Fortis Advantage Portfolios, Inc.
Fortis Equity Portfolios, Inc.
Fortis Growth Fund, Inc.
October 10, 2000
Supplement to the Fortis Stock Funds Statement of Additional
Information dated January 1, 2000
_________________________________________________________________
_______
The following information replaces all of the information on
pages 13 to 15 under the section entitled "Options."
Options
Generally. To reduce fluctuations in net asset value or to
increase current income, each Fund may:
* sell (write) covered call and secured put options; and
* purchase call and put options
on securities that are traded on United States and foreign
securities exchanges and in the over-the-counter markets. The
Funds may write and buy options on the same types of securities
that the Funds may purchase directly.
As a nonfundamental investment policy, each Fund will limit
its investments in options so that:
* the amount of premiums paid for all options, initial margin
deposits on all futures contracts and/or options on futures
contracts, and collateral deposited with respect to forward
contracts held by or entered into by the Fund will not
exceed 5% of the value of the total assets of the Fund; and
* the Fund's assets covering, subject to, or committed to all
options, futures, and forward contracts will not exceed 20%
of the value of the total assets of the Fund.
Additional information about options is contained in Appendix A.
Use of Options. Put and call options may be used for a
variety of purposes:
* To Hedge. Options can be used to hedge against loss. For
example, if a portfolio manager wishes to hedge a security
that the manager owns against a decline in price, the
manager may purchase a put option on the underlying
security, i.e., purchase the right to sell the security to a
third party at a stated price. If the underlying security
then declines in price, the manager can exercise the put
option, thus limiting the amount of the manager's loss
resulting from the decline in price. Similarly, if the
manager intends to purchase a security at some date in the
future, the manager may purchase a call option on the
security today in order to hedge against an increase in its
price before the intended purchase date. The premium paid
for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by a Fund upon exercise
or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may
expire without value to the Fund.
* To Speculate. Options also can be used for speculative
purposes. For example, if a portfolio manager believes that
the price of stocks generally is going to rise, the manager
may purchase a call option on a stock index, the components
of which are unrelated to the stocks the manager holds in a
Fund or intends to purchase. If the stock index appreciates
sufficiently, the Fund will realize a gain. If the stock
index falls, the Fund will lose the premium paid for the
option plus related transaction costs.
* To Produce Gain. Finally, a portfolio manager may write
covered call options or secured put options to realize
additional gain. If the options expire unexercised, the
manager produces a gain by the amount of the price (premium)
received for selling the option minus related transaction
costs.
Writing Call Options. When a Fund sells (writes) a call
option, it gives a third party the right to purchase a security
from the Fund at the exercise price for a stated period or on a
stated date. A call option written by a Fund is "covered" if the
Fund:
* owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security
without additional cash consideration (or for additional
cash consideration segregated from assets available for
investment) upon conversion or exchange of other securities
held in its portfolio; or
* holds a call on the same security having the same principal
amount as the call written and the exercise price of the
call held (i) is equal to or less than the exercise price of
the call written or (ii) is greater than the exercise price
of the call written if the difference is maintained by the
Fund in cash and other liquid assets segregated from assets
available for investment.
By writing covered call options, a Fund might lose the potential
for gain on the underlying security if the option is exercised.
However, Advisers believes that this technique is a relatively
low-risk way to enhance a Fund's return. The Funds will not
write "uncovered" call options.
Writing Put Options. When a Fund sells (writes) a put
option, it gives a third party the right to sell a security to
the Fund at the exercise price for a stated period or on a stated
date. A put option written by a Fund is "secured" if the Fund:
* segregates cash not available for investment or other
liquid assets with a value equal to the exercise price of the
put; or
* holds a put on the same security having the same
principal amount as the put written and the exercise price of
the put held is (a) equal to or greater than the exercise
price of the put written or (b) less than the exercise price
of the put written if the difference is maintained by the Fund
in cash and other liquid assets segregated from assets
available for investment.
By writing a put option, a Fund might become obligated to
purchase the underlying security for more than its current market
price upon exercise of the option. The Funds will not write
"unsecured" put options.
* Buying Call Options. As a holder of a call option, a Fund
has the option to buy the underlying security from the option
writer at the exercise price at any time during the option period
or on a stated date. If a Fund buys a call option, any loss will
be limited to the premium paid for the call option and related
transaction costs. A Fund may exercise the call option, permit
it to expire, or sell it. By selling the call option, the Fund
eliminates its position.
A Fund may buy call options on securities that it intends to
purchase to limit the risk of a substantial increase in the
market price of the security. A Fund may also buy call options
on securities held in its portfolio and on which it has written
call options. Prior to its expiration, a call option may be sold
which eliminates the Fund's position. Profit or loss from such a
sale will depend on whether the amount received is more or less
than the premium paid for the call option plus the related
transaction costs.
* Buying Put Options. As the holder of a put option, a
Fund has the option to sell the underlying security at the
exercise price at any time during the option period or on a
stated date. If a Fund buys a put option, any loss will be
limited to the premium paid for the put option and related
transaction costs. A Fund may exercise the put option, permit it
to expire, or sell it. By selling the put option, the Fund
eliminates its position.
A Fund may buy a put option on an underlying security owned
by the Fund (a "protective put") as a hedging technique to
protect against an anticipated decline in the value of the
security. This hedge protection is provided only during the life
of the put option when the Fund, as the holder of the put option,
is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's
market price. For example, a put option may be purchased in order
to protect unrealized appreciation of a security when the manager
deems it desirable to continue to hold the security due to tax
considerations. The premium paid for the put option and related
transaction costs would reduce any gain realized when the
underlying security is eventually sold.
A Fund may also buy put options at a time when the Fund does
not own the underlying security. By buying put options on a
security it does not own, the Fund seeks to benefit from a
decline in the market price of the underlying security. If the
put option is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or
greater than the exercise price during the life of the put
option, the Fund will lose some or all of the premium it paid to
purchase the put option. For the purchase of a put option to be
profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the
premium and transaction costs.
Options on stock indices. Each Fund may:
* sell (write) covered call options and secured put options
on stock indices; and
* purchase call and put options on stock indices.
In contrast to an option on a security, an option on a stock
index provides the holder with the option to receive a cash
settlement upon exercise of the option, rather than the right to
purchase or sell a security. The amount of the cash settlement
is generally equal to:
* the difference between the closing price of the index and
the exercise price of the option, multiplied by
* a fixed "index multiplier".
Thus, unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market
generally (or in a particular industry or segment of the market)
rather than price movements in an individual stock.
Covered Call Options on Market Indices. A call option written
on a stock index is "covered" if the Fund:
* holds a diversified portfolio of securities similar to
those on which the underlying index is based. However, a Fund
cannot, as a practical matter, acquire and hold a portfolio
containing exactly the same securities that underlie the index
and, as a result, bears a risk that the value of the
securities held will not be perfectly correlated with the
value of the index; or
* holds a call on the same index and in the same principal
amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of
the call written or (b) greater than the exercise price of the
call written if the difference is maintained by the Fund in
cash and other liquid assets segregated from assets available
for investment.
The Funds will not write "uncovered" call options on market
indices.
Secured Put Options on Market Indices. A Fund may also
"secure" put options on stock indices by:
* holding a put on the same index and in the same principal
amount as the put written where the exercise price of the put
held is (a) equal to or greater than the exercise price of the
put written or (b) less than the exercise price of the put
written if the difference is maintained by the Fund in cash
and other liquid assets segregated from assets available for
investment; or
* segregates cash or other liquid assets in an amount equal
to the exercise price of the option from assets available for
investment.
The Funds will not write "unsecured" put options on market
indices.
The following information replaces all of the information on
pages 54 and 55 under the sections entitled "Options on
Securities" and "Options on Stock Indexes."
Options on Securities
An option on a security provides the purchaser ("holder")
with the option to purchase, in the case of a "call" option, or
sell, in the case of a "put" option, the security or securities
underlying the option, for a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date.
The holder pays a non-refundable purchase price for the option,
known as the "premium." The maximum amount of risk the purchaser
of the option assumes is equal to the premium plus related
transaction costs, although this entire amount may be lost. The
risk of the seller, or "writer," however, is potentially
unlimited, unless the option is "covered" or "secured."
Upon exercise of the option, the holder is required to pay
the purchase price of the underlying security, in the case of a
call option, or to deliver the security in return for the
purchase price in the case of a put option. Conversely, the
writer is required to deliver the security, in the case of a call
option, or to purchase the security, in the case of a put option.
Options on securities that have been purchased or written may be
closed out prior to exercise or expiration by entering into an
offsetting transaction on the exchange on which the initial
position was established, subject to the availability of a liquid
secondary market.
Options on securities and options on indices of securities,
discussed below, are traded on national securities exchanges,
such as the Chicago Board Options Exchange and the New York Stock
Exchange, which are regulated by the Commission. The Options
Clearing Corporation guarantees the performance of each party to
an exchange-traded option, by in effect taking the opposite side
of each such option. A holder or writer may engage in
transactions in exchange-traded options on securities and options
on indices of securities only through a registered broker-dealer
which is a member of the exchange on which the option is traded.
In addition, options on securities and options on indices of
securities may be traded on exchanges located outside the United
States and over-the-counter through financial institutions
dealing in such options as well as the underlying instruments.
The particular risks of transactions on foreign exchanges and
over-the-counter transactions are set forth more fully in the
Statement of Additional Information.
Options on Stock Indices
In contrast to an option on a security, an option on a stock
index provides the holder with the right to make or receive a
cash settlement upon exercise of the option, rather than the
right to purchase or sell a security. The purchaser of the
option receives this cash settlement amount if the closing level
of the index on the day of exercise is greater than, in the case
of a call, or less than, in the case of a put, the exercise price
of the option. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount if the
option is exercised. As in the case of options on securities, the
writer or holder may liquidate positions in index options prior
to exercise or expiration by entering into closing transactions
on the exchange on which such positions were established, subject
to the availability of a liquid secondary market.
The index underlying an index option may be a "broad-based"
index, such as the Standard & Poor's 500 Index or the New York
Stock Exchange Composite index, the changes in value of which
ordinarily will reflect movements in the stock market in general.
In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices
of securities of particular industry groups, such as those of oil
and gas or technology companies. An index assigns relative values
to the securities included in the index and the index fluctuates
with changes in the market values of the securities so included.
ASSET ALLOCATION PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
each a series of FORTIS ADVANTAGE PORTFOLIOS, INC.
FORTIS VALUE FUND
FORTIS GROWTH & INCOME FUND
FORTIS CAPITAL FUND
each a series of FORTIS EQUITY PORTFOLIOS, INC.
FORTIS GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 1, 2000
As supplemented, October 10, 2000
This Statement of Additional Information is not a
prospectus. This Statement of Additional Information relates to
a prospectus for Asset Allocation Portfolio, Capital Appreciation
Portfolio, Value Fund, Growth & Income Fund, Capital Fund and
Growth Fund (the "Funds") dated January 1, 2000, and should be
read in conjunction therewith. The financial statements included
as a part of the Funds' Annual Report to Shareholders for the
fiscal year ended August 31, 1999 are incorporated by reference
into this Statement of Additional Information. Copies of the
Funds' Prospectus and/or Annual Report are available, without
charge, by writing or calling Fortis Investors, Inc.
("Investors"), P.O. Box 64284, St. Paul, Minnesota 55164.
Telephone: (651) 738-4000. Toll Free: (800) 800-2000.
