Prospectus
FORWARD FUNDS, INC.
433 California Street, Suite 1010
San Francisco, California 94104
1-800-999-6809
Forward Funds, Inc. (the "Company") is an open-end management investment company
which offers five diversified investment portfolios. This prospectus describes
one of those portfolios - The Small Capitalization Stock Fund (the "Fund" or the
"Small Cap Fund"). The Fund's investment adviser is Webster Investment
Management Company LLC. The Fund's assets are managed by a sub-adviser, Hoover
Capital Management, LLC. The Fund currently offers one class of shares (the
"Shares").
The Shares of the Fund 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 Fund involves investment risk, including the
possible loss of principal.
This Prospectus sets forth concisely the information about the Fund 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 Fund, dated August 31, 1998, as supplemented,
September 8, 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.
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 August 31, 1998, as supplemented September 8,
1998.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
Shares Offered.......................................................1
Offering Price.......................................................1
Investment Objective.................................................1
Investment Policies..................................................1
Risk Factors.........................................................1
Investment Advisers..................................................1
Dividends and Capital Gains..........................................1
Custodian, Administrator, Distributor, and Transfer Agent............2
FUND EXPENSES.................................................................2
FEE TABLE.....................................................................2
INVESTMENT OBJECTIVE AND POLICIES.............................................4
General..............................................................4
Investment Policies..................................................5
RISK FACTORS..................................................................6
Small Companies......................................................6
Debt Securities......................................................7
Investment Grade Debt Securities.....................................7
Below Investment Grade Debt Securities...............................7
Foreign Securities...................................................8
INVESTMENT TECHNIQUES.........................................................8
Equity Securities....................................................8
Corporate Debt Securities............................................8
Convertible Securities...............................................9
Foreign Investments and Foreign Currency Transactions................9
Depositary Receipts.................................................10
Loan Participations and Assignments.................................10
Variable and Floating Rate Securities...............................11
Mortgage-Related and Other Asset-Backed Securities..................11
Repurchase Agreements...............................................12
Reverse Repurchase Agreements and Dollar Roll Agreements............13
When-Issued and Delayed-Delivery Transactions.......................13
Securities Issued by Other Investment Companies.....................13
U.S. Government Obligations.........................................14
Lending of Portfolio Securities.....................................14
Illiquid Securities.................................................14
INVESTMENT RESTRICTIONS......................................................15
MANAGEMENT OF THE FUND.......................................................16
Directors...........................................................16
Investment Advisers.................................................16
Portfolio Manager...................................................17
Other Service Providers.............................................17
Portfolio Transactions..............................................18
VALUATION OF SHARES..........................................................18
PURCHASING SHARES............................................................18
EXCHANGE PRIVILEGE...........................................................19
REDEEMING SHARES.............................................................20
Signature Guarantee.................................................20
By Wire Transfer....................................................20
By Telephone........................................................21
By Mail.............................................................22
Payments to Shareholders............................................22
SHAREHOLDER SERVICE PLAN.....................................................23
DIVIDENDS AND TAXES..........................................................23
Federal Taxes.......................................................23
GENERAL INFORMATION..........................................................25
Description of the Company and Its Shares...........................25
Performance Information.............................................25
Account Services....................................................26
Miscellaneous.......................................................26
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PROSPECTUS SUMMARY
Shares Offered
Shares of the Small Cap Fund, 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 the Small Cap Fund is equal to its net asset value
per share. The share price of the 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 the Fund. No sales charges or redemption fees are charged with
respect to the Fund.
Investment Objective
The Fund seeks high total return.
Investment Policies
The Fund invests primarily in the equity securities of companies having small
market capitalizations that offer future growth potential.
Risk Factors
An investment in the Small Cap Fund involves a certain amount of risk and may
not be suitable for all investors. See "RISK FACTORS." The 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 Advisers
Webster Investment Management Company LLC ("Webster") serves as Investment
Adviser for the Fund. Webster has engaged the services of Hoover Capital
Management, LLC (the "Sub-Adviser") to manage the Fund's assets on a day to day
basis. See "MANAGEMENT OF THE FUND - Investment Advisers."
