MORGAN KEEGAN INTERMEDIATE BOND FUND
A BOND FUND FOR INVESTORS WHO SEEK TO EARN A HIGH LEVEL OF INCOME PRIMARILY FROM
INTERMEDIATE MATURITY, INVESTMENT GRADE BONDS.
MORGAN KEEGAN HIGH INCOME FUND
A BOND FUND FOR INVESTORS WHO CAN ACCEPT HIGHER RISK AND SEEK TO EARN A HIGH
LEVEL OF INCOME PRIMARILY FROM BELOW INVESTMENT GRADE
BONDS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
MORGAN KEEGAN & COMPANY, INC.
Fifty Front Street
Memphis, Tennessee 38103
(901) 524-4100
(800) 366-7426
Dated March 8, 1999
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18
TABLE OF CONTENTS
PAGE
Overview...............................................................1
Fund Information Key.................................................1
Morgan Keegan Intermediate Bond Fund...................................2
Goals and Strategies.................................................2
Portfolio Securities.................................................2
Risk Factors.........................................................3
Who may want to invest...............................................4
Fees and Expenses of the Fund........................................5
Morgan Keegan High Income Fund.........................................6
Goals and Strategies.................................................6
Portfolio Securities.................................................6
Risk Factors.........................................................7
Who may want to invest...............................................8
Fees and Expenses of the Fund........................................9
Your Account..........................................................10
Buying shares.......................................................10
Choosing a Share Class..............................................10
Class Comparison....................................................10
Distribution Plan (Rule 12b-1 Fees).................................12
Policies for Buying Shares..........................................12
To Add to an Account................................................12
Buying Shares Through an Investment Broker..........................12
Internet............................................................13
Selling Shares......................................................13
To Sell Some or All of Your Shares..................................13
Account Policies......................................................14
Additional Policies...................................................15
Investor Services.....................................................16
Funds'Management and Investment Adviser...............................16
Funds'Portfolio Manager...............................................17
Funds'Distributor.....................................................17
Distributions.........................................................17
Tax Considerations....................................................17
More About Risk.......................................................18
Other Securities and Risks............................................18
For Additional Information............................................19
i
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OVERVIEW
THIS PROSPECTUS HAS INFORMATION ABOUT THESE FUNDS YOU SHOULD KNOW BEFORE YOU
INVEST. FOR YOUR OWN BENEFIT AND PROTECTION, PLEASE READ IT CAREFULLY BEFORE YOU
INVEST, AND KEEP IT WITH YOUR INVESTMENT RECORDS FOR FUTURE REFERENCE.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
GOALS AND STRATEGIES The Fund's investment goals and the principal strategies it
intends to follow in pursuing those goals.
PORTFOLIO SECURITIES The primary types of securities in which the Fund invests.
Secondary investments are described in "More about risk" at the end of the
prospectus.
RISK FACTORS The major risk factors associated with the Fund.
EXPENSES The overall costs borne by an investor in the Fund, including sales
charges and annual expenses.
1
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MORGAN KEEGAN INTERMEDIATE BOND FUND
GOALS AND STRATEGIES The Fund seeks a high level of income by investing in
intermediate maturity, investment grade bonds. The Fund seeks capital growth as
a secondary objective, when consistent with the Fund's primary objective.
The Fund seeks its objectives by investing at least 65% of its total assets in
investment grade, intermediate term maturity bonds (those bonds rated investment
grade by at least one nationally recognized statistical rating organization with
overall effective maturities of 1 to 10 years) that Morgan Asset Management,
Inc. (the "Adviser") believes offer attractive yield and capital appreciation
potential. Investment grade securities purchased by the Fund will be rated, at
the time of investment, at least BBB by at least one nationally recognized
statistical rating organization ("NRSRO") including, but not limited to,
Standard & Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc.
("Moody's") or, if unrated, will be determined by the Adviser to be of
comparable quality. If a security satisfies the Fund's minimum rating criteria
at the time of purchase and is subsequently downgraded below such rating, the
Fund will not be required to dispose of such security. If a downgrade occurs,
the Adviser will consider what action, including the sale of such security, is
in the best interest of the Fund and its shareholders. The policy of the Fund is
to keep the portfolio's average effective maturity between 3 and 10 years.
In managing the Fund's portfolio, the Adviser will focus on those securities
believed to offer the most attractive value relative to alternative investments.
That is, the Adviser will invest in securities that it believes offer
potentially better yield or total return (the combination of yield and price
appreciation) than securities of comparable rating and maturity. Similarly, the
Adviser will sell securities that it believes no longer offer potentially better
yield or total return than other available securities. This strategy is
generally referred to as a "value" approach and is primarily concerned with
individual security and sector selection. In addition, the Adviser's strategy
does not attempt to forecast interest rate movements; rather the goal is to keep
the Fund's assets "fully invested" (hold a minimal amount of cash reserves --
generally less than 10%) and to maintain a relatively stable average effective
portfolio maturity.
PORTFOLIO SECURITIES DEBT SECURITIES. Bonds and other debt instruments are used
by issuers to borrow money from investors. The issuer generally pays the
investor a fixed, variable or floating rate of interest, and is obligated to
repay the amount borrowed at maturity.
The Fund may invest in U.S. Government securities, corporate bonds, debentures,
notes, preferred stock, mortgage-backed and asset-backed securities. Moreover,
in addition to purchasing investment grade securities to fulfill its investment
objectives, the Fund may invest up to 35% of its assets in below investment
grade bonds (commonly referred to as "junk bonds"), convertible securities and
common stocks.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities may be supported by (a)
the full faith and credit of the U.S. Treasury (such as the Government National
Mortgage Association ("Ginnie Mae")), (b) the right of the issuer to borrow from
the U.S. Treasury (such as securities of the Student Loan Marketing Association
("Sallie Mae")), (c) the discretionary authority of the U.S. government to
purchase certain obligations of the issuer (such as the Federal National
Mortgage Association ("Fannie Mae")) and Federal Home Loan Mortgage Corporation
("Freddie Mac") or (d) only the credit of the issuer.
MORTGAGE-BACKED SECURITIES are securities representing interests in pools of
mortgages secured by real property. ASSET-BACKED SECURITIES represent interests
in pools of obligations, such as credit card or automobile loan receivables,
purchase contracts and financing leases.
BELOW INVESTMENT GRADE BONDS are securities which are rated below investment
grade by at least one NRSRO or, if unrated, are determined by the Adviser to be
2
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of comparable quality. These securities are described by the rating services to
be speculative or have speculative elements (high in financial risk) that
decrease the probability of future interest and principal payments by the
issuer.
CONVERTIBLE SECURITIES are securities of an issuer convertible at a stated
exchange rate into common stock of the issuer. Convertible securities generally
offer lower interest or dividend yields than non-convertible securities.
Convertible securities purchased by the Fund will be rated at the time of
investment at least BBB by at least one NRSRO or, if unrated, determined by the
Adviser to be of comparable quality.
COMMON STOCKS represent an equity (ownership) interest in a corporation.
RISK FACTORS Investors should expect greater fluctuations in share price, yield
and total return from the Fund compared with funds that invest primarily in U.S.
Government securities or in shorter term debt.
Debt securities fluctuate in price. The value of your investment in the Fund
will go up and down, which means that you could lose money. Typically, a rise in
market interest rates causes a decline in the market value of debt securities.
The longer the Fund's average maturity, the more likely it is to be affected by
a change in interest rates and the greater the effect.
Because different types of debt securities tend to shift in and out of favor
depending on market and economic conditions, the Fund's performance may
sometimes be lower or higher than that of other bond funds. In the long run, the
Fund may produce lower total return than riskier below investment grade and long
term bond funds.
Investment grade debt securities have credit risk and their ratings are no
guarantee that principal repayment or interest payments will be made. The NRSROs
describe the lowest grade of investment grade bonds as having speculative
characteristics.
To the extent that the Fund invests in asset-backed and mortgage-backed
securities, it will also be subject to extension and prepayment risks. Extension
risk is the risk that an unexpected rise in interest rates will extend the life
of a mortgage-backed security beyond the expected prepayment time, typically
reducing the security's market value; and prepayment risk is the risk that
unanticipated prepayments may occur during periods of falling interest rates,
with the prepayments reinvested on behalf of the Fund at the lower prevailing
interest rates.
By investing in below investment grade bonds, the Fund is subject to their
risks, including the risk its below investment grade holdings may: (1) fluctuate
more widely in price and yield than investment-grade bonds; (2) fall in price
during times when the economy is weak or is expected to become weak; (3) be
difficult to sell during market downturns at the time and price the Fund
desires; and (4) default on principal or interest payments when due. The Fund's
performance may also suffer if it owns bonds of an issuer that is affected by
bad news, bonds of an issuer in an industry that is affected by bad news, or
bonds of an issuer that defaults on its obligations, in which case the value and
income of the Fund would decrease. Finally, although the link between interest
rates and bond prices tends to be weaker with below investment grade bonds than
with investment-grade bonds, a rise in interest rates is still likely to cause
below investment grade bonds to fall in price.
Because the Fund may invest in equity securities, such as convertible securities
and common stock, it may be subject to stock market risk. Stock prices typically
fluctuate more than the values of other types of securities, typically in
response to changes in the particular company's financial condition and factors
affecting the market in general. For example, unfavorable or unanticipated poor
earnings performance of the company may result in a decline in its stock's
price, and a broad-based market drop may also cause a stock's price to fall.
The Fund is newly organized and has no operating history prior to the date of
this prospectus.
3
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WHO MAY WANT TO INVEST
The Fund may be appropriate for investors who:
o Are seeking monthly income
o Are seeking higher return than money market funds and are willing to accept
the risk of loss of principal
o Want to diversify their portfolios
o Are seeking a mutual fund for the income portion of an asset allocation
portfolio
o Are retired or nearing retirement
The Fund may NOT be appropriate for investors who:
o Are seeking maximum return over a long time horizon
o Require absolute stability of principal
4
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FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (fees paid directly
from your investment) Class A Class C Class I
- -------------------------------------------------------------------------
Maximum sales charge (Load) 2.00% 0.00% 0.00%
(as a percentage of offering price)
Maximum deferred sales charge (Load) 0.00% 1.00% 0.00%
(as a percentage of the lesser of the
offering price or net asset value)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund Class A Class C Class I
assets)
- -------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40%
Distribution (12b-1) fees 0.25% 0.60% 0.00%
Other expenses1 0.40% 0.40% 0.40%
----------------------------------
Total annual fund operating expenses2 1.05% 1.40% 0.80%
==================================
Fee Waiver 0.15% 0.15% 0.15%
==================================
Net Expenses: 0.90% 1.25% 0.65%
(1) Because the Fund had no operations prior to the date of this prospectus,
these expenses are estimated for its first year of operations.
(2) The Adviser has agreed to waive its fee and to reimburse the Fund for its
first twelve months of operations to the extent its total annual operating
expenses (excluding brokerage, interest, taxes, and extraordinary
expenses) exceed 0.90% of net assets of Class A shares, 1.25% of net
assets of Class C shares and 0.65% of net assets of Class I shares.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This Example assumes that you invest $10,000 in the Fund and then redeem all of
your shares at the end of the time periods indicated. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Class A Class C Class I
-------------------------------------------
1 Year $290 $229 $67
1 Year (if shares are not $290 $129 $67
redeemed)
3 Years (whether or not $514 $431 $241
shares are redeemed)
5
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MORGAN KEEGAN HIGH INCOME FUND
GOALS AND STRATEGIES The Fund seeks a high level of income by investing in below
investment grade bonds (commonly referred to as "junk bonds"). The Fund seeks
capital growth as a secondary objective, when consistent with the Fund's primary
objective.
The Fund seeks its objectives by investing at least 65% of its total assets in
below investment grade bonds (bonds that are rated BB or below by an NRSRO, and
that are deemed to be speculative as to the issuer's ability to make payments of
principal and interest when due) that the Adviser believes offer attractive
yield and capital appreciation potential. All securities purchased by the Fund
will be rated, at the time of investment, at least CCC by at least one NRSRO
including, but not limited to, S&P and Moody's or, if unrated, determined by the
Adviser to be of comparable quality. If a security satisfies the Fund's minimum
rating criteria at the time of purchase and is subsequently downgraded below
such rating, the Fund will not be required to dispose of such security. If a
downgrade occurs, the Adviser will consider what action, including the sale of
such security, is in the best interest of the Fund and its shareholders.
In managing the Fund's portfolio, the Adviser will focus on those securities
believed to offer the most attractive value relative to alternative investments.
That is, the Adviser will invest in securities that it believes offer
potentially better yield or total return (the combination of yield and price
appreciation) than securities of comparable rating and maturity. Similarly, the
Adviser will sell securities that it believes no longer offer potentially better
yield or total return than other available securities. This strategy is
generally referred to as a "value" approach and is primarily concerned with
individual security and sector selection. In addition, the Adviser's strategy
does not attempt to forecast interest rate movements; rather the goal is to keep
the Fund's assets "fully invested" (hold a minimal amount of cash reserves --
generally less than 10%) and to maintain a relatively stable average effective
portfolio maturity. The policy of the Fund is to keep the portfolio's average
effective maturity between 3 and 15 years.
PORTFOLIO SECURITIES Up to 100% of the Fund's total assets may consist of debt
securities that are rated below investment grade and their unrated equivalents
(deemed by the Adviser to be of comparable quality). Types of debt securities
include, but are not limited to, bonds, debentures, notes, mortgage-backed and
asset-backed securities, convertible debt securities of domestic and foreign
corporations, and municipal and foreign government obligations. The Fund may
invest up to 20% of its assets in foreign debt and equity securities. Equity
securities include common stock, preferred stock and convertible preferred
securities. The Fund may invest up to 35% of its assets in other debt securities
including investment grade securities.
