55
SAI
THE MANAGERS FUNDS
STATEMENT OF ADDITIONAL INFORMATION
dated April 1, 1997, as
----
supplemented September 11, 1997
-------------------------------
40 Richards Avenue, Norwalk, Connecticut 06854
Investor Services: (800) 835-3879
This Statement of Additional Information relates to the
Managers Income Equity Fund, Capital Appreciation Fund, Special
Equity Fund, International Equity Fund, (collectively the "Equity
Funds") and the Managers Short Government Fund, Short and
Intermediate Bond Fund, Intermediate Mortgage Fund, Bond Fund, and
Global Bond Fund (collectively the "Income Funds"), (each a "Fund"
and collectively the "Funds") of The Managers Funds, a no-load, open-
end management investment company, organized as a Massachusetts
business trust (the "Trust"). Additional Information regarding the
Managers Money Market Fund is contained separately in Managers Money
Market Fund Statement of Additional Information.
This Statement of Additional Information is not a
prospectus; it should be read in conjunction with the Prospectuses of
the Funds, dated April 1, 1997, as supplemented September 11, 1997,
-------------------------------------
copies of which may be obtained without charge by contacting the
Trust at 40 Richards Avenue, Norwalk, CT 06854 (800) 835-3879 or
(203) 857-5321.
This Statement of Additional Information is authorized for
distribution to prospective investors only if preceded or accompanied
by effective prospectuses for the Funds.
TABLE OF CONTENTS
I. INVESTMENT RESTRICTIONS 1
II. PORTFOLIO TURNOVER 3
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III. TRUSTEES AND OFFICERS 4
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IV. MANAGEMENT OF THE FUNDS 7
V. FUND MANAGEMENT AGREEMENT 8
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VI. ASSET MANAGER PROFILES 12
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VII. ADMINISTRATIVE SERVICES; DISTRIBUTION
ARRANGEMENTS 16
VIII. PORTFOLIO SECURITIES TRANSACTIONS 16
IX. NET ASSET VALUE 18
X. TAX INFORMATION 19
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XI. CUSTODIAN, TRANSFER AGENT AND
INDEPENDENT PUBLIC ACCOUNTANT 22
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XII. CONTROL PERSONS AND PRINCIPAL HOLDERS OF
SECURITIES 23
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XIII. OTHER INFORMATION 24
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XIV. PERFORMANCE INFORMATION 38
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XV. FINANCIAL STATEMENTS 41
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I. INVESTMENT RESTRICTIONS
Except as described below, the following investment restrictions
are fundamental and may not be changed with respect to any Fund
without the approval of a majority of the outstanding voting
securities of the Fund, as such term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
Provided that nothing in the following investment restrictions shall
prevent the Trust from investing all or substantially all of a Fund's
assets in an open-end management investment company, or a series
thereof, with the same investment objective or objectives as such
Fund, no Fund may:
1. Invest in securities of any one issuer (other than
securities issued by the U.S. Government, its agencies and
instrumentalities), if immediately after and as a result of such
investment the current market value of the holdings of its securities
of such issuer exceeds 5% of its total assets; except that up to 25%
of the value of the Intermediate Mortgage Fund's total assets may be
invested without regard to this limitation. The Global Bond Fund may
invest up to 50% of its assets in bonds issued by foreign governments
which may include up to 25% of such assets in any single government
issuer.
2. Invest more than 25% of the value of its total assets in
the securities of companies primarily engaged in any one industry
(other than the United States Government, its agencies and
instrumentalities). Such concentration may occur incidentally as a
result of changes in the market value of portfolio securities, but
such concentration may not result from investment; provided, however,
that the Intermediate Mortgage Fund will invest more than 25% of its
assets in the mortgage and mortgage-finance industry even during
temporary defensive periods. Neither finance companies as a group
nor utility companies as a group are considered a single industry for
purposes of this restriction.
3. Acquire more than 10% of the outstanding voting securities
of any one issuer.
4. Borrow amounts in excess of 5% of its total assets taken at
cost or at market value, whichever is lower. It may borrow only from
banks as a temporary measure for extraordinary or emergency purposes.
It will not mortgage, pledge or in any other manner transfer any of
its assets as security for any indebtedness.
5. Invest in securities of an issuer which together with any
predecessor, has been in operation for less than three years if, as a
result, more than 5% of its total assets would then be invested in
such securities.
6. Invest more than 15%, of the value of its net assets in
illiquid instruments including, but not limited to, securities for
which there are no readily available market quotations, dealer (OTC)
options, assets used to cover dealer options written by it,
repurchase agreements which mature in more than 7 days, variable rate
industrial development bonds which are not redeemable on 7 days
demand and investments in time deposits which are non-negotiable
and/or which impose a penalty for early withdrawal.
7. Invest in companies for the purpose of exercising control
or management.
8. Purchase or sell real estate; provided, however, that it
may invest in securities secured by real estate or interests therein
or issued by companies which invest in real estate or interests
therein.
9. Purchase or sell physical commodities, except that each
Fund may purchase or sell options and futures contracts thereon.
10. Engage in the business of underwriting securities issued by
others.
11. Participate on a joint or a joint and several basis in any
trading account in securities. The "bunching" of orders for the sale
or purchase of marketable portfolio securities with other accounts
under the management of The Managers Funds, L.P. or any portfolio
manager in order to save brokerage costs or to average prices shall
not be considered a joint securities trading account.
12. Make loans to any person or firm; provided, however, that
the making of a loan shall not be construed to include (i) the
acquisition for investment of bonds, debentures, notes or other
evidences of indebtedness of any corporation or government entity
which are publicly distributed or of a type customarily purchased by
institutional investors (which are debt securities, generally rated
not less than Baa by Moody's or BBB by Standard & Poor's, privately
issued and purchased by such entities as banks, insurance companies
and investment companies), or (ii) the entry into "repurchase
agreements." It may lend its portfolio securities to broker-dealers
or other institutional investors if, as a result thereof, the
aggregate value of all securities loaned does not exceed 33-l/3% of
its total assets, except that there is no such percentage limitation
with respect to the Short Government Fund. See "Other Information --
Loan Transactions."
13. Purchase the securities of other Funds or investment
companies except (i) in connection with a merger, consolidation,
acquisition of assets or other reorganization approved by its
shareholders, (ii) for shares in the Money Market Fund in accordance
with an order of exemption issued by the Securities and Exchange
Commission (the "SEC"), and (iii) each Fund, may purchase securities
of investment companies where no underwriter or dealer's commission
or profit, other than customary broker's commission, is involved and
only if immediately thereafter not more than (a) 3% of such company's
total outstanding voting stock is owned by the Fund, (b) 5% of the
Fund's total assets, taken at market value, would be invested in any
one such company or (c) 10% of the Fund's total assets, taken at
market value, would be invested in such securities.
14. Purchase from or sell portfolio securities to its officers,
trustees or other "interested persons" (as defined in the l940 Act)
of the Fund, including its portfolio managers and their affiliates,
except as permitted by the l940 Act.
15. Purchase or retain the securities of an issuer if, to the
Trust's knowledge, one or more of the directors, trustees or officers
of the Trust, or the portfolio manager responsible for the investment
of the Trust's assets or its directors or officers, individually own
beneficially more than l/2 of l% of the securities of such issuer and
together own beneficially more than 5% of such securities.
16. Issue senior securities.
Unless otherwise provided, for purposes of investment
restriction (2) above, relating to industry concentration, the term
"industry" shall be defined by reference to the SEC Industry Codes
set forth in the Directory of Companies Required to File Annual
Reports with the Securities and Exchange Commission.
In addition to the foregoing investment restrictions which
may not be changed without shareholder approval, the Funds are
subject to the following operating policies which may be amended by
the Trust's Board of Trustees. Pursuant to these operating policies,
no Fund may:
1. Invest in real estate limited partnership interests.
2. Invest in oil, gas or mineral leases.
3. Invest more than 5% of its net assets in warrants or
rights, valued at the lower of cost or market, nor more than 2% of
its net assets in warrants or rights (valued on the same basis) which
are not listed on the New York or American Stock Exchanges.
4. Purchase a futures contract or an option thereon if, with
respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and
premiums paid on such positions would exceed 5% of the Fund's net
asset value. The Money Market Fund may not purchase futures
contracts or options thereon.
5. Purchase securities on margin, except for such short-term
credits as are necessary for clearance of portfolio transactions;
provided, however, that each Fund may make margin deposits in
connection with futures contracts or other permissible investments.
6. Effect short sales of securities.
7. Write or sell uncovered put or call options. The security
underlying any put or call purchased or sold by a Fund must be of a
type the Fund may purchase directly, and the aggregate value of the
obligations underlying the puts may not exceed 50% of the Fund's
total assets.
II. PORTFOLIO TURNOVER
Generally, securities are purchased for the Managers Income
Equity Fund, Capital Appreciation Fund, Special Equity Fund, and
International Equity Fund for investment purposes and not for short-
term trading profits. However, these Funds may dispose of securities
without regard to the time they have been held when such action, for
defensive or other purposes, appears advisable to their portfolio
managers.
For the fiscal year ended December 31, 1996, the portfolio
turnover rate for Income Equity Fund was 33%, for Capital
Appreciation Fund was 172%, for Special Equity Fund 56%, and for
International Equity Fund was 30%. For the fiscal year ended
December 31, 1995, the portfolio turnover rate for Income Equity Fund
was 36%, for Capital Appreciation Fund was 134%, for Special Equity
Fund was 65%, and for International Equity Fund was 73%.
For the fiscal year ended December 31, 1996, the portfolio
turnover rate for Short Government Fund was 169%, for Short and
Intermediate Bond Fund was 96%, for Bond Fund was 72% and for Global
Bond Fund was 202%. For the fiscal year ended December 31, 1995, the
annual portfolio turnover rate for Short Government Fund was 238%,
for Short and Intermediate Bond Fund was 131%, for Bond Fund was 46%
and for Global Bond was 214%. The higher than 100% turnover rate for
the Short and Intermediate Bond Fund was due to sales of portfolio
investments to meet shareholder redemptions.
The Intermediate Mortgage Fund generally engages in a
significant amount of trading of securities held for less than one
year. Accordingly, it can be expected that the Fund will generally
have a higher incidence of short-term capital gains, which is taxable
as ordinary income, than might be expected from investment companies
which invest substantially all of their assets on a long-term basis.
The Intermediate Mortgage Fund's rates of portfolio turnover for the
years ended December 31, 1996 and December 31, 1995 were 232% and
506%, respectively.
With the exception of the Intermediate Mortgage Fund, the higher
portfolio turnover rates for the Income Funds are not expected to
result in significantly higher brokerage fees because the securities
primarily purchased and sold by these Funds are usually traded on a
principal basis with no commission paid. The added costs from
brokerage fees and the possibility of more highly taxed short-term
capital gains, which may be offset against capital loss carryovers,
with respect to the Intermediate Mortgage Fund are weighed against
the anticipated gains from trading.
The Bond, Short and Intermediate Bond and Short Government Funds
trade more actively to realize gains through market timing and/or to
increase yields on investments by trading to take advantage of short-
term market variations. This policy generally results in higher
portfolio turnover for these Funds.
III. TRUSTEES AND OFFICERS
The Trust is governed by the Trustees who provide broad
supervision over the affairs of the Trust and the Funds. The
Trustees and officers of the Trust are listed below together with
their principal occupations during at least the past five years, as
well as Trustees' dates of birth. References to The Managers Funds,
L.P., the Manager of the Trust, should be read to apply to Evaluation
Associates Investment Management Company, the predecessor of The
Managers Funds, L.P., for periods prior to August 17, 1990.
<TABLE>
<CAPTION>
Name, Address and Position with Principal Occupation During Past
Trust 5 Years
<S> <C>
ROBERT P. WATSON1 President and Trustee of The
40 Richards Avenue Managers Funds; Chairman and
Norwalk, CT 06854 Chief Executive Officer,
Chief Executive Officer, Evaluation Associates Investment
President, Trustee Management Company (predecessor
of The Managers Funds, L.P.)
Date of birth: 1/21/34 (prior to June 1988 and from
August 1989 to August 1990);
Partner, The Managers Funds,
L.P. (since August 1990);
Executive Vice President,
Evaluation Associates, Inc.
(June 1988 to August 1989).
