDS -- Investment transactions are accounted for on the trade date.
Realized gains and losses from securities sold are recognized on the specific
identification basis. Dividend income is recorded on the ex-dividend date.
Corporate actions, including dividends, on foreign securities are recorded on
the ex-dividend date or, if such information is not available, as soon as
reliable information is available from the Funds' sources. Interest income is
recorded on the accrual basis and includes the accretion of discount and
amortization of premium.
MULTIPLE CLASSES OF SHARES
ALL FUNDS -- Each Fund is divided into Class A, B, C, and X shares. Each class
of shares is separately charged its respective distribution and service fees.
Income, expenses that are not specific to a particular class, and realized and
unrealized gains and losses are allocated to each class based on the daily value
of the shares of each class in relation to the total value of the Fund.
Dividends are declared separately for each class and the per-share amounts
reflect differences in class-specific expenses.
DISTRIBUTIONS TO SHAREHOLDERS
ALL FUNDS -- Dividends, if any, from net investment income are declared and paid
at least annually by the International Small Cap, International Equity, Small
Cap, Small Company Value, and Capital Growth Funds, semiannually by the Equity
Income and Strategic Balanced Funds, quarterly by the Total Return Bond Fund,
and declared daily and paid monthly by the High Yield Bond and Money Market
Funds. Net realized gains
<PAGE>
from investment transactions, if any, are distributed at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
3. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
================================================================================
The Non-Feeder Funds have entered into investment management agreements
with American Skandia Investment Services, Inc. ("Investment Manager") which
provide that the Investment Manager will furnish each Fund with investment
advice and investment management and administrative services. The Investment
Manager has engaged the following firms as Sub-advisors for their respective
Funds: Founders Asset Management, Inc. for International Small Cap and Small
Cap; T. Rowe Price Associates, Inc. for Small Company Value; American Century
Investment Management, Inc. for Strategic Balanced; and Federated Investment
Counseling for High Yield Bond.
ADVISORY FEES
NON-FEEDER FUNDS -- The Investment Manager receives a fee, computed daily and
paid monthly, based on an annual rate of 1.10%, .90%, 1.00%, .90%, and .70% of
the average daily net assets of the International Small Cap, Small Cap, Small
Company Value, Strategic Balanced, and High Yield Bond Funds, respectively. The
fee for International Small Cap is reduced to 1.00% of the average daily net
assets in excess of $100 million.
SUB-ADVISORY FEES
NON-FEEDER FUNDS -- The Investment Manager pays each Sub-advisor a fee, computed
daily and paid monthly, based on an annual rate of .60%, .50%, .60%, .50%, and
.25% of the average daily net assets of the International Small Cap, Small Cap,
Small Company Value, Strategic Balanced, and High Yield Bond Funds,
respectively. The annual rates of the fees payable to the Sub-advisors for
International Small Cap, Small Cap, Strategic Balanced, and High Yield Bond are
reduced for Fund net assets in excess of specified levels.
EXPENSE REIMBURSEMENTS
ALL FUNDS -- The Investment Manager has voluntarily agreed to reimburse each
Fund for operating expenses (exclusive of class-specific distribution fees) in
excess of 1.60%, 1.20%, 1.25%, 1.10%, 1.00%, 1.60%, 1.20%, 1.05%, .90%, and
1.00%, on an annualized basis, of the average daily net assets of the
International Small Cap, Small Cap, Small Company Value, Strategic Balanced,
High Yield Bond, International Equity, Capital Growth, Equity Income, Total
Return Bond, and Money Market Funds, respectively. All amounts paid or payable
to the Funds by the Investment Manager, under the agreement, are reflected in
the Statements of Operations.
MANAGEMENT OF THE COMPANY
NON-FEEDER FUNDS -- Certain officers and Directors of the Funds are officers or
directors of the Investment Manager. The Funds pay no compensation directly to
their officers or interested Directors.
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
DISTRIBUTOR
ALL FUNDS -- American Skandia Marketing, Incorporated ("ASMI") serves as the
principal underwriter and distributor for each Fund.
The Company has adopted a separate Distribution and Service Plan (each a
"Plan" and collectively the "Plans") for Class A, B, C, and X shares of each
Fund in accordance with the requirements of Rule 12b-1 of the Investment Company
Act of 1940.
Under the Class A Plan, the Funds will pay ASMI a distribution and service
fee of .50% of the average daily net assets attributable to Class A shares, half
of which is intended as a fee for services provided to existing shareholders.
ASMI uses distribution and service fees received under the Plan to compensate
qualified dealers, brokers, banks, and other financial institutions ("Dealers")
for services provided in connection with the sale of Class A shares and the
maintenance of shareholder accounts. Such compensation is paid by ASMI quarterly
at an annual rate not to exceed .50% of the Funds' average daily net assets
attributable to Class A shares. Fees incurred under the Plan during the period
ended October 31, 1997 were .50% of the average daily net assets of Class A
shares of the Funds.
A portion of the sales charge on sales of Class A shares may be retained by
ASMI or allocated to Dealers attributable to the sale of those shares. For the
period ended October 31, 1997, ASMI retained no portion of the sales charge on
sales of Class A shares of the Funds.
Under the Class B Plan, the Funds will pay ASMI a distribution and service
fee of 1.00% of the average daily net assets attributable to Class B shares, a
quarter of which is intended as a fee for services provided to existing
shareholders. ASMI uses distribution and service fees received under the Plan to
compensate Dealers for services provided in connection with the sale of Class B
shares and the maintenance of shareholder accounts. Such compensation is paid by
ASMI quarterly at an annual rate not to exceed .50% of the Funds' average daily
net assets attributable to Class B shares held for over seven years. Fees
incurred under the Plan during the period ended October 31, 1997 were 1.00% of
the average daily net assets of Class B shares of the Funds.
Under the Class C Plan, the Funds will pay ASMI a distribution and service
fee of 1.00% of the average daily net assets attributable to Class C shares, a
quarter of which is intended as a fee for services provided to existing
shareholders. ASMI uses distribution and service fees received under the Plan to
compensate Dealers for services provided in connection with the sale of Class C
shares and the maintenance of shareholder accounts. ASMI currently pays a 1.00%
fee to Dealers, in advance, upon sale of Class C shares and retains the fee paid
by the Funds in the first year. After the shares have been held for a year, ASMI
pays such compensation on a quarterly basis. Fees incurred under the Plan during
the period ended October 31, 1997 were 1.00% of the average daily net assets of
Class C shares of the Funds.
Under the Class X Plan, the Funds will pay ASMI a distribution and service
fee of 1.00% of the average daily net assets attributable to Class X shares that
are outstanding for eight years or less, a quarter of which is intended as a fee
for services provided to existing shareholders. ASMI uses distribution and
service fees received under the Plan as reimbursement for its purchases of Bonus
Shares, as well as to compensate Dealers for services provided in connection
with the sale of Class X shares and the maintenance of shareholder accounts.
Compensation to Dealers is paid by ASMI quarterly at an annual rate not to
exceed
<PAGE>
.50% of the Funds' average daily net assets attributable to Class X shares held
for over seven years. Fees incurred under the Plan during the period ended
October 31, 1997 were 1.00% of the average daily net assets of Class X shares of
the Funds.
Purchases of $1 million or more or purchases by certain retirement plans,
with respect to Class A shares, are subject to a contingent deferred sales
charge ("CDSC") if shares are redeemed within 12 months of their purchase. A
CDSC is imposed on Class B and Class X shares redeemed within eight years after
their purchase. A CDSC is imposed on Class C shares redeemed within 12 months of
their purchase. The maximum CDSC imposed is equal to 1%, 6%, 1%, and 6% of the
amount subject to the charge, for Class A, B, C, and X, respectively. CDSCs
collected by ASMI totaled $644, $100, and $385 for Class B, Class C, and Class
X, respectively.
RELATED-PARTY TRANSACTIONS
At October 31, 1997, American Century Investment Management, Inc. owned
shares of ASAF American Century Strategic Balanced Fund, which comprised
approximately 7% of the net assets of the Fund. In addition, the Investment
Manager owned shares of ASAF Federated High Yield Bond Fund, which comprised
approximately 52% of the net assets of the Fund.