BELOW INVESTMENT GRADE BONDS are securities which are rated below investment
grade by at least one NRSRO or, if unrated, are determined by the Adviser to be
of comparable quality. These securities are described by the rating services to
be speculative or have speculative elements (high in financial risk) that
decrease the probability of future interest and principal payments by the
issuer.
MORTGAGE-BACKED SECURITIES are securities representing interests in pools of
mortgages secured by real property. ASSET-BACKED SECURITIES represent interests
in pools of obligations, such as credit card or automobile loan receivables,
purchase contracts and financing leases.
CONVERTIBLE SECURITIES are securities of an issuer convertible at a stated
exchange rate into common stock of the issuer. Convertible securities generally
offer lower interest or dividend yields than non-convertible securities.
Convertible securities purchased by the Fund will be rated at the time of
investment at least CCC by at least one NRSRO or, if unrated, determined by the
Adviser to be of comparable quality.
MUNICIPAL SECURITIES consist of bonds, notes, commercial paper and other
instruments (including participation interests in such securities) issued by or
on behalf of states, territories and possessions of the United States (including
6
<PAGE>
the District of Columbia) and their political subdivisions, agencies or
instrumentalities. The interest on such securities is exempt from the federal
income tax. Such securities may pay fixed, variable or floating rates of
interest.
FOREIGN GOVERNMENT SECURITIES are debt obligations of foreign governments and
governmental agencies, including those of emerging countries.
PREFERRED STOCK are securities that provide the holder with claims on the
issuer's earnings and assets before common stock owners but after bond owners.
Unlike debt securities, the obligations of an issuer of preferred stock may not
typically be accelerated in the event of default (such as the filing of a
bankruptcy petition by the issuer).
COMMON STOCKS represent an equity (ownership) interest in a corporation.
RISK FACTORS This is an aggressive bond fund which has a significant degree of
risk. Investors should expect greater fluctuations in share price, yield and
total return from the Fund compared with the Morgan Keegan Intermediate Bond
Fund.
Most of the Fund's performance depends on what happens in the below investment
grade bond market. The market's behavior is unpredictable, particularly in the
short term. Because of this, the value of your investment will rise and fall,
and you could lose money. By focusing on below investment grade bonds, the Fund
is subject to their risks, including the risk its holdings may: (1) fluctuate
more widely in price and yield than investment-grade bonds; (2) fall in price
during times when the economy is weak or is expected to become weak; (3) be
difficult to sell during market downturns at the time and price the Fund
desires; and (4) default on principal or interest payments when due. The Fund's
performance may also suffer if it owns bonds of an issuer that is affected by
bad news, bonds of an issuer in an industry that is affected by bad news, or
bonds of an issuer that defaults on its obligations, in which case the value and
income of the Fund would decrease. Finally, although the link between interest
rates and bond prices tends to be weaker with below investment grade bonds than
with investment-grade bonds, a rise in interest rates is still likely to cause
below investment grade bonds to fall in price.
Typically, a rise in market interest rates causes a decline in the market value
of debt securities. The longer the Fund's average maturity, the more likely it
is to be affected by a change in interest rates and the greater the effect.
To the extent that the Fund invests in asset-backed and mortgage-backed
securities, it will also be subject to extension and prepayment risks. Extension
risk is the risk that an unexpected rise in interest rates will extend the life
of a mortgage-backed security beyond the expected prepayment time, typically
reducing the security's market value; and prepayment risk is the risk that
unanticipated prepayments may occur during periods of falling interest rates,
with the prepayments reinvested on behalf of the Fund at the lower prevailing
interest rates.
Investments in foreign debt obligations involve special risks not present in
debt obligations of corporate issuers. The issuer of the foreign debt may be
unwilling or unable to pay principal or interest when due in accordance with the
terms of such debt, and the Fund may have limited recourse in the event of
default. A foreign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its currency reserves, the availability of
sufficient foreign exchange, political and economic constraints. In addition,
foreign debt securities denominated in foreign currencies may lose value if
those securities decline in value relative to the U.S. dollar.
While bonds historically have been a leading choice of long-term investors, they
do fluctuate in price. The value of your investment in the Fund will go up and
down, which means that you could lose money.
7
<PAGE>
Because the Fund may invest in equity securities, such as convertible securities
and common stock, it may be subject to stock market risk. Stock prices typically
fluctuate more than the values of other types of securities, typically in
response to changes in the particular company's financial condition and factors
affecting the market in general. For example, unfavorable or unanticipated poor
earnings performance of the company may result in a decline in its stock's
price, and a broad-based market drop may also cause a stock's price to fall.
The Fund is newly organized and has no operating history prior to the date of
this prospectus.
WHO MAY WANT TO INVEST
The Fund may be appropriate for investors who:
o Are seeking monthly income
o Are seeking higher return than money market funds and are willing to accept
the risk of loss of principal
o Want to diversify their portfolios
o Are seeking a mutual fund for the income portion of an asset allocation
portfolio
o Are retired or nearing retirement
The Fund may NOT be appropriate for investors who:
o Are seeking maximum return over a long time horizon
o Require absolute stability of principal
o Cannot accept the potentially significant volatility of share price and
income that is associated with investing in below investment grade bonds
8
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FEES AND EXPENSES OF THE FUND This table describes the fees and expenses you may
pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly
from your investment) Class A Class C Class I
- -------------------------------------------------------------------------
Maximum sales charge (Load) 2.50% 0.00% 0.00%
(as a percentage of offering price)
Maximum deferred sales charge (Load) 0.00% 1.00% 0.00%
(as a percentage of the lesser of the
offering price or net asset value)
ANNUAL FUND EXPENSES (expenses that
are deducted from Fund assets) Class A Class C Class I
- -------------------------------------------------------------------------
Management fee 0.75% 0.75% 0.75%
Distribution (12b-1) fees 0.25% 0.75% 0.00%
Other expenses1 0.40% 0.40% 0.40%
----------------------------------
Total annual fund operating expenses2 1.40% 1.90% 1.15%
==================================
Fee Waiver 0.15% 0.15% 0.15%
==================================
Net Expenses: 1.25% 1.75% 1.00%
(1) Because the Fund had no operations prior to the date of this prospectus,
these expenses are estimated for its first year of operations.
(2) The Adviser has agreed to waive its fee and to reimburse the Fund for its
first twelve months of operations to the extent its annual operating
expenses (excluding brokerage, interest, taxes, and extraordinary expenses)
exceed 1.25% of net assets of Class A shares, 1.75% of net assets of Class C
shares and 1.00% of net assets of Class I shares.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This Example assumes that you invest $10,000 in the Fund and then redeem all of
your shares at the end of the time periods indicated. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Class A Class C Class I
-------------------------------------------
1 Year $375 $278 $102
1 Year (if shares are not redeemed $375 $178 $102
3 Years (whether or not $669 $584 $352
shares redeemed)
9
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YOUR ACCOUNT
BUYING SHARES If you are buying shares through a Morgan Keegan & Company, Inc.
("Morgan Keegan") investment broker, he or she can assist you with all phases of
your investment.
MINIMUM INITIAL INVESTMENT FOR CLASS A AND CLASS C SHARES:
o $1,000
o $250 for Individual Retirement Accounts
MINIMUM ADDITIONAL INVESTMENTS:
o $50 for any account
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To buy shares without the help of a Morgan Keegan investment broker, please use
the instructions on these pages.
CHOOSING A SHARE CLASS
Each fund offers three share classes. Each class has its own expense structure.
Your investment plans will determine which class is most suitable for you. For
example, if you are investing a substantial amount OR if you plan to hold your
shares for a long period, Class A shares may make the most sense for you. If you
are investing for less than five years, you may want to consider Class C shares.
Class I shares are available only to a limited group of investors. If you are
investing through a special program, such as a large employer-sponsored
retirement plan or certain programs available through brokers, you may be
eligible to purchase Class I shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
CLASS COMPARISON
CLASS A -- FRONT LOAD
O Initial sales charge of 2.00% for the Morgan Keegan Intermediate Bond Fund
and 2.50% for the Morgan Keegan High Income Fund (in either case, as a
percentage of offering price which includes the sales load); see schedule
below.
O Lower sales charges for larger investments of $50,000 or more; no sales
charge for purchases of $1 million or more.
O Low or no sales charge for certain wrap-fee programs and other sponsored
arrangements.
O Lower annual expenses than Class C shares due to lower distribution (12b-1)
fee of 0.25%.
O "Right of accumulation" allows you to determine the applicable sales load on
a purchase by including the value of your existing Morgan Keegan Fund
investments as part of your current investment.
O "Letter of intent" allows you to count all investments in this or other
Morgan Keegan Funds over the next 13 months as if you were making them all at
once, for purposes of calculating sales charges.
10
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- --------------------------------------------------------------------------------
Morgan Keegan Intermediate Bond Fund
- --------------------------------------------------------------------------------
Class A Sales Charge
- --------------------------------------------------------------------------------
Your investment As a % of offering price As a % of net
amount invested
- --------------------------------------------------------------------------------
up to $49,999 2.00% 2.04%
$50,000 to $99,999 1.75% 1.78%
$100,000 to $249,999 1.50% 1.52%
$250,000 to $499,999 1.00% 1.01%
$500,000 to $999,999 0.75% 0.76%
- --------------------------------------------------------------------------------
$1 million and over 0.00% 0.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Morgan Keegan High Income Fund
- --------------------------------------------------------------------------------
Class A Sales Charge
- --------------------------------------------------------------------------------
As a % of net
Your investment As a % of offering price amount invested
- --------------------------------------------------------------------------------
up to $49,999 2.50% 2.56%
$50,000 to $99,999 2.25% 2.30%
$100,000 to $249,999 1.75% 1.78%
$250,000 to $499,999 1.25% 1.27%
$500,000 to $999,999 1.00% 1.01%
$1 million and over 0.00% 0.00%
- --------------------------------------------------------------------------------
CLASS C -- LEVEL LOAD
o No initial sales charge.
o Deferred sales charge of 1% of the lesser of the purchase price of the shares
or their net asset value at the time of redemption, payable by you if you
sell shares within one year of purchase. In the event of a partial
redemption, the deferred sales charge will be applied to the oldest shares
held first.
o Annual distribution (12b-1) fee of 0.60% for the Morgan Keegan Intermediate
Bond Fund and 0.75% for the Morgan Keegan High Income Fund.
CLASS I -- NO LOAD
O No sales charges of any kind.
O No distribution (12b-1) fees; annual expenses are lower than other share
classes.
O Available only to certain retirement accounts, advisory accounts of the
investment manager and broker special programs, including broker programs
with record-keeping and other services; these programs usually involve
special conditions and separate fees (contact your financial professional for
information).
11
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DISTRIBUTION PLAN (RULE 12B-1 FEES)
Each Fund has adopted a plan under Rule 12b-1 that allows the Funds to pay
distribution fees for the sale and distribution of the Class A and C shares and
for shareholder servicing; and because these fees are paid out of each Fund's
assets on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
POLICIES FOR BUYING SHARES
Once you have chosen a share class, complete the enclosed application. You can
avoid future inconvenience by signing up now for any services you might later
use.
TIMING OF REQUESTS. All requests received by the close of the New York Stock
Exchange ("NYSE") (normally 4:00 p.m. eastern time) will be executed the same
day, at that day's closing share price. Orders received after the closing of the
NYSE will be executed the following day, at that day's closing share price. To
purchase shares at the next computed net asset value an investor must submit an
order to Morgan Keegan by completing the enclosed purchase application and
sending it along with a check to Morgan Keegan at the address listed in the
application or through a pre-authorized check or transfer plan offered by other
financial institutions.
PURCHASES BY CHECK. Complete the enclosed purchase application. Forward your
application, with all appropriate sections completed, along with a check for
your initial investment payable to your Morgan Keegan investment broker or
Morgan Keegan at 50 North Front Street, Memphis, TN 38103.
Call your Morgan Keegan investment broker or Morgan Keegan at 800-366-7426 or
visit our Web site at www.morgankeegan.com.
TO ADD TO AN ACCOUNT
BY PHONE Contact Morgan Keegan at 800-366-7426.
BY CHECK Fill out the investment stub from an account statement, or indicate the
Fund name and share class on your check. Make checks payable to "Morgan Keegan."
Mail the check and stub to Morgan Keegan at 50 North Front Street, Memphis, TN
38103.
SYSTEMATIC INVESTMENT Call Morgan Keegan to verify that systematic investment is
in place on your account, or to request a form to add it. Investments are
automatic once this is in place.
Call your Morgan Keegan investment broker or Morgan Keegan at 800-366-7426 or
visit our Web site at www.morgankeegan.com.
BUYING SHARES THROUGH AN INVESTMENT BROKER
BY MAIL Send a completed purchase application to Morgan Keegan at the address at
the bottom of this page. Specify the Fund, the share class, the account number
and the dollar value or number, if any, of shares. Be sure to include any
necessary signatures and any additional documents.
BY TELEPHONE As long as the transaction does not require a written request, you
or your investment broker can buy shares by calling Morgan Keegan at
800-366-7426. A confirmation will be mailed to you promptly. Purchase requests,
where the investor making the request does not currently have an account with
Morgan Keegan, must be made by written application and be accompanied by a check
to Morgan Keegan.
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BY EXCHANGE Read the prospectus for the Fund into which you are exchanging. Call
Morgan Keegan at 800-366-7426 or visit our Web site at www.morgankeegan.com. All
exchanges will be made by telephone.
BY SYSTEMATIC INVESTMENT See plan information on page 17.
MORGAN KEEGAN & CO., INC.
