<PAGE>
As filed with the Securities and Exchange Commission on April 23, 1998
Registration No. ________
Investment Company Act Registration No. ________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. 1 / /
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Post-Effective Amendment No. / /
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. _____ / /
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THE PORTLAND MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
c/o Union Bond & Trust Company
5665 SW Meadows Rd., Suite 400
Lake Oswego, Oregon 97035
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(503) 620-7899
Joan Hall
c/o Union Bond & Trust Company
5665 SW Meadows Rd., Suite 400
Lake Oswego, Oregon 97035
(Name and Address of Agent for Service)
Copies to:
R. Toby Borst, Esq. Perry J. Shwachman, Esq.
Dunn, Carney, Allen, Higgins & Tongue Katten Muchin & Zavis
851 S.W. Sixth Avenue, Suite 1500 525 West Monroe St., #1600
Portland, Oregon 97204 Chicago, Illinois 60661-3693
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER THE
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
REGISTRANT IS REGISTERING AN INDEFINITE NUMBER OF ITS SHARES OF BENEFICIAL
INTEREST BY THIS REGISTRATION STATEMENT PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940.
<PAGE>
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THE PORTLAND MUTUAL FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
Form N-1A Cross Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
THE PORTLAND MUTUAL FUNDS
PORTLAND STABLE INVESTMENT FUND
FORM N-1A CROSS REFERENCE SHEET
Part A Item No. and Caption Prospectus Caption
- --------------------------- ---------------------------
1. Cover Page Cover Page
2. Synopsis The Fund; Expense Information
3. Condensed Financial Information Not Applicable
4. General Description of Investments and Related Risks;
Registrant Investment Practices
5. Management of the Fund Expense Information; Additional
Information
6. Capital Stock and Other Who May Invest; Purchase and Redemption
Securities of Fund Shares;Additional Information
7. Purchase of Securities Being Purchase and Redemption of Fund Shares;
Offered Additional Information
8. Redemption or Repurchase Purchase and Redemption of Fund Shares
9. Legal Proceedings. Not Applicable
ii
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THE PORTLAND MUTUAL FUNDS
PORTLAND STABLE INVESTMENT FUND
FORM N-1A CROSS REFERENCE SHEET
-- Continued --
Part B Item No. and Caption Statement of Additional Information
Caption
- --------------------------- -----------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Management of the Fund
13. Investment Objectives and Investment Objectives and Policies
Policies
14. Management of the Fund Management of the Fund
15. Control Persons and Principal Management of the Fund
Holders of Securities
16. Investment Advisory and Other Investment Advisory and Other Services
Services
17. Brokerage Allocation and Other Fund Transactions and Brokerage
Practices Allocation
18. Capital Stock and Other See Prospectus: Purchase and Redemption
Securities of Fund Shares
19. Purchase, Redemption and Pricing Purchase and Redemption of Fund Shares
of Securities Being Offered
20. Tax Status Taxation
21. Underwriters Investment Advisory and Other Services;
see Prospectus: Additional Information
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
iii
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Part C Item No. and Caption
- ---------------------------
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
iv
<PAGE>
INFORMATION HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION
STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion, dated April 23, 1998
THE PORTLAND MUTUAL FUNDS
PORTLAND STABLE INVESTMENT FUND
c/o Union Bond & Trust Company
5665 SW Meadows Rd., Suite 400
Lake Oswego, Oregon 97035
PROSPECTUS
The objective of the Portland Stable Investment Fund (the "Fund") is to
provide investors with a high level of current income while preserving
principal and maintaining a stable net asset value per share. The Fund seeks
to achieve its investment objective by investing in a diversified portfolio
of fixed income securities, money market instruments, options, futures and
other instruments. The Fund is not a money market fund, and there can be no
assurance that it will be able to maintain a stable net asset value per share
or otherwise achieve its objective.
The Fund is a separate series of The Portland Mutual Funds (the "Trust"),
an open-end, management investment company ("mutual fund"). Union Bond & Trust
Company ("UBT") is the investment adviser for the Fund.
The Fund offers three classes of Shares. Classes A and B are offered to
employee benefit plans qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), "government plans" as defined in
Section 414(d) of the Code, "eligible deferred compensation plans" as defined
in Section 457 of the Code, tax sheltered annuity plans qualifying under
Section 403(b) of the Code and to bank-maintained collective investment funds
that hold exclusively assets of U.S. employee benefit plans qualified under
Section 401(a) and tax exempt under Section 501(a) of the Code, and other
plans eligible to invest in bank-maintained collective investment funds.
Class C Shares are offered to investors who desire to invest in the Fund,
through a tax-deferred retirement plan such as an individual retirement
account ("IRA"), SEP-IRA, ROTH-IRA, KEOUGH Plan, or other tax-deferred
retirement account (such investors hereinafter collectively referred to as
"Individual Retirement Investors").
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION CONCERNING THE FUND THAT A
PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING. Please read it before
investing and retain it for future reference. To learn more about the Fund,
investors can obtain a copy of the Fund's Statement of Additional Information
1
<PAGE>
("SAI"), dated April 23, 1998, which has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated herein by reference. For a
free copy of this document, please write to the Trust at the address given
above, or call the Trust's service agent at 1-800-548-4806.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Shares of the Fund are neither insured nor guaranteed by the U.S.
Government. Shares of the Fund are not deposits or obligations of, or
guaranteed or endorsed by, UBT, and the shares are not Federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
agency. An investment in the Fund is subject to risk that may cause the value
of the investment to fluctuate, and when the investment is redeemed, the value
may be higher or lower than the amount originally invested by the investor.
2
<PAGE>
TABLE OF CONTENTS
Page
THE FUND.....................................................................
WHO MAY INVEST...........................................................
EXPENSE INFORMATION......................................................
INVESTMENTS AND RELATED RISKS............................................
INVESTMENT PRACTICES.....................................................
PURCHASE AND REDEMPTION OF FUND SHARES.......................................
CLASSES OF SHARES........................................................
PLAN PARTICIPANT TRANSACTIONS............................................
PURCHASE OF SHARES.......................................................
REDEMPTION OF SHARES.....................................................
NET ASSET VALUE..........................................................
ADDITIONAL INFORMATION.......................................................
CHARACTERISTICS OF FUND SHARES...........................................
BOARD OF TRUSTEES........................................................
INVESTMENT ADVISORY AND OTHER SERVICES...................................
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.................................
TAX CONSIDERATIONS.......................................................
REPORTS..................................................................
PERFORMANCE ADVERTISING..................................................
PRIOR PERFORMANCE OF INSTITUTIONAL PRIVATE ACCOUNTS
MANAGED BY UBT.........................................................
3
<PAGE>
THE FUND
The Fund's investment objective is to provide investors with a high level
of current income while preserving principal and maintaining a stable net
asset value per share. The Fund intends to achieve its objectives by
investing in a diversified portfolio of investment grade fixed income
securities, money market instruments, options, futures and other instruments
("Securities") and by entering into book value benefit responsive agreements
("Wrapper Agreements") (together "Portfolio Securities") with large financial
institutions, such as banks and insurance companies. The value of Securities
in the Fund will generally fluctuate based upon market conditions, interest
rates, credit quality of the issuer, and economic and political events. The
Wrapper Agreements are intended to stabilize the net asset value ("NAV") per
share of the Fund ("Share"). In that regard, it is expected that under
normal circumstances, the value of the Wrapper Agreements will fluctuate in
inverse proportion to fluctuations in the value of the Securities. However,
there can be no assurance that the Fund will achieve its objectives of a
stable NAV. The Fund will incur certain costs in connection with its
investment in Wrapper Agreements. These costs may reduce the Fund's
investment return as compared to the return on a direct investment in
Securities. In addition, the issuer of a Wrapper Agreement could default on
its obligations, or the Fund may be unable to obtain Wrapper Agreements for
all assets in the Fund, potentially resulting in a decline in NAV. UBT may
employ various investment strategies to hedge Fund risks, but there can be no
assurance that these techniques will be effective. See "Investment Practices
and Related Risks" herein.
WHO MAY INVEST.
The Fund offers three classes of Shares. Classes A and B are offered to
employee benefit plans qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), "government plans" as defined in
Section 414(d) of the Code, "eligible deferred compensation plans" as defined
in Section 457 of the Code, employee benefit plans qualifying under Section
403(b) of the Code (each, a "Plan" and collectively, the "Plans") and to
bank-maintained collective investment funds that hold exclusively assets of
U.S. employee benefit plans qualified under Section 401(a) and tax exempt
under Section 501(a) of the Code and other plans eligible to invest in
bank-maintained collective investment funds (each, a "Bank Collective Fund"
and collectively, the "Bank Collective Funds"). Class C Shares are offered
to investors who desire to invest in the Fund through a tax-deferred
retirement plan such as an individual retirement account ("IRA"), SEP-IRA,
ROTH-IRA, KEOUGH Plan, or other tax-deferred retirement account (such
investors hereinafter collectively referred to as "Individual Retirement
Investors"). A Plan or a Bank Collective Fund desiring to invest in the Fund
must restrict participants in such Plan or in employee benefit plans
investing in the Bank Collective Fund from transferring monies from the Fund
to a different fixed income investment option which has a targeted average
duration of three years or less, or seeks to maintain a stable value per unit
or share (a "Competing Fund"); provided, however, that transfers by
participants to a non-Competing Fund may, after a three-month period in such
non-Competing Fund, be transferred to a Competing Fund without restriction.
See "Expense Information" and "Purchase and Redemption of Fund Shares" herein.
The Fund is designed for investors seeking preservation and stability of
principal and a level of current income higher than money market mutual funds
over most time periods. Money market funds maintain a stable value per
share. Although the Fund will purchase Wrapper Agreements with the intention
of maintaining a stable NAV per share, Shares may be worth more or less than
their original cost upon redemption. The Fund is not in itself a balanced
investment plan. Participants of employee benefit plans (collectively "Plan
Participants") and Individual Retirement Investors should consider their
investment objectives and tolerance for risk when making an investment
decision. See "Additional Information" herein.
EXPENSE INFORMATION.
The Fund pays annual operating expenses out of the Fund's assets. An
investment advisory fee and an administrative services fee is paid by the Fund
to UBT. The Fund incurs additional expenses in
4
<PAGE>
connection with, among other things, purchasing Wrapper Agreements,
maintaining shareholder records, furnishing shareholder statements and
providing semi-annual financial reports. The following tables are intended
to assist investors in understanding the expenses associated with investing
in the Fund. The expenses shown below are for the first full year of
operations. "Other expenses" are based on estimated amounts for the current
fiscal year. The tables provide (i) a summary of expenses related to
purchases and redemptions (sales) of Shares, (ii) the anticipated aggregate
annual operating expenses of the Fund, expressed as a percentage of average
daily net assets, and (iii) an illustration of the dollar cost of such
expenses on a $1,000 investment in the Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class A Shares Class B Shares Class C Shares
- -------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Maximum Redemption Fee 2.0% 2.0% 2.0%
(As a Percentage of the Amount
Redeemed)(1)
</TABLE>
(1) Redemption proceeds sent by wire are subject to a $10 processing fee.
Investors effecting Share transactions through certain broker-dealers and
other financial institutions may be charged additional fees by the particular
institution effecting the transaction.
Shareholder transaction expenses are charges paid when investors purchase,
redeem, or exchange Shares. Plan Participant directed redemptions of Class A or
B Shares for reasons of death, disability, retirement, employment termination,
loans, hardship, and other Plan permitted withdrawals and investment transfers
to non-Competing Funds (each, a "Benefit Responsive Payment Event") are not
subject to a redemption fee. Redemptions of Class A or B Shares directed by
Plans or Bank Collective Funds with 12 months' prior notice are also not subject
to a redemption fee. All other redemptions of Class A or B Shares are subject
to a redemption fee payable to the Fund of 2% of the proceeds of the redemption.
Redemptions of Class C Shares for reasons of death or disability, as
defined in Section 72(m)(7) of the Code, (each, a "Qualified Payment Event")
are not subject to a redemption fee. Redemptions of Class C Shares unrelated
to a Qualified Payment Event but made with 12 months' prior notice are not
subject to a redemption fee. Redemptions of Class C Shares which have been
continuously held for at least 12 months by an Individual Retirement Investor
who has attained the age of 59-1/2 will also not be subject to a redemption
fee. All other redemptions of Class C Shares are subject to a 2% redemption
fee. Class A and C Shares are subject to a 0.25% Rule 12b-1 fee. Class B
Shares are subject to a 0.05% Rule 12b-1 fee, which the Distributor has
agreed voluntarily to waive. As a result of the accrual of Rule 12b-1
5
<PAGE>
fees on Class A and C Shares, long-term shareholders of Class A or C Shares
may pay more than the economic equivalent of the maximum initial sales
charges permitted by the National Association of Securities Dealers, Inc.
See "Purchase and Redemption of Fund Shares" herein.
Annual Operating Expenses (as a percentage of the Fund's average daily net
assets)
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-------------- -------------- --------------
<S> <C> <C> <C>
Investment advisory fee (after 0.25% 0.25% 0.25%
reimbursement or waiver)
Rule 12b-1 fee (after 0.25% 0.00%(2) 0.25%
reimbursement or waiver)
Other expenses (after 0.30% 0.30% 0.50%
reimbursement or waiver)(3)
Total operating expenses (after 0.80% 0.55% 1.00%
reimbursement or waiver)
</TABLE>
(2) Class B shares are subject to a 0.05% Rule 12b-1 fee, all of which the
Fund's Distributor has voluntarily agreed to waive.
(3) "Other expenses" include the cost of purchasing Wrapper Agreements and
certain additional services provided to the Fund by UBT and other service
providers.
EXPENSE TABLE EXAMPLE:
An investor would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of each time
period, inclusive of a 2% redemption fee upon redemption at the end of each
period illustrated.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
<S> <C> <C>
Class A Shares $29 $49
Class B Shares $26 $41
Class C Shares $31 $55
</TABLE>
An investor would pay the following expenses on the same investment,
assuming no redemption:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
<S> <C> <C>
Class A Shares $8 $26
Class B Shares $6 $18
Class C Shares $10 $33
</TABLE>
6
<PAGE>
The Annual Operating Expense Table and the Example above show the costs and
expenses that an investor will bear directly or indirectly as a shareholder of
the Fund. The investment advisory and 12b-1 fees are based upon the Fund's
Investment Advisory Agreement with UBT and the 12b-1 Plan adopted by the Board
of Trustees of the Trust (the "Board of Trustees"). The other expenses are
based on estimated amounts for the current fiscal year.
Under the Investment Advisory Agreement, UBT is entitled to an Advisory
Fee of 0.35% of average daily net assets. UBT has voluntarily agreed to
waive 0.10% of that fee. In addition, UBT has agreed to waive or limit its
Advisory Fees or assume Other Expenses (except for Rule 12b-1 fees) in an
amount that operates to limit annual operating expenses of the Fund
(exclusive of Rule 12b-1 fees) to no more than 0.55% for Class A, 0.55% for
Class B and 0.75% for Class C (expressed as a percentage of average daily
net assets). Each such waiver of Advisory Fees or assumptions of Other
Expenses by UBT is subject to a possible reimbursement by the Fund within
three years of the Fund's inception if such reimbursement can be achieved
within the foregoing annual expense limits. Waiver of fees or reimbursements
are expected to be in effect for the current fiscal year; UBT also has agreed
voluntarily to waive 0.10% of the 0.25% fee to which it is entitled under the
Administrative Services Agreement. UBT may terminate its waiver of Advisory
and Administrative Services Fees and assumption of Other Expenses at any
time, in its sole discretion without notice to shareholders. In the absence
of such fee waivers and expense assumptions, and with respect to the Class B
Shares, in the absence of the waiver of the Rule 12b-1 fee, it is estimated
that "Total Operating Expenses" would be 1.00% for Class A Shares, 0.80% for
Class B Shares and 1.20% for Class C Shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Also, the
Example assumes a 5% annual return: actual performance, however, will vary and
may result in a return of greater or less than 5%.
Class A, B and C Shares of the Fund will be sold by Portland Investment
Services, Inc. as the Trust's distributor. For more information about the
Fund's expenses, see "Additional Information" and "Purchase and Redemption of
Fund Shares" herein.
The Fund will have a fiscal year end of December 31. As this is the
Fund's first fiscal year, financial information with respect to the Fund is
limited to a balance sheet at this time.
INVESTMENTS AND RELATED RISKS.
The Fund's investment objective is to preserve principal, obtain a high
level of current income and maintain a stable net asset value per Share. The
Fund seeks to achieve its investment objective by investing its net
investable assets in Securities and by entering into Wrapper Agreements. The
Fund's rate of return is expected to be higher than most money market mutual
funds. However, there can be no assurance that the Fund's investment
objectives will be achieved or that the Fund's rate of return will be higher
than that of most money market mutual funds.
7
<PAGE>
Generally, the value of Securities will fluctuate based upon market
conditions, interest rates, credit quality of the issuer, and economic and
political events. For instance, normally the prices of Securities will fall
when interest rates rise, and rise when interest rates fall. Similarly, a
worsening in the credit quality of an issuer of a Security will generally result
in a lower price, while an improved credit quality normally will have the
opposite effect. The Wrapper Agreements are intended to stabilize the NAV per
Share by offsetting fluctuations in the value of the Securities under certain
conditions. In most circumstances, the combination of Securities and Wrapper
Agreements held by the Fund is expected to provide Fund shareholders with a
stable NAV per Share.
The Fund will incur certain costs in connection with its investment in
Wrapper Agreements. These costs may reduce the Fund's investment return as
compared to the return on a direct investment in Securities. Further, the
Wrapper Agreements do not guarantee the Fund against loss if an issuer of
Securities defaults on payments of interest or principal or if the credit
rating of a Security is downgraded to a level that makes it ineligible for
coverage under a Wrapper Agreement. In addition, a Wrapper Agreement
provider ("Wrap Provider") could default on its obligations under the Wrapper
Agreement or the Fund might be unable to obtain Wrapper Agreements covering
all of its assets. The value of the Shares might decline in the event of
either type of default or if the Fund is unable to obtain Wrapper Agreements
covering all of its assets. In addition, the Board of Trustees may determine,
based on a lowering of the Wrap Provider's credit rating or otherwise, that a
Wrapper Agreement should be valued at a lower value than would otherwise be
sufficient to maintain the Fund's NAV per Share. See "Wrapper Agreements --
Specific Risks of Wrapper Agreements" herein.
The Fund expects to invest at least 65% of its total assets in fixed income
securities ("Fixed Income Securities"). The Fund will invest primarily in
Fixed Income Securities rated at the time of purchase in one of the top two
rating categories by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Rating Services ("S&P"), or Duff & Phelps Credit Rating Co. ("Duff &
Phelps"), or comparably rated by another nationally recognized statistical
rating organization ("NRSRO"), or, if not rated by a NRSRO, of comparable
quality as determined by UBT in accordance with procedures adopted by the
Board of Trustees. The Fund, however, from time to time may purchase Fixed
Income Securities with a lower rating, provided that such Fixed Income
Securities will be rated at least investment grade at the time of purchase by
Moody's, S&P, or Duff & Phelps, or comparably rated by another NRSRO, or, if
not rated by a NRSRO, of comparable quality as determined by UBT in
accordance with procedures adopted by the Board of Trustees. UBT will review
any Securities which are downgraded and make a determination regarding
maintaining or liquidating any positions in such downgraded Fixed Income
Securities.
The Fixed Income Securities purchased by the Fund will include securities
issued or guaranteed by the U.S. Government, or any agency or instrumentality
thereof; debt of domestic or foreign entities, including corporate, sovereign
or supranational entities; asset-backed securities issued by domestic or
foreign entities; mortgage pass-through securities issued by governmental
entities such as the Government National Mortgage Association, the Federal
Home Loan Mortgage Corporation or the Federal National Mortgage Association;
mortgage pass-through securities issued by non-government entities such as
mortgage lenders, banks, or other financial institutions, including private
label mortgage pass-through securities; collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduit securities ("REMICs"),
which are mortgage-backed debt instruments that make payments of principal
and interest at a variety of intervals and are collateralized by any of the
aforementioned mortgage pass-through securities; and other U.S. Government or
agency obligations, including Treasury Income Growth Receipts ("TIGRs")
traded in the STRIPS program, Certificates of Accrual Treasury Securities
("CATS") traded in the STRIPS program, Treasury Receipts ("TRs") and other
zero coupon securities (securities consisting solely of the principal or
interest component of a U.S. Treasury bond).
