<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
March 1, 2000, As Supplemented November 8, 2000
ADJUSTABLE RATE MORTGAGE (ARM) PORTFOLIO,
INTERMEDIATE MORTGAGE SECURITIES PORTFOLIO
and
U.S. GOVERNMENT MORTGAGE SECURITIES PORTFOLIO
ASSET MANAGEMENT FUND
230 West Monroe Street, Chicago, Illinois 60606
The Adjustable Rate Mortgage (ARM) Portfolio (the "ARM Portfolio"), the
Intermediate Mortgage Securities Portfolio (the "Intermediate Mortgage
Portfolio") and the U.S. Government Mortgage Securities Portfolio (the "U.S.
Government Mortgage Portfolio") (each, a "Portfolio" and collectively, the
"Portfolios") are each a portfolio of Asset Management Fund (the "Fund"), a
professionally managed, diversified, open-end investment company. Each Portfolio
is represented by a class of shares separate from those of the Fund's other
portfolios.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectus, dated March 1, 2000 (the
"Prospectus"), a copy of which may be obtained from the Fund at the address
noted above.
The financial statements pertaining to these portfolios which appear in
the Fund's 1999 Annual Report to Shareholders are incorporated herein by
reference.
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TABLE OF CONTENTS
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PAGE
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Fund History....................................................................................................B-1
The Fund's Objective, the Portfolios and Their Investment Policies..............................................B-1
Portfolio Turnover..............................................................................................B-5
Purchase and Redemption of Shares...............................................................................B-5
Dividends, Distributions, Yield and Total Return Quotations.....................................................B-5
Management of the Fund..........................................................................................B-6
Investment Adviser and Administrator...........................................................................B-10
Distributor....................................................................................................B-13
Transfer and Dividend Agent....................................................................................B-15
Custodian......................................................................................................B-15
Determination of Net Asset Value...............................................................................B-15
Taxes..........................................................................................................B-16
Portfolio Transactions.........................................................................................B-17
Investment Restrictions........................................................................................B-17
Organization and Description of Fund Shares....................................................................B-21
Counsel and Independent Accountants............................................................................B-21
General Information............................................................................................B-21
Description of Debt Ratings....................................................................................B-22
Financial Statements...........................................................................................B-22
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Capitalized terms not defined in this Statement of Additional
Information and defined in the Prospectus shall have the meanings defined in the
Prospectus.
FUND HISTORY
Asset Management Fund (the "Fund") is a Delaware business trust
organized under a Declaration of Trust ("Declaration of Trust") dated July 22,
1999. The Fund was formerly a Maryland corporation, which commenced operations
on November 9, 1982. In September 1994, the Fund changed its name from Asset
Management Fund for Financial Institutions, Inc. to Asset Management Fund, Inc.
and on September 30, 1999, as part of the reorganization into a Delaware
business trust, changed its name to Asset Management Fund.
THE FUND'S OBJECTIVE, THE PORTFOLIOS
AND THEIR INVESTMENT POLICIES
MORTGAGE-RELATED SECURITIES
Most Mortgage-Related Securities provide a monthly payment that
consists of both interest and principal payments. In effect, these payments are
a "pass-through" of the monthly payments made by individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by unscheduled payments
resulting from the sale of the underlying residential property, refinancing or
foreclosure net of fees or costs which may be incurred. Some Mortgage-Related
Securities have additional features that entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether or not the mortgagor actually makes the payment. Any
guarantees of interest and principal payments may be either as to timely or
ultimate payment.
The average maturity of pass-through pools varies with the maturities
of the underlying mortgage instruments. In addition, a pool's average maturity
may be shortened by unscheduled or early payments of principal and interest on
the underlying mortgages. Factors affecting mortgage prepayments include the
level of interest rates, general economic and social conditions, and the
location and age of the mortgage. Since prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool or group of pools. However, the average life will be
substantially less than the stated maturity.
The Prospectus indicates that U.S. Mortgage-Related Securities may be
classified into two principal categories, based on whether the issuer or
guarantor of the security or the underlying collateral is a governmental entity,
such as GNMA, or a government-related entity, such as FNMA and FHLMC which are
U.S. Government sponsored corporations. In addition, Private Mortgage
Related-Securities represent interests in, or are collateralized by, pools
consisting principally of residential mortgage loans created by non-governmental
issuers. The following information supplements that in each Prospectus
concerning certain of these issuers:
FNMA is subject to general regulation by the Secretary of Housing and
Urban Development. Its common stock is publicly traded on the New York Stock
Exchange. FNMA purchases residential mortgages from a list of approved seller
services, which include Federal and state savings associations, savings banks,
commercial banks, credit unions and mortgage bankers.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. Its common and
preferred stock is publicly traded on the New York Stock Exchange. FHLMC issues
Participation Certificates ("PCS") which represent interests in mortgages from
FHLMC's national portfolio.
With respect to Private Mortgage-Related Securities, timely payment of
interest and principal may be supported by various forms of credit enhancements,
including individual loan, title, pool and hazard insurance. These credit
enhancements may offer two types of protection: (i) liquidity protection, and
(ii) protection against losses resulting from ultimate default by an obligor and
the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default ensures ultimate
payment of the obligations on at least a
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portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties or through various means of structuring the
transaction as well as a combination of such approaches. The Portfolios will not
pay any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
Credit enhancements can come from external providers such as banks or
financial insurance companies. Alternatively, they may come from the structure
of a transaction itself. Examples of credit support arising out of the structure
of the transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that defaults
on the underlying assets are borne first by the holders of the subordinated
class), creation of "reserve funds" (where cash or investments, sometimes funded
from a portion of the payments on the underlying assets, are held in reserve
against future losses) and "over collateralization" (where the scheduled
payments on, or the principal amount of, the underlying assets exceeds that
required to make payment of the securities and pay any servicing or other fees).
The degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated could
adversely affect the return on an investment in such issue. There can be no
assurance that the private insurers can meet their obligations under the
policies.
Each Portfolio may only invest in Private Mortgage-Related Securities
to the extent it observes the investment restrictions and limitations required
for such investments under OTS Regulations. These investments include
"mortgage-related securities" as that term is defined in Section 3(a)(41) of the
Securities Exchange Act of 1934, subject to any OTS Regulations, and securities
offered and sold pursuant to Section 4(5) of the Securities Act of 1933. Section
3(a)(41) of the Securities Exchange Act of 1934, as amended, defines a
"mortgage-related security" as one that is rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, and that either (A) represents ownership of one or more promissory
notes or other instruments that are secured by a first lien on property on which
is located a residential or mixed residential and commercial structure, on a
residential manufactured home or one or more commercial structures, and that
were originated by a savings association, savings bank, commercial bank, credit
union, insurance company or similar institution which is supervised and examined
by a Federal or state authority or by a mortgage lender approved by the
Secretary of Housing and Urban Development, or (B) is secured by one or more
promissory notes or other instruments meeting the requirements set forth above
that by its terms provides for payments of principal in relation to payments or
reasonable projections of payments. Section 4(5) of the Securities Act of 1933
exempts from registration thereunder offers or sales of one or more promissory
notes or other instruments that are secured by a first lien on property on which
is located a residential or mixed residential and commercial structure and that
were originated by a savings association, savings bank, commercial bank or
similar banking institution which is supervised or examined by Federal or state
authorities, or mortgage lenders approved by the Department of Housing and Urban
Development that sell to such institutions, provided that they are sold in
minimum amounts of $250,000 and payment is made within 60 days.
ADJUSTABLE RATE MORTGAGE SECURITIES
The interest rates paid on the mortgages underlying the ARMS in which
the Portfolios invest generally are readjusted at intervals of one year or less
to an increment over some predetermined interest rate index. There are three
main categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate (LIBOR), rates on six month certificates of
deposit, the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District Home
Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels
and tend to be somewhat less volatile.
The underlying mortgages that collateralize the ARMS in which the
Portfolios invest 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
per reset or adjustment interval and over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting
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<PAGE> 5
changes in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization.
COLLATERALIZED MORTGAGE OBLIGATIONS
CMOs and REMICs that are Multi-Class Mortgage-Related Securities
represent a beneficial interest in a pool of mortgage loans or mortgage-backed
securities typically held by a trust. The beneficial interests are evidenced by
certificates issued pursuant to a pooling and servicing agreement. The
certificates are usually issued in multiple classes with the specific rights of
each class set forth in the pooling and servicing agreement and the offering
documents for the security. The pooling and servicing agreement is entered into
by a trustee and a party that is responsible for pooling and conveying the
mortgage assets to the trust, sometimes referred to as the depositor. Various
administrative services related to the underlying mortgage loans, such as
collection and remittance of principal and interest payments, administration of
mortgage escrow accounts and collection of insurance claims are provided by
services. A master servicer, which may be the depositor or an affiliate of the
depositor, is generally responsible for supervising and enforcing the
performance by the services of their duties and maintaining the insurance
coverages required by the terms of the certificates. In some cases, the master
servicer acts as a servicer of all or a portion of the mortgage loans.