Table of Contents
Page
Fund History . . . . . . . . . . . . . . . . . . . . . . 1
Description of the Funds . . . . . . . . . . . . . . . . 1
Investment Strategies and Risk Considerations . . . . . . 1
Investment Restrictions . . . . . . . . . . . . . . . . . 20
Management of the Funds . . . . . . . . . . . . . . . . . 25
Principal Holders of Securities . . . . . . . . . . . . . 30
Investment Advisory and Other Services . . . . . . . . . 30
Brokerage Allocation and Other Practices . . . . . . . . 34
Capital Stock . . . . . . . . . . . . . . . . . . . . . . 38
Pricing of Shares . . . . . . . . . . . . . . . . . . . . 39
Purchase of Shares . . . . . . . . . . . . . . . . . . . 43
Redemption of Shares . . . . . . . . . . . . . . . . . . 46
Taxation . . . . . . . . . . . . . . . . . . . . . . . . 47
Underwriter and Distribution of Shares . . . . . . . . . 49
Performance Information . . . . . . . . . . . . . . . . . 50
Financial Statements . . . . . . . . . . . . . . . . . . 54
Other Service Providers . . . . . . . . . . . . . . . . . 54
Limitation of Director Liability . . . . . . . . . . . . 54
Additional Information . . . . . . . . . . . . . . . . . 55
Appendix A
Description of Futures, Options and Forward Contracts 56
Appendix B
Corporate Bond and Commercial Paper Ratings
60
Fund History
Asset Allocation Portfolio and Capital Appreciation
Portfolio are portfolios of Fortis Advantage Portfolios, Inc.
("Fortis Advantage") which was incorporated in Minnesota in 1987.
Asset Allocation Portfolio and Capital Appreciation Portfolio
commenced operations on January 4, 1988. Value Fund, Growth &
Income Fund and Capital Fund are the three portfolios of Fortis
Equity Portfolios, Inc. ("Fortis
Equity") which was incorporated in Minnesota in 1949. Value Fund
and Growth & Income Fund commenced operations on January 2, 1996
and Capital Fund commenced operations on June 8, 1949. Fortis
Growth Fund, Inc. ("Fortis Growth") was incorporated in Minnesota
in 1958 and its single portfolio commenced operations on March
31, 1963.
Description of the Funds
Fortis Advantage, Fortis Equity and Fortis Growth are
registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 (the "1940 Act") as open-end
management investment companies. Fortis Advantage currently has
three investment portfolios (only two of which are offered
through the prospectus) and Fortis Equity has three investment
portfolios; Growth Fund has a single portfolio. As a fundamental
policy, each Fund operates as an open-end, diversified investment
company as defined under the 1940 Act. Open-end means that it
generally must redeem an investor's shares upon request. In
order to be diversified, each Fund must meet the following
requirements:
At least 75% of the value of the Fund's total assets will be
represented by cash and cash items (including receivables),
Government securities, securities of other investment
companies, and other securities for the purposes of this
calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the
total assets of the Fund and to not more than 10% of the
outstanding voting securities of such issuer.
Fortis Advantage, Fortis Equity and Fortis Growth may
establish other portfolios, each corresponding to a distinct
investment portfolio and a distinct series of their common stock.
Fortis Advisers, Inc. (Advisers) acts as each Fund's
investment adviser.
Investment Strategies and Risk Considerations
This section of the Statement of Additional Information
contains more information on the types of securities in which the
Funds may invest and the investment strategies that the Funds may
use, including securities and strategies not discussed in the
Prospectus. Unless, otherwise noted, investment strategies used
by the Fund may be changed without the approval of shareholders.
Median Market Capitalization
As discussed in the prospectus, each Fund, except Asset
Allocation Portfolio, intends to maintain its median market
capitalization within a certain range or above or below a
specified amount. There is no assurance that the Funds' median
market capitalizations will always remain within the designated
ranges (or above or below the specified amount) in light of
constantly fluctuating market conditions and the performance of
the stocks held in the Funds' portfolios.
Market capitalization is a measure of a company's relative
size and is calculated by multiplying the number of outstanding
shares of a company by the market price of those shares. Half of
a portfolio's assets are invested in securities of companies with
market capitalizations larger than the median market
capitalization of the portfolio, and half are invested in the
securities of companies with market capitalizations smaller than
the median. For example, in a portfolio of nine securities with
market capitalizations of $1 billion, $1.5 billion, $2 billion,
$3 billion, $5 billion, $8 billion, $8 billion, $8.75 billion and
$9 billion, the median market capitalization of this portfolio
would be $5 billion because half of the portfolio securities have
market capitalizations that are smaller than the median and half
have market capitalizations that are larger than the median.
Median market capitalization is used as a measure of the average
market capitalization of a portfolio and is sometimes used in the
mutual fund industry to categorize a fund as "small cap," "mid
cap" or "large cap." The Funds consider small cap portfolios to
have median market capitalizations of less than $1 billion, mid
cap portfolios to have median market capitalizations of $1
billion to $8 billion and large cap portfolios to have median
market capitalizations of more than $8 billion.
Bank Obligations
The bank obligations in which Asset Allocation Portfolio may
invest are: (i) obligations (including certificates of deposit
and bankers acceptances) of U.S. banks, savings and loan
associations, and savings banks, which institutions have total
assets (as of the date of their most recent annual financial
statements at the time of investment) of not less than $1
billion; (ii) U.S. dollar denominated obligations of Canadian
chartered banks, London branches of U.S. banks, and U.S. branches
or agencies of foreign banks which meet the asset size referred
to in (i) above; and (iii) obligations of the institutions
referred to in (i) above which have total assets of less than $1
billion, provided that the amount of the obligations purchased
does not exceed $100,000 for any one such institution, and the
payment of the principal is insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Insurance
Corporation.
Commercial Paper
Asset Allocation Portfolio may invest without limitation in
commercial paper issued by U.S. corporations or affiliated
foreign corporations and rated (or guaranteed by a company whose
commercial paper is rated) at the date of investment Prime-2 or
higher by Moody's or A-2 or higher by S&P, or comparably rated by
another nationally recognized rating agency, or, if not rated,
issued by a corporation having an outstanding debt issue rated A
or better by Moody's or S&P, or comparably rated by another
nationally recognized rating agency, and, if issued by an
affiliated foreign corporation, such commercial paper (not to
exceed in the aggregate 20% of the Fund's net assets) is U.S.
dollar denominated and not subject at the time of purchase to
foreign tax withholding.
U.S. Government Securities
Each Fund may invest in U.S. government securities, which
include the following U.S. Treasury obligations: U.S. Treasury
bills (initial maturities of one year or less), U.S. Treasury
notes (initial maturities of one to 10 years), and U.S. Treasury
bonds (generally initial maturities of greater than 10 years),
all of which are backed by the full faith and credit of the
United States. The Funds may also invest in obligations issued
or guaranteed by U.S. government agencies or instrumentalities.
For Asset Allocation Portfolio and Growth & Income Fund, these
include government guaranteed mortgage-related securities, some
of which are backed by the full faith and credit of the U.S.
Treasury, e.g., direct pass-through certificates of the
Government National Mortgage Association; some of which are
supported by the right of the issuer to borrow from the U.S.
government, e.g., obligations of Federal Home Loan Banks; and
some of which are backed only by the credit of the issuer itself,
e.g., obligations of the Student Loan Marketing Association.
U.S. government securities are backed by the full faith and
credit of the U.S. government or guaranteed by the issuing agency
or instrumentality and, therefore, there is generally considered
to be little or no risk as to the issuer's capacity to pay
interest and repay principal. Nevertheless, due to fluctuations
in interest rates, there is no guarantee as to the market value
of U.S. government securities.
Mortgage-Related Securities
Asset Allocation Portfolio and Growth & Income Fund may
invest in certain types of mortgage-related securities. One type
of mortgage-related security includes certificates that represent
pools of mortgage loans assembled for sale to investors by
various governmental and private organizations. These securities
provide a monthly payment, which consists of both an interest and
a principal payment, which is in effect a "pass-through" of the
monthly payment made by each individual borrower on his or her
residential mortgage loan, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying
residential property, refinancing, or foreclosure, net of fees or
costs that may be incurred. Some certificates (such as those
issued by the Government National Mortgage Association) are
described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on
the mortgage pool, net of certain fees, regardless of whether the
mortgagor actually makes the payment.
A major governmental guarantor of pass-through certificates
is the Government National Mortgage Association ("GNMA"). GNMA
guarantees, with the full faith and credit of the U.S.
government, the timely payments of principal and interest on
securities issued by institutions approved by GNMA (such as
savings and loan institutions, commercial banks, and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. Other governmental guarantors (but not backed by the
full faith and credit of the United States Government) include
the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA purchases
residential mortgages from a list of approved seller/servicers
which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit
unions, and mortgage bankers.
(i) GNMA Certificates. Certificates of the GNMA ("GNMA
Certificates") evidence an undivided interest in a pool of
mortgage loans. GNMA Certificates differ from bonds in that
principal is paid back monthly as payments of principal,
including prepayments, on the mortgages in the underlying
pool are passed through to holders of the GNMA Certificates
representing interests in the pool, rather than returned in
a lump sum at maturity. "Modified pass-through" GNMA
Certificates entitle the holder to receive a share of all
interest and principal payments paid or owed to the mortgage
pool, net of fees paid or due to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes
the payment.
(ii) GNMA Guarantee. The National Housing Act authorizes
GNMA to guarantee the timely payment of principal and
interest on securities backed by a pool of mortgages insured
by the Federal Housing Administration ("FHA") or the
Farmers' Home Administration ("FmHA"), or guaranteed by the
Veterans Administration ("VA"). GNMA is also empowered to
borrow without limitation from the U.S. Treasury, if
necessary, to make any payments required under its
guarantee.
(iii) Life of GNMA Certificates. The average life of a GNMA
Certificate is likely to be substantially less than the
stated maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the
greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose
no risk of loss of the principal balance of a Certificate,
because of the GNMA guarantee, but foreclosure may impact
the yield to shareholders because of the need to reinvest
proceeds of foreclosure.
As prepayment rates of individual mortgage pools vary
widely, it is not possible to predict accurately the average
life of a particular issue of GNMA Certificates. However,
statistics published by the FHA indicate that the average
life of single family dwelling mortgages with 25 to 30-year
maturities, the type of mortgages backing the vast majority
of GNMA Certificates, is approximately 12 years.
Prepayments are likely to increase in periods of falling
interest rates. It is customary to treat GNMA Certificates
as 30-year mortgage-backed securities that prepay fully in
the twelfth year.
(iv) Yield Characteristics of GNMA Certificates. The coupon
rate of interest of GNMA Certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured
mortgages underlying the certificates, by the amount of the
fees paid to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the
yield that will be earned on GNMA Certificates. First, GNMA
Certificates may be issued at a premium or discount, rather
than at par, and, after issuance, GNMA Certificates may
trade in the secondary market at a premium or discount.
Second, interest is earned monthly, rather than semi-
annually as with traditional bonds; monthly compounding
raises the effective yield earned. Finally, the actual
yield of a GNMA Certificate is influenced by the prepayment
experience of the mortgage pool underlying it. For example,
if interest rates decline, prepayments may occur faster than
had been originally projected and the yield to maturity and
the investment income of the Fund would be reduced.
(v) FHLMC Securities. "FHLMC" is a federally chartered
corporation created in 1970 through enactment of Title III
of the Emergency Home Finance Act of 1970. Its purpose is
to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through
securities, mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble
GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made or owed on
the underlying pool. The FHLMC guarantees timely payment of
interest on PCs and the ultimate payment of principal. Like
GNMA Certificates, PCs are assumed to be prepaid fully in
their twelfth year.
GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semi-
annually and return principal once a year in guaranteed
minimum payments. The expected average life of these
securities is approximately ten years.
(vi) FNMA Securities. "FNMA" is a federally chartered and
privately owned corporation which was established in 1938 to
create a secondary market in mortgages insured by the FHA.
It was originally established as a government agency and was
transformed into a private corporation in 1968.
FNMA issues guaranteed mortgage pass-through certificates
("FNMA Certificates"). FNMA Certificates resemble GNMA
Certificates in that each FNMA Certificate represents a pro
rata share of all interest and principal payments made or
owed on the underlying pool. FNMA guarantees timely payment
of interest on FNMA certificates and the full return of
principal. Like GNMA Certificates, FNMA Certificates are
assumed to be prepaid fully in their twelfth year.
Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may in
addition be the originators of the underlying mortgage loans as
well as the guarantors of the pass-through certificates. Pools
created by such non-governmental issuers generally offer a higher
rate of interest than governmental pools because there are no
direct or indirect governmental guarantees of payments in the
former pools. However, timely payment of interest and principal
of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool, and hazard
insurance. The insurance and guarantees are issued by government
entities, private insurers, and the mortgage poolers.