WILLIAM W. GRAULTY Practicing Attorney (1977 to
65 LaSalle Road present); Executive Vice
West Hartford, CT 06107 President and Head of Trust
Trustee Division, The Connecticut Bank
and Trust Company, N.A. (1956 to
Date of birth: 12/30/23 1976); President, American
Bankers Association, Trust
Division (1974 to 1975);
President Connecticut Bankers
Association, Trust Division (1966
to 1968).
MADELINE H. McWHINNEY President, Dale, Elliott &
24 Blossom Cove Company (management consultants)
Middletown, NJ 07701 (1977 to present); Assistant Vice
Trustee President and Financial
Economist, Federal Reserve Bank
Date of birth: 3/11/22 of New York (1943 to 1973);
Trustee and Treasurer, Institute
of International Education (since
1975); Assistant Director,
Operations, Whitney Museum of
American Art (1983 to 1986);
Member, Advisory Committee on
Professional Ethics, New Jersey
Supreme Court (March 1983 to
present).
STEVEN J. PAGGIOLI Executive Vice President and
479 West 22nd Street Director, Wadsworth & Associates,
New York, NY 10011 Inc. (1986 to present); Vice
Trustee President, Secretary and
Date of birth: 4/3/50 Director, First Fund
Distributors, Inc. (1991 to
present); Vice President,
Secretary and Director;
Investment Company Administration
Corporation (1990 to present);
President and Director,
Southampton Investment Management
Company, Inc. (1991 to present);
Trustee of Professionally Managed
Portfolios (1991 to present).
THOMAS R. SCHNEEWEIS Professor of Finance (1985 to
University of Massachusetts present), Associate Professor of
School of Management Finance (1980-1985), Ph.D.
Amherst, MA 01003 Director (Acting) (1985 to 1986),
Trustee Chairman (Acting) Department of
Date of birth: 5/10/47 General Business and Finance
(1981-1982), and Assistant
Professor of Finance (1977-1980),
University of Massachusetts;
Teaching Assistant, University of
Iowa Principal Occupation (1973-
1977); Financial Consultant,
Ehlers and Associates (1970-
1973).
Name, Address and Position with Principal Occupation During Past
Trust 5 Years
PETER M. LEBOVITZ Director of Marketing, The
40 Richards Avenue Managers Funds, L.P. (September
Norwalk, CT 06854 1994 to present); Director of
Vice President Marketing, Hyperion Capital
Management, Inc. (June 1993 to
June 1994); Senior Vice President
and Chief Investment Officer,
Greenwich Asset Management, Inc.
(April 1989 to June 1993).
Director of Operations, The
DONALD S. RUMERY Managers Funds, L.P. (December
40 Richards Avenue 1994 to present)
Norwalk, CT 06854 Vice President, Signature
Secretary, Financial Group (March 1990 to
- ---------- December 1994)
Treasurer (Principal Financial Vice President, The Putnam
and Accounting Officer) Companies (August 1980 to March
1990).
GIANCARLO (JOHN) E. ROSATI Vice President (July 1992 to
40 Richards Avenue Present) and Assistant Vice
Norwalk, CT 06854 President (July 1986 to June
Assistant Treasurer 1992), The Managers Funds, L.P.;
Accountant, Gintel Co. (June 1980
to June 1986).
PETER M. McCABE Portfolio Administrator, The
40 Richards Avenue Managers Funds, L.P. (August 1995
Norwalk, CT 06854 to Present); Portfolio
Assistant Treasurer Administrator, Oppenheimer
Capital, L.P. (July 1994 to
August 1995); College Student
(September 1990 to June 1994).
</TABLE>
Trustees' Compensation:
The Trust's Disinterested Trustees receive an annual retainer of
$10,000, and meeting fees of $750 for each in-person meeting attended
and $200 for participating in each telephonic meeting. There are no
pension or retirement benefits provided by the Trust or any affiliate
of the Trust to the Trustees. The Trust does not pay compensation to
its officers. The following chart sets forth the aggregate
compensation paid to each Disinterested Trustee for the year-ended
December 31, 1996:
<TABLE>
<CAPTION>
Aggregate Total Compensation
from
Compensation Registrant and Fund
Complex
Name of Trustee from Trust Paid to
Trustees
<S> <C> <C>
William W. Graulty $12,250 $12,250
Madeline H. McWhinney 13,000 13,000
Steven J. Paggioli 13,000 13,000
Thomas R. Schneeweis 13,000 13,000
</TABLE>
As indicated above, certain of the Trust's officers also hold
positions with The Managers Funds, L.P., the Manager of the Trust.
All Trustees and officers as a group owned less than 1% of the shares
of any of the Funds outstanding on the date of this Statement of
Additional Information.
IV. MANAGEMENT OF THE FUNDS
The Trust is governed by the Trustees, who provide broad
supervision over the affairs of the Trust and the Funds. The Trust
has engaged the services of The Managers Funds, L.P. (the "Manager")
as investment manager and administrator to each of the Funds. The
assets of the Funds, are managed by asset managers (each, an "Asset
Manager" and collectively, the "Asset Managers") selected by the
Manager, subject to the review and approval of the Trustees. The
Trust has also retained the services of the Manager as administrator
to carry out the day-to-day administration of the Trust and the
Funds.
The Manager recommends Asset Managers for each Fund to the
Trustees based upon its continuing quantitative and qualitative
evaluation of the Asset Managers' skills in managing assets pursuant
to specific investment styles and strategies. Unlike many other
mutual funds, the Funds are not associated with any one portfolio
manager, and benefit from independent specialists carefully selected
from the investment management industry. Short-term investment
performance, by itself, is not a significant factor in selecting or
terminating an Asset Manager, and the Manager does not expect to
recommend frequent changes of Asset Managers. The Trust has obtained
from the SEC an order permitting the Manager, subject to certain
conditions, to enter into sub-advisory agreements with Asset Managers
approved by the Trustees but without the requirement of shareholder
approval. At meetings held on December 5, 1994 and December 15,
1994, the shareholders of the Funds approved the operation of the
Trust in this manner. Pursuant to the terms of the order, the
Manager is to be able, subject to the approval of the Trustees but
without shareholder approval, to employ new Asset Managers for new or
existing Funds, change the terms of particular sub-advisory
agreements or continue the employment of existing Asset Managers
after events that under the 1940 Act and the sub-advisory agreements
would be an automatic termination of the agreement. Although
shareholder approval will not be required for the termination of sub-
advisory agreements, shareholders of a Fund will continue to have the
right to terminate such agreements for the Fund at any time by a vote
of a majority of outstanding voting securities of the Fund. The
Manager and its corporate predecessor have had over 20 years of
experience in evaluating investment advisers for individuals and
institutional investors.
The assets of each Fund are allocated by the Manager among the
Asset Managers selected for that Fund. Each Asset Manager has
discretion, subject to oversight by the Trustees, and the Manager, to
purchase and sell portfolio assets, consistent with each Fund's
investment objectives, policies and restrictions and specific
investment strategies developed by the Manager. For its services,
the Manager receives a management fee from each Fund. A part of the
fee paid to the Manager is used by the Manager to pay the advisory
fees of the Asset Managers.
Generally, no Asset Manager provides any services to any Fund
except asset management and related recordkeeping services. However,
an Asset Manager or its affiliated broker-dealer may execute
portfolio transactions for a Fund and receive brokerage commissions
in connection therewith as permitted by Section 17(e) of the 1940
Act.
An Asset Manager may also serve as a discretionary or non-
discretionary investment adviser to management or advisory accounts
unrelated in any manner to The Managers Funds, L.P. or its
affiliates. The advisory agreement with each Asset Manager (each, an
"Asset Management Agreement") requires the Asset Manager of a Fund to
provide fair and equitable treatment to such Fund in the selection of
portfolio investments and the allocation of investment opportunities,
but does not obligate the Asset Manager to give such Fund exclusive
or preferential treatment.
Although the Asset Managers make investment decisions for the
Funds independent of those for their other clients, it is likely that
similar investment decisions will be made from time to time. When a
Fund and another client of an Asset Manager are simultaneously
engaged in the purchase or sale of the same security, the
transactions are, to the extent feasible and practicable, averaged as
to price and allocated as to amount between the Portfolio and the
other client(s) pursuant to a formula considered equitable by the
Asset Managers. In specific cases, this system could have
detrimental effect on the price or volume of the security to be
purchased or sold, as far as the Fund is concerned. However, the
Trustees believe, over time, that coordination and the ability to
participate in volume transactions should be to the benefit of such
Fund.
The Board of Trustees and the Manager have adopted a joint Code
of Ethics under Rule 17j-1 of the 1940 Act (the "Code"). The Code
generally requires employees of the Manager to preclear any personal
securities investment (with limited exceptions such as government
securities). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. The substantive restrictions
applicable to all employees of the Manager include a ban on trading
securities based on information about the Funds' trading.
V. FUND MANAGEMENT AGREEMENT
The Trust has entered into a Fund Management Agreement (the
"Fund Management Agreement") with the Manager which, in turn, has
entered into Asset Management Agreements with each of the Asset
Managers selected for the Funds.
The Manager is a Delaware limited partnership. Its general
partner is a corporation that is wholly owned by Robert P. Watson,
President and a Trustee of the Trust.
Under the Fund Management Agreement, the Manager is required to
(i) supervise the general management and investment of the assets and
securities portfolio of each Fund; (ii) provide overall investment
programs and strategies for each Fund; (iii) select and evaluate the
performance of Asset Managers for each Fund and allocate the Fund's
assets among such Asset Managers; (iv) provide financial, accounting
and statistical information required for registration statements and
reports with the SEC; and (v) provide the Trust with the office
space, facilities and personnel necessary to manage and administer
the operations and business of the Trust, including compliance with
state and federal securities and tax laws, shareholder communications
and recordkeeping.
The Fund Management Agreement runs from year to year so long as
its continuance is approved at least annually by the Trustees or by a
1940 Act majority vote of the shareholders of each Fund and those
Trustees who are not "interested persons" of the Trust (as defined in
the 1940 Act) and who have no direct or indirect financial interest
in the agreements (the "Disinterested Trustees"). Any amendment to
the Fund Management Agreement must be approved by a 1940 Act majority
vote of the shareholders of the relevant Fund and by the majority
vote of the Trustees. The Fund Management Agreement is subject to
termination, without penalty, by the Disinterested Trustees or by a
1940 Act majority vote of the shareholders of each Fund on 60 days
written notice to the Manager or by the Manager on 60 days written
notice to the Fund, and terminates automatically if assigned.
The following table sets forth the annual management fee rates
currently paid by each Fund to the Manager, together with the portion
of the management fee that is retained by the Manager as compensation
for its services, each expressed as a percentage of the Fund's
average net assets. The remainder of the management fee is paid to
the Asset Managers. Individual Asset Manager fees are set forth in
the Prospectuses under the heading "Management of the Funds -
Investment Manager," and vary, including in some cases among Asset
Managers of a single Fund.
<TABLE>
<CAPTION>
Weighted Average
Total Management of the Manager's
Name of Fund Fee portion of the
<S> <C> Total Management
Fee
<C>
Income Equity Fund 0.75% 0.40%
Capital Appreciation 0.80% 0.40%
Fund
Special Equity Fund 0.90% 0.40%
International Equity 0.90% 0.40%
Fund
Short Government 0.20% 0.00%
Fund*
Short and 0.50% 0.25%
Intermediate Bond
Fund
Intermediate 0.45% 0.25%
Mortgage Fund
Bond Fund 0.625% 0.375%
Global Bond Fund 0.70% 0.35%
</TABLE>
* Reflects voluntary fee waiver by the Manager which may be
modified or terminated at any time in the sole discretion of the
Manager. In the absence of such waiver, the maximum total
management fee payable by the Short Government Fund would be
0.45% and the weighted average of the Manager's portion of the
total management fee would be 0.25%.
The amount of each Fund's management fee that is retained by the
Manager may vary for a Fund due to changes in the allocation of
assets among its Asset Managers, the effect of an increase in the
Fund's net asset value on the fees payable to its Asset Managers,
and/or the implementation, modification or termination of voluntary
fee waivers by the Manager and/or one or more of the Asset Managers.
Given the asset management arrangements currently in effect, the
Manager's portion of the Short Government Fund's total management
fees would not exceed 0.25%.