Dividends and Capital Gains
Dividends from net income, including short-term capital gains, are declared and
paid annually by the Fund. Distributions of net realized capital gains are made
at least annually. Dividend and capital gains distributions of the Fund are
automatically invested in additional Shares unless the Shareholder elects
otherwise in writing.
Custodian, Administrator, Distributor, and Transfer Agent
Brown Brothers Harriman & Co. is the Fund's custodian. As custodian, Brown
Brothers Harriman & Co. will be responsible for the custody of the 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 Fund. First Data
Distributors, Inc., an affiliate of Investment Services Group, serves as the
Fund's distributor. Investor Services Group is a wholly-owned subsidiary of
First Data Corporation. The Administrator generally assists the Fund 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 the Fund.
FEE TABLE
The Small
Cap Fund
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases1 NONE
Purchase Transaction Fee 0.25%
Maximum Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge on Redemptions2 NONE
Exchange Fees NONE
Account Maintenance Fee3 $10
Annual Fund Operating Expenses (as a percentage of average net assets
annualized):
Investment Advisory Fee 1.05%
Other Expenses after Waiver4 0.40%
Total Fund Operating Expenses after Waiver4 1.45%
_____________
1 The Fund charges $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 to service
shareholders with the Company or its Distributor.
2 The Fund charges a $1.00 fee for redemptions made by check (via mail)
and an $8.00 fee 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 share-holders.
3 The 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. The Board of Directors
reserves the right to change the annual account maintenance fee.
Forward Funds, Inc.'s objective is to give its investors maximum
flexibility, while allocating costs in a fair manner.
4 The Adviser and Sub-Adviser have agreed to waive fees to assure that
the Fund's annual operating expenses do not exceed 1.45%, exclusive of
taxes and any extraordinary expenses. Absent this waiver of fees,
"Total Fund Operating Expenses" as a percentage of average daily net
assets are estimated to be 1.80% for the Fund.
Annual Fund Operating Expenses are paid out of the Fund's assets. Expenses are
factored into the Fund's share price or dividends, and are not charged directly
to Shareholder accounts. As noted in the Fee Table Shareholder Transaction
Expenses, the Fund will assess a transaction fee on share purchases of 0.25% of
the dollar amount invested. The transaction fee will be paid to the Fund and not
to its distributor, administrator or any other service provider. It is not a
sales charge. The fee applies to an initial investment in the Fund and all
subsequent purchases, but not to reinvested dividends or capital gains
distributions. The purpose of the purchase fee is to allocate transaction costs
associated with new purchases to the investor causing the transaction, thus
insulating existing shareholders from those transaction costs. These costs
include brokerage commissions and "bid-ask" spreads on dealer prices. The fee
represents Forward Funds, Inc.'s best estimate of actual costs. Without the fee,
the Fund would incur the costs directly, resulting in reduced investment
performance for all shareholders of the Fund. With the fee, the transaction
costs are borne not by all existing shareholders, but only by those investors
making purchase transactions.
The Directors reserve the right to add a similar redemption fee at a later date
should it be necessary to further protect long-term investors who buy and hold
shares of the Fund versus those investors who buy and sell shares in it more
frequently.
The purpose of the table below is to assist the prospective investor in
understanding the various costs and expenses that a Shareholder in the Fund will
bear directly or indirectly. For a more complete description of the management
fee, see "MANAGEMENT OF THE FUND." For shareholder service plan fees, see
"SHAREHOLDER SERVICE PLAN."
Example*
In the following example, an investor would pay the following expenses on a
$1,000 investment in the Fund, assuming (1) 5% annual return, and (2) redemption
at the end of each time period:
The
Small Cap Fund
1 Year........................ $17
3 Years....................... $47
5 Years....................... $80
10 Years...................... $173
* 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 OBJECTIVE AND POLICIES
General
The Small Cap Fund seeks high total return. It seeks to achieve this 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 investment objective of the 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 the Fund. Other policies of the Fund may be changed by the Company's
Directors, without a vote of the holders of a majority of outstanding Shares of
the 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 Fund will be
achieved.
Investment Policies
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
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 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 places heavy emphasis on
in-house research, which includes personal contacts, site visits and meetings
with company management. 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. It may lend securities and make other
investments and use other investment techniques, see "INVESTMENT TECHNIQUES."