OTHER PERMISSIBLE INVESTMENTS
The following information supplements the discussion in the Prospectus
concerning principal investment strategies:
U.S. Government or Agency Securities. Each Portfolio may invest in
obligations issued or guaranteed by the United States or certain agencies or
instrumentalities thereof or a U.S. Government-sponsored corporation. These
include obligations issued by the United States or by a Federal Home Loan Bank,
Freddie Mac, Fannie Mae, the Government National Mortgage Association, the
Student Loan Marketing Association and the Federal Farm Credit Banks. Since many
of these U.S. Government securities are not backed by the "full faith and
credit" of the United States, the Portfolio must look principally to the agency
or instrumentality or corporation issuing or guaranteeing such obligation for
ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality or corporation does not
meet its commitment.
Certificates of Deposit. Each Portfolio may invest in certificates of
deposit issued by and other time deposits in foreign branches of FDIC insured
banks. Investment in such deposits may involve somewhat different investment
risks from those affecting deposits in United States branches of such banks.
These risks, which might adversely affect the payment of principal and interest
on such deposits, include [future political and economic developments], the
possibility that a foreign jurisdiction might impose withholding taxes on
interest income payable on such deposits, the possible seizure or
nationalization of foreign deposits, or the possible adoption of foreign
governmental restrictions, such as exchange controls.
Repurchase Agreements. Each Portfolio may enter into repurchase
agreements, under which it may acquire a security which it may invest in for a
relatively short period (usually not more than 30 days) subject to an obligation
of the seller to repurchase and the Portfolio to resell the instrument at a
fixed price and time, thereby determining the yield during the Portfolio's
holding period. If the seller defaults in its obligation to repurchase from the
Portfolio the underlying instrument, which in effect constitutes collateral for
the seller's obligation, at the price and time fixed in the repurchase
agreement, the Portfolio might incur a loss if the value of the collateral
declines and might incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller, realization upon the collateral by the Portfolio may be delayed or
limited. Each Portfolio will always receive as collateral instruments whose
market value, including accrued interest, will be at least equal to 100% of the
dollar amount invested by the Portfolio in each agreement, and each Portfolio
will make payment for such instruments only upon their physical delivery to, or
evidence of their book entry transfer to the account of, the Portfolio's
custodian.
Each Portfolio will not enter into any repurchase agreements maturing
in more than 60 days. Each Portfolio enters into repurchase agreements with
primary government securities dealers.
FDIC Insured Institutions. Although each Portfolio's investment in
savings accounts and in certificates of deposit and other time deposits in an
FDIC Insured Institution is insured to the extent of $100,000 by the Federal
Deposit Insurance Corporation, the Portfolio may invest more than $100,000 with
a single institution, and any such excess and any interest on
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<PAGE> 6
the investment would not be so insured. Deposits in foreign branches of FDIC
insured banks, are not insured by the Federal Deposit Insurance Corporation.
Each Portfolio will invest in securities issued by an FDIC Insured
Institution only if such institution or a security issued by such institution
(i) has a short-term debt obligation rating in the highest category by one
nationally recognized statistical rating organization, or (ii) if no such
ratings are available, has comparable quality in the opinion of the Portfolio's
investment adviser under the general supervision of the Board of Trustees of the
Fund.
When-Issued and Other Securities. As discussed on page 19 of the
prospectus, securities may be purchased on a when-issued basis. In addition,
securities may be purchased in transactions where, although the security is
delivered and paid for by regular-way settlement, the delivery period
established by the securities industry for that particular security results in
the payment and delivery at a future date. These securities are referred to in
the prospectus and here as "delayed delivery securities," although under the
Rules of the National Credit Union Administration (specifically Rule section
703.100) these securities are delivered by regular-way settlement and would not
be considered as being subject to delayed delivery. Although the time period for
settlement may be beyond several days, the securities are delivered for
settlement within the time frame that the securities industry has established
for that type of security.
Securities purchased for payment and delivery at a future date are
subject to market fluctuation, and no interest accrues to the Portfolios until
delivery and payment take place. At the time each Portfolio makes the commitment
to purchase such securities, it will record the transaction and thereafter
reflect the value each day of such securities in determining its net asset
value. To facilitate acquisitions of such securities, each portfolio will
maintain with its custodian a separate account with marketable Portfolio
securities in an amount at least equal to such commitments. On delivery dates
for such transactions, the Portfolio will meet its obligations from maturities
or sales of the securities held in the separate account and/or from available
cash.
Other Current Policies. Under current policies of the Board of
Trustees, the Fund has adopted certain voluntary restrictions with respect to
the Portfolios' investments. These restrictions apply to all three Portfolios
unless specified below:
(1) prohibit the purchase of obligations of Federal Land Banks,
Federal Intermediate Credit Banks, the Export-Import Bank of
the United States, the Commodity Credit Corporation, the
National Credit Union Administration and the Tennessee Valley
Authority;
(2) limit the use of repurchase agreements to repurchase
agreements involving obligations of the U.S. Government,
including zero coupon Treasury securities that have been
stripped of either principal or interest by the U.S.
Government so long as the maturity of these securities does
not exceed ten years, and obligations of the Federal Home Loan
Banks, Fannie Mae, the Government National Mortgage
Association, the Federal Farm Credit Banks, the Federal
Financing Bank, the Student Loan Marketing Association and
Freddie Mac;
(3) for the ARM Portfolio and Intermediate Mortgage Portfolio,
limit the maturities of bankers' acceptances to six months and
prohibit investments in bankers' acceptances of Edge Act
corporations guaranteed by their FDIC-insured parent banks
until such time as the appropriateness of these investments
for federal credit unions is clarified;
(4) for the ARM Portfolio, to prohibit investments in interest
rate caps and floors until such time as the appropriateness of
these investments for federal credit unions is clarified;
(5) for the U.S. Government Mortgage Portfolio, to prohibit
investments in reverse repurchase agreements, interest rate
futures contracts, options and options on interest rate
futures contracts, in each case until such time as federal
credit unions may invest in them without limitation; and
(6) for the U.S. Government Mortgage Securities Portfolio,
prohibit loans of federal funds until such time as investors
are limited to institutions meeting the requirements of
Regulation D of the Board of Governors of the Federal Reserve
System.
Although these restrictions are not fundamental policies of the Fund
and may be changed without shareholder vote, the Fund will not alter these
restrictions without notice to shareholders.
See "Investment Restrictions" in this Statement of Additional
Information for a description of additional investment restrictions of the
Portfolios.
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PORTFOLIO TURNOVER
Each Portfolio may engage in trading of the portfolio securities to
take advantage of market variations and to enhance liquidity. The portfolio
turnovers are set forth for certain periods in the tables under "Financial
Highlights."
PURCHASE AND REDEMPTION OF SHARES
The Fund believes that shares of each Portfolio qualify as investments
not subject to percentage of assets limitations under Section 5(c)(1)(Q) of the
Home Owners' Loan Act of 1933, as amended, and the OTS Regulations thereunder
governing investments by federal savings associations, as defined in such Act,
which includes federal savings banks chartered under such Act. In addition,
shares of each Portfolio are eligible for purchase without limitation by
national banks and federal credit unions.
Investors may be charged a fee if they effect transactions through a
broker or agent. Brokers and intermediaries are authorized to accept orders on
the Fund's behalf.
A purchase order is considered binding upon the investor. Should it be
necessary to cancel an order because payment was not timely received, the Fund
will hold the investor responsible for the difference between the price of the
shares when ordered and the price of the shares when the order was cancelled. If
the investor is already a shareholder of the Fund, the Fund may redeem shares
from the investor's account in an amount equal to such difference. In
addition, the Fund may prohibit or restrict the investor from making future
purchases of the Fund's shares.
The Fund reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption (1) for any period during which the
New York Stock Exchange (the "Exchange") is closed, other than customary weekend
and holiday closings, or during which trading on the Exchange is restricted, (2)
for any period during which an emergency, as defined by the rules of the
Securities and Exchange Commission, exists as a result of which (i) disposal by
the Fund of securities held by each Portfolio is not reasonably practicable, or
(ii) is not reasonably practicable for the Fund to determine the value of the
Portfolio's net assets, or (3) for such other periods as the Securities and
Exchange Commission, or any successor governmental authority, may by order
permit for the protection of shareholders of each Portfolio.
DIVIDENDS, DISTRIBUTIONS, YIELD
AND TOTAL RETURN QUOTATIONS
Dividends on shares of each Portfolio are paid monthly on the last
Business Day of each month.
Net investment income of each Portfolio for dividend purposes (from the
time of the immediately preceding determination thereof) will consist of (i)
interest accrued and discount earned (including both original issue and market
discount) less amortization of any premium, (ii) less accrued expenses
attributable to the Portfolio and the general expenses of the Fund prorated on
the basis of relative net assets of the Portfolio in relation to the net assets
of the Fund's other portfolios applicable to that period.
From time to time the Portfolios advertise their "yield" and "total
return." These figures are based on historical earnings and are not intended to
indicate future performance.
The "yield" of a Portfolio refers to the income generated by an
investment in the Portfolio over a 30-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage of
the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period.
