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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1996
FILE NO. 2-84920
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 23 /X/
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 24 /X/
SBSF FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
45 Rockefeller Plaza
New York, New York 10111
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code: (212) 903-1255
LEIGH A. WILSON
45 Rockefeller Plaza
New York, NY 10111
(Name and Address of Agent for Service)
COPY TO:
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MICHAEL R. PARKER, ESQ. ROBERT M. KURUCZA, ESQ.
Spears, Benzak, Salomon MARCO E. ADELFIO, ESQ.
& Farrell, Inc. Morrison & Foerster LLP
45 Rockefeller Plaza 2000 Pennsylvania Ave., NW
New York, New York 10111 Washington, DC 20006
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It is proposed that this filing will become effective (check appropriate box)
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/ / immediately upon filing pursuant to Rule 485(b), / / on (date) pursuant to Rule 485(b),
or or
/X/ 60 days after filing pursuant to Rule 485(a)(1), / / on (date) pursuant to Rule 485(a)(1),
or or
/ / 75 days after filing pursuant to Rule 485(a)(2), / / on (date) pursuant to paragraph (a)(2)
or of Rule 485
</TABLE>
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
No filing fee is required under the Securities Act of 1933 because an indefinite
number of shares of the Registrant's Common Stock, par value $.01 per share, has
previously been registered pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Registrant filed the notice required by Rule 24f-2 on January
29, 1996 for its fiscal year ended November 30, 1995.
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EXPLANATORY NOTE
This Post-Effective Amendment No. 21 to the Registration Statement (the
"Amendment") of SBSF Funds, Inc. (d/b/a Key Mutual Funds) is being filed for the
purpose of reflecting certain revisions to the Rule 12b-1 distribution plan
adopted for the International Index Fund, adding a shareholder servicing plan
for such Fund and making certain non-material changes. This Amendment does not
affect the Registration Statement for the SBSF Fund, the SBSF Convertible
Securities Fund, the SBSF Capital Growth Fund and the SBSF Money Market Fund
currently in effect.
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CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
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N-1A ITEM NO. LOCATION
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PART A PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fund Expenses
Item 3. Condensed Financial Information....... Not Applicable; Performance
Item 4. General Description of Registrant..... Description of Common Stock; Investment
Objectives and Policies; Investment Restrictions
(Part B)
Item 5. Management of the Fund................ Management of the Funds; Expenses, Distribution
Plan, and Shareholder Servicing Plan
Item 5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities.... Description of Common Stock; Shareholder Reports;
Dividends and Distributions; Federal Income Taxes
Item 7. Purchase of Securities Being
Offered............................. Expenses and Distribution Plan; Determination of
Net Asset Value; Purchasing Shares; Investing for
Retirement; The Systematic Investment Plan; The
Systematic Withdrawal Plan; Exchanging Shares
Item 8. Redemption or Repurchase.............. Redeeming Shares
Item 9. Pending Legal Proceedings............. Not Applicable
PART B PART B
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Table of Contents
Item 12. General Information and
History............................. Other Information
Item 13. Investment Objectives and Policies.... Investment Objectives and Policies; Investment
Restrictions; Portfolio Turnover
Item 14. Management of the Fund................ Management of the Funds
Item 15. Control Persons and Principal Holders
of Securities....................... Not Applicable
Item 16. Investment Advisory and Other
Services............................ The Investment Adviser and Administrator;
Expenses, Distributor and Distribution Plan;
Custodian, Transfer Agent and Dividend Disbursing
Agent; Independent Accountants and Reports
Item 17. Brokerage Allocation and
Other Practices..................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.... Other Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase, Redemption and Pricing
Item 20. Tax Status............................ Federal Income Taxes
Item 21. Underwriters.......................... Not Applicable
Item 22. Calculation of Performance Data....... Performance Information
Item 23. Financial Statements.................. Independent Accountants and Reports
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PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered in Part C to this Registration Statement.
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KEY MUTUAL FUNDS
800-539-3863
[LOGO]
PROSPECTUS
Key Mutual Funds, formerly known as SBSF Funds, Inc., (the "Company") is a
professionally managed, no-load, open end, series investment company currently
consisting of six different portfolios, two of which (the "Funds") are described
in this prospectus. Each Fund is a separately managed diversified portfolio with
its own investment objective and policies. The Funds have no sales loads,
redemption fees or exchange fees.
KeyCorp Mutual Fund Advisers, Inc. (the "Adviser" or "KMFA"), an indirect wholly
owned subsidiary of KeyCorp, serves as investment adviser to each of the Funds.
KMFA and its affiliates manage approximately $48 billion for numerous clients
including large corporate and public retirement plans, Taft-Hartley plans,
foundations and endowments, high net worth individuals and mutual funds. The
Funds were created to provide informed investors with experienced, professional
investment management and personal service.
KEY STOCK INDEX FUND
The investment objective of the Key Stock Index Fund ("Stock Index Fund") is
to seek to provide long-term capital appreciation by attempting to match the
investment performance of the Standard & Poor's 500 Composite Stock Index (the
"S&P 500 Index"). The Stock Index Fund will attempt to achieve its objective by
investing primarily in the stocks which comprise the S&P 500 Index.
KEY INTERNATIONAL INDEX FUND
The investment objective of the Key International Index Fund (the
"International Index Fund") is to seek to match as closely as possible the
investment performance of the Morgan Stanley Capital International Europe,
Australia and Far East Index (the "EAFE Index"), before fees and expenses of the
International Index Fund. The International Index Fund attempts to achieve its
objective by investing in a statistically selected sample of the equity
securities included in the EAFE Index.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, KMFA, ANY KEYCORP BANK, ANY OF THEIR AFFILIATES, OR ANY OTHER BANK.
THE SHARES OF THE FUNDS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
AN INVESTMENT IN MUTUAL FUND SHARES IS SUBJECT TO INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Additional information
about the Funds has been filed with the Securities and Exchange Commission (the
"Commission") in a Statement of Additional Information dated June ___ , 1996,
as supplemented from time to time, which is incorporated herein by reference and
is available without charge upon request by writing to Key Mutual Funds at P.O.
Box 8527, Boston, MA 02266 or calling the Funds at 800-539-FUND or 800-539-3863.
Investors are advised to read and retain this Prospectus for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this Prospectus is June , 1996
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TABLE OF CONTENTS
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Fund Expenses.................................... 1
Investment Objectives and Policies............... 2
Management of the Funds.......................... 10
Expenses, Distribution Plan and
Shareholder Servicing Plan..................... 12
Determination of Net Asset Value................. 12
Purchasing Shares................................ 13
The Systematic Investment Plan................... 15
The Systematic Withdrawal Plan................... 15
Redeeming Shares................................. 16
Exchange Privilege............................... 17
Investing For Retirement......................... 18
Dividends
and Distributions.............................. 18
Federal Income Taxes............................. 19
Performance...................................... 20
Description of Common Stock...................... 20
Custodian, Transfer Agent, Shareholder Servicing
Agent and Dividend Disbursing Agent............ 21
Shareholder Reports.............................. 21
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FUND EXPENSES
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EXPENSES ARE ONE OF SEVERAL FACTORS TO CONSIDER WHEN INVESTING IN THE FUNDS. THE
FOLLOWING TABLE SUMMARIZES SHAREHOLDER TRANSACTION EXPENSES AND ESTIMATED FUND
OPERATING EXPENSES FOR THE FUNDS.
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KEY
KEY STOCK INTERNATIONAL
INDEX INDEX
FUND FUND
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Shareholder Transaction Expenses(1):
Maximum sales load imposed on purchases..................................... None None
Maximum sales load imposed on reinvested dividends.......................... None None
Deferred sales load......................................................... None None
Redemption Fees............................................................. None None
Exchange Fees............................................................... None None
Annual Fund Operating Expenses After Expense Waivers and Reimbursements:
(as a percentage of average daily net assets):
Management Fees(2).......................................................... .08% .50%
Other Expenses(3)........................................................... .23% .84%
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Total Fund Operating Expenses(2)(3)(4)...................................... .31% 1.34%
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(1) Investors may be charged a fee if orders are placed through a broker or
agent, including affiliated banks and non-bank affiliates of KMFA and
KeyCorp. (See "Purchasing Shares".)
(2) The Management Fee payable by the Stock Index Fund has been reduced to
reflect a voluntary partial fee waiver by the Adviser. Absent such voluntary
fee waiver, "Management Fees" as a percentage of average daily net assets
would be .10%.
(3) "Other Expenses" include estimates of such expenses as administration fees,
custodial and transfer agent fees, audit, legal and other business expenses
for the current fiscal year. In addition, with respect to the Stock Index
Fund, "Other Expenses" reflect certain voluntary fee waivers and expense
reimbursements. Absent voluntary fee waivers and expense reimbursements,
"Other Expenses" are estimated to be .34% for the Stock Index Fund. With
respect to the International Index Fund, "Other Expenses" also include the
shareholder servicing fees the International Index Fund expects to pay (see
"Expenses, Distribution Plan, and Shareholder Servicing Plan").
(4) Absent the fee waivers and/or expense reimbursements described in Notes (2)
and (3) above, "Total Fund Operating Expenses" are estimated to be .44% for
the Stock Index Fund. There can be no assurance that the foregoing voluntary
fee waivers and/or expense reimbursements will continue.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that an investor in the Funds will bear directly
("Shareholder Transaction Expenses") or indirectly ("Annual Fund Operating
Expenses"). For a more complete description of the Funds' operating expenses,
see "Expenses, Distribution Plan, and Shareholder Servicing Plan."
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The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
each of the Funds.
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KEY
KEY STOCK INTERNATIONAL
INDEX INDEX
FUND FUND
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THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER,
WHILE THE TABLE ASSUMES A 5% ANNUAL RETURN, A FUND'S ACTUAL PERFORMANCE WILL
VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN 5%.
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Example:
You would pay the following expenses on a $1,000 investment, assuming (1) a
5% annual return and (2) full redemption at the end of each time period:
1 Year................................................................... $ 3 $ 14
3 Years.................................................................. 10 43
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INVESTMENT OBJECTIVES AND POLICIES
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The investment objective and policies of each of the two Funds are set forth
below.
KEY STOCK INDEX FUND
The investment objective of the Key Stock Index Fund is to seek to provide
long-term capital appreciation by attempting to match the investment performance
of the Standard & Poor's 500 Composite Stock Index (the "S&P 500 Index" or the
"Index")1.
Under normal market conditions, the Stock Index Fund will attempt to duplicate
the capital performance and dividend income of the S&P 500 Index by investing
primarily in the stocks which comprise the S&P 500 Index and secondarily in
stock index futures, while minimizing transaction costs. The S&P 500 Index is
composed of 500 common stocks chosen on the basis of market value and industry
diversification. While most issuers are among the 500 largest U.S. companies in
terms of aggregate market value, some other stocks are included for purposes of
diversification. The Stock Index Fund attempts to duplicate the investment
results of the S&P 500 Index before fees and expenses, essentially by
replicating the capitalization-weighted composition of the Index. No attempt is
made to manage the Stock Index Fund in the traditional sense using economic,
financial and market analysis. The Stock Index Fund may, from time to time, omit
or limit holdings of certain stocks in the Index due to their illiquidity or
other factors, such as bankruptcy or insolvency. The Stock Index Fund may
compensate for these omissions or limitations by purchasing stocks not included
in the Index that are similar to those omitted or limited if KMFA believes those
purchases will reduce "tracking error" (the difference between the Stock Index
Fund's investment results (before expenses) and that of the Index). To minimize
tracking error, when the Stock Index Fund does not hold all stocks in the Index
in proportion to their Index weighting, KMFA may use statistical analyses in
selecting stocks. As described further below, stock index futures contracts may
be used to minimize tracking error. In connection with engaging in futures
transactions, the Stock Index Fund may hold cash, cash equivalents, and/or U.S.
Government Securities. See "Futures Contracts" in this prospectus and in the
Statement of Additional Information.
It is a reasonable expectation that there will be a close correlation between
the Stock Index Fund's performance and that of the S&P 500 Index in both rising
and falling markets. In this connection, KMFA monitors the Stock Index Fund's
performance correlation to the S&P 500 Index and adjusts the portfolio to the
extent necessary to enable the Stock Index Fund to achieve a correlation to the
S&P 500 Index of at least 0.95, on an annual basis, without taking into account
Stock Index Fund operating expenses. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value of the
Stock Index Fund, including the value of its dividend and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
500 Index. The Stock Index Fund's ability to track the S&P 500 Index, however,
may be affected by, among other things, transaction costs, changes in either the
composition of the S&P 500 Index or number of shares outstanding for the
components of the S&P 500 Index, and the timing and amount of shareholder
purchases and redemptions. The Board of Directors of the Company (the "Board" or
the "Directors") periodically reviews the Stock Index Fund's investment
performance before fees and expenses as compared to the S&P 500 Index. The Board
reviews discrepancies in performance for reasonableness, taking into account the
size of the Stock Index Fund's portfolio and net cash flows, and any corrective
actions deemed necessary will be taken to avert excessive discrepancies in the
future. There can, however, be no assurance that the Stock Index Fund will
achieve its investment objective.
Because of the Stock Index Fund's objective, securities may be purchased,
retained and sold by the Stock Index Fund when such transactions would not be
consistent with traditional investment criteria. Adverse performance will
ordinarily not result in the elimination of a stock from the Stock Index Fund's
portfolio. The Stock Index Fund will remain fully invested in common stocks even
when stock prices are generally falling. Accordingly, an investor is exposed to
a greater risk of loss from fluctuations in the value of the overall securities
market than would be the case if the Stock Index Fund reduced its exposure to
such market conditions. In addition, the share price of the Stock Index Fund is
expected to fluctuate, and investors should be able to sustain sudden and
sometimes substantial fluc-
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1 "Standard & Poor's 500" is a registered service mark of Standard & Poor's
Corporation, which does not sponsor and is in no way affiliated with the Stock
Index Fund.
2
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tuations in the value of their investment. Brokerage costs, fees, operating
expenses and tracking error will
cause the Stock Index Fund's total return to be lower than that of the S&P 500
Index.
The Stock Index Fund may utilize stock index options and stock index futures
contracts and options on stock index futures contracts to a limited extent.
Options, futures contracts, and options on futures contracts may be used for
several reasons: to maintain cash reserves while effectively remaining fully
invested, to facilitate trading, or to reduce transaction costs. The Stock Index
Fund may enter into options and futures contracts only to the extent that total
obligations under such contracts or transactions at the time of purchase
represent not more than 33 1/3% of the Stock Index Fund's total assets.
The Stock Index Fund will attempt to be fully invested at all times, and in
any event, at least 80% of its total assets will be invested in stocks or
derivative securities (options, futures or options on futures).
The Stock Index Fund may also invest temporarily in certain short-term
obligations. Such securities may be used to invest uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions. The Stock Index Fund may
also borrow money for temporary or emergency purposes and purchase securities on
a when-issued or delayed-delivery basis.
KEY INTERNATIONAL INDEX FUND
The investment objective of the Key International
Index Fund is to seek to match as closely as possible the investment performance
of the Morgan Stanley Capital International ("Morgan Stanley") Europe, Australia
and Far East Index (the "EAFE Index")2 before fees and expenses of the
International Index Fund. The International Index Fund attempts to achieve this
objective by investing in a statistically selected sample of the equity
securities included in the EAFE Index.
The EAFE Index is a capitalization-weighted index that includes
approximately 1,100 equity securities of companies located outside the United
States. The countries included in the EAFE Index are Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Malaysia, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. The International Index Fund may not invest
in certain stocks (numbering approximately 50) included in the EAFE Index
because corporate charters have provisions prohibiting ownership by foreign
investors.
The International Index Fund is constructed to have aggregate investment
characteristics similar to those of the EAFE Index. The International Index Fund
invests in a statistically selected sample of the securities included in the
EAFE Index, although not all companies within a country will be represented in
the International Index Fund's portfolio of securities at the same time. The
International Index Fund is expected to invest in approximately 350 stocks.
KMFA, the Adviser, will manage the International Index Fund using advanced
statistical techniques to determine which stocks are to be purchased or sold to
replicate the EAFE Index to the extent feasible. Stocks are selected for
inclusion in the International Index Fund based on country of origin, market
capitalization, yield, volatility and industry sector. From time to time,
adjustments may be made in the International Index Fund's portfolio because of
changes in the composition of the EAFE Index, but such changes should be
infrequent. No attempt is made to manage the portfolio in the traditional sense
using economic, financial and market analysis.
The International Index Fund believes the indexing approach described above is
an effective method of
duplicating the performance of the EAFE Index. It is a reasonable expectation
that there will be a close correlation between the International Index Fund's
performance and that of the EAFE Index in both rising and falling markets. In
this connection, KMFA monitors the International Index Fund's performance
correlation to the EAFE Index and adjusts the portfolio to the extent necessary
to enable the International Index Fund to achieve a correlation to the EAFE
Index of at least 0.95, on an annual basis, without taking into account
International Index Fund operating expenses. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when the net asset value
of the International Index Fund, including the value of its dividend and capital
gains distributions, increases or decreases in exact proportion to changes in
the EAFE Index. The International Index Fund's ability to track the EAFE Index,
however, may be affected by, among other things, transaction costs, changes in
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2 Inclusion of a security in the EAFE Index in no way implies an opinion by
Morgan Stanley as to its attractiveness as an investment. The International
Index Fund is neither sponsored by nor affiliated with Morgan Stanley.
3
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either the composition of the EAFE Index or number of shares outstanding for the
components of the EAFE Index, and the timing and amount of shareholder purchases
and redemptions. The Board periodically reviews the International Index Fund's
investment performance before fees and expenses as compared to the EAFE Index.
The Board reviews discrepancies in performance for reasonableness, taking into
account the size of the International Index Fund's portfolio and net cash flows,
and any corrective actions deemed necessary will be taken to avert excessive
discrepancies in the future. There can, however, be no assurance that the
International Index Fund will achieve its investment objective.
The International Index Fund may utilize stock index options and stock index
futures contracts and options on stock index futures contracts to a limited
extent. Options, futures contracts, and options on futures contracts may be used
for several reasons: to maintain cash reserves while effectively remaining fully
invested, to facilitate trading, or to reduce transaction costs. The
International Index Fund may enter into options and futures contracts only to
the extent that total obligations under such contracts or transactions at the
time of purchase represent not more than 33 1/3% of the International Index
Fund's total assets. The International Index Fund may enter into index and
currency exchange rate swap agreements. The International Index Fund may engage
in foreign currency exchange transactions by buying or selling foreign
currencies, foreign currency options, or foreign currency futures and related
options, and entering into foreign currency forward contracts for the purpose of
more closely tracking the EAFE Index, enhancing portfolio returns or hedging
against foreign exchange risk arising from the International Index Fund's
investment or anticipated investment in securities denominated in foreign
currencies. See "Permissible Investments and Associated Risks -- Forward Foreign
Currency Contracts and Options on Foreign Currencies."
The International Index Fund will attempt to be fully invested at all times,
and in any event, at least 80% of its total assets will be invested in stocks or
derivative securities (options, futures, options on futures, or swaps).
The International Index Fund may also invest temporarily in certain short-term
obligations described below. Such securities may be used to invest uncommitted
cash balances or to maintain liquidity to meet shareholder redemptions. The
International Index Fund also may borrow money for temporary or emergency
purposes and purchase securities on a when-issued or delayed-delivery basis.
PERMISSIBLE INVESTMENTS AND ASSOCIATED RISKS.
In addition to the investments previously described, under normal market
conditions, the Stock Index Fund and the International Index Fund may each
invest up to 20% of their respective total assets in preferred stocks,
investment-grade corporate bonds and notes, warrants, and high quality
short-term debt obligations (including variable amount master demand notes),
bankers' acceptances, certificates of deposit, commercial paper, repurchase
agreements, reverse repurchase agreements, obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, and demand and time
deposits of domestic and foreign banks and savings and loan associations. To the
extent that a significant portion of the assets of a Fund are invested in such
securities, the Funds' tracking error relative to its benchmark index may
increase.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect a Fund's net asset value.
Because each Fund invests primarily in equity securities, which fluctuate in
value, the Funds' shares will fluctuate in value.
SHORT-TERM OBLIGATIONS. Under normal market conditions each of the Funds will
be predominantly invested in equity securities; however, there may be times
when, in the opinion of KMFA, market conditions warrant that, for temporary
defensive purposes, a Fund may hold more than 20% of its total assets in
short-term obligations. To the extent that a Fund's assets are so invested, they
will not be invested so as to meet its investment objective. The instruments may
include investment grade liquid debt securities such as commercial paper,
certificates of deposit, bankers' acceptances, repurchase agreements which
mature in less than seven days and United States Treasury bills. Bankers'
acceptances are instruments of United States banks which are drafts or bills of
exchange "accepted" by a bank or trust company as an obligation to pay on
maturity. Also see "Repurchase Agreements."
INVESTMENT GRADE SECURITIES. Each Fund may invest in obligations which are
rated at the time of purchase within the four highest rating categories assigned
by a nationally recognized statistical rating organization ("NRSRO") (investment
grade) or, if unrated, which KMFA determines to be of comparable quality.
Securities rated in the lowest investment grade category have
4
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speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the debt issuer
to make principal and interest payments than is the case with higher grade debt
securities. The applicable securities ratings are described in the Appendix to
the Statement of Additional Information.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. The
International Index Fund may engage in forward foreign currency exchange
contracts ("forward contracts"). Forward contracts are intended to minimize the
risk of loss to the Fund from adverse changes in the relationship between the
U.S. dollar and foreign currencies. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers. A forward contract may be used, for example, when the International
Index Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. dollar price of
the security. The International Index Fund also may purchase and write put and
call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired. Foreign
currency options may also be used to protect against potential losses in
positions denominated in one foreign currency against another foreign currency
in which assets are or may be invested. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge up to the amount of the premium received and the
International Index Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in the event of rate movements
adverse to the International Index Fund's position, the entire amount of the
premium plus related transaction costs may have to be forfeited. Options on
foreign currencies to be written or purchased by the International Index Fund
will be traded on U.S. and foreign exchanges or over-the-counter. Exchange-
traded options generally settle in cash, whereas options traded over-the-counter
may settle in cash or result in delivery of the underlying currency upon
exercise of the option.
OPTIONS. The Stock Index Fund may engage in writing covered call options from
time to time. A call option is a short-term contract which gives the purchaser
the right to buy from the seller of the option the underlying security at a
specified price during the term of the option. A call option on a stock index
gives the purchaser of the option, in return for the premium paid, the right to
receive from the seller cash equal to the difference between the closing price
of the index and the exercise price of the option. The Stock Index Fund will
write only covered call options. A "covered" call option means generally that so
long as a Fund is obligated as the writer of a call option, the Fund will either
own the underlying securities subject to the call, or hold a call at the same
exercise price, for the same exercise period, and on the same securities as the
call written. Options in which the Stock Index Fund may invest must be listed on
a national securities exchange and issued by the Options Clearing Corporation.
The International Index Fund may write covered call options and "covered" put
options. A put option is a short-term contract which gives the purchaser of the
put option, in return for a premium, the right to sell the underlying security
to the seller of the option at a specified price during the term of the option.
A "covered" put option means generally that so long as the Fund is obligated as
the writer of the put option, the Fund will maintain liquid assets with a value
equal to the exercise price in a segregated account with its custodian, or hold
a put on the same underlying security at an equal or greater exercise price.
Options in which the International Index Fund may invest may be traded on
exchanges and in the over-the-counter market.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when a Fund desires.
FUTURES CONTRACTS. Each Fund may enter into stock index futures contracts,
and the International Index Fund may enter into futures contracts based on
foreign currencies. In addition, each Fund may purchase or sell options on any
futures contracts in which they may invest and may engage in related closing
transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
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securities index. The Stock Index Fund will use stock index futures contracts as
a temporary substitute for taking positions in the securities that comprise the
S&P 500 Index. The International Index Fund also may use stock index futures
contracts and futures contracts based on foreign currencies as a temporary
substitute for taking positions in the securities that comprise the EAFE Index.