The Fund expects its portfolio turnover rate to be less than 100% under normal
market conditions.
In unusual economic or market conditions, the Fund may invest, as a temporary,
defensive measure, all of a substantial portion of its assets in cash
equivalents or other short term instruments.
* * * *
Subject to the foregoing general limitations, the Fund expects 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 the Fund.
The 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. Investments in equity securities are
subject to market risks that may cause their prices to fluctuate over time. The
value of debt securities changes as interest rates fluctuate. When interest
rates increase, the value of debt securities generally decrease. The value of
securities, such as warrants or convertible debt, exercisable for or convertible
into equity securities is also affected by prevailing interest rates, the credit
quality of the issuer and any call provisions. Fluctuations in the value of
securities in which the Fund invests will cause the net asset value of the Fund
to fluctuate. An investment in the Fund, therefore, may be more suitable for
long-term investors who can bear the risk of short-term principal fluctuations.
Small Companies
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.
Debt Securities
Although the Fund normally will not invest extensively in debt securities, such
securities 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 the Fund to invest the resulting proceeds elsewhere, at
generally lower interests rates, which could cause fluctuations in the Fund's
net income. The Fund also may be exposed to event risk, which is the possibility
that corporate debt securities held by the 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 Corporation
("S&P") or, if unrated, deemed to be of equivalent quality as determined by the
Adviser or 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. The Fund will invest in debt securities
rates 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. These debt
securities have greater speculative characteristics. Securities rates B are
regarded as having a great vulnerability to default although currently having
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The ability to maintain other
terms of the contract over any long period of time may be small. Junk bonds are
more subject to default during periods of economic downturns or increases in
interest rates and their yields will fluctuate over time. It may be more
difficult to dispose of or to value junk bonds. Achievement of the Fund's
investment objective may also be more dependent on the Sub-adviser's own credit
analysis to the extent the Fund's portfolio includes junk bonds.
Foreign Securities
Foreign securities include both U.S. dollar and foreign currency denominated
securities of foreign issuers.
There may be less publicly available information about issuers of foreign
securities than is available about companies in the U.S. and foreign auditing
requirements may not be comparable to those in the United States. Interest or
dividends on foreign securities may be subject to foreign withholding taxes.
Investments in foreign countries may be subject to the possibility of
expropriation or confiscatory taxation, exchange controls, political or social
instability or diplomatic developments that could adversely affect the value of
those investments. In addition, the value of the foreign securities may be
adversely affected by movements in the exchange rates between foreign currencies
and the U.S. dollar, as well as other political and economic developments.
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 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.
INVESTMENT TECHNIQUES
Equity Securities
The 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.
Corporate Debt Securities
Corporate debt securities include corporate bonds, zero coupon 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
Adviser or Sub-Adviser will take into account such changes in deciding whether
to hold or sell a security, the Fund does not require an adviser to sell a
security that is downgraded to any particular rating.
Convertible Securities
The 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 the 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. The 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 the Fund's ability to achieve
its investment objective.
Foreign Investments and Foreign Currency Transactions
The Fund invests up to 25% of its assets in foreign investments. 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
the 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 U.S. or abroad. Currencies in which the Fund's
assets are denominated may be devalued against the U.S. dollar, resulting in a
loss to the Fund. The Fund limits its foreign currency denominated investments
to less than 5% of its net assets. The Fund may buy and sell foreign currencies
on a spot and forward basis to reduce the risks of adverse changes in foreign
exchange rates.
For many foreign securities, U.S. dollar denominated American Depositary
Receipts ("ADRs"), which are traded in the United States on exchanges or
over-the-counter, are issued by domestic banks. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers. However, by investing in ADRs rather than
directly in foreign issuers' stock, the Fund can avoid currency risks during the
settlement period for either purchases or sales.
Depositary Receipts
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("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 the Fund's investment policies, the Fund's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities.
Loan Participations and Assignments
The Fund 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, the Fund's investments in loans are
expected to take the form of loan participations and assignments of portions of
loans from third parties. 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 Fund's investments
in loan participations and assignments with limited marketability. If the 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, the 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.