The Funds' investments in pass-through securities may
include multi-class pass-through securities, which are interests
in a trust composed of mortgage loans or other mortgage-backed
securities. Payments of principal and interest on underlying
collateral provide the funds to make scheduled distributions on
the multi-class pass-through security.
Advisers expects that governmental or private entities may
create mortgage loan pools offering pass-through investments in
addition to those described above. As new types of pass-through
securities are developed and offered to investors, Advisers may,
consistent with the Funds' investment objectives, policies, and
restrictions, consider making investments in such new types of
securities.
Other types of mortgage-related securities include debt
securities which are secured, directly or indirectly, by
mortgages on commercial real estate or residential rental
properties, or by first liens on residential manufactured homes
(as defined in section 603(6) of the National Manufactured
Housing Construction and Safety Standards Act of 1974), whether
such manufactured homes are considered real or personal property
under the laws of the states in which they are located.
Securities in this investment category include, among others,
standard mortgage-backed bonds and newer collateralized mortgage
obligations (CMOs).
Mortgage-backed bonds are secured by pools of mortgages,
but, unlike pass-through securities, payments to bondholders are
not determined by payments on the mortgages. The bonds consist
of a single class, with interest payable periodically and
principal payable on the stated date of maturity. CMOs have
characteristics of both pass-through securities and mortgage-
backed bonds. CMOs are secured by pools of mortgages, typically
in the form of "guaranteed" pass-through certificates such as
GNMA, FNMA, or FHLMC securities. The payments on the collateral
securities determine the payments to the bondholders, but there
is not a direct "pass-through" of payments. CMOs are structured
into multiple classes, each bearing a different date of maturity.
Monthly payments of principal received from the pool of
underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding
the longest maturity classes receive principal only after the
shorter maturity classes have been retired. Multi-class pass-
through securities, CMOs, and classes thereof (including those
discussed below) are examples of the types of financial
instruments commonly referred to as "derivatives".
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as a
"tranche," is issued at a specified coupon rate and has a stated
maturity or final distribution date. Principal prepayments on
collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes
of a CMO on a monthly, quarterly or semi-annual basis. The
principal and interest on the underlying mortgages may be
allocated among the several classes of a series of a CMO in many
ways. In a common structure, payments of principal, including
any principal prepayments, on the underlying mortgages are
applied according to scheduled cash flow priorities to classes of
the series of a CMO.
There are many classes of CMOs in which Asset Allocation
Portfolio and Growth & Income Fund may invest. There are
interest-only classes ("IOs"), which entitle the holder to
receive distributions consisting solely or primarily of all or a
portion of the interest in an underlying pool of mortgage loans
or mortgage-backed securities, ("Mortgage Assets"). There are
also principal-only classes ("POs"), which entitle the holder to
receive distributions consisting solely or primarily of all or a
portion of the principal of the underlying pool of Mortgage
Assets. In addition, there are "inverse floaters", which have a
coupon rate that moves in the reverse direction to an applicable
index, and accrual (or "Z") bonds, which are described below.
As to IOs, POs, inverse floaters, and accrual bonds, not
more than 7.5% of Asset Allocation Portfolio's or Growth & Income
Fund's net assets will be invested in any one of these items at
any one time, and no more than 15% of the net assets of either
Fund will be invested in all such obligations at any one time.
Inverse floating CMOs are typically more volatile than fixed
or adjustable rate tranches of CMOs. Investments in inverse
floating CMOs would be purchased by a Fund to attempt to protect
against a reduction in the income earned on the Fund's
investments due to a decline in interest rates. The Fund would
be adversely affected by the purchase of such CMOs in the event
of an increase in interest rates since the coupon rate thereon
will decrease as interest rates increase, and, like other
mortgage-backed securities, the value will decrease as interest
rates increase.
The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including
prepayments) on the related Mortgage Assets. For example, a
rapid or slow rate of principal payments may have a material
adverse effect on the yield to maturity of IOs or POs,
respectively. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the holder of
an IO may incur substantial losses, even if the IO class is rated
AAA. Conversely, if the underlying Mortgage Assets experience
slower than anticipated prepayments of principal, the yield and
market value for the holder of a PO will be affected more
severely than would be the case with a traditional Mortgage
Backed Security. However, if interest rates were expected to
rise, the value of an IO might increase and may partially offset
other bond value declines, and if rates were expected to fall,
the inclusion of POs could balance lower reinvestment rates.
An accrual or "Z" bond holder is not entitled to receive
cash payments until one or more other classes of the CMO have
been paid in full from payments on the mortgage loans underlying
the CMO. During the period in which cash payments are not being
made on the Z tranche, interest accrues on the Z tranche at a
stated rate, and this accrued interest is added to the amount of
principal which is due to the holder of the Z tranche. After the
other classes have been paid in full, cash payments are made on
the Z tranche until its principal (including previously accrued
interest which was added to principal, as described above) and
accrued interest at the stated rate have been paid in full.
Generally, the date upon which cash payments begin to be made on
a Z tranche depends on the rate at which the mortgage loans
underlying the CMO are prepaid, with a faster prepayment rate
resulting in an earlier commencement of cash payments on the Z
tranche. Like a zero coupon bond, during its accrual period the
Z tranche of a CMO has the advantage of eliminating the risk of
reinvesting interest payments at lower rates during a period of
declining market interest rates. At the same time, however, and
also like a zero coupon bond, the market value of a Z tranche can
be expected to fluctuate more widely with changes in market
interest rates than would the market value of a tranche which
pays interest currently. Changes in market interest rates also
can be expected to influence prepayment rates on the mortgage
loans underlying the CMO of which a Z tranche is a part. As
noted above, such changes in prepayment rates will affect the
date at which cash payments begin to be made on a Z tranche, and
therefore also will influence its market value.
Investments in mortgage-related securities involve certain
risks. In periods of declining interest rates, prices of fixed
income securities tend to rise. However, during such periods,
the rate of prepayment of mortgages underlying mortgage-related
securities tends to increase, with the result that such
prepayments must be reinvested by the issuer at lower rates. In
addition, the value of such securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers
of mortgage-related securities owned by the Funds. Because
investments in mortgage-related securities are interest
sensitive, the ability of the issuer to reinvest favorably in
underlying mortgages may be limited by government regulation or
tax policy. For example, action by the Board of Governors of the
Federal Reserve System to limit the growth of the nation's money
supply may cause interest rates to rise and thereby reduce the
volume of new residential mortgages. Additionally, although
mortgages and mortgage-related securities are generally supported
by some form of government or private guarantees and/or
insurance, there is no assurance that private guarantors or
insurers will be able to meet their obligations.
Zero Coupon Obligations
Asset Allocation Portfolio may invest in zero coupon
obligations of the U.S. Government, U.S. Government agencies, and
corporate issuers, including rights to "stripped" coupon and
principal payments. Certain U.S. Government obligations
(principally, Treasury notes and Treasury bonds) and corporate
obligations are "stripped" of their coupons, and the rights to
receive each coupon payment and the principal payment are sold as
separate securities. Once separated, each coupon as well as the
principal amount represents a different single-payment claim due
from the issuer of the security. Each single-payment claim
(coupon or principal) is equivalent to a zero coupon bond. A
zero coupon security pays no interest to its holder during its
life, and its value consists of the difference between its face
value at maturity (the coupon or principal amount), if held to
maturity, or its market price on the date of sale, if sold prior
to maturity, and its acquisition price (the discounted "present
value" of the payment to be received).
Certain zero coupon obligations represent direct obligations
of the issuer of the "stripped" coupon and principal payments.
Other zero coupon obligations are securities issued by financial
institutions which constitute a proportionate ownership of an
underlying pool of stripped coupon or principal payments. Asset
Allocation Portfolio may invest in either type of zero coupon
obligation. The investment policies and restrictions applicable
to corporate and government securities in the Fund shall apply to
the Fund's investments in zero coupon securities (including, for
example, minimum corporate bond ratings and percentage
limitations).
Municipal Securities
Asset Allocation Portfolio may invest up to 20% of its total
assets in municipal securities such as municipal bonds and other
debt obligations. These municipal bonds and debt obligations are
issued by the states and by their local special-purpose political
subdivisions. The term "municipal bonds" includes short-term
municipal notes and other commercial paper issued by the states
and their political subdivisions. The two general
classifications of municipal bonds are "general obligation" bonds
and "revenue" bonds. General obligation bonds are secured by the
governmental issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. Revenue bonds
ordinarily are not backed by the faith, credit or general taxing
power of the issuing governmental entity. The principal and
interest on revenue bonds for private facilities are typically
paid out of rents or other specified payments made to the issuing
governmental entity by a private company that uses or operates
the facilities.
HighYield/High Risk Securities
Asset Allocation Portfolio may invest up to 30% of its total
assets in lower rated, high-yielding corporate bonds commonly
known as "junk bonds." The Fund may also invest up to 10% of its
total assets in corporate bonds that are rated in one of the four
highest rating categories (such as BBB or above), and at the same
time are rated below such categories by another nationally
recognized agency (or in the alternative, any such bonds may be
included with those subject to the 30% limitation on lower rated
bonds). The Fund may retain a security whose rating has changed
if the security otherwise meets the Fund's criteria. The Fund
will not invest in bonds rated below Caa by Moody's or CCC by
S&P, or comparably rated by another nationally recognized rating
agency. Securities in the Caa/CCC rating categories are
considered to be of poor standing and are predominantly
speculative. Lower ratings may reflect a greater possibility
that the financial condition of the issuer, or adverse changes in
general economic conditions, or both, may impair the ability of
the issuer to make payments of interest and principal.
Additionally, investments in securities rated Caa or CCC involve
significant risk exposure to adverse conditions. Such securities
may be in default, or there may be present elements of danger
with respect to the payment of principal or interest. For a
description of ratings assigned by both Moody's and S&P, see the
Appendix.
Participation in high-yielding securities transactions
generally involves greater returns in the form of higher average
yields. However, participation in such transactions involves
greater risks, often related to sensitivity to interest rates,
economic changes, solvency, and relative liquidity in the
secondary trading market. Yields on high yield securities will
fluctuate over time. The prices of high-yielding securities have
been found to be less sensitive to interest rate changes than
higher-rated investments, but more sensitive to adverse economic
changes or individual corporate developments.
During an economic downturn or substantial period of rising
interest rates highly leveraged issuers may experience financial
stress which would adversely affect their ability to serve their
principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. If the
issuer of a security held by Asset Allocation Portfolio
defaulted, the Fund might incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of
market prices of high-yielding securities and the Fund's assets.
Furthermore, in the case of high-yielding securities structured
as zero coupon or debentures the interest on which may be paid in
other securities rather than cash ("PIKs"), their market prices
are affected to a greater extent by interest rate changes and
thereby tend to be more volatile than securities which pay
interest periodically and in cash.
High-yielding securities present risks based on payment
expectations. For example, high-yielding securities may contain
redemption or call provisions. If an issuer exercises these
provisions in a declining interest rate market, Asset Allocation
Portfolio would have to replace the security with a lower-
yielding security, resulting in a decreased return for investors.
Conversely, a high-yielding security's value will decrease in a
rising interest rate market, as will the value of such Fund's
assets. If the Fund experiences unexpected net redemptions, this
may force it to sell its high-yielding securities, without regard
to their investment merits, thereby decreasing the asset base
upon which the Fund's expenses can be spread and possibly
reducing the rate of return.
To the extent that there is no established secondary market,
there may be thin trading of high-yielding securities. This may
adversely affect the ability of the Fund's Board of Directors to
accurately value high-yielding securities and the Fund's assets
and the Fund's ability to dispose of the securities. Securities
valuation becomes more difficult and judgment plays a greater
role in valuation because there is less reliable, objective data
available. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and
liquidity of high-yielding securities, especially in a thinly
traded market. Illiquid or restricted high-yielding securities
purchased by Asset Allocation Portfolio may involve special
registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Certain risks are associated with applying credit ratings as
a method of evaluating high-yielding securities. For example,
credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high-yielding securities.
