Prospectus
FORWARD FUNDS, INC.
The Equity Fund
The Global Asset Allocation Fund
The Global Bond Fund
The International Equity Fund
The Small Capitalization Stock Fund
433 California Street, Suite 1010
San Francisco, California 94104
1-800-999-6809
This prospectus describes the five diversified investment portfolios offered by
Forward Funds, Inc. (the "Company"), an open-end management investment company -
The Small Capitalization Stock Fund, The International Equity Fund, The Equity
Fund, The Global Bond Fund and The Global Asset Allocation Fund (referred to
herein as the "Fund" or "Funds"). Hoover Capital Management, LLC ("Hoover")
serves as sub-investment adviser to The Small Capitalization Stock Fund ("Small
Cap Fund"). Barclays Global Fund Advisors ("Barclays") serves as sub-investment
adviser to The Equity Fund ("Equity Fund"). Templeton Investment Counsel, Inc.
("Templeton") serves as sub-investment adviser to The International Equity Fund
("International Equity Fund"). Pacific Investment Management Company ("PIMCO")
serves as sub-investment adviser to The Global Bond Fund ("Global Bond Fund").
The Global Asset Allocation Fund ("Asset Allocation Fund") has no sub-investment
adviser. Webster Investment Management Company LLC ("Webster") acts as
investment adviser to each of the Funds. Each Fund currently offers one class of
shares ("Shares").
The Shares of the Funds are not insured or guaranteed by the United States
Government nor are they deposits or obligations of, or endorsed, insured or
guaranteed by, any bank, the Federal Deposit Insurance Corporation, or any other
agency. An investment in the Funds involves investment risk, including the
possible loss of principal.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference. A Statement of Additional
Information ("SAI") about the Funds, dated October 1, 1998, has been filed with
the Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. The SAI is available free upon request by calling the Company at the
telephone number shown above.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 1, 1998.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
Shares Offered........................................................1
Offering Price........................................................1
Investment Objectives and Policies....................................1
Risk Factors..........................................................1
Investment Adviser and Sub-Advisers...................................1
Dividends and Capital Gains...........................................2
Custodian, Administrator, Distributor, and Transfer Agent.............2
FUND EXPENSES..................................................................2
FEE TABLE......................................................................3
INVESTMENT OBJECTIVES AND POLICIES.............................................5
General...............................................................5
Investment Policies...................................................6
Other Investment Policies Applicable to the Funds.....................8
RISK FACTORS...................................................................9
Small Cap Stocks.....................................................10
Foreign Securities...................................................10
Currency Transactions................................................12
Debt Securities......................................................12
Investment Grade Debt Securities.....................................12
Below Investment Grade Debt Securities...............................12
Futures and Options..................................................13
INVESTMENT TECHNIQUES.........................................................13
Equity Securities....................................................13
Corporate Debt Securities............................................13
Convertible Securities...............................................14
Foreign Investments and Foreign Currency Transactions................14
Depositary Receipts..................................................15
Loan Participations and Assignments..................................16
Variable and Floating Rate Securities................................16
Inflation-Indexed Bonds..............................................17
Mortgage-Related and Other Asset-Backed Securities...................17
Repurchase Agreements................................................19
Reverse Repurchase Agreements and Dollar Roll Agreements.............19
Certificates of Deposit and Time Deposits............................20
Commercial Paper.....................................................20
Derivative Instruments...............................................20
When-Issued and Delayed-Delivery Transactions........................23
Securities Issued by Other Investment Companies......................24
U.S. Government Obligations..........................................24
Lending of Portfolio Securities......................................24
Illiquid Securities..................................................24
INVESTMENT RESTRICTIONS.......................................................25
MANAGEMENT OF THE FUNDS.......................................................26
Directors............................................................26
Investment Adviser and Sub-Advisers..................................26
The Global Fund Performance Records..................................30
Sub-Advisers' Performance Records....................................30
Other Service Providers..............................................35
Portfolio Transactions...............................................35
VALUATION OF SHARES...........................................................36
PURCHASING SHARES.............................................................36
EXCHANGE PRIVILEGE............................................................37
REDEEMING SHARES..............................................................38
Signature Guarantee..................................................38
By Wire Transfer.....................................................38
By Telephone.........................................................39
By Mail..............................................................39
Payments to Shareholders.............................................40
SHAREHOLDER SERVICE PLANS.....................................................40
DIVIDENDS AND TAXES...........................................................41
Federal Taxes........................................................41
GENERAL INFORMATION...........................................................42
Description of the Company and Its Shares............................42
Performance Information..............................................43
Account Services.....................................................43
Miscellaneous........................................................43
<PAGE>
PROSPECTUS SUMMARY
Shares Offered
Shares of the Funds, each a diversified investment portfolio of Forward Funds,
Inc., are being offered to the public. The Company is a Maryland corporation and
is registered with the SEC as an open-end management investment company.
Offering Price
The public offering price of each Fund is equal to its net asset value per
Share. The Share price of each Fund is expected to fluctuate and the price paid
may be higher or lower than the price at a time when an investor wishes to
redeem Shares of a Fund. No sales charges are charged with respect to the Funds.
Investment Objectives and Policies
The Small Cap, Equity, International Equity, and Asset Allocation Funds seek
high total return (capital appreciation and income). Global Bond Fund seeks
income, with capital appreciation as a secondary objective. Small Cap Fund seeks
its objective by investing primarily in equity securities of companies having
small market capitalizations that offer future growth. Equity Fund seeks its
objective by investing primarily in equity securities of companies located in
the United States. International Equity Fund seeks its objective by investing
primarily in equity securities of companies located outside the United States.
Global Bond Fund seeks its objective by investing primarily in debt securities
of companies and governments located throughout the world. Asset Allocation Fund
seeks its objective by investing primarily in a diversified portfolio of Shares
of the other Funds.
Risk Factors
An investment in each of the Funds involves a certain amount of risk and may not
be suitable for all investors. See "RISK FACTORS." Each Fund may invest directly
or indirectly in foreign securities, which may be subject to price volatility,
currency fluctuations and other risks. Each Fund may also invest directly or
indirectly in various types of equity or debt securities that may be considered
volatile or speculative. Small Cap Fund invests in smaller companies which may
offer greater opportunities for gain but which may have more limited product
lines, markets or financial resources than larger, more established companies.
As a result, the securities of these smaller companies may be subject to greater
price volatility or fluctuation and, therefore, greater risk of loss.
Investment Adviser and Sub-Advisers
Webster acts as investment adviser for each of the Funds. Webster receives a fee
based on a percentage of net assets of each Fund and pays the fees of the
sub-investment advisers ("Sub-Advisers"). Hoover acts as Sub-Adviser for Small
Cap Fund. Barclays acts as Sub-Adviser for Equity Fund. Templeton acts as
Sub-Adviser for International Equity Fund. PIMCO acts as Sub-Adviser for Global
Bond Fund. Each Sub-Adviser receives a fee based on a percentage of net assets
in the Fund it manages. Each Sub-Adviser has substantial amounts of assets under
management for its clients and substantial investment experience. See
"MANAGEMENT OF THE FUNDS Investment Advisers and Sub-Advisers."
Dividends and Capital Gains
Dividends from net income, including short-term capital gains, are declared and
paid quarterly by Global Bond Fund, and annually by the Equity, Small Cap,
International Equity and Asset Allocation Funds. Distributions of net realized
capital gains are made at least annually by each Fund. Dividend and capital
gains distributions of the Funds are automatically invested in additional Shares
unless the Shareholder elects otherwise in writing.
Custodian, Administrator, Distributor, and Transfer Agent
Brown Brothers Harriman & Co. is each Fund's custodian. As custodian, Brown
Brothers Harriman & Co. will be responsible for the custody of each Fund's
assets and as foreign custody manager will also oversee the custody of any Fund
assets held outside of the United States. First Data Investor Services Group,
Inc. ("Investor Services Group," "Administrator," or "Transfer Agent"), whose
principal business address is 53 State Street, Boston, Massachusetts 02109,
serves as administrator, registrar and transfer agent to the Funds. First Data
Distributors, Inc., an affiliate of Investment Services Group, serves as the
Funds' distributor. Investor Services Group is a wholly-owned subsidiary of
First Data Corporation. The Administrator generally assists the Funds in an
administrative and operational capacity, including the maintenance of financial
records and fund accounting. Shareholder inquiries may be directed to Investor
Services Group at P.O. Box 5184, Westborough, Massachusetts 01581-5184.
FUND EXPENSES
The following expense table indicates costs and expenses that an investor should
anticipate incurring either directly or indirectly as a Shareholder of a Fund.
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
<S> <C> <C> <C> <C> <C>
Small International Global Asset
Cap Equity Equity Bond Allocation
Fund Fund Fund Fund Fund
----- ------ ------------ ----- -----------
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases1 NONE NONE NONE NONE NONE
Maximum Sales Charge Imposed on Reinvested
Dividends NONE NONE NONE NONE NONE
Deferred Sales Charge on Redemption2 NONE NONE NONE NONE NONE
Transaction Fee3 0.25% 0.25% 0.25% 0.25% 0.25%
Exchange Fees NONE NONE NONE NONE NONE
Account Maintenance Fee4 $10 $10 $10 $10 $10
Annual Fund Operating Expenses (as a percentage of average net assets annualized)5
Investor Advisory Fees after Waiver6 0.90% 0.63% 0.75% 0.55% 0.05%
Other Expenses 0.55% 0.77% 0.85% 0.85% 0.45%
Total Fund Operating Expenses after 1.45% 1.40% 1.60% 1.40% 0.50%
Waiver7
<FN>
1 The Funds charge $1.50 for electronic checks and $8.00 for wire
transfers. The wire transfer fee does not apply to transactions
effected through an omnibus account of a broker-dealer or other
financial institution that has entered into an agreement with the
Company or its Distributor to service Shareholders.
2 The Funds charge $1.00 for redemptions made by check (via mail) and
$8.00 for wire transfers. The wire transfer fee does not apply to
transactions effected through an omnibus account of a broker-dealer or
other financial institution that has entered into an agreement with the
Company or its Distributor to service Shareholders.
3 Each Fund will assess a transaction fee on Share purchase or redemption
transactions of 0.25% of the dollar amount involved. For investors who
maintain accounts through an omnibus account of a broker-dealer or
other financial institution, the fee is assessed only at the time of an
initial redemption and all subsequent redemptions; for all other
investors the fee is assessed only at the time of each purchase. The
transaction fee will be paid to the Funds and not to the distributor,
administrator or any other service provider. The fee does not apply to
reinvested dividends or capital gains distributions. The purpose of the
transaction fee is to recover some of the Funds' transaction costs
associated with purchases and redemptions. These costs include
brokerage commissions and "bid-ask" spreads on dealer prices,
particularly in the international markets. The fee represents the
Funds' best estimate of actual costs. Without the fee, the Funds would
incur the costs directly, resulting in reduced investment performance
for all Shareholders of the Funds. With the fee, transaction costs are
borne by investors making purchase or redemption transactions. The
Directors of the Funds reserve the right to add a similar purchase or
redemption fee at a later date on all transactions involving any type
of account should it be necessary to further protect long-term
investors.
4 Each Fund will automatically deduct a $10 annual account maintenance
fee from the dividend income of the Fund on an annual basis for
shareholders who receive cash dividends. If the dividend to be paid is
less than the fee, sufficient Shares will be sold from an account to
make up the difference. The Board of Directors reserves the right to
change the annual account maintenance fee. Each Fund's objective is to
give its investors maximum flexibility, while allocating costs in a
fair manner.
5 Annual Fund Operating Expenses are paid out of each Fund's assets.
Expenses are factored into the Fund's share price or dividends, and are
not charged directly to Shareholder accounts. Expenses shown for Asset
Allocation Fund are direct expenses of the Fund. Asset Allocation Fund
will also bear indirectly its proportional share of expenses of each
other Fund in which it invests, so that its return will be reduced by
those expenses. The level of indirect expenses borne by Asset
Allocation Fund will thus be expected to range from 1.40% to 1.60% (or
1.40% to 1.80% without waivers).
6 Webster has agreed to temporarily waive a portion of its fees for each
of the Funds (except Equity Fund and Asset Allocation Fund) for the
current fiscal year. Waived fees will not be recovered at a future
date. Absent the investment advisory fee waiver, "Investment Advisory
Fees" as a percentage of the average daily net assets would be 1.05%,
0.95% and 0.60% for the Small Cap Fund, International Equity Fund and
Global Bond Fund, respectively. See "MANAGEMENT OF THE FUNDS -
Investment Advisers and Sub-Advisers."
7 Absent the fee waivers described in Note 6, "Total Fund Operating
Expenses" as a percentage of average daily net assets are estimated to
be 1.60%, 1.80% and 1.45% for the Small Cap Fund, International Equity
Fund and Global Bond Fund, respectively.
</FN>
</TABLE>
The purpose of the table below is to assist the prospective investor in
understanding the various costs and expenses that a Shareholder in a Fund will
bear directly or indirectly. For a more complete description of the investment
advisory fees, see "MANAGEMENT OF THE FUNDS." For Shareholder Service Plans
fees, see "SHAREHOLDER SERVICE PLAN."
Example*
In the following example, an investor would pay the following expenses on a
$1,000 investment in the indicated Fund, assuming (1) 5% annual return, and (2)
redemption at the end of each time period:
<TABLE>
<S> <C> <C> <C> <C> <C>
Small Asset
Cap Equity International Global Bond Allocation
Fund Fund Equity Fund Fund Fund
------ ------- --------------- -------------- -------------
1 Year........................ $17 $17 $19 $17 $8
2 Years....................... $32 $31 $35 $31 $13
3 Years....................... $47 $46 $52 $46 $18
</TABLE>
*........This example should not be considered a representation of future
expenses, which may be more or less than those shown. The assumed 5% annual
return is hypothetical and should not be considered a representation of past or
future annual return. Actual return may be greater or less than the assumed
amount.
INVESTMENT OBJECTIVES AND POLICIES
General
Small Cap Fund. Small Cap Fund seeks high total return.
Equity Fund. Equity Fund seeks high total return (capital appreciation and
income).
International Equity Fund. International Equity Fund seeks high total return
(capital appreciation and income).
Global Bond Fund. Global Bond Fund seeks income with capital appreciation as a
secondary objective.
Asset Allocation Fund. Asset Allocation Fund seeks high total return (capital
appreciation and income).
The investment objective of each Fund is a fundamental policy and as such may
not be changed without a vote of the holders of a majority of the outstanding
Shares of that Fund. Other policies of a Fund may be changed by the Company's
Directors, without a vote of the holders of a majority of outstanding Shares of
that Fund, unless (i) the policy is expressly deemed to be a fundamental policy
or (ii) the policy is expressly deemed to be changeable only by such majority
vote. There can be no assurance that the investment objective of any Fund will
be achieved.
Investment Policies
Small Cap Fund. Small Cap Fund seeks to achieve its objective by investing
primarily in the equity securities of companies having small market
capitalizations. The Fund anticipates that its investment returns are likely to
be in the form of capital appreciation rather than income, since small
capitalization companies often do not pay regular dividends.
The Fund invests at least 65% of its total assets in the equity securities of
companies with market capitalizations at the time of purchase no larger than the
largest market capitalization of the companies included in the Russell 2000(R)
Index as most recently reported. The Fund typically expects that at least 65% of
its equity holdings will fall within this capitalization range and that its
median and weighted average market capitalization will remain less than $1
billion. The Fund may continue to hold its investment in a company whose
capitalization subsequently grows above the relevant range if the company
continues to satisfy the other investment policies of the Fund.
The Fund seeks value in companies normally offering lower price-to-earnings
multiples and higher earnings growth rates than the Russell 2000(R) Index or
other relevant benchmark. These companies usually possess some or all of the
following characteristics: significant potential for future growth in earnings;
a strong competitive advantage; a clearly defined business focus; strong
financial health; and management ownership. The Sub-Adviser, Hoover, places
heavy emphasis on in-house research, which includes personal contact with
company management and site visits when possible. The securities of
smaller-sized companies may present greater opportunities for capital
appreciation, but may also involve greater risks. See "RISK FACTORS."
The Fund expects to invest predominantly in common stocks, but also may invest
in other equity securities including convertible preferred stocks, convertible
debt securities and warrants. A warrant represents a right to acquire other
equity securities, often for consideration and subject to certain conditions. In
addition, the Fund may invest up to 25% of its total assets in foreign
securities such as U.S. dollar-denominated securities of foreign issuers and
American Depositary Receipts ("ADRs"), but will limit its investments in any one
foreign country to 5% of its total assets. The Fund may invest up to 5% of its
net assets in securities denominated in foreign currencies. See "RISK FACTORS."
Although the Fund does not anticipate holding a large percentage of its assets
in non-equity securities, the Fund may invest up to 35% of its total assets in
debt securities, including up to 25% of its total assets in debt securities (and
convertible debt securities) rated below investment grade sometimes referred to
as "high yield/risk" or "junk bonds." Debt securities may include bonds, notes,
convertible bonds, mortgage-backed and asset-backed securities (including CMOs
and REMICs) and other types. See "INVESTMENT TECHNIQUES." See "RISK FACTORS."
The Fund may also invest in cash-equivalent securities, U.S. Government
securities, repurchase agreements and, in unusual economic or market conditions,
may invest a substantial portion of its assets in cash equivalents or other
short-term instruments. It may lend its portfolio securities and make other
investments and use other investment techniques. See "INVESTMENT TECHNIQUES."
Equity Fund. Equity Fund seeks to achieve its objective by investing primarily
(at least 65% of total assets) in equity securities of companies that are
organized or primarily located in the United States. The Fund's other
investments may include securities of issuers based primarily outside the United
States if their securities are traded on U.S. stock exchanges or through the
National Association of Securities Dealers Automated Quotation System
("NASDAQ").
Barclays, this Fund's Sub-Adviser, anticipates making equity security selections
generally from securities included in the Russell 3000(R) Index. Barclays is not
restricted to securities in this Index and may deviate from the Index's
characteristics. The Index consists of the 3,000 largest U.S. companies and
represents over 90% of the investable U.S. equity market. Barclays may also
invest Equity Fund's assets in futures contracts and other instruments described
herein. See "INVESTMENT TECHNIQUES."
International Equity Fund. International Equity Fund seeks to achieve its
objective by investing primarily (at least 65% of total assets) in equity
securities of companies organized or located outside the United States. Some of
these companies may, however, issue securities which are traded on U.S.
securities markets and this fact will not preclude the Fund's investment in
them. This Fund will invest at least 65% of its total assets in a minimum of
three different countries although it expects to invest in a larger number of
countries than three. In addition, this Fund may invest in companies located in
countries that are considered to be emerging market countries.
Templeton, this Fund's Sub-Adviser, anticipates following a flexible investment
policy in selecting foreign equity securities, seeking out those investments
which it believes will achieve this Fund's long-term objective of total return.
Global Bond Fund. Global Bond Fund seeks to achieve its objective by investing
primarily (at least 65% of total assets) in debt securities of all types issued
by companies as well as governments located throughout the world. Global Bond
Fund will invest at least 65% of its total assets in fixed income securities of
issuers located in at least three different countries, although the Fund expects
to invest in a larger number of countries than three. The Fund may invest up to
100% of its assets in non-U.S. dollar denominated investments and expects to
maintain at least 65% of its assets in such non-U.S. dollar investments.
Debt securities held by Global Bond Fund may include securities rated in any
rating category by a nationally recognized securities rating organization
("NRSRO") or that are unrated. As a result, the Fund may invest in high risk,
lower quality debt securities, commonly referred to as "junk bonds." The Fund
will limit its investment in junk bonds (i.e., those rated lower than the four
highest rating categories or if unrated of comparable quality) to not more than
30% of the Fund's total assets. See "RISK FACTORS."
Asset Allocation Fund. Asset Allocation Fund seeks to achieve its objective by
investing in the global stock and bond markets by means of investments in the
other Funds of the Company which are described in this Prospectus ("Underlying
Funds").
The Fund seeks to achieve its objective by broadly diversifying its assets among
most or all of the Underlying Funds. Webster will invest the Fund's assets in
the Underlying Funds, within the ranges (expressed as a percentage of the Fund's
assets) indicated below:
Underlying Fund Range
Equity Fund 25% - 50%
Global Bond Fund 10% - 40%
International Equity Fund 10% - 30%
Small Cap Fund 5% - 20%
For purposes of determining the Fund's compliance with these percentage
limitations, Webster will determine the value of the Fund's assets at the time
of investment. Investment allocation decisions will be made by Webster's
investment committee.
