STATEMENT OF ADDITIONAL INFORMATION
INVESTORS MARK SERIES FUND, INC.
700 KARNES BOULEVARD
KANSAS CITY, MISSOURI 64108
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS BUT SHOULD
BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR INVESTORS MARK SERIES FUND, INC.,
DATED MAY 1, 1998 (the "PROSPECTUS"). A COPY OF THE PROSPECTUS MAY BE OBTAINED
WITHOUT CHARGE BY CALLING (888) 262-8131, OR WRITING BMA SERVICE CENTER, 9735
LANDMARK PARKWAY DRIVE, ST. LOUIS, MO 63127-1690.
The Prospectus and this SAI omit certain of the information contained in the
registration statement filed with the Securities and Exchange Commission
("SEC"), Washington, D.C. These items may be obtained from the SEC upon payment
of the fee prescribed, or inspected at the SEC's office at no charge. The SEC
maintains a Web Site (http://www.sec.gov) that contains the SAI, material
incorporated by reference, and other information regarding the Fund.
THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED MAY 1, 1998
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY 3
INVESTMENT OBJECTIVES AND POLICIES 3
INVESTMENT RESTRICTIONS 27
DIRECTORS AND OFFICERS OF THE FUND 43
COMPENSATION TABLE 47
THE ADVISER 47
SUB-ADVISERS 49
THE DISTRIBUTOR 49
PERFORMANCE INFORMATION 49
PURCHASE AND REDEMPTION OF SHARES 51
DETERMINATION OF NET ASSET VALUE 51
TAXES 53
PORTFOLIO TRANSACTIONS 55
PORTFOLIO TURNOVER 58
DESCRIPTION OF SHARES 58
PRINCIPAL SHAREHOLDERS 58
FINANCIAL STATEMENTS 62
APPENDIX 63
GENERAL INFORMATION AND HISTORY
Investors Mark Series Fund, Inc. ("Fund") is an open-end management investment
company incorporated in Maryland on June 27, 1997. This SAI relates to all
Portfolios of the Fund. No investment in shares of a Portfolio should be made
without first reading the Prospectus. Capitalized terms not defined herein are
defined in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
This SAI contains additional information concerning certain investment policies,
practices and restrictions of the Fund and is provided for those investors
wishing to have more comprehensive information than that contained in the
Prospectus.
Shares of the Portfolios of the Fund are not available directly to individual
investors but may be offered only to Participating Insurance Companies and
Qualified Plans. Certain Portfolios of the Fund may not be available in
connection with a particular VA Contract, VLI Policy or Qualified Plan or may
not be available in a particular state. Investors should consult the separate
account prospectus of the specific insurance product or the Qualified Plan
documents for information on the availability of the various Portfolios of the
Fund.
Except as described below under "Investment Restrictions", the investment
objectives and policies described in the Prospectus and in this SAI are not
fundamental, and the Directors may change the investment objectives and policies
of a Portfolio without an affirmative vote of shareholders of the Portfolio.
RIGHTS AND WARRANTS
Certain Portfolios may invest in rights and warrants. Rights represent a
privilege offered to holders of record of issued securities to subscribe
(usually on a pro rata basis) for additional securities of the same class, of a
different class, or of a different issuer, as the case may be. Warrants
represent the privilege to purchase securities at a stipulated price and are
usually valid for several years. Rights and warrants generally do not entitle a
holder to dividends or voting rights with respect to the underlying securities
nor do they represent any rights in the assets of the issuing company.
Also, the value of a right or warrant may not necessarily change with the value
of the underlying securities, and rights and warrants cease to have value if
they are not exercised prior to their expiration date.
CONVERTIBLE SECURITIES
By investing in convertible securities, a Portfolio obtains the right to benefit
from the capital appreciation potential in the underlying stock upon exercise of
the conversion right, while earning higher current income than would be
available if the stock were purchased directly. In determining whether to
purchase a convertible, the Sub-Adviser will consider substantially the same
criteria that would be considered in purchasing the underlying stock. While
convertible securities purchased by a Portfolio are frequently rated investment
grade, certain Portfolios may purchase unrated securities or securities rated
below investment grade if the securities meet the Sub-Adviser's other investment
criteria. Convertible securities rated below investment grade (a) tend to be
more sensitive to interest rate and economic changes, (b) may be obligations of
issuers who are less creditworthy than issuers of higher quality convertible
securities, and (c) may be more thinly traded due to such securities being less
well known to investors than either common stock or conventional debt
securities. As a result, the Sub-Adviser's own investment research and analysis
tends to be more important in the purchase of such securities than other
factors.
MORTGAGE-RELATED OBLIGATIONS
Some of the characteristics of mortgage-related obligations and the issuers or
guarantors of such securities are described below.
LIFE OF MORTGAGE-RELATED OBLIGATIONS. The average life of mortgage-related
obligations is likely to be substantially less than the stated maturities of the
mortgages in the mortgage pools underlying such securities. Prepayments or
refinancing of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested long before the
maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is not
possible to predict accurately the average life of a particular issue of
mortgage-related obligations. However, with respect to Government National
Mortgage Association ("GNMA") Certificates, statistics published by the FHA are
normally used as an indicator of the expected average life of an issue. The
actual life of a particular issue of GNMA Certificates, however, will depend on
the coupon rate of the financing.
GNMA CERTIFICATES. GNMA was established in 1968 when the Federal National
Mortgage Association ("FNMA") was separated into two organizations, GNMA and
FNMA. GNMA is a wholly-owned government corporation within the Department of
Housing and Urban Development. GNMA developed the first mortgage-backed
pass-through instruments in 1970 for Farmers Home Administration-FHMA-insured,
Federal Housing Administration-FHA-insured and for Veterans Administration-or
VA-guaranteed mortgages ("government mortgages").
GNMA purchases government mortgages and occasionally conventional mortgages to
support the housing market. GNMA is known primarily, however, for its role as
guarantor of pass-through securities collateralized by government mortgages.
Under the GNMA securities guarantee program, government mortgages that are
pooled must be less than one year old by the date GNMA issues its commitment.
Loans in a single pool must be of the same type in terms of interest rate and
maturity. The minimum size of a pool is $1 million for single-family mortgages
and $500,000 for manufactured housing and project loans.
Under the GNMA II program, loans with different interest rates can be included
in a single pool and mortgages originated by more than one lender can be
assembled in a pool. In addition, loans made by a single lender can be packaged
in a custom pool (a pool containing loans with specific characteristics or
requirements).
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal of and interest on securities backed by a pool of mortgages
insured by FHA or FHMA, or guaranteed by VA. The GNMA guarantee is backed by the
full faith and credit of the United States. GNMA is also empowered to borrow
without limitation from the U.S. Treasury if necessary to make any payments
required under its guarantee.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest on GNMA
Certificates is lower than the interest rated paid on the VA-guaranteed,
FHMA-insured or FHA-insured mortgages underlying the Certificates, but only by
the amount of the fees paid to GNMA and the issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06% of the outstanding principal for providing its guarantee,
and the issuer is paid an annual fee of 0.44% for assembling the mortgage pool
and for passing through monthly payments of interest and principal to GNMA
Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will be
earned on the GNMA Certificates for several reasons. First, GNMA Certificates
may be issued at a premium or discount, rather than at par, and, after issuance,
GNMA Certificates may trade in the secondary market at a premium or discount.
Second, interest is paid monthly, rather than semi-annually as with traditional
bonds. Monthly compounding has the effect of raising the effective yield earned
on GNMA Certificates. Finally, the actual yield of each GNMA Certificate is
influenced by the prepayment experience of the mortgage pool underlying the GNMA
Certificate. If mortgagors prepay their mortgages, the principal returned to
GNMA Certificate holders may be reinvested at higher or lower rates.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA mortgage-backed
securities program in 1970, the amount of GNMA Certificates outstanding has
grown rapidly. The size of the market and the active participation in the
secondary market by securities dealers and many types of investors make the GNMA
Certificates a highly liquid instrument. Prices of GNMA Certificates are readily
available from securities dealers and depend on, among other things, the level
of market rates, the GNMA Certificate's coupon rate and the prepayment
experience of the pools of mortgages backing each GNMA Certificate.
FHLMC PARTICIPATION CERTIFICATES. The Federal Home Loan Mortgage Corporation
("FHLMC") was created by the Emergency Home Finance Act of 1970. It is a private
corporation, initially capitalized by the Federal Home Loan Bank System, charged
with supporting the mortgage lending activities of savings and loan associations
by providing an active secondary market of conventional mortgages. To finance
its mortgage purchases, FHLMC issues FHLMC Participation Certificates and
Collateralized Mortgage Obligations ("CMOs").
Participation Certificates represent an undivided interest in a pool of mortgage
loans. FHLMC purchases whole loans or participations on 30-year and 15-year
fixed-rate mortgages, adjustable-rate mortgages ("ARMs") and home improvement
loans. Under certain programs, it will also purchase FHA and VA mortgages.
Loans pooled for FHLMC must have a minimum coupon rate equal to the
Participation Certificate rate specified at delivery, plus a required spread for
the corporation and a minimum servicing fee, generally 0.375% (37.5 basis
points). The maximum coupon rate on loans is 2% (200 basis points) in excess of
the minimum eligible coupon rate for Participation Certificates. FHLMC requires
a minimum commitment of $1 million in mortgages but imposes no maximum amount.
Negotiated deals require a minimum commitment of $10 million. FHLMC guarantees
timely payment of the interest and the ultimate payment of principal of its
Participation Certificates. This guarantee is backed by reserves set aside to
protect against losses due to default. The FHLMC CMO is divided into varying
maturities with prepayment set specifically for holders of the shorter term
securities. The CMO is designed to respond to investor concerns about early
repayment of mortgages.
FHLMC's CMOs are general obligations, and FHLMC will be required to use its
general funds to make principal and interest payments on CMOs if payments
generated by the underlying pool of mortgages are insufficient to pay principal
and interest on the CMO.
A CMO is a cash-flow bond in which mortgage payments from underlying mortgage
pools pay principal and interest to CMO bondholders. The CMO is structured to
address two major shortcomings associated with traditional pass-through
securities: payment frequency and prepayment risk. Traditional pass-through
securities pay interest and amortized principal on a monthly basis whereas CMOs
normally pay principal and interest semi-annually. In addition, mortgage-backed
securities carry the risk that individual mortgagors in the mortgage pool may
exercise their prepayment privileges, leading to irregular cash flow and
uncertain average lives, durations and yields.
A typical CMO structure contains four tranches, which are generally referred to
as classes A, B, C and Z. Each tranche is identified by its coupon and maturity.
The first three classes are usually current interest-bearing bonds paying
interest on a quarterly or semi-annual basis, while the fourth, Class Z, is an
accrual bond. Amortized principal payments and prepayments from the underlying
mortgage collateral redeem principal of the CMO sequentially; payments from the
mortgages first redeem principal on the Class A bonds. When principal of the
Class A bonds has been redeemed, the payments then redeem principal on the Class
B bonds. This pattern of using principal payments to redeem each bond
sequentially continues until the Class C bonds have been retired. At this point,
Class Z bonds begin paying interest and amortized principal on their accrued
value.
The final tranche of a CMO is usually a deferred interest bond, commonly
referred to as the Z bond. This bond accrues interest at its coupon rate but
does not pay this interest until all previous tranches have been fully retired.
While earlier classes remain outstanding, interest accrued on the Z bond is
compounded and added to the outstanding principal. The deferred interest period
ends when all previous tranches are retired, at which point the Z bond pays
periodic interest and principal until it matures. A Sub-Adviser would purchase a
Z bond for a Portfolio if it expected interest rates to decline.
FNMA SECURITIES. FNMA was created by the National Housing Act of 1938. In 1968,
the agency was separated into two organizations, GNMA to support a secondary
market for government mortgages and FNMA to act as a private corporation
supporting the housing market.
FNMA pools may contain fixed-rate conventional loans on one-to-four-family
properties. Seasoned FHA and VA loans, as well as conventional growing equity
mortgages, are eligible for separate pools. FNMA will consider other types of
loans for securities pooling on a negotiated basis. A single pool may include
mortgages with different loan-to-value ratios and interest rates, though rates
may not vary beyond two percentage points.
PRIVATELY-ISSUED MORTGAGE LOAN POOLS. Savings associations, commercial banks and
investment bankers issue pass-through securities secured by a pool of mortgages.
Generally, only conventional mortgages on single-family properties are included
in private issues, though seasoned loans and variable rate mortgages are
sometimes included. Private placements allow purchasers to negotiate terms of
transactions. Maximum amounts for individual loans may exceed the loan limit set
for government agency purchases. Pool size may vary, but the minimum is usually
$20 million for public offerings and $10 million for private placements.
