As filed with the Securities and Exchange Commission on March _____, 2000
Registration No. 2-52242
Registration No. 811-2538
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
------------------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 72 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 66 [X]
(Check appropriate box or boxes)
------------------------------------
COUNTRYWIDE INVESTMENT TRUST
(Exact name of Registrant as Specified in Charter)
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
(Address of Registrant's Principal Executive Offices)
Registrant's Telephone Number (513) 629-2000
------------------------------------
Copy to:
ROBERT H. LESHNER KAREN M. MCLAUGHLIN, ESQ.
312 Walnut Street, 21st Floor Frost & Jacobs LLP
Cincinnati, Ohio 45202 2500 PNC Center
(Name and Address of Agent for Service) 201 East Fifth Street
Cincinnati, Ohio 45202
------------------------------------
Approximate Date of Proposed Public Offering: Continuous Offering
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on __________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)
[ ] on May 1, 2000 pursuant to paragraph (a) of Rule 485
Registrant registered an indefinite number of securities under the Securities
Act of 1933 and pursuant to Rule 24f-2 under the Investment Company Act of 1940.
Pursuant to paragraph (b)(1) of Rule 24f-2, Registrant filed a Rule 24f-2 Notice
for the fiscal year ended September 30, 1999 on December 21, 1999.
TOTAL NUMBER OF PAGES:
EXHIBIT INDEX ON PAGE:
<PAGE>
COUNTRYWIDE INVESTMENT TRUST
FORM N-1A CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM NO. HEADING IN PROSPECTUS
- ---------------------------------------------------------------------------------------------------
<S> <C>
1. Front and Back Cover Pages Cover Page; Form More Information
2. Risk/Return Summary: Investments, Short Term Government Income Fund; Intermediate
Risks, and Performance Term Government Income Fund; Money Market Fund;
Intermediate Bond Fund; Investment Strategies and
Risks
3. Risk/Return Summary: Fee Table Short Term Government Income Fund; Intermediate
Term Government Income Fund; Money Market Fund;
Intermediate Bond Fund
4. Investment Objectives, Principal Investment Strategies and Risks
Investment Strategies, and Related
Risks
5. Management's Discussion of Fund None
Performance
6. Management, Organization, and The Fund's Management
Capital Structure
7. Shareholder Information Investing with Countrywide; Distributions and Taxes
8. Distribution Arrangements Investing with Countrywide
9. Financial Highlights Information Financial Highlights
FORM N-1A ITEM NO. HEADING IN STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page and Table of Contents Cover Page; Table of Contents
11. Fund History The Trust
12. Description of the Fund and Its Definitions; Policies and Risk Considerations;
Investment and Risks Investment Restrictions; Portfolio Turnover;
Appendix
13. Management of the Fund Trustees and Officers
14. Control Persons and Principal Principal Security Holders
Holders of Securities
15. Investment Advisory and Other The Investment Adviser and Sub-Advisors; The
Services Distributor; Distribution Plans; Custodian;
Auditors; Transfer, Accounting and Administrative
Services; Choosing a Share Class
<PAGE>
16. Brokerage Allocation and Other Securities Transactions
Practices
17. Capital Stock and Other Securities The Trust; Choosing a Share Class
18. Purchase, Redemption, and Pricing Calculation of Share Price and Public Offering
of Shares Price; Other Purchase Information; Redemption in
Kind
19. Taxation of the Fund Taxes
20. Underwriters The Distributor
21. Calculation of Performance Data Historical Performance Information
22. Financial Statements None
</TABLE>
<PAGE>
COUNTRYWIDE FAMILY OF FUNDS
- ---------------------------
PROSPECTUS
MAY 1, 2000
COUNTRYWIDE INVESTMENT TRUST
o SHORT TERM GOVERNMENT INCOME FUND
o INTERMEDIATE TERM GOVERNMENT INCOME FUND
o MONEY MARKET FUND
o INTERMEDIATE BOND FUND
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Fund's shares as an investment or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
<PAGE>
COUNTRYWIDE FAMILY OF FUNDS
Each Fund is a series of Countrywide Investment Trust (the "Trust") which is a
group of six taxable bond and money market funds. The Trust is part of the
Countrywide Family of Funds which also consists of Countrywide Strategic Trust,
a group of eight equity mutual funds, and Countrywide Tax-Free Trust, a group of
six tax-free bond and money market mutual funds. Each Fund has a different
investment goal and risk level. For further information about the Countrywide
Family of Funds, contact Touchstone Securities, Inc. at 800.669.2796.
2
<PAGE>
TABLE OF CONTENTS
Page
Short Term Government Income Fund
Intermediate Term Government Income Fund
Money Market Fund
Intermediate Bond Fund
Investment Strategies And Risks
The Funds' Management
Investing With Countrywide
Distributions And Taxes
Financial Highlights
For More Information
3
<PAGE>
SHORT TERM GOVERNMENT INCOME FUND
- ---------------------------------
THE FUND'S INVESTMENT GOAL
The Short Term Government Income Fund seeks high current income, consistent with
the protection of capital. The Fund is a money market fund and tries to maintain
a constant share price of $1.00 per share.
As with any money market fund, there is no guarantee that the Fund will achieve
its goal or will maintain a constant share price of $1.00 per share.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily (at least 65% of total assets) in short-term
government securities issued by the U.S. Treasury or agencies of the U.S.
government, including mortgage-related government securities. The Fund currently
invests only in government securities backed by the full faith and credit of the
U.S. government, meaning that payment of principal and interest is guaranteed by
the U.S. Treasury. The Fund currently intends to invest only in securities
allowable for federal credit unions.
The Fund also invests in repurchase agreements collateralized by government
securities backed by the full faith and credit of the U.S. government.
To comply with SEC rules, the Fund may only purchase securities that mature in
397 days or less and the dollar-weighted average maturity of its portfolio must
be 90 days or less.
THE KEY RISKS
The Fund could return less than other investments:
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
o Because mortgage-related securities may lose more value due to changes
in interest rates than other debt securities and are subject to
prepayment
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC, the U.S. Treasury or any other government entity. Although the Fund
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the Fund.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading "Investment
Strategies And Risks" later in this Prospectus.
4
<PAGE>
WHO MAY WANT TO INVEST
This Fund is most appropriate for you if you take a relatively low risk approach
to investing. Safety of your investment is of key importance to you.
Additionally, you are willing to accept potentially lower returns in order to
maintain a lower, more tolerable level of risk. This Fund's approach may be most
appropriate for you if you are nearing retirement, or if you have a longer time
horizon, but nevertheless, have a lower risk tolerance. This Fund is also
appropriate for you if you want the added convenience of writing checks directly
from your account.
THE FUND'S PERFORMANCE
The bar chart shown below indicates the risks of investing in the Short Term
Government Income Fund. It shows changes in the performance of the Fund's shares
from year to year during the past 10 years.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
SHORT TERM GOVERNMENT INCOME FUND
YEARS TOTAL RETURN
1990 7.29%
1991 5.44%
1992 2.96%
1993 2.25%
1994 3.16%
1995 4.89%
1996 4.43%
1997 4.61%
1998 4.58%
1999 4.09%
During the period shown in the bar chart, the highest quarterly return was 1.81%
(for the quarter ended September 30, 1990) and the lowest quarterly return was
0.54% (for the quarter ended June 30, 1993).
For information on the Fund's current and effective 7-day yield, call
800.543.0407 (nationwide) or 629.2050 (Cincinnati).
5
<PAGE>
FOR THE PERIODS ENDED DECEMBER 31, 1999
1 Year 5 Years 10 Years
------ ------- --------
Short Term Government Income Fund 4.09% 4.52% 4.36%
---------------------------------
THE FUND'S FEES AND EXPENSES
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on None
Purchases (as a percentage of offering price)
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None1
(as a percentage of amount redeemed)
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.47%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.13%
- --------------------------------------------------------------------------------
Other Expenses 0.35%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.95%
- --------------------------------------------------------------------------------
1 You will be charged $8 for each wire redemption. There is no fee for the
first 6 checks processed in a month. You will be charged $0.25 for each
additional check processed in that month.
The following example should help you compare the cost of investing in the Short
Term Government Income Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same.
6
<PAGE>
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year $ 97
3 Years $ 303
5 Years $ 525
10 Years $ 1,166
7
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND
- ----------------------------------------
THE FUND'S INVESTMENT GOAL
The Intermediate Term Government Income Fund seeks high current income,
consistent with the protection of capital, as its main goal. The Fund may also
seek to increase the value of Fund shares, if consistent with its main goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily (at least 65% of total assets) in intermediate-term
government securities including mortgage-related securities, having an effective
maturity of 20 years or less.
The Fund invests in government securities backed by the full faith and credit of
the U.S. government, meaning that payment of principal and interest is
guaranteed by the U.S. Treasury. It also invests in government securities
supported by the credit of the issuing agency or instrumentality, which may
include the right of the issuer to borrow from the U.S. Treasury. The Fund
currently intends to invest only in securities allowable for federal credit
unions.
The Fund may also invest in mortgage-related government securities.
The Fund may invest in securities issued on a to-be-announced basis.
The dollar-weighted average maturity of the Fund's portfolio normally will be
between 3 and 10 years.
THE KEY RISKS
The Fund could return less than other investments:
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
o Because fluctuations in interest rates generally have a more
pronounced effect on longer-term debt securities
o Because mortgage-related securities may lose more value due to changes
in interest rates than other debt securities and are subject to
prepayment
o Because to-be-announced securities involve additional risks, such as
committing to purchase securities before all the specific information
about the securities is known
The Fund's share price could fluctuate and you could lose money on your
investment in the Fund. An investment in the Fund is not a bank deposit and is
not insured or guaranteed by the FDIC, the U.S. Treasury or any other government
entity.
8
<PAGE>
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading "Investment
Strategies And Risks" later in this Prospectus.
WHO MAY WANT TO INVEST
This Fund is most appropriate for you if you prefer to take a relatively low
risk approach to investing. Safety of your investment may be the most important
factor to you. You may be willing to accept potentially lower returns in order
to maintain a lower, more tolerable level of risk. This Fund's approach may be
most appropriate for you if you are nearing retirement.
THE FUND'S PERFORMANCE
The bar chart shown below indicates the risks of investing in the Intermediate
Term Government Income Fund. It shows changes in the performance of the Fund's
shares from year to year during the past 10 years. The chart does not reflect
any sales charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
INTERMEDIATE TERM GOVERNMENT INCOME FUND
YEARS TOTAL RETURN
1990 6.98%
1991 15.09%
1992 6.60%
1993 10.33%
1994 -6.30%
1995 16.86%
1996 2.53%
1997 7.22%
1998 7.97%
1999 -1.96%
During the period shown in the bar chart, the highest quarterly return was 5.95%
(for the quarter ended June 30, 1995) and the lowest quarterly return was -4.07%
(for the quarter ended March 31, 1994).
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Lehman Brothers Intermediate Government Bond
Index. The Lehman Brothers
9
<PAGE>
Intermediate Government Bond Index is an unmanaged index generally
representative of intermediate term U.S. government securities. The table shows
the effect of the sales charge.
FOR THE PERIODS ENDED DECEMBER 31, 1999
1 Year 5 Years 10 Years
------ ------- --------
Intermediate Term Government Income Fund -6.61% 5.31% 5.80%
----------------------------------------
Lehman Brothers Intermediate Government 0.49% 6.93% 7.10%
Bond Index
----------------------------------------
THE FUND'S FEES AND EXPENSES
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on 4.75%
Purchases (as a percentage of offering price)
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None1
(as a percentage of original purchase price
or the amount redeemed, whichever is less)
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.50%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.13%
- --------------------------------------------------------------------------------
Other Expenses 0.36%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.99%
- --------------------------------------------------------------------------------
1 If you invest $1 million or more and do not pay a front-end sales load, you
may be subject to a deferred sales load of 1.00% if the shares are redeemed
within one year of their purchase and a dealer's commission was paid on the
shares. You will be charged $8 for each wire redemption. There is no fee
for the first 6 checks processed in a month. You will be charged $0.25 for
each additional check processed in that month.
The following example should help you compare the cost of investing in the
Intermediate Term Government Income Fund with the cost of investing in other
mutual funds. The example assumes that you invest $10,000 in the Fund for the
time periods indicated and then sell all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same.
10
<PAGE>
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year $ 571
3 Years $ 775
5 Years $ 996
10 Years $ 1,630
11
<PAGE>
MONEY MARKET FUND
- -----------------
THE FUND'S INVESTMENT GOAL
The Money Market Fund seeks high current income, consistent with liquidity and
stability of capital. The Fund is a money market fund and tries to maintain a
constant share price of $1.00 per share.
As with any money market fund, there is no guarantee that the Fund will achieve
its goal or will maintain a constant share price of $1.00 per share.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily (at least 65% of total assets) in high-quality money
market instruments.
The Fund's investments may include:
o Domestic bank obligations including certificates of deposit, bankers'
acceptances and time deposits
o Government securities issued directly by the U.S. Treasury or by
agencies of the U.S. government
o Short-term corporate debt securities
o Taxable and tax-exempt municipal securities
o Variable and floating rate securities
To comply with SEC rules, the Fund will limit its investments as follows:
o The Fund will invest primarily in securities rated in the highest
rating category.
o The Fund may invest in securities rated in the second highest rating
category (up to 5%) -- and within this 5% limitation, the Fund may
invest up to 1% of its total assets or $1 million in securities of one
issuer, whichever is greater.
o The Fund may purchase unrated securities only if the portfolio manager
determines the securities meet the Fund's quality standards.
o The Fund may only purchase debt securities that mature in 397 days or
less.
o The dollar-weighted average maturity of its portfolio must be 90 days
or less.
o The Fund will not invest more than 5% of its assets in securities of
one issuer.
o The Fund may invest more than 25% of its assets in bank securities but
it will not invest more than 25% of its assets in any other particular
industry.
THE KEY RISKS
The Fund could return less than other investments:
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
12
<PAGE>
o Because issuers may be unable to make timely payments of interest or
principal
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC, the U.S. Treasury or any other government entity. Although the Fund
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the Fund.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading "Investment
Strategies And Risks" later in this Prospectus.
WHO MAY WANT TO INVEST
This Fund is most appropriate for you if you take a relatively low risk approach
to investing. Safety of your investment is of key importance to you.
Additionally, you are willing to accept potentially lower returns in order to
maintain a lower, more tolerable level of risk. This Fund's approach may be most
appropriate for you if you are nearing retirement, or if you have a longer time
horizon, but nevertheless, have a lower risk tolerance. This Fund is also
appropriate for you if you want the added convenience of writing checks directly
from your account.
THE FUND'S PERFORMANCE
The bar chart shown below indicates the risks of investing in the Money Market
Fund. It shows changes in the performance of the Fund's shares from year to year
since the Fund's inception.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
MONEY MARKET FUND
YEARS TOTAL RETURN
1996 5.06%
1997 5.13%
1998 5.01%
1999 4.84%
During the period shown in the bar chart, the highest quarterly return was 1.30%
(for the quarter ended December 31, 1999) and the lowest quarterly return was
1.12% (for the quarter ended June 30, 1999).
For information on the Funds' current and effective 7-day yield, call
800.543.0407 (nationwide) or 629.2050 (in Cincinnati).
13
<PAGE>
FOR THE PERIODS ENDED DECEMBER 31, 1999
Since Fund
1 Year Started
------ -------
Money Market Fund 4.84% 5.02%
-------------------------------
THE FUND'S FEES AND EXPENSES
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on None
Purchases (as a percentage of offering price)
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None1
(as a percentage of amount redeemed)
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.50%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.02%
- --------------------------------------------------------------------------------
Other Expenses 0.59%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses2 1.11%
- --------------------------------------------------------------------------------
1 You will be charged $8 for each wire redemption. There is no fee for the
first 6 checks processed in a month. You will be charged $0.25 for each
additional check processed in that month.
2 After waivers of management fees by the advisor, total operating expenses
were 0.65% for the fiscal year ended September 30, 1999. Touchstone
Advisors may discontinue these fee waivers at any time.
The following example should help you compare the cost of investing in the Money
Market Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods indicated and
then sell all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same.
14
<PAGE>
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year $ 113
3 Years $ 353
5 Years $ 612
10 Years $ 1,352
15
<PAGE>
INTERMEDIATE BOND FUND
- ----------------------
THE FUND'S INVESTMENT GOAL
The Intermediate Bond Fund seeks to provide as high a level of current income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in higher quality investment grade debt securities
(at least 65% of total assets). The Fund's investment in debt securities may be
determined by the direction in which interest rates are expected to move because
the value of these securities generally moves in opposite direction from
interest rates. The Fund expects to have an average maturity between five and
fifteen years.
The Fund's invests in:
o Mortgage-related securities (up to 60%)
o Asset-backed securities
o Preferred Stocks
The Fund also invests in non-investment grade U.S. and foreign debt securities
and preferred stock which are rated as low as B (up to 35%).
In addition, the Fund may invest in:
Within this category of investments, the Fund normally will invest (at least 60%
of its total assets) in securities rated in the 3 highest rating categories or
unrated securities if the portfolio manager determines the securities are of
equivalent quality.
In addition, the Fund may invest in:
o Debt securities denominated by foreign currencies
THE KEY RISKS
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
o Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
16
<PAGE>
o Because issuers of non-investment grade securities held by the Fund
are more likely to be unable to make timely payments of interest or
principal
o Because mortgage-related securities and asset-backed securities may
lose more value due to changes in interest rates than other debt
securities and are subject to prepayment
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading "Investment
Strategies And Risks" later in this Prospectus.
WHO MAY WANT TO INVEST
This Fund is most appropriate for you if you prefer to take a relatively low
risk approach to investing. Safety of your investment may the most important
factor to you. You may be willing to accept potentially lower returns in order
to maintain a lower, more tolerable level of risk. The Fund's approach may be
most appropriate for you if you are nearing retirement.
THE FUND'S PERFORMANCE
The bar chart shown below indicates the risks of investing in the Intermediate
Bond Fund. It shows changes in the performance of the Fund's Class A shares from
year to year since the Fund's inception. The chart does not reflect any sales
charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
INTERMEDIATE BOND FUND - CLASS A
YEARS TOTAL RETURN
1995 16.95%
1996 2.85%
1997 7.30%
1998 8.56%
1999
During the period shown in the bar chart, the highest quarterly return was ____%
(for the quarter ended __________________) and the lowest quarterly return was
_____% (for the quarter ended ______________).
17
<PAGE>
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Lehman Brothers Aggregate Index and to the
Wiesenberger Corp - Investment Grade - MF index. The Lehman Brothers Aggregate
Index is comprised of approximately 6,000 publicly traded bonds with an average
maturity of about 10 years. The Wiesenberger Corp - Investment Grade - MF index
is a composite index of the annual returns of mutual funds that have an
investment style similar to the Intermediate Bond Fund The table shows the
effect of the Class A sales charge.
FOR THE PERIODS ENDED DECEMBER 31, 1999
Since Fund
1 Year Started
------ -------
Intermediate Bond Fund - Class A
-----------------------------------------
Intermediate Bond Fund - Class C
-----------------------------------------
Lehman Brothers Aggregate Index
-----------------------------------------
Wiesenberger Corp - Investment Grade - MF
-----------------------------------------
THE FUND'S FEES AND EXPENSES
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) 4.75% 2.25%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 4.75%1 1.25%
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price None2 1.00%2
or the amount redeemed, whichever is less)1
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Class A Shares Class C Shares
Management Fees 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 1.00%
- --------------------------------------------------------------------------------
Other Expenses
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement3
- --------------------------------------------------------------------------------
Net Expenses 0.90% 1.65%
- --------------------------------------------------------------------------------
18
<PAGE>
1 You may pay a reduced sales charge on very large purchases. There is no
sales charge at the time of purchase for purchases of $1 million or more
but a sales charge of 1.00% will be assessed on shares redeemed within one
year of their purchase. There is also no initial sales charge on certain
purchases in a Roth IRA, a Roth Conversion IRA or a qualified retirement
plan.
2 The 1.00% is waived for benefits paid to you through a qualified pension
plan.
3 After waivers of management fees by the advisor, total operating expenses
for Class A shares were ____% for the fiscal year ended __________________.
As noted above, the management fees paid to Touchstone Advisors by the Fund
was ____%. Touchstone Advisors may discontinue these fee waivers at any
time.
The following example should help you compare the cost of investing in the
Intermediate Bond Fund with the cost of investing in other mutual funds. The
first example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
second example assumes that you invest $10,000 in the Fund for the time periods
indicated but do not sell your shares at the end of those periods. Both examples
assume that your investment has a 5% return each year and that the Fund's
operating expenses remain the same.
19
<PAGE>
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
If You Sell Your
Shares After Class A Shares Class C Shares
1 Year $562 $168
---------------------------------------------------------------------------
3 Years
---------------------------------------------------------------------------
5 Years
---------------------------------------------------------------------------
10 Years
---------------------------------------------------------------------------
If You Do Not Sell
Your Shares After Class A Shares Class C Shares
1 Year $562
---------------------------------------------------------------------------
3 Years
---------------------------------------------------------------------------
5 Years
---------------------------------------------------------------------------
10 Years
---------------------------------------------------------------------------
20
<PAGE>
INVESTMENT STRATEGIES AND RISKS
CAN A FUND DEPART FROM ITS NORMAL STRATEGIES?
Each Fund may depart from its investment strategies by taking temporary
defensive positions in response to adverse market, economic or political
conditions. During these times, a Fund may not achieve its investment goals.
CAN A FUND CHANGE ITS INVESTMENT GOAL?
Each Fund's investment goal may be changed by a vote of the Board of Trustees
without shareholder approval. You would be notified at least 30 days before any
such change took effect.
THE FUNDS AT A GLANCE
The following two tables can give you a quick basic understanding of the types
of securities a Fund tends to invest in and some of the risks associated with a
Fund's investments. You should read all of the information about a Fund and its
risks before deciding to invest.
HOW CAN I TELL, AT A GLANCE, WHICH TYPES OF SECURITIES A FUND MIGHT INVEST IN?
The following table shows the main types of securities in which a Fund generally
will invest. Some of the Funds' investments are described in detail below:
<TABLE>
<CAPTION>
INTERMEDIATE
SHORT TERM TERM MONEY MARKET INTERMEDIATE
GOVERNMENT GOVERNMENT FUND BOND
FUND INCOME FUND FUND
FINANCIAL INSTRUMENTS
<S> <C> <C> <C> <C>
Invests in money market instruments x
- -------------------------------------------------------------------------------------------------------------
Invests in short-term debt securities x x x
- -------------------------------------------------------------------------------------------------------------
Invests in intermediate term debt securities x x
- -------------------------------------------------------------------------------------------------------------
Invests in variable and floating rate securities x
- -------------------------------------------------------------------------------------------------------------
Invests in government securities x x x x
- -------------------------------------------------------------------------------------------------------------
Invests in municipal securities x x
- -------------------------------------------------------------------------------------------------------------
Invests in corporate debt securities x
- -------------------------------------------------------------------------------------------------------------
Invests in mortgage-related securities x x x
- -------------------------------------------------------------------------------------------------------------
Invests in asset-backed securities x x
- -------------------------------------------------------------------------------------------------------------
Invests in investment grade debt securities x
- -------------------------------------------------------------------------------------------------------------
Invests in non-investment grade debt securities x
- -------------------------------------------------------------------------------------------------------------
Invests in foreign debt securities x
- -------------------------------------------------------------------------------------------------------------
21
<PAGE>
INVESTMENT TECHNIQUES
Invests in repurchase agreements x
- -------------------------------------------------------------------------------------------------------------
Invests in to-be-announced securities x x
- -------------------------------------------------------------------------------------------------------------
</TABLE>
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
MONEY MARKET INSTRUMENTS include:
o Bank obligations
o Short-term government securities
o Short-term corporate debt securities
o Short-term municipal securities
o Variable and floating rates securities
BANK OBLIGATIONS include:
o Certificates of deposit are issued by banks in exchange for the
deposit of funds and have penalties for early withdrawal.
o Bankers' acceptances are bills of exchange used by corporations to
finance the shipment and storage of goods and to furnish dollar
exchange.
o Time deposits are deposits in a bank which earn a specified interest
rate over a given period of time.
GOVERNMENT SECURITIES include:
o Obligations issued directly by the U.S. Treasury such as Treasury
bills, notes and bonds
o Obligations issued by agencies or instrumentalities of the U.S.
government, such as Government National Mortgage Association, Student
Loan Marketing Association, Small Business Administration and
Tennessee Valley Authority
o U.S. Treasuries issued without interest coupons (STRIPS)
o Inflation-indexed bonds issued by the U.S. Treasury whose principal
value is periodically adjusted to the rate of inflation
Some government securities are backed by the full faith and credit of the U.S.