4. SHARES OF CAPITAL STOCK
================================================================================
ALL FUNDS -- The authorized capital stock of the Funds is 40 million shares,
with a par value of $.001 per share. Transactions in shares of capital stock,
for the period from July 28, 1997 (commencement of operations) to October 31,
1997, were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS X
------------------ --------------------- ------------------ ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
===== ======= ====== ======== ===== ======= ====== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY:
Sold 23,490 $220,217 42,608 $ 405,136 21,627 $207,357 84,453 $ 806,216
Redeemed (123) (1,174) (81) (797) (3) (25) (2,063) (19,413)
------ -------- ------- ---------- ------- -------- ------- ----------
Net Increase 23,367 $219,043 42,527 $ 404,339 21,624 $207,332 82,390 $ 786,803
====== ======== ======= ========== ======= ======== ======= ==========
CAPITAL GROWTH:
Sold 66,046 $768,680 168,878 $1,766,154 44,354 $465,523 144,494 $1,503,024
Redeemed (5,101) (59,528) (298) (3,181) (3) (25) (10) (105)
------ -------- ------- ---------- ------- -------- ------- ----------
Net Increase 60,945 $709,152 168,580 $1,762,973 44,351 $465,498 144,484 $1,502,919
====== ======== ======= ========== ======= ======== ======= ==========
EQUITY INCOME:
Sold 44,136 $459,412 134,825 $1,411,321 24,377 $255,486 112,415 $1,168,540
Redeemed -- -- (162) (1,731) -- -- (32) (339)
------ -------- ------- ---------- ------- -------- ------- ----------
Net Increase 44,136 $459,412 134,663 $1,409,590 24,377 $255,486 112,383 $1,168,201
====== ======== ======= ========== ======= ======== ======= ==========
TOTAL RETURN BOND:
Sold 5,693 $ 57,481 54,044 $ 542,228 16,227 $163,314 40,314 $ 405,133
Reinvested 10 103 20 202 10 103 43 430
Redeemed (746) (7,525) (202) (2,025) (3) (25) (23) (233)
------ -------- ------- ---------- ------- -------- ------- ----------
Net Increase 4,957 $ 50,059 53,862 $ 540,405 16,234 $163,392 40,334 $ 405,330
====== ======== ======= ========== ======= ======== ======= ==========
</TABLE>
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS X
--------------------- ---------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
====== ======== ====== ======== ====== ======= ====== =======
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET:
Sold 374,404 $ 374,404 702,299 $ 702,299 531,152 $ 531,152 874,395 $ 874,395
Reinvested 1,094 1,094 1,141 1,141 891 891 725 725
Redeemed (78,485) (78,485) (349,856) (349,856) (200,540) (200,540) (308,714) (308,714)
------- ---------- -------- ---------- -------- --------- -------- ---------
Net Increase 297,013 $ 297,013 353,584 $ 353,584 331,503 $ 331,503 566,406 $ 566,406
======= ========== ======== ========== ======== ========= ======== =========
INTERNATIONAL SMALL CAP:
Sold 9,754 $ 97,828 23,340 $ 233,440 7,998 $ 80,146 20,945 $ 209,179
Redeemed -- -- (2) (25) (6) (55) (2) (25)
------- ---------- -------- ---------- -------- --------- -------- ---------
Net Increase 9,754 $ 97,828 23,338 $ 233,415 7,992 $ 80,091 20,943 $ 209,154
======= ========== ======== ========== ======== ========= ======== =========
SMALL CAP:
Sold 18,372 $ 183,278 35,572 $ 354,771 7,399 $ 73,723 27,161 $ 270,490
Redeemed (3) (25) (3) (25) (2) (25) (7) (71)
------- ---------- -------- ---------- -------- --------- -------- ---------
Net Increase 18,369 $ 183,253 35,569 $ 354,746 7,397 $ 73,698 27,154 $ 270,419
======= ========== ======== ========== ======== ========= ======== =========
SMALL COMPANY VALUE:
Sold 35,645 $ 375,919 110,704 $1,167,706 32,096 $ 342,052 61,311 $ 649,944
Redeemed (17) (181) (70) (760) (3) (25) (29) (317)
------- ---------- -------- ---------- -------- --------- -------- ---------
Net Increase 35,628 $ 375,738 110,634 $1,166,946 32,093 $ 342,027 61,282 $ 649,627
======= ========== ======== ========== ======== ========= ======== =========
STRATEGIC BALANCED:
Sold 83,398 $ 838,987 38,292 $ 388,813 21,579 $ 219,920 39,958 $ 399,935
Redeemed (58,685) (600,178) (12) (125) (3) (25) (2) (25)
------- ---------- -------- ---------- -------- --------- -------- ---------
Net Increase 24,713 $ 238,809 38,280 $ 388,688 21,576 $ 219,895 39,956 $ 399,910
======= ========== ======== ========== ======== ========= ======== =========
HIGH YIELD BOND:
Sold 216,427 $2,168,207 92,594 $ 924,866 21,719 $ 216,988 60,245 $ 600,477
Reinvested 336 3,338 106 1,056 47 469 82 811
Redeemed (718) (7,184) (53) (532) (1,002) (9,951) (4,306) (43,056)
------- ---------- -------- ---------- -------- --------- -------- ---------
Net Increase 216,045 $2,164,361 92,647 $ 925,390 20,764 $ 207,506 56,021 $ 558,232
======= ========== ======== ========== ======== ========= ======== =========
</TABLE>
The number of shareholders whose ownership is 5% or more of the net assets
of a fund, and their combined percentage ownership is as follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHAREHOLDERS OWNERSHIP
============ ==========
<S> <C> <C>
Equity Income 1 6%
Total Return Bond 5 38
Money Market 6 47
International Small Cap 2 16
Small Cap 3 17
Small Company Value 1 5
Strategic Balanced 4 24
High Yield Bond 1 52
</TABLE>
<PAGE>
5. TAX MATTERS
================================================================================
ALL FUNDS -- Each Fund intends to qualify as a regulated investment company
under the Internal Revenue Code and to distribute all of its taxable income,
including any net realized gains on investments, to shareholders. Accordingly,
no provision for federal income or excise tax has been made.
Income and capital gains of the Funds are determined in accordance with
both tax regulations and generally accepted accounting principles. Such may
result in temporary and permanent differences between tax basis earnings and
earnings reported for financial statement purposes. Temporary differences that
result in over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. Permanent differences in the recognition of earnings are reclassified to
additional paid-in capital. Distributions in excess of tax-basis earnings are
recorded as a return of capital.
CAPITAL LOSS CARRYFORWARDS -- At October 31, 1997, the following Funds had, for
federal income tax purposes, capital loss carryforwards available to offset
future net realized capital gains.
<TABLE>
<CAPTION>
EXPIRING
IN 2005
============
<S> <C>
Capital Growth $38,807
Equity Income 12,699
Small Company Value 37
Strategic Balanced 1,010
High Yield Bond 4,183
</TABLE>
6. PORTFOLIO SECURITIES
================================================================================
NON-FEEDER FUNDS -- Purchases and sales of securities, other than U.S.
government securities, and short-term obligations, during the period ended
October 31, 1997, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
=============== ===========
<S> <C> <C>
International Small Cap $ 381,711 $ --
Small Cap 180,836 --
Small Company Value 2,051,601 --
Strategic Balanced 633,410 6,926
High Yield Bond 3,214,715 88,250
</TABLE>
Purchases and sales of U.S. government securities, during the period end
October 31, 1997, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
=============== ===========
<S> <C> <C>
Strategic Balanced $298,625 $ --
</TABLE>
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
At October 31, 1997, the cost and unrealized appreciation or depreciation
in value of the investments owned by the Non-Feeder Funds, for federal income
tax purposes, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AGGREGATE UNREALIZED UNREALIZED NET UNREALIZED
COST APPRECIATION DEPRECIATION DEPRECIATION
========= ============ ============ ==============
<S> <C> <C> <C> <C>
International Small Cap $ 381,711 $ 1,437 $ 11,519 $ 10,082
Small Cap 254,041 4,229 6,245 2,016
Small Company Value 2,672,075 30,907 62,524 31,617
Strategic Balanced 1,155,555 32,835 40,051 7,216
High Yield Bond 4,417,473 3,302 28,149 24,847
</TABLE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Investors and Board of Trustees of
American Skandia Master Trust:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the American Skandia Master Trust
(the "Trust"), comprising, respectively, ASMT T. Rowe Price International Equity
Portfolio, ASMT Janus Capital Growth Portfolio, ASMT INVESCO Equity Income
Portfolio, ASMT PIMCO Total Return Bond Portfolio and ASMT JPM Money Market
Portfolio as of October 31, 1997, and their related statements of operations,
changes in net assets and supplementary data for each of the periods presented.