For the 30-day period ended October 31, 1999, the ARM Portfolio's
annualized yield was 5.46%. The average annual total rates of return for the
one-year and five-year periods ended October 31, 1999, and for the period from
September 18, 1991, the date the shares were first publicly offered, were 4.73%,
6.13% and 5.34%, respectively. Without fee waivers, the 30-day annualized yield
would have been 5.16% and the average annual total rates of return for the
one-year and five-year periods and the period since the initial public offering
date would have been 5.23%, 6.63%, 5.82%, respectively.
For the 30-day period ended October 31, 1999, the Intermediate Mortgage
Portfolio's annualized yield was 5.95%. The average annual total rates of return
for the one-year, five-year and ten-year periods ended October 31, 1999, were
2.32%, 6.54% and 6.83%, respectively. Without fee waivers, the 30-day annualized
yield would have been 5.85% and the average annual total rates of return for the
one-year, five-year and ten-year periods would have been 2.82%, 7.02% and
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7.07%, respectively. The total return figures for the ten-year period reflects
the performance of the Portfolio as the Corporate Bond Portfolio, which was
invested primarily in investment grade corporate bonds prior to June 2, 1992.
For the 30-day period ended October 31, 1999, the U.S. Government
Mortgage Portfolio's annualized yield was 6.38%. The average annual total rates
of return for the one-year, five-year and ten-year periods ended October 31,
1999, were 1.63%, 7.16% and 7.25%, respectively.
For each Portfolio, the annualized yield shown above was computed by
dividing the aggregate net income per share for dividend purposes for the 30-day
period by the Portfolio's net asset value on October 31, 1999. The 30-day yield
was then annualized on a bond-equivalent basis assuming semi-annual reinvestment
and compounding of net income per share for dividend purposes.
The "total return" of a Portfolio shows what an investment in the
Portfolio would have earned over a specified period of time (one, five and ten
years; for the ARM Portfolio, one and five years and any longer period of time
measured from September 18, 1991, the date the Portfolio's shares were first
offered publicly), assuming that all distributions and dividends by the
Portfolio were reinvested on the reinvestment dates during the period and less
all recurring fees. Any agreement by the Adviser and Distributor to reduce or
waive their fees under certain circumstances may cause a Portfolio's yield and
total return to be higher than they otherwise would be.
For each Portfolio, the total return for each period shown above was
computed by assuming a hypothetical initial investment of $1,000 on the first
day of such period. It was then assumed that all dividends and distributions
over the period were reinvested and that, at the end of such period, the entire
amount was redeemed. The average annual total rate of return was then determined
by calculating the annual rate required for the initial payment to grow to the
amount which would have been received upon redemption (i.e., the average annual
compound rate of return).
From time to time, each Portfolio may quote a "dividend distribution
rate" in sales literature. The "dividend distribution rate" represents the
aggregation of actual distributions made, representing dividends, realized
short-term capital gains and certain realized long-term capital gains. It does
not reflect unrealized gains or losses. The "dividend distribution rate" differs
from yield in that certain non-recurring components may be included. Any quoted
"dividend distribution rate," therefore, should be considered along with, and
not as a substitute for, the yield and total rate of return of the Portfolio.
From time to time each Portfolio's performance may be compared with
various indices and investments, other performance measures or rankings, or
other mutual funds, or indices or averages of other mutual funds.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Fund is managed by a Board of Trustees. The Trustees are
responsible for managing the Fund's business affairs and for exercising all the
Fund's powers except those reserved for the shareholders. The Trustees'
responsibilities include reviewing the actions of the Fund's investment adviser,
distributor and administrator.
TRUSTEES AND OFFICERS
Trustees and Officers of the Fund, together with information as to
their principal business occupations during the past five years, are shown
below. Each trustee who is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), is indicated by an
asterisk.
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<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS HELD WITH FUND DURING PAST FIVE YEARS AND PRIOR RELATIVE EXPERIENCE
--------------------- -------------- ----------------------------------------------------
<S> <C> <C>
Richard M. Amis (49) Trustee President, First Federal Community Bank since
630 Clarksville Street 1984; Director, First Financial Trust Company; formerly
Paris, TX 75460 Chairman, Texas Savings and Community Bankers
Association.
Arthur G. De Russo (79) Trustee Chief Executive Officer, Eastern Financial Federal Credit
5397 S.E. Major Way Union from 1974 to 1992; Chairman and Director, First
Stuart, FL 34997 Credit Union Trust Co., Inc. from 1988 to
1992; President of the Airline Credit Union
Conference in 1991; Director, Honor ATM
Network, Florida from 1985 to 1990.
David F. Holland (58) Trustee Chairman of the Board since 1989 and Chief
17 New England Executive Park Executive Officer since 1986 of Boston Federal
Burlington, MA 01803 Savings Bank 1989-1995 and 1998 to present;
Director of Fund from 1988 to 1989 and since
1993; Director of Federal Home Loan Bank of
Boston; until December 1997 Chairman of America's
Community Banking Partners, Inc. and Director of ACB
Investment Services, Inc.; Director of
M.S.B. Fund, Inc. since 1997; Director of NYCE
Corporation since 1995; Director from 1990
to 1995 and Chairman 1993-1994 of America's
Community Bankers: member from 1995 to
1997 and President since 1997 of Thrift
Institutions Advisory Council, Director, New England
College of Finance.
Gerald J. Levy (68) Vice Chairman of the Chairman and Chief Executive Officer, Guaranty
4000 W. Brown Deer Road Board and Trustee Bank, S.S.B. since 1984 (from 1959 to 1984, he held
Milwaukee, WI 53209 a series of officer's positions, including
President). Chairman, 1986, United States
League of Savings Institutions; Director of
FISERV, Inc. since 1986; Director since
1995 of the Republic Mortgage Insurance
Company; Director of the Federal Asset
Disposition Association from 1986 to 1989;
and, previously Director and Vice Chairman,
Federal Home Loan Bank of Chicago and
Member of Advisory Committee of the Federal
Home Loan Mortgage Corporation and Federal
National Mortgage Corporation.
Rodger D. Shay (63) Chairman of the Board Chairman and Director of Shay Assets Management,
1000 Brickell Avenue and Trustee Inc. since August 1997 (previously President and
Miami, FL 33131 Director from 1990 to August 1997);
Chairman and Director of Shay Financial
Services, Inc. since August 1997
(previously President and Director from
1990 to August 1997); President, Chief
Executive Officer and member of the
Managing Board of Shay Assets Management
Co. from 1990 to December 1997; President,
Chief Executive Officer and
</TABLE>
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<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS HELD WITH FUND DURING PAST FIVE YEARS AND PRIOR RELATIVE EXPERIENCE
--------------------- -------------- ----------------------------------------------------
<S> <C> <C>
member of the Managing Board of Shay
Financial Services Co. from 1990 to
December 1997; Chairman and Director
Horizon Bank, FSB since 1999; Director
from 1986 to 1991 and President from 1986
to 1992, U.S. League Securities, Inc.; Vice
President since 1995 of Institutional Investors
Capital Appreciation Fund, Inc. and M.S.B.
Fund, Inc.; Director, First Home Savings
Bank, S.L.A. since 1990; previously
Director, Asset Management Fund, Inc. from
1985 to 1990; President of Bolton Shay and
Company and Director and Officer of its
affiliates from 1981 TO 1985; previously,
employed by certain subsidiaries of Merrill
Lynch & Co. from 1955 to 1981, where he
served in various executive positions
including Chairman of the Board of Merrill
Lynch Government Securities, Inc., Chairman
of the Board of Merrill Lynch Money Market
Securities, Inc. and Managing Director of
The Debt Trading Division of Merrill Lynch,
Pierce, Fenner & Smith Inc.
Edward E. Sammons, Jr. (60) President President of Shay Assets Management, Inc. since
230 West Monroe Street August 1997 (previously Executive Vice President
Chicago, IL 60606 from 1990 to August 1997); Executive Vice
President and member of the Managing Board of
Shay Assets Management Co. from 1990 to
December 1997. Executive Vice President and
member of the Managing Board of Shay Financial
Services Co. from 1990 to December 1997 and
Executive Vice President of Shay Financial Services,
Inc., from 1990 to August 1997; Vice President and
Secretary since 1995 of Institutional Investors
Capital Appreciation Fund, Inc. and M.S.B. Fund,
Inc.
Robert T. Podraza (55) Vice President and Vice President of Shay Investment Services, Inc.
230 West Monroe Street Assistant Treasurer since 1990; Vice President since 1990 and Chief
Chicago, IL 60606 Compliance Officer since 1997 of Shay Financial
Services, Inc.; Vice President since 1990 and Chief
Compliance Officer since 1997 of Shay Assets
Management, Inc.; Chief Compliance Officer of Shay
Financial Services Co. and Shay Assets Management
Co. from 1989 to 1997; Director of the National
Society of Compliance Professionals since 1996.
Steven D. Pierce (34) Treasurer Director of Financial Services of BISYS Fund
3435 Stelzer Road Services since 1998; Manager of Financial
Columbus, OH 43219 Operations at CNA Insurance from 1996-1998;
Trust Officer of First Chicago NBD
Corporation from 1994-1996; Senior
Financial Accountant at Kemper Financial
Services from 1989-1994.
Daniel K. Ellenwood (30) Secretary Secretary of the Fund since April 1998; Operations
230 West Monroe Street Analyst, Shay Assets Management, Inc. since
Chicago, IL 60606 November 1997; Compliance Analyst, Shay
Financial Services, Inc. since October 1996; B.S. in
Finance, University of Illinois at Chicago, 1996.