Privately-issued mortgage-related obligations do not carry government or
quasi-government guarantees. Rather, mortgage pool insurance generally is used
to insure against credit losses that may occur in the mortgage pool. Pool
insurance protects against credit losses to the extent of the coverage in force.
Each mortgage, regardless of original loan-to-value ratio, is insured to 100% of
principal, interest and other expenses, to a total aggregate loss limit stated
on the policy. The aggregate loss limit of the policy generally is 5% to 7% of
the original aggregate principal of the mortgages included in the pool.
In addition to the insurance coverage to protect against defaults on the
underlying mortgages, mortgage-backed securities can be protected against the
nonperformance or poor performance of servicers. Performance bonding of
obligations such as those of the servicers under the origination, servicing or
other contractual agreement will protect the value of the pool of insured
mortgages and enhance the marketability.
The rating received by a mortgage security will be a major factor in its
marketability. For public issues, a rating is always required, but it may be
optional for private placements depending on the demands of the marketplace and
investors.
Before rating an issue, a rating agency such as S&P or Moody's will consider
several factors, including: the creditworthiness of the issuer; the issuer's
track record as an originator and servicer; the type, terms and characteristics
of the mortgages, as well as loan-to-value ratio and loan amounts; the insurer
and the level of mortgage insurance and hazard insurance provided. Where an
equity reserve account or letter of credit is offered, the rating agency will
also examine the adequacy of the reserve and the strength of the issuer of the
letter of credit.
MATURITY AND DURATION. The effective maturity of an individual portfolio
security in which a Portfolio invests is defined as the period remaining until
the earliest date when the Portfolio can recover the principal amount of such
security through mandatory redemption or prepayment by the issuer, the exercise
by the Portfolio of a put option, demand feature or tender option granted by the
issuer or a third party or the payment of the principal on the stated maturity
date. The effective maturity of variable rate securities is calculated by
reference to their coupon reset dates. Thus, the effective maturity of a
security may be substantially shorter than its final stated maturity.
Unscheduled prepayments of principal have the effect of shortening the effective
maturities of securities in general and mortgage-backed securities in
particular. Prepayment rates are influenced by changes in current interest rates
and a variety of economic, geographic, social and other factors and cannot be
predicted with certainty. In general, securities, such as mortgage-backed
securities, may be subject to greater prepayment rates in a declining interest
rate environment. Conversely, in an increasing interest rate environment, the
rate of prepayment may be expected to decrease. A higher than anticipated rate
of unscheduled principal prepayments on securities purchased at a premium or a
lower than anticipated rate of unscheduled payments on securities purchased at a
discount may result in a lower yield (and total return) to a Portfolio than was
anticipated at the time the securities were purchased. A Portfolio's
reinvestment of unscheduled prepayments may be made at rates higher or lower
than the rate payable on such security, thus affecting the return realized by
the Portfolio.
FOREIGN SECURITIES
Foreign securities may be purchased and sold on foreign stock exchanges or in
over-the-counter markets (but persons affiliated with a Portfolio will not act
as principal in such purchases and sales). Foreign stock markets are generally
not as developed or efficient as those in the United States. While growing in
volume, they usually have substantially less volume than the New York Stock
Exchange, and securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies. Fixed
commissions on foreign stock exchanges are generally higher than negotiated
commissions on United States exchanges, although each Portfolio will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of stock exchanges, brokers
and listed companies abroad than in the United States.
The dividends and interest payable on certain foreign securities may be subject
to foreign withholding taxes and in some cases capital gains from such
securities may also be subject to foreign tax, thus reducing the net amount of
income or gain available for distribution to a Portfolio's shareholders.
Investors should understand that the expense ratio of a Portfolio investing in
foreign securities may be higher than that of investment companies investing
exclusively in domestic securities because of the cost of maintaining the
custody of foreign securities.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, a Portfolio's investment performance is
affected by the strength or weakness of the U.S. dollar against these
currencies. For example, if the dollar falls in value relative to the Japanese
yen, the dollar value of a yen-denominated stock held in the Portfolio will rise
even though the price of the stock remains unchanged. Conversely, if the dollar
rises in value relative to the yen, the dollar value of the yen-denominated
stock will fall. (See "Currency Transactions," below.)
Certain Portfolios may invest in foreign securities which take the form of
sponsored and unsponsored American Depositary Receipts and Shares ("ADRs" and
"ADSs"), Global Depository Receipts and Shares ("GDRs" and "GDSs") and European
Depository Receipts and Shares ("EDRs" and "EDSs") or other similar instruments
representing securities of foreign issuers (together, "Depository Receipts" and
("Depository Shares"). ADRs and ADSs represent the right to receive securities
of foreign issuers deposited in a domestic bank or a correspondent bank. Prices
of ADRs and ADSs are quoted in U.S. dollars and are traded in the United States
on exchanges or over-the-counter and are sponsored and issued by domestic banks.
EDRs and EDSs and GDRs and GDSs are receipts evidencing an arrangement with a
non-U.S. bank. EDRs and EDSs and GDRs and GDSs are not necessarily quoted in the
same currency as the underlying security. To the extent that a Portfolio
acquires Depository Receipts or Shares through banks which do not have a
contractual relationship with the foreign issuer of the security underlying the
Depository Receipts or Shares to issue and service such Depository Receipts or
Shares (unsponsored Depository Receipts or Shares), there may be an increased
possibility that the Portfolio would not become aware of and be able to respond
to corporate actions, such as stock splits or rights offerings involving the
foreign issuer, in a timely manner. In addition, certain benefits which may be
associated with the security underlying the Depository Receipt or Share may not
inure to the benefit of the holder of such Depository Receipt or Share. Further,
the lack of information may result in inefficiencies in the valuation of such
instruments. Investment in Depository Receipts or Shares does not eliminate all
the risks inherent in investing in securities of non-U.S. issuers. The market
value of Depository Receipts or Shares is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depository Receipt or Share and the underlying securities are
quoted. However, by investing in Depository Receipts or Shares, such as ADRs or
ADSs, that are quoted in U.S. dollars, a Portfolio will avoid currency risks
during the settlement period for purchases and sales.
As described in the Prospectus, each of the Small Cap Equity and Large Cap
Growth Portfolios may invest up to 25% of its total assets in foreign
securities. For purposes of this limitation, foreign securities do not include
ADRs or securities guaranteed by a United States person. Each of the Small Cap
Equity and Large Cap Growth Portfolios will not invest more than 5% of its net
assets in unsponsored ADRs.
EURODOLLAR CONTRACTS
Certain Portfolios may make investments in Eurodollar contracts. Eurodollar
contracts 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. A Portfolio 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.
RESTRICTED, ILLIQUID AND RULE 144A SECURITIES
Each of the Portfolios is authorized to invest in securities which are illiquid
or not readily marketable because they are subject to restrictions on their
resale ("restricted securities") or because, based upon their nature or the
market for such securities, no ready market is available. (The percentage
limitations on such investments are contained in the Prospectus.) Investments in
illiquid securities involve certain risks to the extent that a Portfolio may be
unable to dispose of such a security at the time desired or at a reasonable
price or, in some cases, may be unable to dispose of it at all. In addition, in
order to resell a restricted security, a Portfolio might have to incur the
potentially substantial expense and delay associated with effecting
registration. If securities become illiquid following purchase or other
circumstances cause a Portfolio to exceed its percentage limitation which may be
invested in such securities, the Directors of the Fund, in consultation with the
Adviser and the particular Portfolio's Sub-Adviser, will determine what action,
if any, is appropriate in light of all relevant circumstances.
Certain Portfolios may purchase securities that have been privately placed but
that are eligible for purchase and sale under Rule 144A of the Securities Act of
1933 ("1933 Act"). That Rule permits certain qualified institutional buyers,
such as a Portfolio, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. The Adviser, under the supervision of
the Board of Directors, will consider whether securities purchased under Rule
144A are illiquid and thus subject to a Portfolio's restriction of investing no
more than a certain percentage 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 Adviser will consider the trading
markets for the specific security, taking into account the unregistered nature
of a Rule 144A security. In addition, the Adviser 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) 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, a Portfolio's holdings
of illiquid securities would be reviewed to determine what, if any, steps are
required to assure that a Portfolio does not invest more than it is permitted to
in illiquid securities. Investing in Rule 144A securities could have the effect
of increasing the amount of a Portfolio's assets invested in illiquid securities
if qualified institutional buyers are unwilling to purchase such securities.
STRUCTURED OR HYBRID NOTES
Certain Portfolios of the Fund may invest in structured or hybrid notes. It is
expected that not more than 5% of a Portfolio's net assets will be at risk as a
result of such investments. In addition to the risks associated with a direct
investment in the benchmark asset, investments in structured and hybrid notes
involve the risk that the issuer or counterparty to the obligation will fail to
perform its contractual obligations. Certain structured or hybrid notes may also
be leveraged to the extent that the magnitude of any change in the interest rate
or principal payable on the benchmark asset is a multiple of the change in the
reference price. Leverage enhances the price volatility of the security and,
therefore, a Portfolio's net asset value. Further, certain structured or hybrid
notes may be illiquid for purposes of each Portfolio's limitations on
investments in illiquid securities.
MONEY MARKET INSTRUMENTS AND REPURCHASE AGREEMENTS
Money market instruments include short-term U.S. and foreign Government
securities, commercial paper (promissory notes issued by corporations to finance
their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
UNITED STATES GOVERNMENT SECURITIES. U.S. Government securities include
securities which are direct obligations of the U.S. Government backed by the
full faith and credit of the United States, and securities issued by agencies
and instrumentalities of the U.S. Government, which may be guaranteed by the
U.S. Treasury or supported by the issuer's right to borrow from the U.S.
Treasury or may be backed by the credit of the federal agency or instrumentality
itself. Agencies and instrumentalities of the U.S. Government include, but are
not limited to, Federal Land Banks, the Federal Farm Credit Bank, the Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks and the Federal National Mortgage Association.
BANK OBLIGATIONS. Each of the Portfolios may acquire obligations of banks, which
include certificates of deposit, time deposits, and bankers' acceptances.
Certificates of deposits are generally short-term, interest-bearing negotiable
certificates issued by banks or savings and loan associations against funds
deposited in the issuing institution.
Time deposits are funds in a bank or other financial institution for a specified
period of time at a fixed interest rate for which a negotiable certificate is
not received.
A bankers' acceptance is a time draft drawn on a bank which unconditionally
guarantees to pay the draft at its face amount on the maturity date. A bank
customer, which is also liable for the draft, typically uses the funds
represented by the draft to finance the import, export, or storage of goods.
COMMERCIAL PAPER. Commercial paper involves an unsecured obligation that is
usually sold on a discount basis and has a maturity at the time of issuance of
one year or less. With respect to the Money Market Portfolio, such paper, on the
date of investment by the Portfolio, must be rated in the highest category for
short-term debt securities by at least two NRSROs (or by one NRSRO, if only one
NRSRO has rated the security.) The Money Market Portfolio may invest in unrated
commercial paper if the Board of Directors of the Fund determines, in accordance
with the procedures of Rule 2a-7 under the 1940 Act, that the unrated security
is of comparable quality to rated securities.
Investments in commercial paper by the Intermediate Fixed Income and Global
Fixed Income Portfolios will be rated "P-1" by Moody's or "A-1" by S&P, or
Duff-1 by Duff, which are the highest ratings assigned by these NRSROs (even if
rated lower by one or more of the other NRSROs), or which, if not rated or rated
lower by one or more of the NRSROs and not rated by the other NRSRO or NRSROs,
are judged by the Sub-Adviser to be of equivalent quality to the securities so
rated. With respect to the Global Fixed Income Portfolio, in determining whether
securities are of equivalent quality, the Sub-Adviser may take into account, but
will not rely entirely on, ratings assigned by foreign rating agencies.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a
Portfolio acquires money market instruments (generally U.S. Government
securities) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed-upon price and date (normally the next business day). The
resale price reflects an agreed-upon interest rate effective for the period the
instruments are held by the Portfolio and is unrelated to the interest rate on
the instruments. The instruments acquired by each Portfolio (including accrued
interest) must have an aggregate market value in excess of the resale price and
will be held by the custodian bank for the Fund until they are repurchased.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS
Certain Portfolios may purchase securities on a when-issued or delayed-delivery
basis. Delivery and payment for securities purchased on a when-issued or delayed
delivery basis will normally take place 15 to 45 days after the date of the
transaction. The payment obligation and interest rate on the securities are
fixed at the time that a Portfolio enters into the commitment, but interest will
not accrue to the Portfolio until delivery of and payment for the securities.