50 North Front Street, Memphis, TN 38103
Call toll-free: 1-800-366-7426
(8:30 a.m. - 4:30 p.m., business days, central time)
INTERNET
www.morgankeegan.com
SELLING SHARES
POLICIES FOR SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
o You are selling more than $100,000 worth of shares o The name or address on
the account has changed within the last 30 days
o You want the proceeds to go to a name or address not on the account
registration o You are transferring shares to an account with a different
registration or share class
o You are selling shares held in a corporate or fiduciary account; for these
accounts additional documents are required:
CORPORATE ACCOUNTS: certified copy of a corporate resolution
FIDUCIARY ACCOUNTS: copy of power of attorney or other governing document
To protect your account against fraud, all written requests must bear signature
guarantees. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
TIMING OF REQUESTS All requests received by Morgan Keegan before the close of
the NYSE (normally 4:00 p.m. eastern time) will be executed the same day, at
that day's closing price. Requests received after the close of the NYSE will be
executed the following day, at that day's closing share price.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the payment for
those shares has been collected, you will not receive the proceeds until your
initial payment has cleared. This may take up to 15 days after your purchase
date. Any delay would occur only when it cannot be determined that payment has
cleared.
TO SELL SOME OR ALL OF YOUR SHARES
THROUGH AN INVESTMENT BROKER
BY MAIL Send a letter of instruction, an endorsed stock power or share
certificates (if you hold certificate shares) to Morgan Keegan at the address at
the bottom of this page. Specify the Fund, the share class, the account number
and the dollar value or number of shares. Be sure to include any necessary
signatures and any additional documents.
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BY TELEPHONE As long as the transaction does not require a written request (see
facing page), you or your financial professional can sell shares by calling
Morgan Keegan at 800-366-7426. A check will be mailed to you on the following
business day.
BY EXCHANGE Read the prospectus for the Fund into which you are exchanging. Call
Morgan Keegan at 800-366-7426 or visit our Web site at www.morgankeegan.com. All
exchanges may be made by telephone and mail.
BY SYSTEMATIC WITHDRAWAL See plan information on page 17.
MORGAN KEEGAN & CO., INC.
50 North Front Street
Memphis, TN 38103
Call toll-free: 1-800-366-7426
(8:30 a.m. - 4:30 p.m., business days, central time)
INTERNET
www.morgankeegan.com
ACCOUNT POLICIES
THE FUNDS' BUSINESS HOURS The Funds are open the same days as the NYSE
(generally Monday through Friday). Representatives of the Funds are available
normally from 8:30 a.m. to 4:30 p.m. central time on these days.
CALCULATING SHARE PRICE The offering price of a share is its net asset value
plus a sales charge, if applicable. Each Fund calculates net asset value (NAV)
every business day at the close of regular trading on the NYSE (usually 4:00
p.m. eastern time) by subtracting the liabilities attributable to shares from
the total assets attributable to such shares and dividing the result by the
number of shares outstanding. Securities owned by each Fund for which market
quotations are readily available are valued at current market value. In the
absence of readily available market quotations, securities are valued based upon
appraisals received from an independent pricing service using a computerized
matrix system or based upon appraisals derived from information concerning the
security or similar securities received from recognized dealers in those
securities. Debt securities with remaining maturities of 60 days or less are
valued at amortized cost, unless conditions otherwise indicate. When the Funds
believe that a market quote does not reflect a security's true value, the Funds
may substitute for the market quote a fair value estimate made according to
methods approved by the Board of Directors. Because foreign markets may be open
on days when U.S. markets are closed, the value of foreign securities could
change on days when you can't buy or sell fund shares.
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests on your account by telephone. Your
investment broker can also use these privileges to request exchanges on your
account, and with your written permission, redemptions.
As long as Morgan Keegan takes certain measures to authenticate telephone
requests on your account, you may be held responsible for unauthorized requests.
Unauthorized telephone requests are rare, but if you want to protect yourself
completely, you can decline the telephone privilege on your application. The
Funds may suspend or eliminate the telephone privilege at any time. The Funds
will provide 7 days' prior written notice before suspending or eliminating
telephone privileges.
EXCHANGE PRIVILEGES There is no fee to exchange shares between the Funds or to
exchange Class A shares of either Fund for shares of Morgan Keegan Southern
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Capital Fund. Your new Fund shares will be the same class as your current
shares. Any contingent deferred sales charges will continue to be calculated
from the date of your initial investment.
Frequent exchanges can interfere with Fund management and drive up costs for all
shareholders. Because of this, the Funds currently limit each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The Funds may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request. The Funds will provide 60 days' prior written notice
before suspending or eliminating exchange privileges.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $500, Morgan
Keegan may mail you a notice asking you to bring the account back up to $500 or
close it out. If you do not take action within 60 days, Morgan Keegan may sell
your shares and mail the proceeds to you at the address of record.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell Class A shares, you
have the right to "reinstate" your investment by putting some or all of the
proceeds into Class A Shares of either Fund or the Morgan Keegan Southern
Capital Fund at net asset value, without payment of a sales charge.
ADDITIONAL POLICIES
Please note that the Funds maintain additional policies and reserve certain
rights, including:
Class A shares may be acquired without a sales charge if the purchase is made
through a Morgan Keegan representative who formerly was employed as a broker
with another firm registered as a broker-dealer with the Securities and Exchange
Commission, if the following conditions are met: (1) the purchaser was a client
of the investment executive at the other firm for which the investment executive
previously served as a broker; (2) within 90 days of the purchase of the Fund's
shares, the purchaser redeemed shares of one or more mutual funds for which that
other firm or its affiliates served as principal underwriter, provided that
either the purchaser had paid a sales charge in connection with investment in
such funds or a contingent deferred sales charge upon redeeming shares in such
funds; and (3) the aggregate amount of the Fund's shares purchased pursuant to
this sales charge waiver does not exceed the amount of the purchaser's
redemption proceeds from the shares of the mutual fund(s) for which the other
firm or its affiliates served as principal underwriter. In addition, Class A
shares may be acquired without a sales charge if a purchase is made with the
proceeds of a redemption of other fixed income mutual fund shares, provided that
the purchaser paid a sales charge in connection with purchasing or redeeming
these shares and further provided that the purchase of the Class A shares of the
Fund is made within 30 days of a redemption.
The Funds may vary their initial or additional investment levels in the case of
exchanges, reinvestments, periodic investment plans, retirement and employee
benefit plans, sponsored arrangements and other similar programs.
At any time, the Funds may change or discontinue its sales charge waivers and
any of its order acceptance practices, and may suspend the sale of its shares.
To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to Morgan Keegan promptly.
Dealers may impose a transaction fee on the purchase or sale of shares by
shareholders.
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INVESTOR SERVICES
SYSTEMATIC INVESTMENT PROGRAM (SIP) Use SIP to set up regular automatic
investments in a Fund from your bank account. You determine the frequency and
the amount of your investments, and you can skip an investment with three days'
notice. Not available with Class I shares.
SYSTEMATIC WITHDRAWAL PLAN This plan is designated for retirees and other
investors who want regular withdrawals from a Fund account. Certain terms and
minimums apply.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the Fund into another fund of your choice, without any fees or sales charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
AUTOMATED INVESTMENTS OR WITHDRAWALS Set up regular investments or withdrawals
to suit your needs and let Morgan Keegan do the work for you.
MOVE MONEY BY PHONE Designate this on your application and you can move money
between your bank account and your Morgan Keegan account with a phone call.
DIVIDEND REINVESTMENT Have your dividends automatically reinvested at no sales
charge.
EXCHANGES. It's easy to move money from one Fund to the other or to the Morgan
Keegan Southern Capital Fund, with no exchange fees. (Exchange privilege may be
changed or discontinued at any time.) Call 800-366-7426 or visit our Web site at
www.morgankeegan.com.
OPENING a regular investment or a tax-deferred retirement account at Morgan
Keegan is easy. Your investment broker can help you determine if this Fund is
right for you. He or she is trained to understand investments and can help speed
the application process.
TAKE ADVANTAGE of everything your investment broker and Morgan Keegan have to
offer. The services described on this page can make investing easy for you. And
your investment broker can be a valuable source of guidance and additional
services, for planning your investments and for keeping them on track with your
goals.
Morgan Keegan also offers a full range of prototype retirement plans for
individuals, sole proprietors, partnerships, corporations and employees. Call
800-366-7426 for information on retirement plans or any of the services
described above.
FUNDS' MANAGEMENT AND INVESTMENT ADVISER
The Funds are managed by Morgan Asset Management, Inc. ("Adviser"), 50 North
Front Street, Memphis, TN 38103. Pursuant to an advisory agreement (the
"Advisory Agreement"), the Adviser is responsible for the investment management
of the Funds, including responsibility for making investment decisions and
placing orders to buy, sell or hold a particular security. Morgan Keegan
Intermediate Bond Fund pays the Adviser an advisory fee equal to an annual rate
of 0.40% of its average daily net assets; and Morgan Keegan High Income Fund
pays the Adviser an advisory fee equal to an annual rate of 0.75% of its average
daily net assets. Founded in 1986, the Adviser is a wholly owned subsidiary of
Morgan Keegan, Inc. The Adviser has, as of January 1, 1999, more than $1 billion
in total assets under management.
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FUNDS' PORTFOLIO MANAGER
James C. Kelsoe, CFA, is the Chief Fixed Income Investment Officer of the
Adviser, a position he has held since 1991. He joined Morgan Keegan in 1991 and
has been in the investment business since 1986.
FUNDS' DISTRIBUTOR
Morgan Keegan & Company, Inc., one of the nation's largest independent regional
financial services firms, acts as the distributor of the Funds' shares. It also
is a wholly owned subsidiary of Morgan Keegan, Inc.
DISTRIBUTIONS
INCOME AND CAPITAL GAIN DISTRIBUTIONS. Each Fund distributes its net investment
income and net capital gain to shareholders. Using projections of its future
income, each Fund declares dividends daily and pays them monthly. Net capital
gains, if any, are distributed annually.
You may have your distributions reinvested in shares of the Fund you own or
credited to your brokerage account or mailed out by check. If you do not give
Morgan Keegan other instructions, your distributions will automatically be
reinvested in shares of the Fund you own.
TAX CONSIDERATIONS
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS. In general, any dividends and net
short-term capital gain distributions you receive from the Funds are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
long-term capital gains. This is true no matter how long you have owned your
shares and whether you reinvest your distributions or take them in cash.
Every year, your Fund will send you information detailing the amount of
dividends and net capital gain distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Unless your investment is in a tax-deferred account, you may want to avoid:
o Investing a large amount in a Fund close to a capital gains distribution
payment date (if a Fund makes a capital gain distribution, you will receive
some of your investment back as a taxable distribution), or
o Selling shares of a Fund at a loss for tax purposes and reinvesting in shares
of that Fund 30 days before or after that sale (such a transaction is usually
considered a "wash sale," and you will not be allowed to deduct all or part
of the tax loss).
Your investment in the Funds could have additional tax consequences. Please
consult your tax professional for assistance.
BACKUP WITHHOLDING By law, the Funds must withhold 31% of your distributions and
redemption proceeds if you have not provided complete, correct taxpayer
information and 31% of your distributions if you are otherwise subject to backup
withholding.
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MORE ABOUT RISK
OTHER SECURITIES AND RISKS
Each of the Funds' portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the Funds' descriptions. Below are brief descriptions of other
securities and practices, along with their associated risks.
FOREIGN INVESTMENTS Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information, and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The Fund may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
for them are less efficient than for comparable U.S. securities. Even where a
foreign security increases in price in its local currency, the appreciation may
be diluted by the negative effect of exchange rates when the security's value is
converted to U.S. dollars. Foreign withholding taxes also may apply and errors
and delays may occur in the settlement process for foreign securities.
INTERMEDIATE TERM MATURITY BONDS Bonds (debt) that have average maturities
generally ranging from 1 to 10 years. These bonds normally offer higher yields
but less price stability than short term bonds and offer greater price stability
but lower yield than long term bonds.
INVESTMENT GRADE BONDS Bonds that are rated in the top four credit categories by
at least one NRSRO at the time of purchase or, if not rated, that are considered
by the Adviser to be of comparable quality. Investment grade bonds are
considered less risky than bonds whose ratings are below investment grade;
ratings are no guarantee of quality.
TEMPORARY INVESTMENTS For liquidity and flexibility, each Fund may invest in
investment grade, short term securities. In unusual market conditions, each Fund
may invest more assets in these securities temporarily as a defensive tactic. To
the extent a Fund uses this strategy, it may not achieve its investment
objectives.
YEAR 2000 ISSUES Like other mutual funds, the Funds could be affected by
problems relating to the ability of computer systems to recognize the year 2000.
The Funds are taking steps to ensure that their computer systems are compliant
with Year 2000 issues and to determine that the systems used by their major
service providers are also compliant. Issuers whose securities are held in the
Funds' portfolios may also be adversely affected by the Year 2000 issue. At the
same time, it is impossible to know whether these problems, which could disrupt
the Funds' operations and investments if uncorrected, have been adequately
addressed until the date in question arrives.
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FOR ADDITIONAL INFORMATION
A Statement of Additional Information ("SAI"), dated March 8, 1999, containing
further information about the Funds has been filed with the Securities and
Exchange Commission ("SEC") and, as amended or supplemented from time to time,
is incorporated by reference in this prospectus. A copy of the SAI may be
obtained, without charge:
o from your Morgan Keegan investment broker;
o by calling Morgan Keegan at 800-366-7426;
o by writing to Morgan Keegan at the address noted below; or
o by accessing the Web site maintained by the SEC (http://www.sec.gov).
Information about the Funds (including the SAI) also can be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. (call 800-SEC-0330 for
further information), or may be obtained upon payment of a duplicating fee by
writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
All shareholder inquiries can be made by contacting Morgan Keegan at the address
listed below:
Morgan Keegan & Company, Inc.