During the fiscal years ended December 31, 1994, 1995 and 1996,
the Funds paid the following fees to the Manager under the Fund
Management Agreement and the Manager paid the following fees to each
Asset Manager under the Asset Management Agreements:
<TABLE>
<CAPTION>
January 1, 1996-December 31, January 1, 1995-December
1996 31, 1995
Approxi- Fee Paid Approxi- Fee Paid
mate Fee to mate Fee to Asset
Fee Paid to Retain- Asset Fee Paid Retain- Manager
Name of Fund/Asset Manager ed by Manager to ed by by
Manager <C> Manager by Manager Manager Manager/
<S> <C> Manager/ <C> <C> 1
1 <C>
<C>
Income Equity Fund $349,821 $175,519 $299,824 $150,565
Scudder, Stevens & $86,220 $74,220
Clark, Inc.
Spare, Kaplan,
Bischel & $88,082 $75,039
Associates
Capital $761,925 $380,963 $635,588 $318,716
Appreciation Fund
Essex Investment
Management Co., N/A N/A
Inc./8
Husic Capital $60,917 N/A
Management/2
Special Equity $1,572,132 $698,733 $977,869 $435,343
Fund
Liberty Investment
Mgmt.
$266,030 $187,691
Pilgrim Baxter & $305,198 $190,981
Associates/6
Westport Asset $302,171 $163,854
Mgmt, Inc.
International $1,856,193 $824,774 $948,514 $422,512
Equity Fund
Lazard Fr?res
Asset Management $516,157 $215,232
Co/7
Scudder, Stevens & $515,262 $310,770
Clark, Inc.
Short Government $11,423 $0 $15,835 N/A
Fund
Jennison
Associates Capital $11,423 $15,835
Corp/3
Short and $116,037 $58,018 $128,254 $64,209
Intermediate Bond
Fund
Standish, Ayer & $58,019 $34,464
Wood, Inc.
Intermediate $143,803 $79,890 $241,141 $118,967
Mortgage Fund
Jennison
Associates Capital $63,913 $95,174
Corp/4
January 1, 1994-December
31, 1994
Approxi- Fee Paid
mate Fee to Asset
Fee Paid Retained Manager
Name of Fund/Asset to by by
Manager Manager Manager Manager/
<S> <C> <C> 1
<C>
Income Equity Fund $339,061 $170,110
Scudder, Stevens & $83,842
Clark, Inc.
Spare, Kaplan, Bischel
& $85,108
Associates
Capital Appreciation $669,940 $335,074
Fund
Essex Investment
Management N/A
Company, Inc./8
Husic Capital N/A
Management/2
Special Equity Fund $972,495 $468,413
Liberty Investment $194,588
Management
Pilgrim Baxter & $33,634
Associates/6
Westport Asset $160,027
Management, Inc.
International Equity $728,272 $323,639
Fund
Lazard Fr?res Asset N/A
Management Co/7
Scudder, Stevens & $404,633
Clark, Inc.
Short Government Fund $197,692 $109,438
Jennison Associates $2,338
Capital
Corp/3
Short and Intermediate $433,531 $217,375
Bond Fund
Standish, Ayer & Wood, $84,716
Inc.
Intermediate Mortgage $646,916 $439,614
Fund
Jennison Associates $23,470
Capital
Corp/4
January 1, 1996-December January 1, 1995-December 31,
31, 1996 1995
Approxi- Fee Paid Approxi- Fee Paid
mate Fee to mate to Asset
Fee Paid Retained Asset Fee Paid Fee Manager
Name of Fund/Asset to by Manager to Retaine by
Manager Manager Manager by Manager d by Manager/
<S> <C> <C> Manager/ <C> Manager 1
1 <C> <C>
<C>
Bond Fund $180,197 $108,240 $162,594 $97,557
Loomis, Sayles & $71,957 $65,037
Company, Inc.
Global Bond Fund $126,043 $62,024 $86,482 $43,466
Rogge Global $64,019 $43,016
Partners/5
1/Does not reflect payments made to asset managers whose relationship with a
Fund has been terminated.
2/ Portfolio manager hired during 1996.
3/Portfolio manager hired during 1994. Reflects waiver of a portion of management
fees by the Manager. In the absence of such waiver, the Manager would have received
an additional $29,861, $19,793 and $14,280 for the fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996, respectively.
4/Portfolio manager hired during 1994. Reflects waiver of a portion of management
fees by the Manager. In the absences of such waiver, the Manager would have
received an additional $115,723 and $130,528 for the fiscal years ended
December 31, 1994 and December 31, 1993, respectively.
5/ Fund commenced operation during 1994.
6/ Portfolio manager hired during 1994.
7/ Portfolio manager hired during 1995.
8/ Portfolio manager hired during 1997.
</TABLE>
<TABLE>
January 1, 1994-December 31,
1994
Approxi- Fee Paid
mate Fee to
Fee Paid Retained Asset
Name of Fund/Asset to by Manager
Manager Manager Manager by
<S> <C> <C> Manager/1
<C>
Bond Fund $237,886 $142,664
Loomis, Sayles & $95,222
Company, Inc.
Global Bond Fund $52,093 $27,100
Rogge Global $24,993
Partners/5
1/Does not reflect payments made to asset managers whose relationship with a
Fund has been terminated.
2/ Portfolio manager hired during 1996.
3/Portfolio manager hired during 1994. Reflects waiver of a portion of
management fees by the Manager. In the absence of such waiver, the
Manager would have received an additional $29,861, $19,793 and $14,280
for the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, respectively.
4/Portfolio manager hired during 1994. Reflects waiver of a portion of
management fees by the Manager. In the absences of such waiver, the
Manager would have received an additional $115,723 and $130,528 for the
fiscal years ended December 31, 1994 and December 31, 1993, respectively.
5/Fund commenced operation during 1994.
6/ Portfolio manager hired during 1994.
7/ Portfolio manager hired during 1995.
8/ Portfolio manager hired during 1997.
</TABLE>
Voluntary Fee Waivers and Expense Limitation
From time to time, the Manager may agree voluntarily to waive
all or a portion of the fee it would otherwise be entitled to receive
from a Fund. The Manager may waive all or a portion of its fee for a
number of reasons such as passing on to the Fund and its shareholders
the benefit of reduced portfolio management fees resulting from (i) a
reallocation of Fund assets among Asset Managers, (ii) negotiation by
the Manager of a lower fee payable to an Asset Manager, or (iii) a
voluntary waiver by an Asset Manager of all or a portion of the fees
it would otherwise be entitled to receive from the Manager with
respect to the Fund. The Manager may also decide to waive all or a
portion of its fees from a Fund for other reasons, such as attempting
to make a Fund's performance more competitive as compared to similar
funds. The effect of the fee waivers in effect at the date of this
Statement of Additional Information on the management fees payable by
the Funds is reflected in the tables above and in the Illustrative
Expense Information located in the front of the Prospectuses of the
Equity Funds and the Income Funds. Voluntary fee waivers by the
Manager or by any Asset Manager may be terminated or reduced in
amount at any time and solely in the discretion of the Manager or
Asset Manager concerned. Shareholders will be notified of any change
on or about the time that it becomes effective.
VI. ASSET MANAGER PROFILES
The Asset Managers for each Fund are set forth in the respective
Prospectuses. Assets of each of the Equity Funds are currently
allocated among more than one Asset Manager to provide
diversification among investment strategies. However, not all Asset
Managers with whom Asset Management Agreements are in effect will be
funded at all times. As of the date of this Statement of Additional
Information, the following are the Asset Managers for each Fund.
These Asset Managers have no affiliations with the Funds or with the
Manager.
The following information regarding the names of all controlling
persons of each Asset Manager and the basis of such control has been
supplied by such Asset Manager.
INCOME EQUITY FUND
CHARTWELL INVESTMENT PARTNERS, INC.
- -----------------------------------
The firm is a Limited Partnership which was founded in 1997. It
- ---------------------------------------------------------------------
is controlled by Bobcat Partners, L.P., which is controlled by John
- ---------------------------------------------------------------------
McNiff, James Croney, Jr., and Michael Kennedy.
- -----------------------------------------------
SCUDDER, STEVENS & CLARK, INC.
Scudder, Stevens & Clark, Inc. is a privately-held Delaware
corporation. Daniel Pierce is the Chairman of the Board and Edmond
D. Villani is the President and Chief Executive Officer of Scudder.
Stephen R. Beckwith, Lynn S. Birdsong, Nicholas Bratt, E. Michael
Brown, Mark S. Casady, Linda E. Coughlin, Margaret D. Hadzima, Jerard
K. Hartman, Richard A. Holt, Dudley H. Ladd, Thomas H. O'Brien, John
T. Packard, Kathryn L. Quirk, Cornelia M. Small and Stephen A. Wohler
are the other members of the Board of Directors of Scudder. The
principal occupation of each of the above named individuals is
serving as a Managing Director of Scudder.
All of the outstanding voting and non-voting securities of
Scudder are held of record by Stephen R. Beckwith, Daniel Pierce,
Juris Padegs and Edmund D. Villani in their capacity as
representatives (the "Representatives") of the beneficial owners of
such securities, pursuant to a Security Holders' Agreement among
Scudder, the beneficial owners of securities of Scudder, and the
Representatives. Pursuant to such Security Holders' Agreement, the
Representatives have the right to reallocate shares among the
beneficial owners from time to time. Such reallocation will be at
net book value in cash transactions. All Managing Directors of
Scudder own voting and non-voting stock; all Principals own non-
voting stock.
CAPITAL APPRECIATION FUND
ESSEX INVESTMENT MANAGEMENT COMPANY, INC.
Essex was founded in 1976, and is a Massachusetts corporation
which is controlled by Joseph C. McNay.
HUSIC CAPITAL MANAGEMENT
The firm is was formed in 1986 as a limited partnership which is
100% owned by Frank J. Husic.
SPECIAL EQUITY FUND
LIBERTY INVESTMENT MANAGEMENT
Liberty Investment Management is a division of Goldman Sachs
Asset Management, which itself is a separate operating division of
Goldman, Sachs & Co. The general partners of Goldman, Sachs & Co.
are The Goldman Sachs Group, L.P. (a Delaware Limited Partnership)
("GSGLP") and The Goldman, Sachs & Co. L.L.C. (a Delaware limited
liability company) ("GSCLLC"). The Goldman Sachs Corporation ("GSC")
is the parent company of both GSGLP and GSCLLC. GSGLP is also a
parent of GSCLLC. GSC is the sole general partner of GSGLP.
PILGRIM BAXTER & ASSOCIATES
Pilgrim Baxter & Associates is owned by United Asset Management,
a public company.
WESTPORT ASSET MANAGEMENT, INC.
Westport Asset Management, Inc. is owned by Andrew J. Knuth
(5l%) and by Ronald H. Oliver (49%), each of whom is active as a
portfolio manager/analyst.
KERN CAPITAL MANAGEMENT, LLC
- ----------------------------
Kern Capital Management LLC ("KCM") is a Delaware limited
- --------------------------------------------------------------
liability company founded in 1997. Robert E. Kern is the portfolio
- ---------------------------------------------------------------------
manager, as well as the firm's Managing Member, President and Chief
- ---------------------------------------------------------------------
Executive Officer.
- ------------------
KCM is controlled by Robert E. Kern, David G. Kern, and Fremont
- --------------------------------------------------------------------
Investment Advisors, Inc., a subsidiary of Fremont Investment
- ---------------------------------------------------------------
Advisors, Inc. which is affiliated with The Fremont Group.
- ----------------------------------------------------------
INTERNATIONAL EQUITY FUND
SCUDDER, STEVENS & CLARK, INC.
(See INCOME EQUITY FUND)
LAZARD, FRERES ASSET MANAGEMENT CO.
Lazard, Fr?res Asset Management Co. is a New York limited
liability company founded in 1848. The managing directors are Eileen
D. Alexanderson, Thomas F. Dunn, Norman Eig, Herbert W. Gullquist,
Larry A. Kohn, Robert P. Morgenthau, John R. Reese, John R.
Reinsberg, Michael S. Rome and Alexander E. Zagoreos.
SHORT GOVERNMENT FUND
JENNISON ASSOCIATES CAPITAL CORP.
Jennison Associates Capital Corp. is a wholly-owned subsidiary
of The Prudential Securities Company of America.
SHORT AND INTERMEDIATE BOND FUND
STANDISH, AYER & WOOD, INC.