Although a Portfolio will only make commitments to purchase "when-issued" and
"delayed delivery" securities with the intention of actually acquiring the
securities, a Portfolio may sell the securities before the settlement date if
deemed advisable by the Sub-Adviser.
Unless a Portfolio has entered into an offsetting agreement to sell the
securities purchased on a "when-issued" basis, cash or liquid obligations with a
market value equal to the amount of the Portfolio's commitment will be
segregated with the Fund's custodian bank. If the market value of these
securities declines, additional cash or securities will be segregated daily so
that the aggregate market value of the segregated securities equals the amount
of the Portfolio's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may have a
market value on delivery which is less than the amount paid by a Portfolio.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will decline in value when interest rates rise.
The Global Fixed Income Portfolio may invest up to 25% of its net assets and the
Intermediate Fixed Income Portfolio may invest up to 15% of its net assets in
securities purchased on a "when-issued" or "delayed delivery" basis. The
International Equity Portfolio does not currently intend to purchase or sell
securities on a when-issued or delayed delivery basis if, as a result, more than
5% of its total assets taken at market value at the time of purchase would be
invested in such securities. The Large Cap Growth and Small Cap Equity
Portfolios do not currently intend to have commitments to purchase when-issued
securities in excess of 5% of their net assets.
Certain Portfolios may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which a Portfolio 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
securities because it avoids certain market risks and transaction costs.
At the time a Portfolio enters into a binding obligation to purchase securities
on a when-issued basis or enters into a reverse repurchase agreement, liquid
assets (cash, U.S. government securities or other "high-grade" debt obligations)
of the Portfolio having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the books of the Portfolio and
held by the custodian throughout the period of the obligation. The use of these
investment strategies may increase net asset value fluctuation.
LENDING OF SECURITIES
Subject to the applicable Investment Restrictions contained herein (see
"Investment Restrictions"), certain Portfolios may lend their securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities, or completing arbitrage operations. By lending its
securities, a Portfolio will be attempting to generate income through the
receipt of interest on the loan which, in turn, can be invested in additional
securities to pursue the Portfolio's investment objective. Any gain or loss in
the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Portfolio. A Portfolio may lend its
portfolio securities to qualified brokers, dealers, banks or other financial
institutions, so long as the terms, the structure and the aggregate amount of
such loans are not inconsistent with the 1940 Act, or the Rules and Regulations
or interpretations of the SEC thereunder, which currently require that (a) the
borrower pledge and maintain with the Portfolio collateral consisting of cash,
an irrevocable letter of credit or securities issued or guaranteed by the United
States government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the Portfolio
at any time and (d)) the Portfolio receive reasonable interest on the loan,
which interest may include the Portfolio's investing cash collateral in interest
bearing short-term investments, and (e) the Portfolio receive all dividends and
distributions on the loaned securities and any increase in the market value of
the loaned securities.
A Portfolio bears a risk of loss in the event that the other party to a
securities lending transaction defaults on its obligations and the Portfolio is
delayed in or prevented from exercising its rights to dispose of the collateral,
including the risk of a possible decline in the value of the collateral
securities during the period in which the Portfolio seeks to assert these
rights, the risk of incurring expenses associated with asserting these rights
and the risk of losing all or a part of the income from the transaction. Loan
arrangements made by a Portfolio will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange,
which rules presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. All
relevant facts and circumstances, including creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Fund's Directors.
STRATEGIC TRANSACTIONS
Certain Portfolios may, but are not required to, utilize various other
investment strategies as described below to seek to hedge various market risks
(such as interest rates, currency exchange rates, and broad or specific
fixed-income market movements), to manage the effective maturity or duration of
fixed-income securities, or to enhance potential gain. Such strategies are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments used by the Portfolios may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing its investment objective, a Portfolio may purchase and
sell (write) exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all of the above are called "Strategic Transactions" and
are also referred to in the Prospectus and elsewhere herein as "Derivatives").
Strategic Transactions may be used in an attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Portfolio's portfolio resulting from securities market, interest rate or
currency exchange rate fluctuations, to protect a Portfolio's unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of a Portfolio's portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. In addition to the hedging transactions referred to in the preceding
sentence, Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although a Portfolio will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes. (Transactions such as writing covered call options are
considered to involve hedging for purposes of this limitation.) In calculating
each Portfolio's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if a Sub-Adviser believes that a Portfolio is underweighted in cyclical
stocks and overweighted in consumer stocks, the Portfolio may buy a cyclical
index call option and sell a cyclical index put option and sell a consumer index
call option and buy a consumer index put option. Under such circumstances, any
unrealized loss in the cyclical position would be netted against any unrealized
gain in the consumer position (and vice versa) for purposes of calculating the
Portfolio's net loss exposure. The ability of a Portfolio to utilize these
Strategic Transactions successfully will depend on the Sub-Adviser's ability to
predict pertinent market movements, which cannot be assured. Each Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. A Portfolio's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") for qualification as a
regulated investment company.
RISK OF STRATEGIC TRANSACTIONS
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent a
Sub-Adviser's view as to certain market or interest rate movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. The writing of put and call options may
result in losses to a Portfolio, force the purchase or sale, respectively, of
portfolio securities at inopportune times or for prices higher than (in the case
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation a Portfolio can realize on its investments or cause a
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in a Portfolio's incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase a Portfolio's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have not markets. As a result, in certain markets,
a Portfolio may not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by a Portfolio in writing
options on futures and entering into futures transactions is potentially
unlimited; however, as described above, each Portfolio will attempt to limit its
net loss exposure resulting from Strategic Transactions entered into for
non-hedging purposes. Futures markets are highly volatile and the use of futures
may increase the volatility of a Portfolio's net asset value. Finally, entering
into futures contracts would create a greater ongoing potential financial risk
than would purchases of options where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value and the net result may be less favorable than if the
Strategic Transactions had not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Strategic Transactions involving options require segregation of each
Portfolio's assets in special accounts, as described below under "Use of
Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the payment
of a premium, the right to sell, and the writer the obligation to buy (if the
option is exercised), the underlying security, commodity, index, currency or
other instrument at the exercise price. For instance, a Portfolio's purchase of
a put option on a security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Portfolio the right to
sell such instrument at the option exercise price. A call option, in
consideration for the payment of a premium, gives the purchaser of the option
the right to buy, and the seller the obligation to sell (if the option is
exercised), the underlying instrument at the exercise price. Certain Portfolios
may purchase a call option on a security, futures contract, index, currency or
other instrument to seek to protect the Portfolio against an increase in the
price of the underlying instrument that it intends to purchase in the future by
fixing the price at which it may purchase such instrument. An American style put
or call option may be exercised at any time during the option period while a
European style put or call option may be exercised only upon expiration or
during a fixed period prior thereto. Certain Portfolios are authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by physical
delivery of the underlying security or currency, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amounts, if any, by which the option is "in-the-money"
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Portfolio's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC Options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. A Portfolio will
generally sell (write) OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. OTC options purchased by a Portfolio, and portfolio securities
"covering" the amount of a Portfolio's obligation pursuant to an OTC option sold
by it (the cost of the sell-back plus the in-the-money amount, if any) are
subject to each Portfolio's restriction on illiquid securities, unless
determined to be liquid in accordance with procedures adopted by the Boards of
Directors. For OTC options written with "primary dealers" pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price. The Portfolios expect generally to enter into OTC options that
have cash settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Sub-Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. A Portfolio will engage in OTC option transactions
only with U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York as "primary dealers," or broker-dealers, domestic or foreign
banks or other financial institutions which have received, combined with any
credit enhancements, a long-term debt rating of A from S&P or Moody's or an
equivalent rating from any other NRSRO or which issue debt that is determined to
be of equivalent credit quality by the Sub-Adviser.
If a Portfolio sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale (writing) of put
options can also provide income.
A Portfolio may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by a Portfolio must be
"covered" (i.e., the Portfolio must own the securities or the futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. In addition, a Portfolio may cover a
written call option or put option by entering into an offsetting forward
contract and/or by purchasing an offsetting option or any other option which, by
virtue of its exercise price or otherwise, reduces the Portfolio's net exposure
on its written option position. Even though a Portfolio will receive the option
premium to help offset any loss, the Portfolio may incur a loss if the exercise
price is below the market price for the security subject to the call at the time
of exercise. A call sold by a Portfolio also exposes the Portfolio during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Portfolio to hold a security or instrument which it might otherwise have sold.
A Portfolio may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities) and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices,
currencies and futures contracts. A Portfolio will not sell put options if, as a
result, more than 50% of the Portfolio's assets would be required to be
segregated to cover its potential obligations under such put options other than
those with respect to futures and options thereon. In selling put options, there
is a risk that a Portfolio may be required to buy the underlying security at a
price above the market price.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
Certain Portfolios may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, certain Portfolios
may cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by the Fund's custodian) upon conversion or exchange of other
securities in its portfolio.
GENERAL CHARACTERISTICS OF FUTURES
Certain Portfolios may enter into financial futures contracts or purchase or
sell put and call options on such futures. Futures are generally bought and sold
on the commodities exchanges where they are listed and involve payment of
initial and variation margin as described below. All futures contracts entered
into by a Portfolio are traded on U.S. exchanges or boards of trade that are
licensed and regulated by the Commodity Futures Trading Commission ("CFTC") or
on certain foreign exchanges. The sale of futures contracts creates a firm
obligation by a Portfolio, as seller, to deliver to the buyer the specific type
of financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). The purchase of futures contracts creates a corresponding
obligation by a Portfolio, as purchaser, to purchase a financial instrument at a
specific time and price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position upon exercise of the option.
Each Portfolio's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that a Portfolio may use
commodity futures and option positions (i) for bona fide hedging purposes
without regard to the percentage of assets committed to margin and option
premiums, or (ii) for other purposes permitted by the CTFC to the extent that
the aggregate initial margin and option premiums required to establish such
non-hedging positions (net of the amount that the positions were "in the money"
at the time of purchase) do not exceed 5% of the net asset value of the
Portfolio's portfolio, after taking into account unrealized profits and losses
on such positions. Typically, maintaining a futures contract or selling an
option thereon requires a Portfolio to deposit, with its custodian for the
benefit of a futures commission merchant, or directly with the futures
commission merchant, as security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
directly with the futures commission merchant thereafter on a daily basis as the
value of the contract fluctuates. The purpose of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of a Portfolio. If a Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
CURRENCY TRANSACTIONS
Portfolios may engage in currency transactions with Counterparties to seek to
hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value or to enhance potential gain. Currency
transactions include currency contracts, exchange listed currency futures,
exchange listed and OTC options on currencies, and currency swaps. A forward
currency contract involves a privately negotiated obligation to purchase or sell
(with delivery generally required) a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional (agreed-upon) difference
among two or more currencies and operates similarly to an interest rate swap,
which is described below. A Portfolio may enter into over-the-counter currency
transactions with Counterparties which have received, combined with any credit
enhancements, a long term debt rating of A by S&P or Moody's, respectively, or
that have an equivalent rating from an NRSRO or (except for OTC currency
options) whose obligations are determined to be of equivalent credit quality by
the Sub-Adviser.
A Portfolio's transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Portfolio, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
A Portfolio will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Certain Portfolios may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
in relation to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure. For example, a Portfolio may hold
a French government bond and the Sub-Adviser may believe that French francs will
deteriorate against German marks. The Portfolio would sell french francs to
reduce its exposure to that currency and buy German marks. This strategy would
be a hedge against a decline in the value of French francs, although it would
expose the Sub-Adviser to declines in the value of the German mark relative to
the U.S. dollar.
To seek to reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, certain Portfolios may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
U.S. dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a Portfolio's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the Portfolio's securities
denominated in linked currencies. For example, if the Sub-Adviser considers that
the Austrian schilling is linked to the German deutschemark (the "D-mark"), and
a portfolio contains securities denominated in schillings and the Sub-Adviser
believes that the value of schillings will decline against the U.S. dollar, the
Sub-Adviser may enter into a contract to sell D-marks and buy dollars. Proxy
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a
Portfolio if the currency being hedged fluctuates in value to a degree or in a
direction that is not anticipated. Further, there is the risk that the perceived
linkage between various currencies may not be present or may not be present
during the particular time that a Portfolio is engaging in proxy hedging. If a
Portfolio enters into a currency hedging transaction, the Portfolio will comply
with the asset segregation requirements described below.