The investment policies set forth above are designed to assure that the Fund
maintains a consistent investment approach. The Fund's investments are
concentrated in the Underlying Funds, and the investment performance of the Fund
is directly related to the performance of the Underlying Funds.
In addition to Shares of the Underlying Funds, for temporary cash management
purposes, the Fund may invest in short-term obligations (with maturities of 12
months or less) consisting of commercial paper, bankers' acceptances,
certificates of deposit, repurchase agreements, reverse repurchase agreements
and dollar roll agreements, obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, asset-backed and
mortgage-related securities, and demand and time deposits of domestic and
foreign banks and savings and loan associations. The Fund also may hold
depositary or custodial receipts representing beneficial interests in any of the
foregoing securities.
Other Investment Policies Applicable to the Funds
The following discussion concerns investment policies of each of the Funds
except Asset Allocation Fund, which is, however, affected by these policies
indirectly through its investments in the other Funds.
Consistent with its objective and policies described above, each Fund (except
Asset Allocation Fund) may invest in all types of equity and debt securities,
including, but not limited to, common stocks, preferred stocks, convertible
securities, warrants, options, restricted securities, trust units or
certificates, bonds, debentures, notes, commercial paper and various types of
depositary receipts. There are no specific limits on the various types of equity
or debt securities that may be purchased. Each Fund diversifies its holdings and
does not concentrate its investments in any industry sector. Securities issued
by foreign companies and governments are likely to be denominated in a foreign
currency.
Securities purchased by each Fund may be listed or unlisted in the markets where
they trade and may be issued by companies in various industries, with various
levels of market capitalization. Each Fund will not invest more than 25% of its
assets in securities issued by companies in any one industry. The International
Equity and Global Bond Funds expect to limit their investments in emerging
markets to less than 25% of each of their respective total assets. As a
temporary defensive measure, Small Cap Fund may invest all or a substantial
position of its assets in cash equivalents or other short term instruments; each
other Fund may invest a substantial portion of its assets in securities issued
by U.S. issuers, or in money market instruments or other longer term debt
securities.
The Sub-Advisers manage the Funds with the intent of avoiding the costs
typically associated with a high portfolio turnover rate. Hoover expects the
portfolio turnover rate for Small Cap Fund to be less than 200% under normal
market conditions. Templeton and Barclays anticipate that the portfolio turnover
rate for the Funds they manage will be less than 50%. PIMCO expects a far higher
turnover rate for the debt securities managed by it, estimated at 700%, but the
turnover rate for Global Bond Fund's holdings does not typically involve
brokerage commissions although it can involve indirect costs of dealer spreads.
PIMCO generally intends to increase Global Bond Fund's total return through its
trading strategies in debt securities. Accordingly, the Fund does not anticipate
incurring the higher costs generally associated with a high portfolio turnover
rate.
* * * *
Subject to the foregoing general limitations, the Funds expect to employ the
investment practices and invest in the types of securities discussed below under
"INVESTMENT TECHNIQUES." Moreover, all investments carry certain risks which are
discussed below under "RISK FACTORS" and "INVESTMENT TECHNIQUES."
RISK FACTORS
As with all investments, there is a risk that an investor will lose money when
investing in one or more of the Funds. Fluctuations in the value of securities
in which a Fund invests will cause the net asset value of that Fund to
fluctuate. An investment in a Fund, therefore, may be more suitable for
long-term investors who can bear the risk of short-term principal fluctuations.
The following discussion of risks applies to investment practices of each of the
Funds other than Asset Allocation Fund. Asset Allocation Fund is, however,
affected by these risks through its investments in the other Funds.
Small Cap Stocks
Small Cap Fund invests primarily in the equity securities of smaller companies
and so the price of its Shares is subject to various forces which may cause the
value of its Shares to increase or decrease. Smaller companies present greater
opportunities for capital appreciation, but may also involve greater risks than
larger companies. Generally, securities of smaller companies have been more
volatile in price than securities of larger companies. Although smaller
companies can benefit significantly from the development of successful new
products and services, they also may have limited product lines, markets or
financial resources, and their securities may trade less frequently and in more
limited volume than the securities of larger, more mature companies. Smaller
companies may have greater sensitivity to changing economic conditions, may lack
management depth and may experience greater difficulty raising capital. As a
result, the prices of the securities of such smaller companies may fluctuate to
a greater degree than the prices of the securities of other issuers.
Foreign Securities
The Funds invest in varying proportions of the world's stock and bond markets
and so the price of each Fund's Shares is subject to a wide array of forces
which may cause their value to increase or decrease with movements in the
broader equity and bond markets in which they invest. Factors affecting the
value and income generated by each Fund's holdings and general and regional
economic conditions and market factors may influence Share value. A decline in
the stock market of any country in which a Fund has invested may also be
reflected in declines in the price of the Shares of that Fund. Changes in
currency valuations will also affect the price of the Shares of the Funds.
History reflects both decreases and increases in worldwide stock markets and
currency valuations, and these may recur unpredictably in the future. The value
of debt securities held by a Fund generally will vary inversely with changes in
prevailing interest rates. The value of securities, such as warrants or
convertible debt, that are exercisable for or convertible into equity securities
is also affected by prevailing interest rates, the credit quality of the issuer
and any call provision.
The International Equity and Global Bond Funds have the right to purchase
securities in any foreign country, developed or developing. While the Small Cap
and Equity Funds may also invest in some foreign securities, they do not focus
primarily on foreign securities. Investors in these Funds, and particularly the
International Equity and Global Bond Funds, should therefore consider carefully
the risks involved in investing in securities issued by companies of foreign
nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign investment
controls on daily stock market movements, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. Some countries may withhold portions of interest and
dividends at the source. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. The International Equity and Global Bond Funds may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts.
Brokerage commissions, custodial services and other costs relating to investment
in foreign countries are generally more expensive than in the United States. In
addition, the foreign securities markets of many of the countries in which the
International Equity and Global Bond Funds may invest may also be smaller, less
liquid, and subject to greater price volatility than those in the United States.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Funds are uninvested and no return is
earned thereon. The inability of the Funds to make intended security purchases
due to settlement problems could cause the Funds to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to these Funds due to subsequent declines
in value of the portfolio security or, if a Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
In many foreign countries, there is less government supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies than in the United States. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations also may be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Funds could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
which they trade.
Currency Transactions
The International Equity and Global Bond Funds usually effect currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange market. However, some price spread on currency exchanges (to
cover service charges) will be incurred when these Funds convert assets from one
currency to another. There are further risk considerations, including possible
losses through the holding of securities in domestic and foreign custodial banks
and depositaries, described in the SAI.
Debt Securities
Debt securities in which the Funds may invest may be subject to several types of
investment risk. Market or interest rate risk relates to the change in market
value caused by fluctuations in prevailing interests rates, while credit risk
relates to the ability of the issuer to make timely interest payments and to
repay the principal upon maturity. Call or income risk relates to corporate
bonds during periods of falling interest rates, and involves the possibility
that securities with high interest rates will be prepaid or "called" by the
issuer prior to maturity. Such an event would require a Fund to invest the
resulting proceeds elsewhere, at generally lower interests rates, which could
cause fluctuations in the Fund's net income. A Fund also may be exposed to event
risk, which is the possibility that corporate debt securities held by a Fund may
suffer a substantial decline in credit quality and market value due to a
corporate restructuring.
The value of debt securities will normally increase in periods of falling
interest rates; conversely, the value of these instruments will normally decline
in periods of rising interest rates. Generally, the longer the remaining
maturity of a debt security, the greater the effect of interest rate changes on
its market value.
Investment Grade Debt Securities
Investment grade debt securities include those rates at least Baa by Moody's
Investors Services, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Service
("S&P") or, if unrated, deemed to be of equivalent quality as determined by the
appropriate Sub-Adviser. Debt securities in this lowest tier of investment grade
are generally regarded as having adequate capacity to pay interest and repay
principal, but have speculative characteristics. Changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
interest and principal payments than is the case with higher grade bonds.
Below Investment Grade Debt Securities
Below investment grade securities are sometimes referred to as
"high-yield/high-risk" or "junk" bonds. Small Cap Fund will invest in debt
securities rated at least Ba or B by Moody's or BB or B by S&P or, if unrated,
deemed to be of equivalent quality as determined by the Adviser or Sub-Adviser.
Global Bond Fund is authorized to invest in medium quality or high-risk, lower
quality debt securities that are rated between BBB and as low as CCC by S&P and
between Baa and as low as Caa by Moody's or, if unrated, are of equivalent
investment quality as determined by PIMCO. High-risk, lower quality debt
securities, commonly referred to as "junk bonds," 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 and may be in
default. Unrated debt securities are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers. Regardless of
rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by the appropriate Sub-Adviser to insure, to
the extent possible, that the planned investment is sound. The Funds may, from
time to time, purchase defaulted debt securities if, in the opinion of the
appropriate Sub-Adviser, the issuer may resume interest payments in the near
future. As an operating policy, which may be changed by the Board of Directors
without shareholder approval, Small Cap Fund and Global Bond Fund will not
invest more than 25% and 30%, respectively, of their total assets in debt
securities rated lower than BBB by S&P or Baa by Moody's, or in defaulted debt
securities, which may be illiquid. The other Funds do not anticipate investing
more than 5% of their total assets in such securities.
Futures and Options
Successful use by the Funds of stock and bond index futures contracts and
options on securities indexes is subject to certain special risk considerations.
A liquid options or futures market may not be available when a Fund seeks to
offset adverse market movements. In addition, there may be an imperfect
correlation between movements in the securities included in the index and
movements in the securities in a Fund's portfolio. Successful use of index
futures contracts and options on securities indexes is further dependent on the
Sub-Advisers' ability to predict correctly movements in the direction of the
underlying securities markets and no assurance can be given that their judgment
in this respect will be correct. Risks in the purchase and sale of index futures
and options are further referred to in the SAI.
INVESTMENT TECHNIQUES
The following discussion concerns investment techniques of the Funds other than
Asset Allocation Fund, except to the extent that certain of the following
techniques may apply to cash management investments by Asset Allocation Fund.
Equity Securities
Each Fund may invest in all types of equity securities, including common stocks,
preferred stocks, warrants, options, convertible securities, restricted
securities and depositary receipts. Certain of these types of securities are
discussed below in greater detail. Equity securities are not a primary focus of
Global Bond Fund.
Corporate Debt Securities
Corporate debt securities include corporate bonds, debentures, notes and other
similar corporate debt instruments, including convertible securities. Debt
securities may be acquired with warrants attached. Corporate income-producing
securities may also include forms of preferred or preference stock. The rate of
interest on a corporate debt security may be fixed, floating or variable, and
may vary inversely with respect to a reference rate. See "Variable and Floating
Rate Securities" below. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Investments in corporate debt
securities that are rated below investment grade (rated below Baa (Moody's) or
BBB (S&P)) are described as "speculative" both by Moody's and S&P. See "RISK
FACTORS" above. Rating agencies may periodically change the rating assigned to a
particular security. While the Sub-Advisers will take into account such changes
in deciding whether to hold or sell a security, the Funds do not require a
Sub-Adviser to sell a security that is downgraded to any particular rating.
Convertible Securities
Each Fund may invest in convertible securities, which may offer higher income
than the common stocks into which they are convertible. Typically, convertible
securities are callable by the company, which may, in effect, force conversion
before the holder would otherwise choose.
The convertible securities in which a Fund may invest consist of bonds, notes,
debentures and preferred stocks which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. A Fund
may be required to permit the issuer of a convertible security to redeem the
security, convert it into the underlying common stock, or sell it to a third
party. Thus, the Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on a Fund's ability to achieve
its investment objective.
Foreign Investments and Foreign Currency Transactions
The International Equity and Global Bond Funds invest a substantial amount of
their assets in foreign investments, and Small Cap Fund may invest up to 25% of
its assets in foreign investments. As noted above, foreign securities traded
outside the United States are not a primary focus of Equity Fund. Investment in
foreign securities is subject to special investment risks that differ in some
respects from those related to investments in securities of U.S. domestic
issuers. See "RISK FACTORS" above.
If a security is denominated in foreign currency, the value of the security to a
Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. Currency risks generally increase in lesser developed
markets. Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments to
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention (or the failure to
intervene) by U.S. or foreign governments or central banks, by currency controls
or political developments in the United States or abroad. Currencies in which a
Fund's assets are denominated may be devalued against the U.S. dollar, resulting
in a loss to the Fund. Small Cap Fund limits its foreign currency denominated
investments to less than 5% of its net assets.
A Fund may buy and sell foreign currencies on a spot and forward basis to reduce
the risks of adverse changes in foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be a 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. By entering into a forward foreign currency exchange contract, a Fund
"locks in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. As a result, the Fund
reduces its exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency it will exchange
into. The effect on the Fund is similar to selling securities denominated in one
currency and purchasing securities denominated in another. Contracts to sell
foreign currency would limit any potential gain which might be realized by a
Fund if the value of the hedged currency increases. The Funds may enter into
these contracts for the purpose of hedging against foreign exchange risk arising
from a Fund's investment or anticipated investment in securities denominated in
foreign currencies. The Funds also may enter into these contracts for purposes
of increasing exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another. The Funds may use one
currency (or a basket of currencies) to hedge against adverse changes in the
value of another currency (or a basket of currencies) when exchange rates
between the two currencies are positively correlated. A Fund will segregate
assets determined to be liquid by its Sub-Adviser, in accordance with procedures
established by the Board of Directors, in a segregated account to cover its
obligations under forward foreign currency exchange contracts entered into for
non-hedging purposes. The Funds also may invest in options on foreign
currencies, in foreign currency futures and options thereon, and in foreign
currency exchange-related securities, such as foreign currency warrants and
other instruments whose return is linked to foreign currency exchange rates.
Depositary Receipts
The Funds may purchase sponsored or unsponsored ADRs, European Depositary
Receipts ("EDRs") and Global Depositary Receipts ("GDRs") (collectively,
"Depositary Receipts"). ADRs are Depositary Receipts typically used by a U.S.
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. EDRs and GDRs are typically issued by foreign banks or
foreign trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered form
are designed for use in the U.S. securities market and Depositary Receipts in
bearer form are designed for use in securities markets outside the United
States. Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depositary Receipts.
Depositary Receipts also involve the risks of other investments in foreign
securities, as further discussed below in this section. For purposes of each
Fund's investment policies, a Fund's investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
Loan Participations and Assignments
The Funds may invest in fixed- and floating-rate loans arranged through private
negotiations between an issuer of debt instruments and one or more financial
institutions ("lenders"). Generally, a Fund's investments in loans are expected
to take the form of loan participations and assignments of portions of loans
from third parties.
Large loans to corporations or governments may be shared or syndicated among
several lenders, usually banks. The Funds may participate in such syndicates, or
can buy part of a loan, becoming a direct lender. Participations and assignments
involve special types of risk, including limited marketability and the risks of
being a lender. See "Illiquid Securities" for a discussion of the limits on the
Funds' investments in loan participations and assignments with limited
marketability. If a Fund purchases a participation, it may only be able to
enforce its rights through the lender, and may assume the credit risk of the
lender in addition to that of the borrower. In assignments, a Fund's rights
against the borrower may be more limited than those held by the original lender.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Funds may engage in credit spread trades and invest in floating rate debt
instruments ("floaters"). A credit spread trade is an investment position
relating to a difference in the prices or interest rates of two securities or
currencies, where the value of the investment position is determined by
movements in the difference between the prices or interest rates, as the case
may be, of the respective securities or currencies. The interest rate on a
floater is a variable rate which is tied to another interest rate, such as a
money-market index or Treasury bill rate. The interest rate on a floater resets
periodically, typically every six months. Because of the interest rate reset
feature, floaters provide a Fund with a certain degree of protection against a
rise in interest rates, although a Fund will participate in any declines in
interest rates as well.
The Funds may also invest in inverse floating rate debt instruments ("inverse
floaters"). The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floating rate security may exhibit greater price volatility
than a fixed rate obligation of similar credit quality, and a Fund may
accordingly be forced to hold such an instrument for long periods of time and/or
may experience losses of principal in such investment. Each Fund will not invest
more than 5% of its net assets in any combination of inverse floater, interest
only ("IO"), or principal only ("PO") securities. See "Mortgage-Related and
Other Asset-Backed Securities" for a discussion of IOs and POs.
Inflation-Indexed Bonds
The Funds may invest in inflation-indexed bonds. Inflation-indexed bonds are
fixed income securities whose principal value is periodically adjusted according
to the rate of inflation. Such bonds generally are issued at an interest rate
lower than typical bonds, but are expected to retain their principal value over
time. The interest rate on these bonds is fixed at issuance, but over the life
of the bond this interest may be paid on an increasing principal value, which
has been adjusted for inflation.
If the periodic adjustment rate measuring inflation falls, the principal value
of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
The value of inflation-indexed bonds is expected to change in response to
fluctuations in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than the nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While inflation-indexed bonds are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
Mortgage-Related and Other Asset-Backed Securities
The Funds may invest in mortgage-related or other asset-backed securities. The
value of some mortgage-related or asset-backed securities in which the Funds
invest may be particularly sensitive to changes in prevailing interest rates,
and, like the other investments of a Fund, the ability of a Fund to successfully
utilize these instruments may depend in part upon the ability of its Sub-Adviser
to correctly forecast interest rates and other economic factors.
Mortgage Pass-Through Securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property in
which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loan which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on some mortgage-related securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose a Fund to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
prepayment has been purchased at a premium, the value of the premium would be
lost in the event of prepayment. Like other fixed income securities, when
interest rates rise, the value of a mortgage-related security generally will
decline; however, when interest rates are declining, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed income securities. The rate of prepayments on underlying mortgages
will affect the price and volatility of a mortgage-related security, and may
have the effect of shortening or extending the effective maturity of the
security beyond what was anticipated at the time of purchase. To the extent that
unanticipated rates of prepayment on underlying mortgages increase the effective
maturity of a mortgage-related security, the volatility of such securities can
be expected to increase.
Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments. Interest and pre-paid principal on a CMO are paid, in most cases,
on a monthly basis. CMOs may be collateralized by whole mortgage loans but are
more typically collateralized by portfolios of mortgage pass-through securities
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Association ("FNMA"). CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the first class has been retired. CMOs that are issued or guaranteed by
the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by each Fund, while other CMOs, even if
collateralized by U.S. Government securities, will have the same status as other
privately issued securities for purposes of applying a Fund's diversification
tests.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage-related or asset-backed securities.
Mortgage-Related Securities include securities other than those described above
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property, such as mortgage dollar rolls
(see "Reverse Repurchase Agreements and Dollar Roll Arrangements" below), CMO
residuals or stripped mortgage-backed securities ("SMBS"), and may be structured
in classes with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only, or
"IO" class), while the other class will receive all of the principal (the
principal-only, or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments) on
the related underlying mortgage assets, and a rapid rate of principal payments
may have a material adverse effect on a Fund's yield to maturity from these
securities. A Fund will not invest more than 5% of its net assets in any
combination of IO, PO, or inverse floater securities. The Funds may invest in
other asset-backed securities that have been offered to investors. For a
discussion of the characteristics of some of these instruments, see the
Supplemental Discussion of Investment Techniques and Risks section of the SAI.
Repurchase Agreements
Securities held by a Fund may be subject to repurchase agreements. Under the
terms of a repurchase agreement, a Fund would acquire securities from financial
institutions, subject to the seller's agreement to repurchase such securities at
a mutually agreed upon date and price, which includes interest negotiated on the
basis of current short-term rates. The seller under a repurchase agreement will
be required to maintain at all times the value of collateral held pursuant to
the agreement at not less than the repurchase price (including accrued
interest). If a seller defaults on its repurchase obligations, a Fund may suffer
a loss in disposing of the security subject to the repurchase agreement.