50 North Front Street
Memphis, TN 38103
Investment Company Act File No. 811-09079.
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MORGAN KEEGAN SELECT FUND, INC.
Morgan Keegan Intermediate Bond Fund
Morgan Keegan High Income Fund
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(800) 366-7426
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") is not a prospectus and
should be read in conjunction with the Funds' Prospectus, dated March 8, 1999,
which has been filed with the Securities and Exchange Commission ("SEC"). A copy
of the current Prospectus is available without charge from Morgan Keegan &
Company, Inc. ("Morgan Keegan"), the distributor of the Funds by writing to the
above address or by calling the toll-free number listed above.
--------------------------------------
March 8, 1999
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION..........................................................1
INVESTMENT LIMITATIONS AND POLICIES..........................................1
ADDITIONAL TAX INFORMATION..................................................19
General...................................................................19
Dividends and Other Distributions.........................................20
Income from Foreign Securities............................................21
Hedging Strategies........................................................22
Original Issue Discount Securities........................................23
ADDITIONAL INFORMATION ON REDEMPTIONS.......................................24
VALUATION OF SHARES.........................................................24
PURCHASE OF SHARES..........................................................25
Class A Shares............................................................25
Class C Shares............................................................25
Class I Shares............................................................25
PERFORMANCE INFORMATION.....................................................25
Total Return Calculations.................................................26
Other Information.........................................................27
TAX-DEFERRED RETIREMENT PLANS...............................................28
Individual Retirement Accounts - IRAs.....................................28
Self-Employed Individual Retirement Plans - Keogh Plans...................28
Simplified Employee Pension Plans - SEPPS and Savings
Incentive Match Plans for Employees - SIMPLES.............................29
DIRECTORS AND OFFICERS......................................................29
INVESTMENT ADVISER..........................................................31
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................32
DISTRIBUTOR.................................................................33
DESCRIPTION OF THE FUNDS'SHARES.............................................35
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO
ACCOUNTING SERVICE AGENT....................................................36
LEGAL COUNSEL...............................................................36
CERTIFIED PUBLIC ACCOUNTANTS................................................36
FINANCIAL STATEMENTS........................................................36
Dated: March 8, 1999
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GENERAL INFORMATION
The Morgan Keegan Select Fund, Inc., is an open-end investment management
company (the "Company") organized as a Maryland corporation on October 27, 1998.
The Morgan Keegan Intermediate Bond Fund ("Intermediate Fund") and the Morgan
Keegan High Income Fund ("High Income Fund") (each a "Fund," and collectively
the "Funds") are diversified series of the Company. Each Fund has its own
investment objective and policies as described in the Funds' Prospectus. Each
Fund offers three classes of shares: Class A shares, Class C shares and Class I
shares.
INVESTMENT LIMITATIONS AND POLICIES
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Fund's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined at the time of a
Fund's acquisition of such security or other asset. Accordingly, any subsequent
change in values, net assets, or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
and limitations.
Each Fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting securities"
(as defined in the Investment Company Act of 1940 ("1940 Act")) of the Fund.
However, except for the fundamental investment limitations listed below, the
investment policies and limitations described in this SAI are not fundamental
and may be changed without shareholder approval.
INVESTMENT LIMITATIONS OF THE FUNDS
THE FOLLOWING ARE THE FUNDS' FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH
IN THEIR ENTIRETY. EACH FUND MAY NOT:
(1) issue senior securities, except as permitted under the 1940 Act;
(2) borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
33 1/3% of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed this amount will be
reduced within three days (not including Sundays and holidays) to the extent
necessary to comply with the 33 1/3% limitation;
(3) underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 ("1933 Act") in the disposition of restricted securities;
(4) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the Fund's total assets would
be invested in the securities of companies whose principal business activities
are in the same industry;
<PAGE>
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities);
(7) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or to repurchase agreements; or
(8) with respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities) if, as a result, (a)
more than 5% of the Fund's total assets would be invested in the securities of
that issuer, or (b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL. EACH FUND:
(1) may not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in futures contracts and options are not deemed
to constitute selling securities short;
(2) may not purchase securities on margin, except that a Fund may obtain
such short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin;
(3) may not purchase securities when borrowings exceed 5% of its
total assets;
(4) may borrow money only (a) from a bank, or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements are treated
as borrowings for purposes of fundamental investment limitation (2)); and
(5) may not purchase any security if, as a result, more than 15% of its
net assets would be invested in securities that are illiquid because they are
subject to legal or contractual restrictions on resale or because they cannot be
sold or disposed of in the ordinary course of business at approximately the
prices at which they are valued.
With respect to limitation (5), if through a change in values, net assets,
or other circumstances, a Fund were in a position where more than 15% of its net
assets was invested in illiquid securities, it would consider appropriate steps
to protect liquidity.
The following pages contain more detailed information about types of
instruments in which each Fund may invest, strategies the Adviser may employ in
pursuit of each Fund's investment objective, and a summary of related risks. The
Adviser may not buy all of these instruments or use all of these techniques
unless it believes that doing so will help the Funds achieve their goals.
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ASSET-BACKED SECURITIES represent interests in pools of mortgages, loans,
receivables or other assets. Payment of interest and repayment of principal may
be largely dependent upon the cash flows generated by the assets backing the
securities and, in certain cases, supported by letters of credit, surety bonds,
or other credit enhancements. Asset-backed security values may also be affected
by the creditworthiness of the servicing agent for the pool, the originator of
the loans or receivables, or the entities providing the credit enhancement. In
addition, these securities may be subject to prepayment risk.
MORTGAGE-BACKED SECURITIES are issued by government and non-government
entities such as banks, mortgage lenders, or other institutions. A
mortgage-backed security is an obligation of the issuer backed by a mortgage or
pool of mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations
("CMOs"), make payments of both principal and interest at a range of specified
intervals; others make semiannual interest payments at a predetermined rate and
repay principal at maturity (like a typical bond). Mortgage-backed securities
are based on different types of mortgages, including those on commercial real
estate or residential properties. Stripped mortgage-backed securities are
created when the interest and principal components of a mortgage-backed security
are separated and sold as individual securities. In the case of a stripped
mortgage-backed security, the holder of the "principal-only" security receives
the principal payments made by the underlying mortgage, while the holder of the
"interest-only" security receives interest payments from the same underlying
mortgage.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers and changes in interest rates. In addition,
regulatory or tax changes may adversely affect the mortgage-backed securities
market as a whole. Non-government mortgage-backed securities may offer higher
yields than those issued by government entities, but also may be subject to
greater price changes than government issues. Mortgage-backed securities are
subject to prepayment risk, which is the risk that early principal payments made
on the underlying mortgages, usually in response to a reduction in interest
rates, will result in the return of principal to the investor, causing it to be
invested subsequently at a lower current interest rate. Alternatively, in a
rising interest rate environment, mortgage-backed security values may be
adversely affected when prepayments on underlying mortgages do not occur as
anticipated, resulting in the extension of the security's effective maturity and
the related increase in interest rate sensitivity of a longer-term instrument.
The prices of stripped mortgage-backed securities tend to be more volatile in
response to changes in interest rates than those of non-stripped mortgage-backed
securities.
CLOSED-END INVESTMENT COMPANIES are investment companies that issue a
fixed number of shares, which trade on a stock exchange or over-the-counter.
Closed-end investment companies are professionally managed and may invest in any
type of security. Shares of closed-end investment companies may trade at a
premium or a discount to their net asset value.
CONVERTIBLE SECURITIES are bonds, debentures, notes, preferred stocks or
other securities that may be converted or exchanged (by the holder or by the
issuer) into shares of the underlying common stock (or cash or securities of
equivalent value) at a stated exchange ratio. A convertible security may also be
called for redemption or conversion by the issuer after a particular date and
under certain circumstances (including a specified price) established upon
issue. If a convertible security held by a Fund is called for redemption or
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<PAGE>
conversion, the Fund could be required to tender it for redemption, convert it
into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than the
underlying common stocks, but generally lower than compatible nonconvertible
securities. Because of this higher yield, convertible securities generally sell
at prices above their "conversion value," which is the current market value of
the stock to be received upon conversion. The difference between this conversion
value and the price of convertible securities will vary over time depending on
changes in the value of the underlying common stocks and interest rates. When
the underlying common stocks decline in value, convertible securities will tend
not to decline to the same extent because of the interest or dividend payments
and the repayment of principal at maturity for certain types of convertible
securities. However, securities that are convertible other than at the option of
the holder generally do not limit the potential for loss to the same extent as
securities convertible at the option of the holder. When the underlying common
stocks rise in value, the value of convertible securities may also be expected
to increase. At the same time, however, the difference between the market value
of convertible securities and their conversion value will narrow, which means
that the value of convertible securities will generally not increase to the same
extent as the value of the underlying common stocks. Because convertible
securities may also be interest rate sensitive, their value may increase as
interest rates fall and decrease as interest rates rise. Convertible securities
are also subject to credit risk, and are often lower-quality securities.
BELOW INVESTMENT GRADE BONDS. Below investment grade bonds have poor
protection with respect to the payment of interest and repayment of principal,
or may be in default. These securities are often considered to be speculative
and involve greater risk of loss or price changes due to changes in the issuer's
capacity to pay. The market prices of below investment grade bonds may fluctuate
more than those of higher-quality debt securities and may decline significantly
in periods of general economic difficulty, which may follow periods of rising
interest rates.
While the market for below investment grade bonds has been in existence
for many years and has weathered previous economic downturns, the 1980s brought
a dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of the future performance of the below investment grade bond
market, especially during periods of economic recession.
The market for below investment grade bonds may be thinner and less active
than that for higher-quality debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
below investment grade bonds will be valued in accordance with procedures
established by the Board of Directors, including the use of outside pricing
services. Judgment plays a greater role in valuing below investment grade bonds
than is the case for securities for which more external sources for quotations
and last-sale information are available. Adverse publicity and changing investor
perceptions may affect the liquidity of below investment grade bonds and the
ability of outside pricing services to value below investment grade bonds.
Since the risk of default is higher for below investment grade bonds, the
Adviser's research and credit analysis are an especially important part of
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managing securities of this type. The Adviser will attempt to identify those
issuers of below investment grade bonds whose financial condition is adequate to
meet future obligations, has improved, or is expected to improve in the future.
The Adviser's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government
securities, including a variety of securities that are issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agreements
secured thereby. These securities include securities issued and guaranteed by
the full faith and credit of the U.S. Government, such as Treasury bills,
Treasury notes, and Treasury bonds; obligations supported by the right of the
issuer to borrow from the U.S. Treasury, such as those of the Federal Home Loan
Banks; and obligations supported only by the credit of the issuer, such as those
of the Federal Intermediate Credit Banks. Stripped Government securities are
created by separating the income and principal components of a U.S. Government
security and selling them separately. STRIPS (Separate Trading of Registered
Interest and Principal of Securities) are created when the coupon payments and
the principal payment are stripped from an outstanding U.S. Treasury security by
a Federal Reserve Bank.
Privately stripped government securities are created when a dealer
deposits a U.S. Treasury security or other U.S. Government security with a
custodian for safekeeping. The custodian issues separate receipts for the coupon
payments and the principal payment, which the dealer then sells.
MUNICIPAL OBLIGATIONS. These obligations, which are issued by state and
local governments to acquire land, equipment and facilities, typically are not
fully backed by the municipality's credit, and, if funds are not appropriated
for the following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to a Fund.
The two principal classifications of municipal obligations are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by the
issuer's pledge of its faith, credit and taxing power. "Revenue" bonds are
payable only from the revenues derived from a particular facility or class of
facilities or facility being financed. Industrial development bonds ("IDBs") and
private activity bonds ("PABs") are usually revenue bonds and are not payable
from the unrestricted revenues of the issuer. The credit quality of the IDBs and
PABs is usually directly related to the credit standing of the corporate user of
the facilities. In addition, certain types of IDBs and PABs are issued by or on
behalf of public authorities to finance various privately operated facilities,
including certain pollution control facilities, convention or trade show
facilities, and airport, mass transit, port or parking facilities.
FOREIGN SECURITIES (HIGH INCOME FUND). Foreign securities, foreign
currencies, and securities issued by U.S. entities with substantial foreign
operations may involve significant risks in addition to the risks inherent in
U.S. investments.
Foreign investments involve risks relating to local political, economic,
regulatory, or social instability, military action or unrest, or adverse
diplomatic developments, and may be affected by actions of foreign governments
adverse to the interests of U.S. investors. Such actions may include
expropriation or nationalization of assets, confiscatory taxation, restrictions
on U.S. investment or on the ability to repatriate assets or convert currency
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into U.S. dollars, or other government intervention. There is no assurance that
the Adviser will be able to anticipate these potential events or counter their
effects. In addition, the value of securities denominated in foreign currencies
and of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar.
It is anticipated that in most cases the best available market for foreign
securities will be on an exchange or in over-the-counter ("OTC") markets located
outside of the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading, settlement and
custodial practices (including those involving securities settlement where Fund
assets may be released prior to receipt of payment) are often less developed
than those in U.S. markets, and may result in increased risk or substantial
delays in the event of a failed trade or the insolvency of, or breach of duty
by, a foreign broker-dealer, securities depository or foreign subcustodian. In
addition, the costs associated with foreign investments, including withholding
taxes, brokerage commissions and custodial costs, are generally higher than with
U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers are generally not bound by uniform accounting, auditing,
financial reporting requirements and standards of practice comparable to those
applicable to U.S. issuers. Adequate public information on foreign issuers may
not be available, and it may be difficult to secure dividends and information
regarding corporate actions on a timely basis. In general, there is less overall
governmental supervision and regulation of securities exchanges, brokers, and
listed companies than in the United States. OTC markets tend to be less
regulated than stock exchange markets and, in certain countries, may be totally
unregulated. Regulatory enforcement may be influenced by economic or political
concerns, and investors may have difficulty enforcing their legal rights in
foreign countries.