Mortgage-Related and Other Asset-Backed Securities
The Fund may invest in mortgage-related or other asset-backed securities. The
value of some mortgage-related or asset-backed securities in which the Fund may
invest may be particularly sensitive to changes in prevailing interest rates,
and the ability of the Fund to successfully utilize these instruments may depend
in part upon the ability of the 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 the 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 the 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 the 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 the Fund's yield to maturity from these
securities. The Fund will not invest more than 5% of its net assets in any
combination of IO, PO, or inverse floater securities. The Fund 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 the Fund may be subject to repurchase agreements. Under the
terms of a repurchase agreement, the 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, the Fund may suffer a loss in disposing of the security subject to
the repurchase agreement.
Reverse Repurchase Agreements and Dollar Roll Agreements
The Fund may also borrow funds by entering into reverse repurchase agreements
and dollar roll agreements in accordance with applicable investment
restrictions. Pursuant to such agreements, the 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 the 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 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 the Fund may decline below the price at which the Fund is
obligated to repurchase the securities.
When-Issued and Delayed-Delivery Transactions
The Fund may purchase securities on a when-issued or delayed-delivery basis. The
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. The Fund will not pay for such securities or start earning interest on
them until they are received. When the Fund agrees to purchase securities, its
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, the 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
The Fund may invest up to 10% of its total assets in shares of other investment
companies. The 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 Fund is on other types of financial
instruments, the Fund 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 Fund from time to time may lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The 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 Fund. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on such
securities. Loans are subject to termination by the Fund or the borrower at any
time. While the 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 Fund, the Fund could experience delays in recovering its
securities and possible capital losses. The Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which the
Sub-Adviser has determined to be creditworthy under guidelines established by
the Board of Directors that permit the Fund to loan up to 33-1/3% of the value
of its net assets.
Illiquid Securities
The 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 Adviser or Sub-Adviser 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 the 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 the Adviser
or Sub-Adviser has determined to be liquid under procedures approved by the
Board of Directors).
Illiquid securities 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 the Fund that may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities. A majority of the 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
the Fund will take reasonably practicable steps to attempt to continuously
monitor and comply with its liquidity standards. Also, if the 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, the Fund may not:
(1) invest 25% or more of the total value of its assets in a
particular industry;
(2) issue senior securities, except to the extent permitted by
the Investment Company Act of 1940; or borrow money, except
that the 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 the Fund may engage in futures transactions as
described in the Statement of Additional Information;
(4) make loans, except that the 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, the 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 FUND
Directors
The Directors of the Company, who are elected by the Shareholders of the
Company, oversee the activities of the Fund. There are currently three
directors, two of whom are not "interested persons" of the Company within the
meaning of that term under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"). The Directors, in turn, elect the officers of the Company to
supervise its day-to-day operations.
Investment Advisers
Webster Investment Management Company LLC ("Webster" or the "Investment
Adviser") serves as Investment Adviser of the Fund. Webster, a Delaware limited
liability company, is a newly organized investment management firm that
supervises the activities of the Fund's sub-adviser. Webster is located at 433
California Street, San Francisco, California 94104. Webster has not previously
had responsibility for managing a mutual fund.
Subject to the general supervision of the Company's Board of Directors and in
accordance with the investment objective, policies and restrictions of the Fund,
Webster has the authority to manage the Fund, to make decisions with respect to,
and place orders for, all purchases and sales of the Fund's securities. It also
provides the Fund with ongoing investment guidance and policy direction. There
is a risk to investors in the Fund since Webster has not previously had
responsibility for managing a mutual fund; however, daily investment decisions
will be made by the sub-adviser to the Fund and the Fund's portfolio manager who
has had more than 20 years of investment experience.
For the services provided pursuant to its Investment Management Agreement with
the Fund, Webster receives a monthly fee from the Fund. The Fund pays Webster a
fee at an annual rate of 1.05% of average daily net assets. The fee is computed
daily and paid monthly. Out of this fee, Webster pays the fees of the Fund's
sub-adviser, Hoover Capital Management.
Hoover Capital Management, LLC ("Hoover") serves as sub-adviser to the Fund and,
pursuant to a Sub-Advisory Agreement, makes investment decisions for the Fund.