These financial statements and supplementary data are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and the supplementary data based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and supplementary data are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
investments owned as of October 31, 1997, by correspondence with custodians and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and supplementary data referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned portfolios of the American Skandia Master Trust as of
October 31, 1997, and the results of their operations, the changes in their net
assets and their supplementary data for each of the periods presented, in
conformity with accounting principles generally accepted in the United States of
America.
COOPERS & LYBRAND
Chartered Accountants and Registered Auditors
Dublin, Republic of Ireland
December 12, 1997
<PAGE>
AMERICAN SKANDIA MASTER TRUST
SCHEDULES OF INVESTMENTS
OCTOBER 31, 1997
ASMT T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
ASMT JANUS CAPITAL GROWTH PORTFOLIO
ASMT INVESCO EQUITY INCOME PORTFOLIO
ASMT PIMCO TOTAL RETURN BOND PORTFOLIO
ASMT JPM MONEY MARKET PORTFOLIO
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
- -------------------------------------------------------
ASMT T. ROWE PRICE
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
FOREIGN STOCK -- 63.8%
ARGENTINA -- 1.3%
Banco de Galicia y
Buenos Aires SA de CV
[ADR] 370 $ 8,967
Perez Companc SA C1-B 1,840 11,488
Telefonica de Argentina
SA 490 13,781
YPF SA [ADR] 340 10,880
--------
45,116
--------
AUSTRALIA -- 1.5%
Australian Gas Light
Co. Ltd. 2,000 13,393
Broken Hill Proprietary
Co. Ltd. 1,000 9,939
News Corp. Ltd. 2,005 9,624
St. George Bank Ltd. 2,000 12,144
Woodside Petroleum Ltd. 1,000 8,466
--------
53,566
--------
BELGIUM -- 1.1%
Generale de Banque SA 30 12,272
Kredietbank NV 60 25,178
--------
37,450
--------
BRAZIL -- 1.0%
Lojas Americanas SA
[ADR] 1,000 8,164
Pao de Acucar [ADR] 1,000 18,500
Usinas Siderurgicas de
Minas Gerais SA [ADR] 1,000 7,483
--------
34,147
--------
CANADA -- 0.3%
Alcan Aluminium Ltd. 320 9,085
--------
CHILE -- 0.6%
Chilgener SA [ADR] 338 9,210
Compania Cervecerias
Unidas SA [ADR] 430 10,481
--------
19,691
--------
FINLAND -- 0.3%
Nokia AB Cl-A 120 10,497
--------
FRANCE -- 5.4%
Alcatel Alsthom 100 12,092
AXA-UAP 180 12,352
Carrefour Supermarche
SA 20 10,459
Compagnie de Saint-
Gobain 90 12,946
Compagnie Generale des
Eaux 230 26,892
Legrand SA 50 9,329
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
Louis Vuitton Moet
Hennessy 40 $ 6,810
Pinault-Printemps
Redoute SA 40 18,332
Sanofi SA 130 12,377
Schneider SA 240 12,842
Societe Generale 70 9,607
Societe Nationale Elf
Aquitaine SA 100 12,404
Sodexho SA 20 9,996
Total SA Cl-B 190 21,126
--------
187,564
--------
GERMANY -- 4.1%
Allianz AG 60 13,561
Bayer AG 250 9,006
Bayerische Bank AG 240 10,123
Deutsche Bank AG 270 17,868
Deutsche Telekom AG 520 9,759
Gehe AG 320 16,826
Mannesmann AG 10 4,241
Rhoen-Klinikum AG 50 4,997
SAP AG 50 14,307
SAP AG Pfd. 40 11,957
Siemens AG 180 11,190
Veba AG 320 18,034
--------
141,869
--------
HONG KONG -- 1.5%
Dao Heng Bank Group
Ltd. 3,000 6,909
Henderson Land
Development Co. Ltd. 1,000 5,537
Hong Kong Land Holdings
Ltd. 4,000 9,120
Hutchison Whampoa Ltd. 2,000 13,843
New World Development
Co. Ltd. 2,000 7,038
</TABLE>
<PAGE>
- -------------------------------------------------------
ASMT T. ROWE PRICE
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
Swire Pacific Ltd. Cl-A 1,000 $ 5,343
Wharf Holdings Ltd. 3,000 6,132
--------
53,922
--------
ITALY -- 2.1%
Credito Italiano SPA 4,000 10,685
Ente Nazionale
Idrocarburi SPA 2,000 11,265
Istituto Mobiliare
Italiano SPA 1,000 8,958
Mediolanum SPA 1,000 16,803
Telecom Italia Mobile
SPA 4,000 14,863
Telecom Italia SPA 2,000 12,555
--------
75,129
--------
JAPAN -- 13.8%
Canon, Inc. 1,000 24,279
Dainippon Screen
Manufacturing Co.
Ltd. 1,000 8,115
Daiichi Pharmaceutical
Co. Ltd. 1,000 14,218
Daiwa House Industry
Co. Ltd. 1,000 9,645
DDI Corp. 3 10,027
Denso Corp. 1,000 21,618
East Japan Railway Co.
Ltd. 2 9,728
Fanuc Ltd. 400 16,164
Hitachi Ltd. 1,000 7,691
Kao Corp. 1,000 13,969
Komatsu Ltd. 2,000 10,693
Komori Corp. 1,000 18,292
Kuraray Co. Ltd. 2,000 17,960
Makita Corp. 1,000 14,052
Matsushita Electric
Industrial Co. 1,000 16,795
Marui Co. Ltd. 1,000 16,879
Mitsubishi Corp. 2,000 17,128
Mitsubishi Heavy
Industries Ltd. 3,000 14,742
Mitsui Fudosan Co. Ltd. 1,000 11,308
NEC Corp. 1,000 10,975
Nippon Steel Co. 5,000 10,310
Nippon Telegraph &
Telephone Corp. 10 8,481
Nomura Securities Co.
Ltd. 1,000 11,640
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
Pioneer Electronic
Corp. 1,000 $ 16,463
Sankyo Co. Ltd. 1,000 33,009
Sekisui Chemical Co.
Ltd. 1,000 7,874
Sekisui House Ltd. 1,000 8,564
Sharp Corp. 1,000 7,774
Shin-Etsu Chemical Co. 1,000 24,445
Sony Corp. 200 16,613
Sumitomo Corp. 1,000 7,151
Sumitomo Electric
Industries 1,000 13,220
Teijin Ltd. 4,000 13,137
Tokio Marine & Fire
Insurance Co. 1,000 9,978
Toppan Printing Co.
Ltd. 1,000 12,555
--------
485,492
--------
MALAYSIA -- 0.1%
United Engineers Ltd. 2,000 4,716
--------
MEXICO -- 1.6%
Cementos de Mexico SA
de CV [ADS]* 2,000 15,606
Cifra SA de CV Cl-B
[ADR] 5,560 10,831
Fomento Economico
Mexicano SA de CV 2,000 14,038
Gruma SA [ADR] 144A* 516 8,040
Grupo Modelo SA de CV 1,000 7,470
--------
55,985
--------
NETHERLANDS -- 7.1%
ABN Amro Bank NV 730 14,707
Baan Co. NV 160 11,336
CSM NV 260 11,870
Elsevier NV 1,700 26,717
Fortis Amev NV 240 9,436
ING Groep NV 640 26,877
Koninklijke Nutricia
Verenigde Bedrijven
NV 370 10,581
Polygram NV 200 11,377
Royal Dutch Petroleum
NV 1,080 57,152
Unilever NV 390 20,739
Wolters Kluwer NV 380 46,680
--------
247,472
--------
NEW ZEALAND -- 0.2%
Air New Zealand Ltd.