Some foreign securities impose restrictions on transfer within the United
States or to U.S. persons. Although securities subject to such transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The risks of foreign investing may be magnified for investments in
emerging markets. Security prices in emerging markets can be significantly more
volatile than those in more developed markets, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, may present the risks of nationalization of businesses,
restrictions on foreign ownership and prohibitions on the repatriation of
assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be based on only
a few industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
FOREIGN CURRENCY TRANSACTIONS (HIGH INCOME FUND). The Fund may conduct
foreign currency transactions on a spot (i.e., cash) or forward basis (i.e., by
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entering into forward contracts to purchase or sell foreign currencies).
Although foreign exchange dealers generally do not charge a fee for such
conversions, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency at one rate, while offering a lesser rate of
exchange should the counterparty desire to resell that currency to the dealer.
Forward contracts are customized transactions that require a specific amount of
a currency to be delivered at a specific exchange rate on a specific date or
range of dates in the future. Forward contracts are generally traded in an
interbank market directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange. The Fund may use
currency forward contracts for any purpose consistent with its investment
objective.
The following discussion summarizes the principal currency management
strategies involving forward contracts that could be used by the Fund. The Fund
may also use swap agreements, indexed securities, and options and futures
contracts relating to foreign currencies for the same purposes.
A "settlement hedge" or "transaction hedge" is designed to protect the
Fund against an adverse change in foreign currency values between the date a
security is purchased or sold and the date on which payment is made or received.
Entering into a forward contract for the purchase or sale of the amount of
foreign currency involved in an underlying security transaction for a fixed
amount of U.S. dollars "locks in" the U.S. dollar price of the security. Forward
contracts to purchase or sell a foreign currency may also be used by the Fund in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Adviser.
The Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
the Fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. The Fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms
of cost, yield, or efficiency, but generally would not hedge currency exposure
as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
The Fund may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another foreign
currency. This type of strategy, sometimes known as a "cross-hedge," will tend
to reduce or eliminate exposure to the currency that is sold, and increase
exposure to the currency that is purchased, much as if the Fund had sold a
security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause a Fund to assume the risk of
fluctuations in the value of the currency it purchases.
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Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, the Fund will segregate assets
to cover currency forward contracts, if any, whose purpose is essentially
speculative. The Fund will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
Successful use of currency management strategies will depend on the
Adviser's skill in analyzing currency values. Currency management strategies may
substantially change the Fund's investment exposure to changes in currency
exchange rates and could result in losses to the Fund if currencies do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged the Fund by selling that currency in exchange
for dollars, the Fund would not participate in the currency's appreciation. If
the Adviser hedges currency exposure through proxy hedges, the Fund could
realize currency losses from both the hedge and the security position if the two
currencies do not move in tandem. Similarly, if the Adviser increases the Fund's
exposure to a foreign currency and that currency's value declines, the Fund will
realize a loss. There is no assurance that the Adviser's use of currency
management strategies will be advantageous to the Fund or that it will hedge at
appropriate times.
INDEXED SECURITIES are instruments whose prices are indexed to the prices
of other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic.
Mortgage-indexed securities, for example, could be structured to replicate
the performance of mortgage securities and the characteristics of direct
ownership.
Gold-indexed securities typically provide for a maturity value that
depends on the price of gold, resulting in a security whose price tends to rise
and fall together with gold prices. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. Indexed securities may be more volatile than the underlying
instruments. Indexed securities are also subject to the credit risks associated
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government agencies.
VARIABLE AND FLOATING RATE SECURITIES provide for periodic adjustments in
the interest rate paid on the security. Variable rate securities provide for a
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specified periodic adjustment in the interest rate, while floating rate
securities have interest rates that change whenever there is a change in a
designated benchmark rate. Some variable or floating rate securities are
structured with put features that permit holders to demand payment of the unpaid
principal balance plus accrued interest from the issuers or certain financial
intermediaries.
ZERO COUPON BONDS do not make interest payments; instead, they are sold at
a discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can be
more volatile than other types of fixed-income securities when interest rates
change. In calculating each Fund's dividend, a portion of the difference between
a zero coupon bond's purchase price and its face value is considered income.
FUTURES AND OPTIONS. The following paragraphs pertain to futures and
options: Asset Coverage for Futures and Options Positions, Purchasing Put and
Call Options, Writing Put and Call Options, OTC Options, Futures Contracts,
Futures Margin Payments, Options and Futures Relating to Foreign Currencies, and
Swap Agreements.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. Each Fund will comply
with guidelines established by the SEC with respect to coverage of options and
futures strategies by mutual funds and, if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures or option strategy is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a large
percentage of each Fund's assets could impede portfolio management or each
Fund's ability to meet redemption requests or other current obligations.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the purchaser
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the purchaser pays
the current market price for the option (known as the option premium). Options
have various types of underlying instruments, including specific securities,
indices of securities prices, and futures contracts. The purchaser may terminate
its position in a put option by allowing it to expire or by exercising the
option. If the option is allowed to expire, the purchaser will lose the entire
premium. If the option is exercised, the purchaser completes the sale of the
underlying instrument at the strike price. A purchaser may also 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, 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 security prices do not rise sufficiently to offset the cost of the
option.
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WRITING PUT AND CALL OPTIONS. The writer of a put or call option takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the writer 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. The writer may seek to terminate a position in a put
option before exercise by closing out the option in the secondary market at its
current price. If the secondary market is not liquid for a put option, however,
the writer must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position. When writing an option on a futures contract, each
Fund will be required to make margin payments to an FCM as described above for
futures contracts.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower price.
If security prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should mitigate the
effects of the decline.
Writing a call option obligates the writer 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 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 security price increases.
Combined Positions involve purchasing and writing options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of the overall position. For example,
purchasing a put option and writing a call option on the same underlying
instrument would 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, 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.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the purchaser or writer greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
FUTURES CONTRACTS. In purchasing a futures contract, the buyer agrees to
purchase a specified underlying instrument at a specified future date. In
selling a futures contract, the seller agrees to sell a specified underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the buyer and seller enter into the contract. Some
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currently available futures contracts are based on specific securities, such as
U.S. Treasury bonds or notes, and some are based on indices of securities
prices, such as the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"). Futures can be held until their delivery dates, or can be closed out
before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase a Fund's exposure to positive and negative price
fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When a Fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker, known as a futures
commission merchant ("FCM"), when the contract is entered into. Initial margin
deposits are typically equal to a percentage of the contract's value. If the
value of either party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value on a daily
basis. The party that has a gain may be entitled to receive all or a portion of
this amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of a Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of a Fund, the
Fund may be entitled to return of margin owed to it only in proportion to the
amount received by the FCM's other customers, potentially resulting in losses to
the Fund.
Each Fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity Futures
Trading Commission ("CFTC") and the National Futures Association, which regulate
trading in the futures markets. The Funds intend to comply with Rule 4.5 under
the Commodity Exchange Act, which limits the extent to which the Funds can
commit assets to initial margin deposits and option premiums.
In addition, each Fund will not (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged with futures and options under normal conditions;
(b) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets; or (c) purchase call
options if, as a result, the current value of option premiums for call options
purchased by the Fund would exceed 5% of the Fund's total assets. These
limitations do not apply to options attached to or acquired or traded together
with their underlying securities, and do not apply to securities that
incorporate features similar to options.
The limitations below on the Funds' investments in futures contracts and
options, and the Funds' policies regarding futures contracts and options
discussed elsewhere in this SAI, may be changed as regulatory agencies permit.
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 each Fund's current or anticipated investments exactly. Each Fund may
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invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which the
Fund typically invests, which involves a risk that the options or futures
position will not track the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments 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 security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. Each 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 each 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.
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 and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible to enter into new
positions or close out existing positions. The lack of liquidity in the
secondary market for a contract due to price fluctuation limits could prevent
prompt liquidation of unfavorable positions, and potentially could require a
Fund to continue to hold a position until delivery or expiration regardless of
changes in its value. As a result, each Fund's access to other assets held to
cover its options or futures positions could also be impaired.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES (HIGH INCOME FUND).
Currency futures contracts are similar to forward currency exchange contracts,
except that they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally is
purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase the
underlying currency, and the purchaser of a currency put obtains the right to
sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The Fund may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease its exposure to different foreign currencies. Currency
options may also be purchased or written in conjunction with each other or with
currency futures or forward contracts. Currency futures and options values can
be expected to correlate with exchange rates, but may not reflect other factors
that affect the value of the Fund's investments. A currency hedge, for example,
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should protect a Yen-denominated security from a decline in the Yen, but will
not protect the Fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the Fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the Fund's investments exactly over time.
SWAP AGREEMENTS can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long or short-term interest rates (in the United States or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names.
In a typical cap or floor agreement one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one
type of investment to another. For example, if the High Income Fund agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the Fund's exposure to U.S. interest rates and
increase its exposure to foreign currency and interest rates. Caps and floors
have an effect similar to buying or writing options. Depending on how they are
used, swap agreements may increase or decrease the overall volatility of a
Fund's investments and its share price and yield.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from a Fund. If a swap agreement calls for
payments by a Fund, the Fund must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses. Each Fund
may be able to eliminate its exposure under a swap agreement either by
assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
Each Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Fund enters into a swap agreement on a net basis, it will segregate assets with
a daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If a Fund enters into a swap agreement
on other than a net basis, it will segregate assets with a value equal to the
full amount of the Fund's accrued obligations under the agreement.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Board of Directors, the Adviser determines
the liquidity of each Fund's investments and, through reports from the Adviser,
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the Board of Directors monitors investments in illiquid instruments. In
determining the liquidity of each Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment).
Investments currently considered by the Adviser to be illiquid include
repurchase agreements not entitling the holder to repayment of principal and
payment of interest within seven days, non-government stripped fixed-rate
mortgage-backed securities, and over-the-counter options. Also, the Adviser may
determine some restricted securities, government-stripped fixed-rate
mortgage-backed securities, loans and other direct debt instruments, emerging
market securities, and swap agreements to be illiquid. However, with respect to
over-the-counter options the Funds write, all or a portion of the value of the
underlying instrument may be illiquid depending on the assets held to cover the
option and the nature and terms of any agreement the Funds may have to close out
the option before expiration. In the absence of market quotations, illiquid
investments are priced at fair value as determined in good faith by a committee
appointed by the Board of Directors.
Restricted Securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. Where registration is required, each Fund may
be obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
it may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Fund might obtain a less favorable price than prevailed when it decided to
seek registration of the security.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund, however, could affect adversely the marketability of
such portfolio securities and a Fund might be unable to dispose of such
securities promptly or at reasonable prices.
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LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower to
lenders or lending syndicates (loans and loan participations), to suppliers of
goods or services (trade claims or other receivables), or to other parties.
Direct debt instruments are subject to the Funds' policies regarding the quality
of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of interest and
repayment of principal. Direct debt instruments may not be rated by any
nationally recognized statistical rating service. If scheduled interest or
principal payments are not made, the value of the instrument may be adversely
affected. Loans that are fully secured provide more protections than an
unsecured loan in the event of failure to make scheduled interest or principal
payments. However, there is no assurance that the liquidation of collateral from
a secured loan would satisfy the borrower's obligation, or that the collateral
could be liquidated. Indebtedness of borrowers whose creditworthiness is poor
involves substantially greater risks and may be highly speculative. Borrowers
that are in bankruptcy or restructuring may never pay off their indebtedness, or
may pay only a small fraction of the amount owed. Direct indebtedness of
developing countries also involves a risk that the governmental entities
responsible for the repayment of the debt may be unable, or unwilling, to pay
interest and repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks. For
example, if a loan is foreclosed, the purchaser could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, a purchaser could be held liable as a
co-lender. Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediary. Direct debt instruments that are not in the
form of securities may offer less legal protection to the purchaser in the event
of fraud or misrepresentation. In the absence of definitive regulatory guidance,
the Adviser uses its research to attempt to avoid situations where fraud or
misrepresentation could adversely affect the Funds.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the purchaser has direct recourse against the borrower, the
purchaser may have to rely on the agent to apply appropriate credit remedies
against a borrower. If assets held by the agent for the benefit of a purchaser
were determined to be subject to the claims of the agent's general creditors,
the purchaser might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or interest.
Direct indebtedness may include letters of credit, revolving credit
facilities, or other standby financing commitments that obligate purchasers to
make additional cash payments on demand. These commitments may have the effect
of requiring a purchaser to increase its investment in a borrower at a time when
it would not otherwise have done so, even if the borrower's condition makes it
unlikely that the amount will ever be repaid. Each Fund will set aside
appropriate liquid assets in a segregated custodial account to cover its
potential obligations under standby financing commitments.