RISK OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Portfolio
if it is unable to deliver or receive currency of funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out options on such positions is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
Certain Portfolios may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
and interest rate transactions ("component transactions") instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Sub-Adviser, it is in the best interests of the Portfolio to do
so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
are normally entered into based on the Sub-Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase such risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Strategic Transactions into which certain Portfolios may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. The Portfolios expect to enter into these transactions
primarily for hedging purposes, including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management technique or
protecting against an increase in the price of securities a Portfolio
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, a Portfolio will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes. A Portfolio will not sell interest
rate caps, floors or collars where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative differential
among them and an index swap is an agreement to swap cash flows on a notional
amount based on changes in the values of the reference indices. The purchase of
a cap entitles the purchaser to receive payments on a notional principal amount
from the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. A Portfolio will not enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the Counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the Sub-Adviser. If there is a
default by the Counterparty, a Portfolio may 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. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed. Swaps, caps, floor and collars
are considered illiquid for purposes of each Portfolio's policy regarding
illiquid securities, unless it is determined, based upon continuing review of
the trading markets for the specific security, that such security is liquid. The
Board of Directors of the Fund will delegate to the Sub-Adviser the daily
function of determining and monitoring the liquidity of swaps, caps, floors and
collars. The Board of Directors of the Fund will, however, retain oversight
focusing on factors such as valuation, liquidity and availability of information
and it is ultimately responsible for such determinations. The staff of the SEC
currently takes the position that swaps, caps, floors and collars are illiquid,
and are subject to each Portfolio's limitation on investing in illiquid
securities.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
USE OF SEGREGATED ACCOUNTS
A Portfolio will hold securities or other instruments whose values are expected
to offset its obligations under the Strategic Transactions. A Portfolio will
cover Strategic Transactions as required by interpretive positions of the staff
of the SEC. A Portfolio will not enter into Strategic Transactions that expose
the Portfolio to an obligation to another party unless it owns either (i) an
offsetting position in securities or other options, futures contracts or other
instruments or (ii) cash, receivables or liquid securities with a value
sufficient to cover its potential obligations. A Portfolio may have to comply
with any applicable regulatory requirements for Strategic Transactions, and if
required, will set aside cash and other assets in a segregated account with the
Fund's custodian bank in the amount prescribed. In that case, the Fund's
custodian would maintain the value of such segregated account equal to the
prescribed amount by adding or removing additional cash or other assets to
account for fluctuations in the value of the account and the Portfolio's
obligations on the underlying Strategic Transactions. Assets held in a
segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of a Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
Each Portfolio has adopted certain investment restrictions which are fundamental
and may not be changed without approval by a majority vote of the Portfolio's
shareholders. Such majority is defined in the 1940 Act as the lesser of (i) 67%
or more of the voting securities of the Portfolio present in person or by proxy
at a meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities of the Portfolio. If any percentage restriction
described below is adhered to at the time of investment, a subsequent increase
or decrease in the percentage resulting from a change in the value of the
Portfolio's assets will not constitute a violation of the restriction.
BALANCED PORTFOLIO
The Balanced Portfolio may not:
1. Purchase the securities of any one issuer, except the United States
government, if immediately after and as a result of such purchase (a) the value
of the holdings of the Portfolio in the securities of such issuer exceeds 5% of
the value of the Portfolio's total assets, or (b) the Portfolio owns more than
10% of the outstanding voting securities, or any other class of securities, of
such issuer;
2. Engage in the purchase or sale of real estate, commodities or futures
contracts;
3. Underwrite the securities of other issuers;
4. Make loans to any of its officers, directors, or employees, or to its
manager, or general distributor, or officers or directors thereof;
5. Make any loan (the purchase of a security subject to a repurchase agreement
or the purchase of a portion of an issue of publicly distributed debt securities
is not considered the making of a loan);
6. Invest in companies for the purpose of exercising control of management;
7. Purchase securities on margin, or sell securities short, except that the
Portfolio may write covered call options;
8. Purchase shares of other investment companies except in the open market at
ordinary broker's commission or pursuant to a plan of merger or consolidation;
9. Invest in the aggregate more than 5% of the value of its gross assets in the
securities of issuers (other than federal, state, territorial, or local
governments, or corporations, or authorities established thereby), which,
including predecessors, have not had at least three years' continuous
operations;
10. Except for transactions in its shares or other securities through brokerage
practices which are considered normal and generally accepted under circumstances
existing at the time, enter into dealings with its officers or directors, its
manager or underwriter, or their officers or directors, or any organization in
which such persons have a financial interest;
11. Purchase or retain securities of any company in which any Fund officers or
directors, or Portfolio manager, its partner, officer or director beneficially
owns more than 1/2 of 1% of said company's securities, if all such persons
owning more than 1/2 of 1% of such company's securities, own in the aggregate
more than 5% of the outstanding securities of such company;
12. Borrow or pledge its credit under normal circumstances, except up to 10% of
its gross assets (computed at the lower of fair market value or cost)
temporarily for emergency or extraordinary purposes, and not for the purpose of
leveraging its investments, and provided further that any borrowing in excess of
5% of the total assets of the Portfolio shall have asset coverage of at least 3
to 1;
13. Make itself or its assets liable for the indebtedness of others;
14. Invest in securities which are assessable or involve unlimited liability;
or
15. Purchase any securities which would cause 25% or more of the Portfolio's
total assets at the time of such purchase to be invested in any one industry.
GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio may not:
1. Invest more than 25% of the current value of its total assets in any single
industry, provided that this restriction shall not apply to debt securities
issued or guaranteed by the United States government or its agencies or
instrumentalities.
2. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed to be an underwriter under the Securities Act of 1933.
3. Purchase real estate or real estate mortgage loans, although the Portfolio
may purchase marketable securities of companies which deal in real estate, real
estate mortgage loans or interests therein.
4. Purchase securities on margin (except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities).
5. Purchase or sell commodities or commodity contracts except that the Portfolio
may purchase and sell financial futures contracts and options on financial
futures contracts and engage in foreign currency exchange transactions.
6. With respect to at least 50% of its total assets, invest more than 5% in the
securities of any one issuer (other than the U.S. Government, its agencies or
instrumentalities) or acquire more than 10% of the outstanding voting securities
of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Portfolio may (a)
borrow from banks as a temporary measure for extraordinary or emergency purposes
(but not investment purposes) in an amount up to 15% of the current value of its
total assets to secure such borrowings, (b) enter into forward roll
transactions, and (c) pledge its assets to an extent not greater than 15% of the
current value of its total assets to secure such borrowings; however, the
Portfolio may not make any additional investments while its outstanding
borrowings exceed 5% of the current value of its total assets.
8. Lend portfolio securities, except that the Portfolio may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit for any
borrower), except that the Portfolio may enter into repurchase agreements and
except that the Portfolio may enter into repurchase agreements with respect to
25% of the value of its net assets.
GROWTH & INCOME PORTFOLIO
The Growth & Income Portfolio may not:
1. Sell short securities or buy securities or evidences of interests therein on
margin, although it may obtain short-term credit necessary for the clearance of
purchases of securities;
2. Buy or sell put or call options, although it may buy, hold or sell rights or
warrants, write covered call options and enter into closing purchase
transactions as discussed below;
3. Borrow money which is in excess of one-third of the value of its total assets
taken at market value (including the amount borrowed) and then only from banks
as a temporary measure for extraordinary or emergency purposes (borrowings
beyond 5% of such total assets, may not be used for investment leverage to
purchase securities but solely to meet redemption requests where the liquidation
of the Portfolio's investment is deemed to be inconvenient or disadvantageous);
4. Invest in securities or other assets not readily marketable at the time of
purchase or subject to legal or contractual restrictions on resale except as
described in the Prospectus and SAI;
5. Act as underwriter of securities issued by others, unless it is deemed to be
one in selling a portfolio security requiring registration under the Securities
Act of 1933, such as those described in the Prospectus and SAI;
6. Lend money or securities to any person except that it may enter into
short-term repurchase agreements with sellers of securities it has purchased,
and it may lend its portfolio securities to registered broker-dealers where the
loan is 100% secured by cash or its equivalent as long as it complies with
regulatory requirements and the Fund deems such loans not to expose the
Portfolio to significant risk (investment in repurchase agreements exceeding 7
days and in other illiquid investments is limited to a maximum of 5% of the
Portfolio's assets);
7. Pledge, mortgage or hypothecate its assets; however, this provision does not
apply to permitted borrowing mentioned above or to the grant of escrow receipts
or the entry into other similar escrow arrangements arising out of the writing
of covered call options;
8. Buy or sell real estate including limited partnership interests therein
(except securities of companies, such as real estate investment trusts, that
deal in real estate or interests therein), or oil, gas or other mineral leases,
commodities or commodity contracts in the ordinary course of its business,
except such interests and other property acquired as a result of owning other
securities, though securities will not be purchased in order to acquire any of
these interests;
9. Invest more than 5% of its gross assets, taken at market value at the time of
investment, in companies (including their predecessors) with less than three
years' continuous operation;
10. Buy securities if the purchase would then cause the Portfolio to have more
than (i) 5% of its gross assets, at market value at the time of purchase,
invested in securities of any one issuer, except securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, or (ii) 25% of its
gross assets, at market value at the time of purchase, invested in securities
issued or guaranteed by a foreign government, its agencies or instrumentalities;
11. Buy voting securities if the purchase would then cause the Portfolio to own
more than 10% of the outstanding voting stock of any one issuer;
12. Own securities in a company when any of its officers, directors or security
holders is an officer or director of the Fund or an officer, director or partner
of the Adviser or Sub-Adviser, if after the purchase any of such persons owns
beneficially more than 1/2 of 1% of such securities and such persons together
own more than 5% of such securities;
13. Concentrate its investments in any particular industry, but if deemed
appropriate for attainment of its investment objective, up to 25% of its gross
assets (at market value at the time of investment) may be invested in any one
industry classification used for investment purposes; or
14. Buy securities from or sell them to the Fund's officers, directors, or
employees, or to the Adviser or Sub-Adviser or to their partners, directors and
employees.
INTERMEDIATE FIXED INCOME PORTFOLIO
The Intermediate Fixed Income Portfolio may not:
1. Invest, with respect to at least 75% of its total assets, more than 5% in the
securities of any one issuer (other than the U.S. Government, its agencies or
instrumentalities) or acquire more than 10% of the outstanding voting securities
of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage its
assets, except that the Portfolio may (a) borrow money from banks as a temporary
measure for extraordinary or emergency purposes (but not for investment
purposes) in an amount up to 15% of the current value of its total assets, (b)
enter into forward roll transactions, and (c) pledge its assets to an extent not
greater than 15% of the current value of its total assets to secure such
borrowings; however, the Portfolio may not make any additional investments while
its outstanding bank borrowings exceed 5% of the current value of its total
assets.
3. Lend portfolio securities except that the Portfolio (i) may lend portfolio
securities in accordance with the Portfolio's investment policies up to 33-1/3%
of the Portfolio's total assets taken at market value, (ii) enter into
repurchase agreements, and (iii) purchase all or a portion of an issue of debt
securities, bank loan participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities, and except that
the Portfolio may enter into repurchase agreements with respect to 5% of the
value of its net assets.
4. Invest more than 25% of the current value of its total assets in any single
industry, provided that this restriction shall not apply to U.S. Government
securities, including mortgage pass-through securities (GNMAs).
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the Portfolio
may purchase marketable securities of companies which deal in real estate, real
estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities).
8. Purchase or sell commodities or commodity contracts except that the Portfolio
may purchase and sell financial futures contracts and options on financial
futures contracts and engage in foreign currency exchange transactions.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio may not:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (except U.S. government securities) if immediately
after and as a result of such purchase (a) the value of the holdings of the
Portfolio in the securities of such issuer exceeds 5% of the value of the
Portfolio's total assets or (b) the Portfolio owns more than 10% of the
outstanding voting securities of such issuer.
2. Invest in any one industry (other than U.S. government securities) 25%
or more of the value of its total assets at the time of such investment.
3. Borrow money, except from banks for temporary or emergency purposes in
amounts not to exceed 25% of the Portfolio's total assets (including the amount
borrowed) taken at market value, nor pledge, mortgage or hypothecate its assets,
except to secure permitted indebtedness and then only if such pledging,
mortgaging or hypothecating does not exceed 25% of the Portfolio's total assets
taken at market value. When borrowings exceed 5% of the Portfolio's total
assets, the Portfolio will not purchase portfolio securities.
4. Act as a securities underwriter (except to the extent the Portfolio may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
security), issue senior securities (except to the extent permitted under the
Investment Company Act of 1940), invest in real estate (although it may purchase
shares of a real estate investment trust), or invest in commodities or commodity
contracts except financial futures transactions, futures contracts on securities
and securities indices and options on such futures, forward foreign currency
exchange contracts, forward commitments or securities index put or call options.