8
<PAGE>
In addition to the Fixed Income Securities, the Fund intends to invest a
certain percentage of its assets in liquid short-term investments, including
bankers' acceptances, commercial paper, time deposits, certificates of
deposit, and other instruments of foreign and domestic corporations, banks
and thrift institutions ("Cash Account Assets"). Short-term investments
purchased by the Fund will be rated, at the time of purchase, in one of the
top two short-term rating categories by an NRSRO or, if unrated, will be of
comparable quality as determined by UBT in accordance with procedures adopted
by the Board of Trustees. The Fund may invest up to 35% of its total assets
in such short-term investments for purposes of liquidity and up to 100% of
its total assets in such instruments for temporary defensive purposes. The
Fund may also invest in repurchase agreements, options and futures contracts,
when issued securities and delayed delivery securities and Rule 144A
securities (as defined below) in addition to utilizing certain financing
techniques such as reverse repurchase agreements and dollar rolls. See
"Investment Practices" herein.
In seeking to maintain a stable NAV per share, the Fund will enter into
Wrapper Agreements with respect to its Securities. As such Securities will
fluctuate in value, under normal conditions the Wrapper Agreements are
expected to fluctuate in value in inverse proportion to fluctuations in the
value of the Securities. Therefore, as interest rates rise and the value of
Securities decrease, the value of the Wrapper Agreements increase.
Alternatively, if interest rates decrease and the value of the Securities
rise, the value of the Wrapper Agreements is expected to decrease
proportionally and may have a negative value and be a liability of the Fund.
Under normal market conditions, the average duration of the Fund will
range from 2.0 to 4.5 years. In general, duration is a measure of the
expected life of a security on a present value basis which incorporates the
security's yield, coupon interest payments, final maturity and call features
into a single measure. For example, a 5% coupon bond that pays semi-annual
interest, has five years to maturity and is priced at par, would have a
duration of approximately 4.5 years. Changes in the Fund's duration will be
accomplished primarily through the reinvestment of cash flows and selective
trading of Securities.
The Fund is not a money market fund as defined in Rule 2a-7 of the
Investment Company Act of 1940. In that regard, it is important to note the
distinction between the Fund and short-term investments such as money market
funds. The Securities held by the Fund have a longer average maturity than
those of money market funds. Because a money market fund has a shorter
average maturity, its yield will track the direction of current market rates
of return more closely than the Fund. For example, in a rising interest rate
environment, money market fund yields may rise more quickly than will the
Fund's. In a falling interest rate environment, money market fund yields may
fall more quickly than the Fund's. Over the long-term, however, intermediate
term Fixed Income Securities such as those purchased by the Fund have
historically produced higher returns than short-term investments (i.e., money
market funds). For additional information on the investment objectives of
the Fund, see "Investment Practices" in this Prospectus and the SAI for more
information.
FIXED INCOME SECURITIES. Fixed Income Securities are subject to interest
rate, credit and reinvestment risk. The value of Fixed Income Securities
usually will fluctuate with changes in interest rates. As interest rates
rise, the value will generally decrease, and when interest rates fall, the
value usually increases. Generally, the shorter the maturity of the Fixed
Income Security, the lower its yield and the less sensitive it is to interest
rate changes. In order to help maintain an average portfolio duration of 2.0
to 4.5 years, the Fund intends to invest primarily in Fixed Income Securities
with short-term to intermediate term maturities.
9
<PAGE>
Fixed Income Securities are also subject to the risk that the issuer will
become impaired or default on its obligations. In that regard, the Fund is
subject to the credit risk of each issuer of a Fixed Income Security. If the
issuer of a Fixed Income Security defaults on its obligations, the Fund's
interest income may be reduced or the Fund may incur a loss of principal. The
ratings and certain other requirements which apply to the Fund's permitted
investments, as described elsewhere in this Prospectus and the SAI, are intended
to limit the amount of credit risk undertaken by the Fund. In addition, to
minimize credit risk, UBT intends to diversify the Fund's investments, and to
analyze the creditworthiness of and to monitor each such investment.
UBT, as adviser to the Fund, selects the Fixed Income Securities purchased
by the Fund. In that regard, UBT may use trading as a means of managing the
Fund in seeking to achieve its investment objectives. Purchases and sales of
Fixed Income Securities will occur when UBT believes that such transactions will
be beneficial for the Fund. Therefore, the Fund's ability to meet its
objectives will depend in part on UBT's ability to evaluate particular
securities and anticipate relevant market conditions, including interest rate
trends.
The Fund may invest in various types of Fixed Income Securities. The
following is a description of the types of Fixed Income Securities in which the
Fund intends primarily to invest, together with a description of certain risks
associated with such securities. Investment in such types of Fixed Income
Securities is not a fundamental policy of the Fund, and therefore, changes in
the types of such investments are not subject to shareholder approval.
UBT may decide not to purchase all of the following types of instruments
or use all of the investment techniques described below to the full extent
permitted, unless it believes that doing so will help the Fund achieve its
goal. Current holdings will be described in the financial reports of the
Fund, which will be sent to shareholders twice annually.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Fund may invest in bills,
notes, bonds and other debt securities issued by the U.S. Treasury which are
direct obligations and subject to the full faith and credit of the U.S.
Government. In addition, the Fund may invest in securities which are issued or
guaranteed by U.S. Government-sponsored enterprises and federal agencies.
Securities issued by some agencies and instrumentalities are supported by the
instrumentalities' right to borrow from the U.S. Treasury under certain
circumstances. Securities issued by certain other U.S. agencies or
instrumentalities are supported only by the credit of the entity that issued
them.
U.S. DOLLAR DENOMINATED FOREIGN GOVERNMENT AND AGENCY FIXED INCOME
SECURITIES. Debt instruments issued or guaranteed by foreign governments or
agencies ("foreign debt obligations"), especially foreign debt obligations of
developing countries, may involve a high degree of risk. The issuer of the
obligation or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal and interest when due and
may require renegotiation or rescheduling of debt payments. In addition,
prospects for repayment of principal and interest may depend on political as
well as economic factors. The Fund will not invest in debt securities
denominated in a foreign currency.
MORTGAGE-BACKED SECURITIES. The Fund may purchase mortgage-backed
securities issued by the U.S. Government, its agencies or instrumentalities
and non-governmental entities such as banks, mortgage
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lenders and other financial institutions. In general, mortgage-backed
securities include mortgage-backed bonds, mortgage pass-through securities
and mortgage pay-through securities. A mortgage-backed bond is a general
obligation of the issuer, payable out of the issuer's general funds and
secured by a first lien on a pool of mortgages. A mortgage pass-through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the investors.
Mortgage pay-through securities show characteristics of both pass-through and
mortgage-backed bonds. The mortgage pass-through securities issued by
non-governmental entities such as banks, mortgage lenders or other financial
institutions in which the Fund may invest include private label mortgage
pass-through securities. Collateralized Mortgage Obligations ("CMOs") are
mortgage pay-through securities collateralized by mortgages or
mortgage-backed securities. CMOs are generally issued in classes and series
that have different maturities and often are retired in sequence.
Mortgage-backed securities also include other debt obligations secured by
mortgages on residential or commercial real estate properties.
Mortgage-backed securities, unlike ordinary fixed income securities, which
generally pay a fixed rate of interest and return principal upon maturity, may
repay both interest income and principal as part of their periodic payments.
Mortgage-backed securities are subject to certain "pre-payment" risks since
the underlying mortgage certificates can be prepaid at any time. Prepayment
risk or call risk is the likelihood that, during periods of falling interest
rates, mortgages with higher stated interest rates will be prepaid prior to
maturity (whether through refinancings or otherwise), requiring the Fund to
invest the proceeds at generally lower interest rates.
CORPORATE DEBT SECURITIES. Corporate debt securities are long and short
term debt obligations issued by companies (such as publicly issued and privately
placed bonds, notes and commercial paper).
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable, such as motor vehicle installment sale contracts, other
installment sale contracts, home equity loans, leases of various types of real
and personal property and receivables from revolving credit agreements. These
securities may be in the form of a beneficial interest in a special purpose
trust, a limited partnership interest, or commercial paper or other debt
securities issued by a special purpose entity. Typically, payments or
distributions of principal and interest on asset-backed securities are
credit-enhanced or guaranteed up to certain amounts and for a certain time
period by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the issuer.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Generally, these securities do not have the
benefit of the same type of security interest in the related collateral. For
example, credit card receivables are generally unsecured, and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to avoid payment of certain
amounts owed on the credit cards, thereby reducing the balance due.
Additionally, there is the risk in connection with automobile receivables
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on those securities.
ZERO COUPON SECURITIES. Zero Coupon Securities, including TIGRs, CATS and
TRs, are the separate income or principal components of a debt instrument.
Unlike most other debt securities, however,
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<PAGE>
zero coupon debt securities do not make regular interest payments.
Therefore, zero coupon securities involve risks that are similar in most
respects to those of other debt securities, except that their market price
may be more volatile.
WRAPPER AGREEMENTS. A Wrapper Agreement is a contract between the Fund
and a bank, insurance company or other financial institution (a "Wrap
Provider"), under which the Wrap Provider agrees to make payments to the Fund
upon the occurrence of certain events. By purchasing Wrapper Agreements, the
Fund expects to be able to maintain a stable NAV per Share, because under
normal circumstances, the value of the Fund's Wrapper Agreements is expected
to vary inversely with the value of the Fund's assets covered by such Wrapper
Agreements (the "Underlying Assets"). Therefore, when the value of the
Underlying Assets is less than their "Book Value" (essentially the purchase
price of the Underlying Assets plus any accrued net income thereon), the
Wrapper Agreements will be assets of the Fund with a value equal to such
deficiency. Similarly, when the value of the Underlying Assets is more than
their Book Value, the Wrapper Agreements will be liabilities of the Fund with
a value equal to such excess. Accordingly, under normal conditions, the sum
of the total value of the Fund's Wrapper Agreements plus the total value of
all of the Fund's Underlying Assets is expected to equal the purchase price
of the Underlying Assets, plus interest on the Underlying Assets at the rate
determined in the Wrapper Agreements. The Fund intends to enter into Wrapper
Agreements with Wrap Providers that at the time of agreement have a current
long-term debt or claims paying ability rating in one of the two highest
rating categories by Moody's Investor Services, Inc. ("Moody's") or
Standard & Poors Corporation ("S&P").
DESCRIPTION OF WRAPPER AGREEMENTS. Under a Wrapper Agreement, the Wrap
Provider agrees to make certain payments to the Fund in exchange for an
annual premium which is typically .10% to .25% per dollar of the Underlying
Assets covered by any Wrap Agreement. These payments made by the Wrap
Provider are designed to enable the Fund to make redemption payments
reflecting the purchase price of the Underlying Assets rather than the market
value of the Underlying Assets. Payments may be made under a Wrapper
Agreement when Shares are redeemed, at termination of the Wrapper Agreement,
or both. The payments are based upon the Book Value of the Wrapper
Agreement. Book Value usually is equal to the sum of (i) the purchase price
of the Underlying Assets, minus (ii) the sale price of the Underlying Assets
liquidated to fund Share redemptions, plus (iii) interest accrued at the
crediting rate. The crediting rate is the yield on the Underlying Assets,
adjusted to reflect the amortization of differences between the market value
of the Underlying Assets and Book Value over the duration of such Underlying
Assets, minus Wrap Provider fees and Fund expenses. The crediting rate is
reset at least quarterly. Therefore, among other things, the crediting rate
may be affected by defaulted securities and by increases and decreases in the
Underlying Assets as a result of purchases and redemptions of Shares. In
addition, since the crediting rate reflects the amortization of unrealized
and realized gains and losses on the Underlying Assets, such rate may not
reflect the actual returns achieved by the Underlying Assets. Further, such
rate may be significantly greater or less than current market interest rates;
provided, that under each Wrapper Agreement the crediting rate will never be
less than zero.
If, to effectuate a redemption payment, the Fund is required to liquidate
Underlying Assets, the Wrap Provider may be obligated to pay the Fund all or
some of the difference between the fair market and corresponding Book Value of
such Underlying Assets (if fair market value is less than Book Value). If, on
the other hand, the market value of the liquidated Underlying Assets
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<PAGE>
exceeds the corresponding Book Value, the Fund may be obligated to pay all or
some of the difference to the Wrap Provider. The parties' respective
obligations under the Wrapper Agreements arising from the sale of Underlying
Assets may be paid immediately or may be netted against one another. Through
such obligations, the Wrapper Agreements should, under normal conditions,
reduce the interest rate risk associated with the Fund's investment in
Securities.
A Wrapper Agreement may allow the Fund to borrow money from the Wrap
Provider to make redemption payments. Such borrowings may enable the Fund to
avoid losses and the costs involved in liquidating Underlying Assets. Any such
borrowing will accrue interest daily at a rate agreed to by the Fund and the
Wrap Provider; which rate may be greater or less than the return the Fund may
achieve by retaining Underlying Assets. Also, if the Wrapper Agreement requires
that the proceeds of all new Share purchases be used to repay any outstanding
borrowing, the Fund may not be able to take advantage of investment
opportunities. See "Investment Practices," "Investment Practices - Repurchase
Agreements, Reverse Repurchase Agreements, Securities Lending" and "Investment
Practices -- Borrowing" herein.
Wrapper Agreements may be "participating," "non-participating," or a
hybrid combination of the two. Under a "participating" Wrapper Agreement,
the Fund will not receive any payments from the Wrap Provider until it has
liquidated all of the Underlying Assets. If at that time, there is any
remaining Book Value, the Wrap Provider will pay the Fund such remainder.
Under a "non-participating" agreement, if there is a difference between the
value of the Underlying Assets and Book Value, the Wrap Provider or the Fund
will make a payment to the other each time Underlying Assets are liquidated
to fund Share redemptions. If the value of the Underlying Assets is less
than Book Value, the Wrap Provider will make a payment to the Fund, while if
the value of the Underlying Assets is greater than Book Value, the Fund will
make a payment to the Wrap Provider. In either case, the payment will be
equal to the difference between (i) the amount necessary to fund the
redemption, and (ii) the product of the amount of the redemption multiplied
by the ratio of the value of the Underlying Assets to Book Value. Under a
"hybrid" Wrapper Agreements a certain percentage of payments are treated as
"participating," with all remaining payments being "non-participating."
Generally, payments under a Wrapper Agreement will be made within one day
after the Fund requests a payment. Unless the Share redemption is to be made
on 12 months' notice, the Wrap Providers will be obligated to make payments
within such one day period. In addition, each Wrapper Agreement will allow
the Fund, in the Fund's discretion, to assign a portion of the Wrapper
Agreement to a shareholder as a payment in kind. See "Purchase and
Redemption of Fund Shares -Redemption of Shares" herein.
Payment requests will be allocated among Wrap Providers on a pro-rata
basis, based upon the Book Value of each Wrapper Agreement. However, if a
portion of a Wrapper Agreement is to be assigned as a payment in kind to a
shareholder, the Fund will have the discretion to choose to allocate the
payment to a single Wrapper Agreement. In that circumstance, the Fund will
address subsequent requests for such assignments to a different Wrap Provider
until each Wrap Provider has made roughly its pro rata share of such
assignments.
The terms of a Wrapper Agreement may require that the Underlying Assets
have a specified duration or maturity, consist of specified types of securities
or be of a specified credit quality. The Fund will purchase Wrapper Agreements
whose criteria in this regard are consistent with the Fund's investment
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<PAGE>
objectives and policies as set forth in this Prospectus and the SAI. The
Wrapper Agreement also may limit the Fund's ability to change the investment
objectives, policies and restrictions set forth in this Prospectus and the SAI,
absent the consent of the Wrap Provider.
A Wrapper Agreement may mature on a specified date, and may be terminable
upon notice by the Fund or a default by either the Fund or Wrap Provider. An
"evergreen" Wrapper Agreement contains no maturity date. Under this type of
Wrapper Agreement, either the Fund or the Wrap Provider may elect to terminate
the Wrapper Agreement through a fixed maturity conversion. This means that the
Wrapper Agreement will terminate on a future date which is generally determined
by adding the duration of the Underlying Assets to the date either party makes
such election (e.g., if the election date is 1/1/2001 and the duration of the
Underlying Assets is 3 years, the Wrapper Agreement will terminate on 1/1/2004).
In addition, during the conversion period, the Fund may be required to comply
with certain restrictions with respect to certain Underlying Assets deemed to be
covered by the terminating Wrapper Agreement. Such restrictions typically
include a requirement that the duration of such Underlying Assets approximately
equal the remaining time until the termination of the conversion period.
Generally, at termination of a Wrapper Agreement, the Wrap Provider will be
required to pay the Fund any excess in Book Value over the value of the
Underlying Assets. However, if the Wrapper Agreement terminates because of a
default by the Fund or upon written notice by the Fund (other than through fixed
maturity conversion), no such payment is made.
SPECIFIC RISKS OF WRAPPER AGREEMENTS. The Fund expects that its use of
Wrapper Agreements will allow it to maintain a stable NAV per Share and to pay
dividends to shareholders which reflect the interest income and market value
gains and losses of the Underlying Assets less the expenses incurred by the Fund
and Wrap Provider fees. However, there can be no assurance that the Fund will
maintain such a stable NAV per Share, or that any shareholder will achieve the
same investment return as would be realized by directly investing in the
Underlying Assets. As the crediting rates under the Wrapper Agreements reflect
the amortization of realized and unrealized gains and losses on the Underlying
Assets, a shareholder could realize more or less than the actual investment
returns of the Underlying Assets depending upon the timing of the shareholder's
purchases and redemptions of Shares, as well as those of other shareholders. In
addition, the following risks are inherent in Wrapper Agreements, and could
prevent the Fund from achieving its investment objectives.
FAILURE TO OBTAIN REPLACEMENT WRAPPER AGREEMENTS. If a Wrapper Agreement
matures or terminates, the Fund may be unable to obtain a replacement Wrapper
Agreement or a Wrapper Agreement with substantially the same terms as the
maturing or terminating agreement. In that event, the Fund may not be able
to maintain a stable NAV per Share. If at such time the value of the
Underlying Assets is less than Book Value, the Fund may be required to reduce
its NAV accordingly. Likewise, if at such time the value of the Underlying
Assets is greater than Book Value, the Fund's NAV may increase. In either
case, shareholders may experience unexpected fluctuations in the value of
their Shares. Further, if the new Wrapper Agreement contains unfavorable
terms, such as a higher Wrap Provider fee, the returns of the Fund may be
negatively affected.
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<PAGE>
UNWRAPPED FUND ASSETS. It is currently contemplated that all of the Fund's
Securities will be covered by Wrapper Agreements. The Fund, however, may not be
able to purchase or maintain Wrapper Agreements with respect to all Securities.
Moreover, the Fund may determine not to enter into Wrapper Agreements with
respect to certain of its Securities. Further, a large, sudden increase in the
amount of Share purchases could result in the Fund being unable to obtain
sufficient Wrapper Agreements to cover all its Underlying Assets. In that
event, the Fund may not be able to achieve its investment policy of maintaining
a stable NAV per share, because fluctuations in the market value of assets that
are not covered by Wrapper Agreements may affect the Fund's NAV per Share.