Since credit rating agencies may fail to timely change the credit
ratings to reflect subsequent events, Advisers continuously
monitors the issuers of high-yielding securities held by Asset
Allocation Portfolio to determine if the issuers will have
sufficient cash flow and profits to meet required principal and
interest payments, and to assure the securities' liquidity so the
Fund can meet redemption requests. Achieving the Fund's
investment objective may be more dependent upon Advisers' own
credit analysis than is the case for higher quality bonds. Also,
the Fund may retain a portfolio security whose rating has been
changed if the security otherwise meets the Fund's investment
objective and investment criteria.
Repurchase Agreements
Each Fund may invest in repurchase agreements. A repurchase
agreement is a short-term instrument under which securities are
purchased from a bank or securities dealer with an agreement by
the seller to repurchase the securities at a mutually agreed upon
date, interest rate, and price. Generally, repurchase agreements
are of short duration, usually less than a week, but on occasion
for longer periods of time.
In investing in repurchase agreements, a Fund's risk is
limited to the ability of such bank or securities dealer to pay
the agreed upon amount at the maturity of the repurchase
agreement. In the opinion of management, such risk is not
material; if the other party defaults, the underlying security
constitutes collateral for the obligation to pay--although the
Fund may incur certain delays in obtaining direct ownership of
the collateral, plus costs in liquidating the collateral. In the
event a bank or securities dealer defaults on the repurchase
agreement, management believes that, barring extraordinary
circumstances, the Fund will be entitled to sell the underlying
securities or otherwise receive adequate protection (as defined
in the federal Bankruptcy Code) for its interest in such
securities. To the extent that proceeds from any sale upon a
default were less than the repurchase price, however, the Fund
could suffer a loss. If the Fund owns underlying securities
following a default on the repurchase agreement, the Fund will be
subject to risk associated with changes in the market value of
such securities. The Fund's custodian will hold the securities
underlying any repurchase agreement or such securities may be
part of the Federal Reserve Book Entry System. The market value
of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value
of the collateral falls below the repurchase price of the
repurchase agreement (including any accrued interest), the Fund
will promptly receive additional collateral (so the total
collateral is in an amount at least equal to the repurchase price
plus accrued interest).
Variable Amount Master Demand Notes
Each Fund may invest in variable amount master demand notes.
Variable amount master demand notes are short-term, unsecured
promissory notes issued by corporations to finance short-term
credit needs. They allow the investment of fluctuating amounts
by a Fund at varying market rates of interest pursuant to
arrangements between the Fund and a financial institution that
has lent money to a borrower. Variable amount master demand
notes permit a series of short-term borrowings under a single
note. Both the lender and the borrower have the right to reduce
the amount of outstanding indebtedness at any time.
Such notes provide that the interest rate on the amount
outstanding varies on a daily basis depending upon a stated short-
term interest rate barometer. Advisers will monitor the
creditworthiness of the borrower throughout the term of the
variable master demand note. It is not generally contemplated
that such instruments will be traded and there is no secondary
market for the notes. Typically, agreements relating to such
notes provide that the lender shall not sell or otherwise
transfer the note without the borrower's consent. Thus, variable
amount master demand notes may under certain circumstances be
deemed illiquid assets. However, such notes will not be
considered illiquid where the Fund has a same day withdrawal
option, i.e., where it has the unconditional right to demand and
receive payment in full of the principal amount then outstanding
together with interest to the date of payment.
Illiquid Securities
Each Fund may invest in illiquid securities, including
"restricted" securities. A restricted security is one which was
originally sold in a private placement and was not registered
with the Commission under the Securities Act of 1933 (the "1933
Act") and which is not free to be resold unless it is registered
with the Commission or its sale is exempt from registration. For
this purpose illiquid securities include, among others, (i)
securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on
resale, (ii) options purchased over-the-counter and the cover for
options written over-the-counter, and (iii) repurchase agreements
not terminable within seven days. Each Fund has a nonfundamental
investment restriction that it will invest no more than 15% of
the value of its net assets in illiquid securities, as determined
pursuant to applicable Commission rules and interpretations. In
addition, Growth Fund has a fundamental investment restriction
that it will not invest more than 5% of its net assets in each of
i) restricted securities and ii) bonds, debentures or other debt
securities which are not publicly distributed.
The staff of the Securities and Exchange Commission has
taken the position that the liquidity of securities in the
portfolio of a fund offering redeemable securities is a question
of fact for a board of directors of such a fund to determine,
based upon a consideration by such board of the readily available
trading markets and a review of any contractual restrictions.
The SEC staff also acknowledges that, while such a board retains
ultimate responsibility, it may delegate this function to the
fund's investment adviser.
The Funds' Boards of Directors have adopted procedures to
determine the liquidity of certain securities, including
commercial paper issued pursuant to the private placement
exemption of Section 4(2) of the 1933 Act and securities that are
eligible for resale to qualified institutional buyers pursuant to
Rule 144A under the 1933 Act. Under these procedures, factors
taken into account in determining the liquidity of a security
include (a) the frequency of trades and quotes for the security,
(b) the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, (c) dealer
undertakings to make a market in the security, and (d) the nature
of the security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Section 4(2)
commercial paper or a Rule 144A security that when purchased
enjoyed a fair degree of marketability may subsequently become
illiquid, thereby adversely affecting the liquidity of the
applicable Fund.
Illiquid securities may offer a higher yield than securities
that are more readily marketable. The sale of illiquid
securities, however, often requires more time and results in
higher brokerage charges or dealer discounts or other selling
expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets.
A Fund may also be restricted in its ability to sell such
securities at a time when it is advisable to do so. Illiquid
securities often sell at a price lower than similar securities
that are not subject to restrictions on resale.
Foreign Securities
Each Fund may invest up to 10% of total assets (except that
Asset Allocation Portfolio may invest up to 20% of total assets)
in securities of foreign governments and companies. No more than
15% of Asset Allocation Portfolio's total assets may be invested
in foreign securities that are not traded on national foreign
securities exchanges or traded in the United States. Domestic
branches of foreign banks and foreign branches of domestic banks
are deemed by Advisers to be domestic, not foreign, companies.
Investing in foreign securities may result in greater risk than
that incurred by investing in domestic securities. The
obligations of foreign issuers may be affected by political or
economic instabilities. Financial information published by
foreign companies may be less reliable or complete than
information disclosed by domestic companies pursuant to U.S.
Government securities laws, and may not have been prepared in
accordance with generally accepted accounting principles.
Fluctuations in exchange rates may affect the value of foreign
securities not denominated in United States currency.
Investing in foreign companies involves certain
considerations, including those discussed below, which are not
typically associated with investing in U.S. issuers. Since the
Funds may invest in securities denominated in currencies other
than U.S. dollars, and since they may temporarily hold funds in
bank deposits or other money market investments denominated in
foreign currencies, they may be affected favorably or unfavorably
by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. A change in the value of
a foreign currency relative to the U.S. dollar will result in a
corresponding change in the dollar value of the Fund's assets
denominated in that foreign currency. Changes in foreign
currency exchange rates may also affect the value of dividends
and interest earned, gains and losses realized in the sale of
securities, and net investment income and gains, if any, to be
distributed to shareholders by the Funds. The rate of exchange
between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets.
These forces are affected by the international balances of
payments and other economic and financial conditions, government
intervention, speculation, and other factors.
Foreign securities held by the Funds may not be registered
with, nor the issuers thereof subject to, reporting requirements
of the U.S. Securities and Exchange Commission. Accordingly,
there may be less publicly available information about the
securities and about the foreign company or government issuing
them than is available about a domestic company or government
entity. Foreign companies are generally not subject to uniform
financial reporting standards, practices, and requirements
comparable to those applicable to domestic companies. In
addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation,
limitations of the removal of funds or other assets of the Funds,
political or social instability, or domestic developments which
could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of
Gross National Product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payment positions.
Securities of some foreign companies are less liquid and
their prices are more volatile than securities of comparable
domestic companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of
securities purchased or sold. Due to the increased exposure to
the Funds of market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative
impact on liquidity, the Funds will avoid investing in countries
which are known to experience settlement delays which may expose
the Funds to unreasonable risk of loss.
The Funds will calculate their net asset values to complete
orders to purchase, exchange, or redeem shares only on a Monday
through Friday basis (excluding holidays on which the New York
Stock Exchange is closed). A portion of a Fund's investment
securities may be listed on foreign stock exchanges that may
trade on other days (such as a Saturday). As a result, the
Fund's net asset values may be affected by trading on days when a
shareholder has no access to the Funds.
Delayed Delivery Transactions
Each Fund, except Growth Fund, may purchase securities on a
"when issued" or delayed delivery basis and purchase or sell
securities on a "forward commitment" basis. When such
transactions are negotiated, the price is fixed at the time the
commitment is made, but delivery and payment for the securities
take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements
beyond two months may be negotiated. As to each such Fund, no
more than 20% of its net assets may be invested in when-issued,
delayed delivery or forward commitment transactions, and of such
20%, no more than 10% of net assets may be invested in such
transactions without the intention of actually acquiring
securities, i.e., dollar rolls. At the time a Fund enters into a
transaction on a when-issued or forward commitment basis, a
segregated account consisting of cash, U.S. Government securities
or any security that is not considered restricted or illiquid at
least equal to the value of the when-issued or forward commitment
securities will be established and maintained with the custodian
and will be marked to the market daily. During the period
between a commitment and settlement, no payment is made for the
securities purchased by the purchaser and, thus, no interest
accrues to the purchaser from the transaction. If the Fund
disposes of the right to acquire a when-issued security prior to
its acquisition or disposes of its right to deliver or receive
against a forward commitment, it can incur a gain or loss due to
market fluctuation.
The use of when-issued transactions and forward commitments
enables the Funds to hedge against anticipated changes in
interest rates and prices. The Funds may also enter into such
transactions to generate incremental income. In some instances,
the third-party seller of when-issued or forward commitment
securities may determine prior to the settlement date that it
will be unable or unwilling to meet its existing transaction
commitments without borrowing securities. If advantageous from a
yield perspective, a Fund may, in that event, agree to resell its
purchase commitment to the third-party seller at the current
market price on the date of sale and concurrently enter into
another purchase commitment for such securities at a later date.
As an inducement for the Fund to "roll over" its purchase
commitment, the Fund may receive a negotiated fee.
The purchase of securities on a when-issued, delayed
delivery, or forward commitment basis exposes the Funds to risk
because the securities may decrease in value prior to their
delivery. Purchasing securities on a when-issued, delayed
delivery, or forward commitment basis involves the additional
risk that the return available in the market when the delivery
takes place will be higher than that obtained in the transaction
itself. These risks could result in increased volatility of a
Fund's net asset value to the extent that the Fund purchases
securities on a when-issued, delayed delivery, or forward
commitment basis while remaining substantially fully invested.
There is also a risk that the securities may not be delivered or
that a Fund may incur a loss or will have lost the opportunity to
invest the amount set aside for such transaction in the
segregated asset account.
Dollar Rolls
In connection with their ability to purchase securities on a
when-issued or forward commitment basis, each Fund, except Growth
Fund, may enter into "dollar rolls" in which the Fund sells
securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a
specified future date. The Fund gives up the right to receive
principal and interest paid on the securities sold. However, the
Fund would benefit to the extent of any difference between the
price received for the securities sold and the lower forward
price for the future purchase plus any fee income received.
Unless such benefits exceed the income and capital appreciation
that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such
performance would have been without the use of dollar rolls.
Each Fund will hold and maintain in a segregated account until
the settlement date cash, government securities or liquid high-
grade debt securities in an amount equal to the value of the when-
issued or forward commitment securities. The benefits derived
from the use of dollar rolls may depend, among other things, upon
Advisers ability to predict interest rates correctly. There is
no assurance that dollar rolls can be successfully employed. In
addition, the use of dollar rolls by a Fund while remaining
substantially fully invested increases the amount of the Fund's
assets that are subject to market risk to an amount that is
greater than the Fund's net asset value, which could result in
increased volatility of the price of the Fund's shares.