In addition, the International Index Fund may use futures contracts based on
foreign currencies for the purpose of hedging against changes in currency
exchange rates. A futures contract on a foreign currency is an agreement to buy
or sell a specified amount of a currency for a set price on a future date.
The acquisition of put and call options on futures contracts will give a Fund
the right (but not the obligation), for a specified price, to sell or purchase
the underlying futures contract, upon the exercise of the option, at any time
during the option period.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a fund's total assets (other than in
connection with bona fide hedging purposes), and the value of securities that
are the subject of such futures and options (both for receipt and delivery) may
not exceed 33 1/3% of the market value of a Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain each fund's
qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities or foreign currencies,
limiting the Fund's ability to hedge effectively against exchange rates and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.
SWAP AGREEMENTS. The International Index Fund may enter into index and
currency exchange rate swap agreements. Swap agreements are two-party contracts
entered into primarily by institutional investors for periods ranging from a few
weeks to more than one year. In a standard "swap" transaction, two parties agree
to exchange the returns (or differentials in rates of return) earned or realized
on particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested in a particular foreign currency, or in a "basket" of
securities representing a particular index.
The "notional amount" of the swap agreement is only a fictive basis on which
to calculate the obligations which the parties to a swap agreement have agreed
to exchange. Most swap agreements entered into by the International Index Fund
would calculate the obligations of the parties to the agreement on a "net
basis." Consequently, obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The International Index Fund's obligations
under a swap agreement will be accrued daily (offset against amounts owed) and
any accrued but unpaid net amounts owed to a swap counterparty will be covered
by the maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the portfolio.
Success in the use of swap agreements will depend on the Adviser's ability to
correctly predict whether certain markets reflected in the EAFE Index are likely
to produce greater returns than other markets. Because they are two-party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, there is a risk of loss
of the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Adviser will cause
the International Index Fund to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the International Index Fund's repurchase agreement
guidelines. Certain restrictions imposed by the Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"), may limit the International Index
Fund's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market and the laws relating to swaps, including potential government
regulation, could adversely affect the International Index Fund's ability to
terminate existing swap agreements or to realize amounts to be
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received under such agreements, or to enter into swap agreements or could have
tax consequences. See the Statement of Additional Information for additional
information regarding swap agreements.
ZERO COUPON BONDS. The Stock Index Fund is permitted to purchase both zero
coupon U.S. government securities and zero coupon corporate securities ("zero
coupon bonds"). Zero coupon bonds are purchased at a discount from the face
amount because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yields on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates. For this reason, zero coupon bonds are subject to
substantially greater price fluctuations during periods of changing market
interest rates than are comparable securities which pay interest periodically.
The amount of price fluctuation tends to increase as maturity of the security
increases.
RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Stock Index Fund may also purchase separately traded interest and principal
component parts of such obligations that are transferable through the Federal
book entry system, known as Separately Traded Registered Interest and Principal
Securities ("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These
instruments are issued by banks and brokerage firms and are created by
depositing Treasury notes and Treasury bonds into a special account at a
custodian bank; the custodian holds the interest and principal payments for the
benefit of the registered owners of the certificates or receipts. The custodian
arranges for the issuance of the certificates or receipts evidencing ownership
and maintains the register. Receipts include Treasury Receipts ("TRs"), Treasury
Investment Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury
Securities ("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
fluctuations in value due to changes in interest rates than interest-paying U.S.
Treasury obligations. The Stock Index Fund will limit its investment in such
instruments to 20% of its total assets.
SECURITIES LENDING. In order to generate additional income, each Fund may,
from time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The lending Fund must receive collateral
equal to 100% of the securities' value plus any interest due in the form of cash
or U.S. Government securities, which collateral must be marked to market daily
by KMFA. Should the market value of the loaned securities increase, the borrower
must furnish additional collateral to the Fund. During the time portfolio
securities are on loan, the borrower pays the Fund amounts equal to any
dividends or interest paid on such securities plus any interest negotiated
between the parties to the lending agreement. Loans are subject to termination
by the Funds or the borrower at any time. While the Funds do not have the right
to vote securities on loan, the Funds intend to terminate loans and regain the
right to vote if that is considered important with respect to the investment. A
Fund will only enter into loan arrangements with broker-dealers, banks or other
institutions which KMFA has determined are creditworthy under guidelines
established by the Board. Each Fund intends to limit its securities lending to
33 1/3% of its total assets.
WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
a fund agrees to purchase securities on a when-issued basis, such fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to reflect any increase in the
fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. The Funds
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with their respective investment
objectives and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, a Fund relies on the seller to complete the
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transaction; its failure to do so may cause the Fund to
miss a price or yield considered to be advantageous.
VARIABLE AND FLOATING RATE SECURITIES. The Stock Index Fund may purchase
variable and floating rate notes with ratings within the four highest rating
categories assigned by an NRSRO or, if unrated, which KMFA deems to be of
comparable quality. The interest rates on these securities may be reset daily,
weekly, quarterly, or some other reset period, and may be subject to a floor or
ceiling. There is a risk that the current interest rate on such obligations may
not accurately reflect existing market interest rates. There may be no active
secondary market with respect to a particular variable or floating rate note.
Variable and floating rate notes for which no readily available market exists
will be purchased in an amount which, together with other illiquid securities
held by the Fund, does not exceed 15% of the Fund's net assets unless such notes
are subject to a demand feature that will permit the Fund to receive payment of
the principal within seven days after demand therefor. These securities are
included among those which are sometimes referred to as "derivative securities".
REPURCHASE AGREEMENTS. Each Fund may engage in repurchase agreement
transactions. Under the terms of a repurchase agreement, a Fund acquires
securities from financial institutions or registered broker-dealers, subject to
the seller's agreement to repurchase such securities at a mutually agreed upon
date and price. The seller is required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). If the seller were to default on its repurchase obligation or
become insolvent, a Fund holding such obligation would suffer a loss to the
extent that the proceeds from a sale of the underlying portfolio securities were
less than the repurchase price, or to the extent that the disposition of such
securities by the Fund is delayed pending court action. Repurchase agreements
are considered by the staff of the Commission to be loans by a Fund.
REVERSE REPURCHASE AGREEMENTS. The Stock Index Fund and the International
Index Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements. Pursuant to such an agreement, a Fund sells portfolio
securities to financial institutions such as banks and broker-dealers, and
agrees to repurchase them at a mutually agreed-upon date and price. At the time
the Fund enters into a reverse repurchase agreement, it must place in a
segregated custodial account assets having a value equal to the repurchase price
(including accrued interest); the collateral will be marked to market on a daily
basis, and will be continuously monitored to ensure that such equivalent value
is maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered by the staff of the Commission to be borrowings by a
Fund under the Investment Company Act of 1940, as amended ("1940 Act").
INVESTMENT COMPANY SECURITIES. Each Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant to
an exemptive order issued by the Commission, the Funds may invest in the money
market funds of other investment companies advised by KMFA or its affiliates.
KMFA will waive its fee attributable to a Fund's assets invested in a money
market fund that it advises, and, to the extent required by the laws of any
state in which shares of a Fund are sold, KMFA will waive investment advisory
fees as to all assets invested in other investment companies. Because such other
investment companies employ an investment adviser, such investment by a Fund
will cause shareholders to bear duplicative fees, such as management fees, to
the extent advisory fees are not waived by KMFA.
PRIVATE PLACEMENT INVESTMENTS. Each Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933, as amended (the "1933 Act"). Section 4(2)
commercial paper is generally sold to institutional investors, such as the
Funds, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction or pursuant to registration under the 1933 Act. Section
4(2) commercial paper is normally resold to other institutional investors like
the Funds through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity. The
Funds believe that Section 4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for liquidity established by the
Directors are liquid. The Funds intend, therefore, to treat the restricted
securities which meet the criteria for liquidity estab-
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lished by the Directors, including Section 4(2) commercial paper, as determined
by the Funds' investment adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. This restriction states that a
Fund may not purchase a security if, as a result, more than 15% of its net
assets would be invested in illiquid securities.
The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the Securities Act of 1933.
Rule 144A is a nonexclusive safe-harbor for certain secondary market
transactions involving securities subject to restrictions on resale under
federal securities laws. Rule 144A provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market
for securities eligible for resale under Rule 144A. The Company believes that
the staff of the Commission has left the question of determining the liquidity
of all restricted securities to the Directors. The Directors consider the
following criteria, among others, in determining the liquidity of certain
restricted securities: the frequency of trades and quotes for the security; the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; dealer undertakings to make a market in the security;
and the nature of the security and the nature of the marketplace trades.
INVESTMENT RISKS
CERTAIN INVESTMENT TECHNIQUES. Certain investment management techniques which
the Funds may use, such as the purchase and sale of futures and options,
described above, may expose the Funds to special risks. These products may be
used to adjust the risk and return characteristics of a Fund's portfolio of
investments. These various products may increase or decrease exposure to
security prices, interest rates, or other factors that affect security values,
regardless of the issuer's credit risk. Regardless of whether the intent was to
decrease risk or increase return, if market conditions do not perform
consistently with expectations, use of these products may result in a loss. In
addition, losses may occur if counterparties involved in transactions do not
perform as promised. These products may expose the Fund to potentially greater
risk of loss than more traditional equity investments.
FOREIGN SECURITIES. The International Index Fund may invest in securities of
foreign issuers. Investors should consider carefully the substantial risks
involved in investing in securities issued by issuers in foreign nations, which
are in addition to the usual risks inherent in domestic investments.
Foreign investing involves the possibility of expropriation, nationalization
or confiscatory taxation, foreign taxation of income earned in the foreign
nation (including withholding taxes on interest and dividends) or other foreign
taxes imposed with respect to investments in the foreign nation, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability or diplomatic developments which could affect
investments in securities of issuers in those nations. In addition, in many
countries there is less publicly available information about issuers than is
available in reports about companies in the United States. Foreign companies are
not generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to U.S. companies. In many foreign countries, there is less
government supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States. Foreign
securities transactions may be subject to higher brokerage and custodial costs
than domestic securities transactions. In addition, the foreign securities
markets of many of the countries in which the Fund may invest may also be
smaller, less liquid and subject to greater price volatility than those in the
United States.
Many of the foreign securities in which the Fund invests will be denominated
in foreign currencies. Changes in foreign exchange rates will affect the value
of securities denominated or quoted in foreign currencies. Exchange rate
movements can be large and can endure for extended periods of time, affecting
either favorably or unfavorably the value of the Fund's assets. The Fund may,
however, engage in foreign currency transactions to protect itself against
fluctuations in currency exchange rates in relation to the U.S. dollar. Such
foreign currency transactions may include forward foreign currency contracts,
currency exchange transactions on a spot (i.e., cash) basis, put and call
options on foreign currencies, and foreign exchange futures contracts.
FORWARD FOREIGN CURRENCY CONTRACTS. The International Index Fund may engage
in forward foreign currency exchange contracts which are obligations to purchase
or sell a specific currency at a future date,
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which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. Such contracts do
not eliminate fluctuations in the underlying prices of the securities held by
the Fund. Although such contracts tend to reduce the risk of loss due to a
decline in the value of a currency that has been sold forward, and the risk of
loss due to an increase in the value of a currency that has been purchased
forward, at the same time they tend to limit any potential gain that might be
realized should the value of the currency sold forward increase or the value of
the currency purchased forward decrease.
Successful use of forward contracts depends on the Adviser's skill in
analyzing and predicting relative currency values. Forward contracts alter the
Fund's exposure to currency exchange rate activity and could result in losses to
the Fund if currencies do not perform as the Adviser anticipates. The Fund also
may incur significant costs when converting assets from one currency to another.
NOTE: The Statement of Additional Information contains information about
certain investment practices and portfolio securities of the Funds. The
Statement of Additional Information also contains information about investment
restrictions designed to reduce the risk of an investment in the Funds.
OTHER INFORMATION
The investment objectives of the Funds are not fundamental which means they
may be changed without a vote of the holders of a majority of a Fund's
outstanding shares (as defined in the Statement of Additional Information).
There can be no assurance that either Fund will achieve its investment
objective. The investment policies of the Stock Index Fund and the International
Index Fund may be changed without an affirmative vote of the holders of a
majority of shares of the respective Funds unless (1) a policy is expressly
stated to be a fundamental policy of a Fund or (2) a policy is expressly stated
to be changeable only by such majority vote.
In addition, investments in a Fund are not insured against loss of principal.
No single Fund should be considered, by itself, to provide a complete investment
program for any investor.
In order to permit the sale of a Fund's shares in certain states the Company
may, on behalf of a Fund, make commitments to a state or states that are more
restrictive than the investment policies and limitations described in the
Prospectus and in the Statement of Additional Information.
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MANAGEMENT OF THE FUNDS
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DIRECTORS AND OFFICERS
The Directors, in addition to reviewing the actions of the Funds' Adviser,
Administrator and Distributor, as set forth below, decide upon matters of
general policy. The Company's officers conduct and supervise the daily business
operations of the Funds. The names, addresses and business affiliations of the
directors and officers of the Company are set forth in the Statement of
Additional Information.
THE INVESTMENT ADVISER
The investment adviser to the Funds is KeyCorp Mutual Fund Advisers, Inc. The
Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings, Inc.
and is a wholly-owned subsidiary of KeyBank National Association, a wholly-owned
subsidiary of KeyCorp, one of the largest financial services holding companies
in the United States. KeyCorp's principal offices are located at 127 Public
Square, Cleveland, Ohio 44114.
The Adviser and its affiliates manage approximately $48 billion for numerous
clients including large corporate and public retirement plans, Taft-Hartley
plans, foundations and endowments, high net worth individuals and mutual funds.
The Adviser's principal offices are located at 127 Public Square, Cleveland,
Ohio 44114. KMFA is newly formed, but many of its professionals have, in their
capacity as employees of other subsidiaries of KeyCorp, managed mutual funds.
KMFA was organized as an Ohio corporation on July 27, 1995, and is registered as
an investment adviser under the Investment Adviser's Act of 1940, as amended.
Pursuant to an Investment Advisory Agreement, the Adviser continually conducts
investment research and supervision for the Funds and is responsible for the
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purchase and sale of the Funds' investments, subject to the general supervision
of the Board.
The Investment Advisory Agreement also provides that KMFA may delegate a
portion of its responsibilities to a subadviser. In addition, the Investment
Advisory Agreement provides that KMFA may render services through its own
employees or through the employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Funds and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons that is managed by authorized officers of KMFA.
As compensation for the services rendered and related expenses borne by the
Adviser under the Investment Advisory Agreement, the Stock Index Fund will pay
the Adviser a fee, computed daily and payable monthly, equal to .10% per annum
of the Fund's average daily net assets. The Investment Advisory Agreement
further provides that the International Index Fund will pay the Adviser a fee,
computed daily and payable monthly, equal to .50% per annum of its average daily
net assets. KMFA may periodically waive all or a portion of its advisory fees.
The Adviser is obligated to reimburse the Funds in the event the Funds' expenses
exceed certain prescribed limits. See "Expenses, Distribution Plan and
Shareholder Servicing Plan".
THE ADMINISTRATOR, DISTRIBUTOR
AND FUND ACCOUNTANT
BISYS Fund Services serves as the administrator for the Funds ("BISYS" or the
"Administrator"). The Administrator generally assists in all aspects of the
Funds' administration and operation. Pursuant to the Administration Agreement
between BISYS and the Company, for expenses incurred and services provided as
Administrator, BISYS receives a fee from each Fund, computed daily and paid
monthly, at an annual rate of .15% of each Fund's average daily net assets. The
Administrator may periodically waive all or a portion of its administration fee
with respect to a Fund.
BISYS also serves as the independent underwriter and distributor of the shares
of the Funds ("BISYS" or the "Distributor"). Pursuant to the Distribution
Agreement between the Company and BISYS, BISYS is obligated to use its best
efforts to sell shares of the Funds. In addition, under the Distribution
Agreement, BISYS may enter into agreements with selected dealers for the
distribution of shares.
KMFA neither participates in nor is responsible for the underwriting of Fund
shares.
BISYS Fund Services, Inc. ("BISYS Inc.") provides the Funds with certain
accounting services pursuant to a Fund Accounting Agreement with the Company and
receives a fee for such services.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Funds. The maximum cash
compensation payable by the Distributor is 4.00% of the net asset value of the
shares of a Fund. In addition, the Distributor will, from time to time and at
its own expense, provide compensation, including financial assistance, to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Key Mutual Funds and/or other dealer-sponsored special events including payment
for travel expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Funds' shares to
qualify for this compensation if prohibited by the laws of any state or any
self-regulatory organization, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by the Fund or
its shareholders.
Morrison & Foerster LLP, counsel to the Company, has advised the Company that
KMFA may perform the services contemplated by the Investment Advisory Agreement
without violation of the Glass-Steagall Act or other applicable laws or
regulations. Such counsel has pointed out, however, that there are no
controlling judicial or administrative interpretations or decisions and that
future judicial or administrative interpretations of, or decisions relating to,
present federal or state statutes, including the Glass-Steagall Act, and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as future changes in such statutes,
regulations and judicial and administrative decisions or interpretations, could
prevent KMFA from continuing to perform, in whole or in part, such services. If
KMFA were prohib-
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ited from performing any of such services, it is
expected that the Board of Directors of the Company would recommend to each
Fund's shareholders that they approve a new investment advisory agreement with
another entity or entities qualified to perform such services.
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EXPENSES, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN
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Except as set forth above under "Management of the Funds" and as set forth
below, each of the Funds bears the expenses directly applicable to it and a
portion of the general administrative expenses, applicable to all the Funds of
Key Mutual Funds, which may be allocated among the Funds in a manner believed to
be fair and equitable. Expenses that are directly applicable to a Fund include
expenses of portfolio transactions, shareholder servicing costs, expenses of
registering the shares under Federal and state securities laws, pricing costs
(including the daily calculation of net asset value), interest, certain taxes,
legal and auditing expenses directly incurred by the Fund, and charges of KMFA,
BISYS, BISYS Inc., the Custodian, the Transfer Agent, the Shareholder Servicing
Agent and the Distributor. General expenses which would be allocated include
directors' fees, general corporate legal and auditing expenses, state franchise
taxes, costs of printing proxies, shareholder reports and prospectuses sent to
existing shareholders, trade association fees, Securities and Exchange
Commission fees, and accounting costs.
The Company has adopted a Distribution Plan (the "Distribution Plan") for the
International Index Fund pursuant to Rule 12b-1 under the 1940 Act. No separate
payments are authorized to be made by the International Index Fund under the
Plan. Rather, the Plan provides that to the extent any portion of the fees
payable under the Shareholder Servicing Plan or any Shareholder Servicing
Agreement (described below) is deemed to be for services primarily intended to
result in the sale of Fund shares, such fees are deemed approved and may be paid
pursuant to the Plan and in accordance with Rule 12b-1.
The Company has adopted a shareholder servicing plan for the International
Index Fund. In accordance with the Shareholder Servicing Plan, the Company, on
behalf of the International Index Fund, may enter into shareholder service
agreements under which the International Index Fund may pay fees of up to 0.25%
of its average daily net assets for fees incurred in connection with the
personal service and the maintenance of accounts holding the shares of the
International Index Fund. Such agreements are entered between the Company, on
behalf of the International Index Fund, and various shareholder servicing
agents, including the Distributor, Key Trust Company of Ohio, N.A. and its
affiliates, and other financial institutions and securities brokers (each a
"Shareholder Servicing Agent"). Each Shareholder Servicing Agent generally will
provide support services to shareholders by establishing and maintaining
accounts and records, processing dividend and distribution payments, providing
account information, arranging for bank wires, responding to routine inquiries,
forwarding shareholder communications, assisting in the processing of purchase,
exchange and redemption requests, and assisting shareholders in changing
dividend options, account designations and addresses. Shareholder Servicing
Agents may periodically waive all or a portion of their respective shareholder
servicing fees with respect to the International Index Fund.
The Adviser has agreed that if in any fiscal year the sum of expenses exceeds
the limits set by applicable regulations of state securities commissions, the
amounts payable by the Funds to KMFA for the advisory fee for that year shall be
reduced. For further information see "Expenses, Distribution Plan and
Shareholder Servicing Plan" in the Statement of Additional Information.
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DETERMINATION OF NET ASSET VALUE
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The net asset value of the shares of the Stock Index Fund and the
International Index Fund are determined as of the close of the New York Stock
Exchange ("NYSE"), which is normally at 4:00 P.M. Eastern time, each Business
Day (the "Valuation Time"). A "Business Day" is a day on which the NYSE is open
for trading. The NYSE will not be open in observance of the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
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In general, a Fund's net asset value is equal to the value of its securities,
cash and other assets, less liabilities, divided by the number of shares
outstanding. Securities traded on securities exchanges or the NASDAQ national
market are valued at the last sales price on the exchange where the security is
primarily traded or, lacking any sales, at the mean between the most recent bid
and asked quotation. Securities traded over-the-counter are valued at the mean
between the most recent bid and asked price. Securities for which quotations are
not readily available and any other assets are valued at fair value as
determined in good faith by the Board of Directors. The Funds value short-term
debt instruments at market value except short-term debt instruments having a
maturity of less than 60 days which are valued at amortized cost.
Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
completed each day at various times prior to the close of the NYSE. The values
of such securities used in computing the net asset value of the shares of the
Funds are determined as of such times. Foreign currency exchange rates also are
generally determined prior to the close of the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the NYSE which
will not be reflected in the computation of the Funds' net asset values. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Board.
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PURCHASING SHARES
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Shares may be purchased directly or through an Investment Professional of a
securities broker or other financial institution that has entered into selling
or servicing agreements with Key Mutual Funds or BISYS. An Investment
Professional is a salesperson, financial planner, investment adviser or trust
officer who provides you with information regarding the investment of your
assets. Shares are also available to clients of bank trust departments who have
qualified trust accounts. The minimum investment is $500 ($250 for Individual
Retirement Accounts) for the initial purchase and $25 thereafter. Accounts set
up through a bank trust department or an Investment Professional may be subject
to different minimums, features, requirements and fees. The Investment
Professional will provide this information to you.
Shares of the Funds are sold at the net asset value per share (see
"Determination of Net Asset Value") next determined after receipt and acceptance
by State Street Bank and Trust Company, the Funds' transfer agent (the "Transfer
Agent"), of an order to purchase shares. There are no sales commissions.
Purchases of shares will be effected only on a Business Day (as defined in
"Determination of Net Asset Value") of Key Mutual Funds. An order received and
accepted prior to the Valuation Time on any Business Day will be executed at the
net asset value determined as of the next Valuation Time on that Business Day.
An order received and/or accepted after the Valuation Time on any Business Day
will be executed at the net asset value determined as of the next Valuation Time
on the next Business Day of Key Mutual Funds. Generally, shares of the Funds
begin accruing income dividends on the day they are purchased.
INVESTING DIRECTLY
BY MAIL:
You may purchase shares by completing and signing an Account Application
(initial purchase only) and mailing it, together with a check (or other
negotiable bank draft or money order) in at least the minimum investment
requirement to:
Key Mutual Funds
P.O. Box 8527
Boston, MA 02266-8527
Subsequent purchases may be made in the same manner.
BY TELEPHONE:
Subsequent purchases of shares of the Funds may be made by telephone if you
have checked the Telephone Authorization box and supplied the necessary bank
information on the Account Application. The purchase amount will be transferred
between the bank account designated and your fund account via Automated Clearing
House ("ACH"). Only a bank account maintained in a domestic financial
institution which is an ACH member may be so designated. The Fund may modify or
terminate the telephone and/or ACH privilege at any time or charge a service fee
upon notice to
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<PAGE> 19
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shareholders. No such fee is currently contemplated. If
the designated bank account does not contain sufficient at the time your
order is processed, the order may be canceled, and you could be held liable for
resulting fees and/or losses.
This service requires approximately 15 days to establish. Therefore, it may
not be applicable to request your initial purchase utilizing this method.
BY WIRE:
If an Account Application has been previously received by the Transfer Agent,
you may also purchase shares by wiring funds to: State Street Bank and Trust
Co., ABA #01100028, For Credit to DDA Account #[9905-201-1], For Further Credit
to Account #(insert your account number, name and control number assigned by the
Transfer Agent). The Transfer Agent does not charge a wire fee. PRIOR TO WIRING
ANY FUNDS AND IN ORDER TO ENSURE THAT WIRE ORDERS ARE INVESTED PROMPTLY, YOU
MUST CALL THE TRANSFER AGENT AT 800-539-3863.