Reverse Repurchase Agreements and Dollar Roll Agreements
The Funds may also borrow funds by entering into reverse repurchase agreements
and dollar roll agreements in accordance with applicable investment
restrictions. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them, or substantially similar securities in the case of a dollar
roll agreement, at a mutually agreed-upon date and price. A dollar roll
agreement is identical to a reverse repurchase agreement except for the fact
that substantially similar securities may be repurchased. At the time a Fund
enters into a reverse repurchase agreement or dollar roll agreement, it will
place in a segregated custodial account assets such as U.S. Government
securities or other liquid high grade debt or equity securities consistent with
the Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest), and subsequently will continually monitor the
account to ensure that such equivalent value is maintained at all times. Reverse
repurchase agreements and dollar roll agreements involve the risk that the
market value of the securities sold by a Fund may decline below the price at
which the Fund is obligated to repurchase the securities.
Certificates of Deposit and Time Deposits
The Funds may invest in certificates of deposit and time deposits of domestic
and foreign banks and savings and loan associations if (a) at the time of
investment the depository institution has capital, surplus, and undivided
profits in excess of one hundred million dollars ($100,000,000) (as of the date
of its most recently published financial statements), or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
Commercial Paper
The Funds may invest in short-term promissory notes issued by corporations
(including variable amount master demand notes) rated at the time of purchase
within the two highest categories assigned by an NRSRO (e.g., A-2 or better by
S&P, Prime-2 or better by Moody's or F-2 or better by Fitch Investors Service,
L.P.) or, if not rated, judged by the appropriate Sub-Adviser to be of
comparable quality to instruments that are so rated. Instruments may be
purchased in reliance upon a rating only when the rating organization is not
affiliated with the issuer or guarantor of the instrument.
Derivative Instruments
The Funds may purchase and write call and put options on securities, securities
indexes and foreign currencies, and enter into futures contracts and use options
on futures contracts as further described below. The Funds may also enter into
swap agreements with respect to foreign currencies, interest rates, and
securities indexes. A Fund may use these techniques to hedge against changes in
interest rates, foreign currency exchange rates or securities prices or as part
of their overall investment strategies. The Funds may also purchase and sell
options relating to foreign currencies for purposes of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from one
country to another. A Fund will maintain a segregated account consisting of
assets determined to be liquid by its Sub-Adviser in accordance with procedures
established by the Board of Directors (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover its obligations
under options, futures, and swaps to avoid leveraging the portfolio of the Fund.
The Funds consider derivative instruments to consist of securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, and not to include those securities whose payment of
principal and/or interest depends upon cash flows from underlying assets, such
as mortgage-related or asset-backed securities. The value of some derivative
instruments in which a Fund invests may be particularly sensitive to changes in
prevailing interest rates, and, like the other investments of a Fund, the
ability of a Fund to successfully utilize these instruments may depend in part
upon the ability of its Sub-Adviser to correctly forecast interest rates and
other economic factors. If a Sub-Adviser incorrectly forecasts such factors and
has taken positions in derivative instruments contrary to prevailing market
trends, a Fund could be exposed to the risk of loss. The Funds might not employ
any of the strategies described below, and no assurance can be given that any
strategy used will succeed.
Options on Securities, Securities Indexes, and Currencies. The Funds may
purchase put options on securities and indexes. One purpose of purchasing put
options is to protect holdings in an underlying or related security against a
substantial decline in market value. The Funds may also purchase call options on
securities and indexes. One purpose of purchasing call options is to protect
against substantial increases in prices of securities. The Funds intend to
purchase such options depending on their ability to invest in such securities in
an orderly manner. An option on a security (or index) is a contract that gives
the holder of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option (or the cash value of the index) at a specified
exercise price at any time during the term of the option. The writer of an
option on a security has the obligation upon exercise of the option to deliver
the underlying security upon payment of the exercise price or to pay the
exercise price upon delivery of the underlying security. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. An index is designed to reflect specified
facets of a particular financial or securities market, a specific group of
financial instruments or securities, or certain economic indicators.
A Fund may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. A Fund may write a call or put option only if
the option is "covered" by the Fund holding a position in the underlying
securities or by other means which would permit immediate satisfaction of the
Fund's obligation as writer of the option. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of an option of the
same series.
The Funds may write covered straddles consisting of a combination of a call and
a put written on the same underlying security. A straddle will be covered when
sufficient assets are deposited to meet a Fund's immediate obligations. The
Funds may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise price
of the call is higher than that of the put. In such cases, a Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."
The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase in the underlying
security above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying security at the exercise price. If a put or call
option purchased by a Fund is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or greater than the
exercise price (in the case of a put), or remains less than or equal to the
exercise price (in the case of a call), the Fund will lose its entire investment
in the option. Also, where a put or call option on a particular security is
purchased to hedge against price movements in a related security, the price of
the put or call option may move more or less than the price of the related
security. There can be no assurances that a liquid market will exist when a Fund
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, the Fund may be unable to close
out a position.
The Funds that invest in foreign currency-denominated securities may buy or sell
put and call options on foreign currencies. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Fund to reduce foreign currency risk using such options. Over-the-counter
options differ from traded options in that they are two-party contracts, with
price and other terms negotiated between buyer and seller, and generally do not
have as much market liquidity as exchange-traded options. A Fund may be required
to treat as illiquid over-the-counter options purchased and securities being
used to cover certain written over-the-counter options.
Swap Agreements. The Funds may enter into interest rate, index, equity and
currency exchange rate swap agreements. These transactions would be entered into
in an attempt to obtain a particular return when it is considered desirable to
do so, possibly at a lower cost to a Fund than if the Fund had invested directly
in the asset that yielded the desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard swap transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments, which
may be adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to a "normal
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. Forms of swap
agreements include interest rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or "cap;" interest rate floors, under which, in return
for a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor;" and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa, in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Futures Contracts and Options on Futures Contracts. The Funds may invest in
interest rate, stock index and foreign currency futures contracts and options
thereon. There are several risks associated with the use of futures and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedged securities in a Fund and the hedging vehicle so that the portfolio
return might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when a Fund seeks to close
out a futures contract or a futures option position. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent a Fund from liquidating an unfavorable position, and the
Fund would remain obligated to meet margin requirements until the position is
closed.
The Funds may write covered straddles consisting of a call and a put written on
the same underlying futures contract. A straddle will be covered when sufficient
assets are deposited to meet the Fund's immediate obligations. A Fund may use
the same liquid assets to cover both the call and put options where the exercise
price of the call and put are the same, or the exercise price of the call is
higher than that of the put. In such cases, a Fund will also segregate liquid
assets equivalent to the amount, if any, by which the put is "in the money."
The Funds will only enter into futures contracts or futures options which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Funds will use
financial futures contracts and related options for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission ("CFTC"). With respect to positions in financial
futures and related options that do not qualify as "bona fide hedging," a Fund
will enter such positions only to the extent that aggregate initial margin
deposits plus premiums paid by it for open futures option positions, less the
amount by which any such positions are `in-the-money," would not exceed 5% of
the Fund's net assets.
When-Issued and Delayed-Delivery Transactions
The Funds may purchase securities on a when-issued or delayed-delivery basis. A
Fund will engage in when-issued and delayed-delivery transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, not for investment leverage. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield and thereby involve a risk that the yield obtained in the
transaction will be less than that available in the market when delivery takes
place. A Fund will not pay for such securities or start earning interest on them
until they are received. When a Fund agrees to purchase securities, the
Custodian will set aside cash or liquid securities equal to the amount of the
commitment in a segregated account. Securities purchased on a when-issued basis
are recorded as an asset and are subject to changes in value based upon changes
in the general level of interest rates. In when-issued and delayed-delivery
transactions, a Fund relies on the seller to complete the transaction; the
seller's failure to do so may cause the Fund to miss an advantageous price or
yield.
Securities Issued by Other Investment Companies
Asset Allocation Fund may invest without limit in shares of investment
companies. Each other Fund may invest up to 10% of its total assets in shares of
other investment companies. A Fund will incur additional expenses due to the
duplication of expenses as a result of investing in other investment companies.
U.S. Government Obligations
Although the primary focus of the Funds is on other types of financial
instruments, the Funds may invest in U.S. Government securities for liquidity
and investment purposes.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the GNMA, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the FNMA, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Student Loan
Marketing Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Federal Farm Credit Banks or the FHLMC, are supported only by the credit of
the instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law.
Lending of Portfolio Securities
In order to generate additional income, the Funds from time to time may lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The lending Fund must receive 102% collateral in the form of cash or
U.S. Government securities. This collateral must be valued daily and, should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lending Fund. During the time portfolio securities
are on loan, the borrower pays the lending Fund any dividends or interest paid
on such securities. Loans are subject to termination by the lending Fund or the
borrower at any time. While the lending Fund does not have the right to vote
securities on loan, it intends to terminate the loan and regain the right to
vote if that is considered important with respect to the investment. In the
event the borrower defaults on its obligation to the lending Fund, the lending
Fund could experience delays in recovering its securities and possible capital
losses. The Funds will only enter into loan arrangements with broker-dealers,
banks or other institutions which the applicable Sub-Adviser has determined to
be creditworthy under guidelines established by the Board of Directors that
permit the Funds to lend up to 33-1/3% of the value of their respective total
assets.
Illiquid Securities
A Fund may invest up to 15% of its net assets in illiquid securities. Illiquid
securities for which market quotations are not readily available require pricing
at fair value as determined in good faith under the supervision of the Board of
Directors. The Sub-Advisers may be subject to significant delays in disposing of
illiquid securities, and transactions in illiquid securities may entail
registration expenses and other transaction costs that are higher than
transactions in liquid securities. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which a Fund has
valued the securities. Illiquid securities are considered to include, among
other things, written over-the-counter options, securities or other liquid
assets being used as cover for such options, repurchase agreements with
maturities in excess of seven days, certain loan participation interests,
fixed-time deposits which are not subject to prepayment or provide for
withdrawal penalties upon prepayment (other than overnight deposits), securities
that are subject to legal or contractual restrictions on resale and other
securities whose disposition is restricted under the federal securities laws
(other than securities issued pursuant to Rule 144A under the Securities Act of
1933, as amended (the "1933 Act") and certain commercial paper that a
Sub-Adviser has determined to be liquid under procedures approved by the Board
of Directors).
A Fund's investments may include privately placed securities, which are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered under the federal securities laws.
Although certain of these securities may be readily sold, for example, under
Rule 144A, others may be illiquid, and their sale may involve substantial delays
and additional costs.
* * * * *
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of each Fund that may not be
changed without the approval of the holders of a majority of that Fund's
outstanding voting securities. A majority of a Fund's outstanding voting
securities means the lesser of (a) 67% or more of the voting securities present
at a meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy or (b) more than 50% of the
outstanding voting securities. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes will not be considered a violation of the restriction, except that
a Fund will take reasonably practicable steps to attempt to continuously monitor
and comply with its liquidity standards. Also, if a Fund receives subscription
rights to purchase securities of an issuer whose securities the Fund holds, and
if the Fund exercises such subscription rights at a time when the Fund's
portfolio holdings of securities of that issuer would otherwise exceed the
limits set forth in paragraph 1 below, it will not constitute a violation if,
prior to the receipt of securities from the exercise of such rights, and after
announcement of such rights, the Fund sells at least as many securities of the
same class and value as it would receive on exercise of such rights. As a matter
of fundamental policy, each Fund may not:
(1) invest 25% or more of the total value of its assets in a
particular industry, except that Asset Allocation Fund will
invest over 25% of its assets in securities issued by investment
companies;
(2) issue senior securities, except to the extent permitted by the
Investment Company Act of 1940, as amended (the "1940 Act"), or
borrow money, except that a Fund may borrow up to 15% of its
total assets from banks for temporary or emergency purposes;
(3) purchase or sell commodities or commodity contracts, except that
each Fund may engage in futures transactions as described in this
Prospectus;
(4) make loans, except that each Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit, bankers' acceptances and fixed-time
deposits) in accordance with its investment objective and
policies, (b) invest in loans through Participations and
Assignments, (c) enter into repurchase agreements with respect to
portfolio securities, and (d) make loans of portfolio securities,
as described in this Prospectus;
(5) underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities,
a Fund may be deemed to be an underwriter;
(6) purchase real estate (other than securities secured by real
estate or interests therein or securities issued by companies
that invest in real estate or interests therein); or
(7) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are
necessary for the clearance of transactions).
MANAGEMENT OF THE FUNDS
Directors
Overall responsibility for management of the Funds rests with the Directors of
the Company, who are elected by the Shareholders of the Company. There are
currently three directors, two of whom are not "interested persons" of the
Company within the meaning of that term under the 1940 Act. The Directors, in
turn, elect the officers of the Company to supervise its day-to-day operations.
Investment Adviser and Sub-Advisers
Webster Investment Management Company LLC ("Webster") serves as investment
adviser to each Fund. Webster, a Delaware limited liability company, is a newly
organized registered investment adviser that supervises the activities of each
Sub-Adviser and has the authority to engage the services of different
sub-advisers with the approval of the Directors of the Company. Webster has not
previously acted as investment adviser to a registered investment company.
Webster is located at 433 California Street, Suite 1010, San Francisco,
California, 94104.
Subject to general supervision of the Company's Board of Directors and in
accordance with the investment objective, policies and restrictions of the
Funds, Webster has the authority to manage the Funds, to make decisions with
respect to, and place orders for, all purchases and sales of the Funds'
securities. It also provides the Funds with ongoing investment guidance and
policy direction. Webster has not previously had responsibility for managing a
mutual fund; however, daily investment decisions will be made by the Sub-Adviser
to each Fund, whose investment experience is described below.
Webster is paid an investment advisory fee by each of the Funds, which is
computed daily and paid monthly, at the following annual rates based on the
average daily net asset value of the respective Funds: Equity Fund, 0.625% for
the first $100 million of assets under management; 0.55% for the next $400
million of assets under management; 0.50% on assets over $500 million;
International Equity Fund, 0.95% for the first $25 million of assets under
management; 0.80% for the next $25 million of assets under management; 0.75% for
the next $50 million of assets under management; 0.65% for the next $150 million
of assets under management; 0.60% for the next $250 million of assets under
management; and 0.55% on assets over $500 million; Global Bond Fund, 0.60% for
the first $200 million of assets under management and 0.55% on assets over $200
million; Small Cap Fund, 1.05% of average daily net assets; Asset Allocation
Fund, 0.05% of average daily net assets. Asset Allocation Fund will,
additionally, indirectly bear a share of the investment advisory fees and other
expenses paid by each Underlying Fund proportionate to its investment in that
Fund.
Webster pays the fees of each Sub-Adviser.
Each Fund (other than Asset Allocation Fund) is managed by a Sub-Adviser.
Subject to the general supervision of the Company's Board of Directors and in
accordance with the investment objective, policies and restrictions of the
Funds, the Sub-Advisers manage the Funds, make decisions with respect to, and
place orders for, all purchases and sales of the Funds' securities.
Barclays Global Fund Advisors ("Barclays") serves as Sub-Adviser for Equity
Fund. Barclays is an operating subsidiary of Barclays Global Investors N.A.
("BGI"), a limited purpose national banking association. BGI is a wholly owned
indirect subsidiary of Barclays Bank PLC. Barclays is located at 45 Fremont
Street, San Francisco, California 94105. As of June 30, 1998, BGI provided
investment advisory services for approximately $563 billion in assets. An
investment committee of Barclay's investment professionals makes investment
decisions for the investments of Equity Fund. No single individual acts in the
capacity of a portfolio manager.
Templeton Investment Counsel, Inc. ("Templeton") acts as Sub-Adviser for the
International Equity Fund. Templeton is an indirect wholly owned subsidiary of
Franklin Resources, Inc. ("Franklin"), a publicly owned company. Through its
subsidiaries, Franklin is engaged in various aspects of the financial services
industry. Templeton and its affiliates serve as advisers for a wide variety of
public investment mutual funds and private clients in many nations and as of
June 30, 1998, provided investment advisory services for over $256 billion in
assets. The Templeton organization has been investing globally since 1940.
Templeton and its affiliates have global equity research offices in Australia,
Bahamas, Canada, France, Germany, Italy, Luxembourg, Scotland and the United
States. Templeton's principal business address is 500 East Broward Boulevard,
Suite 2100, Fort Lauderdale, Florida 33394.
Templeton uses a disciplined, long-term approach to value-oriented global and
international investing. It has an extensive global network of investment
research sources. Securities are selected for the International Equity Fund's
portfolio on the basis of fundamental company-by-company analysis. Many
different selection methods are used for different funds and clients and these
methods are changed and improved by Templeton's research on superior selection
methods.
Peter A. Nori, CFA, will manage the International Equity Fund's investments in
non-U.S. equity securities on behalf of Templeton. Mr. Nori is Vice President
and a Portfolio Manager and analyst for Templeton. His current responsibilities
include covering data processing software and hardware industries, the steel
stocks industries, and country coverage of Austria. In addition to his portfolio
management duties involving institutional and mutual fund accounts, Mr. Nori is
lead manager for the Templeton Global Smaller Companies Fund and backup for
Templeton Foreign Smaller Companies Fund. Mr. Nori received a bachelor of
science degree in finance and a master of business administration degree with an
emphasis in finance from the University of San Francisco. Mr. Nori is a
Chartered Financial Analyst (CFA) and a member of the Association for Investment
Management and Research (AIMR). Mr. Nori joined Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc. as an investment adviser in 1987.
Simon Rudolph and Edward Ramos have secondary portfolio management
responsibilities for the International Equity Fund. Mr. Rudolph is a vice
president of Templeton. He joined Templeton in 1997 as a portfolio manager and
research analyst and currently has research responsibility for the worldwide
transport and shipping industry, as well as country coverage of India. Mr.
Rudolph also researches small-cap companies throughout Asia and presently
manages small-cap mutual funds. He holds a Bachelor of Arts degree in economic
history from Durham University in England, and is a Chartered Accountant and a
member of the Institute of Chartered Accountants of England and Wales. Before
joining Templeton, Mr. Rudolph was an executive director for Morgan Stanley in
London, England (November 1989 to January 1997). Mr. Ramos is also a Vice
President of Templeton. His responsibilities include analysis of the
merchandising, financial services and brokerage industries, as well as country
coverage of Taiwan, Egypt and Israel. Before joining Templeton in 1993, Mr.
Ramos was a student at the Columbia Graduate School of Business (August 1992-May
1993). Mr. Ramos received a Master of Business Administration degree with
emphasis in finance, accounting and international business from The Columbia
Graduate School of Business and a Bachelor of Science degree in finance from
Lehigh University. He is a Chartered Financial Analyst (CFA).
Pacific Investment Management Company ("PIMCO") serves as Sub-Adviser for the
Global Bond Fund. PIMCO is an investment counseling firm founded in 1971, and
had approximately $138 billion in assets under management as of June 30, 1998.
PIMCO is a subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors"). The general
partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors Holdings
L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership between PIMCO
Holdings LLC, a Delaware limited liability company and indirect wholly-owned
subsidiary of Pacific Life Insurance Company, and PIMCO Partners, LLC, a
California limited liability company controlled by the PIMCO Managing Directors.
PIMCO Partners, G.P. is the sole general partner of PAH. PIMCO's address is 840
Newport Center Drive, Suite 360, Newport Beach, California 92660. PIMCO is
registered as an investment adviser with the SEC and as a commodity trading
adviser with the CFTC.
The Portfolio Manager for PIMCO's duties on behalf of the Global Bond Fund is
Lee R. Thomas, III, Managing Director and Senior International Portfolio
Manager. As a Fixed Income Portfolio Manager, Mr. Thomas has managed the PIMCO
Foreign Bond, Global Bond and International Bond Funds since July 13, 1995, and
the PIMCO Global Bond Fund II since October 1, 1995. Prior to joining PIMCO in
1995, Mr. Thomas was associated with Investcorp as a member of the management
committee responsible for global securities and foreign exchange trading (from
April 1989 to March 1995). Prior to Investcorp, he was associated with Goldman
Sachs as an Executive Director in foreign fixed income.
Hoover Capital Management, LLC ("Hoover") serves as Sub-Adviser for Small Cap
Fund. Hoover, located at 655 Montgomery Street, Suite 800, San Francisco,
California 94111, as of August 1, 1998 manages more than $60 million in the
small-capitalization sector for institutions and individuals. Hoover was founded
in 1998 by Irene G. Hoover, the Fund's portfolio manager. Ms. Hoover has
approximately 20 years of investment management experience. Webster is currently
negotiating to purchase a fifty-one percent (51%) interest in Hoover which
transaction, if completed, may occur in the fourth quarter of 1998.