C1-B 4,000 8,483
--------
</TABLE>
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
NORWAY -- 1.1%
Norsk Hydro AS 350 $ 19,273
Orkla AS Cl-A 120 11,022
Saga Petroleum ASA 520 9,211
--------
39,506
--------
SINGAPORE -- 0.9%
Overseas Union Bank
Ltd. Cl-F 2,000 6,675
Singapore Land Ltd. 2,000 5,696
Singapore Press
Holdings Ltd. 1,000 13,795
United Overseas Bank
Ltd. 1,000 5,531
--------
31,697
--------
SPAIN -- 1.4%
Banco Santander SA 360 10,092
Empresa Nacional de
Electricidad SA 510 9,613
Iberdrola SA 950 11,372
Repsol SA 220 9,232
Telefonica de Espana SA 370 10,105
--------
50,414
--------
SWEDEN -- 2.0%
Astra AB Cl-B 1,300 20,149
Atlas Copco AB Cl-B 320 9,513
Electrolux AB Cl-B 170 14,083
Hennes & Mauritz AB
Cl-B 390 15,972
Sandvik AB Cl-B 320 9,748
--------
69,465
--------
SWITZERLAND -- 4.0%
ABB AG 20 26,139
Adecco SA 40 12,747
Credit Suisse Group 80 11,301
Nestle SA 20 28,259
Novartis AG 30 47,114
Swiss Bank Corp. 50 13,481
--------
139,041
--------
UNITED KINGDOM -- 12.4%
Abbey National PLC 1,000 15,897
Argos PLC 1,000 10,590
Asda Group PLC 4,000 10,397
British Petroleum Co.
PLC 1,000 14,690
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
Cable & Wireless PLC 1,000 $ 7,982
Cadbury Schweppes PLC 1,000 10,061
Glaxo Wellcome PLC 1,000 21,431
Grand Metropolitan PLC 2,000 18,043
Guinness PLC 2,000 17,876
Kingfisher PLC 2,000 28,775
Ladbroke Group PLC 3,000 13,432
National Westminster
Bank PLC 5,000 71,855
Rank Group PLC 2,000 11,168
Reed International PLC 4,000 39,541
RTZ Corp. PLC 1,000 12,879
Safeway PLC 2,000 13,021
Shell Transport &
Trading Co. PLC 4,000 28,356
Smithkline Beecham PLC 4,000 37,898
Tesco PLC 1,000 8,003
Tomkins PLC 3,000 15,394
United News & Media PLC 2,000 25,153
--------
432,442
--------
TOTAL INVESTMENTS -- 63.8%
(Cost $2,426,017) 2,232,749
OTHER ASSETS LESS
LIABILITIES -- 36.2% 1,264,622
--------
NET ASSETS -- 100.0% $ 3,497,371
========
</TABLE>
Foreign currency exchange contracts outstanding at October 31, 1997:
<TABLE>
<CAPTION>
UNREALIZED
SETTLEMENT CONTRACTS TO IN EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/97 Buy CHF 17,751 $ 12,688 $ 12,698 $ 10
11/97 Buy DEM 58,911 34,290 34,208 (82)
11/97 Buy ESP 1,325,280 9,139 9,118 (21)
11/97 Buy NLG 96,533 49,913 49,708 (205)
11/97 Buy NOK 60,482 8,612 8,629 17
11/97 Buy SEK 66,562 8,876 8,901 25
--------- -------- ------
$ 123,518 $123,262 $ (256)
========= ======== ======
</TABLE>
- -------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
- -------------------------------------------------------
ASMT JANUS CAPITAL
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 56.2%
AIRLINES -- 1.8%
UAL Corp.* 1,625 $ 142,391
--------
BEVERAGES -- 1.4%
Coca-Cola Enterprises,
Inc. 4,081 114,778
--------
CHEMICALS -- 2.9%
Cytec Industries, Inc.* 1,630 79,462
Dupont (E.I.) de
Nemours & Co. 1,359 77,293
Monsanto Co. 1,590 67,972
Solutia, Inc.* 318 7,036
--------
231,763
--------
CLOTHING & APPAREL -- 0.0%
Polo Ralph Lauren
Corp.* 75 1,950
--------
COMPUTER HARDWARE -- 6.4%
Compaq Computer Corp.* 4,050 258,187
Dell Computer Corp.* 2,100 168,262
Veritas Software Corp.* 2,000 83,250
--------
509,699
--------
COMPUTER SERVICES & SOFTWARE -- 7.4%
Edwards (J.D.) & Co.* 2,325 79,050
First Data Corp. 1,995 57,980
Microsoft Corp.* 2,550 331,500
Saville Systems Ireland
PLC [ADR]* 2,000 119,500
--------
588,030
--------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.0%
AES Corp.* 1,150 45,569
Applied Materials,
Inc.* 2,300 76,762
Electronics for
Imaging, Inc.* 408 19,074
General Electric Co. 2,000 129,125
Philips Electronics NV
[ADR] 25 1,959
Teradyne, Inc.* 2,000 74,875
Texas Instruments, Inc. 525 56,011
--------
403,375
--------
ENTERTAINMENT & LEISURE -- 1.9%
Travel Services
International, Inc.* 6,850 153,269
--------
FARMING & AGRICULTURE -- 0.7%
Delta & Pine Land Co. 1,475 54,944
--------
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
FINANCIAL -- BANK & TRUST -- 2.8%
Banc One Corp. 600 $ 31,275
Citicorp 1,200 150,075
GSB Financial Corp.* 200 3,012
Mercantile
Bancorporation, Inc. 852 41,375
--------
225,737
--------
FINANCIAL SERVICES -- 4.0%
FirstSpartan Financial
Corp. 125 4,563
Merrill Lynch & Co.,
Inc. 2,768 187,186
SLM Holding Corp. 890 124,934
--------
316,683
--------
FOOD -- 1.5%
Sara Lee Corp. 2,400 122,700
--------
HEALTHCARE SERVICES -- 0.5%
United Healthcare Corp. 775 35,892
--------
OIL & GAS -- 11.1%
Diamond Offshore
Drilling, Inc. 4,692 292,077
Exxon Corp. 560 34,405
Santa Fe International
Corp. 125 6,148
Schlumberger Ltd. 2,450 214,375
TransCoastal Marine
Services, Inc.* 12,300 305,963
Transocean Offshore,
Inc. 596 32,184
--------
885,152
--------
PHARMACEUTICALS -- 6.5%
Kos Pharmaceuticals,
Inc.* 1,725 61,669
Lilly (Eli) & Co. 436 29,158
Pfizer, Inc. 2,528 178,856
Warner-Lambert Co. 1,766 252,869
--------
522,552
--------
</TABLE>
<PAGE>
AMERICAN SKANDIA MASTER TRUST
=======================================================
ASMT JANUS CAPITAL
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS -- 1.6%
Lucent Technologies,
Inc. 1,000 $ 82,438
Qwest Communication
International, Inc.* 750 46,313
--------
128,751
--------
TRANSPORTATION -- 0.6%
Federal Express Corp.* 700 46,725
--------
TOTAL COMMON STOCK
(Cost $4,477,702) 4,484,391
--------
FOREIGN STOCK -- 0.1%
ELECTRONIC COMPONENTS & EQUIPMENT
Philips Electronics NV
(Cost $3,913) 4,151
--------
PAR
(000)
------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 42.6%
Federal Home Loan
Mortgage Corp.
5.65%, 11/03/97
(Cost $3,398,933) $ 3,400 3,398,933
--------
SHORT-TERM INVESTMENTS -- 0.4%
Temporary Investment
Cash Fund 16,849 16,849
Temporary Investment
Fund 16,849 16,849
--------
(Cost $33,698) 33,698
--------
TOTAL INVESTMENTS -- 99.2%
(Cost $7,914,248) 7,921,173
OTHER ASSETS LESS
LIABILITIES -- 0.8% 61,604
--------
NET ASSETS -- 100.0% $ 7,982,777
========
</TABLE>
- -------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
ASMT INVESCO EQUITY
INCOME PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 64.5%
AEROSPACE -- 1.1%
AlliedSignal, Inc. 2,000 $ 72,000
AUTOMOBILE MANUFACTURERS -- 1.9%
Ford Motor Co. 2,000 $ 87,375
General Motors Corp. 500 32,094
----------
119,469
----------
BEVERAGES -- 1.1%
Anheuser-Busch Companies,
Inc. 1,800 71,887
----------
CHEMICALS -- 1.3%
Dow Chemical Co. 900 81,675
----------
COMPUTER HARDWARE -- 1.5%
International Business
Machines Corp. 1,000 98,062
----------
COMPUTER SERVICES & SOFTWARE -- 2.8%
Edwards (J.D.) & Co.* 3,500 119,000
CompUSA, Inc.* 2,000 65,500
----------
184,500
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.5%
Emerson Electric Co. 1,200 62,925
General Electric Co. 1,600 103,300
Northern States Power Co.