INVESTING THROUGH INVESTMENT PROFESSIONALS OR A BANK TRUST DEPARTMENT
Shares may be purchased by investors who designate an Investment Professional
or a bank trust department through procedures established by the Transfer Agent
in connection with requirements of qualified accounts maintained by or on behalf
of certain persons by Investment Professionals and bank trust departments. With
respect to such purchases, it is the responsibility of the Investment
Professional or a bank trust department to transmit purchase orders to the
Transfer Agent and to deliver federal funds for purchase on a timely basis in
order to receive that day's price. Your Investment Professional or bank trust
department may charge additional fees in connection with purchases and
redemptions of shares. Contact your Investment Professional or trust
representative for complete information.
The services rendered by your bank trust department, including affiliates of
KMFA, in the management of its accounts are not duplicative of any of the
services for which KMFA is compensated. The additional fees paid by clients of
bank trust departments, their affiliates, or an Investment Professional should
be considered in calculating the net yield on investment in a Fund, although
such charges do not affect the Fund's dividends or distributions.
ADDITIONAL INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. All purchases made by check should be in U.S.
dollars and made payable to Key Mutual Funds, or in the case of a retirement
account, the custodian or trustee. Third party checks will not be accepted. When
purchases are made by check or periodic account investment, redemptions will not
be allowed until the investment being redeemed has been in the account for 15
calendar days. If you make a purchase with more than one check, each check must
have a value of at least $25, and the minimum investment requirement still
applies. Key Mutual Funds and its servicing agents reserve the right to limit
the number of checks processed at one time. If your check does not clear, your
purchase may be canceled and you could be liable for any losses and/or fees
incurred. Payment for purchase is expected at the time of the order. If payment
is not received within three business days of the order, the order may be
canceled, and you could be held liable for resulting fees and/or losses.
You may initiate most transactions by telephone through your Investment
Professional, or bank trust department. Subsequent investments by telephone may
be made directly. Note that Key Mutual Funds and its agents will not be
responsible for any losses resulting from unauthorized transactions if they
follow reasonable procedures designed to verify the identity of the caller.
These procedures may include requesting additional information, or using
personalized security codes. Your Investment Professional or the Transfer Agent
may also record calls, and you should verify the accuracy of your confirmation
statements immediately after you receive them. The Transfer Agent may reject any
purchase order for the Funds' shares in its sole discretion.
You will receive a monthly statement reflecting all transactions that affect
the share balance or the registration of your Fund account. You will receive a
confirmation after every transaction that affected the share balance of your
Fund account, except for dividend reinvestment, systematic investment and
systematic withdrawal transactions. These transactions will be detailed on your
Fund account statement. The Funds do not issue stock certificates for the
shares.
Although the Funds continuously offer their shares for sale, each Fund
reserves the right to reject any purchase request.
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<PAGE> 20
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THE SYSTEMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
Under the Systematic Investment Plan, you may make regular systematic monthly
purchases of shares of a Fund through automatic deductions from your bank
account(s). Upon obtaining your authorization, Key Mutual Funds' Transfer Agent
will deduct the specified amount from your designated bank account, which will
then be automatically invested in shares of the relevant Fund at the net asset
value next determined. Bank accounts will be debited on any day from the 1st
through the 28th of each month, as selected by the shareholder. You must first
meet a Fund's initial investment requirement of $500 and are subject to a
minimum subsequent investment of $25. For officers, trustees, directors and
employees, including retired directors and employees, of KMFA, Spears, Benzak,
Salomon & Farrell, Inc., Key Mutual Funds, BISYS, KeyCorp and its affiliates,
(and family members of each of the foregoing) who participate in the Systematic
Investment Plan, there is no minimum initial investment required.
To participate in the Systematic Investment Plan, complete the appropriate
section of the account application and attach a voided personal check with the
bank's magnetic ink coding number across the front. If the bank account is
jointly owned, all owners must sign. Account applications can be obtained by
calling the Transfer Agent at 800-539-3863. To change or discontinue existing
Systematic Investment Plan instructions, submit a written request to or call the
Transfer Agent at 800-539-3863.
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THE SYSTEMATIC WITHDRAWAL PLAN
- --------------------------------------------------------------------------------
The Systematic Withdrawal Plan enables shareholders to make regular monthly,
quarterly, semi-annual or annual redemptions of shares. With your authorization,
the Transfer Agent will automatically redeem shares at the net asset value on
the date of the withdrawal and have the proceeds transferred according to your
written instructions. Fund accounts will be debited on any day from the 1st
through the 28th of each month.
You can have checks sent from your Fund account directly to you, to your bank
account or to a third person. If you opt to have the proceeds sent to your bank
checking account, a voided personal check with the bank's magnetic coding number
across the front must be attached to the account application. The proceeds will
be transferred between your fund account and the bank account via ACH. If the
bank checking account is jointly owned, all owners must sign the application.
To participate in the Systematic Withdrawal Plan, the required minimum balance
is $5,000 per Fund. The required minimum withdrawal is $25.
To participate in the Systematic Withdrawal Plan, call 800-539-3863 for more
information. Systematic Withdrawal Plan payments are drawn from share
redemptions. If Systematic Withdrawal Plan redemptions exceed income and capital
gain dividend distributions earned on Fund shares, the Fund account may
eventually be exhausted. Your account cannot be closed automatically by
depleting the assets in your Systematic Withdrawal Plan. Purchases of additional
shares concurrent with withdrawals may be disadvantageous to certain
shareholders because of tax liabilities. The Systematic Withdrawal Plan is not
necessarily appropriate for use in conjunction with the Systematic Investment
Plan. To change or terminate Systematic Withdrawal Plan instructions, submit a
written request to, or call the Transfer Agent at 800-539-3863. The systematic
Withdrawal Plan may be modified or terminated at any time without notice.
If the amount of the automatic withdrawal exceeds the income accrued for the
period, the principal balance invested will be reduced and shares will be
redeemed.
15
<PAGE> 21
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REDEEMING SHARES
- --------------------------------------------------------------------------------
Shares may ordinarily be redeemed by mail or telephone. However, all or part
of your shares may be redeemed in accordance with instructions and limitations
pertaining to your account with an Investment Professional. For example, if you
have agreed with an Investment Professional to maintain a minimum balance in
your account with the Investment Professional, and the balance in that account
falls below that minimum, you may be obligated to redeem, or the Investment
Professional may redeem for you and on your behalf, all or part of your shares
to the extent necessary to maintain the required minimum balance.
BY MAIL:
In order to redeem shares by mail, send a written request to:
Key Mutual Funds
P.O. Box 8527
Boston, MA 02266-8527
The Transfer Agent may require a signature guarantee by an eligible guarantor
institution. A signature guarantee is designed to protect you, the Fund, and
your and the Fund's agents from fraud. A written redemption request requires a
signature guarantee for redemptions of more than $10,000 worth of shares; if
your Fund account registration has changed within the last 60 days; if the check
is not being mailed to the address on your account; if the check is not being
made out to the account owner; or if the redemption proceeds are being
transferred to another account within Key Mutual Funds or The Victory Portfolios
with a different registration. The following institutions should be able to
provide you with a signature guarantee: banks, brokers, dealers, credit unions
(if authorized under state law), securities exchanges and associations, clearing
agencies, and savings associations. A signature guarantee may not be provided by
a notary public. The Transfer Agent reserves the right to reject any signature
guarantee if (1) it has reason to believe that the signature is not genuine, (2)
it has reason to believe that the transaction would otherwise be improper, or
(3) the guarantor institution is a broker or dealer that is neither a member of
a clearing corporation nor maintains net capital of at least $100,000.
BY TELEPHONE:
Arrangements for the payment of redemption proceeds may be made by telephone
if you have checked the Telephone Authorization box and supplied the necessary
bank information on the Fund's Account Application. Proceeds may be wired to a
domestic financial institution, sent via ACH, mailed to the address of record,
or mailed to a previously designated alternate address. If you select the ACH
method, only a bank account maintained in a domestic financial institution which
is an ACH member may be so designated.
It is not necessary to confirm telephone redemption requests in writing. If
you did not originally select the telephone authorization privilege, you must
provide written instructions as well as a signature guarantee to the Transfer
Agent to add this feature. Neither Key Mutual Funds nor its service agents will
be liable for any loss, damages, expense or cost arising out of any telephone
redemption effected in accordance with Key Mutual Funds' telephone redemption
procedures and pursuant to instructions reasonably believed to be genuine. Key
Mutual Funds will employ procedures designed to provide reasonable assurance
that instructions by telephone are genuine; if these procedures are not
followed, Key Mutual Funds or its service agents may be liable for any losses
due to unauthorized or fraudulent instructions. These procedures include, but
are not limited to, recording of phone conversations, sending confirmations to
shareholders within 72 hours of the telephone transaction, verification of
account name and account number or tax identification number, and sending
redemption proceeds to the address of record, a previously designated bank
account or alternate address. For telephone redemptions, call the Transfer Agent
at 800-539-3863. If you are unable to reach the Transfer Agent by telephone (for
example, during time of unusual market activity), consider placing your order by
mail directly to the Transfer Agent.
ADDITIONAL REDEMPTION INFORMATION
Redemption orders are effected at the net asset value per share next
determined after the shares are properly tendered for redemption, as described
above. The proceeds paid upon redemption of shares in a Fund may be more or less
than the amount invested. Payment to shareholders for shares redeemed will be
made within
16
<PAGE> 22
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three business days after receipt by the Transfer Agent of the request for
redemption.
At various times, Key Mutual Funds may be requested to redeem shares of a Fund
for which good payment has not yet been received. In such circumstances, Key
Mutual Funds may delay the forwarding of proceeds for 15 days or more without
interest to the shareholder until payment has been collected for the purchase of
such shares. Key Mutual Funds intend to pay cash for all shares redeemed, but
under unusual circumstances, Key Mutual Funds may make payment wholly or partly
in portfolio securities at their then-current market value equal to the
redemption price. In such cases, an investor may incur brokerage costs in
converting such securities to cash.
Due to the relatively high cost of handling small investments, Key Mutual
Funds reserves the right to redeem, at net asset value, shares in your account
if, because of redemptions of shares by you or on your behalf, your account with
respect to a Fund has a value of less than $500 (except with respect to
officers, trustees, directors and employees, including retired directors and
employees, of KMFA, Spears, Benzak, Salomon & Farrell, Inc., Key Mutual Funds,
KeyCorp and its affiliates, (and family members of each of the foregoing)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). IRA and Keogh accounts are exempt from this mandatory
redemption. Before Key Mutual Funds exercises the right to redeem such shares
and to send the proceeds to you, you will be given notice that the value of the
shares in your account is less than the minimum amount and will be allowed 60
days to make an additional investment in the Fund in an amount which will
increase the value of the account to at least $500, if applicable.
Key Mutual Funds reserves the right to reject any order for the purchase of
its shares in whole or in part.
The Funds may suspend the right of redemption during any period when (a)
trading on the New York Stock Exchange is restricted as determined by the
Commission or such Exchange is closed, other than customary weekend and holiday
closings; (b) the Commission has by order permitted such suspension or
postponement; or (c) an emergency, as defined by rules of the Commission, exists
making disposal of portfolio securities or determination of the value of assets
of the Funds not reasonably practicable. In case of a suspension of the right of
redemption, the offer of redemption may be withdrawn by the shareholder, or
payment will be received at the net asset value next determined after the
suspension has been terminated.
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EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Shares of a Fund may be exchanged for shares of any Fund of Key Mutual Funds.
You may also exchange shares of a Fund for shares of funds in the Victory Group
(each a "Victory Fund") that are not subject to either a front-end or a
contingent deferred sales charge. In addition, shareholders of Key Mutual Funds
who qualify for a waiver of a front-end sales charge otherwise applicable to a
purchase of shares of a Victory Fund may exchange their shares of a Fund of Key
Mutual Funds for shares of a Victory Fund. Shares of a Fund of Key Mutual Funds
may also be exchanged for Key Class shares of a Victory Fund, when and if such
shares become available. Exchanges will be made on the basis of the relative net
asset value of the shares of the respective Funds. To exchange shares, several
conditions must be met:
1. Shares of the fund selected for exchange must be available for sale in your
state of residence.
2. The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
3. You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any Business Day.
4. You must meet the minimum purchase requirements for the fund you purchase
by exchange.
5. The registration and tax identification numbers of the two accounts must be
identical.
6. BEFORE EXCHANGING, OBTAIN AND READ THE PROSPECTUS FOR THE FUND YOU WISH TO
PURCHASE BY EXCHANGE.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to Valuation Time on
any Business Day. (See "Determination of Net Asset Value.")
Exchanges of shares involve a redemption of the shares exchanged and a
purchase of shares acquired.
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<PAGE> 23
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There are certain exchange policies you should be aware of:
- Shares are normally redeemed from one fund and issued from the other fund in
the exchange transaction on the same Business Day on which the Transfer
Agent receives an exchange request by Valuation Time (normally 4:00 p.m.
Eastern time for non-money market funds) that is in proper form, but either
fund may delay the issuance of shares of the fund into which you are
exchanging if it determines it would be disadvantaged by a same-day transfer
of the proceeds to buy shares. For example, the receipt of multiple exchange
requests from a dealer in a "market-timing" strategy might create excessive
turnover in the Fund's portfolio and associated expenses disadvantageous to
the Fund.
- Because excessive trading can hurt fund performance and harm shareholders,
the Funds reserve the right to refuse any exchange request that will impede
a Fund's ability to invest effectively or otherwise have the potential to
disadvantage the Fund, or to refuse multiple exchange requests submitted by
a shareholder or dealer.
- Key Mutual Funds may amend, suspend or terminate the exchange privilege at
any time upon 60 days' written notice to shareholders.
- If the Transfer Agent cannot exchange all the shares you request because of
a restriction cited above, only the shares eligible for exchange will be
exchanged.
- Each exchange may produce a gain or loss for tax purposes.
See "Redeeming Shares -- By Telephone" for a discussion of certain limitations
on the liability of the Funds and the Transfer Agent in connection with
unauthorized telephone transactions.
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INVESTING FOR RETIREMENT
- --------------------------------------------------------------------------------
You may wish to invest in Key Mutual Funds in connection with Individual
Retirement Accounts (IRAs) and other retirement plans such as Simplified
Employee Pension Plans (SEP/IRA), Salary Reduction Simplified Employee Pensions
Plans (SAR-SEP/IRA), 401(k) Plans, and 403(b) Plans. For more information about
investing in Key Mutual Funds through tax-deferred accounts, call 800-539-3863.
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Each Fund distributes to shareholders substantially all of its net investment
income and any net realized taxable capital gains resulting from sales of
portfolio securities.
The Stock Index Fund and the International Index Fund each declare and pay
dividends, equal to their net investment income, each calendar quarter. Realized
capital gains, if any, are paid annually.
DISTRIBUTION OPTIONS
When you fill out your Account Application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any, will
be automatically reinvested in additional shares of the respective Fund. Income
and capital gain dividends will be reinvested at the net asset value of the Fund
as of the day after the record date. If you do not indicate a choice on your
Account Application, you will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7 days after
the dividend payment date which may be more than 7 days after the dividend
record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the respective Fund at the
net asset value as of the day after the record date, and have your income
dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in shares of
another Key Mutual Fund. Shares will be purchased at the NAV as of the day after
the record date. Dividend
18
<PAGE> 24
distributions can be directed only to an existing account with a registration
that is identical to that of your respective Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital gain
dividends, or only your income dividends, automatically transferred to your bank
checking or savings account. The amount will be determined on the dividend
record date and will normally be transferred to your account within 7 days of
the dividend record date. Dividend distributions can be directed only to an
existing account with a registration that is identical to that of your
respective Fund account. Please call or write the Transfer Agent to learn more
about this dividend distribution option.
Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Key Mutual Funds, P.O. Box 8527,
Boston, MA 02266-8527, or by calling the Transfer Agent at 800-539-3863, and
will become effective with respect to dividends having record dates after
receipt of the Account Application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
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FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
Each Fund has qualified and intends to continue to qualify under Subchapter M
of the Internal Revenue Code as a regulated investment company so long as it is
in the best interest of its shareholders to do so. This qualification relieves
the Funds (but not their shareholders) from paying Federal income tax on income
which is currently distributed to shareholders, assuming certain distribution
requirements are met; it also permits net capital gains of the Funds (i.e., the
excess of net long-term capital gain over net short-term capital loss) to be
treated as long-term capital gains of the shareholders, regardless of how long
shares in the Funds are held. Under the Tax Reform Act of 1986, a nondeductible
4% excise tax may be imposed on the Funds to the extent the Funds do not meet
certain distribution requirements by the end of each calendar year.
Dividend distributions to shareholders from net investment income or net
short-term capital gain (i.e., the excess of short-term capital gain over net
long-term capital loss) are treated as ordinary income for Federal income tax
purposes whether such distributions are taken in cash or reinvested in
additional shares.
Dividends paid by the Stock Index Fund and the International Index Fund may be
eligible for the dividends received deduction for corporate shareholders to the
extent that the Funds' income is derived from certain dividends received from
domestic corporations. In order to qualify for the dividends received deduction,
a corporate shareholder of a Fund must hold the Fund shares paying the dividend
upon which such deduction is based for at least 46 days.
Distributions of net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) of the Funds are taxable to shareholders
as long-term capital gains whether such distributions are taken in cash or
reinvested in additional shares, and regardless of how long shares of the Funds
have been held. Capital gain distributions are not eligible for the dividends
received deduction.
Dividends and capital gains distributions have the effect of reducing the NAV
per share by the amount distributed. Although a distribution paid to you on
newly issued or acquired Fund shares shortly after your purchase would
represent, in substance, a return of your capital, the distribution would
consist of net investment income, and therefore be taxable to you.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year.
Notwithstanding the above, any loss realized by a shareholder upon the sale of
shares in a Fund held six months or less will be treated as long-term capital
loss to the extent of any long-term capital gain distributions received by the
shareholder.
The Company will inform you of the amount and nature of dividends and capital
gains distributions in January of the following year. You should keep all
statements you receive to assist you in your record keeping. The Company is
required to withhold, subject to certain exemptions, at the rate of 31% on
dividends paid and redemption proceeds (and deemed proceeds from exchanges) paid
or credited to individual shareholders if a correct Taxpayer Identification
Number
19
<PAGE> 25
("TIN"), certified when required, is not on file with the Company or Transfer
Agent. In connection with this withholding requirement, you will be asked to
certify on your account application that the social security number or TIN you
provide is correct and that you are not subject to 31% backup withholding for
previous under-reporting to the Internal Revenue Service ("IRS"). Moreover,
failure to furnish a certified TIN to the Company could subject an investor to a
$50 penalty imposed by the IRS.
Dividends and distributions are generally subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state or local taxes.
For additional tax-related information, see "Federal Income Taxes" in the
Statement of Additional Information.
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PERFORMANCE
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From time to time a Fund may advertise the "yield" and "total return" of its
shares. Yield and total return figures are based on historical earnings and are
not intended to indicate future performance. The yield on shares of a Fund will
be calculated by dividing the net investment income per share during a recent
30-day (or one month) period by the maximum public offering price per share of
the Fund on the last day of that period. The results are compounded on a bond
equivalent (semiannual) basis and then annualized. The "total return" of shares
may be calculated on an average annual total return basis or an aggregate total
return basis. Average annual total return refers to the average annual
compounded rates of return on shares over one-, five-, and ten-year periods or
the life of the Fund (as stated in the advertisement) that would equate an
initial amount invested at the beginning of the stated period to the ending
redeemable value of the investment, assuming the reinvestment of all dividend
and capital gains distributions. Aggregate total return reflects the total
percentage change in the value of the investment over the measuring period,
again assuming the reinvestment of all dividends and capital gains
distributions. Total return may also be presented for other periods.
Investment performance, which will vary, is based on many factors, including
market conditions, the composition of the Fund's portfolio and such Fund's
operating expenses. Investment performance also often reflects the risks
associated with a Fund's investment objective and policies. These factors should
be considered when comparing a Fund's investment results to those of other
mutual funds and other investment vehicles. Since yields fluctuate, yield data
cannot necessarily be used to compare an investment in the Funds with bank
deposits, savings accounts and similar investment alternatives which often
provide for an agreed-upon or guaranteed fixed yield for a stated period of
time. Each Fund's annual report will contain additional performance information
and will be available without charge upon request.
See "Performance Information" in the Statement of Additional Information for
further information.
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DESCRIPTION OF COMMON STOCK
- --------------------------------------------------------------------------------
The Company is an open-end, diversified management investment company,
incorporated under Maryland law on May 26, 1983. Pursuant to the Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series of shares. Pursuant to such authority, the Board of Directors has
authorized the issuance of six series of shares, each representing shares in one
of six separate Funds: Stock Index Fund (1 billion authorized shares);
International Index Fund (1 billion authorized shares); SBSF Fund (25 million
authorized shares); SBSF Convertible Securities Fund (25 million authorized
shares); SBSF Capital Growth Fund (25 million authorized shares) and SBSF Money
Market Fund (175 million authorized shares). The par value of the shares of each
of the Funds is $.01 per share. The assets of each Fund are segregated and
separately managed and a shareholder's interest is in the assets and earnings of
the Fund in which he or she holds shares. Each share of a Fund represents an
equal proportionate interest in that portfolio with each other share of the same
series. In the event of the liquidation or dissolution of the Com-
20
<PAGE> 26
pany, shares of a Fund are entitled to receive the assets belonging to that
portfolio that are available for distribution and a proportionate distribution,
based upon the relative net assets of the respective Funds, of any general
assets not belonging to any particular portfolio that are available for
distribution. Shareholders are entitled to one vote for each share held and will
vote in the aggregate and not by portfolio except as otherwise required by the
1940 Act or Maryland law. It is anticipated that the Company will not hold
annual shareholder meetings except when required to do so by the 1940 Act or
Maryland law.
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CUSTODIAN, TRANSFER AGENT, SHAREHOLDER SERVICING AGENT, AND DIVIDEND DISBURSING
AGENT
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Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio 44114, is
the Custodian for the Funds' cash and securities. Key Trust Company of Ohio,
N.A. does not assist in any way, and is not responsible for, investment
decisions involving assets of the Funds. Key Trust Company of Ohio, N.A. is a
subsidiary of KeyCorp and an affiliate of the Adviser and receives compensation
from the Funds for the services it performs as custodian.
State Street Bank and Trust Company, 225 Franklin Street, Boston, Mass.
02110-2875 is Transfer Agent for the shares of the Funds and receives a fee for
its services. Boston Financial Data Services acts as dividend disbursing agent
and shareholder servicing agent for the Funds, and receives a fee for these
services. Their principal business address is Two Heritage Drive, Quincy, Mass.
02171.
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SHAREHOLDER REPORTS
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The Funds will prepare and send to shareholders unaudited semi-annual and
audited annual reports which will include a list of investment securities held
by each of the Funds.
In addition, shareholders of the Funds will receive, monthly, a cumulative
account statement for the calendar year.
The Fund intends to eliminate duplicate mailings of Reports to an address at
which more than one shareholder of record with the same last name has indicated
that mail is to be delivered. Shareholders may receive additional copies of any
Report at no cost by writing to the Fund at the address listed below or by
calling 800-539-3863.
Shareholder inquiries should be addressed to the Funds at Key Mutual Funds,
P.O. Box 8527, Boston, MA 02266-8527. Shareholders may also call the Funds at
800-539-3863.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KEY MUTUAL
FUNDS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY KEY
MUTUAL FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
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<PAGE> 27
KEY MUTUAL FUNDS
INVESTMENT ADVISER
KeyCorp Mutual Fund Advisers, Inc.