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Each Fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see the Funds' investment
limitations). For purposes of these limitations, a Fund generally will treat the
borrower as the "issuer" of indebtedness held by the Fund. In the case of loan
participations where a bank or other lending institution serves as financial
intermediary between each Fund and the borrower, if the participation does not
shift to the Funds the direct debtor-creditor relationship with the borrower,
SEC interpretations require the Funds, in appropriate circumstances, to treat
both the lending bank or other lending institution and the borrower as "issuers"
for these purposes. Treating a financial intermediary as an issuer of
indebtedness may restrict the Funds' ability to invest in indebtedness related
to a single financial intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
REPURCHASE AGREEMENTS. In a repurchase agreement, a Fund purchases a
security and simultaneously commits to sell that security back to the original
seller at an agreed-upon price. The resale price reflects the purchase price
plus an agreed-upon incremental amount which is unrelated to the coupon rate or
maturity of the purchased security. As protection against the risk that the
original seller will not fulfill its obligation, the securities are held in a
separate account at a bank, marked-to-market daily, and maintained at a value at
least equal to the sale price plus the accrued incremental amount. While it does
not presently appear possible to eliminate all risks from these transactions
(particularly the possibility that the value of the underlying security will be
less than the resale price, as well as delays and costs to a Fund in connection
with bankruptcy proceedings), each Fund will engage in repurchase agreement
transactions only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a Fund
sells a security to another party, such as a bank or broker-dealer, in return
for cash and agrees to repurchase that security at an agreed-upon price and
time. While a reverse repurchase agreement is outstanding, a Fund will maintain
appropriate liquid assets in a segregated custodial account to cover their
obligation under the agreement. The Funds will enter into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and found
satisfactory by the Adviser. Such transactions may increase fluctuations in the
market value of Fund assets and may be viewed as a form of leverage.
DELAYED-DELIVERY TRANSACTIONS. Securities may be bought and sold on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. Typically, no interest accrues to the purchaser until the
security is delivered. The Funds may receive fees or price concessions for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations and the risk that the security will not be issued as
anticipated. Because payment for the securities is not required until the
delivery date, these risks are in addition to the risks associated with each
Fund's investments. If each Fund remains substantially fully invested at a time
when delayed-delivery purchases are outstanding, the delayed-delivery purchases
may result in a form of leverage. When delayed-delivery purchases are
outstanding, each Fund will set aside appropriate liquid assets in a segregated
custodial account to cover the purchase obligations. When a Fund has sold a
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security on a delayed-delivery basis, the Fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity or suffer a loss.
Each Fund may re-negotiate a delayed delivery transaction and may sell the
underlying securities before delivery, which may result in capital gains or
losses for the Fund.
SECURITIES LENDING. Each Fund may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows a Fund to
retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Adviser to be
of good standing. Furthermore, they will only be made if, in the Adviser's
judgment, the consideration to be earned from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC Staff that
a Fund may engage in loan transactions only under the following conditions: (1)
the Fund must receive 100% collateral in the form of cash or cash equivalents
(e.g., U.S. Treasury bills or notes) from the borrower; (2) the borrower must
increase the collateral whenever the market value of the securities loaned
(determined on a daily basis) rises above the value of the collateral; (3) after
giving notice, the Fund must be able to terminate the loan at any time; (4) the
Fund must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest, or other
distributions on the securities loaned and to any increase in market value; (5)
the Fund may pay only reasonable custodian fees in connection with the loan; and
(6) the Board of Directors must be able to vote proxies on the securities
loaned, either by terminating the loan or by entering into an alternative
arrangement with the borrower.
Cash received through loan transactions may be invested in other eligible
securities. Investing this cash subjects that investment, as well as the
security loaned, to market forces (i.e., capital appreciation or depreciation).
SHORT SALES. A Fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the Adviser
anticipates a decline in the price of the stock underlying a convertible
security a Fund holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline on the value of the
convertible security. Each Fund currently intends to hedge no more than 15% of
its total assets with short sales on equity securities underlying its
convertible security holdings under normal circumstances.
When a Fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to hold
them aside while the short sale is outstanding. A Fund will incur transaction
costs, including interest expenses, in connection with opening, maintaining, and
closing short sales.
SOURCES OF CREDIT OR LIQUIDITY SUPPORT. The Adviser may rely on its
evaluation of the credit of a bank or other entity in determining whether to
purchase a security supported by a letter of credit guarantee, put or demand
feature, insurance or other source of credit or liquidity. In evaluating the
credit of a foreign bank or other foreign entities, the Adviser will consider
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whether adequate public information about the entity is available and whether
the entity may be subject to unfavorable political or economic developments,
currency controls, or other government restrictions that might affect its
ability to honor its commitment.
LEVERAGE. The use of leverage by each Fund creates an opportunity for
increased net income and capital growth for the Fund, but, at the same time,
creates special risks, and there can be no assurance that a leveraging strategy
will be successful during any period in which it is employed. Each Fund intends
to utilize leverage to provide the shareholders with a potentially higher
return. Leverage creates risks for a Fund including the likelihood of greater
volatility of net asset value and market price of the shares and the risk that
fluctuations in interest rates on borrowings and short-term debt or in the
dividend rates on any preferred shares may affect the return to a Fund. To the
extent the income or capital growth derived from securities purchased with funds
received from leverage exceeds the cost of leverage, a Fund's return will be
greater than if leverage had not been used. Conversely, if the income or capital
growth from the securities purchased with such funds is not sufficient to cover
the cost of leverage, the return to a Fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the
Adviser in its best judgment nevertheless may determine to maintain a Fund's
leveraged position if it deems such action to be appropriate under the
circumstances. Certain types of borrowings by a Fund may result in the Fund's
being subject to covenants in credit agreements, including those relating to
asset coverage and portfolio composition requirements. A Fund may be subject to
certain restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the corporate debt securities or preferred
shares purchased by a Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed by
the 1940 Act. It is not anticipated that these covenants or guidelines will
impede the Fund in managing the Fund's portfolio in accordance with the Fund's
investment objectives and policies.
YEAR 2000 RISKS. Like other financial and business organizations, the
Funds could be adversely affected if computer systems on which they rely do not
properly process date-related information and data involving the years 2000 and
after. The Adviser is taking steps that it believes are reasonable to address
this problem in its own computer systems and to obtain assurances that
comparable steps are being taken by each Fund's other major service providers.
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Funds. Companies in the Funds' portfolios may also be
adversely affected by the Year 2000 issue.
EFFECTIVE MATURITY is the calculated maturity based on analytical factors
that estimate the actual expected return of principal rather than the stated
final maturity date. For example, a mortgage-backed bond may have a 30-year
stated final maturity. However, given the expected periodic principal
prepayments of that bond, the effective maturity may be 10 years rather than the
stated 30 years. The average effective maturity is the dollar-weighted average
of effective maturities of the securities in the Fund's portfolio.
TOTAL RETURN is composed of the income received on the securities held by
the Fund and either capital appreciation or depreciation of those securities.
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Each Fund may not issue senior securities, except as permitted under the
1940 Act. This policy shall not prohibit reverse repurchase agreements, deposits
of assets to margin or guarantee positions in futures, options, swaps and
forward contracts, or the segregation of assets in connection with such
contracts.
Each Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be in
the best interest of the Fund's shareholders.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax considerations
affecting each Fund and its shareholders. Investors are urged to consult their
own tax advisers for more detailed information and for information regarding any
state, local or foreign taxes that may be applicable to them.
GENERAL
Each Fund (which is treated as a separate corporation for federal tax purposes)
intends to qualify for treatment as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code"). To
qualify for that treatment, each Fund must distribute annually to its
shareholders at least 90% of its investment company taxable income (generally,
net investment income plus net short-term capital gain plus, in the case of the
High Income Fund, net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
each Fund, these requirements include the following: (1) 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 securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs and other securities, with these
other securities limited, with respect to any one issuer, to an amount that does
not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (3)
at the close of the quarter of each Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer. If a
Fund failed to qualify for treatment as a RIC for any taxable year, (1) it would
be taxed at corporate rates on the full amount of its taxable income for that
year without being able to deduct the distributions it makes to its shareholders
and (2) the shareholders would treat all those distributions, including
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), as dividends (that is, ordinary income) to the
extent of the Fund's earnings and profits. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for RIC treatment.
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Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
DIVIDENDS AND OTHER DISTRIBUTIONS
A portion of the dividends from a Fund's investment company taxable income
(whether paid in cash or reinvested in additional Fund shares) is eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by a Fund from domestic
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax. Distributions by each Fund of
net capital gain do not qualify for the dividends-received deduction.
Dividends or other distributions declared by a Fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 if they are paid by the Fund during the following January.
Accordingly, such distributions will be taxed to the shareholders for the year
in which that December 31 falls.
A dividend or capital gain distribution paid shortly after shares have
been purchased, although in effect a return of investment, is subject to federal
taxation. Accordingly, an investor should not purchase Fund shares immediately
prior to a dividend or capital gain distribution record date solely for the
purpose of receiving the dividend or distribution.
REDEMPTIONS
A redemption of a Fund's shares will result in a taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales load paid on Class A shares). An exchange of shares
of either Fund for shares of the other Fund or Morgan Keegan Southern Capital
Fund generally will have similar tax consequences. Special rules apply when a
shareholder disposes of Class A shares of a Fund through a redemption or
exchange within 60 days after purchase thereof and subsequently reacquires Class
A shares of that Fund or acquires Class A shares of the other Fund or the Morgan
Keegan Southern Capital Fund without paying a sales charge due to the
reinstatement privilege or exchange privilege. In these cases, any gain on the
disposition of the original Class A shares will be increased, or any loss
decreased, by the amount of the sales charge paid when the shareholder acquired
those shares, and that amount will increase the basis of the shares subsequently
acquired. In addition, if a shareholder purchases shares of a Fund (whether
pursuant to the reinstatement privilege or otherwise) within 30 days before or
after redeeming at a loss other shares of that Fund (regardless of class), all
or part of that loss will not be deductible and instead will increase the basis
of the newly purchased shares.
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If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
INCOME FROM FOREIGN SECURITIES
Dividends and interest received on foreign securities by the High Income
Fund, and gains it realizes thereon, may be subject to income, withholding or
other taxes imposed by foreign countries and U.S. possessions ("foreign taxes")
that would reduce the yield and/or total return on its securities. Tax
conventions between certain countries and the United States may reduce or
eliminate foreign taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors.
The High Income Fund may invest in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (I.E., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which the High Income Fund is a U.S. shareholder --
that, in general, meets either of the following tests: (1) at least 75% of its
gross income is passive or (2) an average of at least 50% of its assets produce,
or are held for the production of, passive income. Under certain circumstances,
the High Income Fund will be subject to federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain on
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders.
If the High Income Fund invests in a PFIC and elects to treat the PFIC as
a "qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain --
which most likely would have to be distributed by the Fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gain were not distributed to the Fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
The High Income Fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. The High Income Fund's adjusted basis in each PFIC's stock
with respect to which it makes this election will be adjusted to reflect the
amounts of income included and deductions taken under the election.
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Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
dates of acquisition and disposition of the securities and (3) that are
attributable to fluctuations in exchange rates that occur between the time the
High Income Fund accrues dividends, interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects the receivables or pays the liabilities, generally will
be treated as ordinary income or loss. These gains or losses, referred to under
the Code as "section 988" gains or losses, may increase or decrease the amount
of the High Income Fund's investment company taxable income to be distributed to
its shareholders.
HEDGING STRATEGIES
The use of hedging strategies, such as selling (writing) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains and losses a Fund realizes in connection
therewith. Gains from the disposition of foreign currencies (except certain
gains that may be excluded by future regulations), and gains from options,
futures and forward contracts derived by a Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement.
Certain futures and foreign currency contracts in which a Fund may invest
will be "section 1256 contracts." Section 1256 contracts held by a Fund at the
end of each taxable year, other than section 1256 contracts that are part of a
"mixed straddle" with respect to which it has made an election not to have the
following rules apply, must be "marked-to-market" (that is, treated as sold for
their fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax. These rules may operate to
increase the amount that a Fund must distribute to satisfy the Distribution
Requirement, which will be taxable to the shareholders as ordinary income, and
to increase the net capital gain recognized by a Fund, without in either case
increasing the cash available to the Fund.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which a Fund may invest. Section 1092 defines a
"straddle" as offsetting positions with respect to personal property; for these
purposes, options and futures contracts are personal property. Section 1092
generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
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vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to a
Fund of straddle transactions are not entirely clear.
If a Fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract,
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward contract entered into by a Fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transaction during any taxable year that otherwise would be
treated as a constructive sale if the transaction is closed within 30 days after
the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (I.E., at no time during that 60-day
period is the Fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially similar or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).
ORIGINAL ISSUE DISCOUNT SECURITIES
A Fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As a holder of those securities, a Fund must include in
its income the OID that accrues on them during the taxable year, even if it
receives no corresponding payment on them during the year. Because a Fund
annually must distribute substantially all of its investment company taxable
income, including any OID, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, a Fund may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from a Fund's cash assets
or from the proceeds of sales of securities, if necessary. A Fund may realize
capital gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
ADDITIONAL INFORMATION ON REDEMPTIONS
Suspension of the right of redemption, or postponement of the date of
payment, may be made (1) for any periods when the New York Stock Exchange (the
"NYSE") is closed (other than customary weekend and holiday closings); (2) when
trading is restricted in markets normally utilized by each Fund or when an
emergency, as defined by the rules and regulations of the SEC exists, making
disposal of the Funds' investments or determination of its net asset value not
reasonably practicable; or (3) for such other periods as the SEC by order may
permit for protection of the Funds' shareholders. In the case of any such
suspension, you may either withdraw your request for redemption or receive
payment based upon the net asset value next determined after the suspension is
lifted.
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Each Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption by making payment in whole or
in part by securities valued in the same way as they would be valued for
purposes of computing the Funds' per share net asset value. However, each Fund
has committed itself to pay in cash all requests for redemption by any
shareholder of record, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of (1) $250,000, or (2) 1% of the net asset
value of the Fund at the beginning of such period. If payment is made in
securities, a shareholder will incur brokerage or transactional expenses in
converting those securities into cash, will be subject to fluctuation in the
market price of those securities until they are sold, and may realize taxable
gain or loss (depending on the value of the securities received and the
shareholder's adjusted basis of the redeemed shares).