CHRISTINE A. CWIK Assistant Secretary Assistant Secretary, Asset Management Fund since
230 West Monroe Street April 1999; Executive Secretary, Shay Assets
Chicago, IL. 60606 Management, Inc. since February 1999; Executive
Secretary, Shay Investment Services, Inc. April 1997
- February 1999; Executive Secretary, Chicago
Bonding 1991 - 1997.
</TABLE>
B-8
<PAGE> 11
The following table sets forth the compensation earned by trustees from
the Fund for the fiscal year ended October 31, 1999:
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL
TRUSTEE FROM THE FUND OF FUND EXPENSES RETIREMENT COMPENSATION
------- ------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Richard M. Amis $14,500 0 0 $14,500
Arthur G. DeRusso 13,500 0 0 13,500
David F. Holland 14,500 0 0 14,500
Gerald J. Levy 14,500 0 0 14,500
Rodger D. Shay 0 0 0 0
</TABLE>
The following table provides certain information at February 2, 2000
with respect to persons known to the Fund to be beneficial (and record) owners
(having sole voting and dispositive power) of 5% or more of the shares of common
stock of the ARM Portfolio, the Intermediate Mortgage Portfolio and the U.S.
Government Mortgage Portfolio:
<TABLE>
<CAPTION>
PERCENT OF PORTFOLIO'S OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES COMMON STOCK
------------------------------------ ---------------- ------------
<S> <C> <C>
ARM PORTFOLIO:
Teachers Credit Union 5,602,326 6.98%
110 So. Main Street
South Bend, IN 46601
INTERMEDIATE MORTGAGE PORTFOLIO:
Fullerton Community Bank 1,155,156 11.16%
200 W. Commonwealth Ave
Fullerton, CA 92832
Fox Valley Savings and Loan 682,155 6.59%
51 E. First Street
Fond Du Lac, WI 54935
Sovereign Bank 1,579,810 15.26%
P O Box 12646
Reading, PA 19612
First Federal Savings and Loan 936,722 9.05%
P O Box 684
Martinsville, VA 24114
</TABLE>
B-9
<PAGE> 12
<TABLE>
<CAPTION>
PERCENT OF PORTFOLIO'S OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES COMMON STOCK
------------------------------------ ---------------- ------------
<S> <C> <C>
BFS Security Corp 887,838 8.57%
17 New England Executive Park
Burlington, MA 01803
Cuero State Bank SSB 820,934 7.93%
P O Box 808
Cuero, TX 77954
U.S. GOVERNMENT MORTGAGE PORTFOLIO:
First Federal Bank FSB 1,354,141 17.70%
109 E. Depot
Colchester, IL 62326
St. Casimirs Savings Bank 606,255 7.93%
2703 Foster Avenue
Baltimore, MD 21224
Skowhegan Savings Bank 1,401,133 18.32%
P O Box 250
Skowhegan, ME 04976
Mechanics Savings Bank 516,238 6.75%
100 Pearl Street
Hartford, CT 06103
BFS Security Corp 805,801 10.53%
17 New England Executive Park
Burlington, MA 01803
</TABLE>
As of February 2, 2000 one of the trustees had, through the
institutions he serves as officer, shared voting and investment power over
1,286 shares (.0168%) of the U.S. Government Mortgage Portfolio. None of the
trustees had, as of February 2, 2000, through the institutions for which they
serve as officers, voting and investment power over any shares of the ARM
Portfolio or the Intermediate Mortgage Portfolio.
INVESTMENT ADVISER AND ADMINISTRATOR
The investment adviser of the Fund since December 8, 1997 is Shay
Assets Management, Inc. (the "Adviser"), a Florida corporation, with its
principal office at 230 West Monroe Street, Chicago, Illinois 60606. The Adviser
is registered as an investment adviser under the Investment Advisers Act of
1940, as amended, and is a wholly owned subsidiary of Shay Investment Services,
Inc., a closely held corporation controlled by Rodger D. Shay, the President of
the Fund.
The initial term of the Investment Advisory Agreement between the Fund
and the Adviser (the "Advisory Agreement"), was completed as to each Portfolio
on March 1, 1999, and now continues from year to year thereafter, subject to
termination by the Fund or the Adviser as hereinafter provided, if such
continuance is approved at least annually by a majority of the outstanding
shares (as defined under "General Information" in this Statement of Additional
Information) of each Portfolio or by the Fund's Board of Trustees. The Advisory
Agreement must also be approved annually by the vote of a majority of the
trustees of the Fund who are not parties to the Advisory Agreement or
"interested persons" of any party thereto. All trustees' votes must be cast in
person at a meeting called for the purpose of voting on such approval.
As compensation for the services rendered by the Adviser under the
Advisory Agreement, the Fund pays the Adviser a fee, payable monthly, with
respect to the ARM Portfolio based on an annual percentage of the average daily
net assets of the Portfolio as follows: 0.45% on the first $3 billion; 0.35% of
the next $2 billion and 0.25% in excess of
B-10
<PAGE> 13
$5 billion. The Adviser may voluntarily elect to waive its advisory fees in an
amount up to but not to exceed 0.45% of the average daily net assets of the
Portfolio. This voluntary waiver agreement may be terminated at any time by the
Adviser. For the Fund's fiscal years ended October 31, 1999 and 1998 (for the
period beginning December 8, 1997), the Adviser was paid fees of $2,376,844 (net
of fee waivers of $1,901,479) and $1,904,871 (net of fee waivers of $1,523,896)
with respect to the ARM Portfolio. For the Fund's fiscal years ended October 31,
1998 (through December 7, 1997) and 1997, the Fund paid Shay Assets Management
Co. ("SAMC") fees with respect to the ARM Portfolio of $206,507 (net of fee
waivers of $165,206) and $1,800,992 (net of fee waivers of $1,440,794),
respectively.
As compensation for the services rendered by the Adviser under the
Advisory Agreement, the Fund pays the Adviser a fee, payable monthly, with
respect to the Intermediate Mortgage Portfolio, at the rate of 0.35% per annum
of the average daily net assets of the Portfolio up to and including $500
million; 0.275% per annum of the next $500 million of such net assets; 0.20% per
annum of the next $500 million of such net assets; and 0.10% per annum of such
net assets over $1.5 billion. The Advisory Agreement provides that in the event
the daily ratio of Expenses (as defined in the Agreement) to daily net assets
with respect to a Portfolio on any day exceeds 0.75% (such expenses hereinafter
called the "Excess Expense" of such Portfolio), the compensation due to the
Adviser for that day shall be reduced but not below zero, by an amount equal to
the Excess Expense of such Portfolio. The Adviser may voluntarily elect to waive
its fees in an amount up to but not to exceed 0.35% of the average daily net
assets of the Portfolio. This voluntary waiver agreement may be terminated at
any time by the Adviser. For the Fund's fiscal years ended October 31, 1999 and
1998 (for the period beginning December 8, 1997), the Adviser was paid fees of
$262,607 (net of fee waivers of $105,042) and $206,032 (net of fee waivers of
$82,413) with respect to the Intermediate Mortgage Portfolio. For the Fund's
fiscal years ended October 31, 1998 (through December 7, 1997) and 1997, the
Fund paid SAMC fees of $20,439 (net of fee waivers of $8,176) and $212,156 (net
of fee waivers of $84,863), respectively, with respect to the Intermediate
Mortgage Portfolio.
As compensation for the services rendered by the Adviser under the
Advisory Agreement, the Fund pays the Adviser a fee, payable monthly, with
respect to the U. S. Government Mortgage Portfolio, at the rate of 0.25% per
annum of the average daily net assets of the Portfolio up to and including $500
million; 0.175% per annum of the next $500 million of such net assets; 0.125%
per annum of the next $500 million of such net assets; and 0.10% per annum of
such net assets over $1.5 billion. The Advisory Agreement provides that in the
event the daily ratio of Expenses (as defined in the Agreement) to daily net
assets with respect to a Portfolio on any day exceeds 0.75% (such expenses
hereinafter called the "Excess Expense" of such Portfolio), the compensation due
to the Adviser for that day shall be reduced but not below zero, by an amount
equal to the Excess Expense of such Portfolio. For the Fund's fiscal years ended
October 31, 1999 and 1998 (for the period beginning December 8, 1997), the
Adviser was paid fees of $217,727 and $158,794 with respect to the U.S.
Government Mortgage Portfolio. For the Fund's fiscal years ended October 31,
1998 (through December 7, 1997) and 1997, the Fund paid fees of $13,968 and
$137,123, respectively, for the U.S. Government Mortgage Portfolio.
The Adviser may from time to time enter into arrangements with entities
such as trade associations and affinity groups ("organizations") whereby the
Adviser agrees to pay such an organization a portion of the management fees
received by the Adviser with respect to assets invested in the Fund by members
of the organization for certain services or products (such as use of logos or
membership lists, bundling with or placement of articles in newsletters or other
organization publications, directory listings, and space at trade shows)
provided by the organization.
The Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by any
portfolio of the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under the Advisory
Agreement.