Treasury, meaning that payment of principal and interest is guaranteed by the
U.S. Treasury. Other government securities are backed only by the credit of the
agency or instrumentality issuing the security, which may include the right of
the issuer to borrow from the U.S. Treasury.
CORPORATE DEBT SECURITIES are obligations of a corporation to pay interest and
repay principal. Corporate debt securities include commercial paper, notes and
bonds.
MUNICIPAL SECURITIES are issued to finance public works, to repay outstanding
obligations, to raise funds for general operating expenses and to lend money to
other public institutions. The
22
<PAGE>
two types of municipal securities are general obligation and revenue bonds.
General obligations bonds are secured by the issuer's full faith and credit and
taxing power, while revenue bonds are backed only by the revenues of the
specific project.
VARIABLE AND FLOATING RATE SECURITIES are securities with interest rates that
are adjusted when a specific interest rate index changes (floating rate
securities) or on a schedule (variable rate securities).
FOREIGN DEBT SECURITIES are obligations of a country other than the U.S. to pay
interest and repay principal.
INVESTMENT GRADE SECURITIES. Investment grade securities are generally rated BBB
or better by Standard & Poor's Rating Service (S&P) or Baa or better by Moody's
Investor Service, Inc. (Moody's).
NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities are higher
risk, lower quality securities, often referred to as "junk bonds" and are
considered speculative. They are rated by S&P as less than BBB or by Moody's as
less than Baa.
ASSET-BACKED SECURITIES. Asset-backed securities represent groups of other
assets, for example, credit card receivables, that are combined or pooled for
sale to investors.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent groups of
mortgage loans that are combined for sale to investors. The loans may be grouped
together by agencies of the U.S. government such as:
o The Government National Mortgage Association (GNMA)
o The Federal National Mortgage Association (FNMA)
o The Federal Home Loan Mortgage Corporation (FHLMC)
The loans may also be grouped together by private issuers such as:
o Commercial banks
o Savings and loan institutions
o Mortgage bankers
o Private mortgage insurance companies
Mortgage-related securities include Collateralized Mortgage Obligations (CMOs)
and Real Estate Mortgage Investment Conduits (REMICs). CMOs and REMICs are types
of mortgage-related securities that provide an investor with a specified
interest in the cash flow from a pool of mortgage loans or other mortgage-backed
securities. CMOs and REMICs are issued in two or more classes with varying
maturity dates and interest rates. A REMIC is a private entity formed to hold a
fixed pool of mortgages secured by an interest in real property. A REMIC is a
type of CMO that qualifies for special tax treatment under the Internal Revenue
Code.
23
<PAGE>
REPURCHASE AGREEMENTS. Repurchase Agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the U.S. Government,
its agencies, and instrumentalities. A repurchase agreement is a transaction in
which a security is purchased with a simultaneous commitment to sell it back to
the seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date. This date is usually not more than seven days from
the date of purchase. The resale price reflects the purchase price plus an
agreed upon market rate of interest, which is unrelated to the coupon rate or
maturity of the purchased security.
TO-BE-ANNOUNCED SECURITIES. To-Be-Announced securities are paid for and
delivered within 15 to 45 days from their date of purchase. In a to-be-announced
transaction, the parties to the transaction commit to purchasing or selling
securities before all the specific information, particularly the face amount of
the securities. If a Fund invests in to-be-announced securities, it will
maintain a segregated account of cash or liquid securities to pay for its
to-be-announced securities and this account will be valued daily in order to
account for market fluctuations in the value of its to-be-announced commitments.
How Can I Tell, at a Glance, the Fund's Key Risks?
The following table shows some of the main risks to which the Fund is subject.
Each risk is described in detail below:
<TABLE>
<CAPTION>
INTERMEDIATE
SHORT TERM TERM MONEY MARKET INTERMEDIATE BOND
GOVERNMENT FUND GOVERNMENT FUND FUND
INCOME FUND
<S> <C> <C> <C> <C>
INTEREST RATE RISK x x x
- -------------------------------------------------------------------------------------------------------------
Mortgage-Related Securities x x x
- -------------------------------------------------------------------------------------------------------------
CREDIT RISK x x x x
- -------------------------------------------------------------------------------------------------------------
Non-Investment Grade Securities x
- -------------------------------------------------------------------------------------------------------------
FOREIGN INVESTING RISK x
- -------------------------------------------------------------------------------------------------------------
</TABLE>
RISKS OF INVESTING IN THE FUND
INTEREST RATE RISK. The Fund is subject to the risk that the market value of the
debt securities in which it invests will decline because of rising interest
rates. The prices of debt securities are generally linked to the prevailing
market interest rates. In general, when interest rates rise, the prices of debt
securities fall, and when interest rates fall, the prices of debt securities
rise. The price volatility of a debt security also depends on its maturity.
Generally, the longer the maturity of a debt security the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
o Mortgage-related securities. Payments from the pool of loans underlying a
mortgage-related security may not be enough to meet the monthly payments of the
mortgage-related security. If this occurs, the mortgage-related security will
lose value. Also, prepayments of mortgages or mortgage foreclosures will shorten
the life of the pool of mortgages underlying a mortgage-related security and
will affect the average life of the mortgage-related securities held
24
<PAGE>
by the Fund. Mortgage prepayments vary based on several factors including the
level of interest rates, general economic conditions, the location and age of
the mortgage and other demographic conditions. In periods of falling interest
rates, there are usually more prepayments. The reinvestment of cash received
from prepayments will, therefore, usually be at lower interest rate than the
original investment, lowering the Fund's yield. Mortgage-related securities may
be less likely to increase in value during periods of falling interest rates
than other debt securities.
CREDIT RISK. The debt securities in the Fund's portfolio are subject to credit
risk. Credit risk is the possibility that an issuer will fail to make timely
payments of interest or principal. Securities rated in the lowest category of
investment grade securities have some risky characteristics and changes in
economic conditions are more likely to cause issuers of these securities to be
unable to make payments.
o Non-Investment Grade Securities. Non-investment grade securities are
sometimes referred to as "junk bonds" and are very risky with respect to their
issuers' ability to make payments of interest and principal. There is a high
risk that the Fund could suffer a loss from investments in non-investment grade
securities caused by the default of an issuer of such securities. Part of the
reason for this high risk is that, in the event of a default or bankruptcy,
holders of non-investment grade securities generally will not receive payments
until the holders of all other debt have been paid. In addition, the market for
non-investment grade securities has, in the past, had more frequent and larger
price changes than the markets for other securities. Non-investment grade
securities can also be more difficult to sell for good value.
FOREIGN INVESTING. Investing in foreign securities poses unique risks such as
fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
THE FUND'S MANAGEMENT
INVESTMENT ADVISOR
Touchstone Advisors, Inc. (the "Advisor" or "Touchstone Advisors") located at
311 Pike Street, Cincinnati, Ohio 45202, is the investment advisor for the Fund.
Touchstone Advisors has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended (the Advisers Act) since 1994. As of
December 31, 1999, Touchstone Advisors had approximately $_____ million in
assets under management.
Touchstone Advisors is responsible for selecting each Fund's Sub-Advisor,
subject to review by the Board of Trustees. Touchstone Advisors selects a
Sub-Advisor that has shown good investment performance in its areas of
expertise. Touchstone Advisors considers various factors in evaluating the
Fund's Sub-Advisor, including:
25
<PAGE>
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over five years or more
o Level of compliance with investment rules and strategies
o Employees, facilities and financial strength
o Quality of service
Touchstone Advisors will also continually monitor the performance of each Fund's
Sub-Advisor through various analyses and through in-person, telephone and
written consultations with the Fund's Sub-Advisor.
Touchstone Advisors discusses its expectations for performance with each
Sub-Advisor. Touchstone provides written evaluations and recommendations to the
Board of Trustees, including whether or not each Sub-Advisor's contract should
be renewed, modified or terminated.
Touchstone Advisors is also responsible for running all of the operations of
each Fund, except for those that are subcontracted to the Sub-Advisor,
custodian, transfer agent and administrator.
Each Fund pays Touchstone Advisors a fee for its services. Out of this fee
Touchstone Advisors pays each Sub-Advisor a fee for its services. The fee paid
to Touchstone Advisors by each Fund is shown in the table below:
Fee to Touchstone Advisors
(as % of average daily net assets)
Short Term Government
Income Fund 0.50% of assets up to $50 million
0.45% of assets from $50 million to $150 million
0.40% of assets from $150 million to $250 million
0.375% of assets over $250 million
- --------------------------------------------------------------------------------
Intermediate Term Government
Income Fund 0.50% of assets up to $50 million
0.45% of assets from $50 million to $150 million
0.40% of assets from $150 million to $250 million
0.375% of assets over $250 million
- --------------------------------------------------------------------------------
Money Market Fund 0.50% of assets up to $50 million
0.45% of assets from $50 million to $150 million
0.40% of assets from $150 million to $250 million
0.375% of assets over $250 million
- --------------------------------------------------------------------------------
Intermediate Bond Fund 0.50% of assets up to $50 million
0.45% of assets from $50 million to $150 million
0.40% of assets from $150 million to $250 million
0.375% of assets over $250 million
- --------------------------------------------------------------------------------
26
<PAGE>
FUND SUB-ADVISOR
The Sub-Advisor makes the day-to-day decisions regarding buying and selling
specific securities for the Fund. The Sub-Advisor manages the investments held
by the Fund according to the Fund's investment goals and strategies.
FUND SUB-ADVISOR TO SHORT TERM GOVERNMENT INCOME FUND, INTERMEDIATE TERM
GOVERNMENT INCOME FUND, MONEY MARKET FUND AND INTERMEDIATE BOND FUND
FORT WASHINGTON INVESTMENT ADVISORS, INC. (FORT WASHINGTON)
420 EAST FOURTH STREET, CINCINNATI, OH 45202
Fort Washington has been registered as an investment advisor under the Advisers
Act since 1990. Fort Washington provides investment advisory services to
individuals, institutions, mutual funds and variable annuity products. As of
December 31, 1999, Fort Washington had assets under management of $_____
billion.
_________________ is primarily responsible for managing the portfolio of the
Short Term Government Income Fund. _______________________________________
Scott Weston, _____________________ of Fort Washington, is primarily responsible
for managing the portfolio of the Intermediate Term Government Income Fund. Mr.
Weston has been employed by Fort Washington or one of its affiliates since 1992
and has been managing the Fund since March 1996.
_________________ is primarily responsible for managing the portfolio of the
Money Market Fund. _______________________________________
Scott Weston, _____________________ of Fort Washington, is primarily responsible
for managing the portfolio of the Intermediate Bond Fund. Mr. Weston has been
employed by Fort Washington or one of its affiliates since 1992 and has been
managing the Fund since September 1997.
Fort Washington is an affiliate of Touchstone Advisors. Therefore, Touchstone
Advisors may have a conflict of interest when making decisions to keep Fort
Washington as the Fund's Sub-Advisor. The Board of Trustees reviews all of
Touchstone Advisor's decisions to reduce the possibility of a conflict of
interest situation.
INVESTING WITH COUNTRYWIDE
CHOOSING THE APPROPRIATE INVESTMENTS TO MATCH YOUR GOALS. Investing well
requires a plan. We recommend that you meet with your financial advisor to plan
a strategy that will best meet your financial goals.
27
<PAGE>
OPENING AN ACCOUNT
YOU CAN CONTACT YOUR FINANCIAL ADVISOR TO PURCHASE SHARES OF THE FUND. You may
also purchase shares of the Fund directly from Touchstone Securities, Inc. (the
"Distributor"). In any event, you must complete the Investment Application
included in this Prospectus. You may also obtain an Investment Application from
the Distributor or your financial advisor.
Investor Alert: The Distributor may choose to refuse any purchase order.
You should read this Prospectus carefully and then determine how much you want
to invest. Check below to find the minimum investment amount required to
purchase shares as well as to learn about the various ways you can purchase your
shares
Initial Additional
Investments Investment
----------- ----------
Regular Account $ 1,000 None
---------------
Accounts for Countrywide Affiliates $ 50 None
-----------------------------------
Retirement Plan Account or Custodial account under $ 250 None
a Uniform Gifts/Transfers to Minors Act ("UGTMA)"
-------------------------------------------------
Investments through the Automatic Investment Plan $ 50 $ 50
-------------------------------------------------
o Investor Alert: The Distributor could change these initial and
additional investment minimums at any time.
PRICING OF FUND SHARES
The Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m. Eastern time) every day the New York
Stock Exchange (NYSE) is open. The Fund calculates its NAV per share, generally
using market prices, by dividing the total value of its net assets by the number
of shares outstanding. Shares are purchased at the next offering price
determined after your purchase or sale order is received in proper form by
Countrywide Fund Services, Inc. (the "Transfer Agent"). The offering price is
the NAV plus a sales charge, if applicable.
The Fund's investments are valued based on market value or, if no market value
is available, based on fair value as determined by the Board of Trustees (or
under their direction). All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values. Some specific
pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost which the Board of
Trustees has determined represents fair value.
o Securities mainly traded on a U.S. exchange are valued at the last
sale price on that exchange or, if no sales occurred during the day,
at the current quoted bid price.
28
<PAGE>
o Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However,
if an event which may change the value of a security occurs after the
time that the closing value on the non-U.S. exchange was determined,
the Board of Trustees might decide to value the security based on fair
value. This may cause the value of the security on the books of the
Fund to be significantly different from the closing value on the
non-U.S. exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S.
exchange may trade on weekends or other days when a Fund does not
price its shares, a Fund's NAV may change on days when shareholders
will not be able to buy or sell shares.
CHOOSING A CLASS OF SHARES
The Intermediate Bond Fund offers Class A shares and Class C shares. Each class
of shares has different sales charges and distribution fees. The amount of sales
charges and distribution fees you pay will depend on which class of shares you
decide to purchase.
Each of the Short Term Government Income Fund, the Intermediate Term Government
Income Fund and the Money Market Fund offers only a single class of shares.
CLASS A SHARES OF INTERMEDIATE BOND FUND AND SHARES OF INTERMEDIATE TERM
GOVERNMENT INCOME FUND
The offering price of Class A shares of the Fund is equal to its NAV plus a
front-end sales charge that you pay when you buy your shares. The front-end
sales charge is generally deducted from the amount of your investment.
The following table shows the amount of front-end sales charge you will pay on
purchases of Class A shares of the Intermediate Bond Fund and shares of the
Intermediate Term Government Income Fund as a percentage of (1) offering price
and (2) the net amount invested after the charge has been subtracted. Note that
the front-end sales charge gets lower as your investment amount gets larger.
Sales Charge as % of Sales Charge as % of
Amount of Your Investment Offering Price Net Amount Invested
------------------------- -------------- -------------------
Under $50,000 4.75% 4.99%
$50,000 but less than $100,000 4.50% 4.72%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.95% 3.04%
$500,000 but less than $1 million 2.25% 2.31%
$1 million or more 0.00% 0.00%
There is no front-end sales charge if you invest $1 million or more in the Fund.
This includes large total purchases made through programs such as Aggregation,
Concurrent Purchases, Letters of Intent and Rights of Accumulation. These
programs are described more fully in the Statement
29
<PAGE>
of Additional Information ("SAI"). In addition, there is no front-end sales
charge on purchases by certain persons related to the Fund or its service
providers and certain other persons listed in the SAI.
If you redeem shares that you purchased as part of the $1 million purchase
within one year, you will pay a contingent deferred sales charge (a sales charge
you pay when you redeem your shares) of 1% on the shares redeemed.
The Intermediate Bond Fund and the Intermediate Term Government Income Fund have
each adopted a distribution plan under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act") for its Class A shares. These plans allow
the Intermediate Bond Fund to pay distribution fees for the sale and
distribution of its Class A shares and the Intermediate Term Government Income
Fund to pay distribution fees for the sale and distribution of its shares. Under
the plans, each Fund pays an annual fee of up to 0.35% of its average daily net
assets that are attributable to its Class A shares and shares, respectively.
Touchstone Advisors has agreed to waive a portion of the maximum Rule 12b-1
distribution fee assessed on Class A shares of Intermediate Bond until May 1,
2002, such that the effective maximum Rule 12b-1 distribution fee on
Intermediate Bond Class A shares during that time period will be equal to 0.25%.
Because these fees are paid out of each Fund's assets on an ongoing basis, these
fees will increase the cost of your investment.
CLASS C SHARES OF INTERMEDIATE BOND FUND
The offering price of Class C shares of the Intermediate Bond Fund is equal to
its NAV plus a 1.25% front-end sales charge that you pay when you buy your
shares. The front-end sales charge is generally deducted from the amount of your
investment. A contingent deferred sales charge of 1.00% of the offering price
will be charged on Class C shares redeemed within one year after you purchased
them.
No contingent deferred sales charge is applied if:
o The shares which you redeem were acquired through the reinvestment of
dividends or capital gains distributions
o The amount redeemed resulted from increases in the value of the
account above the amount of the total purchase payments
When we determine whether a contingent deferred sales charge is payable on a
redemption, we assume that:
o The redemption is made first from amounts free of any contingent
deferred sales charge; then
o From the earliest purchase payment(s) that remain invested in the Fund
When we determine if amounts are available for redemption free of any contingent
deferred sales charge, we:
o Add together all of your original purchase payments
30
<PAGE>
o Subtract any amounts previously withdrawn
o Check if there is any remaining amount free of any contingent deferred
sales charge that can be applied to the total of the current value of
the shares you have asked to redeem
The Intermediate Bond Fund has adopted a distribution plan under Rule 12b-1 of
the 1940 Act for its Class C shares. This plan allows the Fund to pay
distribution and other fees for the sale and distribution of its Class C shares
and for services provided to holders of Class C shares. Under the plan, the Fund
pays an annual fee of up to 1.00% of its average daily net assets that are
attributable to Class C shares. Because these fees are paid out of the Fund's
assets on an ongoing basis, these fees will increase the cost of your investment
and over time may cost you more than paying other types of sales charges.
SHARES OF SHORT TERM GOVERNMENT INCOME FUND AND MONEY MARKET FUND
The offering price of shares of the Short Term Government Income Fund and shares
of the Money Market Fund is equal to its respective NAV.
The Short Term Government Income Fund and the Money Market Fund have each
adopted a distribution plan under Rule 12b-1 of the Investment Company Act of
1940, as amended (the "1940 Act") for its Class A shares. These plans allow the
Short Term Government Income Fund to pay distribution fees for the sale and
distribution of its shares and the Money Market Fund to pay distribution fees
for the sale and distribution of its shares. Under the plans, each Fund pays an
annual fee of up to 0.35% of its average daily net assets that are attributable
to its shares, respectively. Because these fees are paid out of each Fund's
assets on an ongoing basis, these fees will increase the cost of your
investment.
PURCHASING YOUR SHARES
For information about how to purchase shares, telephone the Transfer Agent
(Nationwide call toll-free 800-543-0407; in Cincinnati call 629-2050).
You can invest in the Funds in the following ways:
OPENING AN ACCOUNT
o Please make your check (in U.S. dollars) payable to the Fund.
o Send your check with the completed account application to Countrywide
Fund Services, Inc., P.O. Box 5354, Cincinnati, Ohio 45201-5354 Your
application will be processed subject to your check clearing.
o You may also open an account through your financial advisor. We price
direct purchases based upon the next determined public offering price
(NAV plus any applicable sales load) after your order is received.
Direct purchase orders received by the Transfer Agent by 4:00 p.m.,
Eastern time, are processed at that
31
<PAGE>
day's public offering price. Direct investments received by the
Transfer Agent after 4:00 p.m., Eastern time, are processed at the
public offering price next determined on the following business day.
Purchase orders received from financial advisors before 4:00 p.m.,
Eastern time, and transmitted to the Distributor by 5:00 p.m., Eastern
time, are processed at that day's public offering price. Purchase
orders received from financial advisors after 5:00 p.m., Eastern time,
are processed at the public offering price next determined on the
following business day.
BY MAIL OR
THROUGH YOUR
FINANCIAL ADVISOR
- --------------------------------------------------------------------------------
o You may exchange shares of the Funds for shares of the same class of
another Countrywide Fund at NAV. You may also exchange shares of the
Funds for shares of any money market fund.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in the Prospectus relating
to the exchanged-for shares carefully before making an exchange of
your Fund shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
o You may invest in the Funds through various retirement plans. The
Funds' shares are designed for use with certain types of tax qualified
retirement plans including defined benefit and defined contribution
plans
o For further information about any of the plans, agreements,
applications and annual fees, contact the Transfer Agent or your
financial advisor
THROUGH
RETIREMENT
PLANS
- --------------------------------------------------------------------------------
ADDING TO YOUR ACCOUNT
o Complete the investment form provided at the bottom of a recent
account statement.
o Make your check payable to the applicable Fund.
o Write your account number and asset allocation model number, if
applicable, on the check.
o Either: (1) Mail the check with the investment form in the envelope
provided with your account statement; or (2) Mail your check directly
to your financial advisor at the address printed on your account
statement. Your financial advisor is responsible for forwarding
payment promptly to the Distributor.
BY CHECK
- --------------------------------------------------------------------------------
o Specify your name and account number. If the Transfer Agent receives a
properly executed wire by 4:00 p.m. Eastern time on a day when the
NYSE is open for regular trading, your order will be processed at that
day's public offering price.
BY WIRE
- --------------------------------------------------------------------------------
32
<PAGE>
o You may exchange your shares by calling the Transfer Agent.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in the Prospectus relating
to the exchanged-for shares carefully before making an exchange of
your Fund shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
o You may add to your account in the funds through various retirement
plans. For further information, contact the Transfer Agent or your
financial advisor.
THROUGH
RETIREMENT
PLANS
- --------------------------------------------------------------------------------
INFORMATION ABOUT WIRE TRANSFERS.
You may make additional purchases in the Funds directly by wire transfers.
Contact your bank and ask it to wire federal funds to the Transfer Agent. Banks
may charge a fee for handling wire transfers. You should contact the Transfer
Agent or your financial advisor for further instructions.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
To determine which type of retirement plan is appropriate for you, please
contact your tax advisor.
MORE INFORMATION ABOUT RETIREMENT PLANS.
Retirement Plans may include the following:
INDIVIDUAL RETIREMENT PLANS
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE) IRAs
o Spousal IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
o Education Individual Retirement Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b) Tax Sheltered Accounts that employ as custodian a bank
acceptable to the Distributor
33
<PAGE>
EMPLOYER SPONSORED RETIREMENT PLANS
o Defined benefit plans
o Defined contribution plans (including 401K plans, profit sharing plans
and money purchase plans)
o 457 plans
AUTOMATIC INVESTMENT OPTIONS
The various ways that you can invest in the Fund are outlined below. The
Transfer Agent does not charge any fees for these services.
AUTOMATIC INVESTMENT PLAN. You can pre-authorize monthly investments of $50 or
more in the Fund to be processed electronically from a checking or savings
account. You will need to complete the appropriate section in the Investment
Application to do this. For further details about this service call the Transfer
Agent at 1-800-543-0407; in Cincinnati, 629-2050.
REINVESTMENT/CROSS REINVESTMENT. Dividends and capital gains can be
automatically reinvested in the Fund that pays them or in another Fund within
the same class of shares without a fee or sales charge. Dividends and capital
gains will be reinvested in the Fund that pays them, unless you indicate
otherwise on your account application. You may also choose to have your
dividends or capital gains paid to you in cash.
DIRECT DEPOSIT PURCHASE PLAN. You may automatically invest Social Security
checks, private payroll checks, pension pay outs or any other pre-authorized
government or private recurring payments in the Fund. This occurs on a monthly
basis and the minimum investment is $50.
DOLLAR COST AVERAGING. Our Dollar Cost Averaging program allows you to diversify
your investments by investing the same amount on a regular basis. You can set up
periodic automatic transfers of at least $50 from one Countrywide Fund to any
other. The applicable sales charge, if any, will be assessed.
PROCESSING ORGANIZATIONS. You may also purchase shares of the Fund through a
"processing organization," (e.g., a mutual fund supermarket) which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. Some of the Funds have authorized certain processing organizations to
receive purchase and sales orders on their behalf. Before investing in the Funds
through a processing organization, you should read any materials provided by the
processing organization in conjunction with this Prospectus.