Edward H. Ladd, Director and Chairman, and George W. Noyes,
Director and President, each owns more than 10% of the outstanding
voting securities of Standish. Caleb F. Aldrich, Managing Director
and Vice President, Davis B. Clayson, Managing Director and Vice
President, Dolores S. Driscoll, Managing Director and Vice President,
Richard C. Doll, Director and Vice President, Maria D. O'Malley,
Director and Vice President, and Richard S. Wood, Director, Vice
President and Secretary, each own more than 5% of the outstanding
voting securities of Standish. Nicholas S. Battelle, Walter M. Cabot,
David H. Cameron, Karen K. Chandor, Lawrence H. Coburn, James E.
Hollis, III, Laurence A. Manchester, Arthur H. Parker, Howard B.
Rubin, Austin C. Smith and Ralph S. Tate are each a Director and Vice
President of Standish. Each owns less than 5% of the outstanding
voting securities of Standish.
INTERMEDIATE MORTGAGE FUND
JENNISON ASSOCIATES CAPITAL CORP.
(See SHORT GOVERNMENT FUND)
BOND FUND
LOOMIS, SAYLES & COMPANY, INC.
The New England owns 92% of Loomis, Sayles (which operates
independently) with the remaining 8% owned by about 70 professionals.
GLOBAL BOND FUND
ROGGE GLOBAL PARTNERS plc
Rogge Global Partners plc. is owned by United Asset Management,
a public company.
VII. ADMINISTRATIVE SERVICES; DISTRIBUTION ARRANGEMENTS
The Trust has also retained the services of The Managers Funds,
L.P. as administrator (the "Administrator").
The Managers Funds, L.P. also serves as distributor (the
"Distributor") in connection with the offering of each Fund's shares
on a no-load basis. The Distributor bears certain expenses
associated with the distribution and sale of shares of the Funds.
The Distributor acts as agent in arranging for the sale of each
Fund's shares without sales commission or other compensation and
bears all advertising and promotion expenses incurred in the sale of
shares.
The Distribution Agreement between the Trust and the Distributor
may be terminated by either party under certain specified
circumstances and will automatically terminate on assignment in the
same manner as the Fund Management Agreement. The Distribution
Agreement may be continued annually if specifically approved by the
Trustees or by a vote of the Trust's outstanding shares, including a
majority of the Trustees who are not "interested persons" of the
Trust or the respective Distributor, as such term is defined in the
1940 Act, cast in person at a meeting called for the purpose of
voting on such approval.
VIII. PORTFOLIO SECURITIES TRANSACTIONS
The Asset Management Agreements between the Manager and the
Asset Managers provide, in substance, that in executing portfolio
transactions and selecting brokers or dealers, the principal
objective of each Asset Manager is to seek best price and execution.
It is expected that securities will ordinarily be purchased in the
primary markets, and that in assessing the best net price and
execution available to the applicable Fund, the Asset Manager shall
consider all factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any (for the specific
transaction and on a continuing basis).
In addition, the Asset Managers, in selecting brokers to execute
particular transactions and in evaluating the best net price and
execution available, are authorized by the Trustees to consider the
"brokerage and research services" (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934), provided by
the broker. The Asset Managers are also authorized to cause a Fund
to pay a commission to a broker who provides such brokerage and
research services for executing a portfolio transaction which is in
excess of the amount of commission another broker would have charged
for effecting that transaction. The Asset Managers must determine in
good faith, however, that such commission was reasonable in relation
to the value of the brokerage and research services provided viewed
in terms of that particular transaction or in terms of all the
accounts over which the Asset Manager exercises investment
discretion. Brokerage and research services received from such
brokers will be in addition to, and not in lieu of, the services
required to be performed by each Asset Manager. The Funds may
purchase and sell portfolio securities through brokers who provide
the Fund with research services.
The Trustees will periodically review the total amount of
commissions paid by each Fund to determine if the commissions paid
over representative periods of time were reasonable in relation to
commissions being charged by other brokers and the benefits to each
Fund of using particular brokers or dealers. It is possible that
certain of the services received by the Asset Manager attributable to
a particular transaction will primarily benefit one or more other
accounts for which investment discretion is exercised by the Asset
Managers.
The fees of the Asset Managers are not reduced by reason of
their receipt of such brokerage and research services. Generally, no
Asset Manager provides any services to any Fund except portfolio
investment management and related record-keeping services. However,
an Asset Manager for a particular Fund or its affiliated broker-
dealer may execute portfolio transactions for such Fund and receive
brokerage commissions for doing so in accordance with Section 17(e)
of the 1940 Act and the procedures adopted by the Trustees in
accordance with the rules thereunder. An Asset Manager for a Fund or
its affiliated broker-dealers may not act as principal in any
portfolio transaction for any Fund with which it is affiliated.
In allocating portfolio transactions for a Fund among several
broker-dealers, an Asset Manager may, but is not required to, take
into account any sales of shares of that Fund by the broker-dealer or
by an affiliate of the broker-dealer.
For the fiscal year ended December 31, 1996, the aggregate
brokerage commissions paid by each of the Funds incurring any such
commissions was $44,936 for Income Equity Fund, $421,852 for Capital
Appreciation Fund, $278,627 for Special Equity Fund, and $555,519 for
International Equity Fund. For the fiscal year ended December 31,
1995, the aggregate brokerage commissions paid by each of the Funds
incurring any such commissions were $69,964 for Income Equity Fund,
$283,673 for Capital Appreciation Fund, $119,418 for Special Equity
Fund and $421,365 for International Equity Fund. For the fiscal year
ended December 31, 1994, the aggregate brokerage commissions paid by
each of the Funds incurring any such commissions were $73,083 for
Income Equity Fund,$276,975 for Capital Appreciation Fund, $117,854
for Special Equity Fund and $109,595 for International Equity Fund.
During the fiscal year ended December 31, 1996, the Capital
Appreciation Fund paid brokerage commissions totaling $49,756 to
Fahnestock & Co.("Fahnestock"), an affiliated broker-dealer of Hudson
Capital Advisers which then served as an Asset Manager. Effective
September 1996, Husic Capital Management replaced Hudson Capital
Advisers as an Asset Manager for this Fund. During the fiscal year
ended December 31, 1995, the Capital Appreciation Fund paid brokerage
commissions totaling $41,584 to Fahnestock. During the fiscal year
ended December 31, 1994, the Capital Appreciation Fund paid brokerage
commissions totaling $69,584 to Fahnestock. The brokerage
commissions paid to Fahnestock by the Capital Appreciation Fund
represented 12% of the total brokerage commissions paid by that fund
during the fiscal year ended December 31, 1996; 15% during the fiscal
year ended December 31, 1995; and 25% during the fiscal year ended
December 31, 1994. Such commissions were paid in connection with
portfolio transactions the dollar amount of which represented 8, 16%
and 22%, respectively, of the aggregate dollar amount of all
portfolio transactions involving the payment of commissions by the
Fund during those fiscal years. Brokerage commissions were paid to
Fahnestock in compliance with procedures established by the Trustees,
pursuant to which the commissions were determined to be comparable to
commissions charged by other brokers for similar transactions and by
Fahnestock to similarly situated clients.
IX. NET ASSET VALUE
;
The net asset value of the shares of each Fund is determined
each day on which the New York Stock Exchange ("NYSE") is open for
trading (a "Pricing Day"). The weekdays that the NYSE is expected to
be closed are New Year's Day, Martin Luther King Day,
-----------------------
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Assets of the Funds are valued as follows:
Equity securities listed on an exchange are valued on the basis
of the last quoted sale price on the exchange where such securities
principally are traded on the valuation date, prior to the close of
trading on the NYSE, or, lacking any sales, on the basis of the last
bid price on such principal exchange prior to the close of trading on
the NYSE. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined by the
Asset Manager to be the primary market for such security. Over-the-
counter securities for which market quotations are readily available
are valued on the basis of the last bid price on that date prior to
the close of trading on the NYSE. Securities and other instruments
for which market quotations are not readily available are valued at
fair value, as determined in good faith by the Asset Manager pursuant
to procedures established by the Trustees.
Fixed-income securities are generally valued at the last quoted
bid price prior to the close of trading on the NYSE. Fixed-income
securities for which quoted prices are not readily available will be
valued at fair market value, as determined in good faith by the Asset
Manager pursuant to procedures established by the Trustees. Certain
foreign fixed-income securities are valued at the last quoted sale
price.
Trading of securities owned by a Fund, particularly the
International Equity Fund and Global Bond Fund, for which the
principal trading market is a foreign securities exchange may occur
on days other than Pricing Days. Accordingly, the values of
securities in a Fund's portfolio may be subject to changes on such
days, which changes would not be reflected in the Fund's net asset
value until the next Pricing Day. In addition, trading on foreign
securities exchanges may not take place on all Pricing Days.
Generally securities traded on foreign securities exchanges will be
valued for net asset value purposes at the close of the principal
exchange on which they are traded, which may not be the same time
that the Fund's net asset values are determined. If an event occurs
after the close of a principal exchange that is likely to affect the
valuation of a particular security trading on that exchange, such
security may be valued at fair value, as determined in good faith by
the Asset Manager pursuant to procedures established by the Trustees.
For purposes of determining the net asset value of any Fund
which holds non-dollar denominated portfolio instruments, all assets
and liabilities initially expressed in foreign currency values will
be converted into U.S. dollar values at the mean between the bid and
offered quotations of such currencies against U.S. dollars as last
quoted by any recognized dealer. If such quotations are not
available, the rate of exchange will be determined in accordance with
policies established in good faith by the Trustees. Gains or losses
between trade and settlement dates resulting from changes in exchange
rates between the U.S. dollar and a foreign currency are borne by the
Fund. To protect against such losses, the International Equity Fund,
and Global Bond Fund may enter into forward foreign currency exchange
or futures contracts, which will also have the effect of limiting any
such gains. See "Other Information-Forward Foreign Currency Exchange
Contracts."
X. TAX INFORMATION
Each Fund intends to qualify each year as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). In order to so qualify, a RIC must,
among other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to certain securities
loans, gains from the sale of securities, certain gains from foreign
currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; (ii)
derive less than 30% of its gross income from gains from the sale or
other disposition of securities, options, futures, forward contracts
and certain investments in foreign currencies held for less than
three months; (iii) distribute at least 90% of its dividend, interest
and certain other taxable income ("Investment Company Taxable
Income") each year, as well as 90% of its net tax-exempt interest
income; (iv) at the end of each fiscal quarter maintain at least 50%
of the value of its total assets in cash, government securities,
securities of other regulated investment companies, and other
securities of issuers which represent, with respect to each issuer,
no more than 5% of the value of the RIC's total assets and 10% of the
outstanding voting securities of such issuer; and (v) at the end of
each fiscal quarter have no more than 25% of its assets invested in
the securities (other than those of the U.S. government or other
RICs) of any one issuer or of two or more issuers which the RIC
controls and which are engaged in the same, similar or related trades
and businesses. In any year in which a RIC distributes 90% of its
Investment Company Taxable Income and 90% of its net tax-exempt
interest income, it will not be subject to corporate income tax on
amounts distributed to its shareholders.
If for any taxable year a Fund does not qualify as a RIC, all of
its taxable income (including its net capital gain) will be subject
to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable
as ordinary dividends to the extent of such Fund's current and
accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of
corporate shareholders.
If for any taxable year a Fund complies with certain
requirements, then some or all of the dividends (excluding capital
gain distributions) payable out of income of the Fund that are
attributable to dividends received from domestic corporations may
qualify for the 70% dividends-received deduction available to
corporations.
Ordinary income distributions and distributions of net realized
short-term capital gains to shareholders who are liable for federal
income taxes will be taxed as ordinary dividend income to such
shareholders. Distributions of net mid-term and
------------
long-term capital gains to such shareholders are taxable as mid-term
--------
and long-term capital gains, respectively,
- ---
regardless of how long such shareholders have held shares of a Fund.
These provisions apply whether the dividends and distributions are
received in cash or accepted in shares. Any loss realized upon the
redemption of shares within six months from the date of their
purchase will be treated as a long-term capital loss to the extent of
any distribution of net long-term capital gains during such six-month
period. A loss may be disallowed on the sale of shares of a Fund to
the extent the shareholder acquired other Fund shares within 30 days
prior to the sale of the loss shares or 30 days after such sale.
Dividends and other distributions by any Fund may also be
subject to state and/or local taxes. Shareholders should consult
with their own tax advisers concerning the foregoing state and local
tax consequences of investing in a Fund. Additionally, shareholders
who are foreign persons should consult with their own tax advisers
concerning the foreign tax consequences of investing in a Fund.