The Advisory Agreement will terminate automatically upon its assignment
and is terminable with respect to each Portfolio at any time without penalty by
the Board of Trustees of the Fund or by a vote of a majority of the outstanding
shares (as defined under "General Information" in this Statement of Additional
Information) of the Portfolio on 60 days' written notice to the Adviser, or by
the Adviser on 90 days' written notice to the Fund.
The Portfolio Managers of the Adviser responsible for making investment
decisions concerning the Fund's investments are Edward E. Sammons, Jr., Rodger
D. Shay, Richard Blackburn, Rodger D. Shay, Jr., Jon P. Denfeld and David
Petrosinelli. For information as to the principal occupations during the past
five years of Messrs. Sammons and Shay, who are also officers of the Fund, see
"Management of the Fund" in this Statement of Additional Information. The
principal business occupations during the past five years and professional
backgrounds of the Portfolio Managers who are not also officers of the Fund are
shown below following each of their names and business addresses.
B-11
<PAGE> 14
RICHARD BLACKBURN
230 West Monroe Street
Chicago, IL 60606
Vice President of Shay Assets Management, Inc. and Senior Portfolio
Manager since 1991. From 1982 to 1991 he was employed by the firm primarily as
an account executive and financial consultant. Mr. Blackburn has 34 years of
experience in the securities industry. His previous employers include Harris
Bank, Chicago; Merrill Lynch; and the First National Bank of Chicago. Mr.
Blackburn's primary expertise is in the mortgage securities markets,
particularly in the area of floating and/or adjustable rate securities.
JON P. DENFELD
230 West Monroe Street
Chicago, IL 60606
Portfolio Manager of Shay Assets Management, Inc. since 1996. From 1993
to 1996 he was employed by the Fund's sponsor, Shay Financial Services, Inc., as
an Account Executive specializing in financial institutions. Mr. Denfeld's area
of expertise is in the government and mortgage securities markets.
Mr. Denfeld earned a Bachelor of Arts, with a major in Economics, from
Fairfield University.
RODGER D. SHAY, JR.
1000 Brickell Avenue
Miami, FL 33131
Portfolio Manager of the Adviser and SAMC, the Fund's former adviser,
since 1991. President of Shay Financial Services, Inc., since August, 1997,
previously Senior Vice President from 1994 to August 1997, and Vice President
from 1991 to 1993. He was previously employed by Merrill Lynch, Pierce, Fenner
and Smith Inc., where he served as a senior trader and manager of collateralized
mortgage obligation trading. Mr. Shay's primary expertise is in the mortgage
securities market, particularly in the area of collateralized mortgage
obligations.
DAVID PETROSINELLI
230 West Monroe Street
Chicago, IL 60606
Portfolio Manager of Shay Assets Management, Inc. since 1999. He was
previously Portfolio Manager for the Chicago Public Schools since 1998, where he
managed various operating and bond proceed funds and served as Assistant Vice
President for an insurance holding company since 1995, where he was portfolio
manager for the general fund. Mr. Petrosinelli's primary expertise is in the
government and mortgage securities markets.
Mr. Petrosinelli earned his Bachelor of Science in Finance from
Northeastern University in Boston and a Master of Business Administration, cum
laude, with concentration in Economics from Loyola University in Chicago.
The Fund's current administrative agent (the "Administrator") with
respect to each Portfolio is BISYS Fund Services Ohio, Inc. ("BISYS"). Prior to
August 1, 1999, PFPC Inc. ("PFPC"), a wholly-owned subsidiary of PNC Bank Corp.,
was the Fund's administrative agent. Pursuant to the terms of the Administration
Agreement (the "Administration Agreement") dated as of August 1, 1999, between
the Fund and the Administrator, the Administrator performs various
administrative services for the Fund, including (i) assisting in supervising all
aspects of the Portfolios' operations other than those assumed by the Adviser,
the Distributor, the custodian or the transfer and dividend agent, (ii)
providing each Portfolio with the services of persons competent to perform such
administrative and clerical functions as are necessary in order to provide
effective administration of the Portfolios, (iii) maintenance of each
Portfolio's books and records, (iv) preparation of various filings, reports,
statements and returns filed with governmental authorities or distributed to
shareholders of each Portfolio, (v) computation of each Portfolio's net asset
value for purposes of the sale and redemption of its shares, and (vi)
computation of each Portfolio's daily dividend. Certain functions relating to
state "blue sky" qualification services in
B-12
<PAGE> 15
any of the states where the Portfolios are registered are subject to additional
charges by the Administrator that are not included in the fee rates and minimum
annual fee described below.
As compensation for the services rendered by the Administrator under
the Administration Agreement, the Fund pays the Administrator a fee, computed
daily and payable monthly, with respect to each Portfolio at the rate of 0.03%
per annum of the Portfolio's net assets up to and including $1 billion; 0.02%
per annum of the next $1 billion of net assets; and 0.01% per annum of each
Portfolio's net assets over $2 billion, with a minimum annual fee of $393,200
for all the Fund's five portfolios taken together. If applicable, the minimum
fee is allocated among the Fund's five portfolios based on relative average net
assets. For the fiscal years ended October 31, 1999 (November 1, 1998 through
July 31, 1999), 1998 and 1997, the Fund paid PFPC, the former Administrator,
fees pursuant to the Administration Agreement with respect to each Portfolio as
follows: for the ARM Portfolio, the fees paid were $217,727, $293,520 and
$269,671, respectively. For the Intermediate Mortgage Portfolio, the fees were
$23,981, $31,313 and $31,793, respectively. For the U.S. Government
Mortgage Portfolio, the fees were $19,796, $24,145 and $21,188, respectively.
For the period of August 1, 1999, through October 31, 1999, the Fund paid the
current Administrator, BISYS, $69,778 for the ARM Portfolio, $7,788 for the
Intermediate Mortgage Portfolio and $6,550 for the U.S. Government Mortgage
Portfolio.
The Fund is responsible for the payment of its expenses. Such expenses
include, without limitation, the fees payable to the Adviser, the Administrator
and the Distributor (see "Distributor" below) with respect to each Portfolio,
the fees and expenses of the Fund's custodian and transfer and dividend agent
with respect to each Portfolio, any brokerage fees and commissions of each
Portfolio, any portfolio losses of each Portfolio, filing fees for the
registration or qualification of each Portfolio's shares under federal or state
securities laws, the Portfolio's pro rata share of taxes, interest, costs of
liability insurance, fidelity bonds or indemnification, any costs, expenses or
losses arising out of any liability of, or claim for damages or other relief
asserted against, the Fund with respect to the Portfolio for violation of any
law, each Portfolio's pro rata share of legal and auditing fees and expenses,
expenses of preparing and setting in type prospectuses, proxy material, reports
and notices and the printing and distributing of the same to the shareholders of
each Portfolio and regulatory authorities, the Portfolio's pro rata share of
compensation and expenses of the Fund's trustees and officers who are not
affiliated with the Adviser, the Administrator, the Distributor or the transfer
and dividend agent, and extraordinary expenses incurred by the Fund with respect
to each Portfolio.
DISTRIBUTOR
Shay Financial Services, Inc. is a registered broker-dealer and the
Fund's principal distributor (the "Distributor"). The Distributor, a Florida
corporation, is a wholly owned subsidiary of Shay Investment Services, Inc.,
which is a closely held corporation controlled by Rodger D. Shay.
As compensation for distribution services, the Fund pays the
Distributor a fee, payable monthly, with respect to the ARM Portfolio at the
rate of 0.25% per annum of the average daily net assets of the Portfolio. The
Distributor may voluntarily elect to waive its 12b-1 fees in an amount up to but
not to exceed 0.25% of the average daily net assets of the Portfolio. This
voluntary waiver agreement may be terminated at any time by the Distributor. For
the fiscal years ended October 31, 1999 and 1998 (for the period beginning
December 8, 1997), the Distributor was paid fees of $1,426,108 (net of fee
waivers of $950,737) and $1,142,923 (net of fee waivers of $761,948) for the ARM
Portfolio. For the fiscal years ended October 31, 1998 (through December 7,
1997), 1997 the Fund paid Shay Financial Services Co. ("SFSC") $123,904 (net of
fee waivers of $82,603) and $1,080,595 (net of fee waivers of $720,397),
respectively, for the ARM Portfolio.
As compensation for distribution services, the Fund pays the
Distributor a fee, payable monthly, with respect to each of the Intermediate
Mortgage Portfolio and the U.S. Government Mortgage Portfolio at the rate of
0.15% per annum of the average daily net assets of the Portfolio up to and
including $500 million; 0.125% per annum of the next $500 million of such net
assets; 0.10% per annum of the next $500 million of such net assets; and 0.075%
per annum of such net assets over $1.5 billion. For the fiscal years ended
October 31, 1999 and 1998 (for the period beginning December 8, 1997), the
Distributor was paid fees of $157,564 and $123,619 for the Intermediate Mortgage
Portfolio. For the fiscal years ended
B-13
<PAGE> 16
October 31, 1998 (through December 7, 1997) and 1997, the Fund paid SFSC fees
pursuant to the Rule 12b-1 Agreement, as in effect, of $12,264 and $127,294,
respectively, for the Intermediate Mortgage Portfolio. For the fiscal years
ended October 31, 1999 and 1998 (for the period beginning December 8, 1997), the
Distributor was paid fees of $130,636 and $95,277 for the U.S. Government
Mortgage Portfolio. For the fiscal years ended October 31, 1998 (through
December 7, 1997), and 1997 the Fund paid the Distributor fees pursuant to the
Rule 12b-1 Agreement, as in effect, of $8,380 and $82,274, respectively, for the
U.S. Government Mortgage Portfolio.