Real Estate or Real Estate Investment Trusts
Each Fund, except Growth Fund, is authorized to invest in
real estate investment trusts ("REITs"), real estate development
and real estate operating companies and other real estate related
businesses. The Funds presently intend that any REIT investments
will be primarily in equity REITs, which are trusts that sell
shares to investors and use the proceeds to invest in real estate
or interests in real estate. A REIT may focus on particular
projects, such as apartment complexes or shopping centers, or
geographic regions, such as the Southeastern United States, or
both. Debt REITs invest in obligations secured by mortgages on
real property or interests in real property.
The Funds' investments in real estate securities may be
subject to certain of the same risks associated with the direct
ownership of real estate. These risks include: declines in the
value of real estate; risks related to general and local economic
conditions, overbuilding and competition; increases in property
taxes and operating expenses; and variations in rental income. In
addition, REITs may not be diversified. REITs are subject to the
possibility of failing to qualify for tax-free pass-through of
income under the Internal Revenue Code and failing to maintain
exemption from the 1940 Act. Also, REITs may be dependent upon
management skill and may be subject to the risks of obtaining
adequate financing for projects on favorable terms.
Lending of Portfolio Securities
Consistent with applicable regulatory requirements, each
Fund, except Growth Fund, may lend its portfolio securities
(principally to broker-dealers) where such loans are callable at
any time and are continuously secured by collateral securities
equal to no less than the market value, determined daily, of the
securities loaned. A Fund will receive amounts equal to
dividends or interest on the securities loaned. A Fund will also
earn income for having made the loan. Any cash collateral
pursuant to these loans will be invested in government
securities, certificates of deposit or other high-grade, short-
term obligations or interest-bearing cash equivalents. Each Fund
will limit such lending to not more than 33 1/3% of the value of
its total assets (including the amount lent as well as the
collateral securing such loans). Where voting or consent rights
with respect to loaned securities pass to the borrower,
management will follow the policy of calling the loan, in whole
or in part as may be appropriate, to permit the exercise of such
voting or consent rights if the issues involved have a material
effect on the Fund's investment in the securities loaned.
The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by Advisers to be of good standing and will not be made
unless, in the judgment of Advisers, the consideration to be
earned from such loans would justify the risk.
Options
Generally. To reduce fluctuations in net asset value or to
increase current income, each Fund may:
* sell (write) covered call and secured put options; and
* purchase call and put options
on securities that are traded on United States and foreign
securities exchanges and in the over-the-counter markets. The
Funds may write and buy options on the same types of securities
that the Funds may purchase directly.
As a nonfundamental investment policy, each Fund will limit
its investments in options so that:
* the amount of premiums paid for all options, initial
margin deposits on all futures contracts and/or options on
futures contracts, and collateral deposited with respect to
forward contracts held by or entered into by the Fund will not
exceed 5% of the value of the total assets of the Fund; and
* the Fund's assets covering, subject to, or committed to
all options, futures, and forward contracts will not exceed
20% of the value of the total assets of the Fund.
Additional information about options is contained in Appendix A.
Use of Options. Put and call options may be used for a
variety of purposes:
* To Hedge. Options can be used to hedge against loss. For
example, if a portfolio manager wishes to hedge a security
that the manager owns against a decline in price, the manager
may purchase a put option on the underlying security, i.e.,
purchase the right to sell the security to a third party at a
stated price. If the underlying security then declines in
price, the manager can exercise the put option, thus limiting
the amount of the manager's loss resulting from the decline in
price. Similarly, if the manager intends to purchase a
security at some date in the future, the manager may purchase
a call option on the security today in order to hedge against
an increase in its price before the intended purchase date.
The premium paid for a put or call option plus any transaction
costs will reduce the benefit, if any, realized by a Fund upon
exercise or liquidation of the option, and, unless the price
of the underlying security changes sufficiently, the option
may expire without value to the Fund.
* To Speculate. Options also can be used for speculative
purposes. For example, if a portfolio manager believes that
the price of stocks generally is going to rise, the manager
may purchase a call option on a stock index, the components of
which are unrelated to the stocks the manager holds in a Fund
or intends to purchase. If the stock index appreciates
sufficiently, the Fund will realize a gain. If the stock
index falls, the Fund will lose the premium paid for the
option plus related transaction costs.
* To Produce Gain. Finally, a portfolio manager may write
covered call options or secured put options to realize
additional gain. If the options expire unexercised, the
manager produces a gain by the amount of the price (premium)
received for selling the option minus related transaction
costs.
Writing Call Options. When a Fund sells (writes) a call
option, it gives a third party the right to purchase a security
from the Fund at the exercise price for a stated period or on a
stated date. A call option written by a Fund is "covered" if the
Fund:
* owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash
consideration segregated from assets available for investment)
upon conversion or exchange of other securities held in its
portfolio; or
* holds a call on the same security having the same
principal amount as the call written and the exercise price of
the call held (i) is equal to or less than the exercise price
of the call written or (ii) is greater than the exercise price
of the call written if the difference is maintained by the
Fund in cash and other liquid assets segregated from assets
available for investment.
By writing covered call options, a Fund might lose the potential
for gain on the underlying security if the option is exercised.
However, Advisers believes that this technique is a relatively
low-risk way to enhance a Fund's return. The Funds will not
write "uncovered" call options.
Writing Put Options. When a Fund sells (writes) a put
option, it gives a third party the right to sell a security to
the Fund at the exercise price for a stated period or on a stated
date. A put option written by a Fund is "secured" if the Fund:
* segregates cash not available for investment or other
liquid assets with a value equal to the exercise price of the
put; or
* holds a put on the same security having the same principal
amount as the put written and the exercise price of the put
held is (a) equal to or greater than the exercise price of the
put written or (b) less than the exercise price of the put
written if the difference is maintained by the Fund in cash
and other liquid assets segregated from assets available for
investment.
By writing a put option, a Fund might become obligated to
purchase the underlying security for more than its current market
price upon exercise of the option. The Funds will not write
"unsecured" put options.
Buying Call Options. As a holder of a call option, a Fund
has the option to buy the underlying security from the option
writer at the exercise price at any time during the option period
or on a stated date. If a Fund buys a call option, any loss will
be limited to the premium paid for the call option and related
transaction costs. A Fund may exercise the call option, permit
it to expire, or sell it. By selling the call option, the Fund
eliminates its position.
A Fund may buy call options on securities that it intends to
purchase to limit the risk of a substantial increase in the
market price of the security. A Fund may also buy call options
on securities held in its portfolio and on which it has written
call options. Prior to its expiration, a call option may be sold
which eliminates the Fund's position. Profit or loss from such a
sale will depend on whether the amount received is more or less
than the premium paid for the call option plus the related
transaction costs.
Buying Put Options. As the holder of a put option, a Fund
has the option to sell the underlying security at the exercise
price at any time during the option period or on a stated date.
If a Fund buys a put option, any loss will be limited to the
premium paid for the put option and related transaction costs. A
Fund may exercise the put option, permit it to expire, or sell
it. By selling the put option, the Fund eliminates its position.
A Fund may buy a put option on an underlying security owned
by the Fund (a "protective put") as a hedging technique to
protect against an anticipated decline in the value of the
security. This hedge protection is provided only during the life
of the put option when the Fund, as the holder of the put option,
is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's
market price. For example, a put option may be purchased in order
to protect unrealized appreciation of a security when the manager
deems it desirable to continue to hold the security due to tax
considerations. The premium paid for the put option and related
transaction costs would reduce any gain realized when the
underlying security is eventually sold.
A Fund may also buy put options at a time when the Fund does
not own the underlying security. By buying put options on a
security it does not own, the Fund seeks to benefit from a
decline in the market price of the underlying security. If the
put option is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or
greater than the exercise price during the life of the put
option, the Fund will lose some or all of the premium it paid to
purchase the put option. For the purchase of a put option to be
profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the
premium and transaction costs.
Options on stock indices. Each Fund may:
* sell (write) covered call options and secured put options
on stock indices; and
* purchase call and put options on stock indices.
In contrast to an option on a security, an option on a stock
index provides the holder with the option to receive a cash
settlement upon exercise of the option, rather than the right to
purchase or sell a security. The amount of the cash settlement
is generally equal to:
* the difference between the closing price of the index and
the exercise price of the option, multiplied by
* a fixed "index multiplier".
Thus, unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market
generally (or in a particular industry or segment of the market)
rather than price movements in an individual stock.
Covered Call Options on Market Indices. A call option written
on a stock index is "covered" if the Fund:
* holds a diversified portfolio of securities similar to
those on which the underlying index is based. However, a Fund
cannot, as a practical matter, acquire and hold a portfolio
containing exactly the same securities that underlie the index
and, as a result, bears a risk that the value of the
securities held will not be perfectly correlated with the
value of the index; or
* holds a call on the same index and in the same
principal amount as the call written where the exercise price
of the call held is (a) equal to or less than the exercise
price of the call written or (b) greater than the exercise
price of the call written if the difference is maintained by
the Fund in cash and other liquid assets segregated from
assets available for investment.
The Funds will not write "uncovered" call options on market
indices.
Secured Put Options on Market Indices. A Fund may also
"secure" put options on stock indices by:
* holding a put on the same index and in the same principal
amount as the put written where the exercise price of the put
held is (a) equal to or greater than the exercise price of the
put written or (b) less than the exercise price of the put
written if the difference is maintained by the Fund in cash
and other liquid assets segregated from assets available for
investment; or
* segregates cash or other liquid assets in an amount equal
to the exercise price of the option from assets available for
investment.
The Funds will not write "unsecured" put options on market
indices.
Futures Contracts and Options on Futures Contracts
Futures contracts. Each Fund, except Growth Fund, may enter
into stock index futures contracts for hedging purposes. Each
Fund, except Capital Appreciation Portfolio and Growth Fund, may
enter into interest rate futures contracts for hedging purposes.
Asset Allocation Portfolio, Capital Appreciation Portfolio and
Growth & Income Fund may also enter into foreign currency futures
contracts. Interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts are collectively
referred to as "Futures Contracts."
Purchases or sales of stock index futures contracts are used
to attempt to protect a Fund's current or intended stock
investments from broad fluctuations in stock prices, and interest
rate and foreign currency futures contracts are purchased or sold
to attempt to hedge against the effects of interest or exchange
rate changes on a Fund's current or intended investments in fixed
income or foreign securities. In the event that an anticipated
decrease in the value of portfolio securities occurs as a result
of a general stock market decline, a general increase in interest
rates, or a decline in the dollar value of foreign currencies in
which portfolio securities are denominated, the adverse effects
of such changes may be offset, in whole or in part, by gains on
the sale of Futures Contracts. Conversely, the increased cost of
portfolio securities to be acquired, caused by a general rise in
the stock market, a general decline in interest rates, or a rise
in the dollar value of foreign currencies, may be offset, in
whole or in part, by gains on Futures Contracts purchased by a
Fund. A Fund will incur brokerage fees when it purchases and
sells Futures Contracts, and it will be required to make and
maintain margin deposits.
Options on futures contracts. Each Fund, except Capital
Appreciation Portfolio and Growth Fund, may purchase and write
options on interest rate futures contracts for hedging purposes.
Each Fund, except Growth Fund, may purchase and write options on
stock index futures contracts and may purchase and write options
on foreign currency futures contracts for hedging purposes.
Options on interest rate futures contracts, options on stock
index futures contracts, and options on foreign currency futures
contracts are collectively referred to as "Options on Futures
Contracts."
Put and call options on Futures Contracts may be traded by
the Funds in order to protect against declines in the values of
portfolio securities or against increases in the cost of
securities to be acquired. Purchases of Options on Futures
Contracts may present less risk in hedging the portfolios of the
Funds than the purchase or sale of the underlying Futures
Contracts since the potential loss is limited to the amount of
the premium plus related transaction costs. The writing of such
options, however, does not present less risk than the trading of
futures contracts and will constitute only a partial hedge, up to
the amount of the premium received, and, if an option is
exercised, a Fund may suffer a loss on the transaction.