All of the Funds except for International Equity Fund may invest
in futures contracts or options. Certain options, futures contracts
and options on futures contracts are "section 1256 contracts." Any
gains or losses on section 1256 contracts are generally considered
60% long-term and 40% short-term capital gains or losses ("60/40")
regardless of the length of time the contract was held. Also, section
1256 contracts held by a Fund at the end of each taxable year are
treated for federal income tax purposes as being sold on such date
for their fair market value. The resultant paper gains or losses are
also treated as 60/40 gains or losses. When the section 1256 contract
is subsequently disposed of, the actual gain or loss will be adjusted
by the amount of any preceding year-end paper gain or loss. The use
of section 1256 contracts may force a Fund to distribute to
shareholders paper gains that have not yet been realized in order to
avoid federal income tax liability.
Certain Funds may invest in obligations (such as zero coupon
bonds) which are issued with original issue discount ("OID"). Under
the code, OID is accrued as investment income over the life of the
investment even in the absence of cash payments. Accordingly, such
Funds may be required to sell some of their assets in order to
satisfy the distribution requirements applicable to RICs.
Foreign currency gains or losses on non-U.S. dollar denominated
bonds and other similar debt instruments and on any non-U.S. dollar
denominated forward contracts generally will be treated as ordinary
income or loss. Any non-U.S. dollar denominated futures or options
contract may be treated as either ordinary income or capital gain of
it meets the requirements of Section 1256.
Certain hedging transactions undertaken by a Fund may result in
"straddles" for federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In
addition, losses realized by the Fund on positions that are part of a
straddle may be deferred, rather than being taken into account in
calculating taxable income for the taxable year in which such losses
are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences of hedging
transactions to the Fund are not entirely clear. The hedging
transactions may increase the amount of capital gain realized by the
Fund which, depending on its character, may be a long-term capital
gain taxed as ordinary income when distributed to shareholders. The
Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of
gains or losses from the affected straddle positions will be
determined under rules that vary according to the elections made.
The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected
straddle positions. Because application of the straddle rules may
affect the character of gains or losses, defer losses and/or
accelerate the recognition of gains or losses from the affected
straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain in any year, may be increased or
decreased substantially as compared to a fund that did not engage in
such hedging transactions.
The 30% limit on gains from the sale of certain assets held for
less than three months and the diversification requirements
applicable to each Fund's assets may limit the extent to which each
Fund will be able to engage in transactions in options, futures
contracts or options on futures contracts.
The International Equity, Global Bond, Bond, Short and
Intermediate Bond and Short Government Funds may be subject to a tax
on dividend or interest income received from securities of a non-U.S.
issuer withheld by a foreign country at the source. The United
States has entered into tax treaties with many foreign countries
which entitle the Funds to a reduced rate of tax or exemption from
tax on such income. It is impossible to determine the effective rate
of foreign tax in advance since the amount of each Fund's assets to
be invested within various countries is not known. If more than 50%
of such a Fund's total assets at the close of a taxable year consists
of stock or securities in foreign corporations, the Fund may elect to
pass through to its shareholders the foreign income taxes paid
thereby. In such case, the shareholders would be treated as
receiving, in addition to the distributions actually received by the
shareholders, their proportionate share of foreign income taxes paid
by the Fund, and will be treated as having paid such foreign taxes.
The shareholders will be entitled to deduct or, subject to certain
limitations, claim a foreign tax credit with respect to, such foreign
income taxes. It should be noted that only shareholders who itemize
deductions may deduct foreign income taxes paid by them.
Shareholders of each Fund will be notified each year of the
amounts and tax status of dividends and distributions from their
Fund. The notification will contain information for corporate
shareholders of the Funds that are subject to federal income taxation
of the extent to which, if any, the dividends paid by each Fund
qualify for a deduction for dividends received. Despite such
notification, the dividends-received deduction will not be available
if the corporate shareholder has held shares of a Fund for less than
46 days and will be reduced to the extent that the acquisition of the
shares was financed with indebtedness.
Under the federal income tax law, each Fund will be required to
report to the Internal Revenue Service all distributions of taxable
income and capital gains as well as gross proceeds from all
redemptions of shares except in the case of certain exempt
shareholders. Under the backup withholding provisions of the Code,
such distributions and redemption proceeds may be subject to
withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their
correct taxpayer identification numbers and with required
certifications regarding their status under the federal income tax
law, or with respect to those shareholders whom the Internal Revenue
Service notifies the Funds of certain other non-compliance. If these
withholding provisions are applicable, any distributions to, and
proceeds received by, shareholders, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be
withheld.
The Code imposes a four percent nondeductible excise tax on each
regulated investment company with respect to the amount, if any, by
which such company does not meet distribution requirements specified
under such tax law. Each Fund intends to comply with such
distribution requirements and thus does not expect to incur the four
percent nondeductible excise tax although it may not be possible for
the Funds to avoid this tax in all instances.
The foregoing discussion relates solely to U.S. federal income
tax law. Non-U.S. investors should consult their tax advisers
concerning the tax consequences of ownership of shares of a Fund,
including the possibility that distributions may be subject to a 30%
United States withholding tax (or a reduced rate of withholding
provided by treaty).
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and Treasury Regulations currently
in effect. For the complete provisions, reference should be made to
the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The above discussion covers only Federal income tax
considerations with respect to the Funds and their shareholders.
Foreign, state and local tax laws vary greatly, especially with
regard to the treatment of exempt-interest dividends. Shareholders
should consult their own tax advisers for more information regarding
the Federal, foreign, state, and local tax treatment of each Fund's
shareholders and with respect to their own tax situation.
XI. CUSTODIAN, TRANSFER AGENT AND INDEPENDENT PUBLIC ACCOUNTANT
State Street Bank and Trust Company ("State Street" or the
"Custodian"), 1776 Heritage Drive, North Quincy, Massachusetts, as
Custodian for all the Funds, is responsible for holding all cash
assets and all portfolio securities of the Funds, releasing and
delivering such securities as directed by the Funds, maintaining bank
accounts in the names of the Funds, receiving for deposit into such
accounts payments for shares of the Funds, collecting income and
other payments due the Funds with respect to portfolio securities and
paying out monies of the Funds. In addition, when any of the Funds
trade in futures contracts and those trades would require the deposit
of initial margin with a futures commission merchant ("FCM"), the
Fund will enter into a separate special custodian agreement with a
custodian in the name of the FCM which agreement will provide that
the FCM will be permitted access to the account only upon the Fund's
default under the contract.
The Custodian is authorized to deposit securities in securities
depositories or to use the services of sub-custodians, including
foreign sub-custodians, to the extent permitted by and subject to the
regulations of the Securities and Exchange Commission.
Boston Financial Data Services, Inc., P.O. Box 8517, Boston,
Massachusetts 02266-8517, serves as the Transfer Agent for each of
the Funds.
Coopers & Lybrand L.L.P., One Post Office Square, Boston,
Massachusetts 02109, is the independent public accountant for each of
the Funds.
XII. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 11, 1997, Resource Bank "controlled" (within the
meaning of the 1940 Act i.e., owned in excess of 25% of the shares
of) the Capital Appreciation Fund and Charles Schwab & Co.
"controlled" the Special Equity Fund. An entity which "controls" a
particular Fund could have effective voting control over the
operations of that Fund.
The following chart identifies those shareholders of record on
September 23, 1997 holding 5% or more of the outstanding shares of
any of the Funds. Certain of these shareholders are omnibus
processing organizations.
Income Equity Fund
Huntington National Bank, Columbus, Ohio (18%)
Charles Schwab & Co., Inc., San Francisco, California (17%)
Capital Appreciation Fund
Resource Bank, Minneapolis, Minnesota (30%)
Special Equity Fund
Huntington National Bank, Columbus, Ohio (11%)
Resource Bank, Minneapolis, Minnesota (10%)
Charles Schwab & Co., Inc., San Francisco, California (31%)
International Equity Fund
Huntington National Bank, Columbus, Ohio (7%)
Resource Bank, Minneapolis, Minnesota (11%)
Charles Schwab & Co., Inc., San Francisco, California (22%)
Short Government Fund
C.E. Broom, New London, New Hampshire (7%)
Short and Intermediate Bond Fund
Huntington National Bank, Columbus, Ohio (6%)
Intermediate Mortgage Fund
Roman Catholic Diocese, Syracuse, New York (8%)
Huntington National Bank, Columbus, Ohio (5%)
Bond Fund
Charles Schwab & Co., Inc., San Francisco, California (11%)
All shareholders are entitled to one vote for each share held.
There is no cumulative voting. Accordingly, the holder or holders of
more than 50% of the shares of the Trust would be able to elect all
the Trustees. With respect to the election of Trustees and
ratification of accountants the shareholders of separate Funds vote
together; they generally vote separately by Fund on other matters.
XIII. OTHER INFORMATION
Following is a description of various financial instruments and
other terms referred to in the prospectus and statement of additional
information.
Asset-Backed Securities -- Through the use of trusts and special
purpose corporations, various types of assets, primarily automobile
and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to mortgage pass-
through structures or in a pay-through structure similar to the CMO
structure. A Fund may invest in these and other types of asset-
backed securities that may be developed in the future. Asset-backed
securities present certain risks that are not presented by mortgage-
backed securities. Primarily, these securities do not have the
benefit of a security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled
to the protection of a number of states and federal consumer credit
laws, some of which may reduce the ability to obtain full payment.
In the case of automobile receivables, the security interests in the
underlying automobiles are often not transferred when the pool is
created, with the resulting possibility that the collateral could be
resold. In general, these types of loans are of shorter average life
than mortgage loans and are less likely to have substantial
prepayments.
Bankers Acceptances -- Bankers acceptances are short-term credit
instruments used to finance the import, export, transfer or storage
of goods. They are termed "accepted" when a bank guarantees their
payment at maturity. Eurodollar bankers acceptances are U.S. dollar
denominated bankers acceptances "accepted" by foreign branches of
major U.S. commercial banks.
Cash Equivalents -- Cash equivalents include certificates of
deposit, bankers acceptances, government obligations, commercial
paper, short-term corporate debt securities and repurchase
agreements.
Certificates of Deposit -- Certificates of deposit are issued
against funds deposited in a bank (including eligible foreign
branches of U.S. banks), are for a definite period of time, earn a
specified rate of return and are normally negotiable.
Commercial Paper -- Commercial paper refers to promissory notes
representing an unsecured debt of a corporation or finance company
which matures in less than nine (9) months. Eurodollar commercial
paper refers to notes payable by European issuers in U.S. dollars.
Covered Call Options -- The Equity Funds, other than the
International Equity Fund each may write covered call options on
individual stocks, equity indices and futures contracts, including
equity index futures contracts. The Income Funds each may write
covered call options on individuals bonds and on interest rate
futures contracts. With the exception of the Short Government Fund
and the Intermediate Mortgage Fund, all written call options must be
listed on a national securities exchange or
futures exchange. The Short Government Fund and the Intermediate
Mortgage Fund may write unlisted options in negotiated transactions.
(See "Dealer Options and "Puts and Calls".) The Funds will not
change these policies until this Statement of Additional Information
has been appropriately supplemented, and existing shareholders will
be notified of such a change in the next regular report to them.
A call option is a short-term contract (ordinarily having a
duration of nine months or less) which gives the purchaser of the
option, in return for a premium paid, the right to buy, and the
writer the obligation to sell, the underlying security, financial
instrument, index or futures contract at the exercise price at any
time prior to the expiration of the option, regardless of the market
price of the security, financial instrument, index or futures
contract during the option period. A call option is "covered" if the
Fund writing the option owns, (or has the immediate right to acquire
without the payment of additional consideration), the underlying
security or financial instrument, owns financial instruments whose
returns are closely correlated with the financial instruments on
which the option is written or segregates with the Custodian
sufficient cash and/or short-term high quality securities to meet its
obligations under the call.
In order to terminate its obligation under an outstanding option
which it has written, a Fund may make a "closing purchase
transaction" i.e., purchase a call option on the same financial
instrument, index or futures contract with the same exercise price
and the same expiration date. The Fund will realize a gain or loss
from a closing purchase transaction if the amount paid to purchase a
call option is less or more, respectively, than the amount received
from the sale thereof. A Fund may not effect a closing purchase
transaction with respect to a written option after it has been
notified of the exercise of the option. When a security, financial
instrument, index or futures contract underlying a covered call
option is sold from a Fund's portfolio, the Fund must effect a
closing purchase transaction so as to close out any existing covered
call option on that security, financial instrument, index or futures
contract. A closing purchase transaction may be made only on an
exchange which provides a secondary market for an option with the
same exercise price and expiration date. There is no assurance that
a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange may exist. If a Fund is unable to
effect a closing purchase transaction, the Fund will not be able to
sell the underlying security, financial instrument, index or futures
contract until the option expires.