When shares are purchased this way, there may be various differences. The
processing organization may:
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment requirements
o Impose other charges and restrictions
34
<PAGE>
o Designate intermediaries to accept purchase and sales orders on the
Funds' behalf
The Transfer Agent considers a purchase or sales order as received when an
authorized processing organization, or its authorized designee, receives the
order in proper form. These orders will be priced based on the Fund's NAV next
computed after such order is received in proper form.
Shares held through a processing organization may be transferred into your name
following procedures established by your processing organization and the
Transfer Agent. Certain processing organizations may receive compensation from
the Funds, the Distributor, the Advisor or their affiliates.
SELLING YOUR SHARES
You may sell some or all of your Fund shares on any day that the Fund calculates
its NAV. If your request is received in proper form before the close of regular
trading on the NYSE, you will receive a price based on that day's NAV for the
shares you sell. Otherwise, the price you receive will be based on the NAV that
is next calculated.
THROUGH
RETIREMENT
PLANS
o You can sell or exchange your shares over the telephone, unless you
have specifically declined this option. If you do not wish to have
this ability, you must mark the appropriate section of the Investment
Application. You may only sell shares over the telephone if the amount
is less than $25,000.
o To sell your Fund shares by telephone, call the Transfer Agent,
Nationwide at 800-543-0407; in Cincinnati, 629-2050.
o IRA accounts cannot be sold by telephone
BY TELEPHONE
- --------------------------------------------------------------------------------
o Write to the Transfer Agent.
o Indicate the number of shares or dollar amount to be sold.
o Include your name and account number.
o Sign your request exactly as your name appears on your Investment
Application
BY MAIL
- --------------------------------------------------------------------------------
o Complete the appropriate information on the Investment Application.
o If your proceeds are $1,000 or more, you may request that the Transfer
Agent wire them to your bank account.
o You will be charged a fee of $8.00.
o Redemption proceeds will only be wired to a commercial bank or
brokerage firm in the United States.
o Your redemption proceeds may be deposited without a charge directly
into your bank account through an ACH transaction. Contact the
Transfer Agent for more information.
BY WIRE
- --------------------------------------------------------------------------------
35
<PAGE>
o You may also sell shares by contacting your financial advisor, who may
charge you a fee for this service. Shares held in street name must be
sold through your financial advisor or, if applicable, the processing
organization.
o Your financial advisor is responsible for making sure that sale
requests are transmitted to the Transfer Agent in proper form in a
timely manner.
THROUGH
YOUR FINANCIAL
ADVISOR
- --------------------------------------------------------------------------------
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
Selling your shares may cause you to incur a taxable gain or loss.
o Investor Alert: Unless otherwise specified, proceeds will be sent to
the record owner at the address shown on the Transfer Agent's records.
SIGNATURE GUARANTEES. Some circumstances require that the request for the sale
of shares have a signature guarantee. A signature guarantee helps protect you
against fraud. You can obtain one from most banks or securities dealers, but not
from a notary public. Some circumstances requiring a signature guarantee
include:
o Proceeds from the sale of shares that exceed $25,000
o Proceeds to be paid when the name or the address on the account has
been changed within 30 days of your sale request.
TELEPHONE SALES. If we receive your share sale request before 4:00 p.m., Eastern
time on a day when the NYSE is open for regular trading, the sale of your shares
will be processed at the next determined NAV on that day. Otherwise it will
occur on the next business day.
Interruptions in telephone service could prevent you from selling your shares in
this manner when you want to. When you have difficulty making telephone sales,
you should mail (or send by overnight delivery) a written request for sale of
your shares to the Transfer Agent.
In order to protect your investment assets, the Transfer Agent will only follow
instructions received by telephone that it reasonably believes to be genuine.
However, there is no guarantee that the instructions relied upon will always be
genuine and the Trust will not be liable, in those cases. The Trust has certain
procedures to confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case it may be liable for any losses due
to unauthorized or fraudulent instructions. Some of these procedures include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account shown on the
Trust's records
36
<PAGE>
o Mailing checks only to the account address shown on the Trust's
records
o Directing wires only to the bank account shown on the Trust's records
o Providing written confirmation for transactions requested by telephone
o Tape recording instructions received by telephone
SYSTEMATIC WITHDRAWAL PLAN. You may elect to receive or send to a third party
monthly or quarterly withdrawals of $50 or more if your account value is at
least $5,000. There is no special fee for this service and no minimum amount is
required for retirement plans.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
Involuntary sales may result in the sale of your Fund shares at a loss or may
result in taxable investment gains.
REINSTATEMENT PRIVILEGE. You may reinvest proceeds from a sale of Fund shares or
a dividend or capital gain distribution on Fund shares without a sales charge in
any of the Countrywide Funds. You may do so by sending a written request and a
check to the Transfer Agent within 90 days after the date of the sale, dividend
or distribution. Reinvestment will be at the next NAV calculated after the
Transfer Agent receives your request.
LOW ACCOUNT BALANCES
The Transfer Agent may sell your Fund shares if your balance falls below the
minimum required for your account as a result of redemptions that you have made
(as opposed to a reduction from market changes). This involuntary sale does not
apply to retirement accounts or custodian accounts under the Uniform Gift to
Minors Act (UGTMA). The Transfer Agent will let you know that your shares are
about to be sold and you will have 30 days to increase your account balance to
the minimum amount.
RECEIVING SALE PROCEEDS
The Transfer Agent will forward the proceeds of your sale to you (or to your
financial advisor) within 7 business days (normally within 3 business days) from
the date of a proper request.
PROCEEDS SENT TO FINANCIAL ADVISORS
Proceeds which are sent to your financial advisor will not usually be
re-invested for you unless you provide specific instructions to do so.
Therefore, the financial advisor may benefit from the use of your money.
37
<PAGE>
FUND SHARES PURCHASED BY CHECK
If you purchase Fund shares by personal check, the proceeds of a sale of those
shares will not be sent to you until the check has cleared, which may take up to
15 days. If you may need your money more quickly, you should purchase shares by
federal funds, bank wire, or with a certified or cashier's check.
It is possible that the payments of your sale proceeds could be postponed or
your right to sell your shares could be suspended during certain circumstances.
These circumstances can occur:
o When the NYSE is closed for other than customary weekends and holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a Fund Sub-Advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of its net assets
o During any other time when the SEC, by order, permits.
DISTRIBUTIONS AND TAXES
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
You should consult with your tax advisor to address your own tax situation.
Each Fund intends to distribute to its shareholders substantially all of its
income and capital gains. The table below outlines when dividends are declared
and paid for each Fund:
Dividends Declared Dividends Paid
Short Term Government Income Fund Daily Monthly
Intermediate Term Government Income Fund Monthly Annually
Money Market Fund Daily Monthly
Intermediate Bond Fund Monthly Annually
Distributions of any capital gains earned by the Fund will be made at least
annually.
TAX INFORMATION
DISTRIBUTIONS. The Fund will make distributions that may be taxed as ordinary
income or capital gains (which may be taxed at different rates depending on the
length of time the Fund holds its assets). The Fund's distributions may be
subject to federal income tax whether you reinvest such dividends in additional
shares of the Fund or choose to receive cash.
ORDINARY INCOME. Income and short-term capital gains that are distributed to you
are taxable as ordinary income for federal income tax purposes regardless of how
long you have held your Fund shares.
38
<PAGE>
LONG-TERM CAPITAL GAINS. Long-term capital gains distributed to you are taxable
as long-term capital gains for federal income tax purposes regardless of how
long you have held your Fund shares.
STATEMENTS AND NOTICES. You will receive an annual statement outlining the tax
status of your distributions. You will also receive written notices of certain
foreign taxes paid by the Fund and certain distributions paid by the Fund during
the prior taxable year.
39
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds'
financial performance for the past five years or during the term of its
operation, whichever is shorter. Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate an
investor would have earned or lost on an investment in the Funds (assuming
reinvestment of all dividends and distributions). This information has been
audited by _________________ whose report, along with the Funds' financial
statements, is included in the SAI, which is available upon request. Information
for the period ending May 1, 2000 was audited by other independent accountants.
SHORT TERM GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------
Net investment income 0.040 0.046 0.044 0.044 0.046
--------------------------------------------------------------------------
Dividends from net investment income (0.040) (0.046) (0.044) (0.044) (0.046)
--------------------------------------------------------------------------
Net asset value at end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==========================================================================
Total Return 4.02% 4.74% 4.53% 4.51% 4.69%
==========================================================================
Net assets at end of year (000's) $ 110,060 $ 102,481 $ 96,797 $ 91,439 $ 87,141
==========================================================================
Ratio of net expenses to average net
assets (A) 0.95% 0.91% 0.97% 0.99% 0.99%
Ratio of net investment income to
average net assets 3.95% 4.63% 4.43% 4.42% 4.59%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
A Absent fee waivers and/or expense reimbursements by the Advisor, the
ratios of expenses to average new assets would have been 0.94% for the
year ended September 30, 1998.
40
<PAGE>
INTERMEDIATE TERM GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- ----------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 11.15 $ 10.67 $ 10.49 $ 10.73 $ 10.14
---------------------------------------------------------------------
Income from investment options:
Net investment income 0.60 0.61 0.61 0.61 0.64
Net realized and unrealized gains on
investments (0.81) 0.48 0.18 (0.24) 0.59
---------------------------------------------------------------------
Total from investment operations (0.21) 1.09 0.79 0.37 1.23
---------------------------------------------------------------------
Dividends from net investment income (0.60) (0.61) (0.61) (0.61) (0.64)
---------------------------------------------------------------------
Net asset value at end of year $ 10.34 $ 11.15 $ 10.67 $ 10.49 $ 10.73
=====================================================================
Total Return (A) (1.93)% 10.54% 7.74% 3.55% 12.52%
=====================================================================
Net assets at end of year (000's) $ 45,060 $ 51,168 $ 53,033 $ 56,095 $ 56,969
=====================================================================
Ratio of net expenses to average net
assets 0.99% 0.99% 0.99% 0.99% 0.99%
Ratio of net investment income to
average net assets 5.59% 5.64% 5.78% 5.75% 6.17%
Portfolio turnover rate 58% 29% 49% 70% 58%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
A Total returns shown exclude the effect of applicable sales loads.
41
<PAGE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- ------------------------------------------------------------------------------------------------------------------
YEAR YEAR ONE MONTH YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, AUGUST 31, AUGUST 31,
1999 1998 1997(A) 1997 1996(B)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------------------------
Net investment income 0.046 0.050 0.004 0.050 0.046(C)
------------------------------------------------------------------------
Dividends from net investment income (0.046) (0.050) (0.004) (0.050) (0.046)
------------------------------------------------------------------------
Total distributions (0.03) (0.23) (0.16) (0.12) (0.16)
------------------------------------------------------------------------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========================================================================
Total Return 4.74% 5.07% 4.99%(D) 5.14% 4.70%
========================================================================
Net assets at end of period (000's) $ 23,198 $ 18,492 $ 73,821 $ 94,569 $ 76,363
========================================================================
Ratio of net expenses to average net
assets (E) 0.65% 0.79% 0.80%(D) 0.65% 0.63%(D)
Ratio of net investment income to
average net assets 4.63% 4.95% 4.99%(D) 5.03% 4.94%(D)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
A Effective as of the close of business on August 29, 1997, the Fund was
reorganized and its fiscal year-end, subsequent to August 31, 1997,
was changed to September 30.
B Represents the period from the commencement of operations (September
29, 1995) through August 31, 1996.
C Calculated using weighted average of shares outstanding during the
period.
D Annualized.
E Absent fee waivers and/or expense reimbursements by the Advisor, the
ratios of expenses to average new assets would have been 1.11%, 0.79%
and 0.99% for the periods ended September 30, 1999 and August 31, 1997
and 1996, respectively.
42
<PAGE>
INTERMEDIATE BOND FUND - CLASS A
<TABLE>
<CAPTION>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- --------------------------------------------------------------------------------------------------------------------
YEAR YEAR ONE MONTH YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, AUGUST 31, AUGUST 31,
1999 1998 1997 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year
------------------------------------------------------------------------
Income from investment options:
Net income realized
Net realized and unrealized gains on
investments
------------------------------------------------------------------------
Total from investment operations
------------------------------------------------------------------------
Less distributions:
Dividends from net investment income
Distributions from net realized gains
------------------------------------------------------------------------
Total distributions
------------------------------------------------------------------------
Net asset value at end of period
========================================================================
Total Return
========================================================================
Net assets at end of period (000's)
========================================================================
Ratio of net expenses to average net
assets
Ratio of net investment income to
average net assets
Portfolio turnover rate
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
FOR MORE INFORMATION
For investors who want more information about the Fund, the following documents
are available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Fund and is legally a part of this prospectus.
ANNUAL/SEMI-ANNUAL REPORTS: Each Fund's annual and semi-annual reports provide
additional information about each Fund's investments. In each Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected each Fund's performance during its last
fiscal year.
You can get free copies of the SAI, the reports, other information and answers
to your questions about the Fund by contacting your financial advisor, or the
Fund at:
Countrywide Family of Funds
311 Pike Street
Cincinnati, Ohio 45202
800.669.2796 (Press 3)
http://www.touchstonefunds.com
You can view the Fund's SAI and the reports at the Public Reference Room of the
Securities and Exchange Commission.
For a fee, you can get text-only copies by writing to the Public Reference Room
of the SEC, 450 Fifth Street N.W., Washington, D.C. 20549-0102 or by calling the
SEC at 1-202-942-8090. You can get information about the operation of the Public
Reference Room by calling the SEC at 1-202-942-8090.
You can also view the SAI and the reports free from the SEC's Internet website
at http://www.sec.gov. You can get information about the SEC's Internet website
by writing to the SEC at the above address or by e-mailing a request to:
[email protected].
Investment Company Act file no. 811-2538
44
<PAGE>
COUNTRYWIDE INVESTMENT TRUST
o SHORT TERM GOVERNMENT INCOME FUND
o INTERMEDIATE TERM GOVERNMENT INCOME FUND
o MONEY MARKET FUND
o INTERMEDIATE BOND FUND
MULTIPLE CLASSES OF
SHARES ARE OFFERED BY
THIS PROSPECTUS
<PAGE>
COUNTRYWIDE INVESTMENT TRUST
----------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
May 1, 2000
Short Term Government Income Fund
Intermediate Term Government Income Fund
Money Market Fund
Intermediate Bond Fund
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of the applicable Fund of Countrywide
Investment Trust dated February 1, 2000. A copy of a Fund's Prospectus can be
obtained by writing the Trust at 312 Walnut Street, 21st Floor, Cincinnati, Ohio
45202-4094, or by calling the Trust nationwide toll-free 800-543-0407, in
Cincinnati 629-2050.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
Countrywide Investment Trust
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TABLE OF CONTENTS
-----------------
PAGE
----
THE TRUST......................................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS..................................4
QUALITY RATINGS OF FIXED-INCOME OBLIGATIONS...................................22
INVESTMENT LIMITATIONS........................................................28
TRUSTEES AND OFFICERS.........................................................32
THE INVESTMENT ADVISER AND UNDERWRITER........................................35
DISTRIBUTION PLANS............................................................37
SECURITIES TRANSACTIONS.......................................................39
PORTFOLIO TURNOVER............................................................41
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE..........................42
OTHER PURCHASE INFORMATION....................................................43
TAXES.........................................................................44
REDEMPTION IN KIND............................................................45
HISTORICAL PERFORMANCE INFORMATION............................................45
PRINCIPAL SECURITY HOLDERS....................................................49
CUSTODIAN.....................................................................49
AUDITORS......................................................................50
TRANSFER AGENT................................................................50
ANNUAL REPORT.................................................................51
2
<PAGE>
THE TRUST
- ---------
Countrywide Investment Trust (the "Trust"), formerly Midwest Trust, was
organized as a Massachusetts business trust on December 7, 1980. The Trust
currently offers six series of shares to investors: the Short Term Government
Income Fund, the Intermediate Term Government Income Fund, the Money Market Fund
and the Intermediate Bond Fund (referred to individually as a "Fund" and
collectively as the "Funds"). Each Fund has its own investment objective(s) and
policies.
Shares of each Fund have equal voting rights and liquidation rights. Each
Fund shall vote separately on matters submitted to a vote of the shareholders
except in matters where a vote of all series of the Trust in the aggregate is
required by the Investment Company Act of 1940 or otherwise. Each class of
shares of a Fund shall vote separately on matters relating to its plan of
distribution pursuant to Rule 12b-1. When matters are submitted to shareholders
for a vote, each shareholder is entitled to one vote for each full share owned
and fractional votes for fractional shares owned. The Trust does not normally
hold annual meetings of shareholders. The Trustees shall promptly call and give
notice of a meeting of shareholders for the purpose of voting upon the removal
of any Trustee when requested to do so in writing by shareholders holding 10% or
more of the Trust's outstanding shares. The Trust will comply with the
provisions of Section 16(c) of the Investment Company Act of 1940 in order to
facilitate communications among shareholders.
Pursuant to an Agreement and Plan of Reorganization dated May 31, 1997, the
Money Market Fund and the Intermediate Bond Fund, on August 29, 1997, each
succeeded to the assets and liabilities of another mutual fund of the same name
(referred to individually as a "Predecessor Fund," and collectively as the
"Predecessor Funds"), each of which was an investment series of Trans Adviser
Funds, Inc. The investment objective, policies and restrictions of each of the
Money Market Fund and the Intermediate Bond Fund and its Predecessor Fund are
substantially identical and the financial data and information for periods ended
prior to September 1, 1997 relates to the Predecessor Funds.
Pursuant to an Agreement and Plan of Reorganization dated ________,2000,
the Intermediate Bond Fund, on May 1, 2000, succeeded to the assets and
liabilities of the Touchstone Bond Fund, a series of the Touchstone Series
Trust. The Intermediate Bond Fund adopted the investment objective, policies and
restrictions of the Touchstone Bond Fund, which are similar to those of the
Intermediate Bond Fund. The financial data and information for periods ended
prior to May 1, 2000 relates to the Touchstone Bond Fund.
Each share of a Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interest in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being liquidated will be entitled to
3
<PAGE>
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. Expenses attributable to any Fund are borne by that
Fund. Any general expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated by or under the direction of the Trustees in
such manner as the Trustees determine to be fair and equitable. Generally, the
Trustees allocate such expenses on the basis of relative net assets or number of
shareholders. No shareholder is liable to further calls or to assessment by the
Trust without his express consent.
Both Class A shares and Class C shares of the Intermediate Bond Fund
represent an interest in the same assets of the Fund, have the same rights and
are identical in all material respects except that (i) Class C shares bear the
expenses of higher distribution fees; (ii) certain other class specific expenses
will be borne solely by the class to which such expenses are attributable,
including transfer agent fees attributable to a specific class of shares,
printing and postage expenses related to preparing and distributing materials to
current shareholders of a specific class, registration fees incurred by a
specific class of shares, the expenses of administrative personnel and services
required to support the shareholders of a specific class, litigation or other
legal expenses relating to a class of shares, Trustees' fees or expenses
incurred as a result of issues relating to a specific class of shares and
accounting fees and expenses relating to a specific class of shares; and (iii)
each class has exclusive voting rights with respect to matters relating to its
own distribution arrangements. The Board of Trustees may classify and reclassify
the shares of a Fund into additional classes of shares at a future date.
Under Massachusetts law, under certain circumstances, shareholders of a
Massachusetts business trust could be deemed to have the same type of personal
liability for the obligations of the Trust as does a partner of a partnership.
However, numerous investment companies registered under the Investment Company
Act of 1940 have been formed as Massachusetts business trusts and the Trust is
not aware of an instance where such result has occurred. In addition, the Trust
Agreement disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Trust Agreement also provides for the indemnification out of the Trust
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Moreover, it provides that the Trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust and satisfy any judgment thereon. As a
result, and particularly because the Trust assets are readily marketable and
ordinarily substantially exceed liabilities, management believes that the risk
of shareholder liability is slight and limited to circumstances in which the
Trust itself would be unable to meet its obligations. Management believes that,
in view of the above, the risk of personal liability is remote.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
- ---------------------------------------------
A more detailed discussion of some of the terms used and investment
policies described in the Prospectuses (see "Investment Objectives and
Policies") appears below:
WHEN-ISSUED SECURITIES AND SECURITIES PURCHASED ON A TO-BE-ANNOUNCED BASIS.
The Funds will only make commitments to purchase securities on a when-issued or
to-be-announced ("TBA") basis with the intention of actually acquiring the
securities. A Fund may sell the
4
<PAGE>
securities before the settlement date if it is otherwise deemed advisable as a
matter of investment strategy or in order to meet its obligations, although it
would not normally expect to do so. When-issued securities are securities
purchased for delivery beyond the normal settlement date at a stated price and
yield and thereby involve the risk that the yield obtained in the transaction
will be less than that available in the market when delivery takes place. In a
TBA transaction, a Fund has committed to purchasing or selling securities for
which all specific information is not yet known at the time of the trade,
particularly the face amount in transactions involving mortgage-related
securities.
The Funds may purchase securities on a when-issued or TBA basis only if
delivery and payment for the securities takes place within 120 days after the
date of the transaction. In connection with these investments, each Fund will
direct the Custodian to place cash or liquid securities in a segregated account
in an amount sufficient to make payment for the securities to be purchased. When
a segregated account is maintained because a Fund purchases securities on a
when-issued or TBA basis, the assets deposited in the segregated account will be
valued daily at market for the purpose of determining the adequacy of the
securities in the account. If the market value of such securities declines,
additional cash or securities will be placed in the account on a daily basis so
that the market value of the account will equal the amount of a Fund's
commitments to purchase securities on a when-issued or TBA basis. To the extent
funds are in a segregated account, they will not be available for new investment
or to meet redemptions. Securities purchased on a when-issued or TBA basis and
the securities held in a Fund's portfolio are subject to changes in market value
based upon changes in the level of interest rates (which will generally result
in all of those securities changing in value in the same way, i.e., all those
securities experiencing appreciation when interest rates decline and
depreciation when interest rates rise). Therefore, if in order to achieve higher
returns, a Fund remains substantially fully invested at the same time that it
has purchased securities on a when-issued or TBA basis, there will be a
possibility that the market value of the Fund's assets will experience greater
fluctuation. The purchase of securities on a when-issued or TBA basis may
involve a risk of loss if the seller fails to deliver after the value of the
securities has risen.
When the time comes for a Fund to make payment for securities purchased on
a when-issued or TBA basis, the Fund will do so by using then available cash
flow, by sale of the securities held in the segregated account, by sale of other
securities or, although it would not normally expect to do so, by directing the
sale of the securities purchased on a when-issued or TBA basis themselves (which
may have a market value greater or less than the Fund's payment obligation).
The Intermediate Term Government Income Fund will not invest more than 20%
of its net assets in securities purchased on a when-issued or TBA basis. Each of
the Money Market Fund and the Intermediate Bond Fund expects that commitments to
purchase when-issued securities will not exceed 25% of the value of its total
assets.
STRIPS. STRIPS are U.S. Treasury bills, notes, and bonds that have been
issued without interest coupons or stripped of their unmatured interest coupons,
interest coupons that have been stripped from such U.S. Treasury securities, and
receipts or certificates representing interests in such stripped U.S. Treasury
securities and coupons. A STRIPS security pays no interest in cash
5
<PAGE>
to its holder during its life although interest is accrued for federal income
tax purposes. Its value to an investor consists of the difference between its
face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value. Investing
in STRIPS may help to preserve capital during periods of declining interest
rates. For example, if interest rates decline, GNMA Certificates owned by a Fund
which were purchased at greater than par are more likely to be prepaid, which
would cause a loss of principal. In anticipation of this, a Fund might purchase
STRIPS, the value of which would be expected to increase when interest rates
decline.
STRIPS do not entitle the holder to any periodic payments of interest prior
to maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, STRIPS eliminate the reinvestment risk and lock in a rate of return to
maturity. Current federal tax law requires that a holder of a STRIPS security
accrue a portion of the discount at which the security was purchased as income
each year even though the Fund received no interest payment in cash on the
security during the year.
As a matter of current policy that may be changed without shareholder
approval, the Intermediate Term Government Income Fund will not purchase STRIPS
with a maturity date that is more than 10 years from the settlement of the
purchase.
CUBES. In addition to STRIPS, the Intermediate Bond Fund may also purchase
separately traded interest and principal component parts of obligations that are
transferable through the Federal book entry system, known as Coupon Under Book
Entry Safekeeping ("CUBES"). These instruments are issued by banks and brokerage
firms and are created by depositing Treasury notes and Treasury bonds into a
special account at a custodian bank; the Custodian holds the interest and
principal payments for the benefit of the registered owner of the certificates
or receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS"). STRIPS, CUBES, TRs,
TIGRs and CATS are sold as zero coupon securities, which means that they are
sold at a substantial discount and redeemed at face value at their maturity date
without interim cash payments of interest or principal. This discount is
amortized over the life of the security, and such amortization will constitute
the income earned on the security for both accounting and tax purposes. Because
of these features, these securities may be subject to greater interest rate
volatility than interest-paying U.S. Treasury obligations. The Intermediate Bond
Fund will limit its investment in such instruments to 20% of its net assets.