Forward Foreign Currency Exchange Contracts
Each Fund, except Growth Fund, may enter into contracts for
the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Currency Contract") for
hedging purposes only. These transactions will include forward
purchases or sales of foreign currencies for the purpose of
protecting the dollar value of securities denominated in a
foreign currency or protecting the dollar equivalent of interest
or dividends to be paid on such securities. By entering into
such transactions, however, a Fund may be required to forego the
benefits of advantageous changes in exchange rates. Currency
Contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts
operate in a manner distinct from exchange-traded instruments,
and their use involves certain risks beyond those associated with
transactions in the futures and option contracts described above.
Options on foreign currencies. Each Fund, except Growth
Fund, may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the
dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be
acquired. As in the case of other types of options, the writing
of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a Fund could
be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates, although,
in the event of rate movements adverse to a Fund's position, it
may forfeit the entire amount of the premium plus related
transaction costs. As in the case of Currency Contracts, certain
options on foreign currencies are traded over-the-counter and
involve risks that may not be present in the case of exchange-
traded instruments.
Additional Risks of Options, Futures and Currency Contracts
Options and futures involve certain risks and transaction
costs. For example, a lack of correlation between the index or
instrument underlying an option or futures contract and the
assets being hedged, or unexpected adverse price movements, could
render a Fund's hedging strategy unsuccessful and could result in
losses. A Fund also may enter into transactions in options on
securities and indexes of securities for other than hedging
purposes, which involves greater risk. There can be no assurance
that a liquid secondary market will exist for any contract
purchased or sold, and a Fund may be required to maintain a
position until exercise or expiration, which could result in
losses. Other risks include dependence on Advisers' ability to
predict movements in the prices of individual securities,
fluctuations in the general securities markets, and movements in
interest rates; imperfect correlation between movements in the
price of options, futures contracts, or options thereon and
movements in the price of the security hedged or used for cover;
the fact that skills and techniques needed to trade options,
futures contracts and options thereon are different from those
needed to select the securities in which the Fund invests; lack
of assurance that a liquid secondary market will exist for any
particular option, futures contract or option thereon at any
particular time; and the possible need to defer closing out
certain options, futures contracts, and options thereon in order
to continue to qualify for the beneficial tax treatment afforded
regulated investment companies.
Transactions in options, futures and currency contracts may
be entered into on U. S. exchanges regulated by the SEC or the
Commodity Futures Trading Commission (the "CFTC"), as well as in
the over-the-counter market and on foreign exchanges. In
addition, the securities underlying options and futures contracts
traded by the Funds may include domestic as well as foreign
securities. Investors should recognize that transactions
involving foreign securities or foreign currencies, and
transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing
in U.S. markets.
Regulatory Restrictions
To the extent required to comply with Securities and
Exchange Commission Release No. 10666, when purchasing a futures
contract, writing a put option, or entering into a delayed
delivery purchase, the Funds will each maintain in a segregated
account cash or any security that is not considered restricted or
illiquid equal to the value of such contracts.
To the extent required to comply with CFTC Regulation 4.5
and thereby avoid "commodity pool operator" status, the Funds
will enter into futures contracts options thereon only (a) for
"bona fide hedging purposes" (as defined in CFTC regulations) or
(b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not
exceed 5% of the liquidation value of the Fund's portfolio. The
Funds will not engage in transactions in financial futures
contracts or options thereon for speculation, but only to attempt
to hedge against changes in market conditions affecting the
values of securities which each Fund holds or intends to
purchase. When futures contracts or options thereon are
purchased to protect against a price increase on securities
intended to be purchased later, it is anticipated that at least
75% of such intended purchases will be completed. When other
futures contracts or options thereon are purchased, the
underlying value of such contracts will at all times not exceed
the sum of: (1) accrued profit on such contracts held by the
broker; (2) cash or high quality money market instruments set
aside in an identifiable manner; and (3) cash proceeds from
investments due in 30 days.
Certificates of Deposit and Bankers' Acceptances
Each Fund may invest in certificates of deposits.
Certificates of deposit are receipts issued by a bank in exchange
for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date
specified on the certificate. The certificate usually can be
traded in the secondary market prior to maturity. Bankers'
acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time
draft drawn on a bank by an exporter or importer to obtain a
stated amount of funds to pay for specific merchandise. The
draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held
by the accepting bank as an earning asset or it may be sold in
the secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as
270 days, most acceptances have maturities of six months or less.
Short-Term Money Market Instruments
Each Fund may invest funds awaiting investment or held as
reserves, or for temporary defensive purposes, in commercial
paper, obligations of banks or the U.S. Government and other high
quality, short-term debt instruments. Short-term debt
instruments in which the Funds may invest include (i) short-term
U.S. Government securities and short-term obligations of foreign
sovereign governments and their agencies and instrumentalities,
(ii) interest bearing savings deposits on, and certificates of
deposit and bankers' acceptances of, U.S. and foreign banks,
(iii) commercial paper of U.S. or foreign issuers rated A-1 or
higher by S&P or Prime-1 by Moody's or comparably rated by
another nationally recognized rating agency, or, if not rated,
determined by Advisers to be of comparable quality and (iv)
repurchase agreements relating to the foregoing.
Payment-In-Kind Debentures
Asset Allocation Portfolio may invest in debentures the
interest on which may be paid in other securities rather than
cash ("PIKs"). Typically, during a specified term prior to the
debenture's maturity, the issuer of a PIK may provide for the
option or the obligation to make interest payments in debentures,
common stock, or other instruments (i.e., "in kind" rather than
in cash). The type of instrument in which interest may or will
be paid would be known by the Fund at the time of the investment.
While PIKs generate income for generally accepted accounting
standards purposes, they do not generate cash flow and thus could
cause the Fund to be forced to liquidate securities at an
inopportune time in order to distribute cash, as required by the
Internal Revenue Code.
Portfolio Turnover
The portfolio turnover rate for a Fund is calculated by
dividing the lesser of purchases or sales by such Fund of
investment securities for the particular fiscal year by the
monthly average value of investment securities owned by the Fund
during the same fiscal year. Investment securities for purposes
of this calculation do not include securities with a maturity
date less than twelve months from the date of investment. A 100%
portfolio turnover rate would occur, for example, if the lesser
of the value of purchases or sales of investment securities for a
particular year were equal to the average monthly value of the
investment securities owned during such year.
Each Fund, with the exception of Growth & Income Fund, had
portfolio turnover rates in excess of 100% during the fiscal year
ended August 31, 1999. Additionally, over the two most recently
completed fiscal years, the portfolio turnover rates of Capital
Fund and Growth Fund have increased by over 100% and the
portfolio turnover rate of Capital Appreciation Portfolio has
increased by over 200%. Factors contributing to the increased
portfolio turnover rates included general market volatility,
repositioning of the Funds' portfolios by new management,
attempts to maintain the Funds' market capitalization targets and
the need to sell holdings to meet redemption activity in the
Funds. While higher turnover rates (100% or more) may result in
increased capital gains and transaction costs, the Funds'
managers attempt to have the benefits of these transactions
outweigh the costs, although this cannot be assured.
Investment Restrictions
Each Fund is subject to certain investment restrictions,
which are set forth below. Any investment restriction that is
denoted as "fundamental" may be changed only by the approval of a
majority of a Fund's shareholders. In this situation, majority
means the lesser of (i) 67% of the Fund's outstanding shares
present at a meeting of the holders if more than 50% of the
outstanding shares are present in person or by proxy or (ii) more
than 50% of the Fund's outstanding shares.
Any investment policy or restriction in the Prospectus or
this Statement of Additional Information which involves a maximum
percentage of securities or assets, except those dealing with
borrowing, shall not be considered to be violated unless an
excess over the percentage occurs immediately after an
acquisition of securities or utilization of assets and such
excess results therefrom.
Asset Allocation Portfolio and Capital Appreciation Portfolio
The following investment restrictions are fundamental and
may be changed only by the approval of shareholders. Neither
Fund will:
(1) Purchase securities on margin or otherwise borrow money or
issue senior securities, except that the Funds, in accordance
with their investment objectives and policies, may purchase
securities on a when-issued and delayed delivery basis, within
the limitations set forth in the Prospectus and Statement of
Additional Information. Fortis Advantage may also obtain such
short-term credit as it needs for the clearance of securities
transactions, and may borrow from banks, for the account of
either Fund, as a temporary measure to facilitate redemptions
(but not for leveraging or investment) an amount that does not
exceed 10% of the value of a Fund's total assets. No additional
investment securities may be purchased by a Fund while
outstanding borrowings exceed 5% of the value of such Fund's
total assets.
(2) Mortgage, pledge or hypothecate its assets, except in an
amount not exceeding 10% of the value of its total assets to
secure temporary or emergency borrowing.
(3) Invest in commodities or commodity contracts, other than for
hedging purposes only.
(4) Act as an underwriter of securities of other issuers, except
to the extent that, in connection with the disposition of
portfolio securities, Fortis Advantage may be deemed an
underwriter under applicable laws.
(5) Participate on a joint or a joint and several basis in any
securities trading account.
(6) Invest in real estate, except a Fund may invest in
securities issued by companies owning real estate or interests
therein.
(7) Make loans to other persons. Repurchase agreements, the
lending of securities and the acquiring of debt securities in
accordance with the Prospectus and Statement of Additional
Information are not considered to be "loans" for this purpose.
(8) Concentrate its investments in any particular industry,
except that (i) it may invest up to 25% of the value of its total
assets in any particular industry, and (ii) there is no
limitation with respect to investments in obligations issued or
guaranteed by the U.S. Government or its agencies and
instrumentalities, or obligations of domestic commercial banks.
As to utility companies, gas, electric, water and telephone
companies will be considered as separate industries. As to
finance companies, the following categories will be considered as
separate industries: (a) captive automobile finance, such as
General Motors Acceptance Corp. and Ford Motor Credit Corp.; (b)
captive equipment finance companies, such as Honeywell Finance
Corporation and General Electric Credit Corp.; (c) captive retail
finance companies, such as Macy Credit Corp. and Sears Roebuck
Acceptance Corp.; (d) consumer loan companies, such as Beneficial
Finance Corporation and Household Finance Corporation; (e)
diversified finance companies such as CIT Financial Corp.,
Commercial Credit Corporation and Borg Warner Acceptance Corp.;
and (f) captive oil finance companies, such as Shell Credit,
Inc., Mobil Oil Credit Corp. and Texaco Financial Services, Inc.
(9) Purchase from or sell to any officer, director, or employee
of Fortis Advantage, or Advisers or Investors, or any of their
officers or directors, any securities other than shares of Fortis
Advantage's common stock.
(10) Make short sales, except for sales "against the box." While
a short sale is made by selling a security the Fund does not own,
a short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain securities
identical to those sold short at no added cost.
The following investment restrictions may be changed without
shareholder approval. Neither Fund will:
(1) Invest more than 5% of the value of its total assets in
securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
(2) Invest in a company for the purposes of exercising control
or management.
(3) Buy or sell foreign exchange, except as incidental to the
purchase or sale of permissible foreign investment.
(4) Invest more than 15% of its net assets in illiquid
securities.
(5) Invest more than 20% of its net assets in when-issued,
delayed delivery or forward commitment transactions, and of such
20%, no more than one-half (i.e., 10% of its net assets) may be
invested in when-issued, delayed delivery or forward commitment
transactions without the intention of actually acquiring
securities (i.e., dollar rolls).
Value Fund and Capital Fund
The following investment restrictions are fundamental and
may be changed only by the approval of shareholders. Neither
Fund will:
(1) Concentrate its investments, that is, invest more than 25%
of the value of its assets in any particular industry.
(2) Purchase or sell physical commodities (such as grains,
livestock, etc.) or futures or options contracts thereon;
however, it may purchase or sell any forms of financial
instruments or contracts that might be deemed commodities.
(3) Invest directly in real estate or interests in real estate;
however, the Fund may invest in interests in real estate
investment trusts, debt securities secured by real estate or
interests therein, or debt or equity securities issued by
companies which invest in real estate or interests therein.
(4) Act as an underwriter of securities of other issuers, except
to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under
applicable laws.