The writing of option contracts is a highly specialized activity
which involves investment techniques and risks different than those
ordinarily associated with investment companies. A Fund pays
brokerage commissions in connection with writing covered call options
(or covered put options as discussed below) and effecting closing
purchase transactions, as well as for purchases and sales of the
underlying security, financial instrument, index or futures contract.
The writing of covered call options could result in significant
increases in a Fund's portfolio turnover rate, especially during
periods when market prices of the underlying security, financial
instrument, index or futures contract appreciate. See "Portfolio
Turnover."
Covered Put Options -- The Equity Funds, except for the
International Equity Fund, may write covered put options on
individual stocks, equity indices and equity index futures contracts.
The Income Funds, may write covered put options on individual bonds
and on interest rate futures contracts.
A put option is a short-term contract (ordinarily having a
duration of nine months or less) which gives the purchaser of the
option, in return for a premium paid, the right to sell, and the
writer the obligation to buy, the underlying security, financial
instrument, index or futures contract at the exercise price at any
time prior to the expiration of the option, regardless of the market
price of the financial instrument, index or futures contract during
the option period. A put option is "covered" if the Fund writing the
option segregates with the Custodian sufficient cash and/or short-
term high quality securities to meet its obligations under the put
(or holds a put option on the same underlying security or financial
instrument at an equal or greater exercise price with the same
expiration date). The writer of a put option assumes the risk of a
decrease in the value of the underlying security, financial
instrument, index or futures contract. If such a decrease occurred,
the option could be exercised and the underlying security, financial
instrument, index or futures contract would then be sold to the
writer at a price higher than its then current market value.
A Fund may enter into closing purchase transactions on put
options i.e., purchase a put option on the same financial instrument,
index or futures contract with the same exercise price and the same
expiration date. The Fund will realize a gain or loss from a closing
purchase transaction if the amount paid to purchase a put option is
less or more than the amount received from the sale thereof. A Fund
may not effect a closing purchase transaction with respect to a
written option after it has been notified of the exercise of the
option. When the security, financial instrument, index, or futures
contract underlying a covered put option is sold from the Fund's
portfolio, the Fund must effect a closing purchase transaction to
close out any existing put option on that security or other
instrument. A closing purchase transaction may be made only on an
exchange which provides a secondary market for an option with the
same exercise price and expiration date. There is no assurance that
a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange may exist.
Dealer Options -- Also known as OTC options, these are puts and
calls for which the strike price, expiration and premium are
privately negotiated. See "Other Information -- Puts and Calls." The
Short Government Fund and the Intermediate Mortgage Fund may engage
in dealer options, but only with major financial institutions who are
member banks of the Federal Reserve System and approved as primary
dealers in United States government securities by the Federal Reserve
Bank of New York, and whose creditworthiness and financial strength
are judged by the Asset Manager to be at least as good as that of
financial institutions to which the Fund may loan portfolio
securities. See "Other Information -- Loan Transactions."
Equity Index Futures Contracts -- The Capital Appreciation Fund,
Income Equity Fund and Special Equity Fund may enter into equity
index futures contracts. An equity index futures contract is an
agreement by the Fund to buy or sell an index relating to equity
securities at a specified date and price. No payment is made when
the Fund buys a futures contract and neither the index nor any
securities are delivered when the Fund sells a futures contract.
Instead, the Fund makes a deposit called an "initial margin" equal to
a percentage of the contract's value. Payment is made when the
contract expires unless an offsetting transaction has been entered
into. Equity index futures contracts will be used only as a hedge
against anticipated changes in the level of stock prices or otherwise
to the extent transactions permitted to entities exempt from the
definition of the term commodity pool operator. See "Investment
Restrictions."
Eurodollar Bonds -- U.S. dollar-denominated bonds or debentures
issued outside the United States.
European Currency Unit Bonds -- The European Currency Unit
("ECU") is a basket of European currencies consisting of specified
amounts of the currencies of ten members of the European community.
The ECU is used by members as their budgetary currency to determine
official claims and debts. It fluctuates with the daily exchange
rate changes of the constituent currencies. The ECU is now defined
by the following ten currencies: German Deutschmark, British Pound,
French Franc, Italian Lira, Dutch Guilder, Belgian Franc, Luxembourg
Franc, Finish Kroner, Irish Pound, and Greek Drachma. ECU bonds are
bonds or debentures denominated in ECUs.
Forward Foreign Currency Exchange Transactions -- The value of
the assets of the International Equity Fund, Global Bond Fund, and
the value of any foreign securities of other Funds, will be affected
favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and such Funds may incur
costs in connection with conversions between various currencies.
The Funds will not hold foreign currency except in connection
with the purchase and sale of foreign portfolio securities. Each
Fund may enter into currency exchange transactions at the time of
purchase or sale of a security by buying or selling a currency on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market. Alternatively, when a Fund enters into a
contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to fix the expected cost or proceeds
of the transaction relative to another currency through forward
contracts to purchase or sell foreign currencies ("forward
contracts").
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract
agreed upon the parties, at a price set at the time of the contract.
The forward contract may be denominated in U.S. dollars or may be a
"cross-currency" contract where the forward contract is denominated
in a currency other than U.S. dollars. These contracts are traded
directly between currency traders (usually large commercial banks)
and their customers. The Custodian will segregate cash or marketable
securities in an amount not less than the value of each Fund's total
assets committed to forward contracts. If the value of the
securities segregated declines, additional cash or securities will be
added on a daily basis, i.e, "marked-to-market," so that the
segregated amount will not be less than the amount of each Fund's
commitments with respect to such contracts. Generally, the Funds
will not enter into forward contracts with a term of greater than 90
days.
At the maturity of a forward contract, a Fund may either accept
or deliver the foreign currency or may terminate the obligation under
the forward contract by purchasing an "offsetting" forward contract
with the same currency trader obligating the Fund to sell or
purchase, on the same maturity date, the same amount of the foreign
currency. If a Fund engages in an offsetting transaction, the Fund
will incur a gain or a loss to the extent that there has been
movement in forward contract prices. For example, should currency
prices decline during the period between entering into a forward
contract for the sale of a foreign currency and the date the Fund
enters into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the
currency the Fund has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should currency prices increase,
the Fund will suffer a loss to the extent the price of the currency
the Fund has agreed to purchase exceeds the price of the currency the
Fund has agreed to sell. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract
with respect to the foreign currency.
To the extent that a Fund enters into foreign currency futures
contracts, it will be subject to similar risk considerations. For
more information concerning futures contracts, see "Certain
Securities and Investment Techniques and Related Risks -- Hedging
Techniques -- Futures Contracts" in the Prospectuses.
The forecasting of currency movements is extremely difficult and
the successful execution of a hedging strategy is highly uncertain.
Moreover, it is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a hedging
transaction. For example, it may be necessary for the Fund to
purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of a security is less
than the amount of foreign currency the Fund is obligated to deliver
and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of
the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
Foreign currency exchange transactions do not eliminate
fluctuations in the underlying prices of the securities. They simply
establish rates of exchange for some future point in time.
Additionally, although such transactions may tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at
the same time they tend to limit any potential gain which might
result should the value of such currency increase.
The International Equity Fund does not intend to enter into
forward contracts on a regular or continuous basis, and will not do
so if, as a result, the Fund would have more than 25% of the value of
its respective total assets committed to such contracts. The other
Funds, except for Global Bond Fund, do not intend to enter into
forward contracts on a regular or continuous basis, and will not do
so if, as a result, the Fund would have more than 5% of the value of
its total assets committed to such contracts. The Funds, except for
Global Bond Fund, will also not enter into forward contracts or
maintain a net exposure in such contracts where the Funds would be
obligated to deliver an amount of foreign
currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. The Global Bond Fund may
enter into forward contracts, unless, as a result, more than 50% of
value of the Fund's total assets would be committed to such
contracts.
Interest Rate Futures Contracts -- The Income Funds may enter
into interest rate futures contracts. An interest rate futures
contract is an agreement by the Fund to buy or sell fixed-income
securities at a specified date and price. No payment is made when
the Fund buys a futures contract and no securities are delivered when
the Fund sells a futures contract. Instead, the Fund makes a deposit
called an "initial margin" equal to a percentage of the contract's
value. Payment or delivery is made when the contract expires unless
an offsetting transaction has been entered into. Futures contracts
will be used only as a hedge against anticipated interest rate
changes or otherwise to the extent permitted to entities exempt from
the definition of the term commodity pool operator. See "Investment
Restrictions."
Inverse Floating Obligations -- These are variable rate
securities on which interest rates typically decline as market rates
increase and increase as market rates decline. The Funds typically
purchase such issues directly from the issuing agency. The market for
such obligations is liquid to the extent of the active participation
in the secondary market of securities dealers and a variety of
investors.
Loan Transactions -- Loan transactions involve the lending of
securities to a broker-dealer or institutional investor for its use
in connection with short sales, arbitrages or other securities
transactions. Loans of portfolio securities of a Fund will be made
(if at all) in strictest conformity with applicable federal and state
rules and regulations. The purpose of a loan transaction is to
afford a Fund the opportunity to continue to earn income in addition
to the income on the securities loaned.
The Trustees understand that it is the current view of the staff
of the SEC that a Fund is permitted to engage in loan transactions
only if the following conditions are met: (1) the Fund must receive
100% collateral in the form of cash or cash equivalents, e.g., U.S.
Treasury bills or notes, from the borrower; (2) the borrower must
increase the collateral whenever the market value of the loaned
securities (determined on a daily basis) rises above the level of the
collateral; (3) the Fund must be able to terminate the loan after
notice, at any time; (4) the Fund must receive reasonable interest on
the loan or a fee from the borrower, as well as amounts equivalent to
any dividends, interest or other distributions on the securities
loaned and any increase in market value; (5) the Fund may pay only
reasonable fees in connection with the loan; (6) voting rights on the
securities loaned may pass to the borrower; however, if a material
event affecting the investment occurs, the Trustees must be able to
terminate the loan and vote proxies or enter into an alternative
arrangement with the borrower to enable the Trustees to vote proxies.
Excluding items (1) and (2), these practices may be amended by the
Trustees from time to time as regulatory provisions permit.
While there may be delays in recovery of loaned securities or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to firms deemed by the Trustees
to be of good standing and will not be made unless, in the judgment
of the Fund's Asset Manager made pursuant to standards adopted by the
Trustees, the consideration to be earned from such loans would
justify the risk. Such loan transactions are referred to in this
Statement of Additional Information as "qualified" loan transactions.
The cash collateral acquired through loan transactions may be
invested in any obligation in which the applicable Fund is authorized
to invest in accordance with its investment objectives. The
investment of the cash collateral in other obligations subjects that
investment as well as the security loaned to market forces, i.e.,
capital appreciation or depreciation, just like any other portfolio
security.
Mortgage-Related Securities -- Mortgage-related securities or
pass-throughs are certificates issued by governmental, government-
related and private organizations which are backed by pools of
mortgage loans. These mortgage loans are made by lenders such as
savings and loan institutions, mortgage bankers, commercial banks and
others to residential home buyers throughout the United States. The
securities are "pass-through" securities because they provide
investors with monthly payments which in effect are a "pass-through"
of the monthly payments of principal and interest made by the
individual borrowers on the underlying mortgages, net of any fees
paid to the issuer or guarantor of the pass-through certificates.
The principal governmental issuer of such securities is the
Government National Mortgage Association (GNMA), which is a wholly-
owned U.S. Government corporation within the Department of Housing
and Urban Development. Government-related issuers include the Federal
Home Loan Mortgage Corporation (FHLMC), a corporate instrumentality
of the United States created pursuant to an act of Congress which is
owned entirely by Federal Home Loan Banks, and the Federal National
Mortgage Association (FNMA), a government sponsored corporation owned
entirely by private stockholders. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may be the
originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities.
(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes").
Ginnie Maes represent an undivided interest in a pool of mortgages
that are insured by the Federal Housing Administration or the Farmers
Home Administration or guaranteed by the Veterans Administration.