of Minnesota 1,300 65,488
Tandy Corp. 2,800 96,250
Texas Instruments, Inc. 900 96,021
----------
423,984
----------
FINANCIAL -- BANK & TRUST -- 3.7%
Bank of New York Co.,
Inc. 2,100 98,831
Charter One Financial,
Inc. 900 52,312
Mellon Bank Corp. 1,700 87,656
----------
238,799
----------
FINANCIAL SERVICES -- 3.1%
Ahmanson (H.F.) & Co. 1,700 100,300
Beneficial Corp. 1,300 99,694
----------
199,994
----------
FOOD -- 3.0%
General Mills, Inc. 1,550 102,300
Kellogg Co. 2,200 94,737
----------
197,037
----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
- -------------------------------------------------------
ASMT INVESCO EQUITY
INCOME PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
HEALTHCARE SERVICES -- 1.6%
Tenet Healthcare Corp.* 3,400 $ 103,912
----------
INSURANCE -- 2.4%
C.H. Robinson Worldwide,
Inc.* 2,000 44,000
Ohio Casualty Corp. 2,500 110,625
----------
154,625
----------
OIL & GAS -- 9.6%
Apache Corp. 2,400 100,800
Baker Hughes Inc. 1,400 64,312
Chevron Corp. 1,200 99,525
Exxon Corp. 1,600 98,300
National Fuel Gas Co. 1,500 66,187
Phillips Petroleum Co. 2,100 101,587
Schlumberger Ltd. 1,100 96,250
----------
626,961
----------
PAPER & FOREST PRODUCTS -- 1.5%
Fort James Corp. 2,500 99,219
----------
PHARMACEUTICALS -- 4.0%
American Home Products
Corp. 1,100 81,538
Merck & Co., Inc. 800 71,400
Smithkline Beecham PLC
[ADR] 2,200 104,775
----------
257,713
----------
RAILROADS -- 2.6%
Burlington Northern Santa
Fe Corp. 800 76,000
Kansas City Southern
Industries, Inc. 3,000 91,500
----------
167,500
----------
REAL ESTATE -- 2.1%
Health and Retirement
Property Trust [REIT] 3,600 67,500
Kilroy Realty Corp.
[REIT] 2,600 68,900
----------
136,400
----------
RETAIL & MERCHANDISING -- 2.7%
Penney (J.C.) Co., Inc. 1,400 82,163
Williams-Sonoma, Inc.* 2,400 96,300
----------
178,463
----------
SEMI-CONDUCTORS -- 1.6%
Analog Devices, Inc.* 3,300 100,856
----------
- ------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------
TELECOMMUNICATIONS -- 7.8%
Ameritech Corp. 1,000 $ 65,000
Bell Atlantic Corp. 1,000 79,875
France Telecom SA [ADR]* 3,000 113,625
GTE Corp. 1,600 67,900
SBC Communications, Inc. 1,300 82,713
U.S. West Communications
Group 2,500 99,531
----------
508,644
----------
UTILITIES -- ELECTRIC -- 2.6%
Endesa [ADR] 5,000 93,125
Unicom Corp. 2,800 78,400
----------
171,525
----------
TOTAL COMMON STOCK
(Cost $4,138,511) 4,193,225
----------
PREFERRED STOCK -- 0.4%
PRINTING & PUBLISHING
K-III Communications
Corp.
(Cost $26,500) 1,000 26,450
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 17.0%
BROADCASTING -- 1.8%
Allbritton Communications
Co. Sr. Sub. Debs.
11.50%, 08/15/04 $ 50 52,563
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%, 05/15/06 25 27,312
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP] 9.186%,
07/01/07 50 39,124
------------
118,999
------------
COMPUTER HARDWARE -- 0.8%
International Business
Machines Corp. Debs.
6.22%, 08/01/27 50 50,500
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA MASTER TRUST
<TABLE>
<CAPTION>
- ------------------------------------------------------
PAR
(000) VALUE
- ------------------------------------------------------
<S> <C> <C>
ENERGY SERVICES -- 1.9%
Tuscon Electric Power Co.
Notes
7.65%, 05/01/03 $ 45 $ 44,325
Metropolitan Edison Co.
Notes
8.15%, 01/30/23 75 80,510
------------
124,835
------------
ENTERTAINMENT & LEISURE -- 1.6%
Time Warner Entertainment
Debs.
7.25%, 09/01/08 100 104,000
------------
FINANCIAL SERVICES -- 0.5%
Lehman Brothers Holdings,
Inc. Sr. Notes
8.80%, 03/01/15 25 29,438
------------
HEALTHCARE SERVICES -- 0.8%
FHP International Corp.
Sr. Notes
7.00%, 09/15/03 50 50,313
------------
INSURANCE -- 0.9%
Equitable Companies, Inc.
Sr. Notes
9.00%, 12/15/04 50 56,875
------------
OIL & GAS -- 1.5%
Noram Energy Corp. Sub.
Deb. [CVT] 6.00%,
03/15/12 50 45,500
Pacific Gas & Electric
First Ref. Mtge.
8.00%, 10/01/25 50 52,438
------------
97,938
------------
PAPER & FOREST PRODUCTS -- 1.5%
Champion International
Corp. Debs.
6.40%, 02/15/06 100 98,601
------------
- ------------------------------------------------------
PAR
(000) VALUE
- ------------------------------------------------------
PHARMACEUTICALS -- 0.4%
McKesson Corp. Sub. Debs.
4.50%, 03/01/04 $ 25 $ 22,375
------------
TELECOMMUNICATIONS -- 3.4%
Frontier Corp.
7.25%, 05/15/04 100 103,875
Mcleod USA, Inc. Sr.
Disc. Notes
[STEP] 144A
9.587%, 03/01/07 100 69,000
Nextlink Communications
Sr. Notes
9.625%, 10/01/07 50 50,500
------------
223,375
------------
UTILITIES -- 1.9%
Boston Edison Co. Debs.
7.80%, 03/15/23 25 25,750
Potomac Electric Power
First Mtge.
6.25%, 10/15/04 100 100,625
------------
126,375
------------
TOTAL CORPORATE OBLIGATIONS
(Cost $1,101,884) 1,103,624
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 21.5%
Federal Home Loan Mtge.
Corp.
5.46%, 11/03/97 300 299,909
5.48%, 11/04/97 1,100 1,099,497
------------
(Cost $1,399,406) 1,399,406
------------
COMMERCIAL PAPER -- 3.8%
Merrill Lynch & Co., Inc.
5.56%, 11/03/97
(Cost $249,923) 250 249,923
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 2.3%
Temporary Investment
Cash Fund 74,877 $ 74,877
Temporary Investment
Fund 74,876 74,876
------------
(Cost $149,753) 149,753
------------
TOTAL INVESTMENTS -- 109.5%
(Cost $7,065,977) $7,122,381
LIABILITES IN EXCESS OF OTHER
ASSETS -- (9.5%) (619,700)
------------
NET ASSETS -- 100.0% $6,502,681
============
</TABLE>
- -------------------------------------------------------
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 1.1% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
- -------------------------------------------------------
ASMT PIMCO TOTAL RETURN
BOND PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------
PAR
(000) VALUE
- -----------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 19.9%
Federal Home Loan
Mortgage Corp.
5.48%, 11/28/97 $ 200 $ 199,178
5.48%, 12/15/97 200 198,661
----------
397,839
----------
Federal National
Mortgage Association
5.47%, 01/15/98 100 98,895
----------
Government National
Mortgage Association
[TBA]
7.00%, 11/19/27 500 502,815
----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $996,699) 999,549
----------
U.S. TREASURY OBLIGATIONS -- 38.0%
U.S. Treasury Bonds
6.25%, 08/15/23 250 250,608
6.75%, 08/15/26 1,010 1,084,013
----------
1,334,621
----------
U.S. Treasury Notes
7.00%, 07/15/06 536 574,479
----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $1,851,502) 1,909,100
----------
COMMERCIAL PAPER -- 45.6%
Ameritech Corp.
5.49%, 12/04/97 100 99,490
BellSouth Telecom, Inc.