Hoover, located at 655 Montgomery Street, Suite 800, San Francisco, California
94111, manages more than $30 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. Hoover is paid by Webster, a sub-advisory fee at an
annual rate of 0.80% of average daily net assets. The fee is computed daily and
paid monthly.
Portfolio Manager
Irene Hoover is the portfolio manager for the 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 San Francisco, 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.
Other Service Providers
First Data Investor Services Group, Inc. serves as the Fund's administrator,
transfer agent, and registrar and also provides certain accounting services for
the Fund ("Investor Services Group," "Administrator," or "Transfer Agent"). An
affiliate of Investor Services Group, First Data Distributors, Inc., serves as
the Fund's Distributor (the "Distributor"). The Distributor acts as agent for
the 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 the 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 the Fund's custodian. See "MANAGEMENT OF THE FUND" in
the SAI for further information.
The Fund pays all expenses not assumed by the Adviser, Sub-Adviser or
Administrator. Expenses paid by the Fund 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 Fund;
association dues; and costs of stationery and forms prepared exclusively for the
Fund.
Portfolio Transactions
The 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 the 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 the 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 the Fund will fluctuate as the value of the
Fund's investments change. Net asset value per Share for the Fund for purposes
of pricing sales and redemptions is calculated by dividing the value of all
securities and other assets belonging to the Fund, less the liabilities charged
to the Fund by the number of the Fund's outstanding Shares.
PURCHASING SHARES
Individual investors may purchase shares by several methods. Shares may be
purchased through a broker-dealer who has established a dealer agreement with
the Distributor. 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 Fund. The minimum initial purchase amount for
shares of the Fund is $2,500 for non-retirement accounts, and $250 for
retirement accounts and for subsequent investments.
Purchases of Shares of the Fund 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 by the Valuation Time. 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
in the 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 the 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 Forward Funds, Inc.) 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 Fund
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 the Fund may be exchanged with any other fund that is a portfolio or
series of the Company or with a money market fund, the U.S. Government Money
Market Fund (Vista class), a portfolio of Mutual Fund Trust. There will be no
fees for exchanges. 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 Fund being
acquired may legally be sold and may be modified, limited or terminated at any
time by the 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 Fund limits 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 the 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. 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.
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 himself or herself 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 the Transfer Agent,
the Adviser, or Sub-Adviser, 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 Fund intends 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 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 PLAN
The Company has adopted a Shareholder Service Plan (the "Plan") with respect to
the Shares of the Fund. Pursuant to the Plan, the 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 the 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 the 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, 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 Fund expects to pay dividends of net investment income annually 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
The Fund intends to qualify annually and elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"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, the Fund intends to distribute each calendar year
substantially all of its taxable income and gains.
Distributions from the 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 at the applicable capital gains rate (generally, a maximum rate of
20% or 28%, depending upon the Fund's holding period in the assets sold),
regardless of how long the Shareholder has held the Fund's Shares.
Dividends declared by the 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 the Fund has the effect of reducing
the Fund's net asset value per Share. Since the Fund does 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.
The Fund may be subject to income taxes imposed by the countries in which it
invests with respect to dividends, capital gains and interest income. The Fund
may, under certain circumstances, 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 Fund 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 the Fund.
The preceding discussion is only a summary of some of the federal income tax
considerations generally affecting the Fund 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 advisors with respect to the effect of investing in the 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
Fund described in this Prospectus as well as four other funds. The Shares of the
Company are currently offered as a single class. Each Share represents an equal
proportionate interest in the Fund with other Shares of the Fund, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to the 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 the 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 the 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 the 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 the 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 or any of the Company's funds 24
hours a day by calling 1-800-999-6809 from any touch-tone telephone.
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 the 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 August 31, 1998, as supplemented September 8, 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' Prospectuses, dated August 31,
1998, as supplemented September 8, 1998; _______, 1998 and _____, 1998,
respectively ("Prospectuses"), which have been filed with the Securities and
Exchange Commission ("SEC"). Copies of the Prospectuses for the Funds may be
obtained free of charge by calling the Distributor at 1-800-999-6809. This SAI
is currently intended only for use with the Small Cap Fund as the other funds
are not currenlty offered for sale to the public. Accordingly, the discussion
pertaining to these funds should be disregarded.