(5) Purchase securities on margin or otherwise borrow money,
except that the Fund, in accordance with its investment
objectives and policies, may purchase securities on a when-
issued, delayed delivery, or forward commitment basis, and may
make margin deposits in connection with dealing in commodities or
options thereon. The Fund may also obtain such short-term credit
as it needs for the clearance of securities transactions, and may
borrow from a bank as a temporary measure to facilitate
redemptions (but not for leveraging or investment) an amount that
does not exceed 10% of the value of the Fund's total assets.
Investment securities will not be purchased while outstanding
borrowings (including "roll" transactions) exceed 5% of the value
of the Fund's total assets.
(6) Issue senior securities (as defined in the 1940 Act) other
than as set forth in restriction #5 above concerning borrowing
and except to the extent that using options and futures contracts
or purchasing or selling securities on a when issued, delayed
delivery, or forward commitment basis (including the entering
into of roll transactions) may be deemed to constitute issuing a
senior security.
(7) Make loans to other persons, except that it may lend its
portfolio securities in an amount not to exceed 33 1/3% of the
value of the Fund's total assets (including the amount lent) if
such loans are secured by collateral at least equal to the market
value of the securities lent, provided that such collateral shall
be limited to cash, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, certificates of
deposit or other high-grade, short term obligations or interest-
bearing cash equivalents. Loans shall not be deemed to include
repurchase agreements or the purchase or acquisition of a portion
of an issue of notes, bonds, debentures, or other debt
securities, whether or not such purchase or acquisition is made
upon the original issuance of the securities. ("Total assets" of
the Fund includes the amount lent as well as the collateral
securing such loans.)
The following investment restrictions may be changed without
shareholder approval. Neither Fund will:
(1) Invest more than 5% of the value of its total assets in
securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization;
provided that the Fund shall not purchase or otherwise acquire
more than 3% of the total outstanding voting stock of any other
investment company.
(2) Invest in a company for the purposes of exercising control
or management.
(3) Buy or sell foreign exchange.
(4) Invest in securities that would expose the Fund to
liabilities exceeding the amount invested.
(5) Invest more than 15% of its net assets in illiquid
securities.
(6) Make short sales, except for sales "against the box."
(7) Mortgage, pledge, or hypothecate its assets except to the
extent necessary to secure permitted borrowings.
(8) Purchase the securities of any issuer if such purchase at
the time thereof would cause more than 10% of the voting
securities of any issuer to be held by the Fund.
(9) Invest more than 10% of its total assets in real estate
investment trusts or invest in real estate investment trusts that
are not publicly distributed.
(10) Enter into any options, futures, or forward contract
transactions if immediately thereafter (a) the amount of premiums
paid for all options, initial margin deposits on all futures
contracts and/or options on futures contracts, and collateral
deposited with respect to forward contracts held by or entered
into by the Fund would exceed 5% of the value of the total assets
of the Fund or (b) the Fund's assets covering, subject to, or
committed to all options, futures, and forward contracts would
exceed 20% of the value of the total assets of the Fund. (This
restriction does not apply to securities purchased on a when-
issued, delayed delivery, or forward commitment basis.)
(11) Write, purchase, or sell put or call options, except that it
may write covered call options.
(12) Invest more than 10% of its assets in foreign securities.
Growth Fund
The following investment restrictions are fundamental and
may be changed only by the approval of shareholders. Growth Fund
will not:
(1) Concentrate its investments, that is, invest more than 25%
of the value of its assets, in any particular industry.
(2) Buy or sell commodities or commodity contracts.
(3) Purchase or sell real estate or other interests in real
estate, or interests in real estate investment trusts.
(4) Mortgage, pledge, hypothecate, or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Fund.
(5) Act as an underwriter of securities of other issuers, except
that the Fund may invest up to 5% of the value of its assets (at
time of investment) in portfolio securities which the Fund might
not be free to sell to the public without registration of such
securities under the Securities Act of 1933.
(6) Write, purchase, or sell puts, calls, or combinations
thereof.
(7) Purchase or sell securities on margin or sell short.
(8) Make loans to other persons, except that it may purchase
bonds, debentures, or other debt securities, which are not
publicly distributed in an amount not to exceed 5% of the value
of its total assets. The purchase of a portion of an issue of
publicly distributed bonds, debentures, or other debt securities,
does not constitute the making of a loan.
(9) Borrow money or issue debt securities.
(10) Invest more than 5% of its net assets in each of i)
restricted securities and ii) bonds, debentures or other debt
securities that are not publicly distributed.
The following investment restrictions may be changed without
shareholder approval. Growth Fund will not:
(1) Invest more than 5% of the value of its total assets in
securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
(2) Invest in a company for the purposes of exercising control
or management.
(3) Buy or sell foreign exchange.
(4) Invest in securities that would expose the Fund to
liabilities exceeding the amount invested.
(5) Invest more than 10% of its assets in foreign securities.
(6) Invest more than 15% of its net assets in illiquid
securities.
(7) Issue senior securities (as defined in the 1940 Act), except
as set forth herein and in the prospectus.
Growth & Income Fund
The following investment restrictions are fundamental and
may be changed only by the approval of shareholders. Growth &
Income Fund will not:
(1) Concentrate its investments in any particular industry,
except that (i) it may invest up to 25% of the value of its total
assets in any particular industry, and (ii) there is no
limitation with respect to investments in obligations issued or
guaranteed by the U.S. Government or its agencies and
instrumentalities, or obligations of domestic commercial banks.
As to utility companies, gas, electric, water and telephone
companies will be considered as separate industries. As to
finance companies, the following categories will be considered as
separate industries: (a) captive automobile finance, such as
General Motors Acceptance Corp. and Ford Motor Credit Corp.; (b)
captive equipment finance companies, such as Honeywell Finance
Corporation and General Electric Credit Corp.; (c) captive retail
finance companies, such as Macy Credit Corp. and Sears Roebuck
Acceptance Corp.; (d) consumer loan companies, such as Beneficial
Finance Corporation and Household Finance Corporation; (e)
diversified finance companies such as CIT Financial Corp.,
Commercial Credit Corporation and Borg Warner Acceptance Corp.;
and (f) captive oil finance companies, such as Shell Credit,
Inc., Mobile Oil Credit Corp. and Texaco Financial Services, Inc.
(2) Purchase or sell physical commodities (such as grains,
livestock, etc.) or futures or options contracts thereon.
However, the Fund may purchase or sell any forms of financial
instruments or contracts that might be deemed commodities.
(3) Invest directly in real estate or interests in real estate;
however, the Fund may invest in interests in real estate
investment trusts, debt securities secured by real estate or
interests therein, or debt or equity securities issued by
companies which invest in real estate or interests therein.
(4) Mortgage, pledge, hypothecate, or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Fund, provided that this restriction shall not apply to the
transfer of securities in connection with any permissible
borrowing or the collateral arrangements in connection with
permissible activities.
(5) Act as an underwriter of securities of other issuers, except
to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under
applicable laws.
(6) Purchase securities on margin, except that the Fund, in
accordance with its investment objectives and policies, may
purchase securities on a when-issued, delayed delivery or forward
commitment basis. The Fund may also obtain such short-term credit
as it needs for the clearance of securities transactions and may
make margin deposits in connection with futures contracts.
(7) Make short sales, except for sales "against the box." While
a short sale is made by selling a security the Fund does not own,
a short sale is "against the box" to the extent the Fund
contemporaneously owns or has the right to obtain securities
identical to those sold without payment of any additional
consideration.
(8) Make loans to other persons, except (i) the Fund may lend
its portfolio securities in an amount not to exceed 33 1/3% of
the value of its total assets if such loans are secured by
collateral equal to at least the market value of the securities
lent, provided that such collateral shall be limited to cash,
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, certificates of deposit or other
high-grade, short-term obligations or interest-bearing cash
equivalents; and (ii) it may purchase debt securities through
private placements (restricted securities) in accordance with its
investment objectives and policies.
(9) Issue senior securities (as defined in the 1940 Act) other
than as set forth in restriction #10 below and except to the
extent that using options and futures contracts or purchasing or
selling securities on a when issued, delayed delivery or forward
commitment basis (including the entering into of roll
transactions) may be deemed to constitute issuing a senior
security.
(10) Borrow money except from banks for temporary or emergency
purposes not in excess of 33 1/3% of the value of the Fund's
total assets. The Fund will not purchase securities while
borrowings (including "roll" transactions) in excess of 5% of
total assets are outstanding. In the event that the asset
coverage for the Fund's borrowings falls below 300%, the Fund
will reduce, within three days (excluding Sundays and holidays),
the amount of its borrowings in order to provide for 300% asset
coverage.
The following investment restrictions may be changed without
shareholder approval. Growth & Income Fund will not:
(1) Invest more than 5% of the value of its total assets in
securities of other investment companies, except in connection
with a merger, consolidation, acquisition, or reorganization;
provided that the Fund shall not purchase or otherwise acquire
more than 3% of the total outstanding voting stock of any other
investment company.
(2) Invest in a company for the purpose of exercising control or
management.
(3) Invest more than 15% of its net assets in illiquid
securities.
(4) Enter into any options, futures, or forward contract
transactions if immediately thereafter (a) the amount of premiums
paid for all options, initial margin deposits on all futures
contracts and/or options on futures contracts, and collateral
deposited with respect to forward contracts held by or entered
into by the Fund would exceed 5% of the value of the total assets
of the Fund or (b) the Fund's assets covering, subject to, or
committed to all options, futures, and forward contracts would
exceed 20% of the value of the total assets of the Fund. (This
restriction does not apply to securities purchased on a when-
issued, delayed delivery, or forward commitment basis.)
(5) Purchase the securities of any issuer if such purchase at
the time thereof would cause more than 10% of the voting
securities of any issuer to be held by the Fund.
(6) Borrow money in excess of 10% of its total assets, except as
a temporary or emergency measure. ("Roll" transactions will not
be considered borrowing for purposes of this restriction).
Management of the Funds
Under Minnesota law, the Board of Directors of Fortis
Advantage, Fortis Equity and Fortis Growth has overall
responsibility for managing each company in good faith, in a
manner reasonably believed to be in the best interests of such
company and with the care an ordinarily prudent person would
exercise in similar circumstances. This management may not be
delegated. The Articles of Incorporation limit the liability of
directors to the fullest extent permitted by law.
The names, addresses, principal occupations and other
affiliations of directors and executive officers of Fortis
Advantage, Fortis Equity and Fortis Growth are listed below.
Unless stated otherwise, all positions have been held at least
five years. Each director and officer also serves as a director
or officer of all investment companies managed by Advisers (the
"Fund Complex"). The Fund Complex currently consists of one
closed-end and eight open-end investment companies.
Name and Ag Position Principal Occupations During
Address e with the Past 5 Years
Funds
Richard W. 68 Director Certified public accountant
Cutting and financial consultant.
137 Chapin
Parkway
Buffalo, New
York
Allen R. 59 Director Chairman and Chief Executive
Freedman * Officer of Fortis, Inc.; a
One Chase Managing Director of Fortis
Manhattan Plaza International, N.V.; director
New York, New of Systems and Computer
York Technology Corporation.
Dr. Robert M. 59 Director President, Cranbrook Education
Gavin 380 Community; prior to July 1996,
Lone Pine Road President, Macalester College,
Bloomfield, St. Paul, MN.
Michigan
Jean L. King 55 Director President, Communi-King, a
12 Evergreen communications consulting
Lane firm, St. Paul, MN.
St. Paul,
Minnesota
Dean C. 47 President Chief Executive Officer and a
Kopperud* and Director of Advisers;
500 Bielenberg Director President and a Director of
Drive Woodbury, Investors; President of Fortis
Minnesota Financial Group; a Director of
Fortis Benefits Insurance
Company and Senior Vice
President of Fortis Insurance
Company.
Robb L. Prince 58 Director Financial and employee benefit
5108 Duggan consultant; prior to July
Plaza Edina, 1995, Vice President and
Minnesota Treasurer, Jostens, Inc., a
producer of products and
services for youth, education,
sports award, and recognition
markets; director of Analysts
International Corporation.
Leonard J. 63 Director Principal, Griggs & Santow,
Santow Inc., economic and financial
75 Wall Street consultants
21st Floor
New York, New
York
Noel Schenker 45 Director Marketing consultant; prior to
Shadko 1908 W. 1996, Senior Vice President,
49th Street Marketing and Strategic
Minneapolis, Planning, Rollerblade, Inc.