5.52%, 11/12/97 100 99,831
Caisse D'Amortissement
de la Dette Sociale
5.49%, 12/12/97 100 99,368
Canadian Treasury Bills
5.49%, 11/21/97 100 99,695
Canadian Wheat Board
5.50%, 11/12/97 100 99,832
Du Pont (E.I.) de
Nemours & Co.
5.50%, 11/24/97 200 199,297
Emerson Electric Corp.
5.50%, 11/20/97 100 99,710
Florida Power Corp.
5.50%, 11/04/97 100 99,954
</TABLE>
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA MASTER TRUST
- -------------------------------------------------------
ASMT PIMCO TOTAL RETURN
BOND PORTFOLIO
<TABLE>
<CAPTION>
- -----------------------------------------------------
PAR
(000) VALUE
- -----------------------------------------------------
<S> <C> <C>
Ford Motor Credit Co.
5.58%, 01/14/98 $ 100 $ 98,886
General Electric Capital
Corp.
5.51%, 11/20/97 100 99,704
General Motors
Acceptance Corp.
5.54%, 11/25/97 100 99,624
IBM Credit Corp.
5.52%, 12/10/97 100 99,402
KFW International
Financial
5.49%, 11/13/97 100 99,817
National Rural Utility
Corp.
5.49%, 11/18/97 100 99,736
New Center Asset Trust
5.56%, 01/21/98 100 98,778
Procter & Gamble Corp.
5.47%, 12/08/97 100 99,438
Sara Lee Corp.
5.48%, 12/22/97 100 99,211
United Parcel Service
Co.
5.50%, 11/05/97 100 99,939
Wal Mart Stores, Inc.
5.50%, 12/01/97 200 199,083
Western Australia
Treasury Corp.
5.50%, 12/18/97 100 99,270
Wisconsin Electric &
Power Co.
5.52%, 11/06/97 100 99,923
----------
TOTAL COMMERCIAL PAPER
(Cost $2,289,981) $ 2,289,988
----------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------
SHARES VALUE
- -----------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 4.8%
Temporary Investment
Cash Fund 120,102 $ 120,102
Temporary Investment
Fund 120,105 120,105
------------
(Cost $240,207) 240,207
------------
TOTAL INVESTMENTS -- 108.3%
(Cost $5,378,389) 5,438,844
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (8.3%) (414,301)
------------
NET ASSETS -- 100.0% $5,024,543
============
</TABLE>
- -------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
- -------------------------------------------------------
ASMT JPM MONEY
MARKET PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------
PAR
(000) VALUE
- ------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 91.4%
U.S. Treasury Bills
4.55%, 11/13/97 $ 37 $ 36,944
4.60%, 11/13/97 34 33,948
4.65%, 11/13/97 308 307,523
4.67%, 11/13/97 280 279,564
4.69%, 11/13/97 125 124,805
4.70%, 11/13/97 21 20,967
4.715%, 11/13/97 45 44,929
4.74%, 11/13/97 111 110,825
4.83%, 11/13/97 16 15,974
4.85%, 11/13/97 157 156,746
4.855%, 11/13/97 56 55,909
4.87%, 11/13/97 21 20,966
4.90%, 11/13/97 343 342,440
4.935%, 11/13/97 41 40,932
5.10%, 01/22/98 25 24,709
5.13%, 01/22/98 32 31,626
5.135%, 01/22/98 177 174,930
----------
(Cost $1,823,737) 1,823,737
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 8.9%
Temporary Investment
Cash Fund 88,941 88,941
Temporary Investment
Fund 88,941 88,941
------------
(Cost $177,882) 177,882
------------
TOTAL INVESTMENTS -- 100.3%
(Cost $2,001,619) 2,001,619
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.3%) (6,724)
------------
NET ASSETS -- 100.0% $1,994,895
============
</TABLE>
DEFINITION OF ABBREVIATIONS
- -------------------------------------------------------
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
SECURITY DESCRIPTIONS:
<TABLE>
<S> <C> <C>
ADR -- American Depositary Receipt
ADS -- American Depositary Shares
CVT -- Convertible Security
REIT -- Real Estate Investment Trust
STEP -- Stepped Coupon Bond (Rates shown are the
effective yields at purchase date.)
TBA -- To be Announced Security
COUNTRIES/CURRENCIES:
CHF -- Switzerland/Swiss Franc
DEM -- Germany/German Deutschemark
ESP -- Spain/Spanish Peseta
NLG -- Netherlands/Netherland Guilder
NOK -- Norway/Norwegian Krone
SEK -- Sweden/Swedish Krona
</TABLE>
<PAGE>
AMERICAN SKANDIA MASTER TRUST
OCTOBER 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASMT T. ASMT PIMCO
ROWE PRICE ASMT INVESCO TOTAL
INTERNATIONAL ASMT JANUS EQUITY RETURN ASMT JPM
EQUITY CAPITAL GROWTH INCOME BOND MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
=========== ============= ========== ========== ===========
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in Securities at Value
(A) $ 2,232,749 $7,921,173 $7,122,381 $5,438,844 $2,001,619
Cash 1,569,633 -- -- -- --
Receivable For:
Securities Sold -- -- 22,621 -- --
Dividends and Interest 4,551 3,519 29,256 29,953 69
Contributions 74,343 314,067 507,906 69,125 178,619
Deferred Organization Costs 23,608 23,608 23,694 23,694 23,705
Unrealized Appreciation on Foreign
Currency Exchange Contracts 52 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Assets 3,904,936 8,262,367 7,705,858 5,561,616 2,204,012
---------- ---------- ---------- ---------- ----------
LIABILITIES:
Cash Overdraft -- 9,012 -- -- 176,840
Payable to Investment Manager 28,480 33,122 28,835 28,742 26,200
Payable For:
Securities Purchased 358,011 221,400 1,162,497 500,000 --
Accrued Expenses 20,766 16,056 11,845 8,331 6,077
Unrealized Depreciation on Foreign
Currency Exchange Contracts 308 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Liabilities 407,565 279,590 1,203,177 537,073 209,117
---------- ---------- ---------- ---------- ----------
NET ASSETS $ 3,497,371 $7,982,777 $6,502,681 $5,024,543 $1,994,895
========== ========== ========== ========== ==========
(A) Investments at Cost $ 2,426,017 $7,914,248 $7,065,977 $5,378,389 $2,001,619
========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
FOR THE PERIOD ENDED OCTOBER 31, 1997
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASMT
T. ROWE PRICE ASMT PIMCO
INTERNATIONAL ASMT JANUS ASMT INVESCO TOTAL RETURN ASMT JPM MONEY
EQUITY CAPITAL GROWTH EQUITY INCOME BOND MARKET
PORTFOLIO(1) PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(2) PORTFOLIO(3)
=========== ============== ============= ========== =============
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 6,642 $17,736 $ 19,153 $ 39,783 $ 11,400
Dividends 5,831 23,504 16,622 -- --
Foreign Taxes Withheld (904) (4,643) (3,513) (472) (26)
--------- ------- -------- ------- -------
Total Investment Income 11,569 36,597 32,262 39,311 11,374
--------- ------- -------- ------- -------
EXPENSES:
Advisory Fees 4,658 10,500 4,791 4,456 1,134
Shareholder Servicing Fees 300 300 300 300 300
Administration and Accounting
Fees 5,075 5,150 5,089 5,034 5,005
Custodian Fees 10,233 750 852 474 661
Professional Fees 6,087 8,905 3,436 2,564 205
Organization Costs 1,537 1,537 1,451 1,451 1,441
Trustees' Fees and Expenses 968 1,564 695 574 165
Insurance Fees 307 637 352 392 138
--------- ------- -------- ------- -------
Total Expenses 29,165 29,343 16,966 15,245 9,049
--------- ------- -------- ------- -------
NET INVESTMENT INCOME (LOSS) (17,596) 7,254 15,296 24,066 2,325
--------- ------- -------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) on:
Securities 629 10,688 (18,651) 6,883 32
Foreign Currency
Transactions (111) 5 -- -- --
--------- ------- -------- ------- -------
Net Realized Gain (Loss) 518 10,693 (18,651) 6,883 32
--------- ------- -------- ------- -------
Net Change in Unrealized
Appreciation (Depreciation)
on:
Securities (193,268) 6,925 56,404 60,455 --
Translation of Assets and
Liabilities Denominated
in Foreign Currencies (1,636) -- -- -- --
--------- ------- -------- ------- -------
Net Change in Unrealized
Appreciation (Depreciation) (194,904) 6,925 56,404 60,455 --
--------- ------- -------- ------- -------
Net Gain (Loss) on Investments (194,386) 17,618 37,753 67,338 32
--------- ------- -------- ------- -------
Net Increase (Decrease) in Net
Assets Resulting from
Operations $(211,982) $24,872 $ 53,049 $ 91,404 $ 2,357
========= ======= ======== ======= =======
</TABLE>
(1) Commenced operations on June 10, 1997.