127 Public Square
Cleveland, OH 44114
ADMINISTRATOR
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
COUNSEL
Morrison & Foerster LLP
2000 Pennsylvania Avenue, NW
Washington, DC 20006
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
CUSTODIAN
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110-2875
DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
The date of this Prospectus is June , 1996
<PAGE> 28
KEY MUTUAL FUNDS
KEY STOCK INDEX FUND
KEY INTERNATIONAL INDEX FUND
STATEMENT OF ADDITIONAL INFORMATION
June , 1996
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of Key Mutual Funds, dated June , 1996, as
supplemented from time to time. This Statement of Additional Information is
incorporated by reference in its entirety into the prospectus for Key Stock
Index Fund and Key International Index Fund. Copies of the prospectus may be
obtained by writing to Key Mutual Funds at P.O. Box 8527, Boston, MA 02266-8527,
or by telephoning toll free 800-539-3863.
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................... 3
Additional Information on Fund Investments........................................................... 3
INVESTMENT RESTRICTIONS.................................................................................. 16
PORTFOLIO TURNOVER....................................................................................... 18
MANAGEMENT OF THE FUNDS.................................................................................. 18
Directors and Officers............................................................................... 18
THE INVESTMENT ADVISER AND ADMINISTRATOR................................................................. 19
EXPENSES, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN............................................... 21
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.................................................. 22
PERFORMANCE INFORMATION.................................................................................. 23
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................................................... 25
PURCHASE, REDEMPTION AND PRICING......................................................................... 26
FEDERAL INCOME TAXES..................................................................................... 27
ADDITIONAL INFORMATION................................................................................... 30
INDEPENDENT ACCOUNTANTS AND REPORTS...................................................................... 31
COUNSEL.................................................................................................. 31
APPENDIX A............................................................................................... 32
</TABLE>
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<PAGE> 30
INVESTMENT OBJECTIVES AND POLICIES
Key Mutual Funds, formerly known as SBSF Funds, Inc. (the "Company") is a
professionally managed, no-load, open-end series investment company consisting
of six different portfolios, two of which (each a "Fund" and, collectively, the
"Funds") are described in this Statement of Additional Information. Each Fund is
a separately managed, diversified mutual fund with its own investment objective
and policies. The Funds have no sales loads, redemption fees or exchange fees.
The two Funds and their investment objectives are:
Key Stock Index Fund -- The investment objective of the Key Stock Index Fund
("Stock Index Fund") is to seek to match as closely as possible the investment
performance of the Standard & Poor's 500 Composite Stock Index (the "S&P 500
Index"), before fees and expenses of the Stock Index Fund. The Stock Index Fund
will attempt to achieve its objective by investing primarily in the stocks which
comprise the S&P 500 Index.
Key International Index Fund -- The investment objective of the Key
International Index Fund ("International Index Fund") is to seek to match as
closely as possible the investment performance of the Morgan Stanley Capital
International Europe, Australia and Far East Index (the "EAFE Index"), before
fees and expenses of the International Index Fund. The International Index Fund
attempts to achieve its objective by investing in a statistically selected
sample of the equity securities included in the EAFE Index.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
The following policies supplement the investment objectives and policies of
the Stock Index Fund and the International Index Fund as set forth above and in
the Prospectus.
BANKERS' ACCEPTANCES AND CERTIFICATES OF DEPOSIT. Each Fund may invest in
bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank or a savings
and loan association for a definite period of time and earn a specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign banks,
if at the time of purchase such banks have capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of their most recently
published financial statements). Certificates of deposit and demand and time
deposits in which the Funds may invest will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
Each Fund also may invest in Eurodollar Certificates of Deposit ("ECDs") which
are U.S. dollar-denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, Yankee
Certificates of Deposit ("Yankee CDs") which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit insured by Canadian offices of major Canadian Banks.
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory notes
issued by corporations. Except as noted below with respect to variable amount
master demand notes, issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by a nationally recognized statistical rating
organization ("NRSRO") or, if not rated, found by the Company's Board of
Directors to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by a NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments.
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For a description of the rating symbols of each NRSRO see the Appendix to this
Statement of Additional Information.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes in
which the Funds may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, a Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and a Fund could, for this or other
reasons, suffer a loss to the extent of the default. While the notes are not
typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, Key Mutual Fund Advisers ("KMFA" or the "Adviser") will
continuously monitor the issuer's financial status and ability to make payments
due under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
variable amount master note will be deemed to have a maturity equal to the
longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand. (See Variable and Floating Rate
Notes).
FOREIGN INVESTMENT. The International Index Fund may invest in securities
issued by foreign issuers. Such investments may subject the Fund to investment
risks that differ in some respects from those associated with investments in
obligations of U.S. domestic issuers or in U.S. securities markets. Such risks
include future adverse political and economic developments, possible seizure,
nationalization, or expropriation of foreign investments, less stringent
disclosure requirements, the possible establishment of exchange controls or
taxation at the source, and the adoption of other foreign governmental
restrictions. Additional risks include currency exchange risks, less publicly
available information, the risk that companies may not be subject to the
accounting, auditing and financial reporting standards and requirements of U.S.
companies, the risk that foreign securities markets may have less volume and
therefore many securities traded in these markets may be less liquid and their
prices more volatile than U.S. securities, and the risk that custodian and
brokerage costs may be higher. Permissible investments include obligations or
securities of foreign issuers, foreign branches of U.S. banks and of foreign
banks.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such agencies and instrumentalities only when KMFA
believes that the credit risk with respect thereto is minimal.
SECURITIES LENDING. Each Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. A Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by a Fund or the borrower at any
time. While a Fund will not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. A Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which KMFA has
determined are creditworthy under guidelines established by the Company's Board
of Directors.
VARIABLE AND FLOATING RATE NOTES. The Stock Index Fund may acquire variable
and floating rate notes, subject to the Fund's investment objective, policies
and restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment
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<PAGE> 32
of its interest rate whenever a specified interest rate changes and which, at
any time, can reasonably be expected to have a market value that approximates
its par value. Such notes are frequently not rated by credit rating agencies;
however, unrated variable and floating rate notes purchased by the Fund will
only be those determined by KMFA, under guidelines established by the Company,
to pose minimal credit risks and to be of comparable quality, at the time of
purchase, to rated instruments eligible for purchase under the Fund's investment
policies. In making such determinations, KMFA will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the Fund
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
Variable or floating rate notes may have maturities of more than one year, as
follows:
1. A note that is issued or guaranteed by the United States government or any
agency thereof and which has a variable rate of interest readjusted no less
frequently than annually will be deemed by the Fund to have a maturity
equal to the period remaining until the next readjustment of the interest
rate.
2. A variable rate note, the principal amount of which is scheduled on the
face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature scheduled to be
paid in one year or more will be deemed by the Fund to have a maturity
equal to the longer of the period remaining until the next readjustment of
the interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A floating rate note that is subject to a demand feature will be deemed by
the Fund to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund is
entitled to receive the principal amount of the note either at any time on no
more than 30 days' notice or at specified intervals not exceeding one year and
upon no more than 30 days' notice.
FORWARD FOREIGN CURRENCY CONTRACTS. As provided in the prospectus, the
International Index Fund may purchase and sell forward foreign currency
contracts. Foreign securities involve currency risks. The U.S. dollar value of a
foreign security tends to decrease when the value of the U.S. dollar rises
against the foreign currency in which the security is denominated, and tends to
increase when the value of the U.S. dollar falls against such currency. To hedge
against foreign exchange risk arising from the Fund's investment or anticipated
investment in securities denominated in foreign currencies, the Fund may
purchase and sell forward foreign currency contracts. As provided in the
prospectus, the Fund also may use forward foreign currency contracts to more
closely track the EAFE Index and to enhance portfolio returns. To attempt to
minimize the risk to the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies, the Fund may purchase and sell forward
foreign currency contracts. A forward foreign currency contract (a "forward
contract") is an obligation to purchase or sell a specific currency for an
agreed price at a future date (usually less than a year), which is individually
negotiated and privately traded by currency traders and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for commissions, they do realize a profit based on the difference between
the price at which they are buying and selling various currencies. Although
these contracts are intended to minimize the risk of loss due to a decline in
the value of the hedged currencies, at the same time, they tend to limit any
potential gain which might result should the value of such currencies increase.
While the Fund may enter into forward contracts to reduce currency exchange
risks, changes in currency exchange rates may result in poorer overall
performance for the Fund than if it had not engaged in such transactions.
Moreover, there may be an imperfect correlation between the Fund's portfolio
holdings of securities
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<PAGE> 33
denominated in a particular currency and forward contracts entered into by the
Fund. Such imperfect correlation may prevent the Fund from achieving the
intended hedge or expose the Fund to the risk of currency exchange loss.
The Fund will not enter into forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the Fund
to deliver an amount of currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency. The International Index
Fund also may purchase and sell options on foreign currencies and foreign
currency futures contracts and related options. (See "Options on Foreign
Currencies" and "Currency Futures" in this Statement of Additional Information.)
The Fund will hold cash, cash items or U.S. Government securities and other
liquid assets in a segregated account with its custodian in an amount equal (on
a daily marked-to-market basis) to the amount of the commitments under these
contracts. At the maturity of a forward contract, the Fund may either accept or
make delivery of the currency specified in the contract, or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. The Fund will only enter into such a forward contract
if it is expected that there will be a liquid market in which to close out the
contract. However, there can be no assurance that a liquid market will exist in
which to close a forward contract, in which case the Fund may suffer a loss.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, the Adviser believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interest of the Fund will be served. For example, when the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the Fund will be able to insulate itself from a
possible loss resulting from a change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold and the date on which payment is made or
received, although the Fund would also forego any gain it might have realized
had rates moved in the opposite direction. This technique is sometimes referred
to as a "settlement hedge" or "transaction hedge."
When the Adviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Such a hedge (sometimes
referred to as a "position hedge") will tend to offset both positive and
negative currency fluctuations, but will not offset changes in security values
caused by other factors. The Fund also may hedge the same position by using
another currency (or a basket of currencies) expected to perform similarly to
the hedged currency, when exchange rates between the two currencies are
sufficiently correlated ("proxy hedge"). The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
With respect to positions that constitute "transaction" or "position hedges"
(including "proxy hedges"), the Fund will not enter into forward contracts to
sell currency or maintain a net exposure to such contracts if the consummation
of such contracts would obligate the Fund 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 (or the related currency, in the case of a
proxy hedge).
Finally, the Fund may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
better relative to the U.S. dollar. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that is
sold, and increase exposure to the currency that is purchased, much as if the
Fund had sold a security denominated in one currency and purchased an equivalent
security denominated in another. Cross-hedges protect against losses resulting
from a decline in the hedged currency, but will cause the Fund to assume the
risk of fluctuations in the value of the currency it purchases.
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<PAGE> 34
At the consummation of the forward contract, the Fund may either make delivery
of the foreign currency or terminate its contractual obligation to deliver the
foreign currency by purchasing an offsetting contract obligating it to purchase
at the same maturity date the same amount of such foreign currency. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
such currency for delivery through the sale of portfolio securities denominated
in such currency or through conversion of other assets of the Fund into such
currency. If the Fund engages in an offsetting transaction, the Fund will
realize a gain or a loss to the extent that there has been a change in forward
contract prices. Closing purchase transactions with respect to forward contracts
are usually effected with the currency trader who is a party to the original
forward contract.
The Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, the Fund is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by the Adviser. The Fund generally will not
enter into a forward contract with a term of greater than one year.
The Fund will place cash not available for investment or liquid high grade
debt securities (denominated in U.S. or foreign currency) in a separate account
in an amount equal to the value of the Fund's total assets committed to the
consummation of forward currency exchange contracts entered into with respect to
"position hedges" or "cross hedges." If the value of the securities placed in
the separate account declines, additional cash or securities will be placed in
the account by the Fund on a daily basis so that the value of the account will
equal the amount of the Fund's commitments with respect to such contracts. As an
alternative to maintaining all or a part of the separate account, the Fund may
purchase a call option permitting the Fund to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no higher than the
forward contract price or the Fund may purchase a put option permitting the Fund
to sell the amount of foreign currency subject to a forward purchase contract at
a price as high or higher that the forward contract price.
It should be realized that this method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. It also reduces any potential gain which may have otherwise occurred had
the currency value increased above the settlement price of the contract.
The Fund's foreign currency transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended, for qualification
as a regulated investment company.
OPTIONS ON SECURITIES AND INDEXES. The Stock Index Fund may, as provided in
the Prospectus, purchase and sell ("write") call options on securities and
indexes. Similarly, as described in the Prospectus, the International Index Fund
may purchase and write call and put options on securities and indexes. The Stock
Index Fund and the International Index Fund will write only "covered" put and
call options.
An option on a security (or index) is a contract that gives the holder of the
option, in return for a premium, the right to buy from (in the case of a call)
or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation, upon exercise of the option, to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.) Options in which the Stock Index
Fund may invest will be issued by the Options Clearing Corporation and listed on
a national securities exchange. Options in which the International Index Fund
may invest may be traded on exchanges or in the over-the-counter market.
A Fund will write call options only if they are "covered." A call option on a
security is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are placed in a segregated account by its custodian)
upon conversion or exchange of other securities held by the Fund. A call option
on an index is covered if the Fund maintains with its custodian cash or cash
equivalents equal to the contract value. A call option also is covered if the
Fund owns a call on the same security or index as the call written where the
exercise price of the call held is (1) equal to or less than the exercise price
of the call written,
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<PAGE> 35
or (ii) greater than the exercise price of the call written, provided the
difference is maintained by the Fund in cash or cash equivalents in a segregated
account with its custodian. A put option on a security or an index is "covered"
if the Fund maintains cash or cash equivalents equal to the exercise price in a
segregated account with its custodian. A put option also is covered if the Fund
holds a put on the same security or index as the put written where the exercise
price of the put held is (i) equal to or greater than the exercise price of the
put written, or (ii) less than the exercise price of the put written, provided
the difference is maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian.
If an option written by a Fund expires, the Fund realizes a gain equal to the
premium received at the time the option was written. In an option purchased by a
Fund expires unexercised, the Fund realizes a loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Fund desires.
A Fund will realize a gain from a closing purchase transaction if the cost of
the closing option is less than the premium received from writing the option,
or, if it is more, the Fund will realize a loss. If the premium received from a
closing sale transaction is more than the premium paid to purchase the option,
the Fund will realize a loss. The principal factors affecting the market value
of a put or call option include the supply and demand, interest rates, the
current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or
index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset of
the Fund. The premium received for an option written by a Fund is recorded as a
deferred credit. The value of an option purchased or written is marked to market
daily and is valued at the closing price on the exchange on which it is traded
or, if not traded on an exchange or no closing price is available, at the mean
between the last bid and asked prices.
The staff of the Securities and Exchange Commission has taken the position
that purchased over-the-counter options and assets used to cover written
over-the-counter options are illiquid and, therefore, together with other
illiquid securities, may not exceed 15% of a Fund's net assets.
Risks Associated with Options on Securities and Indexes. The purchase and
writing of options involves certain risks. The writer of the option has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities at the
exercise price. If a put or call option purchased by the Fund is not sold when
it has remaining value, and if the market price of the underlying security, in
the case of a put, remains equal to or greater than the exercise price, the Fund
will lose its entire investment in the option. If a Fund were unable to close
out a covered call option that it had written on a security, it would not be
able to sell the underlying security unless the option expired without exercise.
Furthermore, during the option period, the covered call writer has, in return
for the premium received for the option, given up the opportunity to profit from
a price increase in the underlying securities above the exercise price, but, as
long as its obligation as a writer continues, has retained the risk of loss
should the price of the underlying security decline. In addition, except to the
extent that a call option on an index written by a Fund is covered by an option
on the same index purchased by the Fund, movements in the index may result in a
loss to the Fund.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Additionally, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position. The writing of call options could result in increases in a
Fund's portfolio turnover rate, particularly during periods when market prices
of the underlying securities appreciate.
A decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or unexpected events. Moreover, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives.
OPTIONS ON FOREIGN CURRENCIES. The International Index Fund may, as provided
in the prospectus, purchase and sell ("write") put and call options on foreign
currencies, either on exchanges or in the over-the-counter market. A
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put option on a foreign currency gives the purchaser of the option the right to
sell a foreign currency at the exercise price until the option expires. A call
option on a foreign currency gives the purchaser of the option the right to
purchase the currency at the exercise price until the option expires. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Fund to reduce foreign currency risk using
such options. Over-the-counter options differ from traded options in that they
are two-party contracts with price and other terms negotiated between the buyer
and seller, and generally do not have as much market liquidity as
exchange-traded options.
The International Index Fund will purchase and sell options on foreign
currencies for hedging purposes. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign currency.
If the value of the currency does decline, that Fund will have the right to sell
such currency for a fixed amount of dollars which exceeds the market value of
such currency, resulting in a gain that may offset, in whole or in part, the
negative effect of currency depreciation on the value of the Fund's securities
denominated in that currency.
Conversely, if a rise in the dollar value of a currency in which securities to
be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options on such currency. If the value of
such currency does increase, the purchase of such call options would enable the
Fund to purchase currency for a fixed amount of dollars which is less than the
market value of such currency, resulting in a gain that may offset, at least
partially, the effect of any currency-related increase in the price of
securities the Fund intends to acquire. As in the case of other types of options
transactions, however, the benefit the Fund derives from purchasing foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would deprive it of a portion or
all of the benefits of advantageous changes in such rates.
The International Index Fund also may write options on foreign currencies for
hedging purposes. For example, if the Fund anticipates a decline in the dollar
value of foreign currency-denominated securities due to declining exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received by the Fund.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency. If rates move in the manner projected, the
put option will expire unexercised and allow the Fund to offset such increased
cost up to the amount of the premium. As in the case of other types of options
transactions, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move in
the expected direction. If unanticipated exchange rate fluctuations occur, the
option may be exercised and the Fund would be required to purchase or sell the
underlying currency at a loss which may not be fully offset by the amount of the
premium. As a result of writing options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in currency exchange rates.
A call option written on foreign currency by the Fund is "covered" if the Fund
owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the amount of the
difference is maintained by a Fund in cash and liquid high grade debt securities
in a segregated account with its custodian.
FUTURES TRANSACTIONS. A futures contract is an agreement to buy or sell a
security or currency (or to deliver a final cash settlement price in the case of
a contract relating to an index or otherwise not calling for physical delivery
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at the end of trading in the contracts), for a set price in a future month. Each
Fund may, as provided in the Prospectus, enter into stock index futures
contracts, and the International Index Fund may enter into futures contracts
based on foreign currencies. More specifically, as provided in the prospectus,
the Stock Index Fund may use stock index futures contracts as a substitute for
taking positions in securities that comprise the S&P 500 Index and to minimize
tracking error. Furthermore, as described in the prospectus, the International
Index Fund may use stock index futures contracts and foreign currency futures
contracts as a temporary substitute for taking positions in securities that
comprise the EAFE Index. The International Index Fund also may use foreign
currency futures contracts and related options for the purpose of hedging
against changes in currency exchange rates or to enhance returns.
Each of the Funds, as specified for the Fund in the Prospectus, may also
purchase and write put and call options on futures contracts of the type into
which such Fund is authorized to enter and may engage in related closing
transactions. In the United States, all such futures on securities, stock index
futures, foreign currency futures and related options will be traded on
exchanges that are regulated by the Commodity Futures Trading Commission
("CFTC"). Subject to compliance with applicable CFTC rules, the International
Index Fund also may enter into futures contracts traded on foreign futures
exchanges as long as trading on the aforesaid foreign futures exchanges does not
subject the Fund to risks that are materially greater than the risks associated
with trading on U.S. exchanges. In the United States, futures contracts are
traded on boards of trade which have been designated "contract markets" by the
CFTC. Futures contracts trade on these markets through an "open outcry" auction
on the exchange floor. Currently, there are futures contracts based on a variety
of instruments, indexes and currencies.
When a purchase or sale of a futures contract is made by a Fund, the Fund is
required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin requirement may be as low as 2% or less of a contract's face
value. The initial margin is in the nature of a performance bond or good faith
deposit on the futures contract which is returned to the Fund upon termination
of the contract assuming all contractual obligations have been satisfied. Each
Fund expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"daily settlement," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Positions taken in the futures markets are not normally held until delivery or
final cash settlement is required, but are instead liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Fund will usually be liquidated in this manner, the Fund may instead make
or take delivery of underlying securities (or currencies) whenever it appears
economically advantageous to the Fund to do so. A clearing organization
associated with the exchange on which futures are traded assumes responsibility
for closing-out transactions and guarantees that as between the clearing members
of the exchange, the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.
STOCK INDEX FUTURES. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for equity
securities.
CURRENCY FUTURES. The International Index Fund may, as provided in the
prospectus, purchase and sell futures contracts on foreign currencies. A sale of
a currency futures contract creates an obligation by the Fund, as seller, to
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deliver the amount of currency called for in the contract at a specified future
time for a specified price. A purchase of a currency futures contract creates an
obligation by the Fund, as purchaser, to take delivery of an amount of currency
at a specified future time at a specified price. The Fund may, as provided in
the Prospectus, sell a currency futures contract if the Adviser anticipates that
exchange rates for a particular currency will fall, as a hedge against a decline
in the value of the Fund's securities denominated in such currency. If the
Adviser anticipates that exchange rates will rise, the Fund may purchase a
currency futures contract to protect against an increase in the price of
securities denominated in a particular currency the Fund intends to purchase.
Although the terms of currency futures contracts specify actual delivery or
receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. To offset a currency futures contract sold by the Fund, the
Fund purchases a currency futures contract for the same aggregate amount of
currency and delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund is immediately paid the difference. Similarly, to
close out a currency futures contract purchased by the Fund, the Fund sells a
currency futures contract. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the offsetting sale price is less than
the purchase price, the Fund realizes a loss.
A risk in employing currency futures contracts to protect against the price
volatility of portfolio securities denominated in a particular currency is that
changes in currency exchange rates or in the value of the futures position may
correlate imperfectly with changes in the cash prices of a Fund's securities.
The degree of correlation may be distorted by the fact that the currency futures
market may be dominated by short-term traders seeking to profit from changes in
exchange rates. This would reduce the value of such contracts for hedging
purposes over a short-term period. Such distortions are generally minor and
would diminish as the contract approached maturity. Another risk is that an
Adviser could be incorrect in its expectation as to the direction or extent of
various exchange rate movements or the time span within which the movements take
place.
OPTIONS ON FUTURES. For bona fide hedging and other appropriate risk
management purposes, each Fund may, to the extent provided in the Prospectus,
purchase and write call and put options on futures contracts which are traded on
exchanges that are licensed and regulated by the CFTC for the purpose of options
trading, or, subject to applicable CFTC rules, on foreign exchanges. A "call"
option on a futures contract gives the purchaser the right, in return for the
premium paid, to purchase a futures contract (assume a "long" position) at a
specified exercise price at any time before the option expires. A "put" option
gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price at any time
before the option expires. The writer of an option on a futures contract, unlike
the holder, is subject to initial margin and variation margin requirements on
the option position.
Upon the exercise of a "call," the writer of the option is obligated to sell
the futures contract (to deliver a "long" position to the option holder) at the
option exercise price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a "put," the
writer of the option is obligated to purchase the futures contract (deliver a
"short" position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially the
same risks and for the same duration and risk management purposes as might be
addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of declining securities prices or declining
exchange rates for a particular currency. The purchase of a call option on a
futures contract represents a means of hedging against a market advance
affecting securities prices or currency exchange rates when the Fund is not
fully invested. Depending on the pricing of the option compared to either the
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futures contract upon which it is based or upon the price of the underlying
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a premium
but will assume a risk of adverse movement in the price of the underlying
futures contract comparable to that involved in holding a futures position. If
the option is not exercised, the Fund will realize a gain in the amount of the
premium, which may partially offset unfavorable changes in the value of
securities held by or to be acquired for the Fund. If the option is exercised,
the Fund will incur a loss in the option transaction, which will be reduced by
the amount of the premium it has received, but which may partially offset
favorable changes in the value of its portfolio securities or the currencies in
which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the underlying securities or the currencies in which
such securities are denominated. If the futures prices at expiration is below
the exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Fund's holdings of securities or the currencies in which such securities are
denominated.