Irene Hoover is the portfolio manager for Small Cap Fund. Ms. Hoover is the
founder and managing partner of Hoover. Prior to forming Hoover, she was
director of research and a member of the three-person investment committee, with
more than $5 billion under management, at Jurika and Voyles, Inc., an investment
management firm in Oakland, California. She was employed at that firm from
1991-1997. Ms. Hoover is a chartered financial analyst; she holds a B.A. from
Stanford University and an M.A. from Northwestern University.
For the services provided pursuant to their Sub-Advisory Agreements with
Webster, each Sub-Adviser receives a fee from Webster. The fee is computed daily
and paid monthly and is computed as a percentage of the average daily net assets
of the Fund for which the particular Sub-Adviser has investment management
responsibility. For its services to Small Cap Fund, Webster pays Hoover at a
rate of 0.80% of that Fund's assets less than $500 million and 0.70% on amounts
over $500 million. For its services to Equity Fund, Webster pays Barclays at a
rate of 0.37 1/2% on the first $100 million of that Fund's assets, 0.30% on the
next $400 million, and 0.25% on assets over $500 million. For its services to
International Equity Fund, Webster pays Templeton at a rate of 0.70% on the
first $25 million of that Fund's assets, 0.55% on the next $25 million, 0.50% on
the next $50 million, 0.40% on the next $150 million, 0.35% on the next $250
million, and 0.30% on amounts over $500 million. For its services to Global Bond
Fund, Webster pays PIMCO at a rate of 0.35% of that Fund's assets less than $200
million and 0.30% on amounts over $200 million.
The Global Fund Performance Records
The Global Fund, whose operations commenced in March 1998, initially invested
directly in securities but effective on or about September 28 commenced
operating as a fund of funds and was renamed The Global Asset Allocation Fund.
The Global Fund had as its investment objective total return, which objective it
sought to achieve through investment in publicly traded equity and debt
securities issued by governments and companies in the United States and in other
industrialized nations and emerging markets. The Global Fund was managed by
Templeton, PIMCO and Barclays with Templeton acting as The Global Fund's adviser
for non-U.S. equity investments, PIMCO managing The Global Fund's investment in
fixed income and other debt securities and Barclays acting as The Global Fund's
investment adviser for U.S. equity investments. In acting as Sub-Advisers for
the Equity, International Equity and Global Bond Funds, Barclays, Templeton and
PIMCO, respectively, will be responsible for day-to-day management
responsibilities substantially similar to the portions of The Global Fund which
they managed. The performance record of The Global Fund since inception is
indicated in the table below.
The performance information presented below is not, and should not be
interpreted as, indicative of future results.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
THE GLOBAL FUND
CALENDAR YEAR RETURNS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return for the
Fund (since Return for Templeton Return for PIMCO Return for Barclays
inception in March Portion of Fund Portion of Fund Portion of Fund
1998)
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
1998 -1.40 -6.6 2.5 -0.9
- ------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>
Sub-Advisers' Performance Records
Presented below are the performance results for the Underlying Funds'
Sub-Advisers in managing accounts for private clients and/or other mutual funds
with substantially similar investment objectives, policies and strategies. The
results are not the performance record of the Underlying Funds which only
recently commenced operations. The performance record of The Global Fund, prior
to becoming the Asset Allocation Fund, is shown in the previous chart.
Performance results indicated below are not, and should not be interpreted as,
indicative of future results.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SUB-ADVISERS' PERFORMANCE RESULTS
FOR SIMILAR(1) PRIVATE ACCOUNTS(2)
CALENDAR YEAR RETURNS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
Templeton
(Sub-Adviser
for
International
Equity Fund)
Templeton MSCI AC Barclays Salomon
Tax-Exempt World MSCI AC (Sub-Adviser PIMCO Brothers
Non-U.S. (ex World (ex for Russell (Sub-Adviser World Bond
Equity U.S.) U.S.) Free MSCI EAFE Equity 3000 for Global Index
Composite(3) Index(4) Index(5) Index(5) Fund) Index(6) S&P 500(7) Bond Fund) (hedged)(8)
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1997 11.9 2.6 2.0 2.1 31.8 31.8 33.4 9.3 10.59
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1996 22.8 7.2 6.7 6.4 23.7 21.8 23.0 14.7 8.68
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1995 15.3 11.8 9.9 11.6 41.1 36.8 37.5 23.6 18.06
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1994 1.0 7.6 6.6 8.1 -0.1 0.2 1.3 (from -3.73
inception
date
6/30/94):
1.79
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1993 47.2 32.6 34.9 33.0 13.0 10.9 10.1 N/A 12.41
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1992 -0.7 -11.9 -11.0 -11.9 9.3 9.7 7.6 N/A 7.88
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1991 16.4 12.4 14.0 12.5 38.1 33.7 30.5 N/A 13.17
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
1990 -9.2 -22.8 -22.7 -23.2 (from -5.1 -3.1 N/A 5.92
inception
date
9/30/90):
9.2
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
Average
Annual 11.98(9) 3.7 3.8 3.6 22.9(9) 16.5 16.6 13.4(9) 8.94
- ------ ------------- --------- ------------ ----------- ----------- ------------ ----------- -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS(9) AS OF JUNE 30, 1998 FOR SIMILAR(1) PRIVATE ACCOUNTS
-----------------------------------------------------------------------------------
------------------------------------- --------------- -------------- --------------
<S> <C> <C> <C>
1 Year 3 Years 5 Years
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
Templeton 7.7 17.3 17.9
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
MSCI World (ex U.S.) Index(10) 6.6 11.3 10.5
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
MSCI AC World (ex U.S.) Free 1.4 9.4 9.5
Index(4)
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
MSCI EAFE Index(5) 6.4 11.0 10.3
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
Barclays 27.6 29.3 22.6
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
Russell 3000 Index(6) 28.0 28.2 21.7
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
S&P 500 Index (7) 30.1 30.2 23.1
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
PIMCO 11.01 13.92 N/A
------------------------------------- --------------- -------------- --------------
------------------------------------- --------------- -------------- --------------
SalBro WrldBd Index(8) 11.69 10.62 8.73
------------------------------------- --------------- -------------- --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
SUB-ADVISER'S PERFORMANCE RESULTS
FOR SIMILAR(1) MUTUAL FUNDS TO THE
INTERNATIONAL EQUITY FUND MANAGED BY TEMPLETON
CALENDAR YEAR RETURNS
- ---------------------------------------------------------------------------------------------------------------------------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Maxim
AA Series Mason
Templeton TIFI- Advantage Northwestern Fund, Street
Templeton Foreign Int'l Advantus Mutual Inc.: Marshall Int'l MSCI
Foreign Equity Equity Series Int'l Int'l Int'l Equity World (ex Russell
Fund Series Fund Fund, Inc. Equity Fund Portfolio I Stock Fund Fund U.S.)(10) 3000(7)
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1997 6.7 11.4 11.1 13.2 12.9 3.3 12.8 (from 2.6 31.8
inception
date
4/1/97)
: 0.1
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1996 18.0 21.6 22.7 21.4 21.7 21.0 21.3 N/A 7.2 21.8
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1995 11.2 13.0 19.1 15.4 15.6 10.5 12.8 N/A 11.8 36.8
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1994 0.4 0.2 4.6 0.8 0.7 6.6 (from N/A 7.6 0.2
inception
date
9/1/94):
-6.7
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1993 36.8 34.0 40.7 46.8 (from (from N/A N/A 32.6 10.9
inception inception
date date
4/28/93): 12/1/93):
25.2 1.0
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1992 0.1 -1.3 -6.7 (from N/A N/A N/A N/A -11.9 9.7
inception
date
8/28/92):
-5.3
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1991 18.3 21.4 (from N/A N/A N/A N/A N/A 12.4 33.7
inception
date
8/7/91):
0.0
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
1990 -3.0 (from N/A N/A N/A N/A N/A N/A -22.8 -5.1
inception
date
10/18/90):
-2.8
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
Average
Annual 16.4(9) 12.9(9) 13.3(9) 15.1(9) 16.0(9) 10.2(9) 11.5(9) N/A(9) 3.7 16.5
- ---- ------------ ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS AS OF JUNE 30, 1998
FOR SIMILAR(1) MUTUAL FUNDS
---------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------- ------------ ------------- ----------
1 Year 3 Years 5 Years
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
Templeton Foreign Fund -1.6 10.4 11.8
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
TIFI-Foreign Equity Series 13.3 18.0 16.6
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
AA Advantage Int'l Equity Fund 13.4 18.4 18.8
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
Advantus Series Fund, Inc. 9.2 16.6 N/A
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
Northwestern Mutual Int'l Equity Fund 11.0 17.9 17.6
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
The Maxim Series Fund, Inc.: Int'l 11.1 18.1 17.4
Portfolio I
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
Marshall Int'l Stock Fund 0.5 11.5 N/A
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
Mason Street Int'l Equity Fund -0.1 N/A N/A
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
MSCI World (ex U.S.)(10) 6.6 11.3 10.5
------------------------------------------- ------------ ------------- ----------
------------------------------------------- ------------ ------------- ----------
Russell 3000(7) 28.8 28.5 21.7
------------------------------------------- ------------ ------------- ----------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SUB-ADVISERS' PERFORMANCE RESULTS
FOR SIMILAR(1) MUTUAL FUNDS
CALENDAR YEAR RETURNS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
PIMCO
(Sub-Adviser for Global Salomon Brothers World Jurika & Voyles
Bond Fund)(11) Bond Index (hedged)(8) Mini-Cap(12) Russell 2000(13)
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1997 8.28 10.59 (through September (through September
1997): 1997): 14.49
36.68
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1996 12.53 8.68 32.16 14.76
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1995 (from inception date 52.21 25.21
10/1/95): 18.06
11.77
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1994 N/A -3.73 (from inception date -2.25
10/94):
6.50
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1993 N/A 12.41
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1992 N/A 7.88
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1991 N/A 13.17
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
1990 N/A 5.92
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
Average Annual 11.77(8) 8.94
- -------------------------- --------------------------- --------------------------- ---------------------- ----------------------
</TABLE>
<PAGE>
---------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS AS OF JUNE 30, 1998 FOR SIMILAR(1) MUTUAL FUNDS
---------------------------------------------------------------------------
----------------------------- -------------- -------------- ---------------
1 Year 3 Years 5 Years
----------------------------- -------------- -------------- ---------------
----------------------------- -------------- -------------- ---------------
PIMCO 8.88 N/A N/A
----------------------------- -------------- -------------- ---------------
----------------------------- -------------- -------------- ---------------
SalBro WrldBd Index(8) 11.69 10.62 8.73
----------------------------- -------------- -------------- ---------------
----------------------------- -------------- -------------- ---------------
Jurika & Voyles Mini-Cap(12) 46.97 43.13 N/A
----------------------------- -------------- -------------- ---------------
----------------------------- -------------- -------------- ---------------
Russell 2000 Index(13) 33.19 22.96 20.51
----------------------------- -------------- -------------- ---------------
(1) The use of "similar" reflects information for all private accounts or
mutual funds, as applicable, with substantially similar investment
objectives, policies and strategies as the Funds.
(2) The Sub-Adviser for the Small Cap Fund, Irene Hoover, has managed a
similar private account for Hoover Capital Management since January of
1998. Returns as of June 30, 1998 for the private accounts were 8.06%.
The returns for the Russell 2000 Index as of June 30, 1998 were 5.14%.
The performance information for this account managed by Ms. Hoover has
not been prepared in compliance with the Performance Presentation
Standards of the Association for Investment Management and Research.
(3) This Composite consists of all fully discretionary tax-exempt
portfolios managed by Templeton with non-U.S. equity investment
objectives.
(4) The MSCI AC World Index is the Morgan Stanley Capital International All
Country World Free Index. It is a combination of the MSCI World Free
Index and the MSCI Emerging Markets Free Index. The MSCI World Free
Index measure the returns of securities in developed markets which are
available to International investors. The MSCI Emerging Markets Free
Index measures the returns of emerging markets securities which are
available to international investors. This "ex U.S." index does not
include securities listed on U.S. exchanges.
(5) The MSCI EAFE Index is the Morgan Stanley Capital International Europe,
Australia, Far East Index and is designed to measure the investment
returns of securities of companies located in the developed countries
outside of North America and includes stocks from 21 countries.
(6) The Russell 3000 Index measures the performance of the 3,000 largest
publicly traded U.S. companies by market capitalization. The index is
market value weighted, and performance results reflect the reinvestment
of dividends.
(7) The S&P 500 Index is comprised of the returns of 500 stocks
representing industrial, financial, utility and transportation
companies which are traded on the New York Stock Exchange, the American
Stock Exchange and in the OTC market.
(8) The Salomon Brothers World Bond Index (hedged) measures the performance
of high quality securities in major sectors of the international bond
market. The index includes approximately 600 bonds of ten currencies.
The results presented are currency hedged and reflect the reinvestment
of earnings.
(9) Average annual return reflects performance from inception through 1997
and may be for a greater or lesser period of time than presented in the
average annual return for the comparable index.
(10) The MSCI World (w/o U.S.) Index is the Morgan Stanley Capital
International World Index without U.S. issuers. The index is an
arithmetic, market value weighted, average performance of over 1,470
securities listed on the stock exchanges of countries in Europe,
Australia, the Far East, Canada and the United States. United States
issuers have been excluded in this presentation since the performance
results presented are for private accounts with substantially similar
investment objectives, policies and strategies as the International
Equity Fund which does not invest in securities of U.S. issuers. In
addition, the index performance results reflect reinvestment of
dividends but are not adjusted for foreign withholding taxes.
(11) The performance results reflected are for PIMCO Global Bond Fund II.
(12) Irene Hoover, portfolio manager for the Small Cap Fund, managed the
Jurika & Voyles Mini-Cap Fund from its inception in October 1994
through September 1997. The performance information presented reflects
her management of that fund.
(13) The Russell 2000 Index measures the performance of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately 11%
of the total market capitalization of the Russell 3000 Index.
Except as otherwise provided herein, the performance records regarding similar
private accounts presented above have been prepared in compliance with the
Performance Presentation Standards of the Association for Investment Management
and Research ("AIMR") and have been provided to the Funds by the Sub-Advisers.
The performance records for The Global Fund and for similar mutual funds managed
by the Sub-Advisers have been prepared in compliance with the standards required
by the Securities and Exchange Commission. The Funds have not independently
audited or verified the results. The results are for all private accounts and/or
mutual funds managed with substantially similar investment objectives, policies
and strategies. These accounts are not subject to the restrictions and
limitations of the Investment Company Act of 1940, as amended (the "1940 Act"),
and the Internal Revenue Code of 1986, as amended (the "Code"), which may
adversely affect performance results. The results reflect the deduction of
advisory and other fees and the reinvestment of dividends.
Other Service Providers
First Data Investor Services Group, Inc. serves as the Funds' administrator,
transfer agent, and registrar and also provides certain accounting services for
each Fund ("Investor Services Group," "Administrator," or "Transfer Agent"). An
affiliate of Investor Services Group, First Data Distributors, Inc., serves as
each Fund's Distributor (the "Distributor"). The Distributor acts as agent for
each Fund in the distribution of its Shares and, in such capacity, solicits
orders for the sale of Shares. The Distributor and Investor Services Group's
principal business address is 53 State Street, Boston, Massachusetts 02109.
Investor Services Group is a wholly-owned subsidiary of First Data Corporation.
The Administrator generally assists each Fund in the administration of its
affairs, including the maintenance of financial records and fund accounting.
Investor Services Group also serves as the Funds' transfer agent and dividend
disbursing agent. Shareholder inquiries may be directed to Investor Services
Group at P.O. Box 5184, Westborough, Massachusetts 01581-5184.
Arthur Andersen LLP serves as independent public auditors for the Company. Brown
Brothers Harriman & Co. is each Fund's custodian. See "MANAGEMENT OF THE FUNDS"
in the SAI for further information.
Each Fund pays all expenses not assumed by Webster, the Sub-Advisers or the
Administrator. Expenses paid by the Funds include: custodian, stock transfer and
dividend disbursing fees and accounting and recordkeeping expenses; shareholder
service expenses pursuant to a Shareholder Service Plan; costs of designing,
printing and mailing reports, prospectuses, proxy statements and notices to its
shareholders; taxes and insurance; expenses of the issuance, sale or repurchase
of Shares of the Fund (including federal and state registration and
qualification expenses); legal and auditing fees and expenses; compensation,
fees and expenses paid to Directors who are not interested persons of the
Company; association dues; and costs of stationery and forms prepared
exclusively for the Funds.
Portfolio Transactions
Pursuant to the Sub-Advisory Agreements, each Sub-Adviser places orders for the
purchase and sale of portfolio investments with brokers or dealers selected by
the Sub-Adviser in its discretion.
VALUATION OF SHARES
The net asset value of each Fund is determined and its Shares are priced as of
the close of regular trading on the New York Stock Exchange ("NYSE") (generally
4:00 p.m., Eastern Time) on each Business Day. Each such determination and
pricing is a "Valuation Time". As used herein a "Business Day" is a day on which
the NYSE is open for trading and the Federal Reserve Bank of San Francisco
("FRB") is open, except days on which there are insufficient changes in the
value of a Fund's portfolio securities to materially affect the Fund's net asset
value or days on which no Shares are tendered for redemption and no order to
purchase any Shares is received. Currently, the NYSE and/or the FRB are closed
on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The net asset value per Share of each Fund will fluctuate as the value of that
Fund's investments change. Net asset value per Share for each Fund for purposes
of pricing sales and redemptions is calculated by dividing the value of all
securities and other assets belonging to that Fund, less the liabilities charged
to that Fund by the number of the Fund's outstanding Shares.
PURCHASING SHARES
This Prospectus offers individual investors three methods of purchasing Shares.
Shares may be purchased through a broker-dealer who has established a dealer or
other appropriate agreement with the Distributor or the Funds, or through the
Distributor directly. In addition, Shares of the Fund are continuously offered
and may be purchased either by mail, by telephone, or by wire. There are no
initial sales loads for shares of the Funds. The minimum initial purchase amount
for shares of each Fund is $2,500 for non-retirement accounts, and $250 for
retirement accounts and for subsequent investments. Broker-dealers may charge
their customers a transaction or service fee.
Purchases of Shares of the Funds will be executed at the next calculated net
asset value per Share ("public offering price") following the receipt by the
Company or its authorized agents of an order to purchase Shares in good form. In
the case of orders for the purchase of Shares placed through a broker-dealer,
the applicable public offering price will be the net asset value as so
determined, but only if the dealer receives the order prior to the Valuation
Time for that day and transmits it to the Company. The broker-dealer is
responsible for transmitting such orders promptly. If the broker-dealer fails to
do so, the investor's right to that day's closing price must be settled between
the investor and the broker-dealer. Purchases of Shares of a Fund will be
effected only on a Business Day. An order received prior to the Valuation Time
on any Business Day will be executed at the net asset value determined as of the
Valuation Time on the date of receipt. An order received after the Valuation
Time on any Business Day will be executed at the net asset value determined as
of the Valuation Time on the next Business Day of the Fund.
Depending upon the terms of a particular Shareholder account, a Shareholder may
be charged account fees for services provided in connection with an investment
in a Fund. Information concerning these services and any charges may be obtained
from the Company, Distributor or dealer assessing the charges. This Prospectus
should be read in conjunction with any such information so received.
An account may be opened by mailing a check or other negotiable bank draft in
the minimum amounts described above (payable to the particular Fund) with a
completed and signed Account Application Form to Forward Funds, Inc., c/o First
Data Investor Services Group, Inc., P.O. Box 5184, Westborough, Massachusetts
01581-5184. An Account Application Form may be obtained by calling
1-800-999-6809. The completed investment application must indicate a valid
taxpayer identification number and must be certified as such. Additionally,
investors may be subject to penalties if they falsify information with respect
to their taxpayer identification numbers.
The issuance of Shares is recorded on the books of the Fund. Every Shareholder
will receive a confirmation of, or account statement reflecting, each new
transaction in the Shareholder's account, which will also show the total number
of Shares of the Fund owned by the Shareholder. Shareholders may rely on these
statements in lieu of certificates. Certificates representing Shares of the
Funds will not be issued.