The Distributor is obligated under the Distribution Agreement to bear
the costs and expenses of printing and distributing copies of prospectuses and
annual and interim reports of the Fund (after such items have been prepared and
set in type) that are used in connection with the offering of shares of the Fund
to investors, and the costs and expenses of preparing, printing and distributing
any other literature used by the Distributor in connection with the offering of
the shares of the Portfolios for sale to investors.
The Fund has been informed by the Distributor that during its fiscal
year ended October 31, 1999, of the $1,426,108 (net of fee waivers of $950,738)
fee received in the aggregate by SFSC and the Distributor from the Fund with
respect to the ARM Portfolio, the following expenditures were made:
Advertising ............................ $ 20,692
Printing ............................... 43,260
Employee compensation and costs ........ 1,698,914
Staff travel and expense ............... 142,430
Other administrative expense ........... 266,749
----------
Total .................................. $2,172,045
==========
The Fund has been informed by the Distributor that during its fiscal
year ended October 31, 1999, of the $157,564 fee received in the aggregate by
SFSC and the Distributor from the Fund with respect to the Intermediate Mortgage
Portfolio, the following expenditures were made:
Advertising ............................ $ 2,286
Printing ............................... 4,778
Employee compensation and costs ........ 187,653
Staff travel and expense ............... 15,732
Other administrative expense ........... 29,464
----------
Total .................................. $ 239,913
==========
The Fund has been informed by the Distributor that during its fiscal
year ended October 31, 1999, of the $130,636 fee received in the aggregate by
SFSC and the Distributor from the Fund with respect to the U.S. Government
Mortgage Portfolio, the following expenditures were made:
Advertising ............................ $ 1,895
Printing ............................... 3,962
Employee compensation and costs ........ 155,609
Staff travel and expense ............... 13,046
Other administrative expense ........... 24,432
----------
Total .................................. $ 198,945
==========
Shay Financial Services, Inc., the Fund's Distributor, and its
affiliated persons, including Rodger D. Shay, who is a Trustee and the Chairman
of the Board of the Fund, Edward E. Sammons Jr., who is President of the Fund,
Steven D. Pierce, who is Treasurer of the Fund, Robert T. Podraza, who is Vice
President and Assistant Treasurer of the Fund, and Daniel K. Ellenwood, who is
the Secretary of the Fund, have a direct or indirect financial interest in the
operation of the Fund's Rule 12b-1 Plan and related Distribution Agreement. None
of the Trustees who are not interested persons of the Fund have any direct or
indirect financial interest in the operation of the Fund's Rule 12b-1 Plan and
related Distribution Agreement.
B-14
<PAGE> 17
The Fund has appointed the Distributor to act as the principal
distributor of the Fund's shares pursuant to a Distribution Agreement dated
December 8, 1997 between the Fund and the Distributor (the "Distribution
Agreement"). The initial term of the Distribution Agreement with the Distributor
was completed as of March 1, 1999, and now continues in effect from year to year
thereafter, subject to termination by the Fund or the Distributor as hereinafter
provided, if approved at least annually by the Fund's Board of Trustees and by a
majority of the trustees who are not "interested persons" of the Fund and have
no direct or indirect financial interest in the arrangements contemplated by the
agreement. The Fund's Rule 12b-1 Plan requires the Fund's Board of Trustees to
make a quarterly review of the amount expended under the Rule 12b-1 Plan and the
purposes for which such expenditures were made. The Rule 12b-1 Plan may not be
amended to increase materially the amount paid by the Fund thereunder without
shareholder approval. All material amendments to the Rule 12b-1 Plan must be
approved by the Fund's Board of Trustees and by the "disinterested" trustees
referred to above. The Rule 12b-1 Plan will terminate automatically upon its
assignment and is terminable at any time without penalty by a majority of the
Fund's trustees who are "disinterested" as described above or by a vote of a
majority of the outstanding shares (as defined under "General Information" in
this Statement of Additional Information) of each Portfolio on 60 days' written
notice to the Distributor, or by the Distributor on 90 days' written notice to
the Fund. Although the Distributor's fee is calculable separately with respect
to each Portfolio of the Fund and the Distributor reports expense information to
the Fund on a portfolio-by-portfolio basis, any 12b-1 fee received by the
Distributor in excess of expenses for a given Portfolio may be used for any
purpose, including payment of otherwise unreimbursed expenses incurred in
distributing shares of another Portfolio or to compensate another dealer for
distribution assistance. The 12b-1 Plan does not permit a Portfolio to be
charged for interest, carrying, or other financing charges on any such
unreimbursed carryover amounts, but it does provide for reimbursement for a
portion of the Distributor's overhead expenses.
TRANSFER AND DIVIDEND AGENT
BISYS Fund Services Ohio, Inc. ("BISYS"), 3435 Stelzer Road, Columbus,
Ohio 43219, an Ohio corporation, is the transfer and dividend agent for the
Portfolios' shares.
CUSTODIAN
As of July 30, 1999, The Bank of New York, 100 Church Street, 10th
Floor, New York, New York 10286, a Maryland corporation, became the custodian of
the Portfolio's investments. PFPC Trust Company, an affiliate of PNC Bank Corp,
served as the Fund's former custodian.
DETERMINATION OF NET ASSET VALUE
For purposes of determining the net asset value per share of each
Portfolio, investments for which market quotations are readily available will be
valued at the mean between the most recent bid and asked prices, which may be
furnished by a pricing service, at prices provided directly by market makers, or
using matrix pricing methods. Portfolio securities for which market quotations
are not readily available, and other assets, will be valued at fair value using
methods determined in good faith by the Board of Trustees. Short-term
instruments maturing within 60 days of the valuation date may be valued based
upon their amortized cost. The Board of Trustees will review valuation methods
regularly in order to determine their appropriateness.
B-15
<PAGE> 18
TAXES
The following discussion is not intended to be a full discussion of
income tax laws and their effect on shareholders. Investors should consult their
own tax advisors as to the tax consequences of ownership of shares.
Each of the Fund's portfolios, including these Portfolios, is treated
as a separate entity for accounting and federal income tax purposes, and thus
the provisions of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable to regulated investment companies are applied to each
Portfolio separately, rather than to the Fund as a whole. In addition, net
long-term and short-term capital gains and losses, net investment income, and
operating expenses are determined separately for each Portfolio.
Each Portfolio qualifies as a regulated investment company under
Subchapter M of the Code. In order to so qualify each Portfolio must, among
other things: (a) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of its total assets is represented by
cash or cash items, government securities and other securities with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Portfolio's assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the total value of its
total assets is invested in the securities of any one issuer (other than
government securities) and (b) derive at least 90% of its gross income from
dividends, interest, proceeds from loans of stock and securities, gains from the
sale or other disposition of stock or securities, and other income derived
with respect to its business of investing in stock or securities. If each
Portfolio qualifies as a regulated investment company, it will not be subject to
federal income tax on its income and gains distributed to shareholders, provided
at least 90% of its investment company taxable income earned in the taxable year
(computed without regard to the deduction for dividends paid) is so distributed.
Dividends of each Portfolio's net investment income (which generally
includes income other than capital gains, net of operating expenses), and
distributions of net short-term capital gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) are taxable to
shareholders as ordinary income whether reinvested in shares or paid in cash.
Distributions of net long-term capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses) are taxable to shareholders as
long-term capital gains, regardless of how long shares of the Portfolio have
been held, whether reinvested in shares or paid in cash. Under the Code, net
long-term capital gains received by corporate shareholders (including long-term
capital gain distributions by each Portfolio) are taxed at the same rates as
ordinary income. Net long-term capital gains received by individual shareholders
(including long-term capital gain distributions by each Portfolio) are generally
taxed at a maximum rate of 20%.
Because none of each Portfolio's income will consist of dividends from
domestic corporations, dividends of net investment income as well as
distributions of net long-term and short-term capital gains will not qualify for
the dividends received deduction available to corporate shareholders.
Gain or loss realized upon a sale or redemption of shares of each
Portfolio by a shareholder who is not a dealer in securities will be treated as
long-term capital gain or loss if the shares have been held for more than one
year and otherwise as short-term capital gain or loss. Any loss realized by a
shareholder upon the sale of shares in each Portfolio held one year or less will
be treated as a long-term capital loss, however, to the extent of any long-term
capital gain distributions received by the shareholder with respect to such
shares.
Any capital gains distribution received shortly after the purchase of
shares reduces the net asset value of the shares by the amount of the
distribution and, although in effect a return of capital, will be taxable to the
shareholder. If the net asset value of shares were reduced below the
shareholder's cost by distributions representing gains realized on sales of
securities, such distributions would be a return of investment though taxable in
the same manner as other dividends or distributions.