The writing of a put option on a futures contract is analogous to the purchase
of a futures contract. For example, if the Fund writes a put option on a futures
contract on securities related to securities that the Fund expects to acquire
and the market price of such securities increases, the net cost to a Fund of the
securities acquired by it will be reduced by the amount of the option premium
received. Of course, if market prices have declined, the Fund's purchase price
upon exercise may be greater than the price at which the securities might be
purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. The
Funds will not purchase or write options on futures contracts unless the market
for such options has sufficient liquidity such that the risks associated with
such options transactions are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. In general, the Funds will engage in transactions in futures
contracts and related options only for bona fide hedging and other appropriate
risk management purposes, and not for speculation. The Funds will not enter into
futures contracts for which the aggregate contract amounts exceed 100% of the
Fund's net assets. In addition, with respect to positions in futures and related
options that do not constitute bona fide hedging positions, a Fund will not
enter into a futures contract of futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-money," would exceed 5% of the Fund's total
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option. Each Fund intends to limit its investment in
options to 25% of its total assets.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) cash, U.S. Government securities, or other
high quality liquid debt securities that, when added to the amounts deposited
with a futures commission merchant as margin, are equal to the market value of
the futures contract. Alternatively, the Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as high
or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian (and
mark-to-market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to
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the market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other high quality liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, equal the total
market value of the futures contract underlying the call option. Alternatively,
the Fund may cover its position by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option,
by owning the instruments underlying the futures contract, or by holding a
separate call option permitting the Fund to purchase the same futures contract
at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other high quality liquid debt securities that equal the purchase
price of the futures contract, less any margin on deposit. Alternatively, the
Fund may cover the position either by entering into a short position in the same
futures contract, or by owning a separate put option permitting it to sell the
same futures contract so long as the strike price of the purchased put option is
the same or higher than the strike price of the put option sold by the Fund.
The requirements for qualification as a regulated investment company also may
limit the extent to which a Fund may enter into futures or futures options. See
"Federal Income Taxes."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Fund's securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS, AND FORWARD CURRENCY EXCHANGE CONTRACTS AND OPTIONS
THEREON. Options on securities, futures contracts, options on futures
contracts, currencies and options on currencies may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the United States; may not involve a clearing mechanism and
related
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guarantees; and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities. The value of such positions
also could be adversely affected by (i) other complex foreign political, legal
and economic factors, (ii) lesser availability than in the United States of data
on which to make trading decisions, (iii) delays in a Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) lesser
trading volume.
SWAP AGREEMENTS. The International Index Fund may enter into index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded that desired return or for other
portfolio management purposes. Swap agreements are two party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested in a particular foreign currency or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A Fund's obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by each party to the agreement (the "net amount"). A
Fund's obligations under a swap agreement will be accrued daily (offset against
any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a
swap counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging of the Fund's portfolio. The International
Index Fund may enter into swap agreements only to the extent that obligations
under such agreements represent not more than 10% of the Fund's total assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Adviser's ability to predict correctly
whether certain markets reflected in the EAFE Index are likely to produce
greater returns than other markets. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Adviser will cause
the Fund to enter into swap agreements only with counterparties that would be
eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the Fund
by the Internal Revenue Code may limit the Fund's ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the
Commodity Futures Trading Commission ("CFTC") effective February 22, 1993. To
qualify for this exemption, a swap agreement must be entered into by "eligible
participants," which includes the following, provided the participants' total
assets exceed established levels: a bank or trust company, savings association
or credit union, insurance company, investment company subject to regulation
under the Investment Company Act of 1940, commodity pool, corporation,
partnership, proprietorship, organization, trust or other entity, employee
benefit plan, governmental entity, broker-dealer, futures commission merchant,
natural person, or regulated foreign person. To be eligible, natural persons and
most other entities must have total assets exceeding $10 million; commodity
pools and employee benefit plans must have assets exceeding $5 million. An
eligible swap transaction must also meet three conditions. First, the swap
agreement may not be part of a fungible class of agreements that are
standardized as to their material economic terms. Second, the creditworthiness
of parties with actual or potential obligations under the swap agreement must be
a material consideration in entering into or determining the terms of the swap
agreement, including pricing, cost or credit enhancement terms. Third, swap
agreements may not be entered into and traded on or through a multilateral
transaction execution facility.
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This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest up to 5% of
its total assets in the securities of any one investment company, but may not
own more than 3% of the securities of any one investment company or invest more
than 10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order issued by the Securities and Exchange Commission
(the "SEC" or the "Commission"), the Funds may invest in the money market funds
of other investment companies advised by KMFA or its affiliates. KMFA will waive
its fee with respect to assets of a Fund invested in a money market fund that it
advises, and, to the extent required by the laws of any state in which a Fund's
shares are sold, KMFA will waive its investment advisory fee as to all assets
invested in other investment companies. Because such other investment companies
employ an investment adviser, such investment by a Fund will cause shareholders
to bear duplicative fees, such as management fees, to the extent advisory fees
are not waived by KMFA.
REPURCHASE AGREEMENTS. Securities held by each Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund would
acquire securities from financial institutions or registered broker-dealers
deemed creditworthy by KMFA pursuant to guidelines adopted by the Directors of
the Company, subject to the seller's agreement to repurchase such securities at
a mutually agreed upon date and price. The seller is required to maintain the
value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest). If the seller were to default on
it repurchase obligation or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, a Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets (such as cash or other liquid
high-grade securities) consistent with such Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the price at which the Fund is obligated to repurchase
the securities.
"WHEN-ISSUED" SECURITIES. As discussed in the Prospectus, each Fund may
purchase securities on a "when-issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). The payment obligation and
the interest rate that will be received on when-issued securities are fixed at
the time the buyer enters into the commitment. When a Fund agrees to purchase
securities on a "when-issued" basis, the Fund's custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
the purchase commitment, and in such a case, a Fund may be required subsequently
to place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that any such Fund's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. To the extent cash is set aside in a
separate account, it will not be available for new investment or to meet
redemptions.
When a Fund engages in "when-issued" transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in the Fund
incurring a loss or missing the opportunity to obtain a price considered to be
advantageous. Neither Fund intends to purchase "when-issued" securities for
speculative purposes, but only in furtherance of its investment objective.
15
<PAGE> 43
The investment policies of the Funds set forth above may be changed or altered
by the Board of Directors of the Funds, except to the extent set forth under
"Investment Restrictions".
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental policies of each of the
Funds and may only be changed if approved by the holders of a majority of the
outstanding voting securities of the affected Fund. Under the Investment Company
Act of 1940, as amended ("1940 Act") such approval requires the affirmative
vote, at a meeting of shareholders of a Fund, of (i) at least 67% of the shares
of the Fund present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by represented proxy; or
(ii) more than 50% of the outstanding shares of the Fund, whichever is less.
Neither the Stock Index Fund nor the International Index Fund may:
1. Participate on a joint or joint and several basis in any securities
trading account.
2. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities, and this shall further not prevent the International Index
Fund from purchasing and selling currencies on a spot or forward basis).
3. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Fund from
investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments
by a Fund in securities backed by mortgages on real estate or in
marketable securities of companies engaged in such activities are not
hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except that (a) a
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) a Fund may
acquire other securities, the acquisition of which may result in the
issuance of a senior security, to the extent permitted under applicable
regulations or interpretations of the 1940 Act; and (c) subject to the
restrictions set forth below, a Fund may borrow money as authorized by the
1940 Act.
5. Borrow money, except that (a) a Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase
agreements, provided that the total amount of any such borrowing does not
exceed one-third of the Fund's total assets; and (b) a Fund may borrow
money for temporary or emergency purposes in an amount not exceeding 5% of
the value of its total assets at the time when the loan is made. Any
borrowings representing more than 5% of a Fund's total assets must be
repaid before the Fund may make additional investments.
6. Lend any security or make any other loan if, as a result, more than
one-third of a Fund's total assets would be lent to other parties, but
this limitation does not apply to purchases of publicly issued debt
securities or to repurchase agreements.
7. Underwrite securities issued by others, except to the extent that a Fund
may be considered an underwriter within the meaning of the Securities Act
of 1933 in the disposition of restricted securities.
8. With respect to 75% of a Fund's total assets, a Fund may not purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities) if, as a
result, (a) more than 5% of the Fund's total assets would be invested in
the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
9. Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a
result, more than 25% of a Fund's total assets would be invested in the
securities of companies whose principal business activities are in the
same industry. In the utilities category, the industry shall be determined
according to the service provided. For example, gas, electric, water and
telephone will be considered to be separate industries.
16
<PAGE> 44
The following investment restrictions are non-fundamental and may be changed
without a vote of the shareholders of a Fund:
1. A Fund will not purchase or retain securities of any issuer if the
officers or Directors of the Company or the officers or directors of the
investment adviser to the Fund owning beneficially more than one half of
1% of the securities of such issuer together own beneficially more than 5%
of such securities.
2. A Fund will not invest more than 10% of its total assets in the securities
of issuers which together with any predecessors have a record of less than
three years of continuous operation.
3. The Stock Index Fund will not write or sell puts, straddles, spreads or
combinations thereof or write or purchase put options or purchase call
options.
4. A Fund will not invest in illiquid securities in an amount exceeding, in
the aggregate, 15% of its net assets. An illiquid security is a security
which cannot be disposed of promptly (within seven days), and in the usual
course of business at approximately price at which the Fund has valued
them. Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A and securities acquired in a
transaction or chain of transactions pursuant to Section 4(2) of, or
securities otherwise subject to restrictions or limitations on resale,
under the 1933 Act ("Restricted Securities"), shall not be deemed illiquid
solely by reason of being unregistered. KMFA shall determine whether a
particular security is deemed to be liquid based on the trading markets
for the specific security or other factors. However, because state
securities laws may limit a Fund's investment in Restricted Securities
(regardless of the liquidity of the investment), investments in Restricted
Securities resalable under Rule 144A will continue to be subject to
applicable state law requirements until such time, if ever, that such
limitations are changed.
5. A Fund will not make short sales of securities, other than short sales
"against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that
this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
6. A Fund may invest up to 5% of its total assets in the securities of any
one investment company, but may not own more than 3% of the securities of
any one investment company or invest more than 10% of its total assets in
the securities of other investment companies. Pursuant to an exemptive
order issued by the Securities and Exchange Commission, the Funds may
invest in the money market funds of other investment companies advised
KeyCorp Mutual Fund Advisers, Inc. or its affiliates.
7. The Stock Index Fund will not buy state, municipal, or private activity
bonds.
STATE REGULATIONS. In addition, the Funds, so long as their shares are
registered under the securities laws of the State of Texas and such restrictions
are required as a consequence of such registration, are subject to the following
non-fundamental policies, which may be modified in the future by the Directors
without a vote of the Funds' shareholders: (1) the Funds have represented to the
Texas State Securities Board that they will not invest in oil, gas or mineral
leases or purchase or sell real property (including limited partnership
interests, but excluding readily marketable securities of companies which invest
in real estate); and (2) the Funds have represented to the Texas State
Securities Board that they will not invest more than 5% of net assets in
warrants values at the lower of cost or market; provided that, included within
that amount, but not to exceed 2% of net assets, may be warrants which are not
listed on the NYSE or American Stock Exchange. For purposes of this restriction,
warrants acquired in units or attached to securities are deemed to be without
value.
The policies and limitations listed above supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Fund's net assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Fund's acquisition of such security or other asset except in
the case of borrowing (or other activities that may be deemed to result in the
issuance of a "senior security" under the 1940 Act). Accordingly, any subsequent
change in values, net assets, or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
and limitations. If the value of a Fund's holdings of illiquid securities at any
time exceeds the
17
<PAGE> 45
percentage limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Board of Directors will consider
what actions, if any, are appropriate to maintain adequate liquidity.
PORTFOLIO TURNOVER
Purchases and sales of securities are made at such times as the Adviser deems
to be in the best interest of the Funds' shareholders without regard to the rate
of portfolio turnover, about which there are no restrictions. From time to time,
the Funds may trade in securities for the short term. It is anticipated that the
annual portfolio turnover rate of the Stock Index Fund and the International
Index Fund will not exceed 50% and 50%, respectively. In any particular year,
market conditions could result in portfolio activity at a greater or lesser rate
than anticipated. Portfolio turnover rate is, generally, the percentage computed
by dividing the lesser of purchases or sales by the average value of the
portfolio. High portfolio turnover involves correspondingly higher brokerage
commission expenses which are borne directly by the Funds. In addition, the
effect of engaging in options transactions may be to increase portfolio
turnover.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
Officers and employees of the Adviser are not permitted to serve as officers
or directors of the Funds due to certain regulatory restrictions imposed on
banking organizations and their subsidiaries. See "The Investment Adviser and
Administrator" below. The persons who have been elected to serve as officers and
directors of the Funds, their position with the Funds and their principal
occupations during the last five years are set forth below:
<TABLE>
<CAPTION>
NAME, AGE, ADDRESS AND PRINCIPAL
OCCUPATION DURING PAST FIVE YEARS POSITION WITH REGISTRANT
- ---------------------------------------------------------------------------------- ------------------------
<S> <C>
EDWARD P. CAMPBELL (46) 28601 Clemens Road, Westlake, Ohio 44145. Executive Vice Director
President and Chief Operating Officer of Nordson Corporation (manufacturer of
application equipment). Currently, Trustee of The Victory Portfolios mutual fund
complex.
EUGENE J. MCDONALD (62) 2200 Main Street, Suite 1000, Durham, North Carolina Director
27705. Executive Vice President for Asset Management of Duke University and
President of Duke Management Co.; Director of Central Carolina Financial Corp.
and Sphinx Pharmaceuticals, Inc.
FRANK A. WEIL (64) 147 E. 48th Street, New York, New York 10017. Chairman and Non-Executive
Chief Executive Officer of Abacus & Associates, Inc. (private investment firm). Chairman and
Chairman of the Council for Excellence in Government and Director and President and Director
of the Norman and Hickrill Foundations.
*LEIGH A. WILSON (51) 420 East 54th Street, New York, New York 10012. Chairman and President and
Chief Executive Officer of Glenleigh International Limited (merchant bank); from Director
1993 to present, President of The Victory Funds. Currently, Director of Paribas
North America, Paribas Corporation (investment bank) and Chimney Rock Vineyard &
Winery and Trustee of The Victory Portfolios mutual fund complex.
WILLIAM B. BLUNDIN (57) 125 West 55th Street, New York, NY 10019. Vice Chairman of Vice President
Concord Holding Corp.
SCOTT A. ENGLEHART (33) 3435 Stelzer Road, Columbus, Ohio 43219. Director of Vice President and
Client Services, BISYS Fund Services, Inc. (October 1990 to present). Assistant Secretary
</TABLE>
<TABLE>
<S> <C>
KEVIN L. MARTIN (35) 3435 Stelzer Road, Columbus, Ohio 43219. Vice President of Treasurer
Accounting Services, BISYS Fund Services, Inc. (February 1996 to present);
Senior Manager at Ernst & Young (1984 to February 1996).
</TABLE>
18
<PAGE> 46
<TABLE>
<S> <C>
KAREN A. DOYLE (38) 125 West 55th Street, New York, NY 10019. Manager of Client Secretary
Services, BISYS Fund Services, Inc., (October 1994 to present); Assistant
Treasurer at The Bank of New York (April 1979 to October 1994).
ROBERT L. TUCH (44) 3435 Stelzer Road, Columbus, Ohio 43219. Employee of BISYS Assistant Secretary
Fund Services, Inc. (June 1991 to present); Vice President and Associate General
Counsel, National Securities Research Corp. (July 1990 to June 1991).
ALAINA V. METZ (29) 3435 Stelzer Road, Columbus, Ohio 43219. Chief Administrator, Assistant Secretary
Administrative and Regulatory Services, BISYS Fund Services Limited Partnership
(June, 1995 to present); Supervisor, Mutual Fund Legal Department, Alliance
Capital Management (May 1989 to June 1995).
</TABLE>
*Mr. Wilson is an "interested person" of the Company solely by reason of his
position as President.
Directors who are not "interested persons" of either an investment adviser to
or principal underwriter for the Funds receive an annual fee of $7,500 plus $750
per meeting of the Board of Directors attended and reasonable out-of-pocket
expenses incurred in connection with attending such meetings. Each director who
is an "interested person" of either an investment adviser to or principal
underwriter for the Funds does not receive any compensation from the Company.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM COMPANY
FROM COMPANY FOR THE FISCAL AND VICTORY FUND
NAME YEAR ENDED NOVEMBER 30, 1995 COMPLEX
----------------------------------- ---------------------------- ------------------
<S> <C> <C>
Edward P. Campbell $6,000 $ 33,800(2)
Ted H. McCourtney $9,375 $ 9,375(1)(3)
Eugene J. McDonald $9,375 $ 9,375(3)
Frank A. Weil $9,375 $ 9,375(3)
Leigh A. Wilson $6,000 $ 46,717(2)
</TABLE>
- ---------------
(1) Mr. McCourtney resigned his position as a Director of the Company effective
December 7, 1995.
(2) These amounts include compensation received from the Company, The Victory
Funds (which were reorganized into The Victory Portfolios as of June 5,
1995). There are presently 24 mutual funds in the Victory "Fund Complex"
from which Messrs. Campbell and Wilson receive compensation.
(3) Total compensation paid with respect to service on the board of the Company
only.
THE INVESTMENT ADVISER AND ADMINISTRATOR
INVESTMENT ADVISER. The investment adviser to the Funds is Key Mutual Fund
Advisers, Inc. ("KMFA" or the "Adviser"). KMFA was organized as an Ohio
Corporation on July 27, 1995 and is registered with the SEC as an investment
adviser under the Investment Advisers Act of 1940, as amended. KMFA is a wholly
owned subsidiary of KeyCorp Asset Management Holdings, Inc., which is a wholly
owned subsidiary of KeyBank National Association ("KeyBank"). KeyBank is a
wholly owned subsidiary of KeyCorp, one of the largest financial services
holding companies in the United States. Affiliates of KMFA manage approximately
$48 billion for numerous clients, including large corporate and public
retirement plans, Taft-Hartley plans, foundations and endowments and high net
worth individuals. All references appearing in the prospectus and this statement
of additional information as to the level of assets under the management of KMFA
and its affiliates are as of March 31, 1996.
As of March 31, 1996, KeyCorp had an asset base of $65 billion, with banking
offices in 26 states from Maine to Alaska, and trust and investment offices in
16 states. KeyCorp is the resulting entity of the 1994 merger of Society
Corporation, the bank holding company of which KeyBank, formerly Society
National Bank was a wholly-owned subsidiary, and KeyCorp, the former bank
holding company. KeyCorp's major business activities include providing consumer,
business and traditional banking and associated financial services to consumer,
business and commercial markets. KeyCorp's non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit
19
<PAGE> 47
card processing and leasing companies. KeyBank is the lead affiliate bank of
KeyCorp. KeyCorp's principal offices are located at 127 Public Square,
Cleveland, Ohio 44114.
Pursuant to the investment advisory agreement between the Company, on behalf
of the Funds, and KMFA (the "Investment Advisory Agreement"), KMFA furnishes a
continuous investment program for the Funds' portfolios, makes the day-to-day
investment decisions for the Funds, executes the purchase and sale orders for
the portfolio transactions of the Funds and generally manages the Funds'
investments in accordance with the stated policies of the Funds, subject to the
general supervision of the Board of Directors of the Funds.
As compensation for the services rendered and related expenses borne by the
Adviser under the Investment Advisory Agreement, the Stock Index Fund pays the
Adviser a fee, computed daily and payable monthly, equal to .10% per annum of
the Fund's average daily net assets. The Investment Advisory Agreement further
provides that the International Index Fund will pay the Adviser a fee, computed
daily and payable monthly, equal to .50% per annum of its average daily net
assets. The Adviser is obligated to reimburse the Funds in the event expenses
exceed certain prescribed limits (see "Expenses, Distribution Plan and
Shareholder Servicing Plan").
Unless sooner terminated, the Investment Advisory Agreement, provides that it
will continue in effect for an initial two-year term and, with respect to each
Fund, for consecutive one-year terms thereafter, provided that such continuance
is approved at least annually by the Board of Directors of the Company or by a
vote of a majority of the outstanding voting securities of a Fund (as defined in
the 1940 Act), and, in either case, by a majority of the Directors who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any such party, by votes cast in person at a meeting called
for such purpose.
The Investment Advisory Agreement is terminable as to a Fund at any time on 60
days' written notice without penalty by the Directors, by vote a majority of the
outstanding voting securities of the Fund, or by KMFA. The Investment Advisory
Agreement also terminates automatically in the event of its assignment, as
defined in the 1940 Act.
The Investment Advisory Agreement provides that KMFA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of its services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of KMFA in the
performance of its duties, or from reckless disregard by it of either duties or
obligations thereunder.
The Investment Advisory Agreement also provides that KMFA may delegate a
portion of its responsibilities to a subadviser. In addition, the Investment
Advisory Agreement provides that KMFA may render services through its own
employees or through the employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Funds and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons that is managed by authorized officers of KMFA.
ADMINISTRATOR. BISYS Fund Services Limited Partnership ("BISYS" or the
"Administrator") serves as the Administrator of the Funds pursuant to an
Administration Agreement dated June 1, 1996 (the "Administration Agreement").
The Administrator assists in supervising all operations of each Fund (other than
those performed by KMFA under the Investment Advisory Agreement), subject to the
supervision of the Board of Directors.
For the services rendered to the Funds and related expenses borne by BISYS as
Administrator, each Fund pays BISYS an annual fee, computed daily and paid
monthly, equal to .15% of the average daily net assets of each Fund. BISYS may
periodically waive all or a portion of its fee with respect to any Fund in order
to increase the net income of one or more of the Funds of the Company available
for distribution to shareholders.
Unless sooner terminated, the Administration Agreement will continue in effect
as to the Funds for a period of one year, and, with respect to each Fund, for
successive one year terms thereafter, unless terminated by either party on not
less than 90 days prior written notice to the other party.
The Administration Agreement provides that BISYS shall not be liable for any
action taken or omitted by BISYS in the absence of willful misfeasance, bad
faith or negligence in the performance of its duties, or from the reckless
disregard by it of its obligations and duties thereunder.
20
<PAGE> 48
Under the Administration Agreement, BISYS assists in the Fund's administration
and operation, including providing statistical and research data, clerical
services, internal compliance and various other administrative services,
including among other responsibilities, forwarding certain purchase and
redemption requests to the Transfer Agent, participation in the updating of the
prospectus, coordinating the preparation, filing, printing and dissemination of
reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing office
facilities necessary to carry out its duties thereunder. Under the
Administration Agreement, BISYS may delegate all or any part of its
responsibilities thereunder.
FUND ACCOUNTANT. BISYS Fund Services, Inc. ("BISYS, Inc.") serves as a fund
accountant for each Fund pursuant to a fund accounting agreement with the
Company dated June 1, 1996 (the "Fund Accounting Agreement"). As fund
accountant, BISYS, Inc. calculates the Funds' net asset value, the dividend and
capital gain distribution, if any, and the yield. BISYS, Inc. also provides a
current security position report, a summary report of transactions and pending
securities, a current cash position report, and maintains the general ledger
accounting records for each Fund. Under the Fund Accounting Agreement, BISYS,
Inc. is entitled to receive a fee from each Fund equal to an annual rate of .03%
of the first $100 million of each Fund's average daily net assets, plus .02% of
next $100 million of each Fund's average daily net assets, plus .01% of each
Fund's average daily net assets in excess of $200 million. This fee is subject
to a minimum monthly asset charge of $2,500 for the Stock Index Fund and $3,333
for the International Index Fund, and does not include out-of-pocket expenses.