VALUATION OF SHARES
Net asset value of each Fund's share will be determined daily as of the
close of the NYSE, on every day that the NYSE is open for business, by dividing
the value of the total assets of the Fund, less liabilities, by the total number
of shares outstanding at such time. Pricing will not be done on days when the
NYSE is closed. Currently, the NYSE is closed on weekends and on certain days
relating to the following holidays: New Year's Day, Martin Luther King's Day,
Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving
and Christmas. Securities owned by each Fund for which market quotations are
readily available will be valued at current market value, or, in their absence,
at fair value as determined under procedures adopted by the Funds' Board of
Directors. Securities traded on an exchange or NASD National Market System
securities (including debt securities) will normally be valued at their last
sale price. Other over-the-counter securities (including debt securities), and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), will be valued by a method which the Funds' Board
of Directors believes accurately reflects fair value.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in their
local currency. The Adviser gathers all exchange rates daily at the close of the
NYSE using the last quoted price on the local currency and then translates the
value of foreign currencies from their local currencies into U.S. dollars. Any
changes in the value of forward contracts due to exchange rate fluctuations and
days to maturity are included in the calculation of the net asset value. If an
extraordinary event that is expected to materially affect the value of a
portfolio security occurs after the close of an exchange on which that security
is traded, then that security will be valued as determined in good faith by a
committee appointed by the Board of Directors.
Futures contracts and options are valued on the basis of market
quotations, if available. Premiums received on the sale of call options are
included in the Funds' net asset value, and the current market value of options
sold by the Funds will be subtracted from net assets. Securities of other
open-end investment companies are valued at their respective net asset values.
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PURCHASE OF SHARES
CLASS A SHARES
Class A shares are offered on a continuous basis at a price equal to their
net asset value plus the applicable "initial sales charge" described in the
Prospectus. Proceeds from the initial sales charge are paid to Morgan Keegan and
are used by Morgan Keegan to defray expenses related to providing
distribution-related services to the Funds in connection with sales of Class A
shares, such as the payment of compensation to Morgan Keegan brokers for selling
Class A shares. No initial sales charge is imposed on Class A shares issued as a
result of the automatic reinvestment of dividends or capital gains distribution.
CLASS C SHARES
Class C shares are offered on a continuous basis at a price equal to their
net asset value. Class C shares that are redeemed within one year of purchase
are subject to a contingent deferred sales charge ("CDSC") charged as a
percentage of the dollar amount subject thereto. In determining whether a Class
C CDSC is applicable to a redemption, the calculation will be determined in the
manner that results in the lowest possible rate being charged. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase. Proceeds from the CDSC are paid to Morgan Keegan to defray the
expenses Morgan Keegan incurs in providing distribution-related services to the
Class C shares.
CLASS I SHARES
Class I shares are offered on a continuous basis at a price equal to their
net asset value, without an initial sales charge or CDSC.
PERFORMANCE INFORMATION
The Funds' performance information and quoted rankings used in advertising
and other promotional materials ("Performance Advertisements") are indicative
only of past performance and are not intended to and do not represent future
investment results. The Funds' share price will fluctuate and shares, when
redeemed, may be worth more or less than originally paid.
TOTAL RETURN CALCULATIONS
Average annual total return quotes ("Standardized Return") used in the
Funds' Performance Advertisements are calculated according to the following
formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
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n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
that period
Because each class of the Funds has its own sales charge and fee
structure, the classes have different performance results. In the case of each
class, this calculation assumes the maximum sales charge is included in the
initial investment or the CDSC is applied at the end of the period,
respectively. This calculation assumes that all dividends and other
distributions are reinvested at net asset value on the reinvestment dates during
the period. The "distribution rate" is determined by annualizing the result of
dividing the declared distributions of each Fund during the period stated by the
maximum offering price or net asset value at the end of the period. Excluding
the Funds' sales charge or Class A shares and the CDSC on Class C shares from
the distribution rate produces a higher rate.
In addition to average annual total returns, the Funds may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking each Fund's sales charge on
Class A shares or the CDSC on Class C shares into account. Excluding the Funds'
sales charge on Class A shares and the CDSC on Class C shares from a total
return calculation produces a higher total return figure.
The Funds may advertise yield, where appropriate. Each Fund's yield is
computed by dividing net investment income per share determined for a 30-day
period ("Period") by the maximum offering price per share (which includes the
full sales charge, if applicable) on the last day of the period, according to
the following standard:
6(SUPERSCRIPT)
[ [ a-b ] ]
YIELD = 2 [ [ ------ + 1 ] - 1 ]
[ [ cd ] ]
a = dividends and interest earned during the period
where: b = net expenses accrued during the period
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends
d = the maximum offering price per share on the last day of the
period (NAV where applicable)
In determining interest earned during the Period (variable "a" in the
above formula), a Fund calculates interest earned on each debt obligation held
by it during the Period by (1) computing the obligation's yield to maturity
based on the market value of the obligation (including actual accrued interest)
on the last business day of the Period or, if the obligation was purchased
during the Period, the purchase price plus accrued interest and (2) dividing the
yield to maturity by 360, and multiplying the resulting quotient by the market
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value of the obligation (including actual accrued interest). Once interest
earned is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totaling the interest
earned on all debt obligations. For the purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next call date on which the obligation reasonably can be expected to be called
or, if none, the maturity date.
With respect to the treatment of discount and premium on mortgage-backed
and other asset-backed obligations that are expected to be subject to monthly
payments of principal and interest ("paydowns"): (1) a Fund accounts for gain or
loss attributable to actual paydowns as an increase or decrease to interest
income during the period and (2) a Fund accrues the discount and amortizes the
premium on the remaining obligation, based on the cost of the obligation, to the
weighted average maturity date or, if weighted average maturity information is
not available, to the remaining term of the obligation.
OTHER INFORMATION
From time to time each Fund may compare its performance in Performance
Advertisements to the performance of other mutual funds or various market
indices. The Funds may also quote rankings and ratings, and compare the return
of the Funds with data published by Lipper Analytical Services, Inc.,
IBC/Donaghue's Money Market Fund Report, CDA Investment Technologies, Inc.,
Wiesenberger Investment Companies Service, Investment Company Data Inc.,
Morningstar Mutual Funds, Value Line and other services or publications that
monitor, compare, rank and/or rate the performance of mutual funds. The Funds
may refer in such materials to mutual fund performance rankings, ratings or
comparisons with funds having similar investment objectives, and other mutual
funds reported in independent periodicals, including, but not limited to, The
Wall Street Journal, Money Magazine, Forbes, Business Week, Financial World,
Barron's, Fortune, The New York Times, The Chicago Tribune, The Washington Post
and The Kiplinger Letters.
The Funds may also compare their performance with, or may otherwise
discuss, the performance of bank certificates of deposit ("CDs") and other bank
deposits, and may quote from organizations that track the rates offered on such
deposits. In comparing the Funds or their performance to CDs, investors should
keep in mind that bank CDs are insured up to specified limits by an agency of
the U.S. government. Shares of the Funds are not insured or guaranteed by the
U.S. government, the value of Funds' shares will fluctuate and shares, when
redeemed, may be worth more or less than originally paid. Unlike the interest
paid on many CDs, which remains as a specified rate for a specified period of
time, the return on Funds' shares will vary.
Each Fund's Performance Advertisements may reference the history of the
Fund's Adviser and its affiliates or biographical information of key investment
and managerial personnel including the portfolio manager. The Funds may
illustrate hypothetical investment plans designed to help investors meet
long-term financial goals, such as saving for a college education or for
retirement. The Funds may discuss the advantages of saving through tax-deferred
retirement plans or accounts.
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TAX-DEFERRED RETIREMENT PLANS
As noted in the Funds' Prospectus, an investment in a Fund's shares may be
appropriate for various types of tax-deferred retirement plans. In general,
income earned through the investment of assets of such a plan is not taxed to
the beneficiaries until the income is distributed to them. Investors who are
considering establishing such a plan may wish to consult their attorneys or
other tax advisers with respect to individual tax questions. Additional
information with respect to these plans is available upon request from any
Morgan Keegan broker.
INDIVIDUAL RETIREMENT ACCOUNTS - IRAS
If you have earned income from employment (including self-employment), you
can contribute each year to an IRA up to the lesser of (1) $2,000 for yourself
or $4,000 for you and your spouse, regardless of whether your spouse is
employed, or (2) 100% of compensation. Some individuals may be able to take an
income tax deduction for the contribution. Regular contributions may not be made
for the year you become 70-1/2 or thereafter. Nondeductible contributions may
also be made to an "education IRA" or a "Roth IRA," distributions from which are
not taxable under certain circumstances.
An investment in a Fund's shares through IRA contributions may be
advantageous, regardless of whether the contributions are deductible by you for
tax purposes, because all dividends and capital gain distributions on your Fund
shares are not immediately taxable to you or the IRA; they become taxable only
when distributed to you except as noted above. Distributions made before age 59
1/2, in addition to being taxable, generally are subject to a penalty equal to
10% of the distribution, except in the case of death or disability, when the
distribution is rolled over into another qualified plan, or in certain other
situations.
SELF-EMPLOYED INDIVIDUAL RETIREMENT PLANS - KEOGH PLANS
Morgan Keegan will assist self-employed individuals to set up a retirement
plan through which a Fund's shares may be purchased. Morgan Keegan generally
arranges for a bank to serve as trustee for the plan and performs custodian
services for the trustee and the plan by holding and handling securities.
However, you have the right to use a bank of your choice to provide these
services at your cost. There are penalties for distributions from a Keogh Plan
prior to age 59 1/2, except in the case of death or disability.
SIMPLIFIED EMPLOYEE PENSION PLANS - SEPPS AND
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES - SIMPLES
Morgan Keegan also will make available in a similar manner to corporate
and other employers a SEPP or SIMPLE for investment in Fund shares.
DIRECTORS AND OFFICERS
The Funds' officers are responsible for the operation of the Funds under
the direction of the Board of Directors. The officers and directors of the Funds
and their principal occupations during the past five years are set forth below.
An asterisk (*) indicates officers and/or directors who are interested persons
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of the Funds as defined by the 1940 Act. The address of each officer and
director is Morgan Keegan Tower, 50 Front Street, Memphis, Tennessee 38103,
unless otherwise indicated.
Name Position with the Fund and Principal Occupation
During Past Five Years
Allen B. Morgan, Jr.* President and Director. Mr. Morgan is Chairman
Age 56 and Chief Executive Officer and Executive
Managing Director of Morgan Keegan & Company,
Inc. He also is a Chairman of Morgan Keegan,
Inc., a Director of Morgan Asset Management,
Inc., and a Director of Catherine's Stores, Inc.
James D. Witherington, Jr. Director. Mr. Witherington is President of SSM
845 Crossover Lane Corp. (management of venture capital funds).
Suite 140 He also serves as a Director for several
Memphis, Tennessee 38117 private companies.
Age 49
William F. Hughes, Jr. Mr. Hughes is a Managing Director of Morgan
Age 55 Keegan & Company, Inc. He also is President of
Morgan Asset Management, Inc.
William Jefferies Mann Director. Mr. Mann is Chairman and President
675 Oakleaf Office Lane of Mann Investments, Inc. (hotel
Suite 100 investments/consulting). He also serves as a
Memphis, Tennessee 38117 Director for Heavy Machines, Inc.
Age 65
James Stillman R. McFadden Director. Mr. McFadden is Vice President of
845 Crossover Lane Sterling Equities, Inc. (private equity
Suite 124 financings). He is also President and Director
Memphis, Tennessee 38117 of 1703, Inc. (restaurant management) and a
Age 41 Director of Starr Printing Co .
Joseph C. Weller* Vice President, Treasurer & Assistant
Age 59 Secretary. Mr. Weller is Executive Vice
President and Chief Financial Officer and
Executive Managing Director of Morgan Keegan &
Company, Inc. He also is a Director of Morgan
Asset Management, Inc.
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Name Position with the Fund and Principal Occupation
During Past Five Years
Charles D. Maxwell* Secretary and Assistant Treasurer. Mr. Maxwell
Age 44 is a Managing Director and Assistant Treasurer
of Morgan Keegan & Company, Inc. and
Secretary/Treasurer of Morgan Asset Management,
Inc. He was formerly a senior manager with
Ernst & Young (accountants) (1976-86).
TABLE OF COMPENSATION(1)
Total Compensation
Name and Position Aggregate Compensation in the Morgan Keegan Funds
with the Company from the Company Complex Paid to Directors
---------------- ---------------- -------------------------
Allen B. Morgan, Jr. $0 $0
President and Director
James D. Witherington, Jr. $4,000 $8,000
Director
William F. Hughes, Jr. $0 $0
Director
William Jeffries Mann $4,000 $8,000
Director
James Stillman R. McFadden $4,000 $8,000
Director
Officers and directors of the Company who are interested persons of the Company
receive no salary or fees from the Company.
(1) These estimates are based on the compensation schedule adopted for the
Company's first year of operations. The Morgan Keegan Funds Complex consists of
one other investment company with one series.
INVESTMENT ADVISER
Morgan Asset Management, Inc., an affiliate of Morgan Keegan, serves as
the Funds' investment adviser and manager under an Investment Advisory and
Management Agreement ("Advisory Agreement"). The Advisory Agreement became
effective as of February 26, 1999. The Advisory Agreement provides that, subject
to overall supervision by the Board of Directors, the Adviser manages the
investment and other affairs of the Funds. The Adviser is responsible for
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managing the Funds' portfolio securities and for making purchases and sales of
portfolio securities consistent with the Funds' investment objective, policies
and limitations described in the Prospectus and this SAI. The Adviser is
obligated to furnish the Funds with office space as well as with executive and
other personnel necessary for the operation of the Funds. In addition, the
Adviser is obligated to supply the Board of Directors and officers of the Funds
with certain statistical information and reports, to oversee the maintenance of
various books and records and to arrange for the preservation of records in
accordance with applicable federal law and regulations. The Adviser and its
affiliates also are responsible for the compensation of directors and officers
of each Fund who are employees of the Adviser and/or its affiliates.