GNMA CERTIFICATES. The term "GNMA Certificates" refers to mortgage-backed
securities representing part ownership of a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations and insured by either the Federal Housing Administration or the
Farmer's Home Administration or guaranteed by the Veteran's Administration. GNMA
Certificates are guaranteed by the
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Government National Mortgage Association and are backed by the full faith and
credit of the United States.
1. THE LIFE OF GNMA CERTIFICATES. The average life of GNMA Certificates
is likely to be substantially less than the original maturity of the mortgage
pools underlying the GNMA Certificates due to prepayments, refinancing and
payments from foreclosures. Thus, the greatest part of principal will usually be
paid well before the maturity of the mortgages in the pool. As prepayment rates
of individual mortgage pools will vary widely, it is not possible to accurately
predict the average life of a particular issue of GNMA Certificates. However,
statistics published by the FHA are normally used as an indicator of the
expected average life of GNMA Certificates. These statistics indicate that the
average life of single-family dwelling mortgages with 25-30 year maturities, the
type of mortgages backing the vast majority of GNMA Certificates, is
approximately 12 years. However, mortgages with high interest rates have
experienced accelerated prepayment rates which would indicate a shorter average
life.
2. 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 GNMA Certificates, but
only by the amount of the fees paid to the GNMA and the issuer. For the most
common type of mortgage pool, containing single-family dwelling mortgages, the
GNMA receives an annual fee of 0.06 of 1% of the outstanding principal for
providing its guarantee, and the issuer is paid an annual fee of 0.44 of 1% for
assembling the mortgage pool and for passing through monthly payments of
interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for the following reasons:
(a) GNMA Certificates may be issued at a premium or discount, rather
than at par.
(b) After issuance, GNMA Certificates may trade in the secondary
market at a premium or discount.
(c) Interest is earned monthly, rather than semi-annually as for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
(d) The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors pay off their mortgages early, the principal returned to
Certificate holders may be reinvested at more or less favorable rates.
3. MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Prices
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of GNMA Certificates are readily available from securities dealers and depend
on, among other things, the level of market rates, the Certificate's coupon rate
and the prepayment experience of the pool of mortgages backing each Certificate.
FHLMC CERTIFICATES. The term "FHLMC Certificates" refers to mortgage-backed
securities representing part ownership of a pool of mortgage loans, which are
guaranteed by the Federal Home Loan Mortgage Corporation. The Federal Home Loan
Mortgage Corporation is the leading seller of conventional mortgage securities
in the United States. FHLMC Certificates are not guaranteed by the United States
or by any Federal Home Loan Bank and do not constitute debts or obligations of
the United States or any Federal Home Loan Bank.
Mortgage loans underlying FHLMC Certificates will consist of fixed rate
mortgages with original terms to maturity of between 10 and 30 years,
substantially all of which are secured by first liens on one-family or
two-to-four family residential properties. Mortgage interest rates may be mixed
in a pool. The seller/servicer of each mortgage retains a minimum three-eighths
of 1% servicing fee, and any remaining excess of mortgage rate over coupon rate
is kept by the Federal Home Loan Mortgage Corporation. The coupon rate of a
FHLMC Certificate does not by itself indicate the yield which will be earned on
the Certificate for the reasons discussed above in connection with GNMA
Certificates.
FNMA CERTIFICATES. The term "FNMA Certificates" refers to mortgage-backed
securities representing part ownership of a pool of mortgage loans, which are
guaranteed by the Federal National Mortgage Association.
The FNMA, despite having U.S. Government agency status, is also a private,
for-profit corporation organized to provide assistance in the housing mortgage
market. The only function of the FNMA is to provide a secondary market for
residential mortgages. Mortgage loans underlying FNMA Certificates reflect a
considerable diversity and are purchased from a variety of mortgage originators.
They are typically collateralized by conventional mortgages (not FHA-insured or
VA-guaranteed). FNMA Certificates are highly liquid and usually trade in the
secondary market at higher yields than GNMA Certificates. The coupon rate of a
FNMA Certificate does not by itself indicate the yield which will be earned on
the Certificate for the reasons discussed above in connection with GNMA
Certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Intermediate Term Government
Income Fund and the Intermediate Bond Fund may invest in Collateralized Mortgage
Obligations ("CMOs"). CMOs are fully-collateralized bonds which are the general
obligations of the issuer thereof. The key feature of the CMO structure is the
prioritization of the cash flows from a pool of mortgages among the several
classes of CMO holders, thereby creating a series of obligations with varying
rates and maturities appealing to a wide range of investors. CMOs generally are
secured by an assignment to a trustee under the indenture pursuant to which the
bonds are issued for collateral consisting of a pool of mortgages. Payments with
respect to the underlying mortgages generally are made to the trustee under the
indenture. Payments of principal and interest on the underlying mortgages are
not passed through to the holders of the CMOs as such (that is, the character of
payments of principal and interest is not passed through and therefore payments
to holders of CMOs attributable to interest paid and principal repaid on the
underlying mortgages do not
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necessarily constitute income and return of capital, respectively, to such
holders), but such payments are dedicated to payment of interest on and
repayment of principal of the CMOs. CMOs are issued in two or more classes or
series with varying maturities and stated rates of interest determined by the
issuer. Because interest and principal payments on the underlying mortgages are
not passed through to holders of CMOs, CMOs of varying maturities may be secured
by the same pool of mortgages, the payments on which are used to pay interest on
each class and to retire successive maturities in sequence. CMOs are designed to
be retired as the underlying mortgages are repaid. In the event of sufficient
early prepayments on such mortgages, the class or series of CMO first to mature
generally will be retired prior to maturity. Therefore, although in most cases
the issuer of CMOs will not supply additional collateral in the event of such
prepayments, there will be sufficient collateral to secure CMOs that remain
outstanding.
In 1983, the Federal Home Loan Mortgage Corporation began issuing CMOs.
Since FHLMC CMOs are the general obligations of the FHLMC, it will be obligated
to use its general funds to make payments thereon if payments generated by the
underlying mortgages are insufficient to pay principal and interest in its CMOs.
In addition, CMOs are issued by private entities, such as financial
institutions, mortgage bankers and subsidiaries of homebuilding companies. The
structural features of privately issued CMOs will vary considerably from issue
to issue, and the Adviser will consider such features, together with the
character of the underlying mortgage pool and the liquidity and credit rating of
the issue. The Adviser will consider privately issued CMOs as possible
investments only when the underlying mortgage collateral is insured, guaranteed
or otherwise backed by the U.S. Government or one or more of its agencies or
instrumentalities.
Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities; the
first three classes pay interest at their stated rates beginning with the issue
date and the final class is typically an accrual class (or Z bond). The cash
flows from the underlying mortgage collateral are applied first to pay interest
and then to retire securities. The classes of securities are retired
sequentially. All principal payments are directed first to the shortest-maturity
class (or A bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity security (or B bond).
This process continues until all of the classes have been paid off. Because the
cash flow is distributed sequentially instead of pro rata as with pass-through
securities, the cash flows and average lives of CMOs are more predictable, and
there is a period of time during which the investors into the longer- maturity
classes receive no principal paydowns.
One or more tranches of a CMO may have coupon rates that reset periodically
at a specified increment over an index, such as the London Interbank Offered
Rate ("LIBOR"). These Adjustable Rate tranches, known as "floating-rate CMOs,"
will be treated as Adjustable Rate mortgage securities. Floating-rate CMOs may
be backed by fixed-rate or adjustable-rate mortgages. Floating-rate CMOs are
typically issued with lifetime "caps" on the coupon rate. These caps, similar to
the caps on ARMS, represent a ceiling beyond which the coupon rate may not be
increased, regardless of increases in the underlying interest rate index.
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As a matter of current policy that may be changed without shareholder
approval, the Intermediate Term Government Income Fund will invest in a CMO
tranche either for (1) interest rate hedging purposes subject to the adoption of
monitoring and reporting procedures or (2) other purposes where the average
tranche life would not change more than 6 years based upon a hypothetical change
in time of purchase and on any subsequent test dates (at least annually)
thereafter. Testing models employed must assume market interest rates and
prepayment speeds at the time the standard is applied. Adjustable Rate CMO
tranches are exempted from the average life requirements if (i) the rate is
reset at least annually, (ii) the maximum rate is at least 3% higher than the
rate at the time of purchase, and (iii) the rate varies directly with the index
on which it is based and is not reset as a multiple of the change in such index.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, Adjustable Rate mortgages
have a specified maturity date and amortize principal over their life. In
periods of declining interest rates there is a reasonable likelihood that ARMS
will experience increased rates of prepayment of principal. However, the major
difference between ARMS and fixed-rate mortgage securities is that the interest
rate can and does change in accordance with movements in a particular,
pre-specified, published interest rate index. There are two main categories of
indices: those based on U.S. Treasury obligations and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. The amount of interest on an Adjustable Rate mortgage is
calculated by adding a specified amount to the applicable index, subject to
limitations on the maximum and minimum interest that is charged during the life
of the mortgage or to maximum and minimum changes to that interest rate during a
given period.
The underlying mortgages which collateralize the ARMS will frequently have
caps and floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down (1) per reset or adjustment interval
and (2) over the life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These payment caps
may result in negative amortization. The value of mortgage-related securities in
which the Fund invests may be affected if market interest rates rise or fall
faster and farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the interest rates on the
underlying residential mortgages are adjustable, amortization and prepayments
may occur, thereby causing the effective maturities of the mortgage-related
securities in which the Fund invests to be shorter than the maturities stated in
the underlying mortgages.
INFLATION-INDEXED BONDS. The Intermediate Term Government Income Fund and
the Intermediate Term Bond Fund may invest in inflation-indexed bonds, which are
fixed-income securities whose principal value is periodically adjusted according
to the rate of inflation. Such bonds generally are issued at an interest rate
lower than typical bonds, but are expected to retain their principal value over
time. The interest rate on these bonds is fixed at issuance, but over the life
of the bond this interest may be paid on an increasing principal value, which
has been adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or ten years, although it is anticipated that securities
with other maturities will be issued in
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the future. The securities will pay interest on a semiannual basis, equal to a
fixed percentage of the inflation-adjusted principal amount. For example, if a
Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3%
real rate of return coupon (payable 1.5% semiannually), and inflation over the
first six months were 1%, the mid-year par value of the bond would be $1,010 and
the first semiannual interest payment would be $15.15 ($1,010 times 1.5%). If
inflation during the second half of the year reached 3%, the end-of-year par
value of the bond would be $1,030 and the second semiannual interest payment
would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Fund may be forced to liquidate positions when
it would not be advantageous to do so. There also can be no assurance that the
U.S. Treasury will issue any particular amount of inflation-indexed bonds.
Certain foreign governments, such as the United Kingdom, Canada and Australia,
have a longer history of issuing inflation-indexed bonds, and there may be a
more liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign
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government are generally adjusted to reflect a comparable inflation index,
calculated by that government. There can be no assurance that the CPI-U or any
foreign inflation index will accurately measure the real rate of inflation in
the prices of goods and services. Moreover, there can be no assurance that the
rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which a
Fund purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
of the seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses. To minimize these possibilities,
each Fund intends to enter into repurchase agreements only with its Custodian,
with banks having assets in excess of $10 billion and with broker-dealers who
are recognized as primary dealers in U.S. Government obligations by the Federal
Reserve Bank of New York. The Funds will enter into repurchase agreements which
are collateralized by U.S. Government obligations. Collateral for repurchase
agreements is held in safekeeping in the customer-only account of the Funds'
Custodian at the Federal Reserve Bank. At the time a Fund enters into a
repurchase agreement, the value of the collateral, including accrued interest,
will equal or exceed the value of the repurchase agreement and, in the case of a
repurchase agreement exceeding one day, the seller agrees to maintain sufficient
collateral so that the value of the underlying collateral, including accrued
interest, will at all times equal or exceed the value of the repurchase
agreement. The Short Term Government Income Fund, the Intermediate Term
Government Income Fund and the Money Market Fund will not enter into a
repurchase agreement not terminable within seven days if, as result thereof,
more than 10% of the value of its net assets would be invested in such
securities and other illiquid securities. The Intermediate Bond Fund will not
enter into a repurchase agreement not terminable within seven days if, as a
result thereof, more than 15% of the value of its net assets would be invested
in such securities and other illiquid securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security.
For purposes of the Investment Company Act of 1940, a repurchase agreement
is deemed to be a loan from a Fund to the seller subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
securities purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the securities before repurchase of the security under a
repurchase agreement, a Fund may encounter
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delay and incur costs before being able to sell the security. Delays may involve
loss of interest or decline in price of the security. If a court characterized
the transaction as a loan and a Fund has not perfected a security interest in
the security, that Fund may be required to return the security to the seller's
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, a Fund would be at the risk of losing some or all of the principal and
income involved in the transaction. As with any unsecured debt obligation
purchased for a Fund, the Adviser seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the obligor, in this
case, the seller. Apart from the risk of bankruptcy or insolvency proceedings,
there is also the risk that the seller may fail to repurchase the security, in
which case a Fund may incur a loss if the proceeds to that Fund of the sale of
the security to a third party are less than the repurchase price. However, if
the market value of the securities subject to the repurchase agreement becomes
less than the repurchase price (including interest), the Fund involved will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. It is possible that a Fund will be unsuccessful in
seeking to enforce the seller's contractual obligation to deliver additional
securities.
LOANS OF PORTFOLIO SECURITIES. The Money Market Fund and the Intermediate
Bond Fund may each lend its portfolio securities. Each of the Money Market Fund
and the Intermediate Bond Fund will not make loans to other persons if, as a
result, more than one-third of the value of its total assets would be subject to
such loans. Each Fund's lending policies may not be changed without the
affirmative vote of a majority of its outstanding shares.
Lending portfolio securities exposes a Fund to the risk that the borrower
may fail to return the loaned securities or may not be able to provide
additional collateral or that the Fund may experience delays in recovery of the
loaned securities or loss of rights in the collateral if the borrower fails
financially. To minimize these risks, the borrower must agree to maintain
collateral marked to market daily, in the form of cash and/or liquid securities,
with the Fund's Custodian in an amount at least equal to the market value of the
loaned securities.
Under applicable regulatory requirements (which are subject to change), the
loan collateral must, on each business day, at least equal the value of the
loaned securities. To be acceptable as collateral, letters of credit must
obligate a bank to pay amounts demanded by a Fund if the demand meets the terms
of the letter. Such terms and the issuing bank must be satisfactory to the Fund.
The Fund receives amounts equal to the interest on loaned securities and also
receives one or more of (a) negotiated loan fees, (b) interest on securities
used as collateral, or (c) interest on short-term debt securities purchased with
such collateral; either type of interest may be shared with the borrower. The
Funds may also pay fees to placing brokers as well as custodian and
administrative fees in connection with loans. Fees may only be paid to a placing
broker provided that the Trustees determine that the fee paid to the placing
broker is reasonable and based solely upon services rendered, that the Trustees
separately consider the propriety of any fee shared by the placing broker with
the borrower, and that the fees are not used to compensate the Adviser or any
affiliated person of the Trust or an affiliated person of the Adviser or other
affiliated person. The terms of the Funds' loans must meet applicable tests
under the Internal Revenue Code and permit the Fund to reacquire loaned
securities on five days' notice or in time to vote on any important matter.
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BORROWING AND PLEDGING. As a temporary measure for extraordinary or
emergency purposes, the Short Term Government Income Fund and the Intermediate
Term Government Income Fund may each borrow money from banks or other persons in
an amount not exceeding 10% of its total assets. Each Fund may pledge assets in
connection with borrowings but will not pledge more than 15% of its total
assets. Each Fund will not make any additional purchases of portfolio securities
if outstanding borrowings exceed 5% of the value of its total assets.
Each of the Short Term Government Income Fund and the Intermediate Term
Government Income Fund may borrow money from banks or other persons in an amount
not exceeding 10% of its total assets, as a temporary measure for extraordinary
or emergency purposes. Each Fund may pledge assets in connection with borrowings
but will not pledge more than 15% of its total assets. Each Fund will not make
any additional purchases of portfolio securities if outstanding borrowings
exceed 5% of the value of its total assets.
The Money Market Fund and the Intermediate Bond Fund may each borrow from
banks or from other lenders (provided there is 300% asset coverage) for
temporary or emergency purposes and to meet redemptions and may pledge assets to
secure such borrowings. The Money Market Fund will not make any borrowing which
would cause its outstanding borrowings to exceed one-third of the value of its
total assets. As a matter of operating policy, the Money Market Fund does not
intend to purchase securities for investment during periods when the sum of bank
borrowings exceed 5% of its total assets. This operating policy is not
fundamental and may be changed without shareholder notification.
Borrowing magnifies the potential for gain or loss on a Fund's portfolio
securities and, therefore, if employed, increases the possibility of fluctuation
in its net asset value. This is the speculative factor known as leverage. To
reduce the risks of borrowing, each Fund will limit its borrowings as described
above. Each Fund's policies on borrowing and pledging are fundamental policies
which may not be changed without the affirmative vote of a majority of its
outstanding shares.
The Investment Company Act of 1940 requires the Funds to maintain asset
coverage of at least 300% for all borrowings, and should such asset coverage at
any time fall below 300%, the Fund would be required to reduce its borrowings
within three days to the extent necessary to meet the requirements of the 1940
Act. To reduce its borrowings, a Fund might be required to sell securities at a
time when it would be disadvantageous to do so. In addition, because interest on
money borrowed is a Fund expense that it would not otherwise incur, a Fund may
have less net investment income during periods when its borrowings are
substantial. The interest paid by a Fund on borrowings may be more or less than
the yield on the securities purchased with borrowed funds, depending on
prevailing market conditions.
BANK DEBT INSTRUMENTS. Bank debt instruments in which the Funds may invest
consist of certificates of deposit, bankers' acceptances and time deposits
issued by national banks and state banks, trust companies and mutual savings
banks, or of banks or institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan
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Insurance Corporation. Certificates of deposit are negotiable certificates
evidencing the indebtedness of a commercial bank to repay funds deposited with
it for a definite period of time (usually from fourteen days to one year) at a
stated or variable interest rate. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft which has been drawn on it by
a customer, which instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Investments in time deposits maturing
in more than seven days will be subject to each Fund's restrictions on illiquid
investments (see "Investment Limitations").
The Money Market Fund and the Intermediate Bond Fund may also invest in
certificates of deposit, bankers' acceptances and time deposits issued by
foreign branches of national banks. Eurodollar certificates of deposit are
negotiable U.S. dollar denominated certificates of deposit issued by foreign
branches of major U.S. commercial banks. Eurodollar bankers' acceptances are
U.S. dollar denominated bankers' acceptances "accepted" by foreign branches of
major U.S. commercial banks. Investments in the obligations of foreign branches
of U.S. commercial banks may be subject to special risks, including future
political and economic developments, imposition of withholding taxes on income,
establishment of exchange controls or other restrictions, less governmental
supervision and the lack of uniform accounting, auditing and financial reporting
standards that might affect an investment adversely. Payment of interest and
principal upon these obligations may also be affected by governmental action in
the country of domicile of the branch (generally referred to as sovereign risk).
In addition, evidences of ownership of portfolio securities may be held outside
of the U.S. and the Funds may be subject to the risks associated with the
holding of such property overseas. Various provisions of federal law governing
the establishment and operation of domestic branches do not apply to foreign
branches of domestic banks. The Adviser, subject to the overall supervision of
the Board of Trustees, carefully considers these factors when making
investments. The Funds do not limit the amount of their assets which can be
invested in any one type of instrument or in any foreign country in which a
branch of a U.S. bank or the parent of a U.S. branch is located. Investments in
obligations of foreign banks are subject to the overall limit of 25% of total
assets which may be invested in a single industry.
COMMERCIAL PAPER. Commercial paper consists of short-term, (usually from
one to two hundred seventy days) unsecured promissory notes issued by U.S.
corporations in order to finance their current operations. Certain notes may
have floating or variable rates. Variable and floating rate notes with a demand
notice period exceeding seven days will be subject to a Fund's restrictions on
illiquid investments (see "Investment Limitations") unless, in the judgment of
the Adviser, subject to the direction of the Board of Trustees, such note is
liquid.
VARIABLE RATE DEMAND INSTRUMENTS. The Funds may purchase variable rate
demand instruments. Variable rate demand instruments that the Funds will
purchase are variable amount master demand notes that provide for a periodic
adjustment in the interest rate paid on the instrument and permit the holder to
demand payment of the unpaid principal balance plus accrued interest at
specified intervals upon a specific number of days' notice either from the
issuer or by drawing on a bank letter of credit, a guarantee, insurance or other
credit facility issued with respect to such instrument.
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The variable rate demand instruments in which the Funds may invest are
payable on not more than thirty calendar days' notice either on demand or at
specified intervals not exceeding thirteen months depending upon the terms of
the instrument. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to thirteen months and their
adjustments are based upon the prime rate of a bank or other appropriate
interest rate adjustment index as provided in the respective instruments. In
order to minimize credit risks, the Adviser will decide which variable rate
demand instruments it will purchase in accordance with procedures prescribed by
the Board of Trustees. Each Fund may only purchase variable rate demand
instruments which have received a short-term rating meeting that Fund's quality
standards from an NRSRO or unrated variable rate demand instruments determined
by the Adviser, under the direction of the Board of Trustees, to be of
comparable quality. If such an instrument does not have a demand feature
exercisable by a Fund in the event of default in the payment of principal or
interest on the underlying securities, then the Fund will also require that the
instrument have a rating as long-term debt in one of the top two categories by
any NRSRO. The Adviser may determine, under the direction of the Board of
Trustees, that an unrated variable rate demand instrument meets a Fund's quality
criteria if it is backed by a letter of credit or guarantee or insurance or
other credit facility that meets the quality criteria for the Fund or on the
basis of a credit evaluation of the underlying obligor. If an instrument is ever
deemed to not meet a Fund's quality standards, such Fund either will sell it in
the market or exercise the demand feature as soon as practicable.
Each Fund will not invest more than 10% of its net assets (or 15% of net
assets with respect to the Intermediate Bond Fund) in variable rate demand
instruments as to which it cannot exercise the demand feature on not more than
seven days' notice if the Board of Trustees determines that there is no
secondary market available for these obligations and all other illiquid
securities. The Funds intend to exercise the demand repurchase feature only (1)
upon a default under the terms of the bond documents, (2) as needed to provide
liquidity to a Fund in order to make redemptions of its shares, or (3) to
maintain the quality standards of a Fund's investment portfolio.
While the value of the underlying variable rate demand instruments may
change with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital depreciation is less than would be the case with a
portfolio of fixed income securities. Each Fund may hold variable rate demand
instruments on which stated minimum or maximum rates, or maximum rates set by
state law, limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent it does, increases or decreases in
value may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable banks' "prime rate," or other
interest rate adjustment index, the variable rate demand instruments are not
comparable to long-term fixed rate securities. Accordingly, interest rates on
the variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations or obligations of comparable quality with
similar maturities.
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<PAGE>
RESTRICTED SECURITIES. The Money Market Fund and the Intermediate Bond Fund
(up to 10%) may invest in restricted securities. Restricted securities cannot be
sold to the public without registration under the Securities Act of 1933. The
absence of a trading market can make it difficult to ascertain a market value of
illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses. Restricted securities generally
can be sold in a privately negotiated transaction, pursuant to an exemption from
registration under the securities Act of 1933, or in a registered public
offering. Where registration is required, a Fund may be obligated to pay all or
part of the registration expense and a considerable period may elapse between
the time it decides to seek registration and the time the Fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a Fund might obtain a less
favorable price than prevailed when it decided to seek registration of the
shares. However, in general, the Funds anticipate holding restricted securities
to maturity or selling them in an exempt transaction.
ASSET-BACKED SECURITIES. The Intermediate Term Government Income Fund may
invest in various types of Adjustable Rate securities in the form of
asset-backed securities issued or guaranteed by U.S. Government agencies or
instrumentalities. The securitization techniques used in the context of
asset-backed securities are similar to those used for mortgage-related
securities. Thus, through the use of trusts and special purpose corporations,
various types of receivables are securitized in pass-through structures similar
to the mortgage pass-through structures described above or in a pay-through
structure similar to the CMO structure. In general, collateral supporting
asset-backed securities has shorter maturities than mortgage loans and has been
less likely to experience substantial prepayment.