Each Portfolio generally will be subject to a 4% nondeductible excise
tax to the extent the Portfolio does not meet certain minimum distribution
requirements by the end of each calendar year. To avoid the imposition of the 4%
excise tax, it may be necessary for a dividend to be declared in December and
actually paid in January of the following year, which will be treated as having
been received by shareholders on December 31 of the calendar year in which
declared. Under this rule, therefore, a shareholder may be taxed in one year on
dividends or distributions actually received in January of the following year.
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<PAGE> 19
Dividends and distributions may be subject to state and local taxes.
PORTFOLIO TRANSACTIONS
Purchases and sales of securities for each Portfolio usually are
principal transactions. Portfolio securities normally are purchased directly
from the issuer or from an underwriter or market maker for the securities. There
usually, but not always, are no brokerage commissions paid by the Fund for such
purchases, and during the fiscal year ended October 31, 1999, none of the
Portfolios paid any brokerage commissions. Purchases from dealers serving as
market makers may include the spread between the bid and asked prices. The
Adviser attempts to obtain the best price and execution for portfolio
transactions.
Each Portfolio will not purchase securities from, sell securities to, or
enter into repurchase agreements with, the Adviser or any of its affiliates.
Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser in its best judgment under the general
supervision of the Board of Trustees of the Fund and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the best price. On occasion the Adviser on
behalf of each Portfolio may effect securities transactions on an agency basis
with broker-dealers providing research services and/or research-related products
for the Fund. Research services or research-related products may include
information in the form of written reports, reports accessed by computers or
terminals, statistical collations and appraisals and analysis relating to
companies or industries. However, in selecting such broker-dealers, the Adviser
adheres to the primary consideration of best price and execution.
Investment decisions for each Portfolio of the Fund are made
independently from those for the other portfolios or other clients advised by
the Adviser. It may happen, on occasion, that the same security is held in one
portfolio of the Fund and the other portfolios of one or more of such other
clients. Simultaneous transactions are likely when several portfolios and
clients are advised by the same investment adviser, particularly when a security
is suitable for the investment objectives of more than one of such portfolios or
clients. When two or more portfolios or other clients advised by the Adviser are
simultaneously engaged in the purchase or sale of the same security, the
transactions are allocated to the respective portfolios or clients, both as to
amount and price, in accordance with a method deemed equitable to each portfolio
or client. In some cases this system may adversely affect the price paid or
received by a portfolio of the Fund or the size of the security position
obtainable for such portfolio.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for the ARM
Portfolio, none of which may be changed without the approval of a majority of
the outstanding shares of the Portfolio, as defined under "General Information"
in this Statement of Additional Information. Accordingly, the ARM Portfolio
shall:
(1) Limit its investments and investment techniques so as to
qualify for investment by national banks, federal savings
associations, and federal credit unions; and
may not:
(2) Invest more than 5% of its total assets in the securities of
any one issuer, other than securities issued or guaranteed by
the United States Government or its agencies or
instrumentalities, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to
this 5% limitation.
(3) Borrow money except from banks (a) for temporary or emergency
purposes and in an amount not exceeding 10% of the value of
the Portfolio's net assets, or (b) to meet redemption
requests without immediately selling any portfolio securities
and in an amount not exceeding in the aggregate one-third of
the value of the Portfolio's total assets, less liabilities
other than borrowing; or mortgage, pledge or hypothecate its
assets except in connection with any such borrowing and in
amounts not in excess of 20%
B-17
<PAGE> 20
of the value of its net assets. The borrowing provision of (b)
above is not for investment leverage, but solely to facilitate
management of the Portfolio by enabling the Portfolio to meet
redemption requests when the liquidation of portfolio
securities is considered to be disadvantageous. The
Portfolio's net income will be reduced if the interest expense
of borrowings incurred to meet redemption requests and avoid
liquidation of portfolio securities exceeds the interest
income of those securities. To the extent that borrowings
exceed 5% of the value of the Portfolio's net assets, such
borrowings will be repaid before any investments are made.
(4) Invest more than 25% of the value of the Portfolio's total
assets in the securities of issuers in any single industry;
provided that there shall be no such limitation on investments
in the mortgage and mortgage finance industry (in which more
than 25% of the value of the Portfolio's total assets will,
except for temporary defensive purposes, be invested) or on
the purchase of obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities.
(5) Act as an underwriter of securities, except to the extent that
the Fund may be deemed to be an "underwriter" in connection
with the purchase of securities for the Portfolio directly
from an issuer or an underwriter thereof.
(6) Lend any of its assets, except portfolio securities. This
shall not prevent the Portfolio from purchasing or holding
debt obligations, entering into repurchase agreements and
loaning federal funds and other day(s) funds to FDIC Insured
Institutions (as defined in the Prospectus), in each case to
the extent permitted by the Portfolio's investment objective
and management policies.
(7) Purchase securities on margin or make short sales of
securities; write or purchase put or call options or
combinations thereof or purchase or sell real estate, real
estate mortgage loans (except that the Portfolio may purchase
and sell Mortgage-Related Securities), real estate investment
trust securities, commodities or commodity contracts, or oil
and gas interests.
The Fund has adopted the following investment restrictions for the
Intermediate Mortgage Portfolio and U.S. Government Mortgage Portfolio,
respectively, none of which may be changed without the approval of a majority of
the outstanding shares of the Portfolio, as defined under "General Information"
in this Statement of Additional Information. The restrictions are the same for
both Portfolios except as indicated. Accordingly, the Intermediate Mortgage
Portfolio and the U.S. Government Mortgage Portfolio shall:
(1) Limit its investments and investment techniques so as to
qualify for investment by national banks, federal savings
associations, and federal credit unions; and
may not:
(2) Invest more than 5% of its total assets in the securities of
any one issuer, other than securities issued or guaranteed by
the United States Government or its agencies or
instrumentalities, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to
this 5% limitation.
(3) Enter into reverse repurchase agreements exceeding in the
aggregate one-third of the value of the U.S. Government
Mortgage Portfolio's total assets, less liabilities other than
the obligations created by reverse repurchase agreements.
(4) (Intermediate Mortgage Portfolio) Borrow money except from
banks (a) for temporary purposes and in an amount not
exceeding 10% of the value of the Portfolio's net assets, or
(b) to meet redemption requests without immediately selling
any portfolio securities and in an amount not exceeding in the
aggregate one-third of the value of the Portfolio's total
assets, less liabilities other than such borrowing; or
mortgage, pledge or hypothecate its assets except in
connection with any such borrowing and in amounts not in
excess of 20% of the value of its net assets provided that
there shall be no such limitation on deposits made in
connection with the entering into and holding of interest rate
futures contracts and
B-18
<PAGE> 21
options thereon. The borrowing provision of (b) above is not
for investment leverage, but solely to facilitate management
of the Portfolio by enabling the Portfolio to meet redemption
requests when the liquidation of portfolio securities is
considered to be disadvantageous. To the extent that
borrowings exceed 5% of the value of the Portfolio's net
assets, such borrowings will be repaid before any investments
are made. The Portfolio's ability to enter into reverse
repurchase agreements is not restricted by this paragraph (4)
and collateral arrangements with respect to margins for
interest rate futures contracts and options thereon are not
deemed to be a pledge of assets for the purpose of this
paragraph (4).
(5) (U.S. Government Mortgage Portfolio) Borrow money except from
banks (a) for temporary or emergency purposes and in an amount
not exceeding 10% of the value of the Portfolio's net assets,
or (b) to meet redemption requests without immediately selling
any portfolio securities and in an amount not exceeding in the
aggregate one-third of the value of the Portfolio's total
assets, less liabilities other than borrowing; or mortgage,
pledge or hypothecate its assets except in connection with any
such borrowing and in amounts not in excess of 20% of the
value of its net assets provided that there shall be no such
limitation on deposits made in connection with the entering
into and holding of interest rate futures contracts and
options thereon. The borrowing provision of (b) above is not
for investment leverage, but solely to facilitate management
of the Portfolio by enabling the Portfolio to meet redemption
requests when the liquidation of portfolio securities is
considered to be disadvantageous. The Portfolio's net income
will be reduced if the interest expense of borrowings incurred
to meet redemption requests and avoid liquidation of portfolio
securities exceeds the interest income of those securities. To
the extent that borrowings exceed 5% of the value of the
Portfolio's net assets, such borrowings will be repaid before
any investments are made. The Portfolio's ability to enter
into reverse repurchase agreements is not restricted by this
paragraph (5) and collateral arrangements with respect to
margins for interest rate futures contracts and options
thereon are not deemed to be a pledge of assets for the
purpose of this paragraph (5).
(6) Invest more than 25% of the value of the Portfolio's total
assets in the securities of issuers in any single industry;
provided that there shall be no such limitation on investments
in the mortgage and mortgage finance industry (in which more
than 25% of the value of the portfolio's total assets will,
except for temporary defensive purposes, be invested) or on
the purchase of obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities.
(7) Act as an underwriter of securities, except to the extent that
the Fund may be deemed to be an "underwriter" in connection
with the purchase of securities for the Portfolio directly
from an issuer or an underwriter thereof.