EXPENSES, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN
Except as set forth above, and as set forth below, the Funds are responsible
for the payment of their expenses. Such expenses include the fees payable to
KMFA; any brokerage fees and commissions; taxes; interest; the cost of any
liability insurance or fidelity bonds; costs, expenses, or losses arising out of
any liability of or claim for damages or other relief asserted against the Funds
for violation of any law; legal and auditing fees and expenses; the fees and
certain expenses of the Funds' Custodian, Transfer Agent and Distributor; the
fees of any trade association of which the Funds are a member; the expenses of
printing and mailing reports and notices to the Funds' shareholders; filing fees
for the registration or qualification of Funds shares under Federal or state
securities laws; the fees and expenses involved in registering and maintaining
registration of the Funds and of its shares with the SEC; fees of directors who
are not "interested persons" of an investment adviser to or the principal
underwriter for the Funds; the costs of registering the Funds as a broker or
dealer; the costs of qualifying its shares under state securities laws; the
expenses of servicing shareholders and shareholder accounts not otherwise
incurred by the Adviser or the Administrator; and any extraordinary expenses
incurred by the Funds.
As a result of certain regulatory restrictions imposed on banking
organizations and their subsidiaries, the Company is not permitted to sell
shares of the Funds directly without an independent underwriter. Accordingly,
pursuant to a distribution agreement dated April 5, 1996 (the "Distribution
Agreement"), BISYS Fund Services Limited Partnership ("BISYS") was appointed to
serve as independent underwriter/distributor for the continuous offering of the
shares of the Company. Under the Distribution Agreement, BISYS is obligated to
devote its best efforts to effect sales of shares of the Funds, but is not
required to sell any certain number of shares. In addition, under the
Distribution Agreement, BISYS may enter into agreements with selected dealers
for the distribution of shares of the Funds.
If not earlier terminated, the Distribution Agreement will continue in effect
for successive terms of one year, provided that such continuance is specifically
approved at least annually (a) by a majority of those members of the Board of
Directors of the Company who are not parties to the Agreement or "interested
persons" of any such party (the "Disinterested Directors"), pursuant to a vote
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Board of Directors of the Company or by vote of a "majority of
the outstanding voting securities" of each Fund. The Distribution Agreement may
be terminated by the Company at any time with respect to any Fund, without the
payment of any penalty, by vote of a majority of the Disinterested Directors or
by vote of a "majority of the outstanding voting securities" of such Fund on 60
days' written notice to Concord Financial, or by Concord Financial at any time,
without the payment of any penalty, on 60 days' written notice to the Fund. The
Distribution Agreement will automatically terminate in the event of its
"assignment".
21
<PAGE> 49
The Company has adopted a Distribution Plan (the "Distribution Plan") for the
International Index Fund pursuant to Rule 12b-1 under the 1940 Act. No separate
payments are authorized to be made by the International Index Fund under the
Plan. Rather, the Plan provides that to the extent that any portion of the fees
payable under the Shareholder Servicing Plan or any Shareholder Servicing
Agreement (described below) is deemed to be for services primarily intended to
result in the sale of Fund shares, such fees are deemed approved and may be paid
pursuant to the Plan and in accordance with Rule 12b-1.
Rule 12b-1 requires that the Distribution Plan be approved by a vote of at
least a majority of the outstanding voting securities of the Fund and by a
majority of the Board of Directors, including those directors who are not
"interested persons" of the Funds (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Distribution Plan. The Distribution
Plan must be approved at least annually in the manner described in the foregoing
sentence and may be terminated at any time by a vote of a majority of the
outstanding voting securities of the Fund or a majority of those directors who
are not "interested persons" and who have no direct or indirect financial
interest in the Distribution Plan.
While the Distribution Plan is in effect, the selection and nomination of
directors who are not "interested persons" of the Company (as defined in the
1940 Act) is committed to the discretion of the directors who are not interested
persons of the Company.
The Company, on behalf of the International Index Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(including affiliates of the Adviser) (each a "Shareholder Servicing Agent")
that provide administrative support services to customers who may from time to
time beneficially own shares of the Fund, which services may include: (i)
aggregating and processing purchase and redemption requests for shares from
customers and promptly transmitting net purchase and redemption orders to the
distributor or transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
on behalf of customers; (iv) providing information periodically to customers
showing their positions in shares; (v) arranging for bank wires; (vi) responding
to customer inquiries; (vii) providing subaccounting with respect to shares
beneficially owned by customers or providing the information to the Fund
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from us (such as proxies, shareholder reports, annual and semi-
annual financial statements and dividend, distribution and tax notices) to
customers; (ix) forwarding to customers proxy statements and proxies containing
any proposals regarding this Plan; and (x) providing such other similar services
as the Fund may reasonably request to the extent Shareholder Servicing Agents
are permitted to do so under applicable statutes, rules or regulations. For
expenses incurred and services provided pursuant to the Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and payable monthly, in amounts aggregating not more than 0.25%, on an annual
basis, of the average daily net assets of the Fund. A Shareholder Servicing
Agent may periodically waive all or a portion of its respective shareholder
servicing fees with respect to the Fund to increase the net income of the Fund
available for distribution as dividends.
If total expenses borne by a Fund in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, KMFA will waive
its fees to the extent such excess expenses exceed such expense limitation. As
of the date of this Statement of Additional Information, the most restrictive
expense limitation applicable to the Funds limits the aggregate annual expenses
of each Fund, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of remaining average net assets. Any expenses to be borne by
KMFA will be estimated daily and reconciled and paid on a monthly basis. Fees
imposed on customer accounts by KMFA, Key Trust Company of Ohio, N.A. or its
correspondents, affiliated banks and other non-bank affiliates for cash
management services are not fund expenses for purposes of such limitation.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio 44114 has
been retained as custodian for the Funds' investments. Key Trust Company of
Ohio, N.A. also maintains certain accounting and financial records of the Funds.
Key Trust Company of Ohio, N.A. is a subsidiary of KeyCorp and an affiliate of
the Adviser and receives compensation from the Funds for services it performs as
custodian.
22
<PAGE> 50
State Street Bank and Trust Company, 225 Franklin Street, Boston, Mass.
02110-2875 has been retained as the Funds' Transfer Agent. Boston Financial Data
Services, Two Heritage Drive, Quincy, Mass. 02171 acts as dividend disbursing
agent and shareholder servicing agent for the Fund and receives a fee for these
services.
PERFORMANCE INFORMATION
From time to time the "standardized yield," "dividend yield," "average annual
total return" and "total return" of an investment in Fund shares may be
advertised. An explanation of how yields and total returns are calculated and
the components of those calculations are set forth below.
Yield and total return information may be useful to investors in reviewing a
Fund's performance. A Fund's advertisement of its performance must, under
applicable Commission rules, include the average annual total returns for the
Fund for the 1, 5 and 10-year period (or the life of the Fund, if less) as of
the most recently ended calendar quarter. This enables as investor to compare a
Fund's performance to the performance of other funds for the same periods.
However, a number of factors should be considered before using such information
as a basis for comparison with other investments. An investment in a Fund is not
insured; yield and total return are not guaranteed and normally will fluctuate
on a daily basis. When redeemed, an investor's shares may be worth more or less
than their original cost. Yield and total return for any given past period are
not a prediction or representation by the Company of future yields or rates of
return on its shares. The yield and total returns of a Fund are affected by
portfolio quality, portfolio maturity, the type of investments the Fund holds
and its operating expenses.
STANDARDIZED YIELDS. A Fund's "yield" (referred to as "standardized yield")
for a given 30-day period for the shares of a Fund is calculated using the
following formula set forth in rules adopted by the Commission that apply to all
funds that quote yields:
<TABLE>
<S> <C> <C>
2[(a-b+1)6-1]
---
Standardized Yield = cd
</TABLE>
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of the Fund outstanding during the
30-day period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period,
adjusted for undistributed net investment income.
The standardized yield for a 30-day period may differ from its yield for any
other period. The Commission formula assumes that the standardized yield for a
30-day period occurs at a constant rate for a six-month period and is annualized
at the end of the six-month period. This standardized yield is not based on
actual distributions paid by the Fund to shareholders in the 30-day period, but
is a hypothetical yield based upon the net investment income from the Fund's
portfolio investments calculated for that period. The standardized yield may
differ from the "dividend yield," described below.
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time a Fund may quote a
"dividend yield" or a "distribution return." Dividend yield is based on the
share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share on the last day of the period.
When the result is annualized for a period of less than one year, the "dividend
yield" is calculated as follows:
Dividends + Number of days (accrual period) x 365
Dividend Yield = ------------------
Max. Offering Price (last day of period)
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<PAGE> 51
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
<TABLE>
<C> <C> <S>
ERV(1n) - 1
(P) = Average Annual Total Return
</TABLE>
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
<TABLE>
<C> <C> <S>
ERV-P
P = Total Return
</TABLE>
Total returns assume that all dividends and capital gains distributions during
the period are reinvested to buy additional shares at net asset value per share,
and that the investment is redeemed at the end of the period.
OTHER PERFORMANCE COMPARISONS. From time to time, a Fund may publish the
ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Funds, and ranks the performance of the Funds against (i) all other funds,
excluding money market funds, and (ii) all other equity funds. The Lipper
performance rankings are based on a total return that includes the reinvestment
of capital gains distributions and income dividends but does not take sales
charges or taxes into consideration.
From time to time, a Fund may publish the ranking of the performance of its
shares by Morningstar, Inc., an independent mutual fund monitoring service that
ranks mutual funds, including the Funds, in broad investment categories (equity,
taxable bond, tax-exempt and other) monthly, based upon each funds' three, five
and ten-year average annual total returns (when available) and a risk adjustment
factor that reflects Fund performance relative to three-month U.S. Treasury bill
monthly returns. Such returns are adjusted for fees and sales loads. There are
five ranking categories with a corresponding number of stars: highest (5), above
average (4), neutral (3), below average (2) and lowest (1). Ten percent of the
funds, series or classes in an investment category receive 5 stars, 22.5%
receive 4 stars, 35% receive 3 stars, 22.5% receive 2 stars, and the bottom 10%
receive one star.
The total return on an investment made in shares of a Fund may be compared
with the performance for the same period of one or more of the following
indices: the Standard & Poor's 500 Index, the Morgan Stanley Capital
International Europe, Australia and Far East Index, the Consumer Price Index,
the Salomon Brothers World Government Bond Index, the Shearson Lehman
Government/Corporate Bond Index, and the Dow Jones Industrial Average Index.
Other indices also may be used from time to time. The Consumer Price Index is
generally considered to be a measure of inflation. The Salomon Brothers World
Government Bond Index generally represents the performance of government debt
securities of various markets throughout the world, including the United States.
The Lehman Government/Corporate Bond Index generally represents the performance
of intermediate and long-term government and investment grade corporate debt
securities. The foregoing indices are unmanaged indices of securities that do
not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices.
From time to time, the yields and the total returns of the Funds may be quoted
in and compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders. The
Funds also may include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase
24
<PAGE> 52
more quickly than if dividends or other distributions had been paid in cash. A
Fund may also include discussions or illustrations of the potential investment
goals of a prospective investor (including but not limited to tax and/or
retirement planning), investment management techniques, policies or investment
suitability of Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes, including but not limited to stocks, bonds and Treasury
bills. From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund, as well as the views of the
investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund. A Fund also may
include in advertisements, charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, Treasury bills and shares of the Fund
as well as charts or graphs which illustrate strategies such as dollar cost
averaging, and comparisons of hypothetical yields of investment in tax-exempt
versus taxable investments. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, a Fund
may reprint articles (or excerpts) written regarding a Fund and provide them to
prospective shareholders. Performance information with respect to the Funds is
generally available by calling 800-539-3863.
Investors also may judge, and the Funds may at times advertise performance by
comparing it to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman
Brothers, Merrill Lynch, and Salomon Brothers, and in publications issued by
Lipper Analytical Services, Inc. and in the following publications: IBC's Money
Fund Reports, Value Line Mutual Fund Survey, Ibottson Associates, Morningstar,
CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street Journal, The
New York Times, Business Week, American Banker, Fortune, Institutional Investor
and U.S.A. Today. In addition to yield information, general information about
the Funds that appears in a publication such as those mentioned above may also
be quoted or reproduced in advertisements or in reports to shareholders.
Advertisements and sales literature may include discussions of specifics of
the portfolio manager's investment strategy and process, including, but not
limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the investment
adviser, including, but not limited to, its status within the industry, other
services and products it makes available, total assets under management and its
investment philosophy.
When comparing yield, total return and investment risk of an investment in a
Fund with other investments, investors should understand that certain other
investments have different risk characteristics than an investment in shares of
the Fund. For example, certificates of deposit may have fixed rates of return
and may be insured as to principal and interest by the FDIC, while a Fund's
returns will fluctuate and its share values and returns are not guaranteed.
Money market accounts offered by banks also may be insured by the FDIC and may
offer stability of principal. U.S. Treasury securities are guaranteed as to
principal and interest by the full faith and credit of the U.S. government.
Money market mutual funds may seek to offer a fixed price per share.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Pursuant to the Investment Advisory Agreement, KMFA determines, subject to the
general supervision of the Directors of the Company, and in accordance with each
Fund's investment objective and restrictions, which securities are to be
purchased or sold by a Fund, and which brokers are to be eligible to execute its
portfolio transactions. Purchases from underwriters and/or broker dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker/dealer and purchases from dealers serving as
market makers may include the spread between bid and asked price. At times, the
Funds also may purchase portfolio securities directly from dealers acting as
principals, underwriters or market makers. As these transactions are usually
conducted on a net basis, no brokerage commissions are paid by a Fund. While
KMFA generally seeks
25
<PAGE> 53
competitive prices (inclusive of any spread or commission), a Fund may not
necessarily pay the lowest prices available on each transaction, for reasons
discussed below.
Allocation of transactions to dealers is determined by KMFA in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. In assessing the best overall terms available for any
transaction, KMFA considers 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, research services
provided to KMFA and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis.
In selecting brokers or dealers qualified to execute a particular transaction,
brokers or dealers may be selected who provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) to KMFA, the Funds or other accounts over which KMFA exercises investment
discretion. Research so received is in addition to and not in lieu of services
required to be performed by KMFA and does not reduce the advisory fees payable
to KMFA by the Funds. Such information may be useful to KMFA in serving both the
Funds and other clients and, conversely, such supplemental research information
obtained by the placement of orders on behalf of other clients may be useful to
KMFA in carrying out its obligations to the Funds. The Investment Advisory
Agreement authorizes KMFA to pay a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio transaction for a
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if KMFA determines in good
faith that the total commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
KMFA with respect accounts over which it exercises investment discretion.
The Funds will not execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with KMFA, Key Trust Company of Ohio, N.A. or its
affiliates, BISYS Fund Services Limited Partnership or their affiliates, and
will not give preference to Key Trust Company of Ohio, N.A.'s correspondent
banks or affiliates, or BISYS Fund Services Limited Partnership with respect to
such transactions, securities, savings deposits, repurchase agreements and
reverse repurchase agreements.
Investment decisions for the Funds are made independently from those made for
other funds or any other investment company or account managed by KMFA. Any such
other investment company or account may also invest in the same securities as a
particular Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and another Fund or investment
company or account, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner which KMFA believes to be
equitable to the Fund and such other Fund or investment company or account. In
some instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained by the Fund. To the
extent permitted by law, KMFA may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for the other Funds or
for other investment companies or accounts in order to obtain best execution. As
provided in the Investment Advisory Agreement, in making investment
recommendations for the Funds, KMFA will not inquire or take into consideration
whether an issuer of securities proposed for purchase or sale by a Fund is a
customer of KMFA, its parents or subsidiaries or affiliates and, in dealing with
their commercial customers, KMFA, its parents, subsidiaries, and affiliates will
not inquire or take into consideration whether securities of such customers are
held by the Funds.
PURCHASE, REDEMPTION AND PRICING
The methods of purchase and redemption of shares, and special retirement,
withdrawal and exchange plans offered are fully set forth in the Prospectus.
Certain additional information is provided below.
Pursuant to Rule 11a-3 under the 1940 Act, a Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under the Rule, the 60-day notification requirement may be
waived if (1) the only effect of a modification would be to reduce or eliminate
an administrative fee, redemption fee, or deferred sales charge ordinarily
payable at the time of exchange, or (2) a Fund temporarily suspends the offering
of shares as permitted under the 1940 Act or by the SEC, or because it is unable
to invest amounts effectively in accordance with its investment objective and
policies.
26
<PAGE> 54
The Company and KMFA reserve the right at any time without prior notice to
shareholders to refuse exchange purchases by any person or group if, in the
judgment of KMFA, a Fund would be unable to invest effectively in accordance
with its investment objective and policies, or would potentially be adversely
affected.
As indicated in the Prospectus, the net asset value of each Fund is determined
and the shares of each Fund are priced as of the close of regular trading of the
NYSE ("the Valuation Time") on each Business Day of the Fund. A "Business Day"
is a day on which the NYSE is open for trading. The NYSE will not be open in
observance of the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
The net asset value of the shares of each Fund is normally determined at 4:00
p.m., New York time, each Business Day, and each is equal to the value of the
securities, cash and other assets, less liabilities, divided by the number of
shares outstanding. Securities traded on securities exchanges or the NASDAQ
national market are valued at the last sales price on the exchange where the
security is primarily traded or, lacking any sales, at the mean between the most
recent bid and asked quotation. Securities traded over-the-counter are valued at
the mean between the most recent bid and asked price. Securities for which
quotations are not readily available and any other assets are valued at fair
value as determined in good faith by the Board of Directors. Money market
instruments are valued at market value except money market instruments having a
maturity of less than 60 days which are valued at amortized cost. The amortized
cost method values a security initially at its cost and thereafter assumes a
constant amortization of any discount or premium regardless of the impact of
fluctuating interest rates on the market value of the security. This method does
not take into account unrealized gains or losses.
Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset values
of the shares of the Funds are determined as of such times. Foreign currency
exchange rates also are generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the values of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange which will not be reflected in the
computation of such Funds' net asset values. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by the Board of
Directors.
FEDERAL INCOME TAXES
The Prospectus describes generally the tax treatment of distributions by each
Fund. This section of the Statement of Additional Information includes
additional information concerning Federal income taxes.
Qualification as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended, (the "Code") requires, among other things, that (a) at
least 90% of each Fund's annual gross income be derived from interest; payments
with respect to securities loans; dividends; and gains from the sale or other
disposition of securities, or foreign currencies, or other income (including but
not limited to gains from options, futures, or forward contracts) derived with
respect to each Fund's business of investing in such securities or currencies;
(b) each Fund generally derives less than 30% of its gross income from gains
from the sale or other disposition of securities, options, futures or forward
contracts held for less than three months; and (c) each Fund diversifies its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the market value of each Fund's assets is represented by cash, government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of each Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities and the securities of other regulated investment
companies), or of two or more issuers which the taxpayer controls and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses. As a regulated investment company, each Fund will not be
subject to Federal income tax on its net investment income and net capital gains
distributed to its shareholders, provided that it distributes to its
shareholders at least 90% of its net investment income and tax-exempt income
earned in each year.
A 4% nondeductible excise tax will be imposed on each Fund (other than to the
extent of each Fund's tax-exempt income) to the extent it does not meet certain
minimum distribution requirements by the end of each calendar
27
<PAGE> 55
year. For this purpose, any income or gain retained by each Fund that is subject
to income tax will be considered to have been distributed by year-end. Each Fund
intends to distribute substantially all of its net investment income and net
capital gains and, thus, expects not to be subject to the excise tax. In
addition, dividends and distributions of taxable income declared payable as of a
record date in October, November or December of any calendar year are deemed
under the Code to have been received by the shareholders on December 31 of that
calendar year if the dividend is actually paid in the following January. Such
dividends will, accordingly, be subject to income tax for the year in which the
record date falls.
Income and dividends received by each Fund from sources within foreign
countries may be subject to withholding and other taxes (generally at rates from
10% to 40%) imposed by such countries. Tax conventions between certain countries
and the United States may reduce or eliminate such taxes. If more than 50% in
value of a Fund's total assets at the close of its taxable year consist of
securities of non-U.S. corporations, the Fund will be eligible to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund must (a) include their respective pro rata portions of such withholding
taxes in their Federal income tax returns as gross income, (b) treat such
amounts as foreign taxes paid by them, and (c) either deduct such amounts in
computing their taxable incomes or use these amounts as foreign tax credits
against their Federal income taxes. The Stock Index Fund does not currently
expect to meet the eligibility requirement for filing this election as its
investments in securities of non -U.S. issuers are limited. However, the
International Index Fund, which invests primarily in foreign securities, does
expect to meet the such eligibility requirements for filing this election
because of its substantial investment in securities of non -U.S. issuers.
Gains or losses on sales of portfolio securities by a Fund generally will be
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases including where each Fund acquires a
put or grants a call thereon. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gain recognized on the disposition
of a debt obligation (including tax-exempt obligations purchased after April 30,
1993) purchased by each Fund at a market discount (generally, at a price less
than its principal amount) will generally be treated as ordinary income to the
extent of the portion of the market discount which accrued during the period of
time the Fund held the debt obligation.
To the extent that a Fund recognizes long-term capital gains, such gains will
be distributed at least annually. Such distributions will be taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held Fund shares. If a Fund share is held for six months or less, then
(unless otherwise disallowed) any loss on the sale or exchange of that Fund
share will be treated as a long-term capital loss to the extent of the
designated capital gain distribution thereon. In addition, any loss realized by
a shareholder upon the sale or redemption of Fund shares held less than six
months is disallowed to the extent of any tax exempt-interest dividends received
thereon by the shareholder. These rules shall not apply, however, to losses
incurred under a periodic redemption plan. If a shareholder exchanges or
otherwise disposes of shares of a Fund within 90 days of having acquired such
shares, and if, as a result of having acquired those shares, the shareholder
subsequently pays a reduced sales charge for shares of the Fund, or of a
different fund, the sales charge previously incurred acquiring the Fund's shares
shall not be taken into account (to the extent such previous sales charges do
not exceed the reduction in sales charges) for the purpose of determining the
amount of gain or loss on the exchange, but will be treated as having been
incurred in the acquisition of such other shares. Also, any loss realized on a
redemption or exchange of shares of a Fund will be disallowed to the extent
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
As of the printing of this Statement of Additional Information, the maximum
individual tax rate applicable to ordinary income is 39.60%; the maximum
individual tax rate applicable to net capital gains is 28%; and the maximum
corporate tax rate applicable to ordinary income and net realized capital gains
is 35% (however, to eliminate the benefit of lower marginal corporate income tax
rates, corporations which have taxable income in excess of $100,000 for a
taxable year will be required to pay an additional amount of income tax of up to
$11,750 and corporations which have taxable income in excess of $15,000,000 for
a taxable year will be required to pay an additional amount of tax of up to
$100,000).
Individuals who are not active participants (and who do not have a spouse who
is an active participant) in certain types of retirement plans ("qualified
retirement plans") may deduct contributions to an individual retirement account
("IRA"), up to specified limits. Investment earnings in an IRA will be
tax-deferred until withdrawn. The
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<PAGE> 56
maximum annual deductible contribution to an IRA for individuals under age
seventy and a half is 100% of includible compensation up to a maximum of (i)
$2,000 for single individuals; (ii) $4,000 for a married couple when both
spouses earn income; and (iii) $2,250 when one spouse earns, or elects for IRA
purposes to be treated as earning, no income (together the "IRA contribution
limits").
The IRA deduction is also available for single individual taxpayers and
married couples who are active participants in qualified retirement plans but
who have adjusted gross incomes which do not exceed certain specified limits. If
their adjusted gross income exceeds these limits, the amount of the deductible
contribution is phased down and eventually eliminated.
Any individual who works may make nondeductible contributions to an IRA in
addition to any deductible contributions. Total aggregate deductible and
nondeductible contributions are limited to the IRA contribution limits discussed
above. Nondeductible contributions in excess of the applicable IRA contribution
limit are "nondeductible excess contributions". In addition, contributions made
to an IRA for the year in which an individual attains the age of seventy and a
half, or any year thereafter, are also nondeductible excess contributions.
Nondeductible excess contributions are subject to a 6% excise tax penalty which
is charged each year that the nondeductible excess contribution remains in the
IRA.
An employer also may contribute to an individual's IRA by establishing a
Simplified Employee Pension Plan, known as a SEP-IRA. Participating employers
may make an annual contribution in an amount up to the lesser of 15% of earned
income or $30,000, subject to certain provisions of the Code. Investment
earnings will be tax-deferred until withdrawn.