The Funds' investments in asset-backed securities may include pass-through
securities collateralized by Student Loan Marketing Association ("SLMA")
guaranteed loans whose interest rates adjust in much the same fashion as
described above with respect to ARMS. The underlying loans are originally made
by private lenders and are guaranteed by the SLMA. It is the guaranteed loans
that constitute the underlying financial assets in these asset-backed
securities. There may be other types of asset-backed securities that are
developed in the future in which the Funds may invest.
The Intermediate Bond Fund may invest in certain asset-backed securities
such as securities whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts or a pool of credit card loan receivables.
MUNICIPAL SECURITIES. The Money Market Fund and the Intermediate Bond Fund
may invest in taxable and tax-exempt municipal securities. Municipal securities
consist of (i) debt obligations issued by or on behalf of public authorities to
obtain funds to be used for various public facilities, for refunding outstanding
obligations, for general operating expenses, and for lending such funds to other
public institutions and facilities; and (ii) certain private activity and
industrial development bonds issued by or on behalf of public authorities to
obtain funds to provide for the construction, equipment, repair, or improvement
of privately operated facilities. Municipal notes include general obligation
notes, tax anticipation notes, revenue anticipation notes, bond anticipation
notes, certificates of indebtedness, demand notes and construction loan notes
and participation interests in municipal notes. Municipal bonds include general
obligation
17
<PAGE>
bonds, revenue or special obligation bonds, private activity and industrial
development bonds, and participation interests in municipal bonds. General
obligation bonds are backed by the taxing power of the issuing municipality.
Revenue bonds are backed by the revenues of a project or facility. The payment
of principal and interest on private activity and industrial development bonds
generally is dependent solely on the ability of the facility's user to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Fund may make investments
in obligations issued by highly rated U.S. insurance companies, such as
guaranteed investment contracts and similar funding agreements (collectively
"GICs"). A GIC is a general obligation of the issuing insurance company and not
a separate account. Under these contracts, the Fund makes cash contributions to
a deposit fund of the insurance company's general account. The insurance company
then credits to the Fund on a monthly basis guaranteed interest which is based
on an index. The GICs provide that this guaranteed interest will not be less
than a certain minimum rate. GIC investments that do not provide for payment
within seven days after notice are subject to the Fund's policy regarding
investments in illiquid securities.
PRIVATE PLACEMENT INVESTMENTS. The Money Market Fund may invest in
commercial paper issued in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities laws and is generally sold
to institutional investors who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Adviser believes that Section 4(2)
commercial paper and possibly certain other restricted securities which meet the
criteria for liquidity established by the Trustees are quite liquid. The Fund
intends therefore, to treat the restricted securities which meet the criteria
for liquidity established by the Trustees, including Section 4(2) commercial
paper, as determined by the Adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because Section 4(2)
commercial paper is liquid, the Fund does not intend to subject such paper to
the limitation applicable to restricted securities.
The ability of the Board of Trustees to determine the liquidity of certain
restricted securities is permitted under a position of the staff of the
Securities and Exchange Commission set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a nonexclusive
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The staff of the Securities and Exchange Commission has left
the question of determining the liquidity of all restricted securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities (including Section 4(2) commercial
paper): the frequency of trades and quotes for the security; the number of
dealers willing to purchase or sell the security and the
18
<PAGE>
number of other potential buyers; dealer undertakings to make a market in the
security; and the nature of the security and the nature of the marketplace
trades. The Trustees have delegated to the Adviser the daily function of
determining and monitoring the liquidity of restricted securities pursuant to
the above criteria and guidelines adopted by the Board of Trustees. The Trustees
will monitor and periodically review the Adviser's selection of Rule 144A and
Section 4(2) commercial paper as well as any determinations as to its liquidity.
LOAN PARTICIPATIONS. The Intermediate Bond Fund may invest, subject to an
overall 10% limit on loans, in loan participations, typically made by a
syndicate of banks to U.S. and non-U.S. corporate or governmental borrowers for
a variety of purposes. The underlying loans may be secured or unsecured, and
will vary in term and legal structure. When purchasing such instruments, the
Fund may assume the credit risks associated with the original bank lender as
well as the credit risks associated with the borrower. Investments in loan
participations present the possibility that the Fund could be held liable as a
co-lender under emerging legal theories of lender liability. In addition, if the
loan is foreclosed, the Fund could be part owner of any collateral, and could
bear the costs and liabilities of owning and disposing of the collateral. Loan
participations are generally not rated by major rating agencies and may not be
protected by securities laws. Also, loan participations are generally considered
to be illiquid and are therefore subject to the Fund's overall 15% limitation on
illiquid securities.
ZERO COUPON BONDS. The Intermediate Bond Fund is permitted to purchase zero
coupon securities ("zero coupon bonds"). Zero coupon bonds are purchased at a
discount from the face amount because the buyer receives only the right to
receive a fixed payment on a certain date in the future and does not receive any
periodic interest payments. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligations. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yields on the zero coupon bond, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this reason,
zero coupon bonds are subject to substantially greater price fluctuations during
periods of changing market interest rates than are comparable securities which
pay interest currently, which fluctuation increases the longer the period to
maturity. Although zero coupon bonds do not pay interest to holders prior to
maturity, federal income tax law requires the Fund to recognize as interest
income a portion of the bond's discount each year and this income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sale of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income-producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
LOWER-RATED SECURITIES. The Intermediate Bond Fund may invest up to 20% of
its assets in higher yielding (and, therefore, higher risk), lower rated
fixed-income securities, including debt securities, convertible securities and
preferred stocks and unrated fixed-income securities. Lower rated fixed-income
securities, commonly referred to as "junk bonds", are considered
19
<PAGE>
speculative and involve greater risk of default or price changes due to changes
in the issuer's creditworthiness than higher rated fixed-income securities.
Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by S&P. The Fund may invest in any security which is rated by Moody's or
by S&P, or in any unrated security which the Adviser determines is of suitable
quality. Securities in the rating categories below Baa as determined by Moody's
and BBB as determined by S&P are considered to be of poor standing and
predominantly speculative.
Securities ratings are based largely on the issuer's historical financial
information and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. Although the Adviser will consider
security ratings when making investment decisions in the high yield market, it
will perform its own investment analysis and will not rely principally on the
ratings assigned by the rating agencies. The Adviser's analysis generally may
include, among other things, consideration of the issuer's experience and
managerial strength, changing financial conditions, borrowing requirements or
debt maturity schedules, and its responsiveness to changes in business
conditions and interest rates. It also considers relative values based on
anticipated cash flow, interest or dividend coverage, asset coverage and
earnings prospects.
Lower quality fixed-income securities generally produce a higher current
yield than do fixed-income securities of higher ratings. However, these
fixed-income securities are considered speculative because they involve greater
price volatility and risk than do higher rated fixed-income securities and
yields on these fixed-income securities will tend to fluctuate over time.
Although the market value of all fixed-income securities varies as a result of
changes in prevailing interest rates (e.g., when interest rates rise, the market
value of fixed-income securities can be expected to decline), values of lower
rated fixed-income securities tend to react differently than the values of
higher rated fixed-income securities. The prices of lower rated fixed-income
securities are less sensitive to changes in interest rates than higher rated
fixed-income securities. Conversely, lower rated fixed-income securities also
involve a greater risk of default by the issuer in the payment of principal and
income and are more sensitive to economic downturns and recessions than higher
rated fixed-income securities. The financial stress resulting from an economic
downturn could have a greater negative effect on the ability of issuers of lower
rated fixed-income securities to service their principal and interest payments,
to meet projected business goals and to obtain additional financing than on more
creditworthy issuers. In the event of an issuer's default in payment of
principal or interest on such securities, or any other fixed-income securities
in the Fund's portfolio, the net asset value of the Fund will be negatively
affected. Moreover, as the market for lower rated fixed-income securities is a
relatively new one, a severe economic downturn might increase the number of
defaults, thereby adversely affecting the value of all outstanding lower rated
fixed-income securities and disrupting the market for such securities.
Fixed-income securities purchased by the Fund as part of an initial underwriting
present an additional risk due to their lack of market history. These risks are
exacerbated with respect to fixed-income securities rated Caa or lower by
Moody's or
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<PAGE>
CCC or lower by S&P. Unrated fixed-income securities generally carry the same
risks as do lower rated fixed-income securities.
Lower rated fixed-income securities are typically traded among a smaller
number of broker-dealers rather than in a broad secondary market. Purchasers of
lower rated fixed-income securities tend to be institutions, rather than
individuals, a factor that further limits the secondary market. To the extent
that no established retail secondary market exists, many lower rated
fixed-income securities may not be as liquid as Treasury and investment grade
bonds. The ability of the Fund to sell lower rated fixed-income securities will
be adversely affected to the extent that such securities are thinly traded or
illiquid. Moreover, the ability of the Fund to value lower rated fixed-income
securities becomes more difficult, and judgment plays a greater role in
valuation, as there is less reliable, objective data available with respect to
such securities that are thinly traded or illiquid.
Because investors may perceive that there are greater risks associated with
the lower rated fixed-income securities of the type in which the Fund may
invest, the yields and prices of such securities may tend to fluctuate more than
those for fixed-income securities with a higher rating. Changes in perception of
issuer's creditworthiness tend to occur more frequently and in a more pronounced
manner in the lower quality segments of the fixed-income securities market than
do changes in higher quality segments of the fixed-income securities market,
resulting in greater yield and price volatility.
The Adviser believes that the risks of investing in such high yielding,
fixed-income securities may be minimized through careful analysis of prospective
issuers. Although the opinion of ratings services such as Moody's and S&P is
considered in selecting portfolio securities, they evaluate the safety of the
principal and the interest payments of the security, not their market value
risk. Additionally, credit rating agencies may experience slight delays in
updating ratings to reflect current events. The Adviser relies, primarily, on
its own credit analysis. This may suggest, however, that the achievement of the
Fund's investment objective is more dependent on the Adviser's proprietary
credit analysis, than is otherwise the case for a fund that invests exclusively
in higher quality fixed-income securities.
Once the rating of a portfolio security or the quality determination
ascribed by the Adviser to an unrated, fixed-income security has been
downgraded, the Adviser will consider all circumstances deemed relevant in
determining whether to continue to hold the security, but in no event will the
Fund retain such security if it would cause the Fund to have 20% or more of the
value of its net assets invested in fixed-income securities rated lower than Baa
by Moody's or BBB by S&P, or if unrated, are judged by the Adviser to be of
comparable quality.
The Intermediate Bond Fund may also invest in unrated fixed-income
securities. Unrated fixed-income securities are not necessarily of lower quality
than rated fixed-income securities, but they may not be attractive to as many
buyers.
There is no minimum rating standard for the Fund's investments in the high
yield market; therefore, the Fund may at times invest in fixed-income securities
not currently paying interest or in default. The Fund will invest in such
fixed-income securities where the Adviser perceives a
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<PAGE>
substantial opportunity to realize the Fund's objective based on its analysis of
the underlying financial condition of the issuer. It is not, however, the
current intention of the Fund to make such investments.
MAJORITY. The term "majority" of the outstanding shares of the Trust (or of
any Fund) means the lesser of (1) 67% or more of the outstanding shares of the
Trust (or the applicable Fund) present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust (or the applicable Fund) are present
or represented at such meeting or (2) more than 50% of the outstanding shares of
the Trust (or the applicable Fund).
QUALITY RATINGS OF FIXED-INCOME OBLIGATIONS
- -------------------------------------------
CORPORATE BONDS.
Moody's Investors Service, Inc. provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
Aaa - "Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues."
Aa - "Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities."
A - "Bonds which are rated A possess many favorable investment attributes
and are considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future."
Baa - "Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well."
Ba - "Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class."
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<PAGE>
B - "Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small."
Caa - "Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest."
Ca - "Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings."
C - "Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing."
Standard & Poor's Ratings Group provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
AAA - "Debt rated AAA has the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong."
AA - "Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree."
A - "Debt rated A has strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories."
BBB - "Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
BB - "Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating."
B - "Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating."
CCC - "Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial or economic conditions to
meet timely payment of
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<PAGE>
interest and repayment of principal. In the event of adverse business, financial
or economic conditions, it is not likely to have the capacity to pay interest or
repay principal. The CCC rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied B or B- rating."
CC - "The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating."
C - "The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy has been filed but debt service
payments are continued."
CI - "The rating CI is reserved for income bonds on which no interest is
being paid."
D - "Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition and debt service payments are jeopardized."
Duff and Phelps Inc. provides the following descriptions of its corporate bond
- --------------------------------------------------------------------------------
ratings:
- --------
AAA - "Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt."
AA - "High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions."
A - "Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress."
BBB - "Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles."
BB - "Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category."
B - "Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade."
CCC - "Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and
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<PAGE>
risk can be substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments."
DD - "Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments."
Fitch Investors Service, Inc. provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
AAA - "AAA ratings denote the lowest expectation of credit risk. They are
assigned only in cases of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events."
AA - "AA ratings denote a very low expectation of credit risk. They
indicate strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events."
A - "A ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings."
BBB - "BBB ratings indicate that there is currently a low expectation of
credit risk. Capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this capacity. This is the lowest investment grade
category."
BB - "BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade."
B - "B ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment."
CCC, CC, C - "Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default."
DDD, DD and D - "Securities are not meeting current obligations and are
extremely speculative. 'DDD' designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, 'DD' indicates expected recovery of 50%-90% of such outstanding, and
'D' the lowest recovery potential, i.e. below 50%."
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<PAGE>
Thomson BankWatch provides the following descriptions of its corporate bond
- --------------------------------------------------------------------------------
ratings:
- --------
AAA - "Indicates that the ability to repay principal and interest on a
timely basis is extremely high."
AA - "Indicates a very strong ability to repay principal and interest on a
timely basis, with limited incremental risk compared to issues rated in the
highest category."
A - "Indicates the ability to repay principal and interest is strong.
Issues rated A could be more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings."
BBB - "The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. BBB issues are more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings."
BB - "While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to adequately
service debt obligations."
B - "Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely
basis."
CCC - "Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances."
CC - "CC is applied to issues that are subordinate to other obligations
rated CCC and are afforded less protection in the event of bankruptcy or
reorganization."
D - "Default."
CORPORATE NOTES.
Moody's Investors Service, Inc. provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate note ratings:
- -----------------------
MIG-1 "Notes which are rated MIG-1 are judged to be of the best quality. There
is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing."
MIG-2 "Notes which are rated MIG-2 are judged to be of high quality. Margins of
protection are ample although not so large as in the preceding group."
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<PAGE>
Standard & Poor's Ratings Group provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate note ratings:
- -----------------------
SP-1 "Debt rated SP-1 has very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation."
SP-2 "Debt rated SP-2 has satisfactory capacity to pay principal and interest."
COMMERCIAL PAPER.
Description of Commercial Paper Ratings of Moody's Investors Service, Inc.:
- --------------------------------------------------------------------------
Prime-1 "Superior capacity for repayment of short-term promissory
obligations."
Prime-2 "Strong capacity for repayment of short-term promissory
obligations."
Prime-3 "Acceptable ability for repayment of short-term promissory
obligations."
Description of Commercial Paper Ratings of Standard & Poor's Ratings Group:
- --------------------------------------------------------------------------
A-1 "This designation indicates that the degree of safety regarding timely
payment is very strong."
A-2 "Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1."
A-3 "Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations."
Description of Commercial Paper Ratings of Duff & Phelps, Inc.:
- ---------------------------------------------------------------
DUFF-1 - "Very high certainty of timely payment. Liquidity factors are excellent
and supported by strong fundamental protection factors. Risk factors are minor."
DUFF-2 - "Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small."
Description of Commercial Paper Ratings of Thomson BankWatch:
- -------------------------------------------------------------
TBW-1 - "The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis."
27
<PAGE>
TBW-2 - "The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1."
TBW-3 - "The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate."
TBW-4 - "The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative."
INVESTMENT LIMITATIONS
- ----------------------
The Trust has adopted certain fundamental investment limitations designed
to reduce the risk of an investment in the Funds. These limitations may not be
changed with respect to any Fund without the affirmative vote of a majority of
the outstanding shares of that Fund.
THE LIMITATIONS APPLICABLE TO THE SHORT TERM GOVERNMENT INCOME FUND AND THE
INTERMEDIATE TERM GOVERNMENT INCOME FUND ARE:
1. BORROWING MONEY. Each Fund will not borrow money, except (a) as a
temporary measure for extraordinary or emergency purposes and then only in
amounts not in excess of 10% of the value of the Fund's total assets or (b)
pursuant to Paragraph (15) of this section. Each Fund may pledge its assets to
the extent of up to 15% of the value of its total assets to secure such
borrowings.
2. UNDERWRITING. Each Fund will not act as underwriter of securities
issued by other persons, either directly or through a majority owned subsidiary.
This limitation is not applicable to the extent that, in connection with the
disposition of its portfolio securities (including restricted securities), a
Fund may be deemed an underwriter under certain federal securities laws.
3. ILLIQUID INVESTMENTS. Each Fund will not purchase securities for which
there are legal or contractual restrictions on resale or enter into a repurchase
agreement maturing in more than seven days if, as a result thereof, more than
10% of the value of the Fund's total assets would be invested in such
securities.
4. REAL ESTATE. Each Fund will not purchase, hold or deal in real estate,
including real estate limited partnership interests.
5. COMMODITIES. Each Fund will not purchase, hold or deal in commodities
or commodities futures contracts.
6. LOANS. Each Fund will not make loans to individuals, to any officer or
Trustee of the Trust or to its Adviser or to any officer or director of the
Adviser (each Fund, however, may purchase and simultaneously resell for later
delivery obligations issued or guaranteed as to principal and interest by the
United States Government or an agency or instrumentality thereof;
28
<PAGE>
provided that each Fund will not enter into such repurchase agreements if, as a
result thereof, more than 10% of the value of the Fund's total assets at that
time would be subject to repurchase agreements maturing in more than seven
days). The making of a loan by either Fund does not include the purchase of a
portion of an issue of publicly distributed bonds, debentures or other debt
securities, whether or not the purchase was made upon the original issuance of
the securities.
7. SECURITIES OF ONE ISSUER. Each Fund will not purchase the securities
of any issuer if such purchase at the time thereof would cause more than 25% of
the value of the Fund's total assets to be invested in the securities of such
issuer (the foregoing limitation does not apply to investments in government
securities as defined in the Investment Company Act of 1940).
8. SECURITIES OF ONE CLASS. Each Fund will not purchase the securities of
any issuer if such purchase at the time thereof would cause 10% of any class of
securities of such issuer to be held by a Fund, or acquire more than 10% of the
outstanding voting securities of such issuer. (All outstanding bonds and other
evidences of indebtedness shall be deemed to be a single class of securities of
the issuer, and all kinds of stock of an issuer preferred over the common stock
as to dividends or liquidation shall be deemed to constitute a single class
regardless of relative priorities, series designations, conversion rights and
other differences).
9. INVESTING FOR CONTROL. Each Fund will not invest in companies for the
purpose of exercising control or management.
10. OTHER INVESTMENT COMPANIES. Each Fund will not purchase securities
issued by any other investment company or investment trust except (a) by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than customary brokers' commission or (b) where
such purchase, not made in the open market, is part of a plan of merger or
consolidation or acquisition of assets; provided that each Fund shall not
purchase the securities of any investment companies or investment trusts if such
purchase at the time thereof would cause more than 10% of the value of the
Fund's total assets to be invested in the securities of such issuers, and
provided further, that each Fund shall not purchase securities issued by any
other open-end investment company.
11. MARGIN PURCHASES. Each Fund will not purchase securities or evidences
of interest thereon on "margin," except that the Funds may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
or redemption of securities.
12. COMMON STOCKS. Each Fund will not invest in common stocks.
13. OPTIONS. Each Fund will not engage in the purchase or sale of put or
call options.
14. SHORT SALES. Each Fund will not sell any securities short.
15. WHEN-ISSUED PURCHASES. The Funds will not make any commitment to
purchase securities on a when-issued basis except that the Intermediate Term
Government Income Fund
29
<PAGE>
may make such commitments if no more than 20% of the Fund's net assets would be
so committed.
16. CONCENTRATION. Each Fund will not invest more than 25% of its total
assets in the securities of issuers in any particular industry; provided,
however, that there is no limitation with respect to investments in obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities or repurchase agreements with respect thereto.
17. MINERAL LEASES. The Funds will not purchase oil, gas or other mineral
leases or exploration or development programs.
18. SENIOR SECURITIES. The Funds will not issue or sell any senior
security as defined by the Investment Company Act of 1940 except insofar as any
borrowing that a Fund may engage in may be deemed to be an issuance of a senior
security.
THE LIMITATIONS APPLICABLE TO THE MONEY MARKET FUND AND THE INTERMEDIATE
BOND FUND ARE:
1. BORROWING MONEY. Each Fund will not borrow money, except (a) from a
bank, provided that immediately after such borrowing there is asset coverage of
300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that, when made, such temporary borrowings are
in an amount not exceeding 5% of the Fund's total assets. Each Fund also will
not make any borrowing which would cause outstanding borrowings to exceed
one-third of the value of its total assets.
2. UNDERWRITING. Each Fund will not act as underwriter of securities
issued by other persons, either directly or through a majority owned subsidiary.
This limitation is not applicable to the extent that, in connection with the
disposition of its portfolio securities (including restricted securities), a
Fund may be deemed an underwriter under certain federal securities laws.
3. REAL ESTATE. Each Fund will not purchase, hold or deal in real estate.
4. CONCENTRATION. Each Fund will not invest more than 25% of its total
assets in the securities of issuers in any particular industry; provided,
however, that there is no limitation with respect to investments in obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities or repurchase agreements with respect thereto.
5. COMMODITIES. Each Fund will not purchase, hold or deal in commodities
and will not invest in oil, gas or other mineral explorative or development
programs.
6. LOANS. Each Fund will not make loans to other persons if, as a result,
more than one-third of the value of the Fund's total assets would be subject to
such loans. This limitation does not apply to (a) the purchase of a portion of
an issue of debt securities in accordance with a Fund's investment objective,
policies and limitations or (b) engaging in repurchase transactions.
7. OPTIONS. Each Fund will not engage in the purchase or sale of put or
call options.
30
<PAGE>
8. SENIOR SECURITIES. Each Fund will not issue or sell any senior
security as defined by the Investment Company Act of 1940 except insofar as any
borrowing that the Funds may engage in may be deemed to be an issuance of a
senior security.
The Money Market Fund has adopted the following additional investment
limitation, which may not be changed without the affirmative vote of a majority
of the outstanding shares of the Fund. The Fund will not purchase the securities
of any issuer if such purchase at the time thereof would cause more than 5% of
the value of its total assets to be invested in the securities of such issuer
(the foregoing limitation does not apply to investments in government securities
as defined in the Investment Company Act of 1940).
In addition, the Money Market Fund may not invest more than 25% of its
total assets in a particular industry, except that the Fund may invest more than
25% of total assets in the securities of banks. Currently, the Securities and
Exchange Commission defines the term "bank" to include U.S. banks and their
foreign branches if, in the case of foreign branches, the parent U.S. bank is
unconditionally liable for such obligations. These limitations do not apply to
obligations of the U.S. Government or any of its agencies or instrumentalities.
The Fund does not consider utilities or companies engaged in finance generally
to be one industry. Finance companies will be considered a part of the industry
they finance (e.g., GMAC-auto; VISA-credit cards). Utilities will be divided
according to the types of services they provide; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
THE FOLLOWING INVESTMENT LIMITATIONS OF THE MONEY MARKET FUND AND THE
INTERMEDIATE BOND FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER
APPROVAL.
1. ILLIQUID INVESTMENTS. Each Fund will not purchase securities for which
there are legal or contractual restrictions on resale or enter into a repurchase
agreement maturing in more than seven days if, as a result thereof, more than
15% of the value of the Intermediate Bond Fund's net assets or 10% of the value
of the Money Market Fund's net assets would be invested in such securities.
2. OTHER INVESTMENT COMPANIES. Each Fund will not invest more than 5% of
its total assets in the securities of any investment company and will not invest
more than 10% of the value of its total assets in securities of other investment
companies.
3. MARGIN PURCHASES. Each Fund will not purchase securities or evidences
of interest thereon on "margin." This limitation is not applicable to short-term
credit obtained by a Fund for the clearance of purchases and sales or redemption
of securities.