The Company reserves the right to reject any order for the purchase of its
Shares in whole or in part, including purchases made through the use of third
party checks and drafts drawn on foreign financial institutions.
EXCHANGE PRIVILEGE
Shares of each Fund may be exchanged for shares of any other Fund or with a
money market fund, the Vista U.S. Government Money Market Fund, a portfolio of
Mutual Fund Trust, for which The Chase Manhattan Bank acts as investment
adviser. There will be no fees for exchanges. Before entering into an exchange
transaction, a Shareholder should read prospectus information about the Fund or
money market fund into which they are exchanging. An exchange may be made by
written instruction or, if a written authorization for telephone exchanges is on
file, with the Transfer Agent by calling 1-800-999-6809. Under certain
circumstances, before an exchange can be made, additional documents may be
required to verify the authority or legal capacity of the person seeking the
exchange. Exchanges must be for amounts of at least $1,000. In order to make an
exchange into a new account, the exchange must satisfy the applicable minimum
initial investment requirement. Exchange requests cannot be revoked once they
have been received in good order. This exchange privilege is available only in
U.S. states where Shares of the Funds being acquired may legally be sold and may
be modified, limited or terminated at any time by a Fund upon 60 days' written
notice.
Investors should not view the exchange privilege as a means for market timing
(taking advantage of short-term swings in the market), and the Funds limit the
number of exchanges each Shareholder may make to four exchanges per account (or
two rounds trips) per calendar year. The Company also reserves the right to
prohibit exchanges during the first 15 days following an investment in a Fund.
The Company may terminate or change the terms of the exchange privilege at any
time. In general, Shareholders will receive notice of any material change to the
exchange privilege at least 60 days prior to the change. For federal income tax
purposes, an exchange constitutes a sale of Shares, which may result in a
capital gain or loss.
REDEEMING SHARES
Shareholders may redeem their Shares on any Business Day (see "VALUATION OF
SHARES"). Redemptions will be effected at the net asset value per Share next
determined after receipt of a redemption request by the Distributor or the
Company or its agents. Redemptions may be made by check, wire transfer,
telephone or mail. The Company intends to pay cash for all Shares redeemed, but
in unusual circumstances may make payment wholly or partly in portfolio
securities at their then market value equal to the redemption price. In such
cases, a Shareholder may incur brokerage costs in converting such securities to
cash. Broker-dealers may charge their customers a transaction or service fee.
Broker-dealers may charge their customers a transaction or service fee.
Signature Guarantee
If the proceeds of the redemption are greater than $50,000, or are to be paid to
someone other than the registered holder, or to other than the Shareholder's
address of record, or if the Shares are to be transferred, the owner's signature
must be guaranteed by a commercial bank, trust company, savings association or
credit union as defined by the Federal Deposit Insurance Act, or by a securities
firm having membership on a recognized national securities exchange. No
signature guarantees are required for Shares when an application is on file with
the Transfer Agent and payment is to be made to the Shareholder of record at the
Shareholder's address of record. The Transfer Agent reserves the right to reject
any signature guarantee if (1) it has reason to believe that the signature is
not genuine, (2) it has reason to believe that the transaction would otherwise
be improper, or (3) the guarantor institution is a broker or dealer that is
neither a member of a clearing corporation nor maintains net capital of at least
$100,000.
By Wire Transfer
If a Shareholder has given authorization for expedited wire redemption, Shares
can be redeemed and the proceeds sent by federal wire transfer to a single
previously designated bank account. Requests received by the Company prior to
the close of the NYSE will result in Shares being redeemed that day at the next
determined net asset value and normally the proceeds will be sent to the
designated bank account the following business day. The bank must be a member of
the Federal Reserve wire system. Delivery of the proceeds of a wire redemption
request may be delayed by the Company for up to seven (7) days if the
Distributor deems it appropriate under then current market conditions. Redeeming
Shareholders will be notified if a delay in transmitting proceeds is
anticipated. Once authorization is on file, the Company will honor requests by
any person identifying themselves as the owner of an account or the owner's
broker by telephone at 1-800-999-6809 or by written instructions. The Company
cannot be responsible for the efficiency of the Federal Reserve wire system or
the Shareholder's bank. The Shareholder is responsible for any charges imposed
by the Shareholder's bank. The minimum amount that may be wired is $2,500. The
Company reserves the right to change this minimum or to terminate the wire
redemption privilege. Shares purchased by check may not be redeemed by wire
transfer until such Shares have been owned (i.e., paid for) for at least 15
days. Expedited wire transfer redemptions may be authorized by completing a form
available from the Distributor. To change the name of the single bank account
designated to receive wire redemption proceeds, it is necessary to send a
written request with signatures guaranteed to Investor Services Group, P.O. Box
5184, Westborough, Massachusetts 01581-5184. This redemption option does not
apply to Shares held in broker "street name" accounts. A wire transfer fee will
be charged by the Fund. See "FEE TABLE."
By Telephone
Shares may be redeemed by telephone if the Account Application Form reflects
that the Shareholder has elected that privilege. If the telephone feature was
not originally selected, the Shareholder must provide written instructions to
the Company to add it. The Shareholder may have the proceeds mailed to his or
her address or mailed or wired to a commercial bank account previously
designated on the Account Application Form. Under most circumstances, payments
by wire will be transmitted on the next Business Day. Wire redemption requests
may be made by the Shareholder by telephone to the Company at 1-800-999-6809.
Although there are no redemption fees, a Shareholder may be charged wire
transfer and account closeout fees, as applicable. See "FEE TABLE."
The Company's Account Application Form provides that none of Webster, the
Transfer Agent, the Sub-Advisers, the Company or any of their affiliates or
agents will be liable for any loss, expense or cost when acting upon any oral,
wired or electronically transmitted instructions or inquiries believed by them
to be genuine. While precautions will be taken, as more fully described below,
Shareholders bear the risk of any loss as the result of unauthorized telephone
redemptions or exchanges believed by Investor Services Group to be genuine. The
Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include recording all
phone conversations, sending confirmations to Shareholders within 72 hours of
the telephone transaction, verifying the account name and sending redemption
proceeds only to the address of record or to a previously authorized bank
account. If a Shareholder is unable to contact the Funds by telephone, a
Shareholder may also mail the redemption request to Investor Services Group.
By Mail
A written request for redemption must be received by the Transfer Agent in order
to honor the request. See "FEE TABLE." The Transfer Agent's address is: First
Data Investor Services Group, Inc., P.O. Box 5184, Westborough, Massachusetts
01581-5184. The Transfer Agent will require a signature guarantee by an eligible
guarantor institution. The signature guarantee requirement will be waived if all
of the following conditions apply: (1) the redemption check is payable to the
Shareholder(s) of record, (2) the redemption check is mailed to the
Shareholder(s) at the address of record and (3) an application is on file with
the Transfer Agent. Signature guarantees are also waived if the proceeds of the
redemption request will meet the above conditions and be less than $50,000. The
Shareholder may also have the proceeds mailed to a commercial bank account
previously designated on the Account Application Form. There is no charge for
having redemption proceeds mailed to a designated bank account. To change the
address to which a redemption check is to be mailed, a written request therefor
must be received by the Transfer Agent. In connection with such request, the
Transfer Agent will require a signature guarantee by an eligible guarantor
institution.
For purposes of this policy, the term "eligible guarantor institution" shall
include banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings associations as those terms are
defined in the Securities Exchange Act of 1934, as amended (the "1934 Act").
Payments to Shareholders
Redemption orders are effected at the net asset value per Share next determined
after the Shares are properly tendered for redemption, as described above.
Payment to Shareholders for Shares redeemed generally will be made within seven
days after receipt of a valid request for redemption.
At various times, the Company may be requested to redeem Shares for which it has
not yet received good payment. In such circumstances, the forwarding of proceeds
may be delayed until payment has been collected for the purchase of such Shares,
which delay may be for 15 days or more. The Funds intend to forward such
redemption proceeds upon determining that good payment for purchase orders has
been received. Such delay may be avoided if Shares are purchased by wire
transfer of federal funds. The Company intends to pay cash for all Shares
redeemed, but under abnormal conditions which make payment in cash unwise,
payment for certain large redemptions may be made wholly or partly in portfolio
securities at their then market value equal to the redemption price. In such
cases, an investor may incur brokerage costs in converting such securities to
cash.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION -- Matters Affecting
Redemption" and "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION - Net Asset
Value" in the SAI for examples of when the Company may suspend the right of
redemption or redeem Shares involuntarily.
SHAREHOLDER SERVICE PLANS
The Company has adopted a Shareholder Service Plan (the "Plan") with respect to
the Shares of each Fund. Pursuant to the Plan, each Fund is authorized to pay
third party service providers for certain expenses that are incurred in
connection with providing services to shareholders. Payments under the Plan will
be calculated daily and paid monthly at an annual rate not to exceed 0.35% of
the average daily net assets of a Fund.
Payments under the Plan may be used to pay banks and their affiliates and other
institutions, including broker-dealers (each a "Participating Organization"),
for administrative and/or shareholder service assistance. Such Participating
Organizations will be compensated at an annual rate of up to 0.35% of the
average daily net assets of the Shares held of record or beneficially by such
customers. Payments pursuant to the Plan will be used to compensate
Participating Organizations for providing Shareholder services with respect to
their Customers who are, from time to time, beneficial or record holders of
Shares.
Fees paid pursuant to the Plan are accrued daily and paid monthly, and are
charged as expenses of Shares of a Fund as accrued.
The Plan may be terminated by a vote of a majority of the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan ("Independent Directors"), or by a vote of a
majority of the holders of the outstanding voting securities of the class of
Shares subject thereto.
DIVIDENDS AND TAXES
The Equity, Small Cap, International Equity and Asset Allocation Funds expect to
pay dividends of net investment income and to distribute capital gains annually.
The Global Bond Fund expects to declare and pay income dividends quarterly and
to distribute capital gains annually. A Shareholder will automatically receive
all income, dividends and capital gains distributions in additional full and
fractional Shares at net asset value as of the date of declaration, unless the
Shareholder elects to receive dividends or distributions in cash. Such election,
or any revocation thereof, must be made in writing to the Transfer Agent at
First Data Investor Services Group, Inc., P.O. Box 5184, Westborough,
Massachusetts 01581-5184, and will become effective with respect to dividends
and distributions having record dates after its receipt by the Transfer Agent.
Federal Taxes
Each Fund intends to qualify annually and elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986, as amended ("Code"),
so that it generally will not be subject to federal income tax on its taxable
income and gains that are distributed to Shareholders. In order to avoid a 4%
federal excise tax, each Fund intends to distribute each calendar year
substantially all of its taxable income and gains.
Distributions from a Fund's investment company taxable income (which includes,
among other items, dividends, taxable interest and the excess, if any, of net
short-term capital gains over net long-term capital losses), whether received in
cash or reinvested in Fund shares, are taxable to Shareholders as ordinary
income. Distributions of net capital gains (other than short-term capital gain),
whether received in cash or reinvested in Fund shares, will be taxable to
Shareholders as long-term capital gains, regardless of how long the Shareholder
has held the Fund's shares.
Dividends declared by a Fund in October, November or December and paid during
the following January will be treated as having been received by Shareholders on
December 31 in the year the distributions were declared.
Any dividend or other distribution paid by a Fund has the effect of reducing the
Fund's net asset value per Share. Since the Funds do not declare dividends
daily, a dividend or other distribution paid shortly after a purchase of Shares
would represent, in substance, a return of capital to the Shareholder (to the
extent it is paid on the Shares so purchased), even though subject to income
taxes.
International Equity Fund and Global Bond Fund may be subject to income taxes
imposed by the countries in which they invest with respect to dividends, capital
gains and interest income. Each of these Funds may, under certain circumstances,
be eligible and may elect to treat certain of these taxes as if paid by its
Shareholders. Shareholders would then be required to include such taxes as
income but may be entitled, subject to certain limitations, to a tax credit or
deduction.
The Funds may be required to withhold federal income tax at the rate of 31% of
all taxable distributions paid to Shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications
or who have been notified by the Internal Revenue Service ("IRS") that they are
subject to backup withholding. Corporate Shareholders and certain other
Shareholders specified in the Code are exempt from backup withholding. Backup
withholding is not an additional tax and any amounts withheld may be credited
against the Shareholder's federal income tax liability.
Shareholders will be furnished annually with information relating to the nature
and amounts of distributions made by each Fund in which they have invested.
The preceding discussion is only a summary of some of the federal income tax
considerations generally affecting the Funds and its Shareholders and does not
address every possible situation. Distributions may be subject to state, local
and foreign taxes, and non-U.S. Shareholders may be subject to U.S. tax rules
that differ significantly from those discussed. Prospective Shareholders should
consult their tax advisers with respect to the effect of investing in a Fund.
For additional information relating to taxes, see "TAX CONSIDERATIONS" in the
SAI.
GENERAL INFORMATION
Description of the Company and Its Shares
The Company was organized as a Maryland corporation in 1997 and consists of the
five Funds described in this Prospectus. The Shares of each Fund of the Company
are currently offered as a single class. Each Share represents an equal
proportionate interest in a Fund with other Shares of that Fund, and is entitled
to such dividends and distributions out of the income earned on the assets
belonging to that Fund as are declared at the discretion of the Directors.
Shareholders are entitled to one vote for each Share owned.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Articles of Incorporation, the 1940 Act or other authority
except, under certain circumstances, to elect Directors, amend the Certificate
of Incorporation, approve an investment advisory agreement and satisfy certain
other requirements. To the extent that such a meeting is not required, the
Company may elect not to have an annual or special meeting.
The Company will call a special meeting of Shareholders for purposes of
considering the removal of one or more Directors upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Company. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Company), by majority vote,
has the power to remove one or more Directors.
Performance Information
From time to time performance information for a Fund showing its average annual
total return, aggregate total return and/or yield may be presented in
advertisements, sales literature and Shareholder reports. Such performance
figures are based on historical earnings and are not intended to indicate future
performance.
Investors may also judge the performance of a Fund by comparing or referencing
it to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indexes such as
those prepared by various services, which indexes may be published by such
services or by other services or publications, including, but not limited to,
ratings published by Morningstar, Inc. In addition to performance information,
general information about a Fund that appears in such publications may be
included in advertisements, in sales literature and in reports to Shareholders.
For further information regarding such services and publications, see
"CALCULATION OF PERFORMANCE DATA" in the SAI.
Total return and yield are functions of the type and quality of instruments held
in the portfolio, operating expenses, and market conditions. Any fees charged
with respect to customer accounts for investing in Shares of a Fund will not be
included in performance calculations; such fees, if charged, will reduce the
actual performance from that quoted.
Account Services
Shareholders of the Company may obtain current price, yield and other
performance information on any of the Funds 24 hours a day by calling
1-800-999-6809 from any touch-tone telephone. Shareholder reports which contain
additional performance information will be made available to investors upon
request and without charge.
Miscellaneous
Shareholders will receive unaudited semi-annual reports and annual reports
audited by independent public accountants. Inquiries regarding the Company may
be directed in writing to Investor Services Group, P.O. Box 5184, Westborough,
Massachusetts 01581-5184, or by calling toll free 1-800-999-6809.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
its Distributor. This Prospectus does not constitute an offering by a Fund or by
the Distributor in any jurisdiction in which such offering may not lawfully be
made.
<PAGE>
FORWARD FUNDS, INC.
433 California Street
Suite 1010
San Francisco, California 94104
1-800-999-6809
Statement of Additional Information
dated October 1, 1998
Forward Funds, Inc. (the "Company") is an open-end management investment company
commonly known as a mutual fund. The Company offers five diversified investment
portfolios, The Global Asset Allocation Fund (formerly known as The Global Fund)
(the "Global Fund"), The Small Capitalization Stock Fund (the "Small Cap Fund"),
The Equity Fund (the "Equity Fund"), The International Equity Fund (the
"International Equity Fund") and The Global Bond Fund (the "Global Bond Fund")
(collectively, the "Funds"). There is no assurance that any of the Funds will
achieve its objective.
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the Funds' Prospectus, dated October 1, 1998
("Prospectus"), which has been filed with the Securities and Exchange Commission
("SEC"). A copy of the Prospectus for the Funds may be obtained free of charge
by calling the Distributor at 1-800-999-6809.
TABLE OF CONTENTS
Page
ORGANIZATION OF FORWARD FUNDS, INC.............................................2
MANAGEMENT OF THE FUNDS........................................................2
INVESTMENT OBJECTIVES AND POLICIES.............................................6
SUPPLEMENTAL DISCUSSION OF INVESTMENT TECHNIQUES AND RISKS
ASSOCIATED WITH THE FUNDS' INVESTMENT POLICIES AND
INVESTMENT TECHNIQUES.....................................................8
PORTFOLIO TRANSACTIONS........................................................15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................16
DETERMINATION OF SHARE PRICE..................................................18
SHAREHOLDER SERVICES AND PRIVILEGES...........................................19
DISTRIBUTIONS.................................................................19
TAX CONSIDERATIONS............................................................20
SHAREHOLDER INFORMATION.......................................................24
CALCULATION OF PERFORMANCE DATA...............................................24
GENERAL INFORMATION...........................................................26
FINANCIAL STATEMENTS..........................................................26
APPENDIX A....................................................................27
<PAGE>
ORGANIZATION OF FORWARD FUNDS, INC.
Forward Funds, Inc. is an open-end management investment company which offers
five diversified investment portfolios. The Company was incorporated in Maryland
on October 3, 1997.
The authorized capital stock of the Company consists of six hundred (600)
million shares of one class of common stock having a par value of $0.001 per
share. The Board of Directors of the Company has designated the stock into five
series, the Global Fund, the Small Cap Fund, the Equity Fund, the International
Equity Fund, and the Global Bond Fund, and has authorized the series to offer
two classes. Each Fund currently offers one class of shares (the "Shares").
Holders of Shares of the Funds of the Company have one vote for each Share held,
and a proportionate fraction of a vote for each fractional Share. All Shares
issued and outstanding are fully paid and non-assessable, transferable, and
redeemable at the option of the shareholder. Shares have no preemptive rights.
The Board of Directors may classify or reclassify any unissued Shares of the
Company into Shares of another class or series by setting or changing in any one
or more respects, from time to time, prior to the issuance of such Shares, the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or qualifications of such Shares.
MANAGEMENT OF THE FUNDS
Board of Directors. The Company's Board of Directors oversees the management and
business of the Funds. The Directors and Officers of the Company are listed
below. Their affiliations over the last five years are set forth below. An
asterisk (*) has been placed next to the name of each Director who is an
"interested person," as that term is defined in the Investment Company Act of
1940, as amended (the "1940 Act"), by virtue of that person's affiliation with
the Company, its distributor, its investment advisers or otherwise.
Haig G. Mardikian, Hearst Building, Suite 1000, San Francisco, California 94118.
(Age 50). Director. Mr. Mardikian is primarily involved in real estate
investments and development projects. He is the owner of Haig G. Mardikian
Enterprises, a real estate investment business; a general partner of M&B
Development; general partner of George M. Mardikian Enterprises; and president
and director of Adiuvana-Invest, Inc. In addition to his involvement with the
above-mentioned investment businesses, Mr. Mardikian has served as Managing
Director of United Broadcasting Company and Chairman and Director of SIFE Trust
Fund.
Leo T. McCarthy, One Market, Steuart Tower, Suite 1604, San Francisco,
California 94105. (Age 67). Director. President, The Daniel Group, an
international trade consulting partnership (January 1995 -present); Director,
Linear Technology Corporation (July 1994 - present); Lieutenant Governor of the
State of California (January 1983 - December 1994).
Ronald Pelosi,* 433 California Street, Suite 1010, San Francisco, California
94104. (Age 63). Director. President and Managing Director, Webster Investment
Management Company LLC (August 1998 - Present); President, Sutton Place
Management Co., Inc. (June 1997 - August 1998); Principal, Grayville Associates,
a business consulting firm (June 1996 - Present). Mr. Pelosi was formerly a Vice
President of Korn Ferry International, an executive search consulting firm (June
1994 - June 1996) and President of Ironstone Partners, business consultants
(January 1993 - June 1994).
The Funds pay each Director who is not an interested person (as defined under
the 1940 Act) an annual fee of $6,000. Officers of the Funds and Directors who
are interested persons of the Funds do not receive any compensation from the
Funds or any other funds managed by the Investment Adviser or Sub-Advisers. None
of the officers or Directors of the Funds are affiliated with the Sub-Advisers.