(2) Commenced operations on June 18, 1997.
(3) Commenced operations on June 19, 1997.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA MASTER TRUST
FOR THE PERIOD ENDED OCTOBER 31, 1997
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASMT
T. ROWE PRICE ASMT JANUS ASMT INVESCO ASMT PIMCO ASMT JPM
INTERNATIONAL CAPITAL EQUITY TOTAL RETURN MONEY
EQUITY GROWTH INCOME BOND MARKET
PORTFOLIO(1) PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(2) PORTFOLIO(3)
=========== =========== ========== =========== ===========
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income (Loss) $ (17,596) $ 7,254 $ 15,296 $ 24,066 $ 2,325
Net Realized Gain (Loss) on
Investments 518 10,693 (18,651) 6,883 32
Net Change in Unrealized Appreciation
(Depreciation) on Investments (194,904) 6,925 56,404 60,455 --
---------- ----------- ---------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations (211,982) 24,872 53,049 91,404 2,357
---------- ----------- ---------- ----------- -----------
CAPITAL TRANSACTIONS:
Contributions by Partners 4,291,113 9,561,074 6,911,291 6,540,625 3,320,611
Withdrawals by Partners (601,760) (1,623,169) (481,659) (1,627,486) (1,348,073)
---------- ----------- ---------- ----------- -----------
Net Increase in Net Assets from Capital
Transactions 3,689,353 7,937,905 6,429,632 4,913,139 1,972,538
---------- ----------- ---------- ----------- -----------
Net Increase in Net Assets 3,477,371 7,962,777 6,482,681 5,004,543 1,974,895
NET ASSETS:
Beginning of Period 20,000 20,000 20,000 20,000 20,000
---------- ----------- ---------- ----------- -----------
End of Period $ 3,497,371 $ 7,982,777 $6,502,681 $ 5,024,543 $ 1,994,895
========== =========== ========== =========== ===========
</TABLE>
(1) Commenced operations on June 10, 1997.
(2) Commenced operations on June 18, 1997.
(3) Commenced operations on June 19, 1997.
See Notes to Financial Statements.
<PAGE>
FOR THE PERIOD ENDED OCTOBER 31, 1997
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSETS
AT END OF PORTFOLIO AVERAGE RATIO OF NET INVESTMENT
PERIOD TURNOVER COMMISSION RATIO OF EXPENSES TO INCOME (LOSS) TO
(IN 000'S) RATE RATE PAID AVERAGE NET ASSETS(4) AVERAGE NET ASSETS(4)
---------- -------- ---------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C>
ASMT T. Rowe Price
International Equity Portfolio
(1) $3,497 1% $ 0.0486 6.26% (3.78)%
ASMT Janus
Capital Growth Portfolio (1) $7,983 83% $ 0.0325 2.79% 0.69%
ASMT INVESCO
Equity Income Portfolio (2) $6,503 46% $ 0.0581 2.66% 2.39%
ASMT PIMCO Total
Return Bond Portfolio (2) $5,025 93% N/A 2.22% 3.51%
ASMT JPM
Money Market Portfolio (3) $1,995 N/A N/A 3.91% 1.00%
</TABLE>
(1) Commenced operations on June 10, 1997.
(2) Commenced operations on June 18, 1997.
(3) Commenced operations on June 19, 1997.
(4) Annualized
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA MASTER TRUST
OCTOBER 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
================================================================================
American Skandia Master Trust (the "Trust") is an open-end management
investment company, registered under the Investment Company Act of 1940, as
amended. The Trust was organized on March 6, 1997 as a business trust under the
laws of the State of Delaware. The Trust operates as a series company and, at
October 31, 1997, consisted of five diversified portfolios: ASMT T. Rowe Price
International Equity Portfolio ("International Equity"), ASMT Janus Capital
Growth Portfolio ("Capital Growth"), ASMT INVESCO Equity Income Portfolio
("Equity Income"), ASMT PIMCO Total Return Bond Portfolio ("Total Return Bond"),
and ASMT JPM Money Market Portfolio ("Money Market") (each a "Portfolio" and
collectively the "Portfolios").
2. SIGNIFICANT ACCOUNTING POLICIES
================================================================================
The following is a summary of significant accounting policies followed by
the Trust, in conformity with generally accepted accounting principles, in the
preparation of its financial statements. The preparation of financial statements
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION -- Securities are valued at the close of trading on the New
York Stock Exchange. Equity securities are valued at the last reported sales
price on the securities exchange on which they are primarily traded, or at the
last reported sales price on the NASDAQ National Securities Market. Securities
not listed on an exchange or securities market, or securities in which there
were no transactions, are valued at the average of the most recent bid and asked
prices.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service. Debt
securities of Money Market are valued at amortized cost, which approximates
market value. For Portfolios other than Money Market, debt securities which
mature in 60 days or less are valued at cost (or market value 60 days prior to
maturity), adjusted for amortization to maturity of any premium or discount.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by, or at the direction of, the Board of
Trustees. As of October 31, 1997, there were no securities valued by the Board
of Trustees.
FOREIGN CURRENCY TRANSLATION -- Securities and other assets and liabilities
denominated in foreign currencies are converted each business day into U.S.
dollars based on the prevailing rates of exchange. Purchases and sales of
portfolio securities and income and expenses are converted into U.S. dollars on
the respective dates of such transactions.
Gains and losses resulting from changes in exchange rates applicable to
foreign securities are not reported separately from gains and losses arising
from movements in securities prices.
Net realized foreign exchange gains and losses include gains and losses
from sales and maturities of foreign currency exchange contracts, gains and
losses realized between the trade and settlement dates of foreign securities
transactions, and the difference between the amount of net investment income
accrued on
<PAGE>
foreign securities and the U.S. dollar amount actually received. Net unrealized
foreign exchange gains and losses include gains and losses from changes in the
value of assets and liabilities other than portfolio securities, resulting from
changes in exchange rates.
FOREIGN CURRENCY EXCHANGE CONTRACTS -- A foreign currency exchange contract
("FCEC") is a commitment to purchase or sell a specified amount of a foreign
currency at a specified future date, in exchange for either a specified amount
of another foreign currency or U.S. dollars.
FCECs are valued at the forward exchange rates applicable to the underlying
currencies, and changes in market value are recorded as unrealized gains and
losses until the contract settlement date.
Risks could arise from entering into FCECs if the counter-parties to the
contracts were unable to meet the terms of their contracts. In addition, the use
of FCECs may not only hedge against losses on securities denominated in foreign
currency, but may also reduce potential gains on securities from favorable
movements in exchange rates.
REPURCHASE AGREEMENTS -- A repurchase agreement is a commitment to purchase
government securities from a seller who agrees to repurchase the securities at
an agreed on price and date. The excess of the resale price over the purchase
price determines the yield on the transaction. Under the terms of the agreement,
the market value, including accrued interest, of the government securities will
be at least equal to their repurchase price. Repurchase agreements are recorded
at cost, which, combined with accrued interest, approximates market value.
Repurchase agreements entail a risk of loss in the event that the seller
defaults on its obligation to repurchase the securities. In such case, the
Portfolio may be delayed or prevented from exercising its right to dispose of
the securities.
DEFERRED ORGANIZATION COSTS -- The Trust bears all costs in connection with its
organization. All such costs are amortized on a straight-line basis over a
five-year period beginning on the date of the commencement of operations.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are
accounted for on the trade date. Realized gains and losses from securities sold
are recognized on the specific identification basis. Dividend income is recorded
on the ex-dividend date. Corporate actions, including dividends, on foreign
securities are recorded on the ex-dividend date or, if such information is not
available, as soon as reliable information is available from the Trust's
sources. Interest income is recorded on the accrual basis and includes the
accretion of discount and amortization of premium.
3. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
================================================================================
The Portfolios have entered into investment management agreements with
American Skandia Investment Services, Inc. ("Investment Manager") which provide
that the Investment Manager will furnish each Portfolio with investment advice
and investment management and administrative services. The Investment Manager
has engaged the following firms as Sub-advisors for their respective Portfolios:
Rowe Price-Fleming International, Inc., a United Kingdom Corporation, for
International Equity; Janus Capital
<PAGE>
AMERICAN SKANDIA MASTER TRUST
Corporation for Capital Growth; INVESCO Trust Co. for Equity Income; Pacific
Investment Management Co. for Total Return Bond; and J. P. Morgan Investment
Management Inc. for Money Market.
The Investment Manager receives a fee, computed daily and paid monthly,
based on an annual rate of 1.00%, 1.00%, .75%, .65%, and .50% of the average
daily net assets of the International Equity, Capital Growth, Equity Income,
Total Return Bond, and Money Market Portfolios, respectively. The Investment
Manager pays each Sub-advisor a fee, computed daily and paid monthly, based on
an annual rate of .75%, .45%, .35%, .25%, and .15% of the average daily net
assets of the International Equity, Capital Growth, Equity Income, Total Return
Bond, and Money Market Portfolios, respectively. The Sub-advisors for
International Equity and Money Market are currently voluntarily waiving a
portion their fee payable by the Investment Manager. The annual rates of the
fees payable to the Sub-advisors for International Equity and Money Market are
reduced for Portfolio net assets in excess of specified levels.
Certain officers and Trustees of the Trust are officers or directors of the
Investment Manager. The Trust pays no compensation directly to its officers or
interested Trustees.
4. TAX MATTERS
================================================================================
The Portfolios will be treated as partnerships for federal income tax
purposes. Accordingly, each investor in the Portfolios will be allocated its
share of net investment income and realized and unrealized gains and losses from
investment transactions. It is intended that the Portfolios will be managed in
such a way that an investor will be able to satisfy the requirements of the
Internal Revenue Code applicable to regulated investment companies.
5. PORTFOLIO SECURITIES
================================================================================
Purchases and sales of securities, other than U.S. government securities,
and short-term obligations, during the period ended October 31, 1997, were as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES
========== ==========
<S> <C> <C>
International Equity $4,366,469 $ 8,880
Capital Growth 5,972,039 1,501,112
Equity Income 6,030,830 744,868
</TABLE>
Purchases and sales of U.S. government securities, during the period end
October 31, 1997, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
========= ==========
<S> <C> <C>
Total Return Bond $3,340,178 $ 995,352
</TABLE>
<PAGE>
At October 31, 1997, the cost and unrealized appreciation or depreciation
in value of the investments owned by the Portfolios, for federal income tax
purposes, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET UNREALIZED
AGGREGATE UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
========== ============ ============ ==============
<S> <C> <C> <C> <C>
International Equity $2,426,017 $ 27,818 $221,086 $ (193,268)
Capital Growth 7,914,248 317,320 310,395 6,925
Equity Income 7,067,538 136,836 81,993 54,843
Total Return Bond 5,378,389 60,522 67 60,455
Money Market 2,001,619 -- -- --
</TABLE>
<PAGE>
AMERICAN SKANDIA
ADVISOR FUNDS
------------------------
American Skandia Advisor Funds, Inc.
ANNUAL REPORT TO SHAREHOLDERS
October 31, 1997
ASAF Founders International Small Capitalization Fund
ASAF T. Rowe Price International Equity Fund
ASAF Founders Small Capitalization Fund
ASAF T. Rowe Price Small Company Value Fund
ASAF Janus Capital Growth Fund
ASAF INVESCO Equity Income Fund
ASAF American Century Strategic Balanced Fund
ASAF Federated High Yield Bond Fund
ASAF Total Return Bond Fund
ASAF JPM Money Market Fund
<PAGE>
Letter to Shareholders
Thank you for your confidence in the American Skandia Advisor Funds. This has
been a particularly robust year for the mutual fund industry and our program of
multi-manager funds under a single roof has fared well. Since the funds
commenced operation on July 28, 1997, assets at fiscal year end grew to more
than $20,000,000 with weekly asset growth currently exceeding the $3,000,000
mark. When we consider that the ASAF program represents an innovative concept in
management -- a multi-manager family of world-class managers provided by
financial professionals -- we are gratified with the success.
In October, the third full month of activity for the American Skandia Advisor
Funds, stock mutual fund net inflows were $14.8 billion. In light of the market
correction that occurred, this figure suggests that the confidence in our
economy is truly sustainable. We continue to experience an American-led growth
in stock market confidence with broad investor participation in large and small
capitalization companies.
It is our hope that we can offer investors a broad range of investment
participation opportunities. To date we have brought together ten world-class
money management products including large and small company stock funds,
international investment opportunities, and fixed income strategies. It is our
intention to increase the offerings and expand the range of investment
strategies.
We welcome your questions and your comments. You can reach our Shareholder
Services Desk at 1-888-386-3484 or speak with your financial advisor.
/s/ Wade A. Dokken
- -------------------------
Wade A. Dokken
Chairman
American Skandia Investment Services, Incorporated
<PAGE>
Board of Directors
Gordon C. Boronow
Jan R. Carendi
David E. A. Carson
Julian A. Lerner
Thomas M. Mazzaferro
Thomas M. O'Brien
F. Don Schwartz
Investment Manager
American Skandia Investment Services, Incorporated
Shelton, CT 06484
Distributor
American Skandia Marketing, Incorporated
Shelton, CT 06484
Transfer Agent
Boston Financial Data Services, Inc.
Quincy, MA 02171
Administrator
PFPC Inc.
Wilmington, DE 19809
Independent Accountants
Coopers & Lybrand, L.L.P.
Philadelphia, PA 19103
Custodian
For domestic securities of Funds and Portfolios
investing primarily in domestic securities:
PNC Bank
Philadelphia, PA 19113
Co-custodian for foreign securities of Funds and
Portfolios investing primarily in domestic
securities and custodian for Funds and Portfolios
investing primarily in foreign securities:
Morgan Stanley Trust Company
New York, NY 11201
Legal Counsel
Werner & Kennedy
New York, NY 10019
<PAGE>
AMERICAN SKANDIA ADVISOR FUNDS
Shares of the American Skandia Advisor Funds are:
- - not deposits or obligations of, or guaranteed or endorsed by, any bank
institution;
- - not federally insured by the Federal Deposit Insurance Corporation (FDIC),
the Federal Reserve Board, or any other government agency;
- - subject to investment risk, including the possible loss of the principal
amount invested.
The report and the financial statements contained herein are submitted for the
general information of the shareholders of the Funds. This report is not
authorized for distribution to prospective investors in a Fund unless preceded
or accompanied by a current prospectus.
For more information, including a prospectus, contact American Skandia
Marketing, Incorporated.
One Corporate Drive
P.O. Box 883
Shelton, CT 06484
Telephone: 800-752-6342 (800-SKANDIA)
Website: www.americanskandia.com
(12/97)
ASAF
AMERICAN SKANDIA ADVISOR FUNDS
[LOGO]
Investment Tools for Tomorrow
American Skandia Advisor Funds, Inc.
ANNUAL REPORT TO SHAREHOLDERS
October 31, 1997
<PAGE>
APPENDIX
The rating information which follows describes how the rating services
mentioned presently rate the described securities. No reliance is made upon the
rating firms as "experts" as that term is defined for securities purposes.
Rather, reliance on this information is on the basis that such ratings have
become generally accepted in the investment business.
DESCRIPTION OF CERTAIN DEBT SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"):
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large, or exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S"):
AAA -- Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a strong capacity to pay interest and repay
principal, and differs from the highest rated issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, economic or financial conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or minus (-) -- Ratings from AA to CCC may be modified by the
addition of a plus of minus sign to show relative standing within the major
rating categories.
c -- The letter c indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L -- The letter L indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case of
certificates of deposit, the letter L indicates that the deposit, combined with
other deposits being held in the same and right capacity, will be honored for
principal and accrued predefault interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
p -- The letter p indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* -- Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r -- The r is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to noncredit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities.
DESCRIPTION OF CERTAIN COMMERCIAL PAPER RATINGS
MOODY'S:
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3 -- Issuers rated Prime-3 (or related supporting institutions)
have an acceptable ability for repayment of senior short-term debt obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S:
A-1 -- This highest category indicates that the degree of safety
regarding time payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of the
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated B are regarded as having only speculative capacity
for timely payment.
C -- This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