5. Make loans, except that the Portfolio may enter into repurchase
agreements and may lend portfolio securities in accordance with the Portfolio's
investment policies. The Portfolio does not, for this purpose, consider the
purchase of all or a portion of an issue of publicly distributed bonds, bank
loan participation agreements, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities, to be the making of a loan.
In applying the industry concentration investment restriction (no. 2
above), the Portfolio uses the industry groups designated by the Financial Times
World Index Service.
LARGE CAP VALUE PORTFOLIO
The Large Cap Value Portfolio may not:
1. Purchase the securities of any one issuer, except the United States
government, if immediately after and as a result of such purchase (a) the value
of the holdings of the Portfolio in the securities of such issuer exceeds 5% of
the value of the Portfolio's total assets, or (b) the Portfolio owns more than
10% of the outstanding voting securities, or any other class of securities, of
such issuer;
2. Engage in the purchase or sale of real estate or commodities;
3. Underwrite the securities of other issuers;
4. Make loans to any of its officers, directors, or employees, or to its
manager, or general distributor, or officers or directors thereof;
5. Make any loan (the purchase of a security subject to a repurchase agreement
or the purchase of a portion of an issue of publicly distributed debt securities
is not considered the making of a loan);
6. Invest in companies for the purpose of exercising control of management;
7. Purchase securities on margin, or sell securities short;
8. Purchase shares of other investment companies except in the open market at
ordinary broker's commission or pursuant to a plan of merger or consolidation;
9. Invest in the aggregate more than 5% of the value of its gross assets in the
securities of issuers (other than federal, state, territorial, or local
governments, or corporations, or authorities established thereby), which,
including predecessors, have not had at least three years' continuous
operations;
10. Except for transactions in its shares or other securities through brokerage
practices which are considered normal and generally accepted under circumstances
existing at the time, enter into dealings with its officers or directors, its
manager or underwriter, or their officers or directors, or any organization in
which such persons have a financial interest;
11. Borrow or pledge its credit under normal circumstances, except up to 10% of
its gross assets (computed at the lower of fair market value or cost) for
temporary or emergency purposes, and not for the purpose of leveraging its
investments, and provided further that any borrowing in excess of 5% of the
total assets of the Portfolio shall have asset coverage of at least 3 to 1;
12. Make itself or its assets liable for the indebtedness of others; or
13. Invest in securities which are assessable or involve unlimited liability.
SMALL CAP EQUITY AND LARGE CAP GROWTH PORTFOLIOS
Each of the Small Cap Equity and Large Cap Growth Portfolios may not:
1. With respect to 75% of its total assets, invest more than 5% of its total
assets, taken at market value at the time of a particular purchase, in the
securities of a single issuer, except for securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities or repurchase
agreements for such securities;
2. Acquire more than 10% taken at the time of a particular purchase, of the
outstanding voting securities of any one issuer;
3. Act as an underwriter of securities, except insofar as it may be deemed an
underwriter for purposes of the Securities Act of 1933 on disposition of
securities acquired subject to legal or contractual restrictions on resale;
4. Purchase or sell real estate (although it may purchase securities secured by
real estate or interests therein, or securities issued by companies which invest
in real estate or interests therein), commodities, or commodity contracts,
except that it may enter into (a) futures and options on futures and (b) forward
contracts;
5. Make loans, although it may (a) lend portfolio securities provided that no
such loan may be made if, as a result, the aggregate of such loans would exceed
33-1/3% of the value of its total assets (taken at market value at the time of
such loans); (b) purchase money market instruments and enter into repurchase
agreements; and (c) acquire publicly-distributed or privately-placed debt
securities;
6. Borrow except that it may (a) borrow for non-leveraging, temporary or
emergency purposes, (b) engage in reverse repurchase agreements and make other
borrowings, provided that the combination of (a) and (b) shall not exceed 33-
1/3% of the value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by law,
and (c) enter into futures and options transactions; it may borrow from banks
and other persons to the extent permitted by law;
7. Invest in a security if more than 25% of its total assets (taken at market
value at the time of a particular purchase) would be invested in the securities
of issuers in any particular industry, except that this restriction does not
apply to securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities; or
8. Issue any senior security except to the extent permitted under the 1940 Act.
MID CAP EQUITY PORTFOLIO
The Mid Cap Equity Portfolio may not:
1. Invest more than 25% of the current value of its total assets in any single
industry, provided that this restriction shall not apply to U.S. government
securities.
2. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed to be an underwriter under the Securities Act of 1933.
3. Purchase real estate or real estate mortgage loans.
4. Purchase securities on margin (except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities).
5. Purchase or sell commodities or commodity contracts (except futures contracts
and options on such futures contracts and foreign currency exchange
transactions).
6. With respect to at least 75% of its total assets, invest more than 5% in the
securities of any one issuer (other than the U.S. Government, its agencies or
instrumentalities) or acquire more than 10% of the outstanding voting securities
of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Portfolio may
borrow from banks in an amount up to 15% of the current value of its total
assets as a temporary measure for extraordinary or emergency purposes (but not
investment purposes), and pledge its assets to an extent not greater than 15% of
the current value of its total assets to secure such borrowings; however, the
Portfolio may not make any additional investments while its outstanding
borrowings exceed 5% of the current value of its total assets.
8. Make loans of portfolio securities, except that the Portfolio may enter into
repurchase agreements and except that the Portfolio may enter into repurchase
agreements with respect to 10% of the value of its net assets.
MONEY MARKET PORTFOLIO
The Money Market Portfolio may not:
1. Invest more than 10% of the value of the total assets of the Portfolio in
securities that are not readily marketable, such as repurchase agreements having
a maturity of more than seven days and securities which are secured by interests
in real estate. This restriction does not apply to obligations issued or
guaranteed by the United States government, its agencies, or instrumentalities;
In determining the liquidity of Rule 144A Securities, which are unregistered
securities offered to qualified institutional buyers, and interest-only and
principal-only fixed mortgage-backed securities (IOs and POs) issued by the
United States government or its agencies and instrumentalities, the Sub-Adviser,
under guidelines established by the Board of Directors of the Fund, will
consider any relevant factors including the frequency of trades, the number of
dealers willing to purchase or sell the security, and the nature of marketplace
trades.
In determining the liquidity of commercial paper issued in transactions not
involving a public offering under Section 4(2) of the Securities Act of 1933, as
amended, the Sub-Adviser, under guidelines established by the Board of Directors
of the Fund, will evaluate relevant factors such as the issuer and the size and
nature of its commercial paper programs, the willingness and ability of the
issuer or dealer to repurchase the paper, and the nature of the clearance and
settlement procedures for the commercial paper.
2. Invest more than 5% of the value of the total assets of the Portfolio in
equity securities that are not readily marketable;
3. Invest in real estate, although it may buy securities of companies which deal
in real estate and securities which are secured by interests in real estate,
including interests in real estate investment trusts;
4. Invest in commodities or commodity contracts, except to the extent provided
in Item 14 below;
5. Purchase securities of other investment companies if, as a result, the
Portfolio would own more than 3% of the total outstanding voting stock of any
one investment company, or more than 5% of the Portfolio's assets would be
invested in any one investment company, or more than 10% of the Portfolio's
assets would be invested in investment company securities. These limitations do
not apply to securities acquired in connection with a merger, consolidation,
acquisition, or reorganization, or by purchase in the open market of securities
of closed-end investment companies where no underwriter or dealer's commission
or profit, other than customary broker's commission, is involved, and so long as
immediately thereafter not more than 10% of such Portfolio's total assets, taken
at market value, would be invested in such securities;
6. Make loans, except by the purchase of debt obligations customarily
distributed privately to institutional investors, and except that the Portfolio
may buy repurchase agreements;
7. As to 75% of the value of the total assets of the Portfolio, invest more than
5% of the value of such assets in securities of any one issuer, except that this
restriction shall not apply to securities issued or guaranteed by the United
States government, its agencies, or instrumentalities;
8. As to 75% of the value of the total assets of the Portfolio, invest in more
than 10% of the outstanding voting securities of any one issuer;
9. Act as an underwriter of securities of other issuers, except to the extent
that it may be deemed to be an underwriter in reselling securities, such as
restricted securities, acquired in private transactions and subsequently
registered under the Securities Act of 1933, as amended;
10. Borrow money, except that the Portfolio may enter into reverse repurchase
agreements with banks and except that, as a temporary measure for extraordinary
or emergency purposes (such as to permit the Portfolio to honor redemption
requests without being required to dispose of investments in an inopportune or
untimely manner) and not for investment purposes, any Portfolio may borrow from
banks up to 5% of its assets taken at cost, provided in each case that the total
borrowings have an asset coverage, based on value, of at least 300%;
11. Issue securities senior to its common stock except to the extent set out in
paragraph 10 above;
12. Sell securities short, or maintain a short position;
13. Buy securities on margin, except that it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of securities;
14. Invest in or write puts, call, straddles, or spreads; nor
15. Invest in companies for the purpose of exercising control of management.
NON-FUNDAMENTAL RESTRICTIONS
In addition to the foregoing, and the policies set forth in the Prospectus,
certain Portfolios have adopted additional investment restrictions which may be
amended by the Board of Directors without a vote of shareholders. If any
percentage restriction described below is adhered to at the time of investment,
a subsequent increase or decrease in the percentage resulting from a change in
the value of the Portfolio's assets will not constitute a violation of the
restriction.
GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio may not:
1. Invest in the securities of an issuer for the purpose of exercising control
or management but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
2. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
3. Invest more than 25% of its net assets in repurchase agreements.
4. Purchase additional securities if the Portfolio's borrowings exceed 5% of its
net assets.
Purchases of securities of other investment companies permitted under the
restrictions above could cause the Portfolio to pay additional management and
sub-advisory fees and distribution fees.
INTERMEDIATE FIXED INCOME PORTFOLIO
The Intermediate Fixed Income Portfolio may not:
1. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
2. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
3. Invest more than 15% of its net assets in illiquid securities.
4. Invest more than 5% of its net assets in repurchase agreements.
5. Purchase additional securities if the Portfolio's bank borrowings exceed 5%
of its net assets.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio may not:
1. With respect to 100% of the Portfolio's total assets, purchase the
securities of any one issuer (except U.S. government securities) if immediately
after and as a result of such purchase (a) the value of the holdings of the
Portfolio in the securities of such issuer exceeds 5% of the value of the
Portfolio's total assets or (b) the Portfolio owns more than 10% of the
outstanding voting securities of such issuer.
2. Purchase securities of any company which, including its predecessors and
parents, has a record of less than three years' continuous operation, if such
purchase would cause the Portfolio's investments in all such companies taken at
cost to exceed 5% of the value of the Portfolio's total assets.
3. Purchase securities on margin from a broker or dealer, except that the
Portfolio may obtain such short-term credits as may be necessary for the
clearance of transactions, and may not make short sales of securities. This
limitation shall not prohibit or restrict the Portfolio from entering into
futures, forwards and options contracts or from making margin payments and other
deposits in connection therewith.
4. Purchase the securities of any other investment company, except by
purchase in the open market involving no commission or profit to a sponsor or
dealer (other than the customary broker's commission).
5. Invest in companies for the purposes of exercising control of
management.
6. Purchase any security, including any repurchase agreement maturing in
more than seven days, which is not readily marketable, if more than 15% of the
net assets of the Portfolio, taken at market value at the time of purchase,
would be invested in such securities.
7. Enter into any futures, forwards or options, except that only for the
purpose of hedging, the Portfolio may enter into forward foreign currency
exchange contracts with stated contract values of up to the value of the
Portfolio's assets.
8. Purchase or sell securities on a when-issued or delayed delivery basis,
if as a result more than 5% of its net assets taken at market value at the time
of purchase would be invested in such securities.
9. Purchase or sell any interest in an oil, gas or mineral development or
exploration program, including investments in oil, gas or other mineral leases,
rights or royalty contracts (except that the Portfolio may invest in the
securities of issuers engaged in the foregoing activities).
10. Invest more than 5% of its net assets in warrants. Included in that
amount, but not to exceed 2% of net assets, are warrants whose underlying
securities are not traded on principal domestic or foreign exchanges.
Warrants acquired by the Portfolio in units or attached to securities are not
subject to these limits.