4. SHORT SALES. Each Fund will not make short sales of securities, unless
it owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short.
31
<PAGE>
With respect to the percentages adopted by the Trust as maximum limitations
on a Fund's investment policies and restrictions, an excess above the fixed
percentage (except for the percentage limitations relative to the borrowing of
money or investing in illiquid securities) will not be a violation of the policy
or restriction unless the excess results immediately and directly from the
acquisition of any security or the action taken.
The Trust has never pledged, mortgaged or hypothecated the assets of any
Fund, and the Trust presently intends to continue this policy. The Trust has
never acquired, nor does it presently intend to acquire, securities issued by
any other investment company or investment trust. The Short Term Government
Income Fund and the Intermediate Term Government Income Fund will not purchase
securities for which there are legal or contractual restrictions on resale or
enter into a repurchase agreement maturing in more than seven days if, as a
result thereof, more than 10% of the value of a Fund's net assets would be
invested in such securities. The statements of intention in this paragraph
reflect nonfundamental policies which may be changed by the Board of Trustees
without shareholder approval.
Although not a fundamental policy, portfolio investments and transactions
of the Short Term Government Income Fund and the Intermediate Term Government
Income Fund will be limited to those investments and transactions permissible
for Federal credit unions pursuant to 12 U.S.C. Section 1757(7) and (8) and 12
CFR Part 703. If this policy is changed as to allow the Funds to make portfolio
investments and engage in transactions not permissible for Federal credit
unions, the Trust will so notify all Federal credit union shareholders.
TRUSTEES AND OFFICERS
- ---------------------
The following is a list of the Trustees and executive officers of the
Trust, their compensation from the Trust and their aggregate compensation from
the Western-Southern complex of mutual funds for the fiscal year ended September
30, 1999. Messrs. Coleman, Cox, Schwab and Stautberg did not receive any
compensation from the Trust during the fiscal year since they did not begin
serving as Trustees until October 29, 1999. Each Trustee who is an "interested
person" of the Trust, as defined by the Investment Company Act of 1940, is
indicated by an asterisk. Each of the Trustees is also a Trustee of Countrywide
Tax-Free Trust and Countrywide Strategic Trust.
32
<PAGE>
AGGREGATE
COMPENSATION
FROM
COMPENSATION WESTERN-
POSITION FROM SOUTHERN
NAME AGE HELD TRUST COMPLEX(1)
- --------------------- --- ------ --------- ----------
William O. Coleman 70 Trustee $ 0 $ 2,192
Phillip R. Cox 52 Trustee 0 10,000
+H. Jerome Lerner 61 Trustee 5,000 15,000
*Robert H. Leshner 60 President/Trustee 0 0
*Jill T. McGruder 44 Trustee 0 0
+Oscar P. Robertson 60 Trustee 5,000 15,000
Nelson Schwab, Jr. 81 Trustee 0 2,192
+Robert E. Stautberg 65 Trustee 0 10,000
Joseph S. Stern, Jr. 81 Trustee 0 8,000
Maryellen Peretzky 47 Vice President 0 0
Tina D. Hosking 31 Secretary 0 0
Theresa M. Samocki 30 Treasurer 0 0
(1) The Western-Southern complex of mutual funds consists of six series of the
Trust, six series of Countrywide Tax-Free Trust, eight series of Countrywide
Strategic Trust, eight series of Touchstone Series Trust and eight series of
Touchstone Variable Series Trust.
* Mr. Leshner, as President and a director of Countrywide Investments, Inc.
and Ms. McGruder, as a director of Countrywide Investments, Inc., are each an
"interested person" of the Trust within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940.
+ Member of Audit Committee.
The principal occupations of the Trustees and executive officers of the
Trust during the past five years are set forth below:
WILLIAM O. COLEMAN, 2 Noel Lane, Cincinnati, Ohio is a retired General
Sales Manager and Vice President of The Procter & Gamble Company and a trustee
of The Procter & Gamble Profit Sharing Plan and The Procter & Gamble Employee
Stock Ownership Plan. He is a director of LCA Vision (a laser vision correction
institute) and a trustee of Touchstone Series Trust and Touchstone Variable
Series Trust (registered investment companies).
PHILLIP R. COX, 105 East Fourth Street, Cincinnati, Ohio is President and
Chief Executive Officer of Cox Financial Corp. (a financial services company).
He is a director of the Federal Reserve Bank of Cleveland, Cincinnati Bell Inc.,
PNC Bank N.A. and Cinergy Corporation. He is also a trustee of Touchstone Series
Trust and Touchstone Variable Series Trust.
H. JEROME LERNER, 7149 Knoll Road, Cincinnati, Ohio is a principal of HJL
Enterprises and is Chairman of Crane Electronics, Inc. (a manufacturer of
electronic connectors).
33
<PAGE>
He is also a director of Slush Puppy Inc. (a manufacturer of frozen beverages)
and Peerless Manufacturing (a manufacturer of bakery equipment).
ROBERT H. LESHNER, 312 Walnut Street, Cincinnati, Ohio is President and a
Trustee of Countrywide Strategic Trust and Countrywide Tax-Free Trust,
registered investment companies. He is also President and a director of
Countrywide Investments, Inc. (the investment adviser and principal underwriter
of the Trust). Until 1999, he was President and a director of Countrywide
Financial Services, Inc. (a financial services company and parent of Countrywide
Investments, Inc., Countrywide Fund Services, Inc. and CW Fund Distributors,
Inc.), Countrywide Fund Services, Inc. (a registered transfer agent) and CW Fund
Distributors, Inc. (a registered broker-dealer).
JILL T. McGRUDER, 311 Pike Street, Cincinnati, Ohio is President, Chief
Executive Officer and a director of IFS Financial Services, Inc. (a holding
company), Touchstone Advisors, Inc. (a registered investment adviser) and
Touchstone Securities, Inc. (a registered broker-dealer). She is a Senior Vice
President of The Western-Southern Life Insurance Company and a director of
Capital Analysts Incorporated (a registered investment adviser and
broker-dealer), Countrywide Financial Services, Inc., Countrywide Investments,
Inc., CW Fund Distributors, Inc. and Countrywide Fund Services, Inc. She is also
President and a director of IFS Agency Services, Inc. and IFS Insurance Agency,
Inc. (insurance agencies). Until December 1996, she was National Marketing
Director of Metropolitan Life Insurance Co. From 1991 until 1996, she was Vice
President of Touchstone Advisors, Inc. and IFS Financial Services, Inc.
OSCAR P. ROBERTSON, 4293 Muhlhauser Road, Fairfield, Ohio is President of
Orchem Corp., a chemical specialties distributor, and Orpack Stone Corporation,
a corrugated box manufacturer.
NELSON SCHWAB, JR., 511 Walnut Street, Cincinnati, Ohio is Senior Counsel
of Graydon, Head & Ritchey (a law firm). He is a director of Rotex, Inc. (a
machine manufacturer), The Ralph J. Stolle Company and Security Rug Cleaning
Company. He is also a trustee of Touchstone Series Trust and Touchstone Variable
Series Trust.
ROBERT E. STAUTBERG, 4815 Drake Road, Cincinnati, Ohio is a retired partner
and director of KPMG Peat Marwick LLP. He is a trustee of Good Samaritan
Hospital, Bethesda Hospital and Tri Health. He is also a trustee of Touchstone
Series Trust and Touchstone Variable Series Trust.
JOSEPH S. STERN, JR., 3 Grandin Place, Cincinnati, Ohio is a retired
Professor Emeritus of the University of Cincinnati College of Business. He is
also a Trustee of Touchstone Series Trust and Touchstone Variable Series Trust.
TINA D. HOSKING, 312 Walnut Street, Cincinnati, Ohio is Vice President and
Associate General Counsel of Countrywide Fund Services, Inc. and CW Fund
Distributors, Inc. She is also Secretary of Countrywide Tax-Free Trust and
Countrywide Strategic Trust.
34
<PAGE>
THERESA M. SAMOCKI, 312 Walnut Street, Cincinnati, Ohio is Vice
President-Fund Accounting of Countrywide Fund Services, Inc. and CW Fund
Distributors, Inc. She is also Treasurer of Countrywide Tax-Free Trust and
Countrywide Strategic Trust.
Each Trustee, except for Mr. Leshner and Ms. McGruder, receives a quarterly
retainer of $1,500 and a fee of $1,500 for each Board meeting attended. Such
fees are split equally among the Trust, Countrywide Tax-Free Trust and
Countrywide Strategic Trust.
THE INVESTMENT ADVISER AND UNDERWRITER
- --------------------------------------
Countrywide Investments, Inc. (the "Adviser") is the Funds' investment
manager. The Adviser is a subsidiary of Countrywide Financial Services, Inc.,
which is a wholly-owned subsidiary of Fort Washington Investment Advisors, Inc.
(a registered investment adviser). Fort Washington Investment Advisors, Inc. is
a wholly-owned subsidiary of The Western-Southern Life Insurance Company which
provides life and health insurance, annuities, mutual funds, asset management
and related financial services. Mr. Leshner is deemed to be an affiliate of the
Adviser since he is President and a director of the Adviser. Ms. McGruder is
deemed to be an affiliate of the Adviser since she is a Director of the Adviser.
Mr. Leshner and Ms. McGruder, by reason of such affiliation, may directly or
indirectly receive benefits from the advisory fees paid to the Adviser.
Under the terms of the investment advisory agreements between the Trust and
the Adviser, the Adviser is responsible for the management of the Funds'
investments. The Short Term Government Income Fund, the Intermediate Term
Government Income Fund, the Money Market Fund and the Intermediate Bond Fund
each pay the Adviser a fee computed and accrued daily and paid monthly at an
annual rate of .5% of its average daily net assets up to $50,000,000, .45% of
such assets from $50,000,000 to $150,000,000, .4% of such assets from
$150,000,000 to $250,000,000 and .375% of such assets in excess of $250,000,000.
The total fees paid by a Fund during the first and second halves of each fiscal
year of the Trust may not exceed the semiannual total of the daily fee accruals
requested by the Adviser during the applicable six month period.
Set forth below are the advisory fees paid by the Funds during the fiscal
years ended September 30, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Short Term Government Income Fund 522,067 459,485 476,697
Intermediate Term Government Income Fund 231,334 251,601 274,084
Money Market Fund(1) 137,483 312,309 --
Intermediate Bond(2) --
(1) The Adviser voluntarily waived $127,666 of its fees for the fiscal year
ended September 30, 1999 in order to reduce the operating expenses of the Fund.
(2) The Adviser voluntarily waived $______ and $_____ of its fees for the
fiscal years ended __________________ and ____, respectively, in order to reduce
the operating expenses of the Fund.
35
<PAGE>
Prior to August 29, 1997, the investment adviser of the Predecessor Money
Market Fund and the Predecessor Intermediate Bond Fund was Trans Financial Bank,
N.A. (the "Predecessor Adviser"). For the fiscal period ended August 31, 1997,
the Predecessor Money Market Fund accrued advisory fees of $188,896; however,
the Predecessor Adviser voluntarily waived $130,362 of such fees during the
fiscal year ended August 31, 1997 in order to reduce the operating expenses of
the Fund. For the fiscal period ended August 31, 1997, the Predecessor
Intermediate Bond Fund accrued advisory fees of $60,906; however, the
Predecessor Adviser waived its entire advisory fee and reimbursed the
Predecessor Fund for $43,624 of expenses during the fiscal year ended August 31,
1997 in order to reduce the operating expenses of the Fund.
The Funds are responsible for the payment of all expenses incurred in
connection with the organization, registration of shares and operations of the
Funds, including such extraordinary or non-recurring expenses as may arise, such
as litigation to which the Trust may be a party. The Funds may have an
obligation to indemnify the Trust's officers and Trustees with respect to such
litigation, except in instances of willful misfeasance, bad faith, gross
negligence or reckless disregard by such officers and Trustees in the
performance of their duties. The Adviser bears promotional expenses in
connection with the distribution of the Funds' shares to the extent that such
expenses are not assumed by the Funds under their plan of distribution (see
below). The compensation and expenses of any officer, Trustee or employee of the
Trust who is an officer, director or employee of the Adviser are paid by the
Adviser.
By their terms, the Funds' investment advisory agreements remain in force
until October 28, 2001 and from year to year thereafter, subject to annual
approval by (a) the Board of Trustees or (b) a vote of the majority of a Fund's
outstanding voting securities; provided that in either event continuance is also
approved by a majority of the Trustees who are not interested persons of the
Trust, by a vote cast in person at a meeting called for the purpose of voting
such approval. The Funds' investment advisory agreements may be terminated at
any time, on sixty days' written notice, without the payment of any penalty, by
the Board of Trustees, by a vote of the majority of a Fund's outstanding voting
securities, or by the Adviser. The investment advisory agreements automatically
terminate in the event of their assignment, as defined by the Investment Company
Act of 1940 and the rules thereunder.
The Adviser is also the principal underwriter of the Funds and, as such,
the exclusive agent for distribution of shares of the Funds. The Adviser is
obligated to sell the shares on a best efforts basis only against purchase
orders for the shares. Shares of each Fund are offered to the public on a
continuous basis.
As principal underwriter of the Funds, the Adviser retains the entire sales
load on all direct initial investments and on all investments in accounts with
no designated dealer of record. The Adviser is the only affiliated dealer of the
Funds. The Adviser allows concessions to dealers who sell shares of the
Intermediate Term Government Income Fund and the Intermediate Bond Fund. For the
fiscal year ended September 30, 1999, the aggregate commissions on sales of the
Intermediate Term Government Income Fund's shares were $20,561, of which the
Adviser paid $13,878 to unaffiliated broker-dealers in
36
<PAGE>
the selling network, earned $5,262 as a broker-dealer in the selling network and
retained $1,421 in underwriting commissions. For the fiscal year ended _________
__, ____, the aggregate commissions on sales of the Intermediate Bond Fund's
shares were $_____ of which the Adviser paid $_____ to unaffiliated
broker-dealers in the selling network, earned $_____ as a broker-dealer in the
selling network and retained $____in underwriting commissions. For the fiscal
year ended September 30, 1998, the aggregate commissions on sales of the
Intermediate Term Government Income Fund's shares were $22,767, of which the
Adviser paid $17,566 to unaffiliated broker-dealers in the selling network,
earned $3,762 as a broker-dealer in the selling network and retained $1,439 in
underwriting commissions. For the fiscal year ended _____________, ____, the
aggregate commissions on sales of the Intermediate Bond Fund's shares were
$_____, of which the Adviser paid $_____ to unaffiliated broker-dealers in the
selling network, earned $_____ as a broker-dealer in the selling network and
retained $___ in underwriting commissions. For the fiscal year ended September
30, 1997, the aggregate commissions on sales of the Intermediate Term Government
Income Fund's shares were $14,314, of which the Adviser paid $10,905 to
unaffiliated broker-dealers in the selling network, earned $2,847 as a
broker-dealer in the selling network and retained $562 in underwriting
commissions. For the fiscal year ended _____________, ____, the aggregate
commissions on sales of the Intermediate Bond Fund's shares were $___ of which
the Adviser earned $___ as a broker-dealer in the selling network and retained
$__ in underwriting commissions.
The Funds may compensate dealers, including the Adviser and its affiliates,
based on the average balance of all accounts in the Fund for which the dealer is
designated as the party responsible for the account. See "Distribution Plans"
below.
DISTRIBUTION PLANS
- ------------------
CLASS A SHARES As stated in the Prospectus, the Funds have adopted a plan
of distribution (the "Class A Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 which permits each Fund to pay for expenses incurred in the
distribution and promotion of the Funds' shares, including but not limited to,
the printing of prospectuses, statements of additional information and reports
used for sales purposes, advertisements, expenses of preparation and printing of
sales literature, promotion, marketing and sales expenses, and other
distribution-related expenses, including any distribution fees paid to
securities dealers or other firms who have executed a distribution or service
agreement with the Adviser. The Class A Plan expressly limits payment of the
distribution expenses listed above in any fiscal year to a maximum of .35% of
the average daily net assets of the Short Term Government Income Fund, the
Intermediate Term Government Income Fund, the Money Market Fund and Class A
shares of the Intermediate Bond Fund. Unreimbursed expenses will not be carried
over from year to year.
For the fiscal year ended September 30, 1999, the aggregate
distribution-related expenditures of the Short Term Government Income Fund
("STF"), the Intermediate Term Government Income Fund ("ITF"), the Money Market
Fund ("MMF") and the Intermediate Bond Fund ("IBF") under the Class A Plan were
$147,856, $61,623, $5,128 and $_____, respectively. Amounts were spent as
follows:
37
<PAGE>
STF ITF MMF IBF
--- --- --- ---
Printing and mailing
of prospectuses and
reports to prospective
shareholders ................. $ 4,356 $ 4,123 $ 5,128 $
Payments to broker-
dealers and others
for the sale or
retention of assets .......... 143,500 57,500 --
Advertising and
promotion .................... -- -- --
-------- -------- -------- --------
$147,856 $ 61,623 $ 5,128 $
======== ======== ======== ========
CLASS C SHARES (INTERMEDIATE BOND FUND ONLY) -- The Intermediate Bond Fund
has also adopted a plan of distribution (the "Class C Plan") with respect to the
Fund's Class C shares. The Class C Plan provides for two categories of payments.
First, the Class C Plan provides for the payment to the Adviser of an account
maintenance fee, in an amount equal to an annual rate of .25% of the average
daily net assets of the Class C shares, which may be paid to other dealers based
on the average value of Class C shares owned by clients of such dealers. In
addition, the Fund may pay up to an additional .75% per annum of the daily net
assets of its Class C shares for expenses incurred in the distribution and
promotion of the shares, including prospectus costs for prospective
shareholders, costs of responding to prospective shareholder inquiries, payments
to brokers and dealers for selling and assisting in the distribution of Class C
shares, costs of advertising and promotion and any other expenses related to the
distribution of the Class C shares. Unreimbursed expenditures will not be
carried over from year to year. The Fund may make payments to dealers and other
persons in an amount up to .75% per annum of the average value of Class C shares
owned by its clients, in addition to the .25% account maintenance fee described
above. Class C shares of the Intermediate Bond Fund did not incur any
distribution expenses during the fiscal year ended September 30, 1999.
GENERAL INFORMATION -- Agreements implementing the Plans (the
"Implementation Agreements"), including agreements with dealers wherein such
dealers agree for a fee to act as agents for the sale of the Funds' shares, are
in writing and have been approved by the Board of Trustees. All payments made
pursuant to the Plans are made in accordance with written agreements.
The continuance of the Plans and the Implementation Agreements must be
specifically approved at least annually by a vote of the Trust's Board of
Trustees and by a vote of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the Plans or any
Implementation Agreement (the "Independent Trustees") at a meeting called for
the purpose of voting on such continuance. A Plan may be terminated at any time
by a vote of a majority of the Independent Trustees or by a vote of the holders
of a majority of the outstanding shares of a Fund or the applicable class of a
Fund. In the event a Plan is terminated in accordance with its terms, the
affected Fund (or class) will not be required to make any
38
<PAGE>
payments for expenses incurred by the Adviser after the termination date. Each
Implementation Agreement terminates automatically in the event of its assignment
and may be terminated at any time by a vote of a majority of the Independent
Trustees or by a vote of the holders of a majority of the outstanding shares of
a Fund (or the applicable class) on not more than 60 days' written notice to any
other party to the Implementation Agreement. The Plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval. All material amendments to the Plans must be approved by a vote of the
Trust's Board of Trustees and by a vote of the Independent Trustees.
In approving the Plans, the Trustees determined, in the exercise of their
business judgment and in light of their fiduciary duties as Trustees, that there
is a reasonable likelihood that the Plans will benefit the Funds and their
shareholders. The Board of Trustees believes that expenditure of the Funds'
assets for distribution expenses under the Plans should assist in the growth of
the Funds which will benefit the Funds and their shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
diversification and less chance of disruption of planned investment strategies.
The Plans will be renewed only if the Trustees make a similar determination for
each subsequent year of the Plans. There can be no assurance that the benefits
anticipated from the expenditure of the Funds' assets for distribution will be
realized. While the Plans are in effect, all amounts spent by the Funds pursuant
to the Plans and the purposes for which such expenditures were made must be
reported quarterly to the Board of Trustees for its review. Distribution
expenses attributable to the sale of more than one class of shares of the
Intermediate Bond Fund will be allocated at least annually to each class of
shares based upon the ratio in which the sales of each class of shares bears to
the sales of all the shares of the Fund. In addition, the selection and
nomination of those Trustees who are not interested persons of the Trust are
committed to the discretion of the Independent Trustees during such period.
Robert H. Leshner and Jill T. McGruder, as interested persons of the Trust,
may be deemed to have a financial interest in the operation of the Plans and the
Implementation Agreements.
SECURITIES TRANSACTIONS
- -----------------------
Decisions to buy and sell securities for the Funds and the placing of the
Funds' securities transactions and negotiation of commission rates where
applicable are made by the Adviser and are subject to review by the Board of
Trustees of the Trust. In the purchase and sale of portfolio securities, the
Adviser seeks best execution for the Funds, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), the
execution capability, financial responsibility and responsiveness of the broker
or dealer and the brokerage and research services provided by the broker or
dealer. The Adviser generally seeks favorable prices and commission rates that
are reasonable in relation to the benefits received.
Generally, the Funds attempt to deal directly with the dealers who make a
market in the securities involved unless better prices and execution are
available elsewhere. Such dealers usually act as principals for their own
account. On occasion, portfolio securities for the Funds may be purchased
directly from the issuer. Because the portfolio securities of the Funds are
39
<PAGE>
generally traded on a net basis and transactions in such securities do not
normally involve brokerage commissions, the cost of portfolio securities
transactions of the Funds will consist primarily of dealer or underwriter
spreads. No brokerage commissions were paid by the Funds during the last three
fiscal years.
The Adviser is specifically authorized to select brokers who also provide
brokerage and research services to the Funds and/or other accounts over which
the Adviser exercises investment discretion and to pay such brokers a commission
in excess of the commission another broker would charge if it is determined in
good faith that the commission is reasonable in relation to the value of the
brokerage and research services provided. The determination may be viewed in
terms of a particular transaction or the Adviser's overall responsibilities with
respect to the Funds and to accounts over which it exercises investment
discretion.
Research services include securities and economic analyses, reports on
issuers' financial conditions and future business prospects, newsletters and
opinions relating to interest trends, general advice on the relative merits of
possible investment securities for the Funds and statistical services and
information with respect to the availability of securities or purchasers or
sellers of securities. Although this information is useful to the Funds or the
Adviser, it is not possible to place a dollar value on it. Research services
furnished by brokers through whom the Funds effect securities transactions may
be used by the Adviser in servicing all of its accounts and not all such
services may be used in connection with the Funds.
The Funds have no obligation to deal with any broker or dealer in the
execution of securities transactions. However, the Adviser and other affiliates
of the Trust or the Adviser may effect securities transactions which are
executed on a national securities exchange or transactions in the
over-the-counter market conducted on an agency basis. No Fund will effect any
brokerage transactions in its portfolio securities with the Adviser if such
transactions would be unfair or unreasonable to its shareholders.
Over-the-counter transactions will be placed either directly with principal
market makers or with broker-dealers. Although the Funds do not anticipate any
ongoing arrangements with other brokerage firms, brokerage business may be
transacted from time to time with other firms. Neither the Adviser nor
affiliates of the Trust or the Adviser will receive reciprocal brokerage
business as a result of the brokerage business transacted by the Funds with
other brokers.
During the fiscal year ended September 30, 1999, the Money Market Fund
acquired securities of the Trust's regular broker-dealers as follows: Morgan
Stanley, Dean Witter, Discover & Co. corporate notes $150,000 par value, the
market value of which was $150,136 as of September 30, 1999; Merrill Lynch &
Company corporate notes $420,000 par value, the market value of which was
$421,309 as of September 30, 1999; Bear Stearns & Co., Inc. corporate notes,
$250,000 par value, the market value of which was $251,008 as of September 30,
1999.
During the fiscal year ended September 30, 1999, the Funds entered into
repurchase transactions with the following entities who may be deemed to be
regular broker-dealers of the Trust as defined under the Investment Company Act
of 1940: Banc One Capital Markets,
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<PAGE>
Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley, Dean Witter & Co., Nesbitt-Burns Securities Inc.
and Prudential-Bache Securities Inc.