VALUATION OF WRAPPER AGREEMENTS. The value of each Wrapper Agreement
will be determined by UBT, in accordance with policies and procedures
established by the Board of Trustees on behalf of the Fund. If a Wrap
Provider defaults on its obligations under a Wrapper Agreement or any other
agreement, becomes insolvent, or enters insolvency proceedings, the value of
the Wrapper Agreement will be adjusted to reflect the Wrap Provider's
inability to meet its obligations under the Wrapper Agreement. Further, if a
Wrap Provider's credit ratings are downgraded or if the Board determines that
a Wrap Provider may no longer be able to satisfy its obligations under a
Wrapper Agreement in a timely manner, the value of the Wrapper Agreement may
be adjusted to reflect the uncertainty that the Wrap Provider will be able to
meet its obligations under the Wrapper Agreement. In any such case, the Fund
may not be able to maintain a stable NAV per Share and may experience a
decrease or increase in its NAV per Share depending upon the value of the
Underlying Assets at the time of adjustment.
CREDIT RISK OF UNDERLYING ASSETS. Wrapper Agreements usually do not
require the Wrap Provider to assume the credit risk associated with the issuer
of any Underlying Asset. Therefore, defaults by, and downgrades below
investment grade of, the issuer of an Underlying Asset usually will cause such
Underlying Asset to be removed from the coverage of a Wrapper Agreement. In
addition, certain other downgrades of Underlying Assets will cause such
Underlying Assets to be removed from the coverage of a Wrapper Agreement unless
and until such Assets' credit rating is upgraded to its former level. In these
situations, the termination of the coverage of such Underlying Assets in most
circumstances will cause the value of the Wrapper Agreement to decrease by an
amount essentially equal to the difference between the purchase price and the
fair market value of such assets. In any such event, the Fund may suffer a
decrease in its NAV and may not be able to maintain a stable NAV per Share.
DEPENDENCE UPON A LIMITED NUMBER OF WRAP PROVIDERS. It is currently
intended that the Fund will maintain Wrapper Agreements with one or more Wrap
Providers. If the Fund maintains more than one Wrapper Agreement, coverage of
the Underlying Assets will be allocated among such Wrapper Agreements. However,
there is no guarantee that the Fund will be able to obtain more than one Wrapper
Agreement, and therefore, it is possible that the Fund may be totally dependent
upon one Wrap Provider for coverage of all of the Underlying Assets.
LIABILITY OF WRAP PROVIDERS. A Wrap Provider's payment obligation is
limited to the Book Value of its Wrapper Agreement. If the Fund enters into
Wrapper Agreements with more than one Wrap Provider, no Wrap Provider will be
jointly liable for the payment obligations of any other Wrap Provider.
Therefore, if a Wrap Provider defaults on its obligations under a Wrapper
Agreement, the Fund will not be able to look to any other Wrap Provider for
satisfaction of such obligations. In that event, the Fund may seek to promptly
replace that Wrap Provider with a substitute Wrap Provider. However, there can
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<PAGE>
be no guarantee that any such replacement will be feasible, or that any
substitute Wrap Provider will agree to the same terms as the original Wrap
Provider. Further, if at the time of the replacement, the value of the
Underlying Assets is less than the Book Value of the defaulted Wrapper
Agreement, it may be more difficult or impossible for the Fund to obtain a
replacement Wrapper Agreement from a qualified Wrap Provider. In addition, the
fees charged by any such substitute Wrap Provider could be significantly greater
than those previously charged and could reduce the ultimate returns provided to
shareholders.
ILLIQUID ASSET. Currently, there is no active trading market for Wrapper
Agreements and none is expected to develop. Accordingly, Wrapper Agreements
may not be able to be liquidated within seven days at fair market value.
Therefore, the Wrapper Agreements will be considered illiquid. As such, at
the time of purchase, the fair market value of the Fund's Wrapper Agreements,
together with the fair market value of all other illiquid assets, will not
exceed fifteen percent (15%) of the fair market value of the Fund's net
assets. In the event that the fair market value of all illiquid assets,
including Wrapper Agreements, exceeds 15% of the fair market value of the
Fund's net assets as the result of events other than the purchase of illiquid
assets, the Fund will take steps to reduce in an orderly manner the
percentage of illiquid assets in the Fund such that illiquid assets will not
exceed 15% of the Fund. See "Investments and Related Risks" and "Investment
Practices" herein.
DERIVATIVES. The Fund may invest in various instruments, including the
Wrapper Agreements, that are commonly known as derivatives. Generally, a
derivative is a financial arrangement the value of which is based on, or
"derived" from, a traditional security, asset or market index. Some
derivatives such as mortgage-related and other asset-backed securities are in
many respects like any other investment, although they may be more volatile
or less liquid than more traditional debt securities. There are a range of
risks associated with the use of derivatives. There are a variety of
instruments that can be used for risk management. Futures contracts and
options are commonly used for traditional hedging purposes to attempt to
protect an investor from exposure to changing interest rates, securities
prices or currency exchange rates and for cash management purposes as a low
cost method of gaining exposure to a particular securities market without
investing directly in those securities. However, some derivatives are used
for leverage, which tends to magnify the effect of an instrument's price
changes as market conditions change. Leverage involves the use of a small
amount of money to control a large amount of financial assets and can, in
some circumstances, lead to significant losses. UBT uses derivatives only in
circumstances where it believes they offer the most economic means of
improving the risk/reward profile of the Fund. Derivatives will not be used
to increase portfolio risk above the level that could be achieved using only
traditional investment securities or to acquire exposure to changes in the
value of assets or indices that by themselves would not be purchased for the
Fund. The use of derivatives for non-hedging purposes may be considered
speculative. A further description of the derivatives that the Fund may use
and some of their associated risks is found in "Investment Practices
- --Hedging Strategies" herein.
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INVESTMENT PRACTICES.
The Fund's investment objective is to preserve principal, obtain a high
level of current income and maintain a stable net asset value per Share. This
objective is not a fundamental policy of the Fund and therefore may be changed
upon notice to, but without the approval of, the Fund's shareholders. If there
is a change in the Fund's investment objective, its shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current needs. Shareholders of the Fund will receive 30 days' prior
written notice with respect to any change in the investment objective of the
Fund.
The Fund may invest in a wide range of investments and engage in various
investment-related transactions and practices which are not fundamental policies
of the Fund. Therefore, these investment-practices may be changed by the Board
of Trustees without shareholder approval. The following are some of the more
significant practices:
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest its net assets
in restricted or illiquid securities that may not have price quotations
immediately available. Investments may be illiquid because of the absence of
an active trading market and/or sale restrictions pursuant to the Securities
Act of 1933, or otherwise, making it difficult to sell such securities
promptly at an acceptable price. The Fund will not invest more than 15% of
its net assets in illiquid securities, including Wrapper Agreements. The
Fund may purchase securities eligible for resale under Rule 144A of the
Securities Act of 1933. This rule permits otherwise restricted securities to
be sold to certain institutional buyers. Provided that such securities are
determined to be liquid by the Board of Trustees, or by UBT, pursuant to
guidelines approved by the Board of Trustees, these restricted securities are
treated as exempt from the Fund's 15% limit on illiquid securities. If
institutional trading in Rule 144A securities were to decline, the liquidity
of the Fund could be adversely affected, resulting in the possibility of
undesirable delays in selling these securities at prices representing fair
value. In the event that the fair market value of all illiquid assets,
including Wrapper Agreements, exceeds 15% of the fair market value of the
Fund's net assets as the result of events other than the purchase of illiquid
assets, the Fund will take steps to reduce in an orderly manner the
percentage of illiquid assets in the Fund such that illiquid assets will not
exceed 15% of the Fund.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may be delayed by a month or more after the date of the
purchase commitment. The value of when-issued and delayed delivery securities
is subject to market fluctuations during this period, thereby creating an
unrealized gain or loss to the Fund. Also, no income accrues to the Fund with
respect to such securities, until settlement takes place.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a
security at one price and simultaneously agrees to sell it back to the seller at
a higher price at a stated time. In the event of a bankruptcy or default of the
other party to the repurchase agreement, the Fund could experience costs and
delays in liquidating the underlying security, which is held as collateral, and
the Fund might incur a loss if the value of the collateral held declines during
this period. Also, if the other party becomes insolvent, a bankruptcy court may
determine that the securities do not belong to the Fund and order that the
securities be sold to pay off that party's debts.
REVERSE REPURCHASE AGREEMENTS, SECURITIES LENDING AND DOLLAR ROLLS. In a
reverse repurchase agreement, the Fund sells a security for cash and
simultaneously agrees to repurchase it at an agreed upon price at a stated time.
In addition, the Fund may lend securities with a value of up to 33% of its total
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<PAGE>
assets, to realize additional income. The use of a reverse repurchase agreement
and securities lending may involve the risk of delay in recovery of the
securities or loss of rights in the securities should the other party default or
become insolvent.
In a dollar roll, the Fund sells mortgage-backed or other securities for
delivery in the current month and simultaneously contracts to purchase
substantially similar securities on a specified future date. Reverse repurchase
agreements, securities lending and dollar rolls are considered forms of
borrowing and will be counted towards the Fund's borrowing restrictions. See
"Borrowing" below and in the Fund's SAI. If the Fund enters into transactions
of this type, the Wrapper Agreements will treat the cash proceeds of such
transactions as Underlying Assets but not the portfolio instruments transferred
to another party until possession of such instruments is returned to the Fund.
SHORT-TERM INVESTMENTS. The Fund's assets may be invested in cash or high
quality short-term investments with remaining maturities of 397 days or less.
Assets will be invested in such instruments to meet anticipated redemptions,
expenses for day-to-day operations, to allow an orderly investment program to be
carried out in accordance with the Fund's investment policies, and when, in
UBT's opinion, it is appropriate to adopt a temporary defensive position because
of unstable or adverse conditions affecting the respective markets. Generally,
short-term investments will result in lower long-term returns than investments
in other Fixed Income Securities.
BORROWING. The Fund may borrow money for any purpose in an amount equal
to no more than 1/3 of its total assets. Under the 1940 Act, the Fund 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 liquidation of the Fund's holdings
may be disadvantageous from an investment standpoint.
For purposes of these limitations, borrowings under Wrapper Agreements, as
well as reverse repurchase, securities lending and dollar roll transactions, are
considered to be borrowings by the Fund. See "Investments and Related Risks --
Wrapper Agreements" and "Investment Practices -- Reverse Repurchase Agreements,
Securities Lending and Dollar Rolls" herein.
LEVERAGING. Leveraging creates an opportunity for increased net income
but, at the same time, is considered a speculative technique that creates
special risk considerations. For example, leveraging may exaggerate changes
in the NAV per Share and in the yield on the Securities. Although the
principal of such borrowings will be fixed, the value of assets purchased or
retained with borrowed funds may change while the borrowing is outstanding.
Leveraging will create interest expenses which can exceed the income from the
assets retained. To the extent the income derived from securities purchased
with borrowed funds exceeds the interest on the borrowing, net income will be
greater than if leveraging were not used. Conversely, if the income from the
assets retained with borrowed funds is not sufficient to cover the cost of
leveraging, net income will be less than if leveraging were not used, and
therefore the amount available for distribution to shareholders will be
reduced. UBT currently does not intend to use leverage as a usual practice
in the investment of the Fund's assets.
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<PAGE>
HEDGING STRATEGIES. The Fund may use certain hedging techniques and
strategies designed to adjust the overall risk of its investment portfolio.
These hedging strategies may involve the use of futures contracts, and other
similar instruments (collectively referred to as "hedging instruments"), as
more fully described in the SAI. New financial products and risk management
techniques are introduced continuously. The Fund may use such products and
techniques if they are consistent with the Fund's investment objective and
policies. Among other purposes, these hedging strategies may be used to seek
to maintain a desired portfolio duration or to protect against market risk if
the Fund changes its investments among different types of Fixed Income
Securities.
The Fund might not use any hedging strategies and there can be no assurance
that the use of hedging instruments by the Fund will assist it in achieving its
investment objective. Risks inherent in the use of these instruments include:
(a) the risks that interest rates and securities prices will not move in the
direction anticipated; (b) the imperfect correlation between the prices of
hedging instruments and the prices of securities being hedged; (c) the Fund's
potential inability to purchase or sell portfolio instruments at advantageous
times due to the need for the Fund to maintain "cover" or segregated securities;
(d) the possibility that the Fund will be unable to close or liquidate its
hedged position; and (e) the fact that skills needed to use these strategies are
different from those needed to select Securities.
ASSET COVERAGE. The Fund will comply with guidelines established by the
SEC with respect to coverage of options and futures by mutual funds. The
Fund intends to cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities or by
segregating cash or liquid securities with the Fund's custodian (UBT) in an
amount at all times equal to or exceeding the Fund's commitment with respect
to these instruments or contracts. Assets that are segregated for purposes
of providing cover need not be physically segregated in a separate account
provided that the custodian notes on its books that such assets are
segregated. The Fund will also cover its use of Wrapper Agreements to the
extent required to avoid creating a "senior security" (as defined in the 1940
Act) in connection with its purchase of such agreements.
PURCHASE AND REDEMPTION OF FUND SHARES
CLASSES OF SHARES.
The Fund offers three classes of Shares: Class A, Class B, and Class C
(each a "Class"). No Class is subject to an initial sales charge. Pursuant to
a Plan adopted by the Board of Trustees, Class A, B and C Shares are subject to
distribution and service fees ("Rule 12b-1 Fees") as follows: (1) Class A
Shares pay a Rule 12b-1 Fee at the annual rate of 0.25% of the average daily net
assets attributable to the Class A Shares; (2) Class B Shares are subject to a
Rule 12b-1 Fee at the annual rate of 0.05% of the average daily net assets
attributable to the Class B Shares; and (3) Class C Shares pay a Rule 12b-1 Fee
at the annual rate of 0.25% of the average daily net assets attributable to the
Class C Shares. The Distributor has agreed to waive all of its Rule 12b-1 Fee
in connection with the distribution of Class B Shares. The Distributor may
terminate such waiver at any time, in its sole discretion, with 30 days' prior
written notice to the Fund and UBT.
The services provided in exchange for the above-referenced fees may include
payments to broker-dealers in connection with the sale of Class A, B or C
Shares, establishing and maintaining shareholder accounts, processing purchase
and redemption transactions, arranging for bank wires, performing
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<PAGE>
shareholder sub-accounting, answering client inquiries regarding the Fund,
providing periodic statements showing the client's account balance and those
of Plan Participants and Individual Retirement Investors, transmitting proxy
statements, periodic reports, updated prospectuses and other communications
to shareholders and, with respect to meetings of shareholders, collecting,
tabulating and forwarding to the Trust executed proxies and obtaining such
other information and performing such other services as may reasonably be
required.
The Rule 12b-1 Fees for Class A, B and C Shares may be used by the
Distributor for the purpose of financing any activity which is primarily
intended to result in the sale of shares of the Fund. For example, such fees
may be used by the Distributor: (a) to compensate broker-dealers, including
the Distributor and its registered representatives, for their sale of the
Shares, including the implementation of various incentive programs with
respect to broker-dealers, banks, and other financial institutions; and (b)
to pay other advertising and promotional expenses in connection with the
distribution of the Shares. These advertising and promotional expenses
include, by way of example but not by way of limitation, costs of
prospectuses for other than current shareholders; preparation and
distribution of sales literature; advertising of any type; and compensation
paid to and expenses incurred by officers, employees or representatives of
the Distributor or of other broker-dealers, banks, or other financial
institutions, including travel, entertainment, and telephone expenses. The
Rule 12b-1 Fees are paid to the Distributor under a compensation-type 12b-1
Plan approved by the Fund's Board of Trustees. Payments under the 12b-1 Plan
may exceed expenses actually incurred by the Distributor.
The investment advisory fee applicable to all Classes of Shares is the
same. The amount of dividends payable to Class A and C Shares will be less
than those payable to Class B Shares by the amount of the difference between
the expenses borne by the Class A and C Shares and the Class B Shares.
Class A, B and C Shares are, under certain circumstances, subject to a
maximum redemption fee of 2% of the proceeds of the redemption.
PLAN PARTICIPANT TRANSACTIONS.
Plan Participant-directed purchases, exchanges and redemptions of Shares
are handled in accordance with each Plan's specific provisions, subject to the
Fund restrictions contained herein. Plans may have different provisions with
respect to the timing and method of purchases, exchanges and redemptions by Plan
Participants. Plan Participants should contact their Plan administrator for
details concerning how they may direct transactions in Shares. It is the
responsibility of the Bank Collective Fund's investment manager, Plan
administrator or other Plan service provider to forward instructions for these
transactions to the Distributor or Transfer Agent.
Plan Participants should contact their Plan administrator or the
organization that provides recordkeeping services if they have questions
concerning their account. Plan administrators and fiduciaries should call
1-888-645-0597 for information regarding a Plan's or Bank Collective Fund's
account with the Fund.
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PURCHASE OF SHARES.
Shares of the Fund are offered on each day the New York Stock Exchange
(the "Exchange") is open for trading (a "Business Day"). Purchase orders
received by the Transfer Agent on a Business Day prior to 4:00 p.m. Eastern
Time, and accompanied by payment, will be processed based on that day's
closing net asset value.
Purchase orders for Class A and B Shares must be placed in writing with
the Transfer Agent or through certain broker-dealers and must be accompanied
by sufficient funds. Acceptable methods of payment include checks, federal
funds and wires. Purchase orders for Class C Shares may be placed by mail,
wire or telephone directly with the Transfer Agent or through broker-dealers
or other financial institutions. In connection with the purchase of Class C
Shares, investors may be charged fees for transactions effected through
certain broker-dealers or other financial institutions.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expenses for acting upon wire instructions, or telephone
instructions that it reasonably believes to be genuine. The Fund and the
Transfer Agent will each employ reasonable procedures to confirm that
instructions communicated by telephone are genuine including requiring a form of
personal identification prior to acting upon instructions received by telephone
and recording telephone instructions.
Certificates for Shares will not be issued. Investor shareholdings will be
recorded on the books of the Fund and each shareholder will be regularly advised
of its holdings.
The sale of Shares will be made at NAV per share and therefore such sales
will be suspended during any period when the determination of net asset value is
suspended. The sale of shares may also be suspended by the Board of Trustees
whenever the Board of Trustees determines that it is in the Fund's best interest
to do so. The Fund may, in its complete discretion, reject any order for
purchase of its Shares. Also, Shares may only be purchased in those states
where they may be lawfully sold.
Due to the fixed expenses incurred by the Fund in maintaining individual
accounts, the Fund reserves the right to redeem accounts of Class C shareholders
that fall below the $2,000 minimum required investment due to shareholder
redemptions (but not solely to a decrease in the net asset value of the Fund.)
In order to exercise this right, the Fund will give advance written notice of at
least 30 days to each account below the minimum, during which period the account
may be increased to or above the minimum.
For further information, please refer to "Purchase and Redemption of Fund
Shares" in the SAI.
MINIMUM INVESTMENT. The minimum initial investment in the Fund in
connection with the purchase of Class A or B Shares is $1.0 million. The
minimum initial investment in the Fund for Class C Shares is $2,000 with a
minimum of $500 for subsequent investments. UBT may waive the minimum initial
investment amounts at its discretion. No minimum applies to subsequent
purchases effected by dividend reinvestment.
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<PAGE>
INITIAL PURCHASE BY MAIL. An account may be opened by mailing a check or
other negotiable bank draft payable to The Portland Mutual Funds for at least
the minimum initial amount specified above, and a completed Account
Application to The Portland Mutual Funds, c/o BISYS Fund Services, P.O. Box,
[ADDRESS]. The Fund will not accept third-party checks, i.e., a check not
payable to The Portland Mutual Funds or the Fund for initial or subsequent
investments.
INITIAL PURCHASE BY WIRE. An investor with an account with a commercial
bank that is a member of the Federal Reserve System, may purchase Shares of
the Fund by wire transfer. An Account Application must be received and an
account number assigned prior to receipt of the wire. An Account Application
can be obtained by telephoning 1-888-645-0597. The investor's account
number, taxpayer identification number or Social Security Number, and address
must be specified in the wire. All wires must be received by 4:00 p.m.,
Eastern time for the purchase to be effective on that day. In addition, an
original Account Application should be promptly forwarded to: The Portland
Mutual Funds, c/o BISYS Fund Services, P.O. Box, [ADDRESS]. All wires must
be sent as follows: [WIRE INSTRUCTIONS].