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.............7
PORTFOLIO TRANSACTIONS........................................................15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................16
DETERMINATION OF SHARE PRICE..................................................17
SHAREHOLDER SERVICES AND PRIVILEGES...........................................18
DISTRIBUTIONS.................................................................19
TAX CONSIDERATIONS............................................................19
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. Owner of Haig G. Mardikian Enterprises, a
real estate investment business; 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, Sutton Place Management Co., Inc. (June
1997 - Present); 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 Advser, 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). Managing Director and
Secretary, Sutton Place Management Co., Inc. (April 1998-present); 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). Managing Director
and Treasurer, Sutton Place Management Co., Inc. (March 1998-present); 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 Manager, 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 July
1997, Barclays and its affiliates provided investment advisory services for over
$465 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 $172 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 $118 billion in assets
under management as of December 31, 1997. PIMCO is a subsidiary partnership of
PIMCO Advisers L.P. ("PIMCO Advisers"). PIMCO Advisers has two general partners,
PIMCO Advisers Holdings L.P., a Delaware limited partnership (formerly
Oppenheimer Capital, L.P.) and PIMCO Partners, G.P., a general partnership
between Pacific Investment Management Company, a California corporation and
indirect wholly owned subsidiary of Pacific Life Insurance Company, and PIMCO
Partners, LLC, a Delaware limited liability company controlled by the PIMCO
Managing Directors. PIMCO Partners, G.P. is also the general partner of PIMCO
Advisers Holdings L.P. 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 to manage the
Small Cap Fund's assets on a day to day basis (the "Sub-Adviser").
None of the Investment Manager, 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 Advisers by the Fund are computed and
accrued daily and paid monthly based on the net asset value of shares of the
Fund.
Each Investment Management or Sub-Investment Management 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 each Fund 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 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 an dloan 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. The Sub-Adviser has broad discretion to identify and invest in
countries they consider 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 Investment Sub-Advisers.
Reverse Repurchase Agreements
In a reverse repurchase agreement, the Funds sell 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 Fund's 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, the Fund
bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. 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. 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 Advisers' 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 Manager, Investment
Advisers, 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 Manager, Investment Advisers, Sub-Adviser, 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 Advisers 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
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 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 each Fund's
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 relevant Fund's
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 Advisers and/or Sub-Adviser
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 relevant Fund's 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 its investment practices or policies.
As regulated investment companies, the Funds generally will be relieved of
liability for U.S. federal income tax on that portion of their investment
company taxable income and net realized capital gains which they distribute to
their 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 either "20% Rate Gain"
or "28% Rate Gain," depending upon the particular Fund's holding period for the
assets sold. "20% Rate Gains" arise from sales of assets held by a Fund for more
than 18 months and are subject to a maximum tax rate of 20%; "28% Rate Gains"
arise for sales of assets held by the Fund for more than one year but not more
than 18 months and are subject to a maximum tax rate of 28%. Distributions are
subject to these tax rates 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 reduces 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. Recently enacted rules will affect the timing and character
of gain if the Funds engage in certain transactions which reduce or eliminate
the risk of loss with respect to appreciated financial positions, including
stock and securities. For example, if the Funds enter into a short sale of
property while holding property substantially identical to that sold short, the
entry into the contract will generally constitute a constructive sale and the
Funds will recognize gain (but not loss) as if the property it held had been
sold. The character of gain from a constructive sale will depend upon a Fund's
holding period in the property. If a short sale results in loss, the loss will
be recognized at the time of the closing of the short sale, and its character
may be affected by the straddle rules described above.
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. 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 the Funds receive an "excess distribution" with respect to PFIC
stock, the Funds will generally be subject to tax on the distribution as if it
were realized ratably over the period during which the Shareholder held the PFIC
stock. The Funds 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, the Funds
generally would be required to include in their gross income their 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 Funds' 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 subject to
a maximum tax rate of 20% if the shareholder's holding period for the Shares is
more than 18 months, and a maximum tax rate of 28% if the shareholder's holding
period is more than one year but not more than 18 months. 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 shareholders 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'
Prospectuses 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
was only recently organized and this is the first offering of its 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+."