SMALL CAP EQUITY AND LARGE CAP GROWTH PORTFOLIOS
Each of the Small Cap Equity and Large Cap Growth Portfolios may not:
1. Invest in any of the following: (i) interests in oil, gas or other mineral
leases or exploration or development programs (except readily marketable
securities, including but not limited to master limited partnership interests,
that may represent indirect interests in oil, gas, or other mineral exploration
or development programs); (ii) puts, calls, straddles, spreads, or any
combination thereof (except that it may enter into transactions in options,
futures, and options on futures); (iii) shares of other open-end investment
companies, except in connection with a merger, consolidation, acquisition, or
reorganization; and (iv) limited partnerships in real estate unless they are
readily marketable;
2. Invest in companies for the purpose of exercising control or management;
3. Purchase more than 3% of the stock of another investment company or purchase
stock of other investment companies equal to more than 5% of its total assets
(valued at time of purchase) in the case of any one other investment company and
10% of such assets (valued at time of purchase) in the case of all other
investment companies in the aggregate; any such purchases are to be made in the
open market where no profit to a sponsor or dealer results from the purchase,
other than the customary broker's commission, except for securities acquired as
part of a merger, consolidation or acquisition of assets;
4. Purchase or hold securities of an issuer if 5% of the securities of such
issuer are owned by those officers, or directors of the Fund or of its Adviser,
who each own beneficially more than 1/2 of 1% of the securities of that issuer;
5. Mortgage, pledge, or hypothecate its assets, except as may be necessary in
connection with permitted borrowings or in connection with options, futures, and
options on futures;
6. Invest more than 5% of its net assets (valued at time of purchase) in
warrants, nor more than 2% of its net assets in warrants that are not listed on
the New York or American Stock Exchange;
7. Write an option on a security unless the option is issued by the Options
Clearing Corporation, an exchange, or similar entity;
8. Invest more than 25% of its total assets (valued at time of purchase) in
securities of foreign issuers (other than securities represented by American
Depositary Receipts (ADRs) or securities guaranteed by a U.S. person);
9. Buy or sell an option on a security, a futures contract, or an option on a
futures contract unless the option, the futures contract, or the option on the
futures contract is offered through the facilities of a recognized securities
association or listed on a recognized exchange or similar entity;
10. Purchase a put or call option if the aggregate premiums paid for all put and
call options exceed 20% of its net assets (less the amount by which any such
positions are in-the-money), excluding put and call options purchased as closing
transactions;
11. Purchase securities on margin (except for use of short-term credits as are
necessary for the clearance of transactions), or sell securities short unless
(i) it owns or has the right to obtain securities equivalent in kind and amount
to those sold short at no added cost or (ii) the securities sold are "when
issued" or "when distributed" securities which it expects to receive in a
recapitalization, reorganization, or other exchange for securities it
contemporaneously owns or has the right to obtain and provided that transactions
in options, futures, and options on futures are not treated as short sales;
12. Invest more than 5% of its total assets (taken at market value at the time
of a particular investment) in securities of issuers (other than issuers of
federal agency obligations or securities issued or guaranteed by any foreign
country or asset-backed securities) that, together with any predecessors or
unconditional guarantors, have been in continuous operation for less than three
years ("unseasoned issuers");
13. Invest more than 5% of its total assets (taken at market value at the time
of a particular investment) in restricted securities, other than securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933;
14. Invest more than 15% of its total assets (taken at market value at the time
of a particular investment) in restricted securities and securities of
unseasoned issuers; or
15. Invest more than 15% of its net assets (taken at market value at the time of
a particular investment) in illiquid securities, including repurchase agreements
maturing in more than seven days.
MID CAP EQUITY PORTFOLIO
The Mid Cap Equity Portfolio may not:
1. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
2. Purchase the securities of any other investment company except to the extent
permitted by the 1940 Act.
3. Invest more than 15% of its net assets in securities which are illiquid.
4. Purchase additional securities if the Portfolio's borrowings exceed 5% of its
net assets.
DIRECTORS AND OFFICERS OF THE FUND
The management and affairs of the Fund are supervised by the Directors under the
laws of the State of Maryland. The Directors and executive officers of the Fund
and their principal occupations for the last five years are set forth below.
Each may have held other positions with the named companies during that period.
The age of each Director and officer is indicated in the parenthesis.
*LARRY D. ARMEL, President, Principal Executive Officer and Director (56); BMA
Tower, 700 Karnes Boulevard, Kansas City, Missouri 64108. President of the
Adviser; President, Chief Executive Officer and Director, Jones & Babson, Inc.;
President and Director, David L. Babson Growth Fund, Inc., D. L. Babson Money
Market Fund, Inc., D. L. Babson Tax-Free Income Fund, Inc., Babson Enterprise
Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow
Stock Fund, Inc., Scout Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money
Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout Regional Fund,
Inc., Scout WorldWide Fund, Inc., Scout Balanced Fund, Inc., Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo
USA Global Fund, Inc.; Buffalo Small Cap Fund, Inc., Scout Capital Preservation
Fund, Inc., Scout Kansas Tax-Exempt Bond Fund, Inc.; President and Trustee,
D. L. Babson Bond Trust; Director, AFBA Five Star Fund, Inc.
- -----------------
*NORSE N. BLAZZARD, DIRECTOR (60); 4401 W. Tradewinds Avenue, Suite 207,
Lauderdale By the Sea, Florida 33308; Principal, Blazzard, Grodd & Hasenauer,
P.C., Westport, Connecticut (counsel to the Fund); Partner, Paradigm Partners
International LLC (insurance and financial consulting firm which provides
consulting services to Business Men's Assurance Company of America).
- -----------------
FRANCIS C. ROOD, DIRECTOR (64); Retired, 73-395 Agave Lane, Palm Desert,
California 92260-6653. Formerly, Group Vice President-Administration, Hallmark
Cards Inc.; Director, David L. Babson Growth Fund, Inc., D. L. Babson Money
Market Fund, Inc., D. L. Babson Tax-Free Income Fund, Inc., Babson Enterprise
Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow
Stock Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc.,
Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc., Buffalo Small
Cap Fund, Inc.; Trustee of D. L. Babson Bond Trust.
- -----------------
WILLIAM H. RUSSELL, Director (74); Financial Consultant, 645 West 67th Street,
Kansas City, Missouri 64113; Director, David L. Babson Growth Fund, Inc., D. L.
Babson Money Market Fund, Inc., D. L. Babson Tax-Free Income Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc.,
Shadow Stock Fund, Inc., Babson-Stewart Ivory International Fund, Inc., Buffalo
Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc.,
Buffalo USA Global Fund, Inc., Buffalo Small Cap Fund, Inc.; Trustee of
D. L. Babson Bond Trust.
- -----------------
H. DAVID RYBOLT, Director (55); Consultant, HDR Associates, P.O. Box 2468,
Shawnee Mission, Kansas 66202; Director, David L. Babson Growth Fund, Inc., D.
L. Babson Money Market Fund, Inc. D. L. Babson Tax-Free Income Fund, Inc.,
Babson Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value
Fund, Inc., Shadow Stock Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo Equity
Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc.,
Buffalo Small Cap Fund, Inc.; Trustee of D. L. Babson Bond Trust.
- ------------------
*ROBERT N. SAWYER, Director and Chairman (52); BMA Tower, 700 Karnes Boulevard,
Kansas City, Missouri 64108; Senior Vice President and Chief Investment Officer
of Business Men's Assurance Company of America; Director of Jones & Babson, Inc.
- ------------------
JAMES SEWARD, Director (45); President and Chief Executive Officer, SLH
Corporation; Executive Vice-President, Seafield Capital Corporation; Director,
SLH Corporation, Lab One, Response Oncology, Concordia Career Colleges and
Seafield Capital Corporation.
- ------------------
P. BRADLEY ADAMS, Principal Financial Officer and Principal Accounting Officer
(37); BMA Tower, 700 Karnes Boulevard, Kansas City, Missouri, 64108; Treasurer
of the Adviser; Vice President, Chief Financial Officer and Treasurer, Jones &
Babson, Inc.; Vice President and Treasurer, David L. Babson Growth Fund, Inc.,
D. L. Babson Money Market Fund, Inc., D. L. Babson Tax-Free Income Fund, Inc.,
Babson Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value
Fund, Inc., Shadow Stock Fund, Inc., D. L. Babson Bond Trust, Scout Stock Fund,
Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide Fund, Inc., Scout
Balanced Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc.,
Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc., Buffalo Small Cap
Fund, Inc., Scout Capital Preservation Fund, Inc., Scout Kansas Tax-Exempt Bond
Fund, Inc.; Vice President and Chief Financial Officer, AFBA Five Star Fund,
Inc.
- ------------------
MARTIN A. CRAMER, Secretary (48); Secretary of the Adviser; Vice President and
Secretary, Jones & Babson, Inc., David L. Babson Growth Fund, Inc., D. L. Babson
Money Market Fund, Inc., D. L. Babson Tax-Free Income Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc.,
Shadow Stock Fund, Inc., D. L. Babson Bond Trust, Scout Stock Fund, Inc., Scout
Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market
Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide Fund, Inc., Scout
Balanced Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc.,
Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc., Buffalo Small Cap
Fund, Inc., Scout Capital Preservation Fund, Inc., Scout Kansas Tax-Exempt
Bond Fund, Inc.; Secretary and Assistant Vice President, AFBA Five Star
Fund, Inc.
- ------------------
EDWARD S. RITTER, Vice President (43); BMA Tower, 700 Karnes Boulevard, Kansas
City, Missouri 64108; Vice President of the Adviser; Director of Jones & Babson,
Inc.; Senior Vice President-Corporate Development, Business Men's Assurance
Company of America.
- ------------------
Each of these Directors may be deemed to be an "interested person" of the Fund
as that term is defined in the 1940 Act.
Each Director of the Fund who is not an "interested person" of the Fund receives
an annual fee of $3,000 and an additional fee of $125 for each Directors'
meeting attended and is reimbursed for expenses incurred in connection with
attending Directors' meetings. Each Director receives a separate fee of $125 for
attendance of any Committee meeting held on a day on which no Board meeting is
held.
Messrs. Rood, Russell, Rybolt and Seward have no financial interest in, nor are
they affiliated with the Fund, the Adviser or Jones & Babson, Inc.
The Audit Committee of the Board of Directors is composed of Messrs. Rood,
Russell, Rybolt and Seward. The Pricing Committee is composed of Messrs. Armel
and Sawyer. The Fund will not hold annual meetings except as required by the
Investment Company Act of 1940 and other applicable laws. The Fund is a Maryland
corporation. Under Maryland law, a special meeting of stockholders of the Fund
must be held if the Fund receives a written request for a meeting from the
stockholders entitled to cast at least 25% of all the votes entitled to be cast
at the meeting. The Fund has undertaken that its Directors will call a meeting
of stockholders if such a meeting is requested in writing by the holders of not
less than 10% of the outstanding shares of the Fund. To the extent required by
the undertaking, the Fund will assist shareholder communications in such
matters.
As each Portfolio's initial shareholder, Jones & Babson, Inc. holds all of the
outstanding shares, both beneficially and of record, of each Portfolio as of the
date of this SAI.
COMPENSATION TABLE
Each Director of the Fund who is not an "interested person" of the Fund is
expected to receive the following compensation during the Fund's first full
fiscal year (January 1, 1998 - December 31, 1998):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pension or
Retirement Total
Aggregate Benefits Estimated Compensation
Compensation Accrued as Part Annual from Registrant
Name of Person, from of Fund Benefits Upon and Fund Complex
Position Registrant* Expenses Retirement Paid to Directors
Larry D. Armel** N/A N/A N/A N/A
Director
Norse N. Blazzard N/A N/A N/A N/A
Director**
Francis C. Rood $3,500 N/A N/A $3,500
Director
William H. Russell $3,500 N/A N/A $3,500
Director
H. David Rybolt $3,500 N/A N/A $3,500
Director
Robert N. Sawyer N/A N/A N/A $3,500
Director**
James Seward $3,500 N/A N/A $3,500
Director
</TABLE>
* Each Portfolio is expected to pay its proportionate share of the total
compensation, based on its total net assets, relative to the total net
assets of the Fund.
** Each of these Directors may be deemed to be an "interested person" of the
Fund, as that term is defined in the 1940 Act, and consequently will be
receiving no compensation from the Fund.
THE ADVISER
The Fund and Investors Mark Advisors, LLC (the "Adviser") have entered into an
Investment Advisory Agreement dated July 15, 1997 (the "Investment Advisory
Agreement"), pursuant to which the Adviser is obligated, among other things, to
formulate a continuing program for the investment of the assets of each
Portfolio of the Fund. The fees to be paid under the Investment Advisory
Agreement are set forth in the Prospectus. The Adviser has agreed to assume
certain operating expenses of the Portfolios as described in the Prospectus.