ADDITIONAL PURCHASES BY PHONE (TELEPHONE PURCHASE). Additional Class C
Shares may be purchased by a shareholder by telephoning the Transfer Agent at
1-888-645-0597. The minimum telephone purchase is $500.00. Payment for the
telephone purchase must be received by the Transfer Agent within seven days.
ADDITIONAL PURCHASES BY WIRE. Additional investments may be made at any
time through the wire procedures described above. Commercial banks generally
impose a fee for investments by wire.
REDEMPTION OF SHARES.
Redemption requests in connection with Class A or B Shares must be in
writing and sent to the Distributor or the Transfer Agent. Redemption
requests in connection with Class C Shares may be made through the Transfer
Agent or through certain broker-dealers and other financial institutions. A
fee may be charged by certain financial institutions for this service. The
Fund will redeem shares at net asset value as next computed after receipt by
the Transfer Agent of a request for redemption. The Distributor will not
transmit redemption requests to the Transfer Agent until the Distributor has
determined that the request is in good form. Except for redemptions for
which 12 months' prior notice has been given, redemptions will be made at the
next determined Fund NAV after the redemption request is received in good
order, and in no event will payment be made more than seven days after
receipt of a redemption request in good order. Payments in connection with a
redemption request for which 12 months' prior notice has been given will be
made no later than seven days following the end of the 12 month period. The
Fund may suspend or postpone the right of redemption when permitted by
applicable law. Redemption payments may be in the form of check or wire
transfer. There is no charge for redemption payments made by check. The
Transfer Agent will deduct a wire charge, currently $10.00, from the amount
of a Federal Reserve wire redemption payment made at the request of a
shareholder. Shareholders cannot receive proceeds from redemptions of Shares
of the Fund by Federal Reserve wire on federal holidays restricting wire
transfers.
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<PAGE>
Redemption requests on Class A and B Shares for reasons other than a
Benefit Responsive Payment Event or without 12 months' notice will be subject
to a 2% redemption fee. Redemptions of Class C Shares in connection with a
Qualified Payment Event are not subject to a redemption fee. Redemptions of
Class C Shares unrelated to a Qualified Payment Event but made with 12
months' prior notice are not subject to a redemption fee. Redemptions of
Class C Shares which have been continuously held for at least 12 months by an
Individual Retirement Investor who has attained the age of 59-1/2 will also
not be subject to a redemption fee. All other redemptions of Class C Shares
are subject to a 2% redemption fee.
The Fund has elected to redeem Shares solely in cash up to the lesser of
$250,000 or 1% of the NAV of the Fund during any 90 day period for any one
shareholder. The Fund reserves the right to honor any redemption request in
excess of the foregoing amount by making payment in whole or in part in
Securities or Securities and Wrapper Agreements, selected solely at the
discretion of UBT. To the extent that any such payment in kind includes a
Wrapper Agreement, the Fund will assign a portion of one or more Wrapper
Agreements to the redeeming shareholder. The economic terms and conditions of
each assigned Wrapper Agreement will be substantially similar to the Wrapper
Agreements held by the Fund. By purchasing shares in the Fund the
shareholders agree that they will accept an assignment of a Wrapper Agreement
as part of an in-kind redemption, provided that at the time of the redemption
payment such assignment would not violate applicable law.
To the extent a payment in kind is made with Securities, a shareholder
may incur transaction expenses in custodying and disposing of the Securities.
Therefore, a shareholder receiving Securities may incur costs that may exceed
such shareholder's share of the operating expenses incurred by the Fund. In
addition, Wrapper Agreements assigned to a shareholder as a payment in kind
are illiquid and will require the shareholder to pay fees directly to the
Wrap Provider rather than through the Fund. Further, the Wrapper Agreement
may contain restrictions on the securities subject to such agreement,
including, but not limited to the types, maturities, duration and credit
quality of each security. Therefore, to obtain the benefits of a Wrapper
Agreement, the shareholder may not be able to freely trade the securities
underlying the agreement. Also, Wrapper Agreements assigned to a shareholder
will not provide protection against the credit risk associated with the
issuer of any Underlying Assets (see Specific Risks of Wrapper Agreements).
IN-KIND REDEMPTIONS - CLASS A AND B SHAREHOLDERS
The Fund does not anticipate exercising its rights to redeem in-kind if a
request for redemption is received in connection with a Benefit Responsive
Payment Event or with 12 months notice. A Wrap Provider, prior to the
assignment of a Wrapper Agreement to a Class A or B shareholder, may require
the shareholder to represent and warrant that such assignment does not
violate any applicable laws. Moreover, the Wrap Provider may require the
shareholder to obtain at its own expense the services of a qualified
professional asset manager ("QPAM") acceptable to the Wrap Provider to manage
the Securities distributed in kind in conformity with the Wrapper Agreement
provisions. In the event a Wrapper Agreement cannot be assigned to the
shareholder, the Fund in its discretion may satisfy the redemption request
through (a) a cash payment, (b) a redemption in-kind consisting entirely of
Securities, (c) a combination of cash and Securities, or (d) the Fund may
give the redeeming shareholder the opportunity to choose between one of the
foregoing options or providing the Fund with 12 months notice of its request
for such redemption (which 12-month notice option would cause the redemption
not to be subject to the redemption fee).
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In the event a redemption is made in kind with a Wrapper Agreement, the
Fund will incur costs in obtaining such Wrapper Agreement. These costs are not
expected to exceed the 2% redemption fee.
NET ASSET VALUE.
The NAV per share is calculated by dividing the total value of the Fund's
assets, less any liabilities, by the total number of its Shares outstanding.
The NAV per Share is determined on each day on which the Exchange is open for
business (each such day being a "Valuation Day").
The NAV per Share is determined once on each Valuation Day as of 4:00
p.m., Eastern time (the "Valuation Time"), or if the Exchange closes early,
at the time of the early closing. The Securities and other assets are valued
primarily on the basis of market quotations. When market quotations are not
readily available, the Securities are valued at fair value as determined in
good faith by UBT in accordance with the policies and procedures established
by the Board of Trustees, subject to review of the Board of Trustees.
Pursuant to procedures adopted by the Board of Trustees, the fair value of
a Wrapper Agreement ("Wrapper Value") generally will be equal to the difference
between the Book Value and the market value of the applicable Underlying Assets.
In determining Wrapper Value, the Board of Trustees intends to consider the
credit quality and ability of a Wrap Provider to pay amounts due under the
Wrapper Agreement. If the Board of Trustees determines that a Wrap Provider is
unable to make such payments, the Board of Trustees may assign a Wrapper Value
that is less than the difference between the Book Value and the market value
(plus accrued interest) of the applicable Underlying Assets. In the event of
such an occurrence, the Fund might be unable to maintain a stable NAV.
Under procedures adopted by the Board of Trustees, an NAV per Share which
is later determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at an NAV per Share determined to have been
inaccurate or incorrect will be adjusted; provided, however, that no such
adjustment will be required where the difference between the original NAV per
Share and the recalculated NAV per Share divided by the latter is 0.005 (1/2 of
1%) or less, or shareholder transactions are otherwise unsubstantially affected.
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ADDITIONAL INFORMATION
CHARACTERISTICS OF FUND SHARES.
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate series of the Trust,
a Delaware business trust organized pursuant to a Declaration of Trust dated
September 24, 1997. The Trust reserves the right to add additional series in
the future. UBT has contributed $100,000 to the Trust, such sum representing
the initial capital of the Trust. The Board of Trustees has authority to issue
an unlimited number of shares of beneficial interest, without par value.
The Fund currently offers three Classes of Shares, Class A, Class B, and
Class C. Each Class represents an identical interest in the Fund's
investment portfolio. The Trust also reserves the right to issue additional
classes of Shares of the Fund. Under the Trust's multi-class system, shares
of each class of the Fund represent an equal pro rata interest in the Fund
and, generally, have identical voting, dividend, liquidation, and other
rights, preferences, powers, restrictions, limitations, qualifications and
terms and conditions, except that: (a) each class shall have a different
designation; (b) each class of shares shall bear its "Class Expenses;" (c)
each class shall have exclusive voting rights on any matter submitted to
shareholders that relates solely to its distribution arrangements; (d) each
class shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class; (e) each class may have separate exchange privileges,
although exchange privileges are not currently contemplated; and (f) each
class may have different conversion features, although a conversion feature
is not currently contemplated. The Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes and will take appropriate action if any such conflict
arises. For more information about the different Classes of Shares of the
Fund, please call 1-888-645-0597.
Each Share of each Class of the Fund shall be entitled to one vote (or
fraction thereof in respect of a fractional share) on matters that such Shares
(or Class of Shares) shall be entitled to vote. Shareholders of the Fund shall
vote together on any matter, except to the extent otherwise required by the 1940
Act, or when the Board of Trustees has determined that the matter affects only
the interest of shareholders of one or more Classes, in which case only the
shareholders of such Class or Classes shall be entitled to vote thereon. Any
matter shall be deemed to have been effectively acted upon with respect to the
Fund if acted upon, as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Declaration of Trust.
The Trust is not required to hold annual shareholder meetings, but special
meetings may be called for purposes such as electing or removing Trustees,
changing fundamental policies or approving an investment management or advisory
agreement. Shareholders not attending a shareholders meeting are encouraged to
vote by proxy. The Transfer Agent will mail proxy materials in advance,
including a voting card and information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund will
have one vote for each full Share held and proportionate, fractional votes for
fractional Shares held. A separate vote of the Fund is required on any matter
affecting only the Fund on which shareholders are entitled to vote; shareholders
of the Fund are not entitled to vote on Trust
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matters that do not affect the Fund and do not require a separate vote of the
Fund. All series of the Trust will vote together on certain matters, such as
electing Trustees or approving independent public auditors. Under certain
circumstances, the shareholders of one series of the Trust could control the
outcome of these votes. There normally will be no meetings of shareholders for
the purpose of electing Trustees unless and until such time as less than a
majority of Trustees holding office has been elected by shareholders, at which
time the Trustees then in office will call a shareholders' meeting for the
election of Trustees. Any Trustee may be removed from office upon the vote of
shareholders holding at least two-thirds of the Trust's outstanding shares at a
meeting called for that purpose. The Trustees are required to call such a
meeting upon the written request of shareholders holding at least 10% of the
Trust's outstanding shares. The Trust will also assist shareholders in
communicating with one another as provided for in the 1940 Act.
BOARD OF TRUSTEES.
The Trust is governed by a Board of Trustees that is responsible for
protecting the interests of investors. See "Management of the Trust" in the SAI
for more information with respect to the Trustees and officers of the Trust. By
virtue of the responsibilities assumed by UBT, as administrator of the Trust,
the Trust requires no employees other than its officers. None of the Trust's
officers devotes full time to the affairs of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISER. The Fund has retained the services of UBT as its
investment adviser pursuant to an Investment Advisory Agreement between the
Trust and UBT dated [INSERT DATE] (the "Investment Advisory Agreement"). Union
Bond & Trust Company, with principal offices at 5665 S.W. Meadows Road, Suite
400, Lake Oswego, OR 97035, is a state bank and trust company chartered in 1913
and reorganized in 1992 under the laws of the state of Oregon.
UBT provides a range of investment and fiduciary services to institutional
clients. UBT maintains and manages common and pooled trust funds invested
primarily in fixed income assets whose principal value is believed to be
relatively stable. UBT also acts as custodian with respect to similar fixed
income assets.
UBT is a wholly owned subsidiary of Morley Financial Services, Inc.
("Morley Financial Services"), a holding company which also wholly owns Morley
Capital Management, Inc., Morley & Associates, Inc. and Portland Investment
Services, Inc.
Morley Capital Management, Inc. is a registered investment adviser which
manages money for corporate, government, Taft-Hartley, and bank intermediary
clients on a national basis. Morley & Associates, Inc. is an insurance
brokerage company which provides insurance brokerage services for clients
throughout the United States. UBT offers trust services for Morley Capital
Management, Inc. clients, as well as for other institutional corporate
accounts in the investment market. As of July 31, 1997, Morley
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<PAGE>
Financial Services and its subsidiaries had investment management or advisory
responsibility for approximately $7.5 billion of assets.
UBT, subject to the supervision and direction of the Board of Trustees,
manages the Fund in accordance with the Fund's investment objective and stated
investment policies, makes investment decisions for the Fund, places orders to
purchase and sell securities and other financial instruments on behalf of the
Fund and employs or otherwise engages professional investment managers and
securities analysts who provide research services to the Fund. UBT places
orders for investment transactions on behalf of the Fund with broker-dealers and
other financial intermediaries that it selects. UBT may use an affiliate in
connection with a purchase or sale of an investment for the Fund if UBT believes
that the affiliate's charge for the transaction does not exceed usual and
customary levels. The Fund may invest in the obligations of correspondents and
customers of UBT.
The Investment Advisory Agreement provides for the Fund to pay UBT a fee,
accrued daily and paid monthly, equal to 0.35% per year of the average daily
net assets of the Fund. UBT has agreed voluntarily to waive 0.10% of that
fee. In addition, in the interest of limiting the expenses of the Fund, UBT
has voluntarily entered into an expense limitation agreement with the Fund
("Expense Limitation Agreement") pursuant to which UBT has agreed to waive or
limit a portion of its fee and to assume other expenses (except for Rule
12b-1 fees) in an amount necessary to limit total annual operating expenses
of the Fund (exclusive of Rule 12b-1 fees) to no more than 0.55% for Class
A, 0.55% for Class B, and 0.75% for Class C (expressed as a percentage of
average daily net assets). Reimbursement by the Fund of the advisory fees
waived or limited and other expenses paid by UBT pursuant to the Expense
Limitation Agreement may be made within three years from the date of the
Fund's inception when the Fund has reached a sufficient asset size to permit
reimbursement to be made without causing the total annual operating expense
ratio to exceed the foregoing annual expense limits. Consequently, no
reimbursement by the Fund will be made unless: (i) the Fund's assets exceed
$100 million; (ii) the total annual operating expenses of the Class making
reimbursement is less than the relevant limit set forth above; and (iii) the
payment of such reimbursement is approved by the Board of Trustees on a
quarterly basis.
UBT has been advised by its counsel that UBT currently may perform the
services for the Trust described in this Prospectus and the SAI without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations. State laws on this issue may differ from the interpretations of
relevant federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities law.
FUND MANAGEMENT.
Mr. Taylor E. Drake, Vice President of UBT, is responsible for the
day-to-day management of the Fund. Since joining Morley Capital Management,
Inc. in 1995, he has managed corporate stable value portfolios and designed
and implemented several new fixed income funds. With a total of over 10 years
in the financial markets, Mr. Drake's previous experience includes working
in international structured finance and investment management for Mellon Bank
in Tokyo, and as Associate Director of Investment Banking at US Bancorp. He
received his B.A. degree, cum laude, in Economics and Japanese from Brigham
Young University.
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ADMINISTRATOR. Under an Administration and Services Agreement with the
Trust, UBT assists the Board of Trustees in all aspects of the administration
and operation of the Fund. This Administration and Services Agreement
provides for the Trust to pay UBT a fee, accrued daily and paid monthly, of
0.25% per year of the average daily net assets of the Fund. UBT has agreed
voluntarily to waive 0.10% of this Fee. Under this Administration and
Services Agreement, UBT is responsible for selecting and monitoring the
performance of various third parties providing services to the Fund. Fees
paid to UBT as Administrator may be reduced to the extent the Fund directly
contracts with other third parties who may provide services to the Fund.
DISTRIBUTOR. Portland Investment Services, Inc., a wholly owned
subsidiary of Morley Financial Services serves as the Trust's principal
underwriter on a best efforts basis. Mr. Taylor E. Drake, portfolio manager
of the Fund is an officer of Portland Investment Services, Inc.
CUSTODIAN. UBT acts as custodian for the assets of the Fund under the
Custodian Agreement with the Trust. It is not separately compensated for these
services and may, at its own expense, delegate certain services to other service
providers.
TRANSFER AGENT, FUND ACCOUNTANT & SUB-ADMINISTRATOR. BISYS Fund Services
is the transfer agent, fund accountant and sub-administrator for the Fund,
under agreements approved by the Fund's Board of Trustees. BISYS Fund
Services is wholly owned by The BISYS Group, Inc., 150 Clove Road, Little
Falls, New Jersey 07424, a publicly owned company engaged in information
processing, servicing, and administration and recordkeeping services to and
through investment management and other financial organizations.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.
The Fund intends to distribute all of its net investment income and net
capital gains, if any, to its shareholders on an annual basis. The Fund
currently declares dividends from net investment income daily and pays dividends
monthly. Distributions of net realized capital gains are made annually. An
additional annual distribution ("Additional Distribution") may be paid to
satisfy the tax requirements (outlined below) that the Fund distribute each year
substantially all of its investment company taxable income (see "Tax
Considerations").
Dividends and other distributions paid on each Class of Shares will be
calculated in the same manner, at the same time, on the same day, and will be in
the same amount, except that the per Share dividends on Class A and C Shares
will be lower than those of Class B Shares (which have a lower total
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expense ratio). Dividends paid on the three Classes also might be affected
differently by the allocation of other Class-specific expenses. Dividends
and other distributions are automatically reinvested in additional Shares of
the distributing Class, unless the shareholder sends a written request to the
Fund directing otherwise.
The Fund may declare and pay dividends in amounts which are not equal to
the amount of the net investment income it actually earns. In the event
distributions exceed the income earned, the excess may be considered a return of
capital. In the event the income earned exceeds the amount of the dividends
distributed, the Fund may make an Additional Distribution of such excess amount.
The Board of Trustees, in an effort to maintain a stable NAV per Share in the
event of an Additional Distribution, may declare, effective on the
ex-distribution date of an Additional Distribution, a reverse split of the
Shares in an amount that will cause the total number of Shares held by each
shareholder, including Shares acquired on reinvestment of that distribution, to
remain the same as before that distribution was paid.
For example, if the Fund declares an Additional Distribution of ten cents
per Share when the NAV per Share is $10.00, a shareholder holding one Share
would receive 0.01 additional Shares on reinvestment of that distribution.
If no reverse split were declared, the NAV per Share would be approximately
$9.90 and the total value of the 1.01 shares held by the shareholder would be
$10.00. If a 1.01 to 1 reverse split were declared, however, the
shareholder's 1.01 shares would be combined into one share having a NAV of
$10.00. Thus, a reverse share split would not affect the total value of the
shareholder's Shares.
TAX CONSIDERATIONS.
The Fund intends to qualify each year as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended. By so qualifying, the Fund
will not be subject to federal income taxes to the extent that it distributes
substantially all of its net investment income and any net realized capital
gains. The Fund intends to distribute to its shareholders all of its investment
company taxable income and net capital gain at least annually, if necessary
through Additional Distributions, and therefore does not anticipate incurring
any federal income tax liability.
For Plan Participants utilizing the Fund as an investment option under
their Plan and for other tax-deferred accounts, dividend and capital gain
distributions from the Fund generally will not be subject to current
taxation, but will accumulate on a tax-deferred basis. In general, Bank
Collective Funds, Plans and IRAs are governed by a complex set of tax rules.
Each Plan Participant should consult with their Plan administrator, their
Plan's Summary Plan Description, and/or a professional tax adviser regarding
the tax consequences of their participation in their Plan and of any Plan
contributions or withdrawals. Individual Retirement Investors should consult
with their professional tax adviser regarding the tax consequences associated
with an investment in the Fund.
REPORTS.
Twice a year, the shareholders of the Fund will receive detailed
information regarding the Fund's strategies, holdings and performance.
Mutual fund performance is commonly measured as total return and/or yield.
The Fund's performance may be used from time to time in advertisements,
shareholder
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reports or other communications to shareholders or prospective shareholders.
The Fund's performance is affected by its expenses.
PERFORMANCE ADVERTISING.
The Fund from time to time may advertise certain investment performance
figures. These figures are based on historical earnings but past performance
data is not necessarily indicative of future performance of the Funds. The Fund
may quote yield in conformance with current Securities and Exchange Commission
guidelines.
Yield refers to the income generated by an investment in the Fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield may
not equal the income actually paid to shareholders.