Ginnie Maes entitle the holder to receive all payments (including
prepayments) of principal and interest owed by the individual
mortgagors, net of fees paid to the GNMA and to the issuer which
assembles the mortgage pool and passes through the monthly mortgage
payments to the certificate holders (typically, a mortgage banking
firm), regardless of whether the individual mortgagor actually makes
the payment. Because payments are made to certificate holders
regardless of whether payments are actually received on the
underlying mortgages, Ginnie Maes are of the "modified pass-through"
mortgage certificate type. The GNMA is authorized to guarantee the
timely payment of principal and interest on the Ginnie Maes. The
GNMA guarantee is backed by the full faith and credit of the United
States, and the GNMA has unlimited authority to borrow funds from the
U.S. Treasury to make payments under the guarantee. The market for
Ginnie Maes is highly liquid because of the size of the market and
the active participation in the secondary market of securities
dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs").
Freddie Macs represent interests in groups of specified first lien
residential conventional mortgages underwritten and owned by the
FHLMC. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by the FHLMC. The FHLMC guarantees
either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where the FHLMC
has not guaranteed timely payment of principal, the FHLMC may remit
the amount due on account of its guarantee of ultimate payment of
principal at any time after default on an underlying mortgage, but in
no even later than one year after it becomes payable. Freddie Macs
are not guaranteed by the United States or by any of the Federal Home
Loan Banks and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and
the active participation in the secondary market of the FHLMC,
securities dealers and a variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes"). Fannie Maes represent an undivided interest in a pool of
conventional mortgage loans secured by first mortgages or deeds of
trust, on one family, or two to four family, residential properties.
The FNMA is obligated to distribute scheduled monthly installments of
principal and interest on the mortgages in the pool, whether or not
received, plus full principal of any foreclosed or otherwise
liquidated mortgages. The obligation of the FNMA under its guaranty
is solely the obligation of the FNMA and is not backed by, nor
entitled to, the full faith and credit of the United States.
(4) Mortgage-related securities issued by private
organizations. Pools created by non-governmental issuers generally
offer a higher rate of interest than government and government-
related pools because there are no direct or indirect government
guarantees of payments in such pools. However, timely payment of
interest and principal of these pools is often partially supported by
various forms of insurance or guarantees, including individual loan,
title, pool and hazard insurance. The insurance and guarantees are
issued by government entities, private insurers and the mortgage
poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-related security meets a Fund's investment quality
standards. There can be no assurance that the private insurers can
meet their obligations under the policies. Certain Funds may buy
mortgage-related securities without insurance or guarantees if
through an examination of the loan experience and practices of the
poolers the Asset Manager of the Fund determines that the securities
meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable.
The market value of mortgage-related securities depends on,
among other things, the level of interest rates, the certificates'
coupon rates and the payment history of the mortgagors of the
mortgages in the underlying pool of mortgages.
Municipal Bonds -- Municipal bonds are of three principal types:
General Obligation Bonds, generally issued by states, counties,
cities, towns and regional districts, the proceeds of which are used
to fund a wide range of public projects; Revenue Bonds, the principal
security for which is generally the net revenues derived from a
particular facility, group of facilities or, in some cases, the
proceeds of a special excise or other specific revenue source; and
Industrial Development Bonds, which are considered municipal bonds if
the interest paid is exempt from federal income taxes, and which are
issued by or on behalf of public authorities to raise money to
finance public facilities and privately-operated facilities for
business, manufacturing and housing.
Investments in municipal securities involve risks that differ
from other domestic securities. There could be economic, business or
political developments which might affect all municipal obligations
of a similar type.
For purposes of the investment restrictions set forth in the
section entitled "Investment Restrictions," the identification of the
"issuer" of municipal bonds which are not general obligation bonds is
made by the Asset Manager on the basis of the characteristics of the
obligation as either general obligation, revenue or industrial
development bonds, the most significant of which is the source of the
funds for the payment of principal and interest on such securities.
Although the Funds do not currently invest more than 25% of
their assets in municipal bonds issued by public housing authorities,
state and local housing finance authorities, and municipal utilities
systems and industrial development and pollution control bonds, they
may do so at some point in the future. Since such municipal bonds
are not general obligations of the issuer, they may be more subject
to political and economic changes which may impair their ability to
make interest and principal payments.
The liquidity of lease rental obligations will be determined
based on a variety of factors which may include, among others:
(1) the frequency of trades and quotes for the obligation; (2) the
number of dealers willing to purchase or sell the security and the
number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; (4) the nature of the
marketplace trades, including, the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the
transfer; and (5) the rating assigned to the obligation by an
established rating agency or the Asset Manager.
Generally, industrial development bonds are not backed by the
credit of any governmental or public authority. The Funds may invest
in uncollateralized industrial development bonds which the Asset
Manager has determined to be of a quality equivalent to bonds rated
not less than A by Moody's or Standard & Poor's. The Funds may
invest in industrial development bonds collateralized by letters of
credit issued by banks having stockholders' equity in excess of $100
million as of the date of their most recently published statement of
financial condition. The Funds may also invest in variable rate
industrial development bonds, most of which permit the holder thereof
to receive the principal amount on demand upon seven days notice.
Municipal notes include Tax Anticipation Notes, issued to
finance working capital needs of municipalities; Revenue Anticipation
Notes, issued in expectation of receipt of other types of revenue;
Bond Anticipation Notes, issued to provide interim financing until
long-term bond financing can be arranged; Construction Loan Notes,
sold to provide construction financing; and Tax-Exempt Commercial
Paper, a short-term obligation with a stated maturity of 365 days or
less issued by state and local governments or their agencies to
finance seasonal working capital needs or as short-term financing in
anticipation of longer-term financing. The Funds may invest in
municipal bonds carrying a guarantee or insured by the U.S.
government as to the payment of principal and interest, or which are
fully collateralized by an escrow of U.S. government securities.
Such collateralized bonds are commonly known as defeasance bonds.
Obligations of Domestic and Foreign Banks -- Banks are subject
to extensive governmental regulations which may limit both the
amounts and types of loans and other financial commitments which may
be made and interest rates and fees which may be charged. The
profitability of the banking industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing
lending operations under prevailing money market conditions. Also,
general economic conditions play an important part in the operations
of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to
meet its obligations under a letter of credit.
Puts and Calls -- In addition to writing covered call options
and covered put options, and engaging in closing purchase
transactions with respect thereto as described above, the Equity
Funds, other than the International Equity Fund may purchase options
on individual stocks, equity indices and equity index futures
contracts and the Income Funds may purchase options on individual
bonds and on interest rate future contracts. A put option (sometimes
called a "standby commitment") gives the purchaser of such option,
upon payment of a premium, the right to deliver a specified amount of
a financial instrument or index or futures contract on or before a
fixed date at a predetermined price. A call option (sometimes called
a "reverse standby commitment") gives the purchaser of the option,
upon payment of a premium, the right to call upon the writer to
deliver a specified amount of a financial instrument, index or
futures contract on or before a fixed date, at a predetermined price.
A Fund may purchase put and call options to provide protection
against the adverse affects of changes in the general level of prices
in the markets in which the Fund operates. In purchasing a call
option, the Fund would be in a position to realize a gain if, during
the option period, the price of the financial instrument, index or
futures contract increased by an amount in excess of the premium
paid. It would realize a loss if the price of the financial
instrument, index or futures contract declined or remained the same
or did not increase during the period by more than the amount of the
premium. By purchasing a put option, the Fund would be in a position
to realize a gain if, during the option period, the price of the
financial instrument, index or futures contract declined by an amount
in excess of the premium paid. It would realize a loss if the price
of the financial instrument, index or futures contract increased or
remained the same or did not decrease during that period by more than
the amount of the premium. If a put or call option purchased by the
Fund were permitted to expire without being sold or exercised, its
premium would then represent a realized loss to the Fund.
The Fund may dispose of an option which it has purchased by
entering into a "closing sale transaction" with the writer of the
option. A closing sale transaction terminates the obligation for the
writer of the option and does not result in the ownership of an
option. The Fund realizes a profit or loss from a closing sale
transaction if the premium received from the transaction is more or
less than the cost of the option.
Ratings of Commercial Paper -- Commercial paper rated A-1 by
Standard & Poor's Ratings Group ("S&P") has the following
characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated A or better. The
issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position with the industry.
The reliability and quality of management are unquestioned. Relative
strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3.
The rating P-1 is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. ("Moody's"). Among the factors
considered by Moody's in assigning ratings are the following: (1)
evaluation of the management of the issuer; (2) economic evaluation
of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3)
evaluation for the issuer's products in relation to competition and
customer acceptance; (4) liquidity; (5) amount and quality of long-
term debt; (6) trend of earning over a period of ten years; (7)
financial strength of a parent company and the relationships which
exist with the issuer; and (8) recognition by the management of
obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations.
Ratings of Debt Instruments -- The four highest ratings of
Moody's for debt instruments: Aaa, Aa, A, and Baa are considered to
be investment grade. Debt rated Aaa is judged by Moody's to be of
the best quality. Debt rated Aa is judged to be of high quality by
all standards. Together with the Aaa group, such debt comprises what
is generally known as high-grade debt. Moody's states that debt
rated Aa is rated lower than the best debt because margins of
protection or other elements make long-term risks appear somewhat
larger than for Aaa debt. Debt which is rated A by Moody's possesses
many favorable investment attributes and is considered "upper medium
grade obligations." Factors giving security to principal and
interest of A-rated debt are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the
future. Debt that is rated Baa is neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length
of time. Such debt lacks outstanding investment characteristics and,
in fact, has speculative characteristics as well. Debt that is rated
Ba is judged to have speculative elements and a future which cannot
be considered to be well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
The four highest ratings (investment grade) of S&P for debt
instruments are AAA, AA, A, and BBB. Debt rated AAA has the highest
rating assigned by S&P to an obligation. Capacity to pay interest
and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from
the highest rated issues only in a small degree. Debt rated A has a
strong capacity to pay principal and interest, although it is
somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Debt rated BBB is considered
on the borderline between definitely sound obligations and
obligations where the speculative element begins to predominate.
Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest
degree of speculation among the bonds deemed to be speculative.
The Bond Fund and the Short and Intermediate Bond Fund may
each invest without limitation in debt securities that are rated as
low as BB by S&P or Ba by Moody's. Such securities are frequently
referred to as "junk bonds." Fixed-income securities are subject to
the risk of an issuer's inability to meet principal and interest
payments on the obligations ("credit risk") and may also be subject
to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general
market liquidity ("market risk"). Junk bonds are more likely to
react to developments affecting market and credit risk than are more
highly-rated securities, which react primarily to movements in the
general level of interest rates.
Lower-rated debt obligations also present risks based on
payment expectations. If an issuer calls the obligation for
redemption, a Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors.
Also, as the principal value of bonds moves inversely with movements
in interest rates, in the event of rising interest rates the value of
a Fund's portfolio may decline proportionately more than a portfolio
consisting of higher-rated securities. If a Fund experiences
unexpected net redemptions, it may be forced to sell its higher-rated
bonds, resulting in a decline in the overall credit quality of the
Fund's portfolio and increasing the exposure of the Fund to the risks
of lower-rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to
changes in interest rates than income-bearing bonds.