Officers.
Ronald Pelosi, President. 433 California Street, Suite 1010, San Francisco,
California 94104. (Age 63). See "Board of Directors."
Carl Katerndahl, Executive Vice President and Secretary. 433 California Street,
Suite 1010, San Francisco, California 94104. (Age 35). Executive Vice President
and Managing Director, Webster Investment Management Company LLC (August 1998 -
Present); Managing Director and Secretary, Sutton Place Management Co., Inc.
(April 1998-August 1998); Client Service/Sales Representative, NWQ (April
1997-March 1998); Consultant, Morgan Stanley Dean Witter (April 1993-March
1997); Senior Portfolio Manager, Prudential Securities (April 1988-March 1990).
J. Alan Reid, Jr., Executive Vice President and Treasurer. 433 California
Street, Suite 1010, San Francisco, California 94104. (Age 36). Executive Vice
President and Managing Director, Webster Investment Management Company LLC
(August 1998 - Present); Managing Director and Treasurer, Sutton Place
Management Co., Inc. (March 1998-August 1998); Vice President, Regional
Director, Investment Consulting Services, Morgan Stanley, Dean Witter, Discover
& Co. (September 1997 - February 1998); Vice President, Regional Director,
Investment Consulting Services, Dean Witter (May 1994 - September 1997);
Assistant Vice President, Dean Witter (March 1993 - May 1994).
Julie A. Tedesco, Assistant Secretary. 433 California Street, Suite 1010, San
Francisco, California 94104. (Age 40). Counsel to First Data Investor Services
Group, Inc. (May 1994 - present); Assistant Vice President and Counsel, The
Boston Company Advisers, Inc. (July 1992 - May 1994).
Therese M. Hogan, Assistant Secretary. 433 California Street, Suite 1010, San
Francisco, California 94104. (Age 35). Manager (State Regulations), First Data
Investor Services Group, Inc. (June 1994 - present); Senior Legal Assistant,
Palmer & Dodge (October 1993 - May 1994).
Investment Advisers. The Investment Advisers or Sub-Advisers, as the case may
be, serve as investment advisers for the Funds and have certain responsibilities
for the investment management of the assets of the Company (collectively
referred to herein as "Investment Advisers," "Advisers" or "Sub-Advisers").
The Global Fund. Webster Investment Management Company LLC ("Webster") serves as
Investment Adviser for the Global Fund. Webster is a limited liability
corporation recently organized under the laws of the State of Delaware.
The Equity Fund. Webster serves as Investment Adviser for the Equity Fund.
Webster has engaged the services of Barclays Global Fund Advisers ("Barclays")
to act as Sub-Adviser for the Equity Fund. Barclays, a registered investment
adviser under the 1940 Act, is an operating subsidiary of Barclays Global
Investors N.A. ("BGI"), a limited purpose national banking association. Barclays
is located at 45 Fremont Street, San Francisco, California 94105. As of June 30,
1998, Barclays and its affiliates provided investment advisory services for over
$563 billion of assets. Barclays uses a team management approach to manage
investment portfolios.
The International Equity Fund. Webster serves as Investment Adviser for the
International Equity Fund. Webster has engaged the services of Templeton
Investment Counsel, Inc. ("Templeton") to act as Sub-Adviser for the
International Equity Fund. Templeton is an indirect wholly owned subsidiary of
Franklin Resources, Inc. ("Franklin"), a publicly owned company. Through its
subsidiaries, Franklin is engaged in various aspects of the financial services
industry. Templeton and its affiliates serve as advisers for a wide variety of
public investment mutual funds and private clients in many nations and manage
over $256 billion in assets. The Templeton organization has been investing
globally since 1940. Templeton and its affiliates have offices in Australia,
Bahamas, Canada, France, Germany, Italy, Luxembourg, Scotland and the United
States. Templeton's principal business address is 500 East Broward Boulevard,
Suite 2100, Fort Lauderdale, Florida 33394.
Templeton uses a disciplined, long-term approach to value-oriented global and
international investing. It has an extensive global network of investment
research sources. Securities are selected on the basis of fundamental
company-by-company analysis. Many different selection methods are used for
different funds and clients and these methods are changed and improved by
Templeton's research on superior selection methods.
The Global Bond Fund. Webster serves as Investment Adviser for the Global Bond
Fund and has engaged the services of Pacific Investment Management Company
("PIMCO") to act as Sub-Adviser for the Global Bond Fund. PIMCO is an investment
counseling firm founded in 1971, and had approximately $138 billion in assets
under management as of June 30, 1998. PIMCO is a subsidiary of PIMCO Advisors
L.P. ("PIMCO Advisors"). The general partners of PIMCO Advisors are PIMCO
Partners, G.P. and PIMCO Advisors Holdings L.P. ("PAH"). PIMCO Partners, G.P. is
a general partnership between PIMCO Holdings LLC, a Delaware limited liability
company and indirect wholly-owned subsidiary of Pacific Life Insurance Company,
and PIMCO Partners, LLC, a California limited liability company controlled by
the PIMCO Managing Directors. PIMCO Partners, G.P. is the sole general partner
of PAH. PIMCO's address is 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is registered as an investment adviser with the
Securities and Exchange Commission and as a commodity trading adviser with the
CFTC. The portfolio management team is currently led by Lee R. Thomas, III,
Managing Director and Senior International Portfolio Manager for PIMCO. A Fixed
Income Portfolio Manager, Mr. Thomas has managed the PIMCO Foreign Bond, Global
Bond and International Bond Funds since July 13, 1995, and the PIMCO Global Bond
Fund II since October 1, 1995. Prior to joining PIMCO in 1995, Mr. Thomas was
associated with Investcorp as a member of the management committee responsible
for global securities and foreign exchange trading. Prior to Investcorp, he was
associated with Goldman Sachs as an Executive Director in foreign fixed income.
The Small Cap Fund. Webster serves as Investment Adviser for the Small Cap Fund.
Webster has engaged the services of Hoover Capital Management, LLC Hoover to
manage the Small Cap Fund's assets on a day to day basis.
None of the Investment Adviser or the Sub-Advisers are required to furnish any
personnel, overhead items, or facilities for the Company. All fees paid to the
Investment Adviser by the Funds are computed and accrued daily and paid monthly
based on the net asset value of shares of the Funds.
Each Investment Management or Subadvisory Agreement will remain in effect for
two years following its date of execution, and thereafter will automatically
continue for successive annual periods as long as such continuance is
specifically approved at least annually by (a) the Board of Directors or (b) the
vote of a "majority" (as defined in the 1940 Act) of the respective Fund's
outstanding Shares, as applicable, voting as a single class; provided, that in
either event the continuance is also approved by at least a majority of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Investment Adviser by vote cast in person at a meeting called for the
purpose of voting on such approval.
Each such Agreement is terminable without penalty with not less than 60 days'
notice by the Board of Directors or by a vote of the holders of a majority of
the Fund's outstanding Shares voting as a single class, or upon not less than 60
days' notice by such Adviser. Each such Agreement will terminate automatically
in the event of its "assignment" (as defined in the 1940 Act).
Distributor. Shares of the Funds are distributed pursuant to an Agreement
between the Company and First Data Distributors, Inc. (the "Distributor"). The
Distribution Agreement requires the Distributor to solicit orders for the sale
of Shares and to undertake such advertising and promotion as the Distributor
believes reasonable in connection with such solicitation. The Funds and the
Distributor have agreed to indemnify each other against certain liabilities. The
Distribution Agreement will remain in effect for two years and from year to year
thereafter only if its continuance is approved annually by a majority of the
Board of Directors who are not parties to such agreement or "interested persons"
of any such party and must be approved either by votes of a majority of the
Directors or a majority of the outstanding voting securities of the Funds. The
Distribution Agreement may be terminated by either party on at least 60 days'
written notice and will terminate automatically in the event of its assignment
(as defined in the 1940 Act).
Administrator and Transfer Agent. First Data Investor Services Group, Inc.
(hereinafter "Investor Services Group," "Administrator" and "Transfer Agent"),
whose principal business address is 53 State Street, Boston, Massachusetts
02109, acts as the Company's administrator and transfer agent. As Administrator,
Investor Services Group will perform corporate secretarial, treasury and blue
sky services and act as fund accounting agent for the Funds. For its services as
Administrator, the Funds will pay Investor Services Group a monthly fee based on
the average amount of assets invested in the Funds. Investor Services Group will
receive an annual fee of 0.20% up to and including the first $500 million in
assets; 0.17% for assets between $500 million and $1 billion and 0.125% for all
assets over $1 billion. In addition, the Funds will pay Investor Services Group
certain accounting fees and other expenses. The Administration Agreement between
the Funds and Investor Services Group has an initial term of five years and will
renew automatically for successive two year terms. Pursuant to a Transfer Agency
and Services Agreement, Investor Services Group also acts as transfer agent and
dividend disbursing agent for the Funds. The Transfer Agency and Services
Agreement has a term of five years and automatically renews for successive two
year terms. Investor Services Group and First Data Distributors, Inc. are
wholly-owned subsidiaries of First Data Corporation. Shareholder inquiries may
be directed to Investor Services Group or First Data Distributors, Inc. at P.O.
Box 5184, Westborough, Massachusetts 01581-5184.
The Shares of the Funds are sold without a sales charge. The Distributor may use
its own financial resources to pay expenses associated with activities primarily
intended to result in the promotion and distribution of the Funds' shares to pay
expenses associated with providing other services to Shareholders. In some
instances, additional compensation or promotional incentives may be offered to
dealers that have sold or may sell significant amounts of Shares during
specified periods of time. Such compensation and incentives may include, but are
not limited to, cash, merchandise, trips and financial assistance to dealers in
connection with pre-approved conferences or seminars, sales or training programs
for invited sales personnel, payment for travel expenses (including meals and
lodging) incurred by sales personnel and members of their families, or other
invited guests, to various locations for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding the Company
and/or other events sponsored by dealers. See the Prospectus of the Funds for
information on how to purchase and sell Shares of the Funds, and the charges and
expenses associated with an investment.
Shareholder Service Plans. Each Fund has a Shareholder Service Plan applicable
to Shares of the Funds ("Shareholder Service Plans"). The Company intends to
operate the Shareholder Service Plans in accordance with their terms. Under the
Shareholder Service Plans, third party service providers may be entitled to
payment each month in connection with the offering, sale, and Shareholder
servicing of Shares in amounts not to exceed 0.35% of the average daily net
assets of the shares of each Fund.
Under the Shareholder Service Plans, ongoing payments may be made on a quarterly
basis to Participating Organizations for both distribution and Shareholder
servicing at the annual rate of 0.35% of a Fund's average daily net assets of
Shares that are registered in the name of that Participating Organization as
nominee or held in a Shareholder account that designates that Participating
Organization as the dealer of record. These fees may also be used to cover the
expenses of the Distributor primarily intended to result in the sale of shares
of the Funds, including payments to Participating Organizations for selling
shares of the Funds and for servicing shareholders. Activities for which these
fees may be used include: overhead of the Distributor; printing of prospectuses
and SAIs (and supplements thereto) and reports for other than existing
shareholders; payments to dealers and others that provide Shareholder services;
and costs of administering the Shareholder Service Plan.
In the event a Shareholder Service Plan is terminated in accordance with its
terms, the obligations of a Fund to make payments to the Distributor pursuant to
the Shareholder Service Plan will cease and the Fund will not be required to
make any payments for expenses incurred after the date the Plan terminates. The
Funds will receive payment under the Shareholder Service Plans without regard to
actual distribution expenses incurred.
The Shareholder Service Plans have been approved by the Company's Board of
Directors, including all of the Directors who are not interested persons of the
Company, as defined in the 1940 Act. The Shareholder Service Plans must be
renewed annually by the Board of Directors, including a majority of the
Directors who are not interested persons of the Company and who have no direct
or indirect financial interest in the operation of the Shareholder Service
Plans, cast in person at a meeting called for that purpose. The Shareholder
Service Plans may be terminated as to the Company at any time, without any
penalty, by such Directors or by a vote of a majority of the Company's
outstanding Shares on 60 days' written notice.
Any change in the Shareholder Service Plans of the Funds that would increase
materially the expenses paid by the Funds requires Shareholder approval;
otherwise, the Shareholder Service Plans may be amended by the Board of
Directors of the Funds, including a majority of those Directors who are not
"interested persons' and who have no direct or indirect financial interest in
the operation of the Shareholder Service Plans or in any agreements related to
it (the "Independent Directors"), by a vote cast in person.
Third party service providers are required to report in writing to the Board of
Directors at least quarterly on the monies reimbursed to them under the
Shareholder Service Plans, as well as to furnish the Board with such other
information as may reasonably be requested in connection with the payments made
under the Shareholder Service Plans in order to enable the Board to make an
informed determination of whether the Shareholder Service Plans should be
continued.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each of the Funds is a fundamental policy and as
such may not be changed without a vote of the holders of a majority of the
outstanding Shares of the relevant Fund. Non-fundamental policies of each of the
Funds may be changed by the Company's Directors, without a vote of the holders
of a majority of outstanding Shares of a Fund unless (i) the policy is expressly
deemed to be a fundamental policy or (ii) the policy is expressly deemed to be
changeable only by such majority vote. There can be no assurance that the
investment objective of the Funds will be achieved.
Investment Policies
The Equity Fund. The Equity Fund will seek its investment objective by investing
primarily in equity securities of companies located in the United States.
The Global Bond Fund. The Global Bond Fund will seeks its investment objective
by investing primarily in debt securities of companies and governments located
throughout the world.
The International Equity Fund. The International Equity Fund will seeks its
investment objective by investing primarily in equity securities of companies
located outside the United States.
The Global Fund. The Global Fund seeks its investment objective by investing in
a diversified portfolio of the Underlying Funds. Accordingly, the investment
performance of The Global Fund is directly related to the performance of the
Underlying Funds, which may engage in the investment techniques described below.
In addition to shares of the Underlying Funds, for temporary cash management
purposes, The Global Fund may invest in short-term obligations (with maturities
of 12 months or less) consisting of commercial paper, bankers' acceptances,
certificates of deposit, repurchase agreements, reverse repurchase agreements
and dollar roll agreements, obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, asset-backed and
mortgage-related securities, and demand and time deposits of domestic and
foreign banks and savings and loan associations. The Global Fund may also hold
depositary or custodial receipts representing beneficial interests in any of the
foregoing securities.
The Small Cap Fund. The Small Cap Fund will invest at least 65% of its total
assets in the equity securities of companies with market capitalizations at the
time of purchase no larger than the largest market capitalization of the
companies included in the Russell 2000 Index as most recently reported. The
Small Cap Fund expects to invest predominantly in common stocks, but may also
invest in all types of equity and debt securities including preferred stocks,
convertible securities, warrants and foreign securities. There are no limits on
types of equity or debt securities that may be purchased so long as they are
publicly traded. Securities may be issued by companies located in the United
States or in any other country and may include securities issued by governments
or their agencies and instrumentalities.
The Small Cap Fund may invest up to 5% of its assets in securities of emerging
markets. Hoover has broad discretion to identify and invest in countries it
considers to qualify as emerging markets' securities. However, an emerging
market will generally be considered as one located in any country that is
defined as an emerging or developing economy by any of the following: the
International Bank for Reconstruction and Development (e.g., the World Bank),
including its various offshoots, such as the International Finance Corporation,
or the United Nations or its authorities.
Debt securities held by the Small Cap Fund may include securities rated in any
rating category by a Nationally Recognized Securities Rating Organization
("NRSRO") or that are unrated. As a result, the Small Cap Fund may invest in
high risk, lower quality debt securities, commonly referred to as "junk bonds."
The Small Cap Fund will limit its investment in junk bonds (i.e. those rated
lower than the four highest rating categories or if unrated determined to be of
comparable quality) to not more than 25% of the Small Cap Fund's total assets.
Securities purchased by the Small Cap Fund may be listed or unlisted in the
markets where they trade and may be issued by companies in various industries,
with various levels of market capitalization. The Small Cap Fund will not invest
more than 25% of its total assets in securities issued by companies in any one
industry.
* * * * * * *
SUPPLEMENTAL DISCUSSION OF INVESTMENT TECHNIQUES AND RISKS
ASSOCIATED WITH THE FUNDS' INVESTMENT POLICIES AND
INVESTMENT TECHNIQUES
Additional information concerning investment techniques and risks associated
with certain of the Funds' investments is set forth below. Unless otherwise
indicated, the discussion below pertains to all of the Funds.
Inflation-Indexed Bonds
The Global Fund (through its investments in the Global Bond Fund) and the Global
Bond Fund may invest in inflation-indexed bonds. Inflation-indexed securities
issued by the U.S. Treasury will initially have maturities of ten years,
although it is anticipated that securities with other maturities will be issued
in the future. The securities will pay interest on a semi-annual basis, equal to
a fixed percentage of the inflation adjusted principal amount. For example, if
the Global Bond Fund purchased an inflation-indexed bond with a par value of
$1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and
inflation over the first six months were 1%, the mid-year par value of the bond
would be $1,010 and the first semi-annual payment would be $15.15 ($1,010 times
1.5%). If inflation during the second half of the year reached 3%, the
end-of-year par value of the bond would be $1,030 and the second semi-annual
interest payment would be $15.45 ($1,030 times 1.5%).
The U.S. Treasury has only recently commenced issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that the Global Bond Fund may be forced to liquidate
its position when it would not be advantageous to do so. There also can be no
assurance that the U.S. Treasury will issue any particular amount of
inflation-indexed bonds. Certain foreign governments, such as the United
Kingdom, Canada and Australia, have a longer history of issuing
inflation-indexed bonds, and there may be a more liquid market in certain of
these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer
Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the
U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the
cost of living, made up of components such as housing, food, transportation and
energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
Mortgage-Related and Other Asset-Backed Securities
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the Government National Mortgage Association or "GNMA"); or guaranteed by
agencies or instrumentalities of the U.S. Government (in the case of securities
guaranteed by the Federal National Mortgage Association or "FNMA" or the Federal
Home Loan Mortgage Corporation or "FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers or the mortgage poolers.
Repurchase Agreements
In a repurchase agreement, a Fund purchases a security and simultaneously
commits to sell that security back to the original seller at an agreed-upon
price. The resale price reflects the purchase price plus an agreed-upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. To protect a Fund from risk that the original seller will
not fulfill its obligations, the securities are held in accounts of the Fund at
a bank, marked-to-market daily, and maintained at a value at least equal to the
sale price plus the accrued incremental amount. While it does not presently
appear possible to eliminate all risks from these transactions (particularly the
possibility that the value of the underlying security will be less than the
resale price, as well as costs and delays to the Funds in connection with
bankruptcy proceedings), it is the current policy of both of the Funds to engage
in repurchase agreement transactions with parties whose creditworthiness has
been reviewed and found satisfactory by the Sub-Advisers.
Reverse Repurchase Agreements
In a reverse repurchase agreement, a Fund sells a portfolio instrument to
another party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the Funds will maintain appropriate liquid
assets in a segregated custodial account to cover its obligation under the
agreement. The Funds will enter into reverse repurchase agreements only with
parties whose creditworthiness has been found satisfactory by the Investment
Advisers or Sub-Advisers. Such transactions may increase fluctuations in the
market value of a Fund's assets and may be viewed as a form of leverage.
Derivative Instruments
Most swap agreements entered into by a Fund calculate the obligations of the
parties to the agreement on a "net basis." Consequently, the Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
The Fund's current obligations under a swap agreement will be accrued daily
(offset against amounts owed to the Fund), and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of assets determined to be liquid by the
Investment Adviser or Sub-Adviser in accordance with procedures established by
the Board of Directors, to limit any potential leveraging of the Fund's
portfolio.