The Fund may advertise its total return and its holding period return for
various periods of time. Total return is calculated by determining, over a
period of time, the average annual compounded rate of return that an
investment in the Fund earned over that period, assuming reinvestment of all
distributions. Holding period return refers to the percentage change in the
value of an investment in a Fund over a period of time assuming reinvestment
of all distributions.
Total return and holding period return differ from yield in that the return
figures include capital changes in an investment while yield measures the rate
of net income generated by a Fund. Total return differs from holding period
return principally in that total return is an average annual figure while
holding period return is a cumulative figure for the entire period.
Total return and holding period return and yields are based on past results
and are not an indication of future performance. Performance information or
advertisements may include comparisons of the Fund's investment results to
various unmanaged indices or results of other mutual funds with similar
investment objectives.
PRIOR PERFORMANCE OF INSTITUTIONAL PRIVATE ACCOUNTS
MANAGED BY UBT
The following table sets forth composite performance data relating to the
historical performance of all portfolios managed by UBT that have investment
objectives and risks substantially similar to those of the Fund. The
composite data is provided to illustrate the past performance of UBT in
managing substantially similar portfolios as measured against a specified
market index. It does not represent the performance of the Fund. Investors
should not consider this performance data as an indication of future
performance of the Fund or of UBT.
30
<PAGE>
All information set forth in the table below relies on data supplied by
UBT or in the case of the comparative indices from statistical services,
reports or other sources believed by UBT to be reliable. Except as otherwise
indicated, however, such information has not been verified and is unaudited.
Investors should be aware that stable value investments are designed to
reduce volatility. This is accomplished through the purchase of Wrapper
Agreements which under normal circumstance fluctuate in value in inverse
proportion to market movements, thus allowing for the underlying assets in an
account to be effectively carried at book value. Investors should be aware
of this unique aspect of stable value in trying to draw direct comparisons
between stable value returns and market value indices, or comparing one
stable value account to another. In addition, returns on stable value
portfolios can differ depending upon portfolio-specific factors such as (1)
the amount and timing of cash flows, and (2) the general level of interest
rates when those cash flows occur. The composite performance data presented
below represents the actual returns of all accounts and funds with
substantially similar investment objectives, policies and strategies managed
by UBT.
All returns presented were calculated on a total return basis and include
all interest and accrued income credited to the portfolios. All are
presented net of all fees and expenses assessed by UBT including investment
management fees, administration fees, custodial fees, recordkeeping fees,
brokerage commissions and execution expenses associated with the purchase
and/or disposition of account assets. Quarterly returns of the composites
combine the individual accounts' returns by asset-weighing each individual
account's asset value as of the beginning of the quarter. The yearly returns
are computed by geometrically linking the returns of each quarter within the
calendar year. This calculation method differs from the SEC methods of
calculating returns.
The portfolios that are included in the composites are not subject to the
same types of expenses to which the Fund is subject nor to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Fund by the Investment Company Act or Subchapter M
of the Internal Revenue Code. Consequently, the performance results for the
composites could have been adversely affected if the portfolios included in
the composites had been regulated as investment companies under the federal
securities laws.
The results presented below may not necessarily be the same as the return
experienced by any particular investor as a result of the timing of
investments and redemptions. In addition, the effect of taxes on any
investor will depend on such person's tax status, and the results have not
been reduced to reflect any income tax which may have been payable.
The investment results presented below are not intended to predict or
suggest the returns that might be experienced by the Fund or an investor
investing in the Fund. Investors should also be aware that the
31
<PAGE>
use of a methodology different from that used below to calculated performance
could result in different performance data.
- --------------------------------------------------------------------------------
Year Stable Value Composite(1) 90-day T-bills(2) 30-day commercial
paper(3)
- --------------------------------------------------------------------------------
Last 1 Year
- --------------------------------------------------------------------------------
Last 3 Years
- --------------------------------------------------------------------------------
Last 5 Years
- --------------------------------------------------------------------------------
1993
- --------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
1997(4)
- --------------------------------------------------------------------------------
- ---------------------------------------
(1)The Composite figures are net of all fees and expenses charged by UBT.
(2)[description of relevant index]
(3)[Describe relevant index.]
(4)Through [relevant quarter end]
32
<PAGE>
Investment Adviser of the Fund and Administrator
UNION BOND & TRUST COMPANY
Distributor
PORTLAND INVESTMENT SERVICES, INC.
Custodian
UNION BOND & TRUST COMPANY
Independent Accountants
COOPERS & LYBRAND, LLP
Counsel
DUNN, CARNEY, ALLEN, HIGGINS & TONGUE
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the SAI or the
Fund's official sales literature in connection with the offering of the Shares
and, if given or made, such other information or representations must not be
relied on as having been authorized by the Fund. This Prospectus does not
constitute an offer in any state in which, or to any person to whom, such offer
may not lawfully be made.
[END OF PROSPECTUS]
33
<PAGE>
PART B
Subject to Completion, dated April 23, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION
The Portland Mutual Funds
Portland Stable Investment Fund
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Portland Stable Investment Fund (the "Fund")
Prospectus dated April 23, 1998. The Prospectus provides the basic
information investors should know before investing and may be obtained without
charge by calling the Transfer Agent at 1-888-645-0597.
This Statement of Additional Information is not an offer by the Fund to
an investor that has not received a Prospectus. No broker/dealer, sales
representative, or other person has been authorized to give any information
or to make any representations other than those contained in the Prospectus
and this Statement of Additional Information, and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Fund. This Statement of Additional Information does not
constitute an offer or solicitation by anyone in any state in which such
offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it
is unlawful to make such offer or solicitation. Capitalized terms not
otherwise defined in this Statement of Additional Information have the
meanings accorded to them in the Prospectus.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK
CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . .
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . .
FUND TRANSACTIONS AND BROKERAGE ALLOCATION . . . . . . . . . . . . . . .
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . .
ORGANIZATION OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . .
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . .
PURCHASE AND REDEMPTION OF FUND SHARES . . . . . . . . . . . . . . . . . . .
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . .
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . .
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Portland Stable Investment Fund (the "Fund") is a separate series of
The Portland Mutual Funds (the "Trust"), an open end management investment
company. The investment objective of the Fund is to provide investors with a
high level of current income while preserving principal and maintaining a
stable net asset value per share. The Fund seeks to achieve its investment
objectives by investing its net investable assets primarily in a diversified
portfolio of investment grade securities, money market instruments, options,
futures and other instruments ("Securities") and by entering into book value
benefit responsive agreements ("Wrapper Agreements") (together "Portfolio
Securities") with large financial institutions, such as banks and insurance
companies. There can, of course, be no assurance that the Fund will achieve
its investment objectives.
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS
The following is a discussion of certain investments of, and techniques
employed by, the Fund.
FINANCIAL SERVICES INDUSTRY OBLIGATIONS. The Fund may hold short-term
investments in each of the following obligations of the financial services
industry:
(1) Certificates of Deposit. Certificates of deposit are negotiable
certificates evidencing the indebtedness of a commercial bank or a savings
and loan association to repay funds deposited with it for a definite period
of time (usually from fourteen days to one year) at a stated or variable
interest rate.
(2) Time Deposits. Time deposits are non-negotiable deposits
maintained in a banking institution or a savings and loan association for a
specified period of time at a stated interest rate.
(3) Bankers' Acceptances. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft which has
been drawn on it by a customer, which instruments reflect the obligation
both of the bank and of the drawer to pay the face amount of the instrument
upon maturity.
In addition, the Fund may hold other short-term investments, such as commercial
paper, which are short-term (maturities of 270 days or less) unsecured
promissory notes issued by corporations.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities include
securities representing interests in a pool of mortgages. These securities,
which may be issued by FNMA, GNMA and the Federal Home Loan Mortgage
Corporation, provide investors with payments consisting of both interest and
principal as the mortgages in the underlying mortgage pools are repaid. The
Fund will invest in pools of mortgage loans assembled for sale to investors by
agencies or instrumentalities of the U.S. Government and by non-governmental
entities such as banks, mortgage lenders, other financial institutions and
special purpose vehicles thereof ("Non-Governmental Entities"). Unscheduled or
early payments on the underlying mortgages may shorten the securities' effective
maturities.
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<PAGE>
Other types of securities representing interests in a pool of mortgage
loans are known as collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICS"). CMOs and REMICs are debt instruments
collateralized by pools of mortgage loans or other mortgage-backed securities.
Multi-class pass-through securities are equity interests in a trust composed of
mortgage loans or other mortgage-backed securities. Payments of principal and
interest on underlying collateral provides the funds to pay debt service or make
scheduled distributions on the multi-class pass-through securities. The Fund
may invest in CMOs, REMICs and multi-class pass-through securities
(collectively, "CMOs" unless the context indicates otherwise) issued by agencies
or instrumentalities of the U.S. Government (such as the Federal Home Loan
Mortgage Corporation) or by Non-Governmental Entities.
CMOs may be issued with a variety of classes or "tranches," which have
different maturities and are often retired in sequence. One or more tranches of
a CMO may have coupon rates which reset periodically at a specified increment
over an index such as the London Interbank Offered Rate. These "Floating Rate
CMOs" typically are issued with lifetime "caps" on their coupon rate, which
means that there is a ceiling beyond which the coupon rate may not be increased.
The coupon rate on some Floating Rate CMOs may change as a multiple of the
change in the relevant interest rate. As a result, any increase in the index
rate may cause a correspondingly greater increase in the coupon rate, and any
decrease in the index rate may cause a correspondingly greater decrease in the
coupon rate of such Floating Rate CMOs. Likewise, changes in the index rate
will have an increased effect on the market value of such Floating Rate CMOs,
although in the opposite direction from the change in the index rate.
REMICS, which have elected to be treated as such under the Internal Revenue
Code, are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs
in that they issue multiple classes of securities. As with other CMOs, the
mortgages which collateralize the REMICs in which a Fund may invest include
mortgages backed by GNMA certificates or other mortgage pass-through securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and by Non-Governmental Entities.
The average life of securities representing interests in pools of mortgage
loans is likely to be substantially less than the original maturity of the
mortgage pools as a result of prepayments or foreclosures of such mortgages.
Prepayments are passed through to the registered holder with the regular monthly
payments of principal and interest, and have the effect of reducing future
payments. To the extent the mortgages underlying a security representing an
interest in a pool of mortgages are prepaid, the Fund may experience a loss (if
the price at which the security was acquired by the Fund was at a premium over
par, which represents the price at which the security will be redeemed upon
prepayment). In addition, prepayments of such securities held by the Fund will
reduce their par value.
Furthermore, the prices of mortgage-related securities can be significantly
affected by changes in interest rates. Prepayments may occur with greater
frequency in periods of declining mortgage rates because, among other reasons,
it may be possible for mortgagors to refinance their outstanding mortgages at
lower interest rates. In such periods, it is likely that any prepayment
proceeds would be reinvested by the Fund at lower rates of return.
4
<PAGE>
However, rising mortgage rates will normally decrease the price of
mortgage-backed securities. In the case of floating rate CMO's issued with a
coupon rate cap, this decrease will usually accelerate as mortgage rates come
closer to the capped rate. Further, an increase in such rates may affect the
volatility of these securities since it is likely that the prepayment rate will
decrease. In that event, a security that was considered a short-term security
at the time of purchase could effectively be changed into a long-term security,
which generally fluctuates more widely in response to changes in interest rates
than short- or intermediate-term securities.
STRIPS. The Federal Reserve creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the coupon payments and the
principal payment from an outstanding Treasury security and selling them as
individual securities. To the extent the Fund purchases the principal portion
of the STRIPS, the Fund will not receive regular interest payments. Instead
they are sold at a deep discount from their face value. The Fund will accrue
income on such STRIPS for tax and accounting purposes, in accordance with
applicable law, which income is distributable to shareholders. Because no cash
is received at the time such income is accrued, the Fund may be required to
liquidate other Securities to satisfy its distribution obligations. Because the
principal portion of the STRIP does not pay current income, its price can be
volatile when interest rates change. In calculating its dividend, the Fund
takes into account as income a portion of the difference between the principal
portion of the STRIPS's purchase price and its face value.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities on a when-issued or delayed delivery basis, with delivery and payment
for the securities normally taking place 15 to 45 days after the date of the
transaction. Such an agreement to purchase securities is termed a "forward
commitment." The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the buyer enters into
the commitment.
The Fund may enter into such forward commitments if the Fund holds, and
maintains until the settlement date in a segregated account, cash or any
security that is not considered restricted or illiquid, equal to the value of
the when-issued or forward commitment securities and marked to market daily.
There is no percentage limitation on the Fund's total assets which may be
invested in forward commitments. The purchase of securities on a when-issued,
delayed delivery or forward commitment basis exposes the Fund to risk because
the securities may decrease in value prior to their delivery. Purchasing
securities on a when-issued, delayed delivery or forward commitment basis
involves the additional risk that the return available in the market when the
delivery takes place will be higher than that obtained in the transaction
itself. There is also a risk that the securities may not be delivered or that
the Fund may incur a loss or will have lost the opportunity to invest the amount
set aside for such transaction in the segregated asset account. Although the
Fund will generally enter into forward commitments with the intention of
acquiring securities, the Fund may dispose of a commitment prior to settlement
if UBT deems it appropriate to do so. The Fund may realize short-term profits
or losses upon the sale of forward commitments.
U.S. GOVERNMENT AND AGENCY OBLIGATIONS. The Fund may invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. U.S.
Treasury bonds, notes, and bills and some agency securities, such as those
issued by the Federal Housing Administration and the Government National
Mortgage Association (GNMA), are backed by the full faith and credit
5
<PAGE>
of the U.S. Government as to payment of principal and interest and are the
highest quality government securities. Other securities issued by U.S.
Government agencies or instrumentalities, such as securities issued by the
Federal Home Loan Banks and the Federal Home Loan Mortgage Corporation, are
supported only by the credit of the agency that issued them, and not by the
U.S. Government. Securities issued by the Federal Farm Credit System, the
Federal Land Banks, and the Federal National Mortgage Association (FNMA) are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances, but are not backed by the full faith and credit of the
U.S. Government.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- GENERAL. The
successful use of these instruments draws upon UBT's skill and experience with
respect to such instruments and usually depends on its ability to forecast
interest rate movements correctly. If interest rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of futures contracts
or options thereon or may realize losses and thus will be in a worse position
than if such strategies had not been used. In addition, the correlation between
movements in the price of futures contracts or options thereon and movements in
the price of the securities hedged or used for cover will not be perfect and
could produce unanticipated losses.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or
sale for future delivery of Fixed-Income Securities or contracts based on
financial indices, including any index of U.S. Government securities, foreign
government securities or corporate debt securities. The Fund also may enter
into futures contracts based on debt securities that are backed by the full
faith and credit of the U.S. Government, such as long-term U.S. Treasury bonds,
U.S. Treasury notes, GNMA modified pass-through mortgage-backed securities
and three-month U.S. Treasury bills, and futures contracts that are based on
bonds issued by entities other than the U.S. Government.
A futures contract is an agreement to buy or sell a security (or deliver a
final cash settlement price in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contracts) for a set price in the future. Futures exchanges and trading in
futures is regulated by the Commodity Futures Trading Commission ("CFTC") under
the Commodity Exchange Act. Futures contracts trade on certain regulated
contracts markets.
When a futures contract is purchased or sold, the Fund must allocate cash
or securities as a deposit payment ("initial margin"). It is expected that the
initial margin will approximately equal 1% to 5% of a contract's face value.
Daily thereafter, the futures contract is valued and the Fund may have to
provide additional margin or may receive back margin based upon declines or
increases in the contract's value ("variation margin").
Positions in the futures markets usually are not held until delivery or
cash settlement is required. Instead, those positions usually are liquidated by
buying (or selling, as the case may be) an offsetting position consisting of an
identical futures contract calling for delivery in the same month. Where it
appears economically beneficial to the Fund, however, the Fund may instead take
delivery of underlying securities. A clearing organization associated with the
exchange on which futures are traded assumes responsibility for closing-out
transactions and guarantees that, as between the clearing members of an
exchange, the sale and purchase
6
<PAGE>
obligations will be performed with regard to all positions that remain open
at the termination of the contract. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with
the exchange on which the contracts are traded, the Fund will incur brokerage
fees when it purchases or sells futures contracts.
The purpose of the Fund's acquisition or sale of a futures contract is to
attempt to establish more certainty with respect to the effective rate of return
on its Securities. For example, if interest rates were expected to increase
(which would cause the prices of debt securities to decline), the Fund might
enter into futures contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the debt securities
owned by the Fund. If interest rates did increase, the value of the debt
securities held by the Fund would decline, but the value of the futures
contracts to the Fund would increase at approximately the same rate. Moreover,
the Fund would be able to use the increase in the value of the futures contracts
to purchase additional interest-bearing instruments, thereby to some extent
reducing any difference that might otherwise develop between the Fund's current
yield and the yield on newly-issued instruments of similar duration and credit
quality.
Similarly, when it is expected that interest rates may decline (thus
increasing the value of debt securities), the Fund may purchase futures
contracts for the acquisition of debt securities to attempt to hedge against
anticipated purchases of debt securities at higher prices. Since the
fluctuations in the value of futures contracts should be similar to those of the
underlying debt securities, the Fund could take advantage of the anticipated
rise in the value of debt securities without actually buying them until the
market had stabilized. To the extent the Fund enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover
the Fund's obligations with respect to such futures contracts will consist of
cash, cash equivalents or high quality liquid securities from its portfolio
in an amount equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and additional
margin payments made by the Fund with respect to such futures contracts.
The Fund could accomplish similar results by selling debt securities with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase, and by buying debt securities with long maturities and
selling debt securities with short maturities when interest rates are expected
to decline. However, since the futures market may be more liquid than the cash
market, the use of futures contracts as a risk management technique may enable
the Fund to accomplish the same result more effectively and perhaps at a lower
cost.
As noted above, futures contracts entail risk. Although UBT believes that
the use of such contracts will benefit the Fund, if its investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates and interest rates instead decrease, the Fund will lose part or
all of the benefit of the increased value of its debt securities that it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash to meet a daily
additional margin requirement, it may have to sell Securities at a time when it
would be disadvantageous to do so.
7
<PAGE>
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write (sell)
options on futures contracts for hedging purposes. These options are traded
on exchanges that are licensed and regulated by the CFTC for the purpose of
options trading. A call option on a futures contract gives the purchaser the
right, in return for the premium payment, to purchase a futures contract at a
specified price at any time before the option expires. A put option gives
the purchaser the right, in return for the premium paid, to sell a futures
contract at a specified exercise price at any time before the option expires.
Options on futures contracts can be used by the Fund to hedge the same
risks as might be addressed by the direct purchase or sale of the underlying
futures contracts themselves. Depending on the pricing of the option, compared
to either the futures contract upon which it is based or the price of the
underlying securities themselves, it may or may not be less risky than direct
ownership of the futures contracts or the underlying securities.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received by the Fund as a purchaser in an option transaction
will be reduced by the amount of the premium paid in addition to transaction
costs. In the event of an adverse market movement, however, the Fund will not
be subject to a risk of loss on the option transaction, other than loss of the
premium paid and transaction costs. Consequently, the Fund may benefit more
from a favorable movement in the value of its Securities than it would have
benefitted if the hedge had been effected through the use of futures.
If the Fund writes call options on futures contracts, the Fund will receive
a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of the securities held by, or to be acquired for, the Fund. If the
option is exercised, the Fund will incur a loss in the option transaction.
This loss is reduced by the amount of premium received and may be partially
offset by favorable changes in the value of its Securities.
While the purchaser or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, the Fund's ability to establish and close out options positions
at fairly established prices will depend on the existence of a liquid market.
The Fund will not purchase or write options on futures contracts unless, in
UBT's opinion, the market for such options has sufficient liquidity that the
risks associated with such options transactions are not at unacceptable
levels.
The Trustees have adopted a restriction that the Fund will not enter into
any futures contract or option on a futures contract if immediately thereafter
the amount of margin deposits on all the futures contracts held by the Fund and
premiums paid on outstanding options on its futures contracts (other than those
entered into for bona fide hedging purposes) would exceed 5% of market value of
the Fund's total assets.