Minnesota
Joseph M. 57 Director Investment consultant and
Wikler private investor; prior to
12520 Davan 1994, Director of Research,
Drive Chief Investment Officer,
Silver Spring, Principal and a Director, The
Maryland Rothschild Co., and investment
adviser, Baltimore, MD.
Gary N. Yalen 57 Vice President and Chief Investment
One Chase President Officer of Advisers (since
Manhattan Plaza 1995) and Senior Vice
New York, New President, Investments, of
York Fortis, Inc.; prior to 1996,
President and Chief Investment
Officer, Fortis Asset
Management, a former division
of Fortis, Inc.
Howard G. 62 Vice Executive Vice President and
Hudson President Head of Fixed Income
One Chase Investments of Advisers since
Manhattan Plaza 1995; prior to 1996, Senior
New York, New Vice President, Fixed Income,
York Fortis Asset Management.
Lucinda S. 52 Vice Executive Vice President and
Mezey President Head of Equity Investments of
One Chase Advisers since October 1997;
Manhattan Plaza from 1995 to October 1997,
New York, New Chief Investment Officer, Alex
York Brown Capital Advisory and
Trust Co., Baltimore, MD;
prior to 1995, Senior Vice
President and Head of Equity
Investments, PNC Bank,
Philadelphia, PA.
James S. Byrd 48 Vice Executive Vice President of
90 South 7th President Advisers since 1995; prior to
Street 1995, Vice President of
Minneapolis, Advisers and of Investors.
Minnesota
Nicholas L.M. 33 Vice Vice President of Advisers
de Peyster One President since 1995; prior to 1995,
Chase Manhattan Vice President, Equities,
Plaza Fortis Asset Management.
New York, New
York
Diane M. Gotham 41 Vice Vice President of Advisers
90 South 7th President since 1998; from 1994 to 1998,
Street securities analyst for
Minneapolis, Advisers.
Minnesota
Laura E. 38 Vice Vice President of Advisers
Granger President since 1998; from 1993-1998,
One Chase portfolio manager, General
Manhattan Plaza Motors Investment Management,
New York, New New York, NY.
York
Maroun M. Hayek 51 Vice Vice President of Advisers
One Chase President since 1995; prior to 1996,
Manhattan Plaza Vice President, Fixed Income,
New York, New Fortis Asset Management.
York
Robert C. 43 Vice Vice President of Advisers
Lindberg President since 1993.
One Chase
Manhattan Plaza
New York, New
York
Charles L. 57 Vice Vice President of Advisers;
Mehlhouse President prior to March 1996, portfolio
One Chase manager, Marshall & Ilsley
Manhattan Plaza Bank Corporation, Milwaukee,
New York, New WI.
York
Kevin J. 48 Vice Vice President of Advisers
Michels President since 1995; prior to 1996,
One Chase Vice President,
Manhattan Plaza Administration, Fortis Asset
New York, New Management.
York
Christopher J. 36 Vice Vice President of Advisers
Pagano One President since 1996; prior to March
Chase Manhattan 1996, government strategist,
Plaza Merrill Lynch, New York, NY.
New York, New
York
Kendall C. 43 Vice Vice President of Advisers
Peterson President since August 1999; prior to
One Chase August 1999, Vice President
Manhattan Plaza and portfolio manager at
New York, New Prudential Insurance Company
York of America, Newark, NJ.
Stephen M. 56 Vice Vice President of Advisers
Rickert President since 1995; from 1994 to 1996,
One Chase Corporate Bond Analyst, Fortis
Manhattan Plaza Asset Management.
New York, New
York
Michael J. 48 Vice Vice President of Advisers
Romanowski One President since 1998; from October 1995
Chase Manhattan to March 1998, portfolio
Plaza manager, Value Line, New York,
New York, New NY; prior to October 1995,
York securities analyst, Conning &
Co., Hartford, CT.
Christopher J. 39 Vice Vice President of Advisers
Woods One President since 1995; prior to 1996 Vice
Chase Manhattan President, Fixed Income,
Plaza Fortis Asset Management.
New York, New
York
Robert W. 50 Vice Vice President/Securities
Beltz, Jr. President Operations of Advisers and of
500 Bielenberg Investors.
Drive
Woodbury,
Minnesota
Peggy L. 42 Vice Senior Vice President,
Ettestad President Operations of Advisers since
500 Bielenberg March 1997; prior to March
Drive 1997, Vice President, G.E.
Woodbury, Capital Fleet Services,
Minnesota Minneapolis, MN.
Tamara L. 41 Vice Vice President of Advisers and
Fagely President of Investors since 1998; prior
500 Bielenberg and to 1998, Second Vice President
Drive Treasurer of Advisers and Investors.
Woodbury,
Minnesota
Dickson W. 50 Vice Senior Vice President,
Lewis President Marketing and Sales of
500 Bielenberg Advisers and of Investors
Drive since July 1997; from 1993 to
Woodbury, July 1997, President and Chief
Minnesota Executive Officer,
Hedstrom/Blessing, Inc.,
Minneapolis, MN.
David A. 57 Vice Vice President and Assistant
Peterson President General Counsel, Fortis
500 Bielenberg Benefits Insurance Company.
Drive
Woodbury,
Minnesota
Scott R. 40 Vice Vice President, Associate
Plummer President General Counsel and Assistant
500 Bielenberg Secretary of Advisers.
Drive
Woodbury,
Minnesota
Rhonda J. 41 Vice Since January 1996, Senior
Schwartz President Vice President and General
500 Bielenberg Counsel of Advisers, Vice
Drive President and General Counsel,
Woodbury, Life and Investment Products
Minnesota of Fortis Insurance Company
and Senior Vice President and
General Counsel of Fortis
Benefits Insurance Company,
FFG Division; from 1994 to
January 1996, Vice President,
General Counsel and Secretary
of Fortis, Inc.
Melinda S. 46 Vice Senior Vice President and
Urion President Chief Financial Officer of
500 Bielenberg Advisers since 1997; from 1995
Drive to 1997, Senior Vice President
Woodbury, of Finance and Chief Financial
Minnesota Officer, American Express
Financial Corporation; prior
to March 1995, corporate
controller, American Express
Financial Corporation and
prior to 1994, controller and
treasurer, IDS Life Insurance
Company, Minneapolis, MN.
Michael J. 54 Secretary Partner, Dorsey & Whitney LLP,
Radmer the Company's General Counsel.
220 South Sixth
Street
Minneapolis,
Minnesota
* Denotes directors who are interested persons, as defined in
the Investment Company Act of 1940, as amended (the "1940
Act"), of the Company and Advisers. Mr. Kopperud is an
"interested person" of Advisers and the Company primarily
because he holds certain positions, including serving as
Chief Executive Officer and a director of Advisers. Mr.
Freedman is an "interested person" of Advisers and the
Company primarily because he holds certain positions,
including serving as Chairman and Chief Executive Officer of
Fortis, Inc., the parent company of Advisers, and as a
Managing Director of Fortis International, N.V., the parent
company of Fortis, Inc.
Each director who is not affiliated with Advisers or Investors
receives a monthly fee ($200 per month from each of Value Fund,
Growth & Income Fund and Capital Fund; $350 per month from Growth
Fund and $200 per month from each of Asset Allocation Portfolio
and Capital Appreciation Portfolio), $100 per meeting attended
from each Fund, and $100 per committee meeting attended from each
Fund (and reimbursement of travel expenses to attend meetings).
Each such director also receives a monthly fee, a meeting fee and
a committee meeting fee from each fund in the Fund Complex for
which they are a director. The following table sets forth the
aggregate compensation received by each director from Fortis
Advantage, Fortis Equity and Fortis Growth during the fiscal year
ended August 31, 1999, as well as the total compensation received
by each director from the Fund Complex during the calendar year
ended December 31, 1998. Mr. Freedman and Mr. Kopperud, who are
affiliated with Advisers and Investors, did not receive any
compensation. No executive officer receives any compensation
from the
Funds.
Aggregate Aggregate Aggregate Total
compensation compensation compensation compensatio
Director from from from n
Fortis Fortis Equity Fortis Growth from
Advantage Fund
Complex*
Richard W. $3,050 $2,700 $4,600 $31,200
Cutting
Dr. Robert M. $3,050 $2,700 $4,600 $31,200
Gavin
Benjamin S. $3,050 $2,700 $4,600 $22,200
Jaffray**
Jean L. King $2,850 $2,500 $4,400 $31,200
Edward M. $3,050 $2,700 $4,600 $31,200
Mahoney**
Robb L. $3,050 $2,700 $4,600 $31,200
Prince
Leonard J. $2,928 $2,578 $4,478 $30,300
Santow
Noel Schenker $3,050 $2,700 $4,600 $22,200
Shadko
Joseph M. $3,050 $2,700 $4,600 $31,300
Wikler
___________________________________
* The Fund Complex consists of one closed-end and eight open-end
investment companies managed by Advisers.
** Messrs. Jaffray and Mahoney retired from the Board of
Directors effective January 1, 2000.
During the fiscal year ended August 31, 1999, the Funds paid
legal fees and expenses as set forth below to a law firm of which
the Funds' Secretary is a partner.
Asset Allocation Portfolio $ 9,362
Value Fund $ 1,986
Growth & Income Fund $ 1,837
Capital Fund $ 28,000
Growth Fund $ 43,861
Capital Appreciation Portfolio $ 5,651
Directors Gavin, Kopperud, Prince and Schenker Shadko are
members of the Executive Committee of the Board of Directors.
While the Executive Committee is authorized to act in the
intervals between regular board meetings with full capacity and
authority of the full Board of Directors, except as limited by
law, it is expected that the Committee will meet at least twice a
year.
Directors, officers and other persons affiliated with the
Funds are eligible to purchase shares of the Funds without a
sales charge. For more complete information about these
arrangements, refer to "Purchase of Shares-Exemptions from the
Sales Charge."
Principal Holders of Securities
As of December 20, 1999, no person owned of record or, to a
Fund's knowledge, beneficially as much as 5% of the outstanding
shares of any Class of Fund shares, except as follows: Asset
Allocation Portfolio-Class C: KCB Services and Co., C/F Mary M.
Wilson IRA, P.O. Box 4310, Frederick, MD 21705 (10%). Asset
Allocation Portfolio-Class Z: First Trust, N.A., C/F for James R.
Wettengel IRA, 2957 Granada Lane North, Oakdale, MN 55128. Value
Fund-Class A: John Alden Life Ins. Co., c/o Kevin Michels, Fortis
Advisers, 1 Chase Manhattan Plaza, New York, NY 10005 (7%);
Fortis Insurance Company, c/o Kevin Michels, Fortis Advisers, 1
Chase Manhattan Plaza, New York, NY 10005 (5%); Fortis Benefits
Ins. Co., c/o Fortis Inc., Fortis Advisers, 1 Chase Manhattan
Plaza, New York, NY 10005 (5%); Fortis Benefits Ins. Co., c/o
Kevin Michels, Fortis Advisers, 1 Chase Manhattan Plaza, New
York, NY 10005 (5%). Growth Fund-Class Z: Mitra & Co., 1000 N.
Water St., Milwaukee, WI 53202 (58%).
As of December 20, 1999, the directors and executive
officers as a group beneficially owned less than 1% of the
outstanding shares of each class of each Fund.
Investment Advisory and Other Services
General
Fortis Advisers, Inc. ("Advisers") has been the investment
adviser and manager of each Fund since inception. Fortis
Investors, Inc. ("Investors") acts as the Funds underwriter.
Each acts pursuant to written agreements periodically approved by
the directors or shareholders. The address of each is that of the
Funds. As of October 31, 1999, Advisers managed thirty-three
investment company portfolios with combined net assets of
approximately $7.1 billion.
Control and Management of Advisers and Investors
Fortis, Inc. ("Fortis") owns 100% of the outstanding voting
securities of Advisers, and Advisers owns all of the outstanding
voting securities of Investors.
Fortis, located in New York, New York, is a financial
services company that provides specialty insurance and investment
products