Obligations under swap agreements so covered will not be construed to be "senior
securities" for purposes of the Funds' investment restriction concerning senior
securities. A Fund will not enter into a swap agreement with any single party if
the net amount owed or to be received under existing contracts with that party
would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Investment Adviser or Sub-Adviser's
ability to correctly predict whether certain types of investments are likely to
produce greater returns than other investments. Because they are two-party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid investments. Moreover, a Fund bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. A Fund
will enter into swap agreements only with counterparties that meet certain
standards for creditworthiness (generally, such counterparties would have to be
eligible counterparties under the terms of the Fund's repurchase agreement
guidelines). Certain restrictions imposed on the Funds by the Internal Revenue
Code of 1986, as amended (the "Code"), may limit a Fund's ability to use swap
agreements. The swap market is a relatively new market and is largely
unregulated. It is possible that developments in the swap market, including
potential government regulation, could adversely affect the Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
Illiquid Securities
The Funds may invest in an illiquid or restricted security if the Investment
Adviser or Sub-Adviser believes that it presents an attractive investment
opportunity. Generally, a security is considered illiquid if it cannot be
disposed of within seven days. Its illiquidity might prevent the sale of such a
security at a time when the Adviser might wish to sell, and these securities
could have the effect of decreasing the overall level of the Funds' liquidity.
Further, the lack of an established secondary market may make it more difficult
to value illiquid securities, requiring the Funds to rely on judgments that may
be somewhat subjective in determining value, which could vary from the amount
that the Funds could realize upon disposition.
Restricted securities, including placements, are subject to legal or contractual
restrictions on resale. They can be eligible for purchase without SEC
registration by certain institutional investors known as "qualified
institutional buyers," and under the Funds' procedures, restricted securities
could be treated as liquid. However, some restricted securities may be illiquid
and restricted securities that are treated as liquid could be less liquid than
registered securities traded on established secondary markets. Each of the Funds
may not invest more than 15% of its total assets in illiquid securities,
measured at the time of investment.
Borrowing
Each of the Funds may borrow up to 15% of the value of its total assets from
banks for temporary or emergency purposes. Under the 1940 Act, each of the Funds
is required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of a Fund's holdings may be
disadvantageous from an investment standpoint. The Funds do not engage in
leveraging by means of borrowing which may exaggerate the effect of any increase
or decrease in the value of portfolio securities or the Funds' net asset values.
Money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the income received from the securities purchased with
borrowed funds.
Debt Securities
The Funds may invest in debt securities that are rated between BBB and as low as
CCC by Standard & Poor's Ratings Services ("S&P") and between Baa and as low as
Caa by Moody's Investors Service, Inc. ("Moody's") or, if unrated, are of
equivalent investment quality as determined by the Investment Advisers or
Sub-Advisers. The market value of debt securities generally varies in response
to changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Funds' net asset values.
Bonds which are rated Baa by Moody's 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. Bonds which are rated C by
Moody's 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.
Bonds rated BBB by S&P 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 in higher rated categories. Bonds rated D by S&P are
the lowest rated class of bonds, and generally are in payment default. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Although they may offer higher yields than higher rated securities, high-risk,
low rated debt securities (commonly referred to as "junk bonds") and unrated
debt securities generally involve greater volatility of price and risk of
principal and income, including the possibility of default by, or bankruptcy of,
the issuers of the securities. In addition, the markets in which low rated and
unrated debt securities are traded are more limited than those in which higher
rated securities are traded. The existence of limited markets for particular
securities may diminish the Funds' ability to sell the securities at fair value
either to meet redemption requests or to respond to a specific economic event
such as a deterioration in the creditworthiness of the issuer. Reduced secondary
market liquidity for certain low rated or unrated debt securities may also make
it more difficult for the Funds to obtain accurate market quotations for the
purposes of valuing their portfolios. Market quotations are generally available
on many low rated or unrated securities only from a limited number of dealers
and may not necessarily represent firm bids of such dealers or prices for actual
sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Funds to achieve their
investment objectives may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would be
the case if the Funds were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interests rates, for example,
could cause a decline in low rated debt securities prices because the advent of
a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the Funds may incur additional expenses seeking
recovery.
Options on Securities, Indexes and Futures
The Funds may write covered put and call options and purchase put and call
options on securities, securities indexes and futures contracts that are traded
on U.S. and foreign exchanges and over-the-counter. An option on a security or a
futures contract is a contract that gives the purchaser of the option, in return
for the premium paid, the right to buy a specified security or futures contract
(in the case of a call option) or to sell a specified security or futures
contract (in the case of a put option) from or to the writer of the option at a
designated price during the term of the option. An option on a securities index
gives the purchaser of the option, in return for the premium paid, the right to
receive from the seller cash equal to the difference between the closing price
of the index and the exercise price of the option.
The Funds may write a call or put option only if the option is "covered." A call
option on a security or futures contract written by a fund is "covered" if the
fund owns the underlying security or futures contract covered by the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option on a security or futures contract is also covered if a
fund holds a call on the same security or futures contract and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the fund in cash or high-grade U.S. government securities in a
segregated account with its custodian. A put option on a security or futures
contract written by a Fund is "covered" if the Fund maintains cash or
fixed-income securities with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security or futures
contract and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written.
The Funds will cover call options on securities indexes that they write by
owning securities whose price changes, in the opinion of the Investment Adviser
or Sub-Adviser, are expected to be similar to those of the index, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, where a Fund
covers a call option on a securities index through ownership of securities, such
securities may not match the composition of the index. In that event, the Fund
will not be fully covered and could be subject to risk of loss in the event of
adverse changes in the value of the index. A Fund will cover put options on
securities indices that it writes by segregating assets equal to the option's
exercise price, or in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations.
The Funds will receive a premium from writing a put or call option, which
increases their gross income in the event the option expires unexercised or is
closed out at a profit. If the value of a security, index or futures contract on
which a Fund has written a call option falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction costs)
that could offset all or a portion of any decline in the value of the portfolio
securities being hedged. If the value of the underlying security, index or
futures contract rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in its
investments. By writing a put option, a Fund assumes the risk of a decline in
the underlying security, index or futures contract. To the extent that the price
changes of the portfolio securities being hedged correlate with changes in the
value of the underlying security, index or futures contract, writing covered put
options will increase the Fund's losses in the event of a market decline,
although such losses will be offset in part by the premium received for writing
the option.
A Fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, the Fund will seek to offset a decline in
value of the portfolio securities being hedged through appreciation of the put
option. If the value of the Fund's investments does not decline as anticipated,
or if the value of the option do not increase, the Fund's loss will be limited
to the premium paid for the option plus related transaction costs. The success
of this strategy will depend, in part, on the accuracy of the correlation
between the changes in value of the underlying security, index or futures
contract and the changes in value of the Fund's security holdings being hedged.
A Fund may purchase call options on individual securities or futures contracts
to hedge against an increase in the price of securities or futures contracts
that it anticipates purchasing in the future. Similarly, a Fund may purchase
call options on a securities index to attempt to reduce the risk of missing a
broad market advance, or an advance in an industry or market segment, at a time
when the Fund holds uninvested cash or short-term debt securities awaiting
reinvestment. When purchasing call options, a Fund will bear the risk of losing
all or a portion of the premium paid if the value of the underlying security,
index or futures contract does not rise.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although a Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, it may experience losses in some cases as a result of such
inability. The value of over-the-counter options purchased by a Fund, as well as
the cover for options written by a Fund, are considered not readily marketable
and are subject to the Company's limitation on investments in securities that
are not readily marketable.
A Fund's ability to reduce or eliminate its futures and related options
positions will depend upon the liquidity of the secondary markets for such
futures and options. Each Fund intends to purchase or sell futures and related
options only on exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. Use of futures and
options for hedging may involve risks because of imperfect correlations between
movements in the prices of the futures or options and movements in the prices of
the securities being hedged. Successful use of futures and related options by a
Fund for hedging purposes also depends upon the Investment Adviser's or
Sub-Advisers' ability to predict correctly movements in the direction of the
market, as to which no assurance can be given.
There are several risks associated with transactions in options on securities
indexes. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when a Fund seeks to close out an
option position. If a Fund were unable to close out an option that it had
purchased on a securities index, it would have to exercise the option in order
to realize any profit or the option may expire worthless. If trading were
suspended in an option purchased by a Fund, it would not be able to close out
the option. If restrictions on exercise were imposed, a Fund might be unable to
exercise an option it had purchased. Except to the extent that a call option on
an index written by a Fund is covered by an option on the same index purchased
by the Fund, movements in the index may result in a loss to the Fund; however,
such losses may be mitigated by changes in the value of the Fund's securities
during the period the option was outstanding.
Investment in Foreign and Developing Markets
The Global (through its investments in Underlying Funds), International Equity
and Global Bond Funds may purchase securities in any foreign country, developed
or developing. Potential investors in these Funds should consider carefully the
substantial risks involved in securities of companies and governments of foreign
nations, which are in addition to the usual risks inherent in domestic
investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the United
States. Most foreign companies are not generally subject to uniform accounting
and financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The Funds, therefore,
may encounter difficulty in obtaining market quotations for purposes of valuing
its portfolio and calculating its net asset value. Foreign markets have
substantially less volume than the New York Stock Exchange ("NYSE") and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign countries,
which are generally fixed rather than subject to negotiation as in the United
States, are likely to be higher. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the United States.
Investments in businesses domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include: (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Funds' investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
The Funds attempt to buy and sell foreign currencies on as favorable a basis as
practicable. Some price spread on currency exchanges (to cover service charges)
may be incurred, particularly when the Funds change investments from one country
to another or when proceeds of the sale of shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent the Funds from transferring cash out of the country
or withhold portions of interest and dividends at the source. There is the
possibility of cessation of trading on national exchanges, expropriation,
nationalization or confiscatory taxation, withholding and other foreign taxes on
income or other amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in foreign
nations.
The Funds may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the Funds may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluation in the currencies in which the Funds' portfolio securities are
denominated may have a detrimental impact on the Funds.
Year 2000 Concerns
The services provided to the Funds by the Investment Adviser, Sub-Advisers,
Investor Services Group and the Distributor are dependent upon the operation of
these service providers' computer systems. Many computer software systems in use
today cannot distinguish between the year 2000 and the year 1900 because of the
way dates are encoded and calculated (the "Year 2000 Problem"). The failure to
make this distinction could have a negative implication on handling securities
trades, pricing and account services. Each of the Investment Adviser,
Sub-Advisers, Investor Services Group and the Distributor are taking steps that
each believes are reasonably designed to address the Year 2000 Problem with
respect to the computer systems that they use. Although there can be no
assurances, the Funds believe these steps will be sufficient to avoid any
adverse impact on the Funds. The Year 2000 Problem may also adversely affect the
companies whose shares the Funds have purchased. If the business of an issuer in
which the Fund has invested experiences difficulties due to the Year 2000
Problem the market value of its securities may decrease. The Funds are unable to
predict what impact, if any, the Year 2000 Problem will have on the issuers of
securities in which it invests.
PORTFOLIO TRANSACTIONS
The Investment Adviser and Sub-Advisers (the "Adviser" or "Advisers") are
authorized to select the brokers or dealers that will execute transactions to
purchase or sell investment securities for the Funds. In all purchases and sales
of securities for the Funds, the primary consideration is to obtain the most
favorable price and execution available. Pursuant to the Investment Management
Agreement and/or Sub-Advisory Agreements, each Adviser determines which brokers
are to be eligible to execute portfolio transactions of the Funds. Purchases and
sales of securities in the over-the-counter market will generally be executed
directly with a "market-maker," unless in the opinion of the Adviser, a better
price and execution can otherwise be obtained by using a broker for the
transaction.
In placing portfolio transactions, each Adviser will use its best efforts to
choose a broker capable of providing the brokerage services necessary to obtain
the most favorable price and execution available. The full range and quality of
brokerage services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors such as the firm's ability to engage in
transactions in shares of banks and thrifts that are not listed on an organized
stock exchange. Consideration may also be given to those brokers that supply
research and statistical information to the Funds and/or the Advisers, and
provide other services in addition to execution services. The placement of
portfolio brokerage with broker-dealers who have sold Shares of the Funds is
subject to rules adopted by the National Association of Securities Dealers, Inc.
("NASD"). The Advisers may also consider the sale of their shares as a factor in
the selection of broker-dealers to execute its portfolio transactions.
While it will be the Company's general policy to seek to obtain the most
favorable price and execution available, in selecting a broker to execute
portfolio transactions for the Funds, the Adviser may also give weight to the
ability of a broker to furnish brokerage and research services to the Funds or
the Adviser. In negotiating commissions with a broker, the Adviser may therefore
pay a higher commission than would otherwise be the case if no weight were given
to the furnishing of these supplemental services, provided that the amount of
such commission has been determined in good faith by the Adviser to be
reasonable in relation to the value of the brokerage and research services
provided by such broker, which services either produce a direct benefit to the
Funds or assist the Adviser in carrying out its responsibilities to the Funds or
its other clients.
Purchases of the Funds' Shares also may be made directly from issuers or from
underwriters. Where possible, purchase and sale transactions will be effected
through dealers which specialize in the types of securities which the Funds will
be holding, unless better executions are available elsewhere. Dealers and
underwriters usually act as principals for their own account. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter which has
provided such research or other services as mentioned above.
Some securities considered for investment by the Funds may also be appropriate
for other clients served by the Funds' Advisers. If the purchase or sale of
securities consistent with the investment policies of the applicable Fund and
one or more of these other clients serviced by the Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
Funds and the Advisers' other clients in a manner deemed fair and reasonable by
the Adviser. There is no specified formula for allocating such transactions.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered at the net asset value next computed following
receipt of the order by the dealer and/or by the Company's Distributor or
Transfer Agent. The Funds may authorize one or more brokers to receive on their
behalf purchase and redemption orders and such brokers are authorized to
designate other intermediaries as approved by the Funds to receive purchase and
redemption orders on the Funds' behalf. The Funds will be deemed to have a
received a purchase or redemption order when an authorized broker or, if
approved by the Funds, a broker's authorized designee, receives the order. The
Distributor, at its expense, may provide additional promotional incentives to
dealers in connection with the sales of Shares and other funds managed by the
Advisers. In some instances, such incentives may be made available only to
dealers whose representatives have sold or are expected to sell significant
amounts of such Shares. The incentives may include payment for travel expenses,
including lodging, incurred in connection with trips taken by qualifying
registered representatives and members of their families to locations within or
outside of the United States, merchandise or other items. Dealers may not use
sales of the Shares to qualify for the incentives to the extent such may be
prohibited by the laws of any state in the United States.
Telephone Redemption and Exchange Privileges. As discussed in the Funds'
Prospectus, the telephone redemption and exchange privileges are available for
all Shareholder accounts; however, retirement accounts may not utilize the
telephone redemption privilege. The telephone privileges may be modified or
terminated at any time. The privileges are subject to the conditions and
provisions set forth below and in the Prospectus.
1. Telephone redemption and/or exchange instructions received in
good order before the pricing of the Funds on any day on which
the NYSE is open for business (a "Business Day"), but not later
than 4:00 p.m., Eastern time, will be processed at that day's
closing net asset value. There is no fee for redemptions.
2. Telephone redemptions and/or exchange instructions should be
made by dialing 1-800-999-6809.
3. The Transfer Agent will not permit exchanges in violation of
any of the terms and conditions set forth in the Prospectus or
herein.
4. Telephone redemption requests must meet the following
conditions to be accepted by the Transfer Agent:
(a) Proceeds of the redemption may be directly
deposited into a predetermined bank account, or
mailed to the current address on the application.
This address cannot reflect any change within the
previous sixty (60) days.
(b) Certain account information will need to be
provided for verification purposes before the
redemption will be executed.
(c) Only one telephone redemption (where proceeds are
being mailed to the address of record) can be
processed within a 30 day period.
(d) The maximum amount which can be liquidated and
sent to the address of record at any one time is
$50,000.
(e) The minimum amount which can be liquidated and
sent to a predetermined bank account is $5,000.
Matters Affecting Redemptions. Payments to shareholders for Shares redeemed will
be made within seven days after receipt by the Transfer Agent of the request in
proper form (payments by wire will generally be transmitted on the next Business
Day), except that the Company may suspend the right of redemption or postpone
the date of payment as to the Funds during any period when (a) trading on the
NYSE is restricted as determined by the SEC or such exchange is closed for other
than weekends and holidays; (b) an emergency exists as determined by the SEC
making disposal of portfolio securities or valuation of net assets of the Funds
not reasonably practicable; or (c) for such other period as the SEC may permit
for the protection of the Funds' shareholders. At various times, a Fund may be
requested to redeem Shares for which it has not yet received good payment.
Accordingly, a Fund may delay the mailing of a redemption check until such time
as the Fund has assured itself that good payment has been collected for the
purchase of such Shares, which may take up to 15 days.
Net Asset Value. The Funds intend to pay in cash for all Shares redeemed, but
under abnormal conditions that make payment in cash unwise, the Funds may make
payment wholly or partly in securities at their then current market value equal
to the redemption price. In such case, an investor may incur brokerage costs in
converting such securities to cash. In the event the Funds liquidate portfolio
securities to meet redemptions, the Funds reserve the right to reduce the
redemption price by an amount equivalent to the pro-rated cost of such
liquidation not to exceed one percent of the net asset value of such Shares.
Due to the relatively high cost of handling small investments, the Funds reserve
the right, upon 30 days' written notice, to redeem, at net asset value, the
Shares of any Shareholder whose account has a value of less than $1,000 in a
Fund, other than as a result of a decline in the net asset value per Share.
Before a Fund redeems such Shares and sends the proceeds to the shareholder, it
will notify the Shareholder that the value of the shares in the account is less
than the minimum amount and will allow the Shareholder 60 days to make an
additional investment in an amount that will increase the value of the account
to at least $1,000 before the redemption is processed. This policy will not be
implemented where the Company has previously waived the minimum investment
requirements and involuntary redemptions will not result from fluctuations in
the value of the shareholder's Shares.
The value of Shares on redemption or repurchase may be more or less than the
investor's investment, depending upon the market value of the portfolio
securities at the time of redemption or repurchase.
DETERMINATION OF SHARE PRICE
The net asset value and offering price of each of the Funds' Shares will be
determined once daily as of the close of trading on the NYSE (4:00 p.m., Eastern
time) during each day on which the NYSE is open for trading, the Federal Reserve
Bank of San Francisco is open, and any other day except days on which there are
insufficient changes in the value of a Fund's portfolio securities to affect
that Fund's net asset value or days on which no Shares are tendered for
redemption and no order to purchase any Shares is received. As of the date of
this SAI, the NYSE and/or the Federal Reserve Bank of San Francisco are closed
on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the average of the last reported
bid and ask price on the valuation day. In cases in which securities are traded
on more than one exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary market.
Portfolio securities which are primarily traded on foreign securities exchanges,
other than the London Stock Exchange, are generally valued at the preceding
closing values of such securities on their respective exchanges, except when an
occurrence subsequent to the time a value was so established is likely to have
changed such value. In such an event, the fair value of those securities will be
determined through the consideration of other factors by or under the direction
of the Board of Directors. Securities for which quotations are not readily
available and all other assets will be valued at their respective fair values as
determined in good faith by or under the direction of the Board of Directors of
the Company. Puts, calls and futures contracts purchased and held by the Funds
are valued at the close of the securities or commodities exchanges on which they
are traded. Options on securities and indices purchased by the Funds generally
are valued at their last bid price in the case of exchange-traded options or, in
the case of options traded on the over the counter market, the average of the
last bid price as obtained from two or more dealers unless there is only one
dealer, in which case that dealer's price is used. Futures contracts will be
valued with reference to established futures exchanges. The value of options on
futures contracts is determined based upon the current settlement price for a
like option acquired on the day on which the option is being valued. A
settlement price may not be used for the foregoing purposes if the market makes
a limit move with respect to a particular commodity. The value of all assets and
liabilities expressed in foreign currencies will be converted into U.S. dollar
values at the mean between the buying and selling rates of such currencies
against U.S. dollars last quoted by any major bank or broker-dealer. The Funds
generally value their holdings through the use of independent pricing agents,
except for securities which are valued under the direction of the Board of
Directors or which are valued by the Investment Adviser and/or Sub-Advisers
using methodologies approved by the Board of Directors.
The net asset value per Share of each of the Funds will fluctuate as the value
of the Funds' investments change. Net asset value per Share for each of the
Funds for purposes of pricing sales and redemptions is calculated by dividing
the value of all securities and other assets belonging to a Fund, less the
liabilities charged to that Fund by the number of such Fund's outstanding
Shares.
Orders received by dealers prior to the close of trading on the NYSE will be
confirmed at the offering price computed as of the close of trading on the NYSE
provided the order is received by the Transfer Agent prior to its close of
business that same day (normally 4:00 p.m., Eastern time). It is the
responsibility of the dealer to insure that all orders are transmitted in a
timely manner to a Fund. Orders received by dealers after the close of trading
on the NYSE will be confirmed at the next computed offering price as described
in the Funds' Prospectus.