OPTIONS ON SECURITIES. The Fund may purchase and write (sell) put and call
options. Options have various types of underlying instruments, including
specific securities, indices of securities prices, and futures contracts. By
purchasing a put option, the Fund obtains the right (but not the obligation) to
sell the option's underlying instrument at a fixed "strike" price. In
8
<PAGE>
return for this right, the Fund pays the current market price of the option
(known as the option premium). The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option.
If the option is allowed to expire, the Fund will lose the entire premium it
paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the "strike" price. The Fund also may terminate a
put option position by closing it out in the secondary market at its current
price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's "strike"
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if the underlying prices do not rise sufficiently to offset the
cost of the option.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the "strike" price for the option's
underlying instrument if the other party to the option chooses to exercise it.
Therefore, the Fund will assume the risk of loss should the price of the
underlying instrument fall below the exercise price.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the "strike" price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if the underlying prices remain the same or fall. Through receipt of
the option premium, a call writer mitigates the effects of a price decline.
At the same time, because a call writer must be prepared to deliver the
underlying instrument in return for the "strike" price, even if its current
value is greater, a call writer gives up some ability to participate in the
underlying price increases.
The Fund may purchase and write options in combination with other options,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one "strike" price and buying a call
option at a lower price, in order to reduce the risk of the written call option
in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
The Fund may write (sell) covered call and put options on its Securities
("covered options") to a limited extent in an attempt to increase income.
However, the Fund may forgo the benefits of appreciation on securities sold or
may pay more than the market price on securities
9
<PAGE>
acquired pursuant to call and put options it writes. A call option written
by a Fund is "covered" if the Fund owns the underlying security 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 is also covered, if
the Fund holds a call option on the same security and in the same principal
amount as the written call option where the exercise price of the call option
so held (a) is equal to or less than the exercise price of the written call
option or (b) is greater than the exercise price of the written call option
if the difference is maintained by the Fund in cash, U.S. Government
securities and other high quality liquid securities in a segregated account
with its custodian.
If a covered call option expires unexercised, the Fund will realize income
in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Fund has no control, the Fund
must sell the underlying security to the option holder at the exercise price.
By writing a covered call option, the Fund forgoes, in exchange for the net
premium, the opportunity to profit during the option period from an increase in
the market value of the underlying security above the exercise price.
If a put option expires unexercised, the Fund will realize income in the
amount of the net premium received for writing the option. If the put option is
exercised, a decision over which the Fund has no control, the Fund must purchase
the underlying security from the option holder at the exercise price. By
writing a put option, the Fund, in exchange for the net premium, accepts the
risk of a decline in the market value of the underlying security below the
exercise price. The Fund will only write put options involving securities for
which a determination is made at the time the option is written that the Fund
wishes to acquire securities at the exercise price.
The writing of covered call options may be deemed to involve the pledge of
the securities against which the option is being written. Securities against
which call options are written will be segregated on the books of the custodian
for the Fund.
The Fund may purchase call and put options on any securities in which it
may invest. The Fund would normally purchase a call option in anticipation of
an increase in the market value of such securities. The Fund would normally
purchase put options in anticipation of a decline in the market value of
securities in its portfolio ("protective puts") or securities of the type in
which it is permitted to invest. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund's
holdings.
Put options also may be purchased by the Fund to seek to benefit from a
decline in the price of securities that the Fund does not own. The Fund would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying Securities.
The Fund has adopted certain non-fundamental policies concerning option
transactions that are discussed below. The Fund's activities in options may also
be restricted by the requirements
10
<PAGE>
of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. If the option markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying securities markets that will not be
reflected in the option markets. It is impossible to predict the volume of
trading that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions, because the predominant market is the issuing broker rather
than an exchange and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Fund will purchase such options only from broker-dealers who are primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. UBT will monitor the
creditworthiness of dealers with whom the Fund enters into such options
transactions under the general supervision of the Trustees.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match a Fund's current or anticipated
investments exactly. The Fund may invest in options and futures contracts
based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests.
Options and futures prices also can diverge from the prices of their
underlying instruments even if the underlying instruments match the Fund's
investment well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect the security prices the same way. Imperfect correlation
also may result from: differing levels of demand in the options and futures
markets and the securities markets, structural differences in how options and
futures and securities are traded, or imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
secondary market will exist for any particular options or futures contract at
any particular time. Options may have relatively low trading volume, thereby
impacting their liquidity. Additionally, options
11
<PAGE>
and futures contracts are subject to price fluctuation limits. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Fund to enter into new positions or
close out existing positions. If the secondary market for a contract is not
liquid because of price fluctuation limits or otherwise, it could prevent
prompt liquidation of unfavorable positions, and potentially could require
the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions also could be impaired.
SWAPS. A swap is an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
single or periodic fixed amounts. Swaps may be based on fixed interest
rates, price indices, total return on interest rate indices, fixed income
indices, stock indices and commodity indices (as well as amounts derived from
arithmetic operations on these indices).
The Fund may engage in swaps under which one party pays a single or
periodic fixed amount or an amount based upon a specified index, and the other
party pays a periodic amount based on the movement of another specified
index. Swaps do not involve the delivery of securities, other underlying
assets, or principal. Accordingly, the risk of loss under a swap is limited
to the net amount of payments that the Fund is contractually obligated to
make. If the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund contractually is
entitled to receive.
12
<PAGE>
If a swap counterparty defaults, the Fund may have contractual remedies
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become more liquid. Certain swap transactions involve more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than traditional swap transactions.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund's obligations under a
swap agreement (offset against any amounts owing to the Fund) will be accrued
daily.
Swaps are subject to the risk that the swap counterparty may not fulfill
its obligations under the swap agreement. Accordingly, the Board of Trustees
have established credit guidelines for the Fund governing the selection of swap
counterparties. These guidelines establish a minimum credit rating for each
swap counterparty and provide for certain credit enhancement techniques (for
example, collateralization of amounts due from swap counterparties) to limit
exposure to counterparties that have a S&P rating below A.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary securities
transactions. If UBT is incorrect in its forecasts of market values, interest
rates, and currency exchange rates, the investment performance of the Fund would
be less favorable than it would have been if this investment technique were not
used.
ASSET COVERAGE FOR SWAPS, FUTURES, AND OPTIONS POSITIONS. The Fund will
comply with guidelines established by the Securities and Exchange Commission
with respect to coverage of options and futures by mutual funds, and if the
guidelines so require will segregate cash or U.S. Government securities or other
high-grade liquid debt securities in the amount prescribed. To the extent that
any accrued but unpaid net amounts are owed to a swap counterparty, the Fund may
also segregate assets as described above to cover such amounts and thereby avoid
potential leveraging of the Fund. To the extent that the Fund enters into swaps
for hedging purposes, the Fund believes that such obligations do not constitute
"senior securities" under the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions. In the event a large
percent of the Fund's assets are segregated for coverage of futures and options
positions, the Fund's ability to meet redemption requests or other current
obligations could be adversely affected.
FOREIGN SECURITIES. The Fund may invest in fixed income securities
which are issued by foreign companies and debt obligations of foreign
governments or international organizations. However, purchases of foreign
securities will be limited to Yankee dollar obligations (U.S. dollar
13
<PAGE>
denominated obligations issued by foreign companies and traded on U.S. markets)
and Eurodollar obligations (U.S. dollar denominated obligations issued by
foreign companies and traded on foreign markets).
Foreign government obligations generally consist of debt securities
supported by national, state or provincial governments or similar political
units or governmental agencies. Such obligations may or may not be backed by
the national government's full faith and credit and general taxing powers.
Investments in foreign fixed income securities also include obligations
issued by international organizations. International organizations include
entities designated or supported by governmental entities to promote economic
reconstruction or development as well as international banking institutions
and related government agencies. Examples are the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
There may be less information publicly available about a foreign company
than about a U.S. company, and foreign companies are not generally subject to
accounting, auditing and financial reporting standards and practices
comparable to those in the U.S. Other risks associated with investments in
foreign fixed income securities include changes in the administrations or
economic and monetary policies of foreign governments, the imposition of
exchange control regulations, the possibility of expropriation decrees and
other adverse foreign governmental action, the imposition of foreign taxes,
less liquid markets, less government supervision of exchanges, brokers and
issuers, difficulty in enforcing contractual obligations, delays in
settlement of securities transactions and greater price volatility. In
addition, investing in foreign fixed income securities will generally result
in higher commissions than investing in similar domestic securities.
INVESTMENT RESTRICTIONS
The following investment restrictions are deemed "fundamental policies."
They may be changed only by the vote of a "majority of the outstanding voting
securities" of the Fund. "Majority of the outstanding voting securities" under
the 1940 Act, and as used in this Statement of Additional Information means,
with respect to the Fund, the lesser of: (i) 67% or more of the outstanding
voting securities of the Fund present at a shareholders' meeting, if more than
50% of the outstanding voting securities of the Fund are represented at the
meeting in person or by proxy or (ii) more than 50% of the outstanding voting
securities of the Fund. Other investment practices which may be changed by the
Board of Trustees without the approval of shareholders to the extent permitted
by applicable law, regulation or regulatory policy are deemed "non-fundamental
policies."
14
<PAGE>
FUNDAMENTAL.
(1) BORROWING MONEY. The Fund will not borrow money in an amount
exceeding 33-1/3% of the total assets of the Fund. This limitation does
not preclude the Fund from entering into securities lending and reverse
repurchase transactions, provided that the Fund has an asset coverage of
300% for all borrowings.
(2) SENIOR SECURITIES. The Fund will not issue senior securities.
This limitation is not applicable to activities that may be deemed to
involve the issuance or sale of a senior security by the Fund, provided
that the Fund's engagement in such activities is consistent with or
permitted by the Investment Company Act of 1940, as amended, the rules and
regulations promulgated thereunder or interpretations of the Securities and
Exchange Commission or its staff.
(3) UNDERWRITING. The Fund will not act as underwriter of securities
issued by other persons. This limitation is not applicable to the extent
that, in connection with the disposition of Securities (including
restricted securities), the Fund may be deemed an underwriter under certain
securities laws.
(4) REAL ESTATE. The Fund will not purchase or sell real estate.
This limitation is not applicable to investments in securities secured by
real estate or interests therein.
(5) COMMODITIES. The Fund will not purchase or sell physical
commodities unless acquired as a result of ownership of securities or other
investments. This limitation does not preclude the Fund from purchasing or
selling options or futures contracts.
(6) LOANS. The Fund will not make loans to other persons, except,
(a) by loaning Securities, (b) by engaging in repurchase agreements, or
(c) by purchasing nonpublicly offered debt securities. For purposes of
this limitation, the term "Loans" shall not include the purchase of a
portion of an issue of publicly distributed bonds, debentures or other
securities.
(7) CONCENTRATION AND DIVERSIFICATION. The Fund will not
concentrate its investments in any particular industry, but if it is
deemed appropriate for the Fund's investment objective, up to, but not
including, 25% of its total assets may be invested in any one industry.
In addition, with respect to 75% of the Fund's total assets, the Fund
(a) will not purchase securities of any issuer if such purchase at the
time thereof would cause the Fund to hold more than 10% of any class of
securities of such issuer (for which purpose all indebtedness of an
issuer shall be deemed a single class), except that options and futures
contracts shall not be subject to this restriction; and (b) will not
invest more than 5% of its assets in the securities of any one issuer.
These limitations are not applicable to investments in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities or repurchase agreements with respect thereto.
With respect to the percentages adopted by the Trust as maximum limitations
on its investment policies and limitations, an excess above the fixed percentage
will not be a violation of the policy or limitation unless the excess results
immediately and directly from the acquisition
15
<PAGE>
of any security or the action taken. This paragraph does not apply to the
borrowing policy set forth in paragraph (1) above.
Notwithstanding any of the foregoing limitations, any investment
company, whether organized as a trust, association or corporation, or a
personal holding company, may be merged or consolidated with or acquired by
the Trust, provided that if such merger, consolidation or acquisition results
in an investment in the securities of any issuer prohibited by said
paragraphs, the Trust shall, within ninety days after the consummation of
such merger, consolidation or acquisition, dispose of all of the securities
of such issuer so acquired or such portion thereof as shall bring the total
investment therein within the limitations imposed by said paragraphs above as
of the date of consummation.
NON-FUNDAMENTAL. The following limitations have been adopted by the Trust
with respect to the Fund and are Non-Fundamental (these restrictions may be
changed by a vote of the Trustees of the Trust as applicable without shareholder
approval):
(i) PLEDGING. The Fund will not mortgage, pledge, hypothecate
or in any manner transfer, as security for indebtedness, any assets of
the Fund except as may be necessary in connection with borrowings
described in limitation (1) above. Margin deposits, security
interests, liens and collateral arrangements with respect to
transactions involving options, futures contracts, short sales,
securities lending, repurchase agreements and other permitted
investments and techniques are not deemed to be a mortgage, pledge or
hypothecation of assets for purposes of this limitation.
(ii) MARGIN PURCHASES. The Fund will not purchase securities or
evidences of interest thereon on "margin." This limitation is not
applicable to short term credit obtained by the Fund for the clearance
of purchases and sales or redemption of securities, or to arrangements
with respect to transactions involving options, futures contracts,
short sales and other permitted investments and techniques.
(iii) SHORT SALES. The Fund will not effect short sales of
securities unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short.
(iv) INVESTMENT COMPANY PURCHASES. The Fund will not
invest more than 5% of its net assets in securities issued by any
investment company except to the extent permitted by the 1940 Act,
except that this limitation does not apply to securities received
or acquired as dividends, through offers of exchange, or as a
result of reorganization, consolidation or merger.
(v) ILLIQUID INVESTMENTS. The Fund will not invest more than
15% of its net assets in securities that are illiquid or not readily
marketable (excluding Rule 144A securities deemed by the Board of
Trustees to be liquid).
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<PAGE>
An investment restriction will not be considered violated if that
restriction is complied with at the time the relevant action is taken,
notwithstanding a later change in the market value of an investment,
in net or total assets or in a change in the credit rating of the
investment or any other later change.
PORTFOLIO TURNOVER
Fund transactions will be undertaken principally to accomplish the Fund's
objectives. Securities may be sold in anticipation of a market decline (a rise
in interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a Security may be sold and another
purchased at approximately the same time to take advantage of what UBT believes
to be a temporary disparity in the normal yield relationship between the two
securities. Yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, due to such factors as changes in the overall demand for or supply of
various types of securities or changes in the investment objectives of
investors.
The Fund will not seek to realize profits by anticipating short-term market
movements and intends to purchase Securities (other than Cash Account Assets)
for long-term investment. Under ordinary circumstances, Securities will be held
for more than one year. While the rate of portfolio turnover will not be a
limiting factor when UBT deems changes appropriate, it is anticipated that given
the Fund's investment objective its annual portfolio turnover rate should not
generally exceed 50%.
FUND TRANSACTIONS AND BROKERAGE ALLOCATION
Subject to policies established by the Board of Trustees, UBT is
responsible for decisions to buy and sell securities, futures contracts and
options thereon for the Fund, the selection of brokers, dealers and futures
commission merchants to effect transactions and the negotiation of brokerage
commissions, if any. Broker-dealers and futures commission merchants may
receive brokerage commissions on portfolio transactions, including options,
futures contracts and options on futures transactions and the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant. Purchases and
sales of certain Securities on behalf of the Fund may be placed by UBT with
the issuer or a primary or secondary market-maker for these securities on a
net basis, without any brokerage commission being paid by the Fund. Trading
does, however, involve transaction costs. Transactions with dealers serving
as market-makers reflect the spread between the bid and asked prices.
Transaction costs may also include fees paid to third parties for information
as to potential purchasers or sellers of securities. Purchases of
underwritten issues may be made that will include an underwriting fee paid to
the underwriter.
UBT seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Fund taking into account such factors
as price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill
required of the executing broker-dealer through its familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others.
17
<PAGE>
UBT reviews on a routine basis commission rates, execution and settlement
services performed, and makes internal and external comparisons.
UBT is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for the
Fund with a broker or dealer to pay a commission (to the extent applicable)
in excess of that which another broker or dealer might have charged for
effecting the same transaction, in recognition of the receipt of brokerage or
research services from such broker or dealer. The term "brokerage and
research services" means (a) advice, either directly or through publications
or writings, as to (i) the value of securities, (ii) the advisability of
investing in, purchasing or selling securities, and (iii) the availability of
securities or purchasers or sellers of securities; (b) furnishing analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts; or (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody) or required in connection therewith by
applicable SEC or SRO rule. Higher commissions may be paid to firms that
provide brokerage and research services to the extent permitted by law. UBT
may use this research information in managing the Fund's assets, as well as
the assets of other clients.
Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Board of
Trustees may determine, UBT may consider sales of shares of the Fund and of
other investment company clients of UBT as a factor in the selection of
broker-dealers to execute portfolio transactions. UBT will make such
allocations if commissions are comparable to those charged by nonaffiliated,
qualified broker-dealers for similar services.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain services obtained from brokers and dealers can be useful
to the Fund and to UBT, it is the opinion of the Fund's management that such
information is only supplementary to UBT's own research effort, since the
information must still be analyzed, weighed and reviewed by UBT's staff. Such
information may be useful to UBT in providing services to clients other than the
Fund, and not all such information is used by UBT in connection with the Fund.
Conversely, such information provided to UBT by brokers and dealers through whom
other clients of UBT effect securities transactions may be useful to UBT in
providing services to the Fund.
In certain instances there may be securities that are suitable for the
Fund, as well as for one or more of UBT's other clients. Investment decisions
for the Fund and for UBT's other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives
18
<PAGE>
of more than one client. When two or more clients are simultaneously engaged
in the purchase or sale of the same security, the securities are allocated
between (among) clients in a manner believed to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on
the price or volume of the security as far as the Fund is concerned.
However, it is believed that the ability of the Fund to participate in volume
transactions will produce better executions for the Fund.
MANAGEMENT OF THE FUND
ORGANIZATION OF THE TRUST
The Fund was organized as a separate series of the Trust. The Trust is an
open-end investment company established under the laws of Delaware by an
Agreement and Declaration of Trust dated September 24, 1997 (the "Declaration of
Trust"). The Declaration of Trust permits the Trustees to issue an unlimited
number of shares of beneficial interest of separate series without par value.
Shares of the Trust do not have cumulative voting rights or any preemptive
or conversion rights, and the Trustees have the authority from time to time to
divide or combine the shares of any series into a greater or lesser number of
shares of that series so long as the proportionate beneficial interest in the
assets belonging to that series and the rights of shares of any other series are
in no way affected. In case of any liquidation of a series, the holders of
shares of the series being liquidated will be entitled to receive as a class a
distribution out of the assets, net of the liabilities, belonging to that
series. Expenses attributable to any series are borne by that series.
Any general expenses of the Trust not readily identifiable as belonging to
a particular series are allocated by or under the direction of the Trustees in
such manner as the Trustees determine to be fair and equitable. No shareholder
is liable to further calls or assessment by the Trust without his, her or its
express consent.
TRUSTEES AND OFFICERS
The names, addresses, principal occupations and other affiliations of the
Trustees and executive officers of the Trust, during the past five years are set
forth below. Each Trustee who is an "interested person" of the Trust, as
defined in the Investment Company Act of 1940, is indicated by an asterisk.
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<PAGE>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE THE FUND DURING PAST 5 YEARS
- ---------------- --- ------------- --------------------
Harold H. Morley* 54 President and President and Chief
5665 S.W. Meadows Rd. Trustee Executive Officer of
Suite 400 Morley Financial
Lake Oswego, OR 97035 Services, Inc.;
President and Chief
Executive Officer of
Morley Capital
Management, Inc.;
President and Chief
Executive Officer of
Union Bond & Trust
Company
Joan K. Hall 43 Secretary Senior Vice President
5665 S.W. Meadows Rd. and Corporate Secretary
Suite 400 of Morley Financial
Lake Oswego, OR 97035 Services, Inc.; Senior
Vice President,
Financial Officer and
Corporate Secretary of
Morley Capital
Management, Inc.; Senior
Vice President,
Financial Officer and
Corporate Secretary of
Union Bond & Trust
Company
Frederick F. Fletcher 46 Treasurer Controller of Morley
5665 S.W. Meadows Rd. Financial Services,
Suite 400 Inc.; Corporate
Lake Oswego, OR 97035 Controller of Morley
Capital Management,
Inc.; Corporate
Controller of Union Bond
& Trust Company
Self-employed accountant
from 1994-1997; Director
of Sales for Evergreen
International from
1986-1994.