(8) Lend any of its assets, except portfolio securities. This
shall not prevent the Portfolio from purchasing or holding
debt obligations, entering into repurchase agreements and
loaning federal funds and other day(s) funds to FDIC Insured
Institutions (as defined in the Prospectus), in each case to
the extent permitted by the Fund's investment objective and
the Portfolio's management policies.
(9) (Intermediate Mortgage Portfolio) Purchase securities on
margin or make short sales of securities; write or purchase
put or call options or combinations thereof except that the
Portfolio may write covered call options and purchase call or
put options on investments eligible for purchase by the
Portfolio; or purchase or sell real estate, real estate
mortgage loans (except that the Portfolio may purchase and
sell Mortgage-Related Securities), real estate investment
trust securities, commodities or commodity contracts, or oil
and gas interests; except that the Portfolio may enter into
interest rate futures contracts and may write call options and
purchase call and put options on interest rate futures
contracts if (a) as to interest rate futures contracts, each
futures contract is (i) for the sale of a financial instrument
(a "short position") to hedge the value of securities held by
the Portfolio or (ii) for the purchase of a financial
instrument of the same type and for the same delivery month as
the financial instrument underlying a short position held by
the Portfolio (a "long position offsetting a short position"),
(b) the sum of the aggregate
B-19
<PAGE> 22
futures market prices of financial instruments required to be
delivered under open futures contract sales and the aggregate
purchase prices under open futures contract purchases does not
exceed 30% of the value of the Portfolio's total assets, and
(c) immediately thereafter, no more than 5% of the Portfolio's
total assets would be committed to margin. This ability to
invest interest rate futures contracts and options thereon is
not for speculation, but solely to permit hedging against
anticipated interest rate changes.
(10) (U.S. Government Mortgage Portfolio) Purchase securities on
margin or make short sales of securities; write or purchase
put or call options or combinations thereof except that the
Portfolio may write covered call options and purchase call or
put options on securities in which the Portfolio may invest;
or purchase or sell real estate, real estate mortgage loans
(except that the Portfolio may purchase and sell
Mortgage-Related Securities), real estate investment trust
securities, commodities or commodity contracts, or oil and gas
interests except that the Portfolio may enter into interest
rate futures contracts and may write call options and purchase
call and put options on interest rate futures contracts if (a)
as to interest rate futures contracts, each futures contract
is (i) for the sale of a financial instrument (a "short
position") to hedge the value of securities held by the
Portfolio or (ii) for the purchase of a financial instrument
of the same type and for the same delivery month as the
financial instrument underlying a short position held by the
Portfolio (a "long position offsetting a short position"), (b)
the sum of the aggregate futures market prices of financial
instruments required to be delivered under open futures
contract sales and the aggregate purchase prices under open
futures contract purchases does not exceed 30% of the value of
the Portfolio's total assets, and (c) immediately thereafter,
no more than 5% of the Portfolio's total assets would be
committed to margin. This ability to invest in interest rate
futures contracts and options thereon is not for speculation,
but solely to permit hedging against anticipated interest rate
changes.
The Fund has also adopted certain investment restrictions which are
non-fundamental policies. Unlike fundamental policies, which may only be changed
with the approval of a majority of the outstanding shares of the Portfolio,
non-fundamental policies may be changed by the Fund's Trustees without
shareholder approval. However, in the event the Fund's Trustees agree to change
a non-fundamental policy, shareholders will be notified in advance of such
change. Accordingly, the Portfolios have adopted the following non-fundamental
policies:
(1) The Adjustable Rate Mortgage (ARM) Portfolio, the Intermediate
Mortgage Securities Portfolio, and the U.S. Government
Mortgage Securities Portfolio (collectively referred to as the
"Mortgage Securities Portfolios") invest primarily in
"securities backed by or representing an interest in mortgages
on domestic residential housing or manufactured housing"
meeting the definition of such assets for purposes of the
qualified thrift lender ("QTL") test under the current Office
of Thrift Supervision ("OTS") Regulations. Pending any
revisions of the current OTS Regulations, each Mortgage
Securities Portfolio expects that, absent extraordinary market
developments, at least 65% of its assets will qualify for QTL
purposes for savings associations, although actual percentages
may be higher. In addition, each Mortgage Securities Portfolio
will not purchase any investments having a risk-based
weighting in excess of 20% under the current risk-based
capital regulations established by the OTS. Also, each
Mortgage Securities Portfolio will not purchase any
investments having a risk-based weighting for banks in excess
of 50% under current federal regulations of the appropriate
regulatory agencies. Furthermore, each Mortgage Securities
Portfolio will not invest in "high risk" securities that do
not meet the tests contained in the "Supervisory Policy
Statement on Securities Activities" adopted by the Federal
Deposit Insurance Corporation, the Office of the Comptroller
of the Currency, the OTS and the National Credit Union
Administration, respectively, and each Mortgage Securities
Portfolio limits its investments to those permissible without
limitation for federal savings associations, national banks
and federal credit unions under current applicable
regulations.
(2) Each Portfolio may not invest more than 15% of its net assets
in illiquid securities, including repurchase agreements
maturing in more than seven days.
B-20
<PAGE> 23
ORGANIZATION AND DESCRIPTION OF FUND SHARES
The Fund consists of an unlimited number of shares of beneficial
interest divided into five Portfolios: the Money Market Portfolio, the Short
U.S. Government Securities Portfolio, the Adjustable Rate Mortgage (ARM)
Portfolio, the Intermediate Mortgage Securities Portfolio, and the U.S.
Government Mortgage Securities Portfolio. Shares of the Money Market Portfolio
are issued in two classes: D shares and I shares. The shares of each Portfolio
represent interests only in the corresponding portfolio. When issued and paid
for in accordance with the terms of offering, each share is fully paid and
nonassessable. All shares of beneficial interest of the same class have equal
dividend, distribution, liquidation and voting rights and are redeemable at net
asset value, at the option of the shareholder. In addition, the shares have no
preemptive, subscription or conversion rights and are freely transferable.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted by the provisions of such Act or applicable state law, or otherwise,
to the holders of the outstanding voting securities of an investment company
such as the Fund shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares (as defined
under "General Information" below) of each class affected by such matter. Rule
18f-2 further provides that a class shall be deemed to be affected by a matter
unless it is clear that the interests of each class in the matter are identical
or that the matter does not affect any interest of such class. However, the Rule
exempts the selection of independent public accountants and the election of
trustees from the separate voting requirements of the Rule.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Vedder, Price, Kaufman & Kammholz is legal counsel to the Fund and
passes upon the validity of the shares offered by the Prospectus.
PricewaterhouseCoopers LLP is the Fund's independent accountants. The
financial statements of each Portfolio incorporated in this Statement of
Additional Information by reference to the Fund's Annual Report to Shareholders
for the year ended October 31, 1999 (see "Financial Statements" below), have
been so incorporated in reliance on the report of PricewaterhouseCoopers LLP
given on the authority of such firm as experts in accounting and auditing.
GENERAL INFORMATION
The Fund sends to all of the shareholders of each Portfolio semi-annual
reports and annual reports, including a list of investment securities held by
each Portfolio, and, for annual reports, audited financial statements of each
Portfolio.
As used in each Prospectus and this Statement of Additional
Information, the term "majority," when referring to the approvals to be obtained
from shareholders, means the vote of the lesser of (1) 67% of the Fund's shares
of each class or of the class entitled to a separate vote present at a meeting
if the holders of more than 50% of the outstanding shares of all classes or of
the class entitled to a separate vote are present in person or by proxy, or (2)
more than 50% of the Fund's outstanding shares of all classes or of the class
entitled to a separate vote. The Bylaws of the Fund provide that an annual
meeting of shareholders is not required to be held in any year in which none of
the following is required to be acted on by shareholders pursuant to the 1940
Act: election of trustees; approval of the investment advisory agreement;
ratification of the selection of independent public accountants; and approval of
a distribution agreement.
The Prospectus and this Statement of Additional Information do not
contain all the information included in the registration statement filed with
the Securities and Exchange Commission under the Securities Act of 1933 with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The registration statement, including the exhibits filed therewith,
may be examined at the office of the Securities and Exchange Commission in
Washington, D.C.
Statements contained in each Prospectus and this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
registration statement of which the Prospectus and Statement of Additional
Information form a part, each such statement being qualified in all respects by
such reference.
B-21
<PAGE> 24
DESCRIPTION OF DEBT RATINGS
Bonds rated Aa by Moody's are judged to be of high quality by all
standards. Together with the Aaa Group they comprise what are 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 bonds. Moody's applies the numerical
modifiers 1, 2 and 3 to certain general rating classifications, including Aa.
The modifier 3 indicates that the issue ranks in the lower end of its generic
rating category. Debt rated AA by Standard & Poor's has a very strong capacity
to pay interest and repay principal and differs from the highest rated issues,
which are rated AAA, only in small degree. Ratings in certain categories,
including AA, may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories. Duff and Phelps, Inc. and
Fitch Investors Service, Inc. have comparable rating systems.
FINANCIAL STATEMENTS
The financial statements required to be included in this Statement of
Additional Information are incorporated herein by reference to the Fund's Annual
Report to Shareholders for the year ended October 31, 1999 (the "Annual
Report"). The Fund will provide the Annual Report without charge to each person
to whom this Statement of Additional Information is delivered.
B-22