The Investment Advisory Agreement further provides that the Adviser shall
furnish the Fund with office space and necessary personnel, pay ordinary office
expenses, pay all executive salaries of the Fund and furnish, without expense to
the Fund, the services of such members of its organization as may be duly
elected officers or Directors of the Fund.
Under the Investment Advisory Agreement, the Fund is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, Directors' fees and expenses, insurance
premiums, brokers' commissions, taxes and governmental fees, expenses of issue
or redemption of shares, expenses of registering or qualifying shares for sale,
reports and notices to shareholders, and fees and disbursements of custodians,
transfer agents, registrars, shareholder servicing agents and dividend
disbursing agents, and certain expenses with respect to membership fees of
industry associations.
The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at Adviser's own cost and expense, for the purpose of making
investment recommendations and research information available to the Fund.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of Adviser will be liable for any loss suffered by
the Fund in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations and duties.
The Investment Advisory Agreement may be terminated without penalty by vote of
the Directors, as to any Portfolio by the shareholders of that Portfolio, or by
Adviser on 60 days written notice. The Investment Advisory Agreement also
terminates without payment of any penalty in the event of its assignment. In
addition, the Investment Advisory Agreement may be amended only by a vote of the
shareholders of the affected Portfolio(s), and provides that it will continue in
effect from year to year, after its initial two-year term, only so long as such
continuance is approved at least annually with respect to each Portfolio by vote
of either the Directors or the shareholders of the Portfolio, and, in either
case, by a majority of the Directors who are not "interested persons" of the
Adviser. In each of the foregoing cases, the vote of the shareholders is the
affirmative vote of a "majority of the outstanding voting securities" as defined
in the 1940 Act.
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more Portfolios of the Fund pursuant to separate written agreements (the
"Sub-Advisory Agreements"). Certain of the services provided by, and the fees
paid to, the Sub-Advisers are described in the Prospectus under "Management of
the Fund - Sub-Advisers."
Subject to the supervision of the Adviser and the Board of Directors of the
Fund, each of the Sub-Advisers invests and reinvests the Portfolios' assets
consistent with each Portfolio's respective investment objectives and policies
pursuant to the terms of the Sub-Advisory Agreements. Each Sub-Advisory
Agreement continues in effect for each Portfolio from year to year after its
initial two-year term so long as its continuation is approved at least annually
by a majority of the Directors of the Fund and by the shareholders of each
Portfolio or the Board of Directors. Each Sub-Advisory Agreement may be
terminated at any time upon 60 days notice by either party, or by a majority
vote of the outstanding shares of a Portfolio with respect to that Portfolio,
and will terminate automatically upon assignment or upon the termination of the
Investment Advisory Agreement. Additional Portfolios may be subject to a
different agreement.
THE DISTRIBUTOR
Jones & Babson, Inc. (the "Distributor") and the Fund are parties to a
distribution agreement (the "Distribution Agreement") pursuant to which the
Distributor serves as principal underwriter for the Fund. The Distributor will
receive no compensation for serving in such capacity.
The Distribution Agreement is renewable annually. The Distribution Agreement may
be terminated by the Distributor, by a majority vote of the Directors who are
not interested persons and have no financial interest in the Distribution
Agreement or by a majority vote of the outstanding securities of the Fund upon
not more than sixty (60) days' written notice by either party or upon assignment
by the Distributor.
PERFORMANCE INFORMATION
From time to time, a Portfolio may advertise yield and/or total return. Such
performance data for a Portfolio should be distinguished from the rate of return
of a corresponding division of a Participating Insurance Company's separate
account, which rate will reflect the deduction of additional insurance charges,
including mortality and expense risk charges, and will therefore be lower. VA
Contract owners and VLI Policy owners should consult their contract and policy
prospectuses, respectively, for further information. Such performance data also
will not reflect any charges or expenses in connection with Qualified Plans.
Accordingly, Qualified Plan documents or other informational materials supplied
by Qualified Plan sponsors should be carefully reviewed for information
concerning relevant charges and expenses. The Portfolio's results also should be
considered relative to the risks associated with its investment objectives and
policies.
COMPUTATION OF YIELD
MONEY MARKET PORTFOLIO. The Portfolio's yield is computed by determining the
percentage net change, excluding capital changes, in the value of an investment
in one share of the Portfolio over the base period, and multiplying the net
change by 365/7 (or approximately 52 weeks). The Portfolio's effective yield
represents a compounding of the yield by adding 1 to the number representing the
percentage change in value of the investment during the base period, raising
that sum to a power equal to 365/7, and subtracting 1 from the result.
OTHER PORTFOLIOS. From time to time, a Portfolio may advertise yield. These
figures will be based on historical earnings and are not intended to indicate
future performance. The yield of a Portfolio refers to the annualized income
generated by an investment in the Portfolio over a specified 30-day period. The
yield is calculated by assuming that the income generated by the investment
during that period generated each period over one year and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula:
Yield = (2 (a-b/cd + 1)6 - 1) where a = dividends and interest earned during the
period; b = expenses accrued for the period (net of reimbursement); c = the
current daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
CALCULATION OF TOTAL RETURN
From time to time, a Portfolio may advertise total return. The total return of a
Portfolio refers to the average compounded rate of return to a hypothetical
investment for designated time periods (including but not limited to, the period
from which the Portfolio commenced operations through the specified date),
assuming that the entire investment is redeemed at the end of each period. In
particular, total return will be calculated according to 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; and ERV = ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the designated
time period as of the end of such period.
Quotations of total return, which are not annualized, represent historical
earnings and asset value fluctuations. Total return is based on past performance
and is not a guarantee of future results.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made on any day on which the New York Stock
Exchange is open for business. Currently, the following holidays are observed by
the Fund: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Shares of each
Portfolio are offered on a continuous basis.
The Fund reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of each Portfolio's securities is not reasonably
practicable, or for such other periods as the SEC has by order permitted. The
Fund also reserves the right to suspend sales of shares of a Portfolio for any
period during which the New York Stock Exchange, the Adviser, the
Sub-Adviser(s), the Transfer Agent and/or the Custodian are not open for
business.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of 4:00
p.m. Eastern time on each day the New York Stock Exchange is open for trading.
The New York Stock Exchange is normally closed on the following national
holidays: New Year's Day, Martin Luther King Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
The value of a foreign security is determined in its national currency as of the
close of trading on the foreign exchange on which it is traded or as of 4:00
p.m. Eastern time, if that is earlier, and that value is then converted into
its U.S. dollar equivalent at the foreign exchange rate in effect at noon,
Eastern time, on the date the value of the foreign security is determined.
Portfolio securities that are listed on foreign exchanges may trade on days on
which the New York Stock Exchange is closed. As a result, the net asset values
of Portfolios holding foreign securities may be significantly affected on days
on which shareholders have no access to the Portfolios.
The valuation of the Money Market Portfolio's portfolio securities is based upon
their amortized cost, which does not take into account unrealized securities
gains or losses. This method involves initially valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. By using amortized cost valuation, the Fund seeks to
maintain a constant net asset value of $1.00 per share for the Money Market
Portfolio, despite minor shifts in the market value of its portfolio securities.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Money Market Portfolio would receive if it sold the instrument. During
periods of declining interest rates, the quoted yield on shares of the Money
Market Portfolio may tend to be higher than a like computation made by a fund
with identical investments utilizing a method of valuation based on market
prices and estimates of market prices for all of its portfolio instruments.
Thus, if the use of amortized cost by the Portfolio resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Money Market Portfolio would be able to obtain a somewhat higher yield if he or
she purchased shares of the Money Market Portfolio on that day, than would
result from investment in a fund utilizing solely market values, and existing
investors in the Money Market Portfolio would receive less investment income.
The converse would apply on a day when the use of amortized cost by the
Portfolio resulted in a higher aggregate portfolio value. However, as a result
of certain procedures adopted by the Fund, the Fund believes any difference will
normally be minimal.
The net asset value of the shares of each of the Portfolios other than the Money
Market Portfolio is determined by dividing the total assets of the Portfolio,
less all liabilities, by the total number of shares outstanding. Securities
traded on a national securities exchange or quoted on the NASDAQ National Market
System are valued at their last-reported sale price on the principal exchange or
reported by NASDAQ or, if there is no reported sale, and in the case of
over-the-counter securities not included in the NASDAQ National Market System,
at a bid price estimated by a broker or dealer. Debt securities, including
zero-coupon securities, and certain foreign securities will be valued by a
pricing service. Other foreign securities may be valued by the Fund's Pricing
Committee. Securities for which current market quotations are not readily
available and all other assets are valued at fair value as determined in good
faith by the Directors, although the actual calculations may be made by persons
acting pursuant to the direction of the Directors.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Fund could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Fund in connection with such disposition). In addition, specific
factors are also generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the time
of purchase and at the time of valuation), the size of the holding, the prices
of any recent transactions or offers with respect to such securities, and any
available analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the New
York Stock Exchange. The values of these securities used in determining the net
asset value of the Fund's shares are computed as of such times. Also, because of
the amount of time required to collect and process trading information as to
large numbers of securities issues, the values of certain securities (such as
convertible bonds and U.S. Government Securities) are determined based on market
quotations collected earlier in the day at the latest practicable time prior to
the close of the Exchange. Occasionally, events affecting the value of such
securities may occur between such times and the close of the Exchange which will
not be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value, in the manner described
above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated in the Fund's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Fund. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made.
TAXES
The following is only a summary of certain income tax considerations generally
affecting a Portfolio and its shareholders, and is not intended as a substitute
for careful tax planning. Shareholders are urged to consult their tax advisors
with specific reference to their own tax situations, including their state and
local income tax liabilities.
FEDERAL INCOME TAX
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By maintaining its qualifications as a
RIC, each Portfolio intends to eliminate or reduce to a nominal amount the
federal taxes to which it may be subject.
In order to qualify for treatment as a RIC under the Code, a Portfolio must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Portfolio's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities, or certain other income; (ii) at the
close of each quarter of the Portfolio's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with such other
securities limited, in respect to any one issuer, to an amount that does not
exceed 5% of the value of the Portfolio's assets and that does not represent
more than 10% of the outstanding voting securities of such issuer; and (iii) at
the close of each quarter of the Portfolio's taxable year, not more than 25% of
the value of its assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer or of
two or more issuers which are engaged in the same, similar or related trades or
businesses if the Portfolio owns at least 20% of the voting power of such
issuers.
Notwithstanding the Distribution Requirement described above, which requires
only that a Portfolio distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), the
Portfolio will be subject to a nondeductible 4% federal excise tax to the extent
it fails to distribute by the end of any calendar year 98% of its ordinary
income for that year and 98% of its capital gain net income (the excess of
short- and long-term capital gains over short- and long-term capital losses) for
the one-year period ending on October 31 of that calendar year, plus certain
other amounts.
If a Portfolio fails to qualify as a RIC for any taxable year, it will be
taxable at regular corporate rates on its net investment income and net capital
gain without any deductions for amounts distributed to shareholders. In such an
event, all distributions (including capital gains distributions) will be taxable
as ordinary dividends to the extent of that Portfolio's current and accumulated
earnings and profits and such distributions will generally be eligible for the
corporate dividends-received deduction.
SECTION 817 DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of segregated asset accounts that fund contracts such as the
VA Contracts and VLI Policies (that is, the assets of the Portfolios), which are
in addition to the diversification requirements imposed on the Portfolios by the
1940 Act and Subchapter M. Failure to satisfy those standards would result in
imposition of Federal income tax on a VA Contract or VLI Policy owner with
respect to the increase in the value of the VA Contract or VLI Policy. Section
817(h)(2) provides that a segregated asset account that funds contracts such as
the VA Contracts and VLI Policies is treated as meeting the diversification
standards if, as of the close of each calendar quarter, the assets in the
account meet the diversification requirements for a regulated investment company
and no more than 55% of those assets consist of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
The Treasury Regulations amplify the diversification standards set forth in
Section 817(h) and provide an alternative to the provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if (i) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (ii) no more than 70% of such
value is represented by any two investments; (iii) no more than 80% of such
value is represented by any three investments; and (iv) no more than 90% of such
value is represented by any four investments. For purposes of these Regulations
all securities of the same issuer are treated as a single investment, but each
United States government agency or instrumentality shall be treated as a
separate issuer.
Each Portfolio will be managed with the intention of complying with these
diversification requirements. It is possible that, in order to comply with these
requirements, less desirable investment decisions may be made which would affect
the investment performance of a Portfolio.