Donald W. Magnusen 55 Prospective Trustee Senior Partner, Veber &
4380 S.W. Macadam Ave. Partners; President of
Portland, OR 97219 Breezley Investment Co.
from 1994 to 1996;
Executive Vice President
of U.S. Bancorp from
1960 to 1994
Jan W. Jansen 51 Prospective Trustee President of Strand,
720 S.W. Washington St. Atkinson, Williams &
Suite 610 York; Vice President
Portland, OR 97205 and Manager of U.S.
Bancorp from 1988 to
1994
The estimated compensation to be paid to the Trustees of the Trust for the
fiscal year ending December 31, 1998, is set forth in the following table.
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<PAGE>
<TABLE>
<CAPTION>
ESTIMATED ANNUAL ESTIMATED ANNUAL
COMPENSATION COMPENSATION FROM
NAME FROM THE FUND FUND COMPLEX
---- ---------------- -----------------
<S> <C> <C>
Harold H. Morley $0.00 $0.00
Jan W. Jansen $10,000.00 $10,000.00
Donald W. Magnusen $10,000.00 $10,000.00
</TABLE>
The Trust does not have any pension or retirement plans. As of
___________________, 1997, the Trustees and officers of the Trust and the Fund
owned in the aggregate less than 1% of the shares of the Fund. As of the
Effective Date of the Fund's Registration Statement, UBT owns 100% of the Fund's
Shares by virtue of its purchase of $100,000 of Fund Shares in connection with
the establishment of the Fund. UBT may, from time to time, purchase Fund Shares
for certain of its collective trust funds. UBT will be deemed to having voting
control of the Fund until purchases of Fund Shares by unaffiliated persons
results in their ownership of more than 75% of the Fund's Shares.
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL. Under the terms of the Trust's investment advisory agreement with
UBT dated _________________, 1997 (the "Advisory Agreement"), UBT manages the
Fund subject to the supervision and direction of the Board of Trustees. UBT
will: (i) act in strict conformity with the Declaration of Trust, the 1940
Act and the Investment Advisers Act of 1940, as the same may from time to
time be amended; (ii) manage the Fund in accordance with the Fund's
investment objectives, restrictions and policies; (iii) make investment
decisions for the Fund; and (iv) place purchase and sale orders for
securities and other financial instruments on behalf of the Fund.
UBT bears all expenses in connection with the performance of services
under the Advisory Agreement. Subject to the Expense Limitation Agreement,
the Trust and the Fund bear certain other expenses and costs incurred in its
operation, including: taxes, interest, brokerage fees and commissions, if
any; fees of Trustees of the Trust who are not officers, directors or
employees of UBT, Portland Investment Services, Inc. or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; Wrapper Agreement
costs; certain insurance premiums; outside auditing and legal expenses; costs
of maintenance of corporate existence; costs attributable to investor
services, including, without limitation, telephone and personnel expenses;
costs of preparing and printing prospectuses and statements of additional
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information for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings of shareholders,
officers and Trustees of the Trust, and any extraordinary expenses.
As of ________________________, 1997, the Fund had not commenced investment
operations and had not incurred investment advisory fees.
UBT has informed the Fund that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in
the possession of any of its affiliates. In making investment
recommendations for the Fund, UBT will not inquire or take into consideration
whether an issuer of securities proposed for purchase or sale by the Fund is
a customer of UBT, its parent or its affiliates and, in dealing with its
customers, UBT, its parent and affiliates will not inquire or take into
consideration whether securities of such customers are held by any fund
managed by UBT or any such affiliate.
CONTROL AND MANAGEMENT OF INVESTMENT ADVISER. Morley Financial Services,
Inc. ("MFS") owns 100% of the issued and outstanding voting securities of UBT.
MFS is a corporation organized under the laws of the State of Oregon. MFS is a
holding company which also owns 100% of the issued and outstanding voting
securities of Morley Capital Management, Inc. ("Morley Capital"). Morley
Capital is a corporation organized under the laws of the State of Oregon.
Morley Capital is a registered investment adviser which manages money for
corporate, government, Taft Hartley, and bank intermediary clients on a national
basis. Morley Capital currently has approximately $7.5 billion under
management.
As of December 31, 1997, virtually all of MFS' issued and outstanding
voting securities were owned by Harold H. Morley (who is President and Chief
Executive Officer of MFS, Morley Capital, and UBT), the MFS Employee
Stock Ownership Plan ("ESOP"), and Pacific Life Insurance Company ("Pacific
Life"). Pursuant to the terms of a Voting Agreement, Mr. Morley has the
ability to vote the shares held by Pacific Life. As a result of his
ownership of shares in MFS and the Voting Agreement, Mr. Morley has the power
to vote the majority of MFS' voting securities. Mr. Morley may be deemed to
be a controlling person of UBT due to his ownership of shares in MFS, his
power to vote Pacific Life's shares in MFS, and his positions of President
and Chief Executive Officer of UBT. Pacific Life and the ESOP may also be
deemed to be controlling persons by virtue of their ownership of shares in
MFS.
Pacific Life, a California stock life insurance company founded in 1868,
offers a complete portfolio of life, health, and retirement plans for
individuals and businesses. Pacific Life is duly licensed to conduct insurance
operations in the District of Columbia and every state except New York.
Pacific Life has been a provider of stable value insurance and investment
products since 1941. Pacific Life has a claims paying ability rating of Aa3
from Moody's and AA+ from S&P. As of December 31, 1996, Pacific Life and its
affiliates had approximately $135 billion in total assets and funds under
management.
UBT is the investment adviser to the Fund. UBT is a state bank and trust
company chartered in 1913 and reorganized under the laws of the state of Oregon
in 1992.
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UBT provides a range of investment and fiduciary services to institutional
clients. UBT maintains and manages common and pooled trust funds invested
primarily in fixed income assets whose principal value is relatively stable.
UBT currently has approximately $1.0 billion under management. UBT also acts
as custodian with respect to similar fixed income assets.
Notwithstanding Pacific Life's ownership interest in MFS, MFS and its
subsidiaries are operated completely independently of Pacific Life. While
Pacific Life has two representatives on MFS' Board of Directors (out of nine
directors), Pacific Life and MFS otherwise have their own directors, officers,
and employees, each is separately capitalized, and each maintains its own
separate books and records and operates as an independent profit center.
INVESTMENT ADVISORY AGREEMENT. UBT acts as investment adviser to the Fund
pursuant to the terms of the Advisory Agreement. The Advisory Agreement
provides certain limitations on UBT's liability, but also provides that UBT
shall not be protected against any liability to the Fund or its shareholders by
reason of wilful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its duties or
obligations thereunder.
As compensation for its services, the Fund is obligated to pay UBT a fee
computed and accrued daily and paid monthly at an annual rate of 0.35% of the
average daily net assets of the Fund. UBT has agreed voluntarily to waive 0.10%
of that fee. In addition, in the interest of limiting the expenses of the Fund,
UBT has entered into an expense limitation agreement with the Fund ("Expense
Limitation Agreement"). Pursuant to the Expense Limitation Agreement, UBT has
agreed to waive or limit its fees and to assume other expenses (except for Rule
12b-1 Fees) to the extent necessary to limit the total annual operating expenses
of each Class of the Fund (expressed as a percentage of average daily net assets
and excluding Rule 12b-1 Fees) to no more than 0.55% for Class A, 0.55% for
Class B and 0.75% for Class C of the Fund. Reimbursement by the Fund of the
advisory fees waived or limited and other expenses reimbursed by UBT pursuant to
the Expense Limitation Agreement may be made at a later date when the Fund has
reached a sufficient asset size to permit reimbursement to be made without
causing the total annual operating expense ratio of the Fund to exceed the
limits set forth above. No reimbursement will be made unless: (i) the Fund's
assets exceed $100 million; (ii) the total annual expense ratio of the Class
making such reimbursement is less than the limit set forth above; and (iii) the
payment of such reimbursement is approved by the Board of Trustees on a
quarterly basis. Except as provided for in the Expense Limitation Agreement,
reimbursement of amounts previously waived or assumed by UBT is not permitted.
The continuance of the Advisory Agreement after the first two years must be
specifically approved at least annually (i) by the Board of Trustees or by vote
of a majority of the Fund's outstanding voting securities and (ii) by the
affirmative vote of a majority of the Trustees who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement may be terminated (i)
at any time without penalty by the Fund upon the vote of a majority of the
Trustees or by vote of the majority of the Fund's outstanding voting securities
upon 60 days' written notice to UBT or (ii) by UBT at any time without penalty
upon 60 days' written notice to the Fund. The Advisory Agreement will also
terminate automatically in the event of its assignment (as defined in the 1940
Act).
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ADMINISTRATOR. Under the Administration and Services Agreement, UBT is
obligated to oversee the administration of the Fund's business and affairs
and provide certain services required for effective administration of the
Fund. UBT will supply and maintain office facilities (which may be in UBT's
own offices); assist the Fund in selecting, coordinating the activities of,
supervising and acting as liaison with any other person or agent engaged by
the Fund, including the Fund's depository agent or sub-custodian, consultants,
transfer agent, sub-transfer agents, intermediaries with respect to mutual
fund alliance programs, dividend disbursing agent, sub-administrator,
independent accountants, and independent legal counsel; maintain customary
books and records on behalf of the Fund with respect to its own activities,
and monitor and oversee the performance of any agents providing service to
the Fund to ensure that all financial, accounting, corporate, and other
records required to be maintained and preserved by the Fund or on its behalf
will be maintained in accordance with applicable laws and regulations;
monitor and review activities and procedures of the Fund and its agents in
order to identify and seek to obtain possible service improvements and cost
reductions; assist in developing, reviewing, maintaining, and monitoring the
effectiveness of Fund accounting and compliance policies and procedures,
including portfolio valuation procedures, expense allocation procedures,
personal trading procedures, and the Fund's Code of Ethics; assist in
developing, implementing, and monitoring the Fund's use of automated systems
for the purchase, sale, redemption and transfer of Fund Shares and the
payment of Rule 12b-1 fees to broker-dealers and others that provide personal
services, distribution support services, and/or account maintenance services
to shareholders, and for recording and tracking such transactions and/or
payments; furnish to or place at the disposal of the Fund such information,
reports, evaluations, analyses, and opinions relating to its administrative
functions and the administrative functions performed by the
Sub-Administrator, as the Fund may, at any time or from time to time,
reasonably request or as UBT may deem helpful to the Fund; provide
appropriate assistance in the development and/or preparation of all reports
and communications by the Fund to Fund shareholders and all reports and
filings necessary to maintain the registrations and qualifications of the
Fund's Shares under federal securities law; and respond to all inquiries from
Fund shareholders or otherwise answer communications from Fund shareholders
if such inquiries or communications are directed to UBT.
Under the Administrative Services Agreement, UBT is entitled to an annual
fee of 0.25% of average daily net assets, of which it has agreed to waive 0.10%.
As of __________________, 1997, the Fund had not commenced investment operations
and had not incurred administrative services fees.
SUB-ADMINISTRATOR. Prior to the effective date of the registration
statement, UBT shall appoint a Sub-Administrator to assist UBT in connection
with UBT's duties and responsibilities to the Fund under the Administration and
Services Agreement. Generally, the Sub-Administrator shall perform or supervise
the performance by others of all administrative services in connection with the
operation of the Fund, other than those administrative services to be performed
by UBT. The services to be provided by the Sub-Administrator shall include
general administrative services, regulatory reporting services and fund
accounting services.
CUSTODIAN. UBT, whose address is 5665 SW Meadows Rd., Suite 400, Lake
Oswego, Oregon 97305, serves as Custodian for the Trust pursuant to the
Custodian Agreement. As
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Custodian, it holds the Fund's assets, collects all income and other payments
with respect thereto, disburses funds at the Fund's request and maintains
records in connection with its duties. UBT will comply with the
self-custodian provisions of Rule 17f-2 under the 1940 Act.
SUB-CUSTODIAN. To Be Filed By Amendment.
TRANSFER AGENT. [INSERT NAME] acts as the Fund's transfer agent and, in
such capacity, maintains the records of each shareholder's account, answers
shareholders' inquiries concerning their accounts, processes purchases and
redemptions of the Fund's Shares, acts as dividend and distribution disbursing
agent and performs other accounting and shareholder service functions. In
addition, [INSERT NAME] provides the Fund with certain monthly reports,
record-keeping and other management-related services.
COUNSEL AND INDEPENDENT ACCOUNTANTS. Dunn, Carney, Allen, Higgins &
Tongue, 851 S.W. Sixth Avenue, Suite 1500, Portland, Oregon 97204, serves as
counsel to the Trust. Coopers & Lybrand, 1300 S.W. Fifth Avenue, Suite 2700,
Portland, OR 97201 acts as independent public accountants of the Trust.
DISTRIBUTOR. Portland Investment Services, Inc. (the "Distributor")
shall serve as the exclusive agent for distribution of shares of the Fund.
Pursuant to a distribution agreement (the "Distribution Agreement"), the
Distributor will be obligated to sell the shares of the Fund on a best
efforts basis only against purchase orders for the shares. Shares of the Fund
are offered to the public on a continuous basis.
The Distribution Agreement is renewable annually. The Distribution
Agreement may be terminated by the Distributor, by a majority vote of the
Trustees who are not interested persons and have no financial interest in the
Distribution Agreement or by a majority vote of the outstanding securities of
the Fund upon not more than 60 days' written notice by either party or upon
assignment by the Distributor.
The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act to enable the Fund to directly and indirectly bear certain expenses
relating to the distribution of each Class of the Fund's Shares and/or the
ongoing servicing or maintenance of existing shareholder accounts. Pursuant to
the Distribution Plan, the Fund will pay the Distributor a fee at the aggregate
annual rate of up to .25% of the Fund's average daily net assets attributable to
its Class A and C Shares and .05% of the Fund's average daily net assets
attributable to its Class B Shares. Among other things, the Distributor may use
these fees to pay financial intermediaries, plan fiduciaries, and investment
professionals ("Service Providers") to compensate them for providing to
shareholders or the underlying beneficial owners of Shares: (i) personal
support services; (ii) distribution assistance and distribution support
services; and (iii) account maintenance services. The Distributor has
voluntarily agreed to waive its fee with respect to the Class B Shares. The
Distributor may terminate this waiver prospectively at any time. In addition,
the Distributor and UBT, out of their own assets, may pay for certain
expenses incurred in connection with the distribution of the Shares of the
Fund or the servicing and maintenance of existing shareholder accounts.
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The Distributor shall prepare and deliver written reports to the Trust's
Board of Trustees on a regular basis (at least quarterly) setting forth the
payments made to the Distributor and Service Providers pursuant to the
Distribution Plan, and the purposes for which such expenditures were made, as
well as any supplemental reports as the Board of Trustees may from time to
time reasonably request.
Except to the extent that the Administrator or UBT may benefit through
increased fees from an increase in the net assets of the Fund which may have
resulted in part from the expenditures, no interested person of the Fund nor any
Trustee of the Trust who is not an interested person in the Fund had a direct or
indirect financial interest in the operation of the Plan or any related
agreement.
As of [DATE], 1997, the Fund had not commenced investment operations and
had not incurred any obligation to pay the Distributor for distribution
services.
BANKING REGULATORY MATTERS. UBT has been advised by its counsel that UBT
may perform the services for the Fund contemplated by the Advisory Agreement and
other activities for the Fund described in the Prospectus and this Statement of
Additional Information without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. However, counsel has pointed out that
future changes in either Federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and future
statutes and regulations, might prevent UBT from continuing to perform those
services for the Trust. State laws on this issue may differ from the
interpretations of relevant Federal law and banks and financial institutions may
be required to register as dealers pursuant to state securities law. If the
circumstances described above should change, the Board of Trustees would review
the relationship with UBT and consider taking all actions necessary under the
circumstances.
PURCHASE AND REDEMPTION OF FUND SHARES
PURCHASE OF SHARES
Purchases and redemptions may be made on any day on which the New York
Stock Exchange is open for business. Currently, the following holidays are
observed by the Fund: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Shares of
the Fund are offered on a continuous basis.
The Fund will offer and sell its shares at its net asset value per share,
which will be determined in the manner set forth below.
The net asset value of the Shares of each Class of the Fund will be
determined once daily, immediately after the declaration of dividends, if any,
at 4:00 p.m. Eastern time or, if the New York Stock Exchange closes early, at
the time of such early closing. The net asset value per share of each Class of
the Fund will be computed by dividing the investments represented by that Class,
plus any cash or other assets, minus all liabilities, by the total number of
outstanding shares of that Class of the Fund at such time. All expenses borne
by the Fund and each of its Classes will be accrued daily.
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Debt securities (other than short-term debt obligations maturing in 60 days
or less), including listed securities and securities for which price quotations
are available, will normally be valued on the basis of market valuations
furnished by a pricing service. Such market valuations may represent the last
quoted price on the securities' major trading exchange or quotes received from
dealers or market makers in the relevant securities or may be determined through
the use of matrix pricing. In matrix pricing, pricing services may use various
pricing models, involving comparable securities, historic relative price
movements, economic factors and dealer quotations. Over-the-counter securities
will normally be valued at the bid price. Short-term debtor obligations and
money market securities maturing in 60 days or less are valued at amortized
cost.
Securities for which market quotations are not readily available are valued
by UBT pursuant to procedures adopted by the Board of Trustees.
The value of the Fund's Wrapper Agreements will be determined as
described in the Prospectus, in accordance with procedures adopted by the
Board of Trustees. Each quarter UBT will report to the Board of Trustees
with respect to compliance with those procedures and the value of the Fund's
Wrapper Agreements.
The Fund's other assets are valued primarily on the basis of market
quotations or, if quotations are not readily available, by a method that the
Board of Trustees believes accurately reflects fair value.
REDEMPTION OF SHARES
The Fund reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of the Fund's Securities is not reasonably practicable, or
for such other periods as the SEC may permit. The Fund also reserves the right
to suspend sales of its shares for any period during which the New York Stock
Exchange, UBT, the Administrator, Transfer Agent and/or the Custodian are not
open for business.
The Fund intends that it usually will redeem its Shares for cash. The Fund
is required 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 NAV of
the Fund at the beginning of the period.
As described in the Prospectus, however, the Fund reserves the right, in
circumstances where in its sole discretion it determines that cash redemption
payments would be undesirable, to honor any request for redemption by making
payment wholly or partly in Securities and in Wrapper Agreements, as the same
may be chosen by UBT in its sole discretion (an "in kind redemption"). The
Trust, on behalf of the Fund, is seeking an exemptive order from the SEC with
respect to redemptions in kind made to 5% or greater shareholders of the
Fund. Until such time as appropriate regulatory authorization is obtained,
the Fund will not make redemptions in kind to 5% or greater shareholders of
the Fund.
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Although the Fund will seek to maintain a stable net asset value per Share,
the value of the Shares on redemption may be more or less than the shareholder's
cost, depending upon the market value of the Fund's assets (including the
Wrapper Agreements) at the time of redemption.
TAXATION
The following is only a summary of certain income tax considerations
generally affecting the Fund and its shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their
tax advisers with specific reference to their own tax situations, including
their state and local income tax liabilities.
FEDERAL INCOME TAX. The following discussion of federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
The Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By maintaining its qualifications as a
RIC, the Fund intends to eliminate or reduce a nominal amount the federal taxes
to which it may be subject.