During the fiscal year ended December 31, 1996, the weighted
average ratings of the debt obligations held by the Bond Fund and the
Short and Intermediate Bond Fund, expressed as a percentage of each
Fund's total investments, were as follows:
<TABLE>
<CAPTION>
Percentage of Total Investments of:
Short and
Ratings Bond Fund Intermediate
<S> <C> Bond Fund
<C>
Government and
AAA/Aaa 14% 50%
AA/Aa 3% 5%
A/A 6% 18%
BBB/Baa 61% 22%
BB/Ba 9% 5%
Not rated 7% -
</TABLE>
Repurchase Agreements -- Pursuant to guidelines approved and
periodically reviewed by the Trustees, a Fund may enter into
repurchase agreements with such banking institutions and securities
dealers as have been approved by the Trustees. A Fund may enter into
repurchase agreements as a short-term investment of its idle cash in
order to earn income. A repurchase agreement, which provides a means
for the Fund to earn income on funds for periods as short as
overnight, is an arrangement under which the purchaser (i.e., the
Fund) purchases a U.S. Government security ("Government Obligation")
and the seller agrees, at the time of sale, to repurchase the
Government Obligation at a specified time and price. The repurchase
price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the
same, with interest at a stated rate due to the Fund, together with
the repurchase price on repurchase. In either case, the income to
the Fund is unrelated to the interest rate on the Government
Obligation subject to the repurchase agreement. Government
Obligations will be held by the Custodian or in the Federal Reserve
Book Entry System. For purposes of the 1940 Act, a repurchase
agreement is deemed to be a loan from the Fund to the seller of the
Government Obligation subject to the repurchase agreement. The
Funds' investment restriction which limits lending by the Funds
specifically exempts repurchase transactions. It is not clear
whether a court would consider the Government Obligation purchased by
the Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Government Obligation before the
repurchase of the Government Obligation under a repurchase agreement,
the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in
price of the Government Obligation. If the court characterizes the
transaction as a loan and the Fund has not perfected a security
interest in the Government Obligation, the Fund may be required to
return the Government Obligation to the seller's assets and be
treated as an unsecured creditor of the seller. As an unsecured
creditor, the Fund would be at risk of losing some or all of the
principal and income involved in the transaction. As with any
unsecured debt obligation purchased for a Fund, the Trustees seek to
minimize the risk of loss through repurchase agreements by analyzing
the creditworthiness of the obligor, in this case the seller of the
Government Obligation. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may
fail to repurchase the Government Obligation, in which case the Fund
may incur a loss if the proceeds to the Fund of the sale to a third
party are less than the repurchase price. However, if the market
value of the Government Obligation subject to the repurchase
agreement becomes less than the repurchase price (including
interest), the Fund will direct the seller of the Government
Obligation to deliver additional securities so that the market value
of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. The seller may not be contractually
bound to deliver additional securities.
In addition to repurchase agreements with respect to U.S.
Government Obligations described above, the Intermediate Mortgage
Fund may also invest in repurchase agreements pertaining to the types
of securities in which it may invest.
Rights and Warrants -- Rights are short-term warrants issued in
conjunction with new stock issues. Warrants give the holder the
right to purchase an issuer's securities at a stated price during a
stated term. The Funds' ability to invest in rights and warrants is
limited by their operating policies--see "Investment Restrictions."
Short Sales -- When a Fund makes a short sale, it sells a
security it does not own in anticipation of a decline in market
price. The proceeds from the sale are retained by the broker until
the Fund replaces the borrowed security. To deliver the security to
the buyer, the Fund must arrange through a broker to borrow the
security and, in so doing, the Fund will become obligated to replace
the security borrowed at its market price at the time of replacement,
whatever that price may be. The Fund may have to pay a premium to
borrow the security. The Fund may, but will not necessarily, receive
interest on such proceeds. The Fund must pay to the broker any
dividends or interest payable on the security until it replaces the
security. The Fund's obligation to replace the security borrowed
will be secured by collateral deposited with the broker, consisting
of cash or U.S. government securities or liquid high-grade debt
obligations acceptable to the broker.
If the price of a security sold short increases between the time
of the short sale and the time the Fund replaces the borrowed
security, the Fund will incur a loss, and if the price declines
during this period, the Fund will realize a capital gain. Any
realized capital gain will be decreased, and any incurred loss
increased, by the amount of transaction costs and any premium,
dividend, or interest which the Fund may have to pay in connection
with such short sale.
U.S. Government Securities -- Securities issued or guaranteed by
the U.S. Government include a variety of Treasury securities that
differ only with respect to their interest rates, maturities and
dates of issuance. Treasury Bills have maturities of one year or
less, Treasury Notes have maturities of one to ten years and Treasury
Bonds generally have maturities of greater than ten years at the date
of issuance.
U.S. Government agencies or instrumentalities which issue or
guarantee securities include, but are not limited to, the Federal
Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration,
Governmental National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Federal Land Banks, Maritime Administration, the
Tennessee Valley Authority, District of Columbia Armory Board, the
Inter-American Development Bank, the Asian-American Development Bank,
the Student Loan Marketing Association and the International Bank for
Reconstruction and Development.
Obligations of U.S. Government agencies and instrumentalities
may or may not be supported by the full faith and credit of the
United States. Some are backed by the right of the issuer to borrow
from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others,
such as the Student Loan Marketing Association, are supported only by
the credit of the instrumentality. In the case of securities not
backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing
the obligation for ultimate repayment, and may not be able to assert
or claim against the United States itself in the event the agency or
instrumentality does not meet its commitment.
Variable Rate Securities -- Variable rate securities are debt
securities which have no fixed coupon rate. The amount of interest
to be paid to the holder typically is contingent upon another
specified rate, such as the yield on 90-day Treasury bills. Variable
rate securities may also include debt with an interest rate which
resets in the opposite direction of the rate of the index upon which
it is contingent. See "Other Information - Inverse Floating
Obligations."
"When-Issued" Securities--Certain of the Funds may, from time to
time, purchase securities on a "when-issued" basis. The price of
"when-issued" securities is fixed at the time the commitment to
purchase is made, but delivery and payment for the "when-issued"
securities take place at a later date. Normally, the settlement date
occurs within one to two months of the date of purchase. During the
period between purchase and settlement, no payment is made by the
Fund to the issuer and no interest accrues to the Fund. Such
transactions therefore involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which
risk is in addition the risk of decline in value of the Fund's other
assets. While "when-issued" securities may be sold prior to the
settlement date, the Fund intends to purchase such securities with
the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the
commitment to purchase a security on a "when-issued" basis, it will
record the transaction and reflect the value of the security in
determining its net asset value. Each Fund will establish a
segregated account in which it will maintain cash and marketable
securities equal in value to commitments for "when-issued"
securities. Such segregated securities either will mature or, if
necessary, be sold on or before the settlement date.
Purchase and sale of securities on a "forward commitment" basis
includes purchase of "when-issued" securities and involves a
commitment by a Fund to purchase or sell particular securities with
payment and delivery to take place at some future date, normally one
to two months after the date of the transaction. As with "when-
issued" securities, these transactions involve certain risks to a
Fund, but they also enable a Fund to hedge against anticipated
changes in interest rates and prices.
XIV. PERFORMANCE INFORMATION
Total Return Computations As indicated in the Prospectus, the
Funds may include in advertisements or sales literature certain total
return and yield information computed in the manner described in the
Prospectus. The following chart sets forth the average annual total
return quotations for each of the Funds for certain specified periods
of time ending December 31, 1996.
<TABLE>
<CAPTION>
Annual -
ized
Since
Commen-
Annual- Annual- cement
ized 5 ized of Opera-
Years 10 tions Commence-
NAME OF FUND 1 Year <C> Years <C> ment Date
<S> <C> <C> <C>
Income Equity Fund 17.08% 14.45% 12.46% 14.57% 10/31/84
Capital Appreciation Fund 13.73% 14.04% 14.66% 15.48% 6/30/84
Special Equity Fund 24.75% 17.42% 17.60% 16.47% 6/30/84
International Equity Fund 12.77% 14.02% 10.62% 14.30% 12/31/85
Short Government Fund 3.89% 2.90% NA 5.21% 10/31/87
Short & Int. Bond Fund 4.15% 5.94% 6.97% 8.56% 6/30/84
Intermediate Mortgage Fund 3.33% 2.27% 6.36% 7.13% 5/31/86
Bond Fund 4.97% 8.94% 9.36% 11.37% 6/30/84
Global Bond Fund 4.39% NA NA 7.48% 3/25/94
</TABLE>
* The performance figures shown are calculated beginning with
each Fund's first full month of operation, with the exception of
the Global Bond Fund which is shown as of its actual inception
dates. Rates of return for the Funds are net of all direct fees
and expenses and (except for the Global Bond Fund) have been
restated to show the effect that each Fund's present advisory fee
expenses would have had on performance.
The average annual total return ("T") is computed by using the
redeemable value of the end of a specified period ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of time
("n") according to the formula: P(1+T)n=ERV.
Yield Computations (Income Equity Fund and the Income Funds).
As indicated in the Prospectuses, the Equity and the Income Funds may
advertise or include in sales literature yield quotations based on a
30-day period. "Yield" refers to income generated by an investment
in the Fund during the previous 30-day (or one-month) period. Yield
is computed by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
a - b 6
YIELD = 2[( c*d +1) - 1]
For these purposes, a equals dividends and interest earned during the
period; b equals expenses accrued for the period (net of
reimbursements); c equals the average daily number of shares
outstanding during the period that were entitled to receive
dividends; and d equals the maximum offering price per share on the
last day of the period.
The figure is then annualized. That is, the amount of income
generated during the 30-day (or one-month) period is assumed to be
generated each month over a 12-month period and is shown as a
percentage of the investment. The Funds' yield figures are based on
historical earnings and are not intended to indicate future
performance. For the 30-day period ended December 31, 1996, the
annualized yield of the Income Equity Fund and each of the Income
Funds, was as follows:
<TABLE>
<CAPTION> 30-Day
Annualized Yield
Fund at 12/31/96
<S> <C>
Income Equity Fund 2.67%
Short Government Fund 5.08%
Short and Intermediate
Bond Fund 5.24%
Intermediate Mortgage Fund 5.64%
Bond Fund 6.39%
Global Bond Fund 4.66%
</TABLE>
Performance Comparisons
As set forth in the Prospectus, the performance of any of the
Funds may be compared to the performance of other mutual funds having
similar objectives, expressed as a ranking prepared by independent
services or publications that monitor the performance of mutual funds
such as Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Inc., and IBC Money Fund Report. In addition, any Fund's performance
may be compared to that of various unmanaged indices such as the
Standard & Poor's 500 Stock Price Index or the Dow Jones Industrial
Average.
"Lipper-Fixed Income Fund Performance Analysis" is a monthly
publication prepared by Lipper, which tracks net assets, total
return, principal return and yield on approximately 950 fixed-income
mutual funds offered in the United States. Lipper also prepares the
"Lipper Composite Index," a performance benchmark based upon the
average performance of publicly offered stock funds, bond funds, and
money market funds as reported by Lipper.
Morningstar, Inc., a widely used independent research firm, also
ranks mutual funds by overall performance, investment objectives and
assets.
From time to time, in reports and sales literature, the Funds
may compare their performance, risk quality and liquidity
characteristics to money market funds, treasury bills and notes,
GIC's and various indices of unmanaged securities. Charts may be
shown depicting the relative yield and risk relationships between the
Fund and these indices. In general, instruments with shorter
maturities or durations tend to be less risky (have lower price
volatility) than those with longer maturities or durations. Risk and
yield tend to be greater for corporate issues than for government
securities or money market funds. Money market funds invest only in
high quality instruments that are denominated in U.S. dollars and
that have relatively short periods to maturity. Accordingly, money
market funds tend to have fairly low risk and price volatility. The
indices used, and the basis for these comparisons, may include:
The IBC Money Market Fund Index, prepared IBC Financial Data,
Inc. in "IBC's Money Market Fund Report," a weekly publication which
tracks net assets, yield, maturity and portfolio holdings on
approximately 700 money market funds offered in the U.S. Yields
quoted on the IBC index are based on a 30-day period.
Two-year Treasury notes or one-year Treasury bills, as quoted in
the Wall Street Journal or by other financial institutions such as T.
Rowe Price Associates, Inc. Yields on these indices are generally
higher than on money market funds, but carry higher risk due to their
longer durations.
Three Year GIC index, as quoted in the Wall Street Journal and
prepared by T. Rowe Price Associates, Inc. In general, GICs will be
riskier than comparable maturity government issues or money funds,
and will have a higher yield. While GICs do carry "guarantees" as to
the repayment of principal, these guarantees are only backed by the
company which underwrites the contract, and could possibly default.
In addition, GICs can be considered illiquid due to their contractual
terms; however their price volatility is relatively stable as a
result of this.
Unmanaged government and corporate indices published by Merrill
Lynch, Pierce, Fenner & Smith, Inc. Indices which may be compared to
the Short Government Fund include the Merrill Lynch 1-10 Year High
Quality Corporate Bond Index and the Corporate Master Index. These
indices are published in the Wall Street Journal as well as in
Merrill Lynch's "Taxable Bond Indices", a monthly publication which
lists principal, coupon and total return on over 100 different
taxable indices tracked by Merrill Lynch.
XV. FINANCIAL STATEMENTS
The audited Financial Statements and the Notes thereto for The
Managers Funds, and the auditor's reports of Coopers & Lybrand
L.L.P., independent public accountants, are herein incorporated by
reference from The Managers Funds' Annual Reports dated December 31,
1996.
_______________________________
1Trustee who is an "interested person" of the Trust (as defined in Section
2(a)(19) of the 1940 Act).