SHAREHOLDER SERVICES AND PRIVILEGES
For investors purchasing Shares under a tax-qualified individual retirement or
pension plan or under a group plan through a person designated for the
collection and remittance of monies to be invested in Shares on a periodic
basis, the Funds may, in lieu of furnishing confirmations following each
purchase of Fund shares, send statements no less frequently than quarterly,
pursuant to the provisions of the Securities Exchange Act of 1934, as amended
("1934 Act"), and the rules thereunder. Such quarterly statements, which would
be sent to the investor or to the person designated by the group for
distribution to its members, will be made within five business days after the
end of each quarterly period and shall reflect all transactions in the
investor's account during the preceding quarter.
All Shareholders will receive a confirmation of each new transaction in their
accounts. CERTIFICATES REPRESENTING SHARES OF THE COMPANY WILL NOT BE ISSUED
UNLESS THE SHAREHOLDER REQUESTS THEM IN WRITING.
Self-Employed and Corporate Retirement Plans. For self-employed individuals and
corporate investors that wish to purchase Shares, there is available through the
Company a Prototype Plan and Custody Agreement. For further details, including
the right to appoint a successor Custodian, see the Plan and Custody Agreements
as provided by the Company. Employers who wish to use Shares of the Company
under a custodianship with another bank or trust company must make individual
arrangements with such institution.
Individual Retirement Accounts. Investors having earned income are eligible to
purchase Shares of the Funds under an individual retirement account ("IRA")
pursuant to Section 408(a) of the Code. An individual who creates an IRA may
contribute annually certain dollar amounts of earned income, and an additional
amount if there is a non-working spouse. Simplified Employee Pension Plans
("Simple IRAs") which employers may establish on behalf of their employees are
also available. Full details on the IRA and Simple IRA are contained in Internal
Revenue Service required disclosure statements, and the Custodian will not open
an IRA until seven days after the investor has received such statement from the
Company. An IRA funded by Shares of the Funds may also be used by employers who
have adopted a Simplified Employee Pension Plan.
Purchases of Shares by Section 403(b) retirement plans and other retirement
plans are also available. It is advisable for an investor considering the
funding of any retirement plan to consult with an attorney or to obtain advice
from a competent retirement plan consultant.
DISTRIBUTIONS
Shareholders have the privilege of reinvesting both income dividends and capital
gains distributions, if any, in additional Shares of the Funds at the then
current net asset value, with no sales charge. Alternatively, a Shareholder can
elect at any time to receive dividends and/or capital gains distributions in
cash. In the absence of such an election, each purchase of Shares of the Funds
is made upon the condition and understanding that the Transfer Agent is
automatically appointed the shareholder's agent to receive the investor's
dividends and distributions upon all Shares registered in the investor's name
and to reinvest them in full and fractional Shares of the Funds at the
applicable net asset value in effect at the close of business on the
reinvestment date. A Shareholder may still at any time after a purchase of
Shares of the Funds request that dividends and/or capital gains distributions be
paid to the investor in cash.
TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
generally affecting the Funds and their Shareholders. This discussion does not
provide a detailed explanation of all tax consequences, and Shareholders are
advised to consult their own tax advisers with respect to the particular
consequences to them of an investment in the Funds.
Qualification as a Regulated Investment Company. Each of the Funds intends to
qualify as a regulated investment company under the Code. To so qualify, a Fund
must, among other things, in each taxable year: (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities and gains
from the sale or other disposition of foreign currencies, or other income
(including gains from options, futures contracts and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter, (i)
at least 50% of the value of the Fund's total assets is represented by cash and
cash items, U.S. Government securities, securities of other regulated investment
companies, and other securities, with such other securities limited in respect
of any one issuer to an amount not greater in value than 5% of the Fund's total
assets and to not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's total assets is
invested in the securities (other than U.S. Government securities or securities
of other regulated investment companies) of any one issuer or of any two or more
issuers that the Fund controls and that are determined to be engaged in the same
business or similar or related businesses; and (c) distribute at least 90% of
its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses).
The status of the Funds as regulated investment companies does not involve
government supervision of management or of their investment practices or
policies. As a regulated investment company, each Fund generally will be
relieved of liability for U.S. federal income tax on that portion of its
investment company taxable income and net realized capital gains which it
distributes to its Shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are subject to a
nondeductible 4% excise tax. To prevent application of the excise tax, the Funds
intend to make distributions in accordance with the calendar year distribution
requirement.
Distributions. Dividends of investment company taxable income (including net
short-term capital gains) are taxable to Shareholders as ordinary income,
whether received in cash or reinvested in Fund Shares. The Funds' distributions
of investment company taxable income may be eligible for the corporate
dividends-received deduction to the extent attributable to the Funds' dividend
income from U.S. corporations, and if other applicable requirements are met.
However, the alternative minimum tax applicable to corporations may reduce the
benefit of the dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
designated by the Funds as capital gains dividends are taxable to Shareholders,
whether received in cash or reinvested in Fund Shares, as long-term capital
gains, regardless of the length of time the Funds' Shares have been held by a
Shareholder, and are not eligible for the dividends-received deduction. Any
distributions that are not from the Funds' investment company taxable income or
net capital gains may be characterized as a return of capital to Shareholders
or, in some cases, as capital gains. Shareholders will be notified annually as
to the federal tax status of dividends and distributions they receive and any
tax withheld thereon.
Dividends, including capital gain dividends, declared in October, November, or
December with a record date in such month and paid during the following January
will be treated as having been paid by the Funds and received by Shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Distributions by a Fund reduce the Net Asset Value of that Fund's Shares. Should
a distribution reduce the net asset value below a Shareholder's cost basis, the
distribution nevertheless may be taxable to the Shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying Shares just prior to a
distribution by a Fund. The price of Shares purchased at that time includes the
amount of the forthcoming distribution, but the distribution will generally be
taxable to the Shareholder.
Original Issue Discount. Certain debt securities acquired by a Fund may be
treated as debt securities that were originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by a Fund, original issue discount
that accrues on a debt security in a given year generally is treated for federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code.
Some debt securities may be purchased by a Fund at a discount which exceeds the
original issue discount on such debt securities, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any taxable debt security having market discount
generally will be treated as ordinary income to the extent it does not exceed
the accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by a Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semi-annual compounding of interest.
Options, Futures and Foreign Currency Forward Contracts; Straddle Rules. A
Fund's transactions in foreign currencies, forward contracts, options, and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (that
is, may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are treated as long-term or
short-term capital gains or losses. These rules could therefore, in turn, affect
the character, amount, and timing of distributions to Shareholders. These
provisions also may require the Fund to mark-to-market certain positions in its
portfolio (that is, treat them as if they were sold), which may cause the Fund
to recognize income without receiving cash to use to make distributions in
amounts necessary to avoid income and excise taxes. A Fund will monitor its
transactions and may make such tax elections as management deems appropriate
with respect to foreign currency, options, futures contracts, forward contracts,
or hedged investments. A Fund's status as a regulated investment company may
limit its ability to engage in transactions involving foreign currency, futures,
options, and forward contracts.
Certain transactions undertaken by the Funds may result in "straddles" for
federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Funds, and losses realized by the Funds on
positions that are part of a straddle may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for the
taxable year in which the losses are realized. In addition, certain carrying
charges (including interest expense) associated with positions in a straddle may
be required to be capitalized rather than deducted currently. Certain elections
that the Funds may make with respect to its straddle positions may also affect
the amount, character and timing of the recognition of gains or losses from the
affected positions.
Constructive Sales. Under certain circumstances, a Fund may recognize a gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was substantially disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
Currency Fluctuation - Section 988 Gains and Losses. Gains or losses
attributable to fluctuations in foreign currency exchange rates that occur
between the time the Funds accrue receivables or expenses denominated in a
foreign currency and the time the Funds actually collect such receivables or pay
such liabilities generally are treated as ordinary income or loss. Similarly, on
disposition of certain investments (including debt securities denominated in a
foreign currency and certain futures contracts, forward contracts, and options),
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or other instrument and the date
of disposition also are treated as ordinary income or loss. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of a Fund's investment company taxable income
available to be distributed to its Shareholders as ordinary income.
Passive Foreign Investment Companies. Some of the Funds may invest in the stock
of foreign companies that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute passive assets (such as
stocks or securities) or if 75% or more of its gross income is passive income
(such as, but not limited to, interest, dividends, and gain from the sale of
securities). If a Fund receives an "excess distribution" with respect to PFIC
stock, the Fund will generally be subject to tax on the distribution as if it
were realized ratably over the period during which the Fund held the PFIC stock.
The Fund will be subject to tax on the portion of an excess distribution that is
allocated to prior Fund taxable years, and an interest factor will be added to
the tax, as if it were payable in such prior taxable years. Certain
distributions from a PFIC and gain from the sale of PFIC shares are treated as
excess distributions. Excess distributions are characterized as ordinary income
even though, absent application of the PFIC rules, certain excess distributions
might have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect to
PFIC stock. Under an election that is available in some circumstances, a Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions were
received from the PFIC in a given year. If this election were made, the rules
relating to the taxation of excess distributions would not apply. In addition,
another election would involve marking-to-market the Fund's PFIC shares at the
end of each taxable year, with the result that unrealized gains would be treated
as though they were realized and reported as ordinary income. Any mark-to-market
losses and any loss from an actual disposition of PFIC shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years.
Other Investment Companies. It is possible that by investing in other investment
companies, the Funds may not be able to meet the calendar year distribution
requirement and may be subject to federal income and excise tax. The
diversification and distribution requirements applicable to the Funds may limit
the extent to which the Funds will be able to invest in other investment
companies.
Sale or Other Disposition of Shares. Upon the sale or exchange of his Shares, a
Shareholder will realize a taxable gain or loss depending upon his basis in the
Shares. Such gain or loss will be treated as capital gain or loss if the Shares
are capital assets in the Shareholder's hands; gain will generally be taxed as
long-term capital gain if the Shareholder's holding period is more than one
year. Gain from disposition of Shares held not more than one year will be
treated as short-term capital gain. Any loss realized on a sale or exchange will
be disallowed to the extent that the Shares disposed of are replaced (including
replacement through the reinvesting of dividends and capital gain distributions)
within a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the Shares. In such a case, the basis of the Shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a Shareholder
on the sale of Fund Shares held by the Shareholder for six months or less will
be treated for federal income tax purposes as a long-term capital loss to the
extent of any distributions of capital gain dividends received by the
Shareholder with respect to such Shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their Shares. This prohibition generally applies where (1) the
Shareholder incurs a sales charge in acquiring Fund Shares, (2) the Shares are
disposed of before the 91st day after the date on which they were acquired, and
(3) the Shareholder subsequently acquires Shares of the same or another Fund and
the otherwise applicable sales charge is reduced or eliminated under a
"reinvestment right" received upon the initial purchase of Shares. In that case,
the gain or loss recognized will be determined by excluding from the tax basis
of the Shares exchanged all or a portion of the sales charge incurred in
acquiring those Shares. This exclusion applies to the extent that the otherwise
applicable sales charge with respect to the newly acquired Shares is reduced as
a result of having incurred a sales charge initially. Sales charges affected by
this rule are treated as if they were incurred with respect to the Shares
acquired under the reinvestment right. This provision may be applied to
successive acquisitions of Shares.
Backup Withholding. The Funds generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to a Shareholder if (1) the
Shareholder fails to furnish the Funds with the Shareholder's correct taxpayer
identification number or social security number and to make such certifications
as the Funds may require, (2) the IRS notifies the Shareholder or the Funds that
the Shareholder has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (3) when required
to do so, the Shareholder fails to certify that he is not subject to backup
withholding. Any amounts withheld may be credited against the Shareholder's
federal income tax liability.
Foreign Shareholders. Taxation of a Shareholder who, as to the United States, is
a nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the applicable Fund is "effectively connected" with a U.S. trade or business
carried on by such Shareholder.
If the income from the applicable Fund is not effectively connected with a U.S.
trade or business carried on by a foreign Shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower treaty
rate) upon the gross amount of the dividend. The foreign Shareholder would
generally be exempt from U.S. federal income tax on gains realized on the sale
of Shares of the applicable Fund, capital gain dividends and amounts retained by
the applicable Fund that are designated as undistributed capital gains.
If the income from the applicable Fund is effectively connected with a U.S.
trade or business carried on by a foreign Shareholder, then ordinary income
dividends, capital gain dividends and any gains realized upon the sale of Shares
of the applicable Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
Foreign noncorporate Shareholders may be subject to backup withholding on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless such Shareholders furnish the Funds with proper
certification of their foreign status.
The tax consequences to a foreign Shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
Shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Funds, including the
applicability of foreign taxes.
Future Changes in Law; Other Taxes. The foregoing general discussion of U.S.
federal income tax consequences is based on the Code and the Treasury
Regulations issued thereunder as in effect on the date of this SAI. Future
legislative or administrative changes or court decisions may significantly
change the preceding conclusions, and any changes or decisions may have a
retroactive effect.
Rules of state and local taxation of ordinary income dividends and capital gains
dividends from regulated investment companies often differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investment in the Funds.
SHAREHOLDER INFORMATION
Certificates representing Shares of the Funds will not normally be issued to
shareholders. The Transfer Agent will maintain an account for each Shareholder
upon which the registration and transfer of Shares are recorded, and any
transfers shall be reflected by bookkeeping entry, without physical delivery.
The Transfer Agent will require that a Shareholder provide requests in writing,
accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
The Company reserves the right, if conditions exist that make cash payments
undesirable, to honor any request for redemption or repurchase order with
respect to Shares of the Funds by making payment in whole or in part in readily
marketable securities chosen by the Company and valued as they are for purposes
of computing the Funds' net asset values (redemption-in-kind). If payment is
made in securities, a Shareholder may incur transaction expenses in converting
theses securities to cash. The Company has elected, however, to be governed by
Rule 18f-1 under the 1940 Act as a result of which the Funds are obligated to
redeem Shares with respect to any one Shareholder during any 90-day period
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
relevant Fund at the beginning of the period.
CALCULATION OF PERFORMANCE DATA
The Funds may, from time to time, include "total return" in advertisements or
reports to shareholders or prospective investors. Quotations of average annual
total return will be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in the Funds over periods of 1, 5 and 10
years (up to the life of the Funds), calculated pursuant to the following
formula which is prescribed by the SEC:
P(1 + T)n = ERV
Where:
P= a hypothetical initial payment of $1,000,
T= the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From time to time, the Funds may advertise their average annual total return
over various periods of time. These total return figures show the average
percentage change in the value of an investment in the Funds from the beginning
date of the measuring period. These figures reflect changes in the price of the
Fund's Shares and assume that any income dividends and/or capital gains
distributions made by the Funds during the period were reinvested in Shares of
the Funds. Figures will be given for 1, 5 and 10 year periods (if applicable)
and may be given for other periods as well (such as from commencement of the
applicable Fund's operations, or on a year-by-year basis).
Quotations of yield for the Funds will be based on all investment income per
Share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
Share on the last day of the period, according to the following formula:
[FORMULA OMITTED]
Where:
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per Share on the last day of the
period.
Additional Performance Quotations. Advertisements of total return will always
show a calculation that includes the effect of the maximum sales charge but may
also show total return without giving effect to that charge. Because these
additional quotations will not reflect the maximum sales charge payable, these
performance quotations will be higher than the performance quotations that
reflect the maximum sales charge.
Total returns are based on past results and do not predict future performance.
Performance Comparisons. In reports or other communications to shareholders or
in advertising material, each Fund may compare the performance of its Shares
with that of other mutual funds as listed in the rankings prepared by Lipper
Analytical Services, Inc., Morningstar, Inc., CDA Technologies, Inc., or similar
independent services that monitor the performance of mutual funds or with other
appropriate indexes of investment securities. In addition, certain indexes may
be used to illustrate historic performance of select asset classes. The
performance information may also include evaluations of the Funds published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Money and The Wall Street Journal. If the Funds compare their
performance to other funds or to relevant indexes, the Funds' performance will
be stated in the same terms in which such comparative data and indexes are
stated, which is normally total return rather than yield. For these purposes the
performance of the Funds, as well as the performance of such investment
companies or indexes, may not reflect sales charges, which, if reflected, would
reduce performance results.
Reports and promotional literature may also contain the following information:
(i) a description of the gross national or domestic product and populations,
including age characteristics, of various countries and regions in which the
Funds may invest, as compiled by various organizations, and projections of such
information; (ii) the performance of U.S. equity and debt markets; (iii) the
geographic distribution of the Company's portfolios; and (iv) the number of
shareholders in the Funds and the dollar amount of the assets under management.
In addition, reports and promotional literature may contain information
concerning the Advisers, or affiliates of the Company, including (i) performance
rankings of other funds managed by the Advisers, or the individuals employed by
the Advisers who exercise responsibility for the day-to-day management of the
Company, including rankings of mutual funds published by Lipper Analytical
Services, Inc., Morningstar, Inc., CDA Technologies, Inc., or other rating
services, companies, publications or other persons who rank mutual funds or
other investment products on overall performance or other criteria; and (ii)
lists of clients, the number of clients, or assets under management.
GENERAL INFORMATION
Custodian. The Funds' cash and securities owned by the Company are held by Brown
Brothers Harriman & Co., as Custodian, which takes no part in the decisions
relating to the purchase or sale of the Company's portfolio securities. As
Custodian, Brown Brothers Harriman & Co. also acts as Foreign Custody Manager
for the foreign securities of the Funds.
Legal Counsel. Legal matters for the Company are handled by Dechert Price &
Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006.
Independent Auditors. Arthur Andersen, LLP, Spear Street Tower, 1 Market, Suite
3500, San Francisco, California 94105-9019, acts as independent auditors for the
Company.
Other Information. The Company is registered with the SEC as an open-end
management investment company. Such registration does not involve supervision of
the management or policies of the Company by any governmental agency. The Funds'
Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC and copies of this information may be
obtained from the SEC upon payment of the prescribed fee or examined at the SEC
in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their investments in the Funds
through annual and semi-annual reports showing portfolio composition,
statistical data and any other significant data, including financial statements
audited by the independent certified public accountants.
FINANCIAL STATEMENTS
Unaudited financial statements relating to the Funds will be prepared
semi-annually and distributed to shareholders. Audited financial statements will
be prepared annually and distributed to shareholders. Since the Small Cap Fund,
International Equity Fund, Equity Fund and Global Bond Funds were only recently
organized and this is the first offering of their Shares, there are no financial
statements at this time.
<PAGE>
APPENDIX A
Rated Investments
Corporate Bonds
Excerpts from Moody's Investors Services, Inc. ("Moody's") description
of its bond ratings:
"Aaa": Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or 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 that 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 fluctuations 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 that 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 sometime in the
future.
"Baa": Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appears 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 that 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 that are rated "B" generally lack characteristics of
desirable investments. 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 that are rated "Caa" are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" through "B." The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
Excerpts from Standard & Poor's Corporation ("S&P") description of its
bond ratings:
"AAA": Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
"AA": Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from "AAA" issues by a small degree.
"A": Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
"BBB": 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" and "CCC": Bonds rated "BB" and "B" are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. "BB" represents a
lower degree of speculation than "B" and "CCC" 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.
To provide more detailed indications of credit quality, the "AA" or "A"
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Commercial Paper
The rating "Prime-1" is the highest commercial paper rating assigned by
Moody's. These issues (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issues rated "Prime-2" (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics of "Prime-1" rated issues, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debt having original maturities of no more than
365 days. Commercial paper rated "A-1" by S&P indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
"A-1+." Commercial paper rated "A-2" by S&P indicates that capacity for timely
payment is strong. However, the relative degree of safety is not as high as for
issues designated "A-1."
Commercial Paper
Rated commercial paper purchased by a Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality pursuant to guidelines approved by a Fund's Boards of Trustees and
Directors. Highest quality ratings for commercial paper for Moody's and S&P are
as follows:
Moody's: The rating "Prime-1" is the highest commercial paper rating
category assigned by Moody's. These issues (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
S&P: Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated in the "A-1" category by S&P indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issuers determined to possess overwhelming safety characteristics are
denoted "A-1+."