The Funds bear separately all their other expenses which are not assumed
by the Adviser. These expenses include, among others: legal and audit expense;
organizational expenses; interest; taxes; governmental fees; membership fees for
investment company organizations: the cost (including brokerage commissions or
charges, if any) of securities purchased or sold by the Funds and any losses
incurred in connection therewith; fees of custodians, transfer agents,
registrars or other agents; distribution fees; expenses of preparing share
certificates; expenses relating to the redemption of the Funds' shares; expenses
of registering and qualifying Funds' shares for sale under applicable federal
and state laws and maintaining such registrations and qualifications; expenses
of preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices and dividends to each Fund's shareholders; costs of
stationery; costs of shareholders and other meetings of the Funds; compensation
and expenses of the independent directors; and insurance covering each Fund and
its respective officers and directors. The Funds are also liable for such
nonrecurring expenses as may arise, including litigation to which the Funds may
be party. The Funds also may have an obligation to indemnify its directors and
officers with respect to any such litigation.
The Intermediate Fund pays the Adviser a management fee at an annual rate
of 0.40% of the Fund's average daily net assets. The High Income Fund pays the
Adviser a management fee at an annual rate of 0.75% of the Fund's average daily
net assets.
The Advisory Agreement will remain in effect from year to year, provided
such continuance is approved by a majority of the Board of Directors or by vote
of the holders of a majority of the outstanding voting securities of each Fund.
Additionally, the Advisory Agreement must be approved annually by vote of a
majority of the directors of the Funds who are not parties to the Agreement or
"interested persons" of such parties as that term is defined in the 1940 Act.
The Advisory Agreement may be terminated by the Adviser or the Funds, without
penalty, on 60 days' written notice to the other, and will terminate
automatically in the event of its assignment.
Under the Advisory Agreement, the Funds will have the non-exclusive right
to use the name "Morgan Keegan" until the Agreement is terminated, or until the
right is withdrawn in writing by the Adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser is responsible for the execution
of the Funds' portfolio transactions and must seek the most favorable price and
execution for such transactions, subject to the possible payment, as described
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below, of higher commissions to brokers who provide research and analysis. The
Funds may not always pay the lowest commission or spread available. Rather, the
Funds also will take into account such factors as size of the order, difficulty
of execution, efficiency of the executing brokers facilities (including the
services described below) and any risk assumed by the executing broker.
The Adviser may give consideration to research, statistical and other
services furnished by broker/dealers to the Adviser for its use, may place
orders with broker/dealers who provide supplemental investment and market
research and securities and economic analysis, and may pay to those brokers a
higher brokerage commission or spread than may be charged by other brokers. Such
research and analysis may be useful to the Adviser in connection with services
to clients other than the Funds. The Adviser's fee is not reduced by reason of
its receipt of such brokerage and research services.
From time to time the Funds may use Morgan Keegan as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. The Adviser
will not cause the Funds to pay Morgan Keegan any commission for effecting a
securities transaction for the Funds in excess of the usual and customary amount
other broker/dealers would have charged for the transaction. Rule 17e-1 under
the 1940 Act defines "usual and customary" commissions to include amounts which
are "reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time."
The Adviser may also select other brokers to execute portfolio
transactions. In the over-the-counter market, the Funds will generally deal with
responsible primary market-makers unless a more favorable execution can
otherwise be obtained through brokers.
The Funds may not buy securities from, or sell securities to, Morgan
Keegan as principal. The Funds' Board of Directors has adopted procedures in
conformity with Rule 10f-3 under the 1940 Act whereby the Funds may purchase
securities that are offered in underwritings in which Morgan Keegan is a
participant.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Morgan
Keegan from executing transactions on an exchange for the Funds except pursuant
to the provisions of Rule lla2-2(T) thereunder. That rule permits Morgan Keegan,
as a member of a national securities exchange, to perform functions other than
execution in connection with a securities transaction for the Funds on that
exchange only if the Funds expressly consents by written contract.
Investment decisions for the Funds are made independently from those of
other accounts advised by the Adviser. However, the same security may be held in
the portfolios of more that one account. When two or more accounts
simultaneously engage in the purchase or sale of the same security, the prices
and amounts will be equitably allocated among the accounts. In some cases, this
procedure may adversely affect the price or quantity of the security available
to a particular account. In other cases, however, an account's ability to
participate in large volume transactions may produce better executions and
prices.
Morgan Keegan personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
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shareholders by all Morgan Keegan directors, officers and employees, establishes
procedures for personal investing and restricts certain transactions. For
example, personal trading in most securities requires pre-clearance. In
addition, the code of ethics places restrictions on the timing of personal
investing in relation to trades by the Funds.
DISTRIBUTOR
Morgan Keegan acts as distributor of the Funds' shares pursuant to an
Underwriting Agreement between the Funds and Morgan Keegan dated as of February
26, 1999 ("Underwriting Agreement"). The shares of the Funds are offered
continuously. The Underwriting Agreement obligates Morgan Keegan to provide
certain services and to bear certain expenses in connection with the offering of
each Fund's shares, including, but not limited to: printing and distribution of
prospectuses and reports to prospective shareholders; preparation and
distribution of sales literature, and advertising; administrative and overhead
cost of distribution such as the allocable costs of executive office time
expended on developing, managing and operating the distribution program;
operating expenses of branch offices, sales training expenses, and telephone and
other communication expenses. Morgan Keegan compensates investment brokers of
Morgan Keegan and other persons who engage in or support distribution of shares
and shareholder service based on the sales for which they are responsible and
the average daily net asset value of each Fund's shares in accounts of their
clients. Morgan Keegan also pays special additional compensation and promotional
incentives from time to time, to investment brokers for sales of Fund shares.
Each Fund has adopted a Distribution Plan with respect to the Class A
shares and Class C shares (each a "Plan," collectively, the "Plans") pursuant to
Rule 12b-1 under the 1940 Act. Under the Intermediate Fund Rule 12b-1 Plan,
distribution and service fees will be paid at an aggregate annual rate of up to
0.25% for Class A shares, and 0.60% for Class C shares of the Fund's average
daily net assets attributable to shares of that class. Under the High Income
Fund Rule 12b-1 Plan, distribution and service fees will be paid at an aggregate
annual rate of up to 0.25% for Class A shares and 0.75% for Class C shares of
the Fund's average daily net assets attributable to shares of that class. Class
I shares are not subject to a distribution and service fee.
Service fees and distribution fees paid by the Funds to Morgan Keegan
under the Plans may exceed or be less than Morgan Keegan's expenses thereunder.
No interested person of the Funds or non-interested director had a direct or
indirect interest in the Plans or related agreements. The Funds benefits from
the Plans by virtue of an ongoing broker's involvement with individual customers
as well as the benefit from continued promotion.
The Plans were approved by the Initial Shareholder on January 13, 1999,
and as required by Rule 12b-1 under the 1940 Act, by the Board of Directors on
November 16, 1998, including a majority of the directors who are not "interested
persons" of the Funds, as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plans or the
Underwriting Agreement (the "Qualified Directors").
In approving the Plans, in accordance with the requirements of Rule
12b-1, the Board of Directors determined that the service and distribution fees
were reasonable in view of the compensation Morgan Keegan investment brokers can
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receive relative to the compensation offered by competing bond funds. The Board
of Directors also determined that the fees are reasonable in light of the
service and distribution fees paid by other similar funds. Finally, the Board of
Directors determined that there was a reasonable likelihood that the Plans would
benefit each Fund and its shareholders. This determination was based, in part,
on the belief that the Plans enable the Funds to have Morgan Keegan investment
brokers available to promote and sell the Funds, thereby assisting the Funds to
attract assets. Growth of assets is expected to benefit the Funds and the
Adviser. The Funds are expected to benefit from the potential for economies of
scale in their operations that can arise from growth in assets, as well as from
the increased potential for flexibility in portfolio management resulting from a
net inflow of assets, as opposed to net redemptions. Shareholders of the Funds
are expected to benefit from continuing services provided by investment brokers
and other staff members of Morgan Keegan as Distributor. The Adviser and Morgan
Keegan are expected to benefit from the fact that their advisory, service and
distribution fees, which are based on a percentage of assets, increase as Fund
assets grow and that their brokerage commissions and transfer fees will also
increase as assets grow. The Board of Directors acknowledged, however, that
there is no assurance that benefits to the Funds will be realized as a result of
the Plans.
The Plans may be terminated by vote of a majority of the Qualified
Directors or by vote of a majority of each Fund's outstanding voting securities
of the applicable class. Termination of the Plans terminates any obligation of
the Funds to pay service and distribution fees to Morgan Keegan, other than
service and distribution fees that may have accrued but that have not been paid
as of the date of termination. Any change in the Plans that would materially
increase the service and distribution costs to the Funds requires shareholder
approval; otherwise the Plans may be amended by the Directors, including a
majority of the Qualified Directors, as described above.
The Plans, as currently in effect, will continue for successive one-year
periods, provided that each such continuance specifically is approved by (1) the
vote of a majority of the Qualified Directors and (2) the vote of a majority of
the entire Board of Directors of the Funds.
Rule 12b-1 requires that any person authorized to direct the disposition
of monies paid or payable by the Funds pursuant to the Plan or any related
agreement shall provide to the Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which expenditures were made. Rule 12b-1 also provides that the
Funds may rely on that rule only if the selection and nomination of the Fund's
independent directors are committed to the discretion of such independent
directors.
The Underwriting Agreement was approved by vote of the Board of Directors
and the Qualified Directors on November 16, 1998. The Underwriting Agreement is
subject to the same provisions for annual renewal as the Plans. In addition, the
Underwriting Agreement will terminate upon assignment or upon 60 days' notice
from Morgan Keegan. Each Fund may terminate the Underwriting Agreement, without
penalty, upon 60 days' notice, by a majority vote of either its Board of
Directors, the Qualified Directors, or the outstanding voting securities of each
Fund.
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DESCRIPTION OF THE FUNDS' SHARES
The Company is incorporated as a Maryland corporation. The Articles of
Incorporation permit the Board of Directors the right to issue one billion
shares (1,000,000,000), par value of one tenth of one cent ($.001) . Under the
Articles of Incorporation, the Directors have the authority to divide or combine
the shares into a greater or lesser number, to classify or reclassify any
unissued shares of the Company into one or more separate series or class of
shares, without further action by the shareholders. As of the date of this SAI,
the Directors have authorized two series of shares (Intermediate Bond Fund and
High Income Fund) and the issuance of three classes of shares of each Fund,
designated as Class A, Class C and Class I. Shares are freely transferable and
have no preemptive, subscription or conversion rights. When issued, shares are
fully paid and non-assessable.
The Articles of Incorporation provide that all dividends and distributions
on shares of each series or class will be distributed pro rata to the holders of
that series or class in proportion to the number of shares of that series or
class held by such holders. In calculating the amount of any dividends or
distributions, (1) each class will be charged with the transfer agency fee
attributable to that class, (2) each class will be charged separately with such
other expenses as may be permitted by the SEC and the Board of Directors and (3)
all other fees and expenses shall be charged to the classes, in the proportion
that the net assets of that class bears to the net assets of the applicable
series.
Each class will vote separately on matters pertaining only to that class,
as the Board of Directors may determine. On all other matters, all classes shall
vote together and every share, regardless of class, shall have an equal vote
with every other share. Except as otherwise provided in the Articles of
Incorporation, the By-laws of the Company or as required by the provisions of
the 1940 Act, all matters will be decided by a vote of a majority of the
outstanding voting securities validly cast at a meeting at which a quorum is
present. One-third of the aggregate number of shares of that series or class
outstanding and entitled to vote shall constitute a quorum for the transaction
of business by that series or class.
Unless otherwise required by the 1940 Act or the Articles of
Incorporation, the Funds have no intention of holding annual meetings of
shareholders. The Funds' shareholders may remove a Director by the majority of
all votes of the Company's outstanding shares and the Board of Directors shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 25% of the outstanding shares of each Fund.
At least two-thirds of the directors holding office must have been elected by
the shareholders.
CUSTODIAN, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
AND PORTFOLIO ACCOUNTING SERVICE AGENT
Morgan Keegan & Company, Inc., Morgan Keegan Tower, Fifty Front Street,
Memphis, Tennessee 38103, serves as the transfer and dividend disbursing agent
of each Fund. For these services, Morgan Keegan receives from each Fund a fee of
$4,000 per month, or $48,000 per year.
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Morgan Keegan also provides accounting services to each Fund. For these
services, which include portfolio accounting, expense accrual and payment, fund
valuation and financial reporting, tax accounting, and compliance control
services, Morgan Keegan receives from each Fund a fee of $1,500 per month, or
$18,000 per year.
The Funds reserve the right, upon 60 days' written notice, to make other
charges to investors to cover administrative costs.
State Street Bank and Trust Company, National Association, 108 Myrtle
Street, Quincy, Massachusetts, 02171, serves as the Funds' custodian.
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to each Fund and has passed upon certain
matters in connection with this offering.
CERTIFIED PUBLIC ACCOUNTANTS
KPMG LLP, Fifty North Front Street, Memphis, Tennessee 38103, are the
Funds' independent certified public accountants. KPMG LLP, performs an audit of
the Funds' financial statements and reviews the Funds' federal and state income
tax returns.
FINANCIAL STATEMENTS
Audited financial statements for the Fund and notes thereto, dated as of
January 14, 1999, and the report of KPMG LLP, are attached to this SAI.
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