In order to qualify for that treatment, the Fund must distribute annually
to its shareholders at least 90% of its investment company taxable income
(generally, interest, dividends, and the excess of short-term capital gain over
net long-term capital loss) ("Distribution Requirement") and also must meet
several additional requirements. Among these requirements are the following:
(i) at least 90% of the Fund's gross income each taxable year must be derived
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock or securities, or certain other
income, including gains from the options or future contracts (the "Income
Requirement"); and (ii) the Fund's assets must be diversified, such that (a) at
least 50% of the value of its total assets consist of cash and cash items, U.S.
Government securities, securities of other RICs and other securities, with such
other securities limited, in respect to any one issuer, to an amount that does
not exceed 5% of the value of the Fund's assets or 10% of the issuer's
outstanding voting securities, and (b) not more than 25% of the value of the
Fund's assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer or of two or more
issuers which are engaged in the same, similar or related trades or businesses
if the Fund owns at least 20% of the voting power of such issuers.
Even if the Fund meets the Distribution Requirement described above, the
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of any calendar year 98% of its ordinary income
for that year and 98% of its capital net income (the excess of short- and
long-term capital gains over short- and long-term capital losses) for the
one-year period ending on October 31 of that calendar year, plus certain
other amounts.
The Fund's use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the character
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and timing of recognition of the gains and losses it realizes in connection
therewith. Gains from options and futures contracts derived by the Fund with
respect to its business of investing in securities will qualify as
permissible income for the Fund under the Income Requirement.
If a Fund fails to qualify as a RIC for any taxable year, it will be
taxable at regular corporate rates on its net investment income and net capital
gain without any deductions for amounts distributed to shareholders. In such an
event, all distributions (including capital gains distributions) will be taxable
as ordinary dividends to the extent of that Fund's current and accumulated
earnings and profits and such distributions will generally be eligible for the
corporate dividends-received deduction.
In certain cases, the Fund will be required to withhold, and remit to the
U.S. Treasury, 31% of any distributions paid to a shareholder who (i) has failed
to provide a correct taxpayer identification number, (ii) is subject to backup
withholding by the Internal Revenue Service, or (iii) has not certified to the
Fund that such shareholder is not subject to backup withholding.
FOREIGN WITHHOLDING TAXES. Income received by the Fund from sources
within foreign countries may be subject to withholding and other taxes
imposed by those countries that would reduce the yield on its securities.
Tax conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign investors.
STATE TAXES. The Trust is organized as a Delaware business trust, and
neither the Trust nor the Fund is liable for any income or franchise tax in the
State of Delaware, provided that the Fund continues to qualify as a RIC.
Distributions by the Fund to shareholders and the ownership of Shares may
be subject to state and local taxes.
FINANCIAL STATEMENTS
To Be Filed By Amendment.
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PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION. From time to time, quotations of the
Share's performance may be included in advertisements, sales literature or
shareholder reports. These performance figures are calculated in the following
manner:
YIELD: Yield refers to the income generated by an investment over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond mutual funds.
Because this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
Performance information or advertisements may include comparisons of the
Shares' investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles. From time to time, the Shares'
ranking may be quoted from various sources, such as Lipper Analytical Services,
Inc., Value Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Shares will vary depending upon
interest rates, the current market value of the securities held by the Fund and
the Wrapper Agreements and changes in the expenses of the Shares and the Fund.
In addition, during certain periods for which total return may be provided, UBT
may have voluntarily agreed to waive portions of its fees, or to reimburse
certain operating expenses of the Fund on a month-to-month basis. Such waivers
will have the effect of increasing the Shares' net income (and therefore its
yield and total return) during the period such waivers are in effect.
TOTAL RETURN: The Shares' average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (made at the maximum
public offering price with all distributions reinvested) to reach the value of
that investment at the end of the periods. The Shares may also calculate total
return figures that represent aggregate performance over a period or
year-by-year performance.
PERFORMANCE RESULTS: Any performance information provided for the Shares
should not be considered as representative of its performance in the future,
because the NAV and public offering price of Shares will vary based not only on
the type, quality and maturities of the securities held by the Fund but also on
changes in the current value of such securities and on changes in the expenses
of the Fund. Total return reflects the performance of both principal and
income.
COMPARISONS OF FUND PERFORMANCE. Comparison of the quoted nonstandardized
performance of various investments is valid only if performance is calculated in
the same manner. Since there are different methods of calculating performance,
investors should consider the effect of the methods used to calculate
performance when comparing performance of the Fund with performance quoted with
respect to other investment companies or types of investment.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by
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mutual fund rating services or to unmanaged
indices that may assume reinvestment of dividends but generally do not
reflect deductions for administrative and management costs. Evaluations of
the Fund's performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for the Fund's performance
information could include the following: ASIAN WALL STREET JOURNAL,
BARRON'S, BUSINESS WEEK, CHANGING TIMES, THE KIPLINGER MAGAZINE, CONSUMER
DIGEST, FINANCIAL TIMES, FINANCIAL WORLD, FORBES, GLOBAL INVESTOR, INVESTOR'S
DAILY, LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS,
MONEY, MORNINGSTAR, INC., NEW YORK TIMES, PERSONAL INVESTING NEWS, PERSONAL
INVESTOR, SUCCESS, U.S. NEWS AND WORLD REPORT, VALUELINE, WALL STREET
JOURNAL, WEISENBERGER INVESTMENT COMPANIES SERVICES, WORKING WOMEN and WORTH.
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APPENDIX
DESCRIPTION OF RATING SERVICES
The ratings of rating services represent their opinions as to the quality of
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, UBT also makes its own evaluation of these securities, subject to
review by the Board of Trustees. After purchase by the Fund, an obligation may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event would require the Fund to eliminate the
obligation from its portfolio, but UBT will consider such an event in its
determination of whether the Fund should continue to hold the obligation. The
minimum rating required for an obligation to be purchased by the Fund is
"investment grade" which means a rating of Baa or better by Moody's, BBB or
better by S&P and BBB or better by Duff & Phelps. A description of the ratings
referred to herein and in the Prospectus is set forth below.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa Bonds 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 rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds 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 rated Baa are considered as medium-grade obligations, i.e. they
are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of
interest and principal payments
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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 rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be in default
or elements of danger may be present with respect to principal
or interest.
Ca Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
short-comings.
C Bonds rated C are the lowest-rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic
rating classification from Aa through B in its corporate bond
system. The modifier 1 indicates that the security 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 issue
ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's to
a debt obligation. 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 the higher-rated issues only in 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.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Although it usually exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments.
B Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial,
33
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or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
CC Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
The D rating will also be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' LONG-TERM DEBT RATINGS:
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic
conditions.
A Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB Below investment grade but deemed likely to meet obligation when due.
Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
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B Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers 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 cited above 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.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF S&P SHORT-TERM ISSUER CREDIT RATINGS:
A-1 Strong capacity to meet financial commitments. Within this category,
certain obligors are designated with a plus sign (+). This indicates
that the obligor's capacity to meet its financial commitments is
extremely strong.
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A-2 Satisfactory capacity to meet financial commitments. However, the
obligor is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligors in the highest
rating category.
A-3 Adequate capacity to meet financial obligations. However, adverse
economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial
commitments.
DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS:
D-1+ Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk free U.S.
Treasury short term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
D-3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
DESCRIPTION OF MOODY'S INSURANCE FINANCIAL STRENGTH RATINGS:
Aaa Exceptional financial security. While the financial strength of these
companies is likely to change, such changes as can be visualized are
most unlikely to impair their fundamentally strong position.
Aa Excellent financial security. Together with the Aaa group they
constitute what are generally known as high grade companies. They are
rated lower than Aaa companies because long-term risks appear somewhat
larger.
A Good financial security. However, elements may be present which
suggest a susceptibility to impairment sometime in the future.
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Baa Adequate financial security. However, certain protective elements may
be lacking or may be characteristically unreliable over any great
length of time.
Ba Questionable financial security. Often the ability of these
companies to meet policyholder obligations maybe very moderate and
thereby not well safeguarded in the future.
B Poor financial security. Assurance of punctual payment of
policyholder obligations over any long period of time is small.
Caa Very poor financial security. They may be in default on their
policyholder obligations or there may be present elements of danger
with respect to punctual payment of policyholder obligations and
claims.
Ca Extremely poor financial security. Such companies are often in
default on their policyholder obligations or have other marked
shortcomings.
C Lowest rated class of insurance company. Such companies can be
regarded as having extremely poor prospects of ever offering
financial security.
Numeric modifiers: Numeric modifiers are used to refer to the ranking within the
group -- one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.
DESCRIPTION OF S&P CLAIMS PAYING ABILITY RATING DEFINITIONS:
SECURE RANGE: AAA TO BBB
AAA Superior financial security on an absolute and relative basis.
Capacity to meet policyholder obligations is overwhelming under a
variety of economic and underwriting conditions.
AA Excellent financial security. Capacity to meet policyholder
obligations is strong under a variety of economic and underwriting
conditions.
A Good financial security, but capacity to meet policyholder obligations
is somewhat susceptible to adverse economic and underwriting
conditions.
BBB Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting
conditions.
37
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VULNERABLE RANGE: BB TO CCC
BB Financial security may be adequate, but capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail"
policies, is vulnerable to adverse economic and underwriting
conditions.
B Vulnerable financial security. Currently able to meet policyholder
obligations, but capacity to meet policyholder obligations is
particularly vulnerable to adverse economic and underwriting
conditions.
CCC Extremely vulnerable financial security. Continued capacity to meet
policyholder obligations is highly questionable unless favorable
economic and underwriting conditions prevail.
R Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation,
receivership, liquidation, or any other action that reflects
regulatory concern about the insurer's financial condition.
Information on this status is provided by the National Association of
Insurance Commissioners and other regulatory bodies. Although believed
to be accurate, this information is not guaranteed. The "R" rating
does not apply to insurers subject only to nonfinancial actions such
as market conduct violations.
Plus (+) or minus (-) Ratings from "AA" to "B" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
DUFF & PHELPS' CLAIMS PAYING ABILITY RATINGS:
AAA Highest claims paying ability. Risk factors are negligible.
AA Very high claims paying ability. Protection Factors are strong. Risk
is modest, but may vary slightly over time due to economic and/or
underwriting conditions.
A High claims paying ability. Protection factors are average and there
is an expectation of variability in risk over time due to economic
and/or underwriting conditions.
BBB Adequate claims paying ability. Protection factors are adequate.
There is considerable variability in risk over time due to economic
and/or underwriting conditions.
BB Uncertain claims paying ability and less than investment grade
quality. However, the company is deemed likely to meet these
obligations when due. Protection factors will vary widely with
changes in economic and/or underwriting conditions.
B Possessing risk that policyholder and contractholder obligations will
not be paid when due. Protection factors will vary widely with
changes in economic and underwriting conditions or company fortunes.
38
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CCC There is substantial risk that policyholder and contractholder
obligations will not be paid when due. Company has been or is likely
to be placed under state insurance department supervision.
DD Company is under an order of liquidation.
[END OF STATEMENT OF ADDITIONAL INFORMATION]
39
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) FINANCIAL STATEMENTS:
Financial Statements included in Part A:
None
Financial Statements included in Part B:
(i) Report of Independent Certified Public Accountants
(ii) Statement of Assets and Liabilities as of _________,
1998.
(b) EXHIBITS:
(1) Declaration of Trust
(2) By-Laws of the Trust
(3) Voting Trust Agreement - Not Applicable
(4) Instruments Defining the Rights of Holders of the Registrant's
Shares of Beneficial Interest - See Item 24(b)(1)
(5) Form of Investment Advisory Agreement
(6) (a) Form of Distribution Agreement (to be filed by
amendment)
(6) (b) Form of Selected Dealer Agreement (to be filed by
amendment)
(7) Bonus, Profit Sharing or Pension Plans - Not Applicable
(8) Form of Custodian Agreement (to be filed by amendment)
(9) Form of Administration and Services Agreement (to be filed by
amendment)
(10) Opinion and Consent of Dunn, Carney, Allen, Higgins & Tongue
(to be filed by amendment)
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(11) Consent of Independent Certified Public Accountants (to be
filed by amendment)
(12) Financial Statements Omitted from Item 23 - Not Applicable
(13) Form of Purchase Agreement (attached)
(14) Retirement Plan - Not Applicable
(15) Plan of Distribution pursuant to Rule 12b-1 (to be filed by
amendment)
(16) Schedule for Computation of Performance Quotations - Not
Applicable
(17) Financial Data Schedule (to be filed by amendment)
(18) Plan Pursuant to Rule 18f-3 (to be filed by amendment)
Item 25. Persons Controlled By or Under Common Control With The Trust.
Upon commencement of the Trust's operations, UBT will be the sole
initial shareholder of the Trust and will control the Trust by virtue
of its ownership of 100% of the Trust's Shares. UBT may, from time to
time, purchase Fund Shares for certain of its collective trust funds.
By virtue of its ownership of Fund Shares and its ability to vote
Shares held by its collective trust funds, UBT may be deemed to be a
controlling person of the Trust until more than 75% of the Fund's
Shares are owned by unaffiliated persons.
UBT is a wholly-owned subsidiary of Morley Financial Services, Inc.
("MFS"), an Oregon corporation. MFS is a holding company, which also
wholly-owns Morley Capital Management Inc. ("Morley Capital"), an
Oregon corporation, which is a registered investment adviser.
As described in the Statement of Additional Information, as of
September 15, 1997, virtually all of MFS' issued and outstanding
voting securities were owned by Harold H. Morley (who is President
and Chief Executive Officer of MFS, Morley Capital, and UBT),
the MFS Employee Stock Ownership Plan (the "ESOP"), and Pacific Life
Insurance Company ("Pacific Life"), a California stock life insurance
company. Through its ownership of MFS shares, Pacific Life may be
deemed to be a controlling person of MFS and, indirectly, of UBT.
Pursuant to the terms of a Voting Agreement, the power to vote the MFS
shares owned by Pacific Life is held by Mr. Morley. Pacific Life,
directly and through its subsidiaries, engages in the insurance and
other financial services businesses,
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including institutional and mutual fund asset management, financial
planning, reinsurance, and junior capital investment.
As a result of his ownership of shares in MFS and the Voting
Agreement, Mr. Morley has the power to vote the majority of MFS'
voting securities. Mr. Morley may be deemed to be a controlling
person of UBT due to his ownership of shares in MFS, his power to vote
Pacific Life's shares in MFS, and his positions of President and Chief
Executive Officer of UBT. The ESOP may also be deemed to be a
controlling person of UBT by virtue of its ownership of MFS shares.
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders
-------------- ------------------------
Portland Stable Investment Fund Class A: 0
Class B: 1
Class C: 0
Item 27. Indemnification.
Under Section 2 Article VII of Registrant's Agreement and Declaration
of Trust, any past or present Trustee or officer of Registrant
(including persons who serve at Registrant's request as directors,
officers or trustees of another organization in which Registrant has
any interest as a shareholder, creditor or otherwise [hereinafter
referred to as a "Covered Person"]) is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any action, suit or proceeding to
which he may be a party or otherwise involved by reason of his being
or having been a Covered Person. This provision does not authorize
indemnification when it is determined, in the manner specified in the
Agreement and Declaration of Trust, that such Covered Person would
otherwise be liable to Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard
of his duties.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to
Trustees, officers and controlling persons of Registrant pursuant to
the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission (the
"SEC") such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by Registrant
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of expenses incurred or paid by a Trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
UBT serves as investment adviser to the Trust. UBT, a trust company
organized under the laws of the State of Oregon, is a wholly owned
subsidiary of Morley Financial Services, Inc., an Oregon corporation.
UBT conducts a variety of trust activities.
To the knowledge of the Trust, none of the directors or officers of
UBT, except those set forth below, is or has been at any time during
the past two fiscal years engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain
directors and officers also hold various positions with and engage in
business for Morley Financial Services, Inc. Set forth below are the
names and principal businesses of the directors and officers of UBT
who are, or during the past two fiscal years have been, engaged in any
other business, profession, vocation or employment of a substantial
nature. These persons may be contacted c/o UBT, 5665 SW Meadows Rd.,
Suite 400, Lake Oswego, Oregon 97035.
Name and Principal Business Address, Principal Occupation and Other
Information.
Donald C. Burdick, 434 Ridgeway Road, Lake Oswego, OR 97034
Independent Consultant and Investor-Director, Morley Financial
Services, Inc.
Item 29. Principal Underwriters.
(a) Portland Investment Services, Inc. is the Distributor for shares of
the Registrant. Portland Investment Services, Inc. does not act as
principal underwriter for any other investment company.
(b) Set forth below are the names, principal business addresses and
positions of each officer of the Distributor.
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NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
------------------ --------------------- ---------------------
Richard T. Borst President and None
2155 Bridle Way Director
West Linn, OR 97065
Taylor E. Drake Vice President None
5665 S.W. Meadows Rd.
Suite 400
Lake Oswego, OR 97035
Joan V. Hall Secretary Secretary
5665 S.W. Meadows Rd.
Suite 400
Lake Oswego, OR 97035
(c) Not Applicable.
Item 30. Location of Accounts and Records.
All accounts and records of Registrant are maintained by Union Bond &
Trust Company, 5665 S.W. Meadows Rd., Suite 400, Lake Oswego, OR
97035.
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
(a) Inapplicable.
(b) The Registrant hereby undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the effective date
of Registrant's 1933 Act Registration Statement.
(c) Inapplicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in this City of Portland and State of Oregon, on this 8th day
of October, 1997.
THE PORTLAND MUTUAL FUNDS
By: /s/ Joan K. Hall
------------------------------
Joan K. Hall
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Harold H. Morley President and Trustee October 8, 1997
- --------------------------- ---------------
Harold H. Morley
/s/ Frederick F. Fletcher Treasurer October 8, 1997
- --------------------------- (Principal Financial ---------------
Frederick F. Fletcher and Accounting Officer)
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POWER OF ATTORNEY
The undersigned Trustee and officers, as indicated respectively below, of
The Portland Mutual Funds (the "Trust") each hereby constitutes and appoints the
President, Secretary and each Assistant Secretary of the Trust, each of them
with full powers of substitution, as his true and lawful attorney-in-fact and
agent to execute in his name and on his behalf in any and all capacities the
Registration Statements on Form N-1A, and any and all amendments thereto, and
all other documents, filed by the Trust with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940, as amended, and
(as applicable) the Securities Act of 1933, as amended, and any and all
instruments which such attorneys and agents, or any of them, deem necessary or
advisable to enable the Trust to comply with such Acts, the rules, regulations
and requirements of the SEC, and the securities or Blue Sky laws of any state or
other jurisdiction, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the SEC and such other jurisdictions,
and the undersigned each hereby ratifies and confirms as his own act and deed
any and all acts that such attorneys and agents, or any of them, shall do or
cause to be done by virtue hereof. Any one of such attorneys and agents has,
and may exercise, all of the powers hereby conferred. The undersigned each
hereby revokes any Powers of Attorney previously granted with respect to any
Trust concerning the filings and actions described herein.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand as of
the 8th day of October, 1997.
Signatures Title
---------- -----
/s/ Harold H. Morley
- ------------------------------------ President and Trustee of The Trust
Harold H. Morley
/s/ Joan K. Hall
- ------------------------------------ Secretary of the Trust
Joan K. Hall
/s/ Frederick F. Fletcher
- ------------------------------------ Treasurer of the Trust
Frederick F. Fletcher
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CONSENT
Pursuant to the requirements of Rule 438 under the Securities Act of 1933,
as amended, the undersigned prospective Trustees of The Portland Mutual Funds
(the "Trust") each hereby consents to the filing of this Registration Statement
on Form N-1A, and any and all amendments thereto, in which the undersigned are
named as prospective Trustees of the Trust.
Signatures Date
---------- ----
/s/ Donald W. Magnusen October 8, 1997
- --------------------------------------- ---------------
Donald W. Magnusen
Prospective Trustee
/s/ Jan W. Jansen October 8, 1997
- --------------------------------------- ---------------
Jan W. Jansen
Prospective Trustee
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THE PORTLAND MUTUAL FUNDS
EXHIBIT INDEX
EXHIBIT NUMBER:
(1) Declaration of Trust
(2) By-Laws of the Trust
(5) Form of Investment Advisory Agreement
(13) Form of Purchase Agreement
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