PORTFOLIO TRANSACTIONS
Transactions on U.S. stock exchanges, commodities markets, futures markets and
other agency transactions involve the payment by the Fund of negotiated
brokerage commissions. Such commissions vary among different brokers. A
particular broker may charge different commissions according to such factors as
the difficulty and size of the transaction. Transactions in foreign securities
often involve the payment of fixed brokerage commissions, which may be higher
than those in the United States. There is generally no stated commission in the
case of securities traded in the over-the-counter markets, but the price paid by
the Fund usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Fund includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. It is anticipated
that most purchases and sales of securities by Portfolios investing primarily in
certain fixed-income securities will be with the issuer or with underwriters of
or dealers in those securities, acting as principal. There may be customary
mark-ups on such principal transactions. Accordingly, those Portfolios would not
ordinarily pay significant brokerage commissions with respect to securities
transactions.
It is currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Fund and buy and sell
securities for the Fund through a substantial number of brokers and dealers. In
so doing, the Sub-Advisers will use their best efforts to obtain for the Fund
the best price and execution available. In seeking the best price and execution,
the Sub-Advisers, having in mind the Fund's best interests, will consider all
factors they deem relevant, including, by way of illustration, price, the size
of the transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience, and financial stability of the broker-dealer
involved, and the quality of service rendered by the broker-dealer in other
transactions. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to seeking best execution
and such other policies as the Board of Directors may determine, the
Sub-Advisers may also consider sales of Fund shares or VA Contracts and VLI
Policies as a factor in the selection of dealers to execute portfolio
transactions for the Fund.
A Sub-Adviser may place orders for the purchase and sale of exchange-listed
portfolio securities with a broker-dealer that is an affiliate of the
Sub-Adviser where in, the judgment of the Sub-Adviser, such firm will be able to
obtain a price and execution at least as favorable as other qualified brokers.
Pursuant to the rules of the SEC, a broker-dealer that is an affiliate of the
Sub-Adviser or, if it is also a broker-dealer, the Sub-Adviser may receive and
retain compensation for effecting portfolio transactions for a Portfolio on a
national securities exchange of which the broker-dealer is a member if the
transaction is "executed" on the floor of the exchange by another broker which
is not an "associated person" of the affiliated broker-dealer or the Sub-Adviser
and if there is in effect a written contract between the Sub-Adviser and the
Fund expressly permitting the affiliated broker-dealer or Sub-Adviser to receive
and retain such compensation.
SEC rules further require that commissions paid to such an affiliated
broker-dealer or Sub-Adviser by a Portfolio on exchange transactions not exceed
"usual and customary brokerage commissions." The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time." The Board of Directors has adopted procedures for evaluating
the reasonableness of commissions paid to broker-dealers that are affiliated
with the Sub-Advisers or to Sub-Advisers that are broker-dealers and will review
these procedures periodically.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive brokerage and research services (as defined in the Securities Exchange
Act of 1934 (the "1934 Act")) from broker-dealers which execute portfolio
transactions for the clients of such advisers and from third parties with which
such broker-dealers have arrangements. Consistent with this practice, the
Sub-Advisers may receive brokerage and research services and other similar
services from many broker-dealers with which they place the Fund's portfolio
transactions and from third parties with which such broker-dealers have
arrangements. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Advisers and/or their affiliates in advising various other clients
(including the Fund), although not all of these services are necessarily useful
and of value in managing the Fund. The management fees paid by the Fund are not
reduced because the Sub-Advisers and/or their affiliates may receive such
services.
As permitted by Section 28(e) of the 1934 Act, a Sub-Adviser may cause a
Portfolio to pay a broker-dealer which provides "brokerage and research
services" as defined in the 1934 Act to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess of
the commission which another broker-dealer would have charged for effecting that
transaction provided that the Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised. A Sub-Adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Adviser or the
Directors may adopt from time to time.
INVESTMENT DECISIONS. Investment decisions for the Fund and for the other
investment advisory clients of the Sub-Advisers are made with a view to
achieving their respective investment objectives and after consideration of such
factors as their current holdings, availability of cash for investment, and the
size of their investments generally. Frequently, a particular security may be
bought or sold for only one client or in different amounts and at different
times for more than one but less than all clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In addition, purchases or sales of the same security
may be made for two or more clients of the Sub-Adviser on the same day. In such
event, such transactions will be allocated among the clients in a manner
believed by the Sub-Adviser to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Sub-Adviser in the interest of
achieving the most favorable net results for the Fund.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the SEC as the ratio of
the lesser of annual sales or purchases to the monthly average value of the
portfolio, excluding from both the numerator and the denominator securities with
maturities at the time of acquisition of one year or less. Under that
definition, the Money Market Portfolio would not calculate portfolio turnover.
Portfolio turnover generally involves some expense to a Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities.
DESCRIPTION OF SHARES
The Fund is authorized to issue 500,000,000 shares of each Portfolio and to
create additional portfolios of the Fund. Each share of a Portfolio represents
an equal proportionate interest in that Portfolio with each other share. Shares
are entitled upon liquidation to a pro rata share in the net assets of the
Portfolio available for distribution to shareholders. Shareholders have no
preemptive rights. All consideration received by the Fund for shares of any
Portfolio and all assets in which such consideration is invested would belong to
that Portfolio and would be subject to the liabilities related thereto.
PRINCIPAL SHAREHOLDERS
As of December 31, 1997, the following shareholders owned the indicated
percentages of the outstanding shares of the Portfolios in the Investors Mark
Series Fund. Assicurazioni Generali S.p.A. is the ultimate parent company of
Transocean Holdings Corporation, Business Men's Assurance Company of America
and Jones & Babson, Inc. and, therefore, may be deemed a controlling person of
the Fund for purposes of the 1940 Act.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth & Large Cap Small Cap Large Cap Intermediate Mid Cap Global
Names and Addresses Balanced Income Value Equity Growth Fixed Income Equity Fixed Income
- ------------------- -------- ------- --------- --------- --------- ------------- -------- ------------
BMA Variable Annuity
Account A
Business Men's Assurance
Co. of America
P.O. Box 419458
Kansas City, MO 64141 .04% .17% .14% .25% .17% .05% .26% .02%
Transocean Holdings Corp.
One Liberty Plaza
New York, NY 10006 99.20% 99.28%
Generali U.S. Branch
One Liberty Plaza,
37th Floor
New York, NY 10006 99.52% 99.28% 99.40%
Business Men's Assurance Co.
of America
P.O. Box 412879
Kansas City, MO 64141 99.41% 99.19% 99.76%
Jones & Babson, Inc.
700 Karnes Blvd
Kansas City, MO 64108 .44% .55% .44% .55% .55% .55% .55% .22%
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Money
Names and Addresses Market
- ------------------- ------
BMA Variable Annuity
Account A
Business Men's Assurance
Co. of America
P.O. Box 419458
Kansas City, MO 64141 .10%
Transocean Holdings Corp.
One Liberty Plaza
New York, NY 10006
Generali U.S. Branch
One Liberty Plaza,
37th Floor
New York, NY 10006 98.80%
Business Men's Assurance Co.
of America
P.O. Box 412879
Kansas City, MO 64141
Jones & Babson, Inc.
700 Karnes Blvd
Kansas City, MO 64108 1.10%
</TABLE>
FINANCIAL STATEMENTS
The Fund's Financial Statements and notes thereto for the period from November
13,1997 (commencement) through December 31, 1997, and the report of Ernst &
Young LLP, independent auditors, with respect thereto, appear in the Fund's
Annual Report for the period ended December 31, 1997 which is incorporated by
reference into this SAI. The Fund delivers a copy of the Annual Report to
investors along with the SAI. In addition, the Fund will furnish, without
charge, additional copies of such Annual Report to investors which may be
obtained by calling (888) 262-8131.
APPENDIX
DESCRIPTION OF STOCK RATINGS
Standard & Poor's Earnings and Dividend Rankings for Common Stocks (S&P) Growth
and stability of earnings and dividends are deemed key elements in establishing
Standard & Poor's earnings and dividend rankings for common stocks. Basic scores
are computed for earnings and dividends, then adjusted by a set of predetermined
modifiers for growth, stability within long-term trend, and cyclically. Adjusted
scores for earnings and dividends are then combined to yield a final score. The
final score is measured against a scoring matrix determined by an analysis of
the scores of a large and representative sample of stocks. The rankings are:
A+ Highest
A High
A- Above Average
B+ Average
B Below Average
B- Lower
C Lowest
D In Reorganization
Value Line Ratings of Financial Strength - The financial strength of each of
the companies reviewed by Value Line is rated relative to all the others. The
ratings are:
A++ The very highest relative financial strength
A+ Excellent financial position relative to other companies.
A High grade relative financial strength.
B++ Superior financial health on a relative basis.
B+ Very good relative financial structure.
B Good overall relative financial structure.
C++ Satisfactory finances relative to other companies.
C+ Below-average relative financial position.
C Poorest financial strength relative to other major companies.
The ratings are based upon computer analysis of a number of key variables that
determine: (a) financial leverage, (b) business risk and (c) company size plus
the judgment of their analysts and senior editors regarding factors that cannot
be quantified across-the-board for all stocks. The primary variables that are
indexed and studied include equity coverage of debt, equity coverage of
intangibles, "quick ratio" accounting methods, variability of return, quality of
fixed charge coverage, stock price stability and company size.
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds 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 risks appear somewhat larger than in 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 the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds 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.
DESCRIPTION OF S&P CORPORATE RATINGS
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are 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
bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC and C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the least degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. A C rating is typically applied to debt
subordinated to senior debt which is assigned an actual or implied CCC rating.
It may also be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
DESCRIPTION OF DUFF & PHELPS CORPORATE RATINGS
AAA - Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA - risk is modest but may vary slightly from time to time because of
economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Investment grade. Considerable variability in risk during economic
cycles.
BB - Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B - Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in quality rating within this category or into a higher or
lower quality rating grade.
SUBSTANTIAL RISK - Well below investment grade securities. May be in
default or have considerable uncertainty as to timely payment of interest,
preferred dividends and/or principal. Protection factors are narrow and risk can
be substantial with unfavorable economic/industry conditions, and/or with
favorable company developments.
DESCRIPTION OF FITCH CORPORATE RATINGS
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issues is generally rated "[-]+."
A - Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and to repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB - Bonds considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
B - Bonds considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety.
CCC - Bonds which may have certain identifiable characteristics which, if
not remedied, may lead to the default of either principal or interest payments.
CC - Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C - Bonds which are in imminent default in payment of interest or
principal.
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
AAA - Bonds that are rated AAA indicate that the ability to repay principal
and interest on a timely basis is extremely high.
AA - Bonds that are rated AA indicate a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
TBW may apply plus ("+") and minus ("-") modifiers in the AAA and AA
categories to indicate where within the respective category the issue is placed.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. CORPORATE RATINGS
AAA - Obligations which are rated AAA are considered to be of the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic, or
financial conditions are unlikely to increase investment risk significantly.
AA - Obligations which are rated AA are considered to be of a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is strong. Those issues determined to possess
extremely strong safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1. An A-3 designation
indicates an adequate capacity for timely payment. Issues with this designation,
however, are more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations. B issues are regarded as
having only speculative capacity for timely payment. C issues have a doubtful
capacity for payment. D issues are in payment default. The D rating category is
used when interest payments or principal payments are not made on the due date,
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Issuers rated Prime-2 (or
supporting institutions) have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 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. Issuers rated
Prime-3 (or supporting institutions) have an acceptable ability for repayment of
senior short-term obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection measurements and may
require relatively high financial leverage. Adequate alternate liquidity is
maintained. Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
The rating Duff-1 is the highest commercial paper rating assigned by Duff &
Phelps. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
The rating F-1+ (Exceptionally Strong Credit Quality) is the highest
commercial paper rating assigned by Fitch. Issues rated F-1+ are regarded as
having the strongest degree of assurance for timely payment. The rating F-1
(Very Strong Credit Quality) reflects an assurance of timely payment only
slightly less in degree than the strongest issues. An F-2 rating (Good Credit
Quality) indicates a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as for issues assigned F-1+ and F-1. Issues
rated F-3 (Fair Credit Quality) have characteristics suggesting that the degree
of assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
DESCRIPTION OF IBCA LIMITED AND IBCA INC. COMMERCIAL PAPER RATINGS
A1 - Short-term obligations rated A1 are supported by the highest capacity
for timely repayment. Where issues possess a particularly strong credit feature,
a rating of A1+ is assigned.
A2 - Short-term obligations rated A2 are supported by a satisfactory
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
TBW-1 - Issues rated TBW-1 indicate a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2 - Issues rated TBW-2 indicate that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