The foregoing discussion regarding IRAs is based upon the Code and Federal
regulations in effect as of the date of this Statement of Additional Information
and summarizes only some of the important Federal income tax considerations
generally effecting IRA contributions made by individuals or their employers. It
is not intended as a substitute for careful tax planning.
If an option granted by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the Fund in the
closing transaction. Some realized capital losses may be deferred if they result
from a position that is part of a tax "straddle," discussed below. If securities
are sold by a Fund pursuant to the exercise of a call option granted by it, such
Fund will add the premium received to the sale price of the securities delivered
in determining the amount of gain or loss on the sale. If securities are
purchased by the Fund pursuant to the exercise of a put option granted by it,
such Fund will subtract the premium received from its cost basis in the
securities purchased. The requirement that each Fund derive less than 30% of its
gross income from gains from the sale of securities held for less than three
months may limit a Fund's ability to grant options.
The amount of any gain or loss realized by a Fund on closing out a futures
contract will generally result in a realized capital gain or loss for tax
purposes. Futures contracts held at the end of each fiscal year will be required
to be "marked to market" for Federal income tax purposes pursuant to Section
1256 of the Code. In this regard, they will be deemed to have been sold at
market value. Sixty percent (60%) of any net gain or loss recognized on these
deemed sales and sixty percent (60%) of any net realized gain or loss from any
actual sales, generally will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss. Transactions
that qualify as designated hedges are excepted from the marked to market rule
and the "60%/40%" rule. Currency transactions may be subject to Section 988 of
the Code, under which foreign currency gains or losses would generally be
computed separately and treated as ordinary income or losses. Each Fund will
attempt to monitor Section 988 transactions to avoid an adverse tax impact.
Offsetting positions held by a regulated investment company involving certain
financial forward, futures or option contracts may be considered, for tax
purposes, to constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256, discussed
above. If a regulated investment company were treated as entering into straddles
by reason of its engaging in certain financial forward, futures or option
contracts, such straddles could be characterized as "mixed straddles" if the
futures, forwards, or options comprising a part of such straddles were governed
by Section 1256 of the Code.
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<PAGE> 57
The regulated investment company may make one or more elections with respect to
"mixed straddles" and "straddles." Depending upon which election is made, if
any, the results with respect to the regulated investment company may differ.
Generally, to the extent the straddle rules apply to positions established by
the regulated investment company, losses realized by the regulated investment
company may be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle and the conversion transaction
rules, short-term capital loss on straddle positions may be recharacterized as
long-term capital loss, and long-term capital gain may be characterized as
short-term capital gain or ordinary income.
If a Fund purchases an equity interest in a "passive foreign investment
company" ("PFIC"), the Fund may be subject to an interest charge by the IRS upon
distributions from the PFIC or the Fund's disposition of its interest in the
PFIC. If a Fund invests in a PFIC, the Fund intends to make an available
election under which the Fund will not be subject to the interest charge, but
must annually include its allocable share of income from the PFIC, regardless of
whether the Fund receives any distributions from the PFIC.
FOREIGN SHAREHOLDERS. Under the Code, distributions of net investment income
by any Fund to a non-resident alien individual, non-resident alien fiduciary of
a trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax (at a rate of 30% or a
lower treaty rate). Withholding will not apply if a dividend paid by each Fund
to a foreign shareholder is "effectively connected" with a U.S. trade or
business, in which case the reporting and withholding requirements applicable to
U.S. citizens or domestic corporations will apply. Distributions of net
long-term capital gains are not subject to tax withholding, but, in the case of
a foreign shareholder who is a nonresident alien individual, such distributions
ordinarily will be subject to U.S. income tax at a rate of 30% if the individual
is physically present in the U.S. for more than 182 days during the taxable
year.
OTHER MATTERS. Investors should be aware that the investments to be made by
the Fund may involve sophisticated tax rules such as the original issue
discount, real estate mortgage investment conduit, and subpart F income rules
that would result in income or gain recognition by the Fund without
corresponding current cash receipts. Although the Fund will seek to avoid
significant noncash income, such noncash income could be recognized by the Fund,
in which case the Fund may distribute cash derived from other sources in order
to meet the minimum distribution requirements described above.
The foregoing discussion, and the discussions in the prospectus applicable to
each shareholder, address only some of the Federal tax considerations generally
effecting investments in a Fund. Each investor is urged to consult his or her
tax adviser regarding specific questions as to Federal, state or local taxes.
ADDITIONAL INFORMATION
The Company is an open-end management investment company organized as a
corporation under the laws of the State of Maryland on May 26, 1983. The Company
offers shares of common stock which represent interests in one of six separate
portfolios. This SAI relates to the following Funds of the Company: Key Stock
Index Fund and Key International Index Fund. Each Fund offers only one class of
shares. Shares of each Fund of the Company are redeemable at the net asset value
thereof at the option of the holders thereof or in certain circumstances at the
option of the Company. For information concerning the methods of redemption and
the rights of shares ownership, see the Prospectus under the caption "Redeeming
Shares."
Generally, on each matter submitted to a vote of shareholders, each
shareholder is entitled to one vote per share. In addition, all shares of each
Fund vote as a single class; provided, however, that (i) as to any matter with
respect to which a separate vote of any Fund is required by the 1940 Act or
under the Maryland General Corporation law, the requirements as to a separate
vote by that Fund apply in lieu of single class voting; (ii) in the event that
the separate vote requirements referred to in (i) apply with respect to one or
more Funds, then, subject to (iii) below, the shares of all other Funds vote as
a single class; and (iv) as to any matter which does not affect the interest of
a particular Fund, only the holders of shares of the one or more affected Funds
are entitled to vote. And, notwithstanding any provision of the Maryland General
Corporation Law requiring a greater portion than a majority of the votes
entitled to be cast in order to take or authorize any action, any such action
may be taken or authorized upon the concurrence of a majority of the aggregate
number of votes entitled to be cast thereon.
30
<PAGE> 58
Shares of the Funds have no subscription or preemptive rights and only such
conversion or exchange privileges as the Directors may grant in their
discretion.
Generally, a special meeting of shareholders of the Company will be called by
the Secretary upon receipt of a request in writing signed by stockholders
holding not less than 25% of the common stock at the time issued and outstanding
and entitled to vote thereat.
INDEPENDENT ACCOUNTANTS AND REPORTS
At least semi-annually, the Company will furnish the shareholders of the Funds
with a list of the investments held in the Funds and financial statement for the
Funds. The annual financial statements of the Funds will be audited by the
Company's independent auditors. The Board of Directors has selected Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036 as the
independent accountant to audit the Funds' books and review and prepare the
Funds' tax returns for fiscal years ending on or after November 30, 1996.
COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue NW, Washington, D.C. 20006,
serves as legal counsel to the Company.
31
<PAGE> 59
APPENDIX A
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
MOODY'S BOND RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong positions of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are considered as upper-
medium-grade obligations. Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate and municipal bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
</TABLE>
MOODY'S SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: Prime-1, Prime-2 and Prime-3.
Issuers rated Prime-1 have a superior ability for repayment of senior
short-term debt obligations. Issuers rated Prime-2 have a strong ability for
repayment of senior short-term debt obligations; and issuers rated Prime-3 have
an acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likeli-
32
<PAGE> 60
hood of default capacity and willingness of the obligor as to the timely payment
of interest and repayment of principal in accordance with the terms of the
obligation; (2) nature of and provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poors does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions than debt
in the higher-rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
NR Indicates that no rating has been requested, that there is insufficient information on which to base
a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of
policy.
</TABLE>
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard and Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The commercial paper rating is not a recommendation to purchase, sell,
or hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based upon current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. The ratings may be changed, suspended or withdrawn as a
result of changes in or unavailability of such information, or based on other
circumstances. Ratings are graded into two group categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. The categories are as
follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
1, 2 or 3 to indicate the relative degree of safety.
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely payment is strong.
A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree
of safety is not as high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher
designations.
</TABLE>
33
<PAGE> 61
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Incorporated by Reference in Part B:
Audited Financial Statements, including:
Statements of Investments, November 30, 1995
Statements of Assets and Liabilities, November 30, 1995
Statements of Operations, November 30, 1995
Statements of Changes in Net Assets for the years ended November 30,
1995 and 1994
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants dated January 17, 1996
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ----
<C> <S> <C> <C>
1(a) -- Articles of Incorporation, as amended and supplemented*
(b) -- Articles Supplementary.
2(a) -- By-Laws.*
(b) -- By-Laws, as amended.*
3 -- None.
4 -- None.
5(a) -- Investment Advisory Agreement.*
(b) -- Investment Advisory Agreement, as amended.*
(c) -- Proposed Advisory Agreement (for SBSF Fund, SBSF Money Market Fund, SBSF Convertible
Securities Fund and SBSF Capital Growth Fund).*
(d) -- Form of Investment Advisory Agreement (for Key Stock Index Fund and Key International
Index Fund).*
6 -- None.
7 -- None.
8(a) (i) -- Form of Custody Agreement.*
(a) (ii) -- Custody Agreement*
(b) -- Form of Transfer Agency Agreement.*
9(a) -- Administration Agreement.*
(b) -- Administration Agreement, as amended.*
(c) -- Proposed Administration Agreement.*
(d) -- Form of Administration Agreement (for Key Stock Index Fund and Key International Index
Fund).
(e) -- Form of Fund Accounting Agreement. (for Key Stock Index Fund and Key International Index
Fund).
10 -- Opinion of Counsel.
11 -- Consent of Independent Accountants.
12 -- None.
13 -- Investment Representation Letter.*
14 -- None.
15(a) -- Distribution Plan pursuant to Rule 12b-1.*
(b) -- Distribution Plan pursuant to Rule 12b-1, as amended.*
(c) -- Distribution Plan pursuant to Rule 12b-1, as amended (for Key International Index Fund).
(d) -- Shareholder Servicing Plan and related form of Shareholder Servicing Agreement (for Key
International Index Fund).
16 -- Not Applicable.
</TABLE>
- ---------------
* Previously filed.
C-1
<PAGE> 62
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by or under common control with Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders as of April 30, 1996: SBSF Fund 1,121 record holders;
SBSF Convertible Securities Fund 492 record holders; SBSF Capital Growth Fund
294; and SBSF Money Market Fund 259 record holders.
ITEM 27. INDEMNIFICATION.
The Corporation shall indemnify directors, officers, employees and agents of
the Corporation against judgments, fines, settlements and expenses (including
attorney's fees) to the fullest extent authorized, and in the manner permitted,
by applicable federal and state law, except that such indemnification will not
be permitted if, in the opinion of the Board of Directors, such indemnification
would be inconsistent with the position of the staff of the Securities and
Exchange Commission (the "Commission") in its interpretive releases relating to
matters of indemnification, including Investment Company Act Release No. 11330
(September 4, 1980) for so long as such releases remain the position of the
staff of the Commission. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers or
persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See information set forth under the caption "Investment Adviser" in the
Prospectus and the Statement of Additional Information.
KeyCorp Mutual Fund Advisers, Inc. ("KMFA") is the investment adviser to each
fund of the Key Funds. KMFA is a wholly-owned indirect subsidiary of KeyCorp, a
bank holding company which had total assets of approximately $65 billion as of
March 31, 1996. KeyCorp is a leading financial institution doing business in 26
states from Maine to Alaska, providing a full array of trust, commercial, and
retail banking services. Its non-bank subsidiaries include investment advisory,
securities brokerage, insurance, bank credit card processing, mortgage and
leasing companies. KMFA and its affiliates have over $48 billion in assets under
management, and provide a full range of investment management services to
personal and corporate clients.
To the knowledge of Registrant, none of the directors or officers of KMFA,
except those set forth below, is or has been at any time during the past two
calendar years engaged in any other business, profession, vocation or employment
of a substantial nature, except that certain directors and officers of KMFA also
hold positions with KeyCorp or its subsidiaries.
The principal executive officers and directors of KMFA are as follows:
W. Christopher Maxwell, Director, Chairman and Chief Executive Officer. Also
Executive Vice President of KeyCorp Management Company ("KMC").
Kathleen A. Dennis, Director and President. Also Senior Vice President of
KMC.
Martin J. Walker, Director. Also Director, Chairman, President and Chief
Executive Officer of Society Asset Management and Executive Vice President
of KeyCorp.
John M. Keane, Vice President and Treasurer. Also Vice President, KMC.
William J. Blake, Secretary. Also Secretary, Society Asset Management and
Key Investments. Attorney, KeyCorp.
Steven N. Bulloch, Assistant Secretary. Also Senior Vice President and
Senior Counsel, KMC.
Charles G. Crane, Senior Vice President and Senior Managing Director. Also
Senior Vice President and Managing Director, SBSF, 45 Rockefeller Plaza, New
York, NY 10111
Eric P. Rasmussen, Senior Vice President and Senior Managing Director. Also
Director, CEO and Chairman of Applied Technology Investments, Inc. and
Director, Corporate Treasury of KeyCorp.
Dennis M. Grapo, Senior Vice President and Senior Managing Director. Also
Senior Vice President and Senior Managing Director of Society Asset
Management and Senior Vice President of Key Trust Company of Ohio.
Frank J. Riccardi, Senior Vice President and Senior Managing Director. Also
Senior Vice President and Senior Managing Director of Society Asset
Management and Senior Vice President of Key Trust Company of Ohio.
C-2
<PAGE> 63
Anthony Aveni, Senior Vice President and Senior Managing Director. Also
Senior Vice President and Senior Managing Director of Society Asset
Management and Senior Vice President of Key Trust Company of Ohio.
The business address of each of the foregoing individuals is 127 Public
Square, Cleveland, Ohio 44114, except as otherwise indicated.
ITEM 29. PRINCIPAL UNDERWRITER.
(a) BISYS Fund Services, Limited Partnership ("BISYS Fund Services") is
expected to act as distributor and administrator for the Registrant as of
July 1, 1996. BISYS Fund Services also distributes the securities of the
American Performance Funds, the AmSouth Mutual Funds, The ARCH Fund, Inc.,
The BB&T Mutual Funds Group, The Coventry Group, the MarketWatch Funds,
the MMA Praxis Mutual Funds, M.S.D.&T. Funds, the Pacific Capital Funds,
The Parkstone Group of Funds, the Qualivest Funds, The Riverfront Funds,
Inc., The Sessions Group and the Summit Investment Trust, each of which is
an open-end management investment company.
(b) Partners of BISYS Fund Services, as of May 31, 1996 were as follows:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH OFFICES WITH
BUSINESS ADDRESS BISYS FUND SERVICES REGISTRANT
- ---------------------------------- ---------------------- --------------
<S> <C> <C>
BISYS Fund Services Inc. Sole General Partner None
3435 Stelzer Road
Columbus, OH 43219
WC Subsidiary Corporation Sole Limited Partner None
150 Clove Road
Little Falls, New Jersey 07424
The BISYS Group, Inc. Sole Shareholder None
150 Clove Road
Little Falls, New Jersey 07424
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder will be maintained at the offices
of:
(1) Key Mutual Funds, 45 Rockefeller Plaza, New York, NY 10111;
(2) State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110
(records relating to its functions as Transfer Agent);
(3) BFDS, Two Heritage Drive, Quincy, MA 02071 (records relating to its
functions as dividend disbursing agent and shareholder servicing agent);
(4) BISYS Fund Services, 3435 Stelzer Road, Columbus, OH 43219 (records
relating to its functions as Administrator, Distributor and Fund
Accountant);
(5) Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, OH 44114
(records relating to its functions as Custodian); and
(6) KeyCorp Mutual Fund Advisers, Inc., 127 Public Square, Cleveland, OH
44114-1306 (records relating to its functions as Investment Adviser).
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "Investment Adviser" and
"Administrator" in Parts A and B of the Registration Statement, Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Registrant undertakes to file a post-effective amendment with respect to
Key Stock Index Fund and Key International Index Fund, using financials which
need not be certified, within four to six months of the effective date of the
Registration Statement under the Securities Act of 1933 for such Funds.
C-3
<PAGE> 64
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
when such annual report is issued, containing information called for by Item 5A
of Form N-1A, upon request and without charge.
C-4
<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Columbus, and State of
Ohio, on the 11th day of June, 1996.
SBSF FUNDS, INC.
By *
Leigh A. Wilson
President
By /s/ Scott A. Englehart
Scott A. Englehart
*Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to Registrant's Registration Statement has been signed
below by the following individuals in the capacities indicated on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- ------------------------------------------- ------------------
<S> <C> <C>
* President and Director (Principal June 11, 1996
Leigh A. Wilson Executive Officer)
* Director June 11, 1996
Eugene J. McDonald
* Non-Executive Chairman and Director June 11, 1996
Frank A. Weil
* Director June 11, 1996
Edward P. Campbell
* Treasurer (Principal Financial June 11, 1996
Kevin L. Martin Officer and Principal Accounting Officer)
/s/ Scott A. Englehart
Scott A. Englehart
*Attorney-in-Fact
</TABLE>
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------------------------------- ------------------------------------------------------------
<S> <C>
EX-99.B1(a) Articles Supplementary
EX-99.B9(d) Form of Administration Agreement
EX-99.B9(e) Form of Fund Accounting Agreement
EX-99.B10 Opinion of Counsel
EX-99.B11 Consent of Independent Accountants
EX-99.B15(c) Distribution Plan pursuant to Rule 12b-1, as amended
EX-99.B15(d) Shareholder Servicing Plan and Related Form of Shareholder
Servicing Agreement
</TABLE>
<PAGE> 1
Exhibit-99.B1(a)
SBSF FUNDS, INC.
ARTICLES SUPPLEMENTARY
SBSF Funds, Inc. (d/b/a Key Mutual Funds), a Maryland corporation
having its principal office in Maryland at c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202 (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act").
SECOND: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by Section 2-105(c) of the Corporations and
Associations Article, and pursuant to Section 2-208.1 of the Corporations and
Associations Article and resolutions duly adopted at a regular meeting of the
Corporation's Board of Directors, the Board of Directors has authorized the
appropriate Officers of the Corporation to take such action as is necessary to
increase the number of authorized shares of common stock of the Corporation to
twenty-five billion (25,000,000,000), all of which have a par value of one cent
($.01) per share, having an aggregate par value of two hundred fifty million
dollars ($250,000,000).
THIRD: Immediately before the twenty-four billion seven hundred fifty
million (24,750,000,000) increase in the aggregate number of shares as set forth
in Article SECOND hereto, the Corporation was authorized to issue two hundred
fifty million (250,000,000) shares of common stock, all of which had a par value
of one cent ($.01) per share, having an aggregate par value of two million five
hundred thousand dollars ($2,500,000).
Of those two hundred fifty million shares, one hundred seventy five
million (175,000,000) shares were classified as Shares of SBSF Money Market
Fund; twenty five million (25,000,000) shares were classified as Shares of SBSF
Fund; twenty five million (25,000,000) shares were classified as Shares of SBSF
Convertible Securities Fund; and twenty five million (25,000,000) shares were
classified as Shares of SBSF Capital Growth Fund.
FOURTH: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by the Articles of Incorporation, as amended and
supplemented (the "Charter") and Article V thereto, and pursuant to resolutions
duly adopted at a regular meeting of the Corporation's Board of Directors, the
Board of Directors of the Corporation has duly classified two billion seven
hundred fifty million (2,750,000,000) shares of the Corporation's authorized but
unclassified and unissued shares of common
<PAGE> 2
stock as shares of SBSF Money Market Fund, and the shares so classified
shall have the relative rights and preferences specified for such class of
shares of the Corporation's common stock as set forth in Article V.
FIFTH: Pursuant to authority expressly vested in the Board of Directors
of the Corporation by the Charter and Article V thereto, and pursuant to
resolutions duly adopted at regular meetings of the Corporation's Board of
Directors, the Board of Directors of the Corporation has duly classified five
billion (5,000,000,000) shares of Corporation's authorized but unclassified and
unissued shares of common stock as follows and has provided for the issuance of
such series: "Key Stock Index Fund," consisting of one billion (1,000,000,000)
shares; "Key International Index Fund," consisting of one billion
(1,000,000,000) shares; "Key Growth Fund," consisting of one billion
(1,000,000,000) shares; "Key Growth and Income Fund," consisting of one billion
(1,000,000,000) shares; and "Key Income Fund," consisting of one billion
(1,000,000,000) shares (the "New Series," individually or collectively, as the
context requires).
SIXTH: Shares of capital stock of the New Series shall have the
following assets, liabilities, preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption:
(a) All consideration received by the Corporation for
the issue or sale of Shares of a New Series, together with all
assets in which such consideration is invested or reinvested,
all income, earnings, profits and proceeds thereof, including
any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may
be, shall irrevocably belong to that New Series for all
purposes, subject only to the rights of creditors, and shall
be so recorded upon the books of account of the Corporation.
Such consideration, assets, income, earnings, profits, and
proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds, in
whatever form the same may be, are herein referred to as
"assets belonging to" that New Series.
(b) The assets belonging to each New Series shall be
charged with the liabilities of the Corporation in respect of
each such New Series and all expenses, costs, charges and
reserves attributable to each such New Series and with all
payments of consideration made incident to the redemption or
reacquisition of any Shares of each such
2
<PAGE> 3
New Series. The Board of Directors shall cause any
general liabilities, expenses, costs, charges or reserves of
the Corporation which are not readily identifiable as
belonging to any particular New Series to be allocated and
charged to and among all Series in proportion to their
relative asset values. The liabilities, expenses, costs,
charges and reserves allocated and charged to a New Series
are herein referred to as "liabilities belonging to" that
New Series. Each allocation of liabilities, expenses, costs,
charges and reserves shall be conclusive and binding upon
the holders of all New Series for all purposes.
(c) Income belonging to a New Series includes all
income, earnings and profits derived from assets belonging to
that New Series, less any expenses, costs, charges or reserves
belonging to that New Series, for the relevant time period,
all determined in accordance with generally accepted
accounting principles.
(d) Dividends and distributions on Shares of a New
Series may be paid with such frequency as the Board of
Directors may determine, which may be daily or otherwise
pursuant to a standing resolution or resolutions adopted only
once or with such frequency as the Board of Directors may
determine, to the holders of Shares of that New Series, from
such of the income and capital gains, accrued or realized,
from the assets belonging to that New Series, after providing
for actual and accrued liabilities belonging to that New
Series. Except as hereinafter provided, all dividends on
Shares of a New Series shall be paid only out of the income
belonging to that Series and capital gains distributions on
Shares of a New Series shall be paid only out of the capital
gains belonging to that New Series.
Dividends and distributions may be made in cash or
Shares or a combination thereof as determined by the Board of
Directors or pursuant to any program that the Board of
Directors may have in effect at the time for the election by
each Shareholder of the mode of the making of such dividend or
distribution to that Shareholder. Any such dividend or
distribution paid in Shares will be paid at the net asset
value thereof as determined in accordance with paragraph (k)
of this Article SIXTH.
3
<PAGE> 4
(e) In the event of the liquidation or dissolution of
the Corporation, the Shareholders of each New Series shall be
entitled to receive, as a New Series, when and as declared by
the Board of Directors, the excess of the assets belonging to
that New Series over the liabilities belonging to that New
Series. The liquidation of any New Series with Shares then
outstanding may be authorized by the Board of Directors,
subject to the approval of a majority of the outstanding
voting securities of that New Series, as defined in the 1940
Act.
(f) On each matter submitted to a vote of the
Shareholders, each holder of a Share shall be entitled to one
vote for each Share standing in his name on the books of the
Corporation on the date fixed in accordance with the by-laws
for determination of shareholders entitled to vote at such
meeting, irrespective of the Series thereof and all Shares of
all Series shall vote as a single class; provided, however,
that (i) as to any matter with respect to which a separate
vote of any Series is required by the 1940 Act or would be
required under the Maryland General Corporation law, such
requirements as to a separate vote by that Series shall apply
in lieu of single class voting as described above; (ii) in the
event that the separate vote requirements referred to in (i)
above apply with respect to one or more Series, then, subject
to (iii) below, the Shares of all other Series shall vote as a
single class; and (iv) as to any matter which does not affect
the interest of a particular Series, only the holders of
Shares of the one or more affected Series shall be entitled to
vote. Notwithstanding any provision of the General Corporation
Law of the State of Maryland requiring a greater portion than
a majority of the votes entitled to be cast in order to take
or authorize any action, any such action may be taken or
authorized upon the concurrence of a majority of the aggregate
number of votes entitled to be cast thereon.