CODE OF ETHICS. The Trust and the Adviser have each adopted a Code of Ethics
under Rule 17j-1 of the Investment Company Act of 1940. The Code significantly
restricts the personal investing activities of all employees of the Adviser and,
as described below, imposes additional, more onerous, restrictions on investment
personnel of the Adviser. The Code requires that all employees of the Adviser
preclear any personal securities investment (with limited exceptions, such as
U.S. Government obligations). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. In addition, no employee may purchase or
sell any security which at the time is being purchased or sold (as the case may
be), or to the knowledge of the employee is being considered for purchase or
sale, by any Fund. The substantive restrictions applicable to investment
personnel of the Adviser include a ban on acquiring any securities in an initial
public offering. Furthermore, the Code provides for trading "blackout periods"
which prohibit trading by investment personnel of the Adviser within periods of
trading by the Funds in the same (or equivalent) security. The Code of Ethics
adopted by the Trust and the Adviser are on public file with, and are available
from, the Securities and Exchange Commission.
PORTFOLIO TURNOVER
- ------------------
The Adviser intends to hold the portfolio securities of the Short Term
Government Income Fund and the Money Market Fund to maturity and to limit
portfolio turnover to the extent possible. Nevertheless, changes in a Fund's
portfolio will be made promptly when determined to be advisable by reason of
developments not foreseen at the time of the original investment decision, and
usually without reference to the length of time a security has been held.
The Intermediate Term Government Income Fund and the Intermediate Bond Fund
do not intend to purchase securities for short term trading; however, a security
may be sold in anticipation of a market decline, or purchased in anticipation of
a market rise and later sold. Securities will be purchased and sold in response
to the Adviser's evaluation of an issuer's ability to meet its debt obligations
in the future. A security may be sold and another purchased when, in the opinion
of the Adviser, a favorable yield spread exists between specific issues or
different market sectors.
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. High turnover may result in a Fund recognizing greater amounts of income
and capital gains, which would increase the amount of income and capital gains
which a Fund must distribute to its shareholders in order to maintain its status
as a regulated investment company and to avoid the imposition of federal income
or excise taxes. A 100% turnover rate would occur if all of a Fund's portfolio
securities were replaced once within a one year period.
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<PAGE>
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
- ----------------------------------------------------
The share price (net asset value) and the share price of the shares of the
Short Term Government Income Fund and the Money Market Fund is determined as of
12:30 p.m. and 4:00 p.m., Eastern time, on each day the Trust is open for
business. The share price and the public offering price (net asset value plus
applicable sales load) of the shares of the Intermediate Term Government Income
Fund and the Intermediate Bond Fund are determined as of the close of the
regular session of trading on the New York Stock Exchange (currently 4:00 p.m.,
Eastern time), on each day the Trust is open for business. The Trust is open for
business on every day except Saturdays, Sundays and the following holidays: New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. The Trust may also
be open for business on other days in which there is sufficient trading in any
Fund's portfolio securities that its net asset value might be materially
affected. For a description of the methods used to determine the share price and
the public offering price, see "Calculation of Share Price and Public Offering
Price" in the Prospectus.
Pursuant to Rule 2a-7 promulgated under the Investment Company Act of 1940,
the Short Term Government Income Fund and the Money Market Fund each value their
portfolio securities on an amortized cost basis. The use of the amortized cost
method of valuation involves valuing an instrument at its cost and, thereafter,
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. Under the amortized cost method of valuation, neither the amount
of daily income nor the net asset value of the Short Term Government Income Fund
or the Money Market Fund is affected by any unrealized appreciation or
depreciation of the portfolio. The Board of Trustees has determined in good
faith that utilization of amortized cost is appropriate and represents the fair
value of the portfolio securities of the Short Term Government Income Fund and
the Money Market Fund.
Pursuant to Rule 2a-7, the Short Term Government Income Fund and the Money
Market Fund each maintain a dollar-weighted average portfolio maturity of 90
days or less, purchase only securities having remaining maturities of thirteen
months or less and invest only in United States dollar-denominated securities
determined by the Board of Trustees to be of high quality and to present minimal
credit risks. If a security ceases to be an eligible security, or if the Board
of Trustees believes such security no longer presents minimal credit risks, the
Trustees will cause the Fund to dispose of the security as soon as possible. The
maturity of U.S. Government obligations which have a variable rate of interest
readjusted no less frequently than annually will be deemed to be the period of
time remaining until the next readjustment of the interest rate.
The Board of Trustees has established procedures designed to stabilize, to
the extent reasonably possible, the price per share of the Short Term Government
Income Fund and the Money Market Fund as computed for the purpose of sales and
redemptions at $1 per share. The procedures include review of each Fund's
portfolio holdings by the Board of Trustees to determine whether a Fund's net
asset value calculated by using available market quotations deviates more than
one-half of one percent from $1 per share and, if so, whether such deviation may
result in material dilution or is otherwise unfair to existing shareholders. In
the event the Board of Trustees determines that such a deviation exists, it will
take corrective action as it
42
<PAGE>
regards necessary and appropriate, including the sale of portfolio securities
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturities; withholding dividends; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations.
The Board of Trustees has also established procedures designed to ensure that
each Fund complies with the quality requirements of Rule 2a-7.
While the amortized cost method provides certainty in valuation, it may
result in periods during which the value of an instrument, as determined by
amortized cost, is higher or lower than the price the Short Term Government
Income Fund or the Money Market Fund would receive if it sold the instrument.
During periods of declining interest rates, the daily yield on shares of each
Fund may tend to be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio securities. Thus, if the use
of amortized cost by a Fund resulted in a lower aggregate portfolio value on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield than would result from investment in a fund utilizing
solely market values and existing investors would receive less investment
income. The converse would apply in a period of rising interest rates.
Portfolio securities held by the Intermediate Term Government Income Fund
or the Intermediate Bond Fund for which market quotations are readily available
are generally valued at their most recent bid prices as obtained from one or
more of the major market makers for such securities. Securities (and other
assets) for which market quotations are not readily available are valued at
their fair value as determined in good faith in accordance with consistently
applied procedures established by and under the general supervision of the Board
of Trustees.
OTHER PURCHASE INFORMATION
- --------------------------
The Prospectus describes generally how to purchase shares of the Funds.
Additional information with respect to certain types of purchases of shares of
the Intermediate Term Government Income Fund and Class A shares of the
Intermediate Bond Fund is set forth below.
RIGHT OF ACCUMULATION. A "purchaser" (as defined in the Prospectus) of
shares of the Intermediate Term Government Income Fund and Class A shares of the
Intermediate Bond Fund has the right to combine the cost or current net asset
value (whichever is higher) of his existing shares of the load funds distributed
by the Adviser with the amount of his current purchases in order to take
advantage of the reduced sales loads set forth in the tables in the Prospectus.
The purchaser or his dealer must notify the Transfer Agent that an investment
qualifies for a reduced sales load. The reduced load will be granted upon
confirmation of the purchaser's holdings by the Transfer Agent.
LETTER OF INTENT. The reduced sales loads set forth in the tables in the
Prospectus may also be available to any "purchaser" (as defined in the
Prospectus) of shares of the Intermediate Term Government Income Fund and Class
A shares of the Intermediate Bond Fund who submits a Letter of Intent to the
Transfer Agent. The Letter must state an intention to invest within a thirteen
month period in any load fund distributed by the Adviser a specified amount
which, if made at one time, would qualify for a reduced sales load. A Letter of
Intent may be submitted
43
<PAGE>
with a purchase at the beginning of the thirteen month period or within ninety
days of the first purchase under the Letter of Intent. Upon acceptance of this
Letter, the purchaser becomes eligible for the reduced sales load applicable to
the level of investment covered by such Letter of Intent as if the entire amount
were invested in a single transaction.
The Letter of Intent is not a binding obligation on the purchaser to
purchase, or the Trust to sell, the full amount indicated. During the term of a
Letter of Intent, shares representing 5% of the intended purchase will be held
in escrow. These shares will be released upon the completion of the intended
investment. If the Letter of Intent is not completed during the thirteen month
period, the applicable sales load will be adjusted by the redemption of
sufficient shares held in escrow, depending upon the amount actually purchased
during the period. The minimum initial investment under a Letter of Intent is
$10,000.
A ninety-day backdating period can be used to include earlier purchases at
the purchaser's cost (without a retroactive downward adjustment of the sales
charge). The thirteen month period would then begin on the date of the first
purchase during the ninety-day period. No retroactive adjustment will be made if
purchases exceed the amount indicated in the Letter of Intent. The purchaser or
his dealer must notify the Transfer Agent that an investment is being made
pursuant to an executed Letter of Intent.
OTHER INFORMATION. The Trust does not impose a front-end sales load or
imposes a reduced sales load in connection with purchases of shares of the
Intermediate Term Government Income Fund and Class A shares of the Intermediate
Bond Fund made under the reinvestment privilege or the purchases described in
the "Reduced Sales Load," "Purchases at Net Asset Value" or "Exchange Privilege"
sections in the Prospectus because such purchases require minimal sales effort
by the Adviser. Purchases described in the "Purchases at Net Asset Value"
section may be made for investment only, and the shares may not be resold except
through redemption by or on behalf of the Trust.
TAXES
- -----
The Prospectus describes generally the tax treatment of distributions by
the Funds. This section of the Statement of Additional Information includes
additional information concerning federal taxes.
Each Fund has qualified and intends to qualify annually for the special tax
treatment afforded a "regulated investment company" under Subchapter M of the
Internal Revenue Code so that it does not pay federal taxes on income and
capital gains distributed to shareholders. To so qualify a Fund must, among
other things, (i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currency, or
certain other income (including but not limited to gains from options, futures
and forward contracts) derived with respect to its business of investing in
stock, securities or currencies; and (ii) diversify its holdings so that at the
end of each quarter of its taxable year the following two conditions are met:
(a) at least 50% of the value of the Fund's total assets is represented by cash,
U.S. Government securities, securities of other regulated investment companies
and other securities (for this
44
<PAGE>
purpose such other securities will qualify only if the Fund's investment is
limited in respect to any issuer to an amount not greater than 5% of the Fund's
assets and 10% of the outstanding voting securities of such issuer) and (b) not
more than 25% of the value of the Fund's assets is invested in securities of any
one issuer (other than U.S. Government securities or securities of other
regulated investment companies).
A Fund's net realized capital gains from securities transactions will be
distributed only after reducing such gains by the amount of any available
capital loss carryforwards. As of September 30, 1999, the Intermediate Term
Government Income Fund and the Money Market Fund had capital loss carryforwards
for federal income tax purposes of $2,354,472, and $6,403, respectively. In
addition, the [Intermediate Bond Fund] and the Money Market Fund elected to
defer until the September 30, 2000 tax year $_______ and $4,941, respectively,
of capital losses incurred after October 31, 1998. These capital loss
carryforwards and "post-October" losses may be carried forward to offset any
capital gains for eight years, after which any undeducted capital loss remaining
is lost as a deduction.
A federal excise tax at the rate of 4% will be imposed on the excess, if
any, of a Fund's "required distribution" over actual distributions in any
calendar year. Generally, the "required distribution" is 98% of a Fund's
ordinary income for the calendar year plus 98% of its net capital gains
recognized during the one year period ending on October 31 of the calendar year
plus undistributed amounts from prior years. The Funds intend to make
distributions sufficient to avoid imposition of the excise tax.
The Trust is required to withhold and remit to the U.S. Treasury a portion
(31%) of dividend income on any account unless the shareholder provides a
taxpayer identification number and certifies that such number is correct and
that the shareholder is not subject to backup withholding.
REDEMPTION IN KIND
- ------------------
Under unusual circumstances, when the Board of Trustees deems it in the
best interests of a Fund's shareholders, the Fund may make payment for shares
repurchased or redeemed in whole or in part in securities of the Fund taken at
current value. If any such redemption in kind is to be made, each Fund intends
to make an election pursuant to Rule 18f-1 under the Investment Company Act of
1940. This election will require the Funds to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the net asset value of each Fund during any 90
day period for any one shareholder. Should payment be made in securities, the
redeeming shareholder will generally incur brokerage costs in converting such
securities to cash. Portfolio securities which are issued in an in-kind
redemption will be readily marketable.
HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
Yield quotations on investments in the Short Term Government Income Fund
and the Money Market Fund are provided on both a current and an effective
(compounded) basis. Current yields are calculated by determining the net change
in the value of a hypothetical account for a seven calendar day period (base
period) with a beginning balance of one share,
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<PAGE>
dividing by the value of the account at the beginning of the base period to
obtain the base period return, multiplying the result by (365/7) and carrying
the resulting yield figure to the nearest hundredth of one percent. Effective
yields reflect daily compounding and are calculated as follows: Effective yield
= (base period return + 1)365/7 -1. For purposes of these calculations, no
effect is given to realized or unrealized gains or losses (the Short Term
Government Income Fund and the Money Market Fund do not normally recognize
unrealized gains and losses under the amortized cost valuation method). The
Short Term Government Income Fund's current and effective yields for the seven
days ended September 30, 1999 were 4.23% and 4.32%, respectively. The Money
Market Fund's current and effective yields for the seven days ended September
30, 1999 were 4.84% and 4.96%, respectively.
From time to time, the Intermediate Term Government Income Fund and the
Intermediate Bond Fund may advertise average annual total return. Average annual
total return quotations will be computed by finding the average annual
compounded rates of return over 1, 5 and 10 year periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all
dividends and distributions. The calculation also assumes the deduction of the
current maximum sales load from the initial $1,000 payment. If a Fund has been
in existence less than one, five or ten years, the time period since the date of
the initial public offering of shares will be substituted for the periods
stated. The average annual total returns of the Intermediate Term Government
Income Fund and the Intermediate Bond Fund for the periods ended September 30,
1999 are as follows:
Intermediate Term Government Income Fund
- ----------------------------------------
1 Year -6.59%
5 Years 5.33%
10 Years 6.13%
Intermediate Bond Fund (Class A)
- --------------------------------
1 Year
Since Inception (October 3, 1995)
The Intermediate Term Government Income Fund and the Intermediate Bond Fund
may also advertise total return (a "nonstandardized quotation") which is
calculated differently from average annual total return. A nonstandardized
quotation of total return may be a cumulative return which measures the
percentage change in the value of an account between the beginning
46
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and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. This computation does not include
the effect of the applicable front-end sales load for the Intermediate Term
Government Income Fund and the Intermediate Bond Fund which, if included, would
reduce total return. The total returns of the Intermediate Term Government
Income Fund ("ITF") and the Intermediate Bond Fund-Class A ("IBF") as calculated
in this manner for each of the last ten fiscal years (or since inception) are as
follows:
ITF IBF
--- ---
Period Ended
- ------------
September 30, 1990 5.31%
September 30, 1991 14.19%
September 30, 1992 13.27%
September 30, 1993 10.15%
September 30, 1994 -6.76%
September 30, 1995 12.52%
September 30, 1996 3.55%
September 30, 1997 7.74%
September 30, 1998 10.54%
September 30, 1999 -1.93%
A non-standardized quotation may also indicate average annual compounded rates
of return without including the effect of the applicable front-end sales load or
over periods other than those specified for average annual total return. The
average annual compounded rates of return for the Intermediate Term Government
Income Fund and the Intermediate Bond Fund (excluding sales loads) for the
periods ended September 30, 1999 are as follows:
Intermediate Term Government Income Fund
- ----------------------------------------
1 Year -1.93%
3 Years 5.32%
5 Years 6.36%
10 Years 6.65%
Since Inception (February 6, 1981) 8.24%
Intermediate Bond Fund (Class A)
- --------------------------------
1 Year
3 Years
Since Inception (October 3, 1995)
A non-standardized quotation of total return will always be accompanied by the
Fund's average annual total return as described above.
From time to time, the Intermediate Term Government Income Fund and the
Intermediate Bond Fund may advertise their yield. A yield quotation is based on
a 30-day (or one month) period and is computed by dividing the net investment
income per share earned during the period
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<PAGE>
by the maximum offering price per share on the last day of the period, according
to the following formula:
6
Yield = 2[a-b/cd + 1) - 1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Generally, interest earned (for the purpose of "a" above) on debt obligations is
computed by reference to the yield to maturity of each obligation held based on
the market value of the obligation (including actual accrued interest) at the
close of business on the last business day prior to the start of the 30-day (or
one month) period for which yield is being calculated, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest). With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
paydowns of principal and interest, gain or loss attributable to actual monthly
paydowns is accounted for as an increase or decrease to interest income during
the period and discount or premium on the remaining security is not amortized.
The yield of the Intermediate Term Government Income Fund for September 1998 was
4.40%. The yield of the Intermediate Bond Fund for September 1998 was 5.28%.
The performance quotations described above are based on historical earnings
and are not intended to indicate future performance. Average annual total return
and yield are computed separately for Class A and Class C shares of the
Intermediate Bond Fund. The yield of Class A shares is expected to be higher
than the yield of Class C shares due to the higher distribution fees imposed on
Class C shares.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding each Fund may discuss
various measures of Fund performance, including current performance ratings
and/or rankings appearing in financial magazines, newspapers and publications
which track mutual fund performance. Advertisements may also compare performance
(using the calculation methods set forth in the Prospectus) to performance as
reported by other investments, indices and averages. When advertising current
ratings or rankings, the Funds may use the following publications or indices to
discuss or compare Fund performance:
IBC Financial Data Inc.'s Money Fund Report provides a comparative analysis
of performance for various categories of money market funds. The Short Term
Government Income Fund may compare performance rankings with money market funds
appearing in the Taxable U.S. Treasury & Repo Funds category. The Money Market
Fund may compare performance rankings with money market funds appearing in the
First Tier Taxable category.
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<PAGE>
Lipper Fixed Income Fund Performance Analysis measures total return and
average current yield for the mutual fund industry and ranks individual mutual
fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales loads. The Short Term Government Income Fund
may provide comparative performance information appearing in the U.S. Government
Money Market Funds category, the Intermediate Term Government Income Fund may
provide comparative performance information appearing in the Intermediate U.S.
Government Funds category, the Money Market Fund may provide comparative
performance information appearing in the Money Market Funds category and the
Intermediate Bond Fund may provide comparative performance information appearing
in the Intermediate Investment Grade Debt Funds category.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate
their performance. In addition, there can be no assurance that the Funds will
continue this performance as compared to such other averages.
PRINCIPAL SECURITY HOLDERS
- --------------------------
As of November 12, 1999, Citizens Business Bank, Trustee FBO Countrywide
Credit Industries, Inc., P.O. Box 671, Pasadena, California owned of record
14.5% of the outstanding shares of the Intermediate Term Government Income
Fund;; James Money Market Account FBO its Customers, 312 Walnut Street,
Cincinnati, Ohio owned of record 11.2% of the outstanding shares of the Money
Market Fund; National Investor Services Corp. FBO The Exclusive Benefit of its
Customers, 55 Water Street, New York, New York owned of record 7.4% of the
outstanding shares of the Money Market Fund and BAND & Co. c/o Firstar East,
P.O. Box 1787, Milwaukee, Wisconsin owned of record 22.9% of the outstanding
Class A shares of the Intermediate Bond Fund.
As of November 12, 1999, the Trustees and officers of the Trust as a group
owned of record and beneficially less than 1% of the outstanding shares of the
Trust and of each Fund.
CUSTODIAN
- ---------
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio, has been
retained to act as Custodian for each Fund's
49
<PAGE>
investments. The Fifth Third Bank acts as each Fund's depository, safekeeps its
portfolio securities, collects all income and other payments with respect
thereto, disburses funds as instructed and maintains records in connection with
its duties. As compensation, The Fifth Third Bank receives from each Fund a base
fee at the annual rate of .005% of average net assets (subject to a minimum
annual fee of $1,500 per Fund and a maximum fee of $5,000 per Fund) plus
transaction charges for each security transaction of the Funds.
AUDITORS
- --------
The firm of Ernst & Young LLP has been selected as independent auditors for
the Trust for the fiscal year ending September 30, 2000, subject to shareholder
approval. Ernst & Young will perform an annual audit of the Trust's financial
statements and advise the Trust as to certain accounting matters.
TRANSFER AGENT
- --------------
The Trust's transfer agent, Countrywide Fund Services, Inc. ("CFS"),
maintains the records of each shareholder's account, answers shareholders'
inquiries concerning their accounts, processes purchases and redemptions of the
Funds' shares, acts as dividend and distribution disbursing agent and performs
other shareholder service functions. CFS is an affiliate of the Adviser by
reason of common ownership. CFS receives for its services as transfer agent a
fee payable monthly at an annual rate of $25 per account from each of the Short
Term Government Income Fund and the Money Market Fund and $21 per account from
each of the Intermediate Term Government Income Fund and the Intermediate Bond
Fund, provided, however, that the minimum fee is $1,000 per month for each Fund.
In addition, the Funds pay out-of-pocket expenses, including but not limited to,
postage, envelopes, checks, drafts, forms, reports, record storage and
communication lines.
CFS also provides accounting and pricing services to the Trust. For
calculating daily net asset value per share and maintaining such books and
records as are necessary to enable CFS to perform its duties, the Short Term
Government Income Fund, the Intermediate Term Government Income Fund and the
Money Market Fund each pay CFS a fee in accordance with the following schedule:
Asset Size of Fund Monthly Fee
----------------------------- -----------
$ 0 - $ 50,000,000 $ 2,000
$ 50,000,000 - $ 100,000,000 $ 2,500
$ 100,000,000 - $ 200,000,000 $ 3,000
$ 200,000,000 - $ 300,000,000 $ 3,500
Over $ 300,000,000 $ 4,500 *
50
<PAGE>
The Intermediate Bond Fund pays CFS a fee in accordance with the following
schedule:
Asset Size of Fund Monthly Fee
----------------------------- -----------
$ 0 - $ 50,000,000 $ 3,000
$ 50,000,000 - $ 100,000,000 $ 3,500
$ 100,000,000 - $ 200,000,000 $ 4,000
$ 200,000,000 - $ 300,000,000 $ 4,500
Over $ 300,000,000 $ 5,500 *
* Subject to an additional fee of .001% of average daily net assets in excess
of $300 million.
In addition, each Fund pays all costs of external pricing services.
CFS is retained by the Adviser to assist the Adviser in providing
administrative services to the Funds. In this capacity, CFS supplies
non-investment related statistical and research data, internal regulatory
compliance services and executive and administrative services. CFS supervises
the preparation of tax returns, reports to shareholders of the Funds, reports to
and filings with the Securities and Exchange Commission and state securities
commissions, and materials for meetings of the Board of Trustees. For the
performance of these administrative services, CFS receives a fee from the
Adviser. The Adviser is solely responsible for the payment of these
administrative fees to CFS, and CFS has agreed to seek payment of such fees
solely from the Adviser.
ANNUAL REPORT
- -------------
The Funds' financial statements as of September 30, 1999 appear in the
Trust's annual report which is attached to this Statement of Additional
Information.
51
<PAGE>
SHORT TERM GOVERNMENT
INCOME FUND
<PAGE>
INTERMEDIATE TERM GOVERNMENT
INCOME FUND
MONEY MARKET FUND
<PAGE>
INTERMEDIATE BOND FUND
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
- -------- --------
(a) (i) ARTICLES OF INCORPORATION
Registrant's Restated Agreement and Declaration of Trust, which was
filed as an Exhibit to Registrant's Post-Effective Amendment No. 68,
is hereby incorporated by reference.
(ii) Amendment No. 1, dated December 8, 1994, to Registrant's Restated
Agreement and Declaration of Trust, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 68, is hereby incorporated
by reference.
(iii) Amendment No. 2, dated January 31, 1995, to Registrant's Restated
Agreement and Declaration of Trust, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 68, is hereby incorporated
by reference.
(iv) Amendment No. 3, dated February 28, 1997, to Registrant's Restated
Agreement and Declaration of Trust, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 66, is hereby incorporated
by reference.
(b) (i) BYLAWS
Registrant's Bylaws, as amended, which were filed as an Exhibit to
Registrant's Post-Effective Amendment No. 66, are hereby incorporated
by reference.
(ii) Amendment to Bylaws adopted January 10, 1984, which were filed as an
Exhibit to Registrant's Post-Effective Amendment No. 68, are hereby
incorporated by reference.
(c) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
Article IV Of Registrant's Restated Agreement and Declaration of Trust
provides the following rights for security holders:
LIQUIDATION. In event of the liquidation or dissolution of the
Trust, the Shareholders of each Series that has been established
and designated shall be entitled to receive, as a Series, when
and as declared by the Trustees, the excess of the assets
belonging to that Series over the liabilities belonging to that
Series. The assets so distributable to the Shareholders of any
particular Series shall be distributed among such Shareholders in
proportion to the number of Shares of that Series held by them
and recorded on the books of the Trust.
VOTING. All shares of all Series shall have "equal voting rights"
as such term is defined in the Investment Company Act of 1940 and
except as otherwise provided by that Act or rules, regulations or
orders promulgated thereunder. On each matter submitted to a vote
of the Shareholders, all shares of each Series shall vote as a
single
<PAGE>
class except as to any matter with respect to which a vote of all
Series voting as a single series is required by the 1940 Act or
rules and regulations promulgated thereunder, or would be
required under the Massachusetts Business Corporation Law if the
Trust were a Massachusetts business corporation. As to any matter
which does not affect the interest of a particular Series, only
the holders of Shares of the one or more affected Series shall be
entitled to vote.
REDEMPTION BY SHAREHOLDER. Each holder of Shares of a particular
Series shall have the right at such times as may be permitted by
the Trust, but no less frequently than once each week, to require
the Trust to redeem all or any part of his Shares of that Series
at a redemption price equal to the net asset value per Share of
that Series next determined in accordance with subsection (h) of
this Section 4.2 after the Shares are properly tendered for
redemption.
Notwithstanding the foregoing, the Trust may postpone payment of
the redemption price and may suspend the right of the holders of
Shares of any Series to require the Trust to redeem Shares of
that Series during any period or at any time when and to the
extent permissible under the 1940 Act, and such redemption is
conditioned upon the Trust having funds or property legally
available therefor.
TRANSFER. All Shares of each particular Series shall be
transferable, but transfers of Shares of a particular Series will
be recorded on the Share transfer records of the Trust applicable
to that Series only at such times as Shareholders shall have the
right to require the Trust to redeem Shares of that Series and at
such other times as may be permitted by the Trustees.
Article V of Registrant's Restated Agreement and Declaration of Trust
provides the following rights for security holders:
VOTING POWERS. The Shareholders shall have power to vote only (i)
for the election or removal of Trustees as provided in Section
3.1, (ii) with respect to any contract with a Contracting Party
as provided in Section 3.3 as to which Shareholder approval is
required by the 1940 Act, (iii) with respect to any termination
or reorganization of the Trust or any Series to the extent and as
provided in Sections 7.1 and 7.2, (iv) with respect to any
amendment of this Declaration of Trust to the extent and as
provided in Section 7.3, (v) to the same extent as the
stockholders of a Massachusetts business corporation as to
whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class
action on behalf of the Trust or the Shareholders, and (vi) with
respect to such additional matters relating to the Trust as may
be required by the 1940 Act, this Declaration of Trust, the
Bylaws or any registration of the Trust with the Commission (or
any successor agency) in any state, or as the Trustees may
consider necessary or desirable. There shall be no cumulative
voting in the election of any Trustee or Trustees. Shares may be
voted in person or by proxy.
<PAGE>
(d) INVESTMENT ADVISORY CONTRACTS
(i) Form of Registrant's Investment Advisory Agreement with Touchstone
Advisors, Inc., which was filed as an Exhibit to Registrant's
Post-Effective Amendment #71, is hereby incorporated by reference.
(ii) Form of Registrant's Sub-Advisory Agreement with Fort Washington
Investment Advisors, Inc., which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 71, is hereby incorporated
by reference.
(e) UNDERWRITING CONTRACTS
(i) Form of Underwriter's Dealer Agreement, which was filed as an Exhibit
to Registrant's Post-Effective Amendment No. 66, is hereby
incorporated by reference.
(ii) Form of Distribution Agreement with Touchstone Securities, Inc., which
was filed as an Exhibit to Registrant's Post-Effective Amendment No.
71, is hereby incorporated by reference.
(f) BONUS OR PROFIT SHARING CONTRACTS
None.
(g) CUSTODIAN AGREEMENTS
Custody Agreement with The Fifth Third Bank, which was filed as an
Exhibit to Registrant's Post-Effective Amendment No. 68, is hereby
incorporated by reference.
(h) OTHER MATERIAL CONTRACTS
(i) Registrant's Accounting and Pricing Services Agreement with
Countrywide Fund Services, Inc., which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 70, is hereby incorporated
by reference.
(ii) Registrant's Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement with Countrywide Fund Services, Inc., which was
filed as an Exhibit to Registrant's Post-Effective Amendment No. 70,
is hereby incorporated by reference.
(iii) Administration Agreement between Countrywide Investments, Inc. and
Countrywide Fund Services, Inc., which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 70, is hereby incorporated
by reference.
(i) LEGAL OPINION
Opinion and Consent of Counsel, which was filed as an Exhibit to
Registrant's Pre-Effective Amendment No. 1, is hereby incorporated by
reference.
(j) OTHER OPINIONS
None
(k) OMITTED FINANCIAL STATEMENTS
None.
<PAGE>
(l) INITIAL CAPITAL AGREEMENTS
None.
(m) RULE 12b-1 PLAN
(i) Registrant's Plans of Distribution Pursuant to Rule 12b-1, which was
filed as an Exhibit to Registrant's Post-Effective Amendment No. 70,
is hereby incorporated by reference.
(ii) Form of Sales Agreement for Money Market Funds, which was filed as an
Exhibit to Registrant's Post-Effective Amendment No. 41, is hereby
incorporated by reference.
(iii) Form of Administration Agreement for the administration of shareholder
accounts, which was filed as an Exhibit to Registrant's Post-Effective
Amendment No. 41, is hereby incorporated by reference.
(n) FINANCIAL DATA SCHEDULE
Financial Data Schedules, which were filed as Exhibits to Registrant's
Form N-SAR, are hereby incorporated by reference.
(o) RULE 18f-3 PLAN
Amended Rule 18f-3 Plan Adopted with Respect to the Multiple Class
Distribution System, which was filed as an Exhibit to Registrant's
Post-Effective Amendment No. 65, is hereby incorporated by reference.
(p) CODE OF ETHICS
(i) Registrant's Code of Ethics, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 70, is hereby incorporated
by reference.
Item 24. Persons Controlled by or Under Common Control with the Registrant
-----------------------------------------------------------------
None
Item 25. Indemnification
---------------
(a) Article VI of the Registrant's Restated Agreement and Declaration of Trust
provides for indemnification of officers and Trustees as follows:
Section 6.4 Indemnification of Trustees, Officers, etc.
The Trust shall indemnify each of its Trustees and officers, including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise, and including persons who
served as directors and officers of Midwest Income Investment
<PAGE>
Company (hereinafter referred to as a "Covered Person") against all
liabilities, including but not limited to amounts paid in satisfaction
of judgments, in compromise or as fines and penalties, and expenses,
including reasonable accountants' and counsel fees, incurred by any
Covered Person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before
any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or
with which such person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such a Trustee
or officer, director or trustee, and except that no Covered Person
shall be indemnified against any liability to the Trust or its
Shareholders to which such Covered Person would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such
Covered Person's office ("disabling conduct"). Anything herein
contained to the contrary notwithstanding, no Covered Person shall be
indemnified for any liability to the Trust or its Shareholders to
which such Covered Person would otherwise be subject unless (1) a
final decision on the merits is made by a court or other body before
whom the proceeding was brought that the Covered Person to be
indemnified was not liable by reason of disabling conduct or, (2) in
the absence of such a decision, a reasonable determination is made,
based upon a review of the facts, that the Covered Person was not
liable by reason of disabling conduct, by (a) the vote of a majority
of a quorum of Trustees who are neither "interested persons" of the
Company as defined in the Investment Company Act of 1940 nor parties
to the proceeding ("disinterested, non-party Trustees"), or (b) an
independent legal counsel in a written opinion.
Section 6.5 Advances of Expenses.
The Trust shall advance attorneys' fees or other expenses incurred by
a Covered Person in defending a proceeding, upon the undertaking by or
on behalf of the Covered Person to repay the advance unless it is
ultimately determined that such Covered Person is entitled to
indemnification, so long as one of the following conditions is met:
(i) the Covered Person shall provide security for his undertaking,
(ii) the Trust shall be insured against losses arising by reason of
any lawful advances, or (iii) a majority of a quorum of the
disinterested non-party Trustees of the Trust, or an independent legal
counsel in a written opinion, shall determine, based on a review of
readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered Person ultimately
will be found entitled to indemnification.
Section 6.6 Indemnification Not Exclusive, etc.
The right of indemnification provided by this Article VI shall not be
exclusive of or affect any other rights to which any such Covered
Person may be entitled. As used in this Article VI, "Covered Person"
shall include such person's heirs, executors and administrators, an
"interested Covered Person" is one against whom the action, suit or
other proceeding in question or another action, suit or other
proceeding on the same
<PAGE>
or similar grounds is then or has been pending or threatened, and a
"disinterested" person is a person against whom none of such actions,
suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending or
threatened. Nothing contained in this article shall affect any rights
to indemnification to which personnel of the Trust, other than
Trustees and officers, and other persons may be entitled by contract
or otherwise under law, nor the power of the Trust to purchase and
maintain liability insurance on behalf of any such person.
(b) The Registrant maintains a mutual fund and investment advisory professional
and directors and officers liability policy. The policy provides coverage
to the Registrant, its trustees and officers and Touchstone Advisors, Inc.
(the "Adviser") in its capacity as investment adviser and Touchstone
Securities, Inc. (the "Underwriter") in its capacity as principal
underwriter, among others. Coverage under the policy includes losses by
reason of any act, error, omission, misstatement, misleading statement,
neglect or breach of duty. The Registrant may not pay for insurance which
protects the Trustees and officers against liabilities rising from action
involving willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their offices.
The Advisory Agreements and the Subadvisory Agreements provide that the
Adviser (or Subadvisor) shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Registrant in connection
with the matters to which the Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence of the Adviser (or
Subadvisor) in the performance of its duties or from the reckless disregard
by the Adviser (or Subadvisor) of its obligations under the Agreement.
Registrant will advance attorneys' fees or other expenses incurred by the
Adviser (or Subadvisor) in defending a proceeding, upon the undertaking by
or on behalf of the Adviser (or Subadvisor) to repay the advance unless it
is ultimately determined that the Adviser is entitled to indemnification.
The Underwriting Agreement with the Underwriter provides that the
Underwriter, its directors, officers, employees, shareholders and control
persons shall not be liable for any error of judgment or mistake of law or
for any loss suffered by Registrant in connection with the matters to which
the Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of any of such persons in the
performance of the Underwriter's duties or from the reckless disregard by
any of such persons of the Underwriter's obligations and duties under the
Agreement. Registrant will advance attorneys' fees or other expenses
incurred by any such person in defending a proceeding, upon the undertaking
by or on behalf of such person to repay the advance if it is ultimately
determined that such person is not entitled to indemnification.
Item 26. Business and Other Connections of the Investment Adviser
- -------- --------------------------------------------------------
A. Touchstone Advisors, Inc. ("Touchstone") is a registered investment adviser
which provides investment advisory services to the Short Term Government
Income Fund, the Intermediate Term Government Income Fund, the Money Market
Fund and the Intermediate Bond Fund. Touchstone also serves as the
investment adviser to Touchstone
<PAGE>
Series Trust, Touchstone Variable Series Trust, Countrywide Strategic Trust
and Countrywide Tax Free Trust.
The following list sets forth the business and other connections of the
directors and executive officers of Touchstone. Unless otherwise noted with
an asterisk(*), the address of the corporations listed below is 311 Pike
Street, Cincinnati, Ohio 45202.
(1) Jill T. McGruder, President and a Director of Touchstone.
(a) A Director of Countrywide Financial Services, Inc., Countrywide
Fund Services, Inc., CW Fund Distributors, Inc., Capital Analysts
Incorporated, 3 Radnor Corporate Center, Radnor, PA, an investment
adviser and broker-dealer.
(b) President, Chief Executive Officer and a Director of IFS Financial
Services, Inc., a holding company, Touchstone Advisors, Inc., an
investment adviser and Touchstone Securities, Inc., a broker-dealer.
(c) President and a Director of IFS Agency Services, Inc., an
insurance agency, IFS Insurance Agency, Inc., an insurance agency, and
IFS Systems, Inc., an information systems provider.
(d) Senior Vice President of The Western-Southern Life Insurance
Company, 400 Broadway, Cincinnati, Ohio, an insurance company.
(e) A Trustee of Countrywide Strategic Trust, Countrywide Investment
Trust and Countrywide Tax-Free Trust.
(2) Teresa A. Siegel, Vice President and Chief Financial Officer of
Touchstone.
(a) Chief Financial Officer of IFS Financial Services, Inc.
(3) Patricia J. Wilson, Chief Compliance Officer of Touchstone
(a) Chief Compliance Officer of Touchstone Securities, Inc.
(b) Director of Compliance of IFS Financial Services, Inc.
(4) Donald J. Wuebbling, a Director of Touchstone
(a) Director of Touchstone Securities, Inc.
(b) Vice President and General Counsel of The Western and Southern
Life Insurance Company
<PAGE>
(5) James N. Clark, a Director of Touchstone
(a) Director of Touchstone Securities, Inc.
(b) Executive Vice President and Director of The Western and Southern
Life Insurance Company
(6) William F. Ledwin, a Director of Touchstone
(a) A Director of CountrywideFinancial Services, Inc., Countrywide
Fund Services, Inc., CW Fund Distributors, Inc., Touchstone Advisors,
Inc., IFS Agency Services, Inc., Capital Analysts Incorporated, 3
Radnor Corporate Center, Radnor, PA., IFS Insurance Agency, Inc.,
Touchstone Securities, Inc., IFS Financial Services, Inc., IFS
Systems, Inc. and Eagle Realty Group, Inc., 421 East Fourth Street, a
real estate brokerage and management service provider.
(b) President and a Director of Fort Washington Investment Advisors,
Inc., 420 E. Fourth Street, Cincinnati, OH., an investment adviser.
(c) Vice President and Chief Investment Officer of Columbus Life
Insurance Company, 400 East Fourth Street, Cincinnati, OH., a life
insurance company.
(d) Senior Vice President and Chief Investment Officer of The
Western-Southern Life Insurance Company.
B. Fort Washington Investment Advisors, Inc. ("Ft. Washington") is a
registered investment adviser which provides sub-advisory services to the
Short Term Government Income Fund, the Intermediate Term Government Income
Fund, the Money Market Fund and the Intermediate Bond Fund. Ft. Washington
also serves as the Sub-Advisor to series of Touchstone Variable Series
Trust, Countrywide Tax Free Trust and Countrywide Strategic Trust and
provides investment advice to institutional and individual clients.
The following list sets forth the business and other connections of the
directors and executive officers of Ft. Washington.
(1) William J. Williams, Chairman and a director of Ft. Washington
(a) Chairman of the Board of The Western and Southern Life Insurance
Company
(2) William F. Ledwin, President and a director of Ft. Washington
See biography above
(3) James J. Vance, Vice President and Treasurer of Ft. Washington
<PAGE>
(a) Vice President and Treasurer of The Western and Southern Life
Insurance Company
(4) Rance G. Duke, Vice President and Senior Portfolio Manager of Ft.
Washington
(a) Second Vice President and Senior Portfolio Manager of The Western
and Southern Life Insurance Company
(5) John C. Holden, Vice President and Senior Portfolio Manager of Ft.
Washington
(a) Vice President and Senior Portfolio Manager of Fort Washington
Investment Advisors, Inc.
(6) Charles E. Stutenroth IV, Vice President and Senior Portfolio Manager
pf Ft. Washington
(a) Vice President and Senior Portfolio Manager of Fort Washington
Investment Advisors, Inc.
(b) Senior Vice President and Portfolio Manager of Bank of America
Investment Management, Charlotte North Carolina until 1999.
(7) Brendan M. White, Vice President and Senior Portfolio Manager of Ft.
Washington
Item 27 Principal Underwriters
----------------------
(a) Touchstone Securities also acts as underwriter for Countrywide Tax-Free
Trust and series of Countrywide Strategic Trust. Unless otherwise noted
with an asterisk(*), the address of the persons named below is 311 Pike
Street, Cincinnati, Ohio 45202.
(b)
POSITION WITH POSITION WITH
NAME UNDERWRITER REGISTRANT
---------------------------------------------------------------------------
Jill T. McGruder President/Director Trustee
William F. Ledwin Director None
Patricia J. Wilson Chief Compliance Officer None
Teresa A. Siegel Vice President & Chief None
Financial Officer
James J. Vance Vice President & Treasurer None
Edward S. Heenan Controller/Director None
Donald J. Wuebbling Director None
James N. Clark Director None
Robert F. Morand Secretary None
Richard K. Taulbee Vice President None
<PAGE>
(c) None
Item 28. Location of Accounts and Records
--------------------------------
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder will be maintained by the Registrant.
Item 29. Management Services Not Discussed in Part A or Part B
-----------------------------------------------------
None.
Item 30. Undertakings
------------
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the provisions of Massachusetts law and the
Agreement and Declaration of Trust of the Registrant or the Bylaws of the
Registrant, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) Within five business days after receipt of a written application by
shareholders holding in the aggregate at least 1% of the shares then
outstanding or shares then having a net asset value of $25,000, whichever
is less, each of whom shall have been a shareholder for at least six months
prior to the date of application (hereinafter the "Petitioning
Shareholders"), requesting to communicate with other shareholders with a
view to obtaining signatures to a request for a meeting for the purpose of
voting upon removal of any Trustee of the Registrant, which application
shall be accompanied by a form of communication and request which such
Petitioning Shareholders wish to transmit, Registrant will:
(i) provide such Petitioning Shareholders with access to a list of the
names and addresses of all shareholders of the Registrant; or
(ii) inform such Petitioning Shareholders of the approximate number of
shareholders and the estimated costs of mailing such communication,
and to undertake such mailing promptly after tender by such
Petitioning Shareholders to the Registrant of the material to be
mailed and the reasonable expenses of such mailing.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Cincinnati, State of Ohio, on the 28th day of February, 2000.
COUNTRYWIDE INVESTMENT TRUST
By: /s/ Robert H. Leshner
Robert H. Leshner, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the ___ day of February, 2000
SIGNATURE TITLE
/s/ Robert H. Leshner February 28, 2000
Robert H. Leshner President and Trustee
/s/ Theresa M. Samocki February 28, 2000
Theresa M. Samocki Treasurer
William O. Coleman* Trustee
Phillip R. Cox* Trustee
H. Jerome Lerner* Trustee
/s/ Jill T. McGruder February 28, 2000
Jill T. McGruder Trustee
Oscar P. Robertson* Trustee
Nelson Schwab, Jr.* Trustee
Robert E. Stautberg* Trustee
Joseph S. Stern, Jr.* Trustee
*By: /s/ Jill T. McGruder March 1, 2000
Jill T. McGruder
As attorney in fact for each Trustee
<PAGE>
EXHIBIT INDEX
99.23.j Consent of Accountants to be filed by Amendment
99 Powers of Attorney
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust (each, a "Trust");
and
WHEREAS, each Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
to consolidate the prospectuses and statements of additional information of the
Trust (each, a "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, each
Post-Effective Amendment (and the prospectuses, statements of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Post-Effective Amendments"). The
undersigned hereby gives and grants to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof. The
undersigned hereby ratifies and confirms as his own act and deed all that said
attorneys may or shall lawfully do or cause to be done by virtue hereof. Each
attorney in fact and agent has, and may exercise, all of the powers conferred
hereby.
The authority hereby granted is limited to the execution and filing of the
Post-Effective Amendments and, unless earlier revoked by the undersigned or
expressly extended by the undersigned in writing, shall remain in force and
effective only until the Post-Effective Amendments shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th day
of February, 2000.
/s/ William O. Coleman
-----------------------------
William O. Coleman, Trustee
<PAGE>
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust (each, a "Trust");
and
WHEREAS, each Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
to consolidate the prospectuses and statements of additional information of the
Trust (each, a "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, each
Post-Effective Amendment (and the prospectuses, statements of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Post-Effective Amendments"). The
undersigned hereby gives and grants to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof. The
undersigned hereby ratifies and confirms as his own act and deed all that said
attorneys may or shall lawfully do or cause to be done by virtue hereof. Each
attorney in fact and agent has, and may exercise, all of the powers conferred
hereby.
The authority hereby granted is limited to the execution and filing of the
Post-Effective Amendments and, unless earlier revoked by the undersigned or
expressly extended by the undersigned in writing, shall remain in force and
effective only until the Post-Effective Amendments shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 24th day
of February, 2000.
/s/ H. Jerome Lerner
-----------------------------
H. Jerome Lerner, Trustee
<PAGE>
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust (each, a "Trust");
and
WHEREAS, each Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
to consolidate the prospectuses and statements of additional information of the
Trust (each, a "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, each
Post-Effective Amendment (and the prospectuses, statements of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Post-Effective Amendments"). The
undersigned hereby gives and grants to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof. The
undersigned hereby ratifies and confirms as his own act and deed all that said
attorneys may or shall lawfully do or cause to be done by virtue hereof. Each
attorney in fact and agent has, and may exercise, all of the powers conferred
hereby.
The authority hereby granted is limited to the execution and filing of the
Post-Effective Amendments and, unless earlier revoked by the undersigned or
expressly extended by the undersigned in writing, shall remain in force and
effective only until the Post-Effective Amendments shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this _____
day of _______________, 2000.
/s/ Oscar P. Robertson
-----------------------------
Oscar P. Robertson, Trustee
<PAGE>
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust (each, a "Trust");
and
WHEREAS, each Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
to consolidate the prospectuses and statements of additional information of the
Trust (each, a "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, each
Post-Effective Amendment (and the prospectuses, statements of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Post-Effective Amendments"). The
undersigned hereby gives and grants to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof. The
undersigned hereby ratifies and confirms as his own act and deed all that said
attorneys may or shall lawfully do or cause to be done by virtue hereof. Each
attorney in fact and agent has, and may exercise, all of the powers conferred
hereby.
The authority hereby granted is limited to the execution and filing of the
Post-Effective Amendments and, unless earlier revoked by the undersigned or
expressly extended by the undersigned in writing, shall remain in force and
effective only until the Post-Effective Amendments shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 24th day
of February, 2000.
/s/ Nelson Schwab, Jr.
-----------------------------
Nelson Schwab, Jr., Trustee
<PAGE>
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust (each, a "Trust");
and
WHEREAS, each Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
to consolidate the prospectuses and statements of additional information of the
Trust (each, a "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, each
Post-Effective Amendment (and the prospectuses, statements of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Post-Effective Amendments"). The
undersigned hereby gives and grants to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof. The
undersigned hereby ratifies and confirms as his own act and deed all that said
attorneys may or shall lawfully do or cause to be done by virtue hereof. Each
attorney in fact and agent has, and may exercise, all of the powers conferred
hereby.
The authority hereby granted is limited to the execution and filing of the
Post-Effective Amendments and, unless earlier revoked by the undersigned or
expressly extended by the undersigned in writing, shall remain in force and
effective only until the Post-Effective Amendments shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 24th of
February, 2000.
/s/ Robert E. Stautberg
-----------------------------
Robert E. Stautberg, Trustee
<PAGE>
POWER OF ATTORNEY
WHEREAS, the undersigned is a trustee of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust (each, a "Trust");
and
WHEREAS, each Trust proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Act of 1933, as
amended, a Post-Effective Amendment to its Registration Statement on Form N-1A
to consolidate the prospectuses and statements of additional information of the
Trust (each, a "Post-Effective Amendment");
NOW THEREFORE, the undersigned hereby constitutes and appoints Jill T.
McGruder and Edward S. Heenan, each of them individually and with full powers of
substitution, as his true and lawful attorney in fact and agent to execute and
file, in his name and on his behalf in any and all capacities, each
Post-Effective Amendment (and the prospectuses, statements of additional
information and exhibits included therein and any supplement to any of the
foregoing) and thereafter to execute and file any additional post-effective
amendment or amendments, amended prospectus or prospectuses, amended statement
or statements of additional information, amended exhibits or any supplements to
any of the foregoing (collectively, the "Post-Effective Amendments"). The
undersigned hereby gives and grants to said attorneys full power and authority
to do and perform each and every act and thing whatsoever requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do if personally present at the doing thereof. The
undersigned hereby ratifies and confirms as his own act and deed all that said
attorneys may or shall lawfully do or cause to be done by virtue hereof. Each
attorney in fact and agent has, and may exercise, all of the powers conferred
hereby.
The authority hereby granted is limited to the execution and filing of the
Post-Effective Amendments and, unless earlier revoked by the undersigned or
expressly extended by the undersigned in writing, shall remain in force and
effective only until the Post-Effective Amendments shall have become effective.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 24th day
of February, 2000.
/s/ Joseph S. Stern, Jr.
-----------------------------
Joseph S. Stern, Jr., Trustee