(g) Each shareholder of a New Series, upon request to
the Corporation, accompanied by surrender of any outstanding
certificate or certificates therefor in proper form for
transfer, shall be entitled to require the Corporation to
redeem all or any part of the Shares of any New Series
standing in his name on the books of the Corporation, at the
then current net asset value of the Shares of such New Series.
The method of computing such
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<PAGE> 5
current net asset value, and the time within which the
Corporation shall make payment therefor shall be determined
as hereinafter provided. Notwithstanding the foregoing, the
Corporation may suspend the right of the shareholders to
require the Corporation to redeem Shares:
(1) for any period (i) during which the New York
Stock Exchange is closed other than the customary weekend
and holiday closings, or (ii) during which trading on the
New York Stock Exchange is restricted;
(2) for any period during which an emergency, as
determined by the Securities and Exchange Commission or
any successor thereto, exists as a result of which (i)
disposal by it is not reasonably practicable, or (ii) it
is not reasonably practicable for the Corporation fairly
to determine the value of its net assets; or
(3) for such other periods as the Securities and
Exchange Commission or any successor thereto may by order
permit for the protection of security holders of the
Corporation.
(h) The Corporation may at any time and from time to
time, at the sole discretion of the Board of Directors, upon
not less than 30 days' written notice, redeem at the then
current net asset value of such Shares, all the Shares of any
New Series of any shareholder the aggregate current net asset
value of whose Shares of that Series is less than $500.
(i) Payment of the redemption or repurchase price for
Shares of any New Series redeemed or repurchased by the
Corporation may be made either in cash or in securities or
other assets at the time owned by the Corporation and
belonging to that New Series or partly in cash and partly in
securities or other assets at the time owned by the
Corporation and belonging to that New Series as the Board of
Directors may, in its sole discretion, determine. In the case
of redemption, the value of any part of such payment to be
made in securities or other assets of the Corporation shall be
the value employed in determining the redemption price, and
payment of the redemption price
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<PAGE> 6
shall be made on or before the seventh day following
the day on which the Shares are properly presented for
redemption except that delivery of any securities included
in any such payment shall be made as promptly as any
necessary transfers on the books of the issuers whose
securities are to be delivered may be made, and, except as
postponement of the date of payment may be permissible under
the 1940 Act and the rules and regulations thereunder.
(j) In the case of shares of stock of the Corporation
issued in whole or in part in exchange for securities, there
may, at the discretion of the Board of Directors of the
Corporation, be included in the value of such securities, for
the purpose of determining the number of shares of capital
stock of the Corporation issuable in exchange therefor, the
amount, if any, of brokerage commissions (not exceeding an
amount equal to the rates payable in connection with the
purchase of comparable securities on the New York Stock
Exchange) or other similar costs of acquisition of such
securities held by the holder of said securities in acquiring
the same.
(k) The net asset value per Share of each New Series
shall be determined in good faith pursuant to the direction of
the Board of Directors in a manner not inconsistent with the
Investment Company Act of 1940 or any rule, regulation or
order thereunder as of such specific time or times as the
Board of Directors shall determine.
(l) No holder of any Shares of a New Series shall be
entitled as of right to subscribe for, purchase, or otherwise
acquire any Shares which the Corporation proposes to issue for
any rights or options which the Corporation proposes to grant
for the purchase of Shares or for the purchase of any bonds,
securities, or obligations of the Corporation which are
convertible into or exchangeable for, or which carry any
rights to subscribe for, purchase, or otherwise acquire
Shares; and any and all of such Shares, bonds, securities or
obligations of the Corporation, whether now or hereafter
authorized or created may be issued, or may be reissued or
transferred if the same have been reacquired and have treasury
status, and any and all of such rights and options may be
granted by the Board of Directors to such persons, firms,
corporations and
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<PAGE> 7
associations, and for such lawful consideration, and on
such terms, as the Board of Directors in its discretion may
determine, without first offering the same, or any thereof,
to any such holder.
(m) Except as otherwise provided herein, the
preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption applicable to the
Corporation's stock as set forth in the Corporation's Charter,
shall apply.
SEVENTH: The Board of Directors has duly authorized the filing of
these Articles Supplementary.
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IN WITNESS WHEREOF, SBSF Funds, Inc. has caused these presents to be signed
in its name and on its behalf by its President and witnessed by its Assistant
Secretary on the 30th day of May, 1996.
WITNESS: SBSF FUNDS, INC.
/s/ Scott A. Englehart /s/ Leigh A Wilson
Scott A. Englehart, Asst. Sec. Leigh A. Wilson, President
THE UNDERSIGNED, President of SBSF Funds, Inc., who executed on behalf of
the Corporation the Articles Supplementary of which this Certificate is made a
part, hereby acknowledges in the name and on behalf of said Corporation the
foregoing Articles Supplementary to be the corporate act of said Corporation and
hereby certifies that the matters and facts set forth herein with respect to the
authorization and approval thereof are true in all material respects under the
penalties of perjury.
/s/ Leigh A. Wilson
Leigh A. Wilson, President
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<PAGE> 1
EX-99.B9(d)
ADMINISTRATION AGREEMENT
This Administration Agreement is made as of this 1st day of June, 1996
between SBSF Funds, Inc. (d/b/a Key Mutual Funds), a Maryland corporation
(herein called the "Company"), and Concord Holding Corporation, a Delaware
corporation (herein called "Concord").
WHEREAS, the Company is an open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and consisting of various investment portfolios, certain of which are
listed on Schedule I hereto, as such Schedule may be revised from time to time
(individually, a "Fund" and collectively, the "Funds"); and
WHEREAS, the Company offers for sale shares of common stock par value
$.01 per share of the Funds (herein collectively called "Shares"); and
WHEREAS, pursuant to a Distribution Agreement dated April 5, 1995 (the
"Distribution Agreement") between the Company and Concord Financial Group, Inc.
("Concord Financial"), the Company has retained Concord Financial as its
Distributor to provide for the sale and distribution of the Shares; and
WHEREAS, the Company desires to retain Concord as its Administrator to
provide it with certain administrative services with respect to each of the
Funds and their respective Shares, and Concord is willing to render such
services;
NOW THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Company has delivered to Concord copies of each of the following
documents and will deliver to it all future amendments and supplements thereto,
if any:
(a) The Company's Articles of Incorporation and all amendments
thereto (such Articles of Incorporation, as presently in effect and as
it shall from time to time be amended, herein called the "Articles");
<PAGE> 2
(b) The By-Laws of the Company (such By-Laws as presently in
effect and as they shall from time to time be amended, herein called
the "By-Laws");
(c) Resolutions of the Board of Directors of the Company
authorizing the execution and delivery of this Agreement;
(d) The Company's most recent Post-Effective Amendment to its
Registration Statement(s) under the Securities Act of 1933, as amended
(the "1933 Act"), and under the 1940 Act, on Form N-1A as filed with
the Securities and Exchange Commission (the "Commission") relating to
the Shares and any further amendment thereto;
(e) Notification of registration of the Company under the 1940
Act on Form N-8A as filed with the Commission; and
(f) Prospectuses and Statements of Additional Information of
the Company with respect to the Funds (such prospectuses and statements
of additional information, as presently in effect and as they shall
from time to time be amended and supplemented, herein called
individually the "Prospectus" and collectively, the "Prospectuses").
II. ADMINISTRATION
1. APPOINTMENT OF ADMINISTRATOR. The Company hereby appoints Concord
as its Administrator for each of the Funds on the terms and for the period set
forth in this Agreement and Concord hereby accepts such appointment and agrees
to perform the services and duties set forth in this Section II for the
compensation provided in this Section II. The Company understands that Concord
now acts and will continue to act as administrator of various investment
companies and fiduciary of other managed accounts, and the Company has no
objection to Concord so acting. In addition, it is understood that the persons
employed by Concord to assist in the performance of its duties hereunder, will
not devote their full time to such services and nothing herein contained shall
be deemed to limit or restrict the right of Concord or any affiliate of Concord
to engage in and devote time and attention to other businesses or to render
services of
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<PAGE> 3
whatever kind or nature.
2. REPRESENTATIONS OF CONCORD. Concord represents and warrants that:
(1) the various procedures and systems which Concord has implemented with regard
to safeguarding from loss or damage attributable to fire, theft, or any other
cause of the records and other data of the Company and Concord's records, data,
equipment facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder, and (2) this Agreement has been duly authorized by Concord and, when
executed and delivered by Concord, will constitute a legal, valid and binding
obligation of Concord, enforceable against Concord in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting the rights and remedies of creditors and secured
parties.
3. SERVICES AND DUTIES.
(a) As Administrator, and subject to the supervision and
control of the Board of Directors of the Company, Concord will provide
facilities, equipment, statistical and research data, clerical
services, internal compliance services relating to legal matters, and
personnel to carry out all administrative services required for
operation of the business and affairs of the Funds, other than those
investment advisory functions which are to be performed by the Funds'
investment adviser(s), the services of Concord Financial as Distributor
pursuant to the Distribution Agreement, those services to be performed
by the Funds' custodian, transfer agent and any fund accounting agent,
and those services normally performed by the Funds' counsel and
auditors. Concord's responsibilities include without limitation the
following services:
(1) Overseeing the performance of the Funds'
custodian and transfer agent;
(2) Making available information concerning each Fund
to its shareholders; distributing written communications to
each Fund's shareholders of record such as periodic listings
of each Fund's securities, annual and semi-annual reports, and
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<PAGE> 4
Prospectuses and supplements thereto); and handling
shareholder problems and calls relating to administrative
matters; and
(3) Providing and supervising the services of
employees whose principal responsibility and function shall be
to preserve and strengthen each Fund's relationships with its
shareholders.
(b) Concord shall assure that persons are available to
transmit wire, telephone or electronic redemption requests to the
Funds' transfer agent as promptly as practicable.
(c) Concord shall assure that persons are available to
transmit wire, telephone or electronic orders accepted for the purchase
or exchange of Shares to the Funds' transfer agent as promptly as
practicable.
(d) Concord shall participate in the periodic updating of the
Prospectuses and shall coordinate (i) the filing, printing and
dissemination of reports to each Fund's shareholders and the
Commission, including but not limited to annual reports and semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2, (ii) the
preparation, filing, printing and dissemination of proxy materials, and
(iii) the preparation and filing of post-effective amendments to the
Funds' Registration Statement on Form N-1A relating to the updating of
financial information and other routine matters.
(e) Concord shall pay all costs and expenses of maintaining
the offices of the Funds, wherever located, and shall arrange for
payment by the Funds of all expenses payable by the Funds.
(f) Concord, after consultation with the Funds' investment
adviser(s), shall determine the jurisdictions in which the Shares shall
be registered or qualified for sale and, in connection therewith, shall
be responsible for obtaining and maintaining the registration or
qualification of the Shares for sale under the securities laws of such
jurisdictions. Payment of Share registration fees and any fees for
qualifying or continuing the qualification of the Funds shall be made
by the Funds.
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<PAGE> 5
(g) Concord shall provide the services of certain persons who
may be appointed as officers of the Company by the Company's Board of
Directors.
(h) Concord shall oversee the maintenance by the Funds'
custodian and transfer agent of the books and records required under
the 1940 Act in connection with the performance of the Company's
agreements with such entities, and shall maintain, or provide for the
maintenance of, such other books and records (other than those required
to be maintained by the Funds' investment adviser(s) and any fund
accounting agent) as may be required by law or may be required for the
proper operation of the business and affairs of the Funds. In
compliance with the requirements of Rule 31a-3 under the 1940 Act,
Concord agrees that all such books and records which it maintains, or
is responsible for maintaining, for the Funds are the property of the
Company and further agrees to surrender promptly to the Company any of
such books and records upon the Company's request. Concord further
agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act said books and records required to be maintained by Rule 31a-1
under said Act.
(i) Concord shall coordinate the preparation of the Funds'
federal, state and local income tax returns.
(j) Concord shall prepare such other reports relating to the
business and affairs of the Company and each Fund (not otherwise
appropriately prepared by the Funds' investment adviser(s), any fund
accounting agent, Concord Financial or the counsel or auditors) as the
officers and Directors of the Company may from time to time reasonably
request in connection with the performance of their duties.
(k) In performing its duties as Administrator of the Company,
Concord will act in conformity with the Articles, By-Laws and
Prospectuses and with the instructions and directions of the Board of
Directors of the Company and will conform to and comply with the
requirements of the 1940 Act and all other applicable federal or state
laws and regulations.
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<PAGE> 6
4. SUBCONTRACTORS. It is understood that Concord may from time to time
employ or associate with itself such person or persons as Concord may believe to
be particularly fitted to assist in the performance of this Agreement; provided,
however, that the compensation of such persons shall be paid by Concord and that
Concord shall be as fully responsible to the Company for the acts and omissions
of any subcontractor as it is for its own acts and omissions.
5. EXPENSES ASSUMED AS ADMINISTRATOR. Except as otherwise stated in
this subsection 5, Concord shall pay all expenses incurred by it in performing
its services and duties as Administrator, including the cost of providing office
facilities, equipment and personnel related to such services and duties. Other
expenses incurred in the operation of the Company (other than those borne by the
Company's investment adviser) including taxes, interest, brokerage fees and
commissions, if any, fees of directors who are not officers, directors,
partners, employees or holders of 5 percent or more of the outstanding voting
securities of the Company's investment advisers or Concord or any of their
affiliates, Commission fees and state blue sky registration or qualification
fees, advisory fees, charges of custodians, transfer and dividend disbursing
agents' fees, fund accounting agents' fees, fidelity bond and directors' and
officers' errors and omissions insurance premiums, outside auditing and legal
expenses, costs of maintaining corporate existence, costs attributable to
shareholder services, including without limitation telephone and personnel
expenses, costs of preparing and printing Prospectuses for regulatory purposes
and for distribution to existing shareholders, costs of shareholders' reports
and Company meetings and any extraordinary expenses will be borne by the
Company.
6. COMPENSATION. For the services provided and the expenses assumed as
Administrator pursuant to this Section II, the Company will pay Concord a fee,
computed daily and payable monthly, at the annual rate of .15% of each Fund's
average daily net assets. Such fee as is attributable to each Fund shall be a
separate (and not joint or joint and several) obligation of each such Fund. No
individual Fund shall have any responsibility for any obligation, if any, with
respect to any other Fund arising out of this Agreement.
III. CONFIDENTIALITY
Concord will treat confidentially and as proprietary information of the
Company all
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<PAGE> 7
records and information relative to the Company and the Funds and
their prior or present shareholders or those persons or entities who respond to
Concord Financial inquiries concerning investment in the Company, and except as
provided below, will not use such records and information for any purpose other
than performance of its responsibilities and duties with regard to any other
investment portfolio which may be added to the Company in the future. Any other
use by Concord of the information and records referred to above may be made only
after prior notification to and approval in writing by the Company. Such
approval shall not be unreasonably withheld and may not be withheld where (i)
Concord may be exposed to civil or criminal contempt proceedings for failure to
divulge such information; (ii) Concord is requested to divulge such information
by duly constituted authorities; or (iii) Concord is so requested by the
Company.
IV. STANDARD OF CARE; INDEMNIFICATION; LIMITATION OF LIABILITY
Concord shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Company
for any action taken or omitted by Concord in the absence of bad faith, willful
misfeasance, negligence or reckless disregard by it of its obligations and
duties. The Company agrees to indemnify and hold harmless Concord, its
employees, agents, directors, officers and nominees from and against any and all
claims, demands, actions and suits, whether groundless or otherwise, and from
and against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to Concord's actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information, records, instructions or requests with
respect to the Funds given or made to Concord by a duly authorized
representative of the Company; provided that this indemnification shall not
apply to actions or omissions of Concord in cases of its own bad faith, willful
misfeasance, negligence or reckless disregard by it of its obligations and
duties, and further provided that prior to confessing any claim against it which
may be the subject of this indemnification, Concord shall give the Company
written notice of and reasonable opportunity to defend against said claim in its
own name or in the name of Concord.
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<PAGE> 8
Concord agrees to indemnify and hold harmless the Company, its
employees, agents, directors, officers and nominees from and against any and all
claims, demands, actions and suits, whether groundless or otherwise, and from
and against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to Concord's bad faith, willful misfeasance, negligence or
reckless disregard by it of its obligations and duties, with respect to the
performance of services under this Agreement.
Any person, even though also an officer, director, employee or agent of
Concord, who may be or become an officer, director, employee or agent of the
Company, shall be deemed, when rendering services to the Company, or acting on
any business of the Company (other than services or business in connection with
Concord's duties hereunder) to be rendering such services to or acting solely
for the Company and not as an officer, director, employee or agent or one under
the control or direction of Concord even though paid by Concord.
V. DURATION AND TERMINATION
The term of this Agreement shall commence on the date first set forth
above and shall remain in effect through May 31, 1997 ("Initial Term"). This
Agreement shall be renewed automatically for successive periods of one year
after the Initial Term, unless terminated by either party on not less than 90
days prior written notice to the other party. In the event of a material breach
of this Agreement by either party, the non-breaching party shall notify the
breaching party in writing of such breach and upon receipt of such notice, the
breaching party shall have 45 days to remedy the breach or the non-breaching
party may immediately terminate this Agreement.
Notwithstanding the foregoing, after such termination for so long as
Concord, with the written consent of the Company, in fact continues to perform
any one or more of the services contemplated by this Agreement or any schedule
or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due Concord and unpaid by the Company upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. Concord shall be entitled to collect from the Company, in addition
to the
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<PAGE> 9
compensation described in Section II, paragraph 6, the amount of all of
Concord's cash disbursements for services in connection with Concord's
activities in effecting such termination, including without limitation, the
delivery to the Company and/or its designees of the Company's property, records,
instruments and documents, or any copies thereof. Subsequent to such
termination, for a reasonable fee, Concord will provide the Company with
reasonable access to any Company documents or records remaining in its
possession.
VI. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated, except by an instrument in writing signed by the party against whom
an enforcement of the change, waiver, discharge or termination is sought.
VII. NOTICES
Notices of any kind to be given to the Company hereunder by Concord
shall be in writing and shall be duly given if mailed or delivered to the
Company c/o Scott A. Englehart, Assistant Secretary, SBSF Funds, Inc., c/o BISYS
Investment Services Group, 3435 Stelzer Road, Columbus, Ohio 43219, with copies
to Kathleen A. Dennis, Senior Vice President, KeyCorp Mutual Funds Group, 127
Public Square, 13th Floor, Cleveland, Ohio 44114-1306 and Michael R. Parker,
Vice President and General Counsel, Spears, Benzak, Salomon & Farrell, Inc., 45
Rockefeller Plaza, New York, NY 10011, or at such other address or to such
individual as shall be so specified by the Company to Concord. Notices of any
kind to be given to Concord hereunder by the Company shall be in writing and
shall be duly given if mailed or delivered to Concord at 3435 Stelzer Road,
Columbus, Ohio 43219, Attention: Stephen P. Mintos, Executive Vice President, or
at such other address or to such other individual as Concord shall specify to
the Company.
VIII. MISCELLANEOUS
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule
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<PAGE> 10
or otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Section V hereof, this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and shall be governed by New York law; provided, however, that
nothing herein shall be construed in a manner inconsistent with the 1940 Act or
any rule or regulation of the Commission thereunder.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
SBSF FUNDS, INC.
d/b/a KEY MUTUAL FUNDS
By: ___________________________________
Attest: ________________________ CONCORD HOLDING CORPORATION
By: ___________________________________
Attest: ________________________
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<PAGE> 12
SCHEDULE I
Funds
- -----
1. Key Stock Index Fund
2. Key International Index Fund
12
<PAGE> 1
EX-99.B9(e)
FUND ACCOUNTING AGREEMENT
AGREEMENT made as of this 1st day of June, 1996 between SBSF Funds,
Inc. (d/b/a Key Mutual Funds) (the "Company"), a Maryland corporation, having
its principal place of business at 45 Rockefeller Plaza, New York, New York
10111, and BISYS Fund Services, Inc., a corporation organized under the laws of
the State of Delaware and having its principal place of business at 3435 Stelzer
Road, Columbus, Ohio 43219.
WHEREAS, the Company desires that BISYS perform certain fund accounting
services for each investment portfolio of the Company identified on Schedule A
hereto (individually referred to herein as a "Fund" and collectively as the
"Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AS FUND ACCOUNTANT. BISYS will keep and maintain the
following books and records of each Fund pursuant to Rule 31a-1 under the
Investment Company Act of 1940 (the "Rule"):
a. Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash and
all other debits and credits, as required by subsection (b)(1) of the Rule;
b. General and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued and
interest received, as required by subsection (b)(2)(i) of the Rule;
c. Separate ledger accounts required by subsection (b)(2)(ii)
and (iii) of the Rule; and
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d. A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of the Rule.
All such books and records shall be the property of the Company, and BISYS
agrees to make such books and records available for inspection by the Company or
by the Securities and Exchange Commission at reasonable times and otherwise to
keep confidential all records and other information relative to the Company;
except when requested to divulge such information by duly constituted
authorities or court process, or when requested by the Company.
In addition to the maintenance of the books and records specified
above, BISYS shall perform the following accounting services daily for each
Fund;
a. Calculate the net asset value per Share;
b. Calculate the dividend and capital gain distribution, if any;
c. Calculate the yield or total return and other performance figures,
as appropriate;
d. Provide the following reports:
(i) a current security position report;
(ii) a summary report of transactions and pending
maturities (including the principal cost, and accrued
interest on each portfolio security in maturity date
order); and
(iii) a current cash position report (including cash
available from portfolio sales and maturities and
sales of a Fund's Shares less cash needed for
redemptions and settlement of portfolio purchases);
e. Such other similar services with respect to a Fund as may be
reasonably requested by the Company.
2. COMPENSATION. See Schedule B attached hereto.
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<PAGE> 3
3. EFFECTIVE DATE. This Agreement shall become effective with respect
to a Fund as of the date first written above (the "Effective Date").
4. TERM. This Agreement shall become effective on the Effective Date
and, unless earlier terminated as provided herein, shall continue as to a
particular Fund for one year from its Effective Date and, thereafter, if not
terminated, this Agreement shall continue automatically as to a particular Fund
for successive terms of one year. This Agreement is terminable with respect to a
Fund (a) upon notice of nonrenewal, (b) upon mutual agreement of the parties, or
(c) for "cause" (as defined below) by the party alleging cause upon the
provision of sixty days' notice. After such termination, for so long as BISYS,
with the written consent of the Company, in fact continues to perform any one or
more of the services contemplated by this Agreement or any schedule or exhibit
hereto, the provisions of this Agreement, including without limitation the
provisions dealing with indemnification, shall continue in full force and
effect. Compensation due BISYS and unpaid by the upon such termination shall be
immediately due and payable upon and notwithstanding such termination. BISYS
shall be entitled to collect from the Company, in addition to the compensation
described under Section 2 hereof, the amount of all of BISYS' cash disbursements
for services in connection with BISYS' activities in effecting such termination,
including without limitation, the delivery to the Company and/or its designees
of the property, records, instruments and documents, or any copies thereof.
Subsequent to receipt of such disbursements, BISYS will provide the Company with
reasonable access to any Company documents or records remaining in its
possession.
For purposes of this Agreement, "cause" shall mean (i) willful
misfeasance, bad faith, negligence, abandonment, or reckless disregard on the
part of either party with respect to its obligations and duties set forth
herein; (ii) regulatory, administrative, or judicial action initiated against
either party with regard to the violation of any rule, regulation, order, or
law; (iii) the dissolution or liquidation of either party or other cessation of
business other than a reorganization or recapitalization of such party as an
ongoing business; (iv) financial difficulties on the part of either party which
are evidenced by the authorization or commencement of, or involvement by way of
pleading, answer, consent, or acquiescence in, a voluntary or involuntary case
under Title 11 of the United States Code, as from time to time in effect, or any
applicable law, other
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than said Title 11, of any jurisdiction relating to the modification or
alternation of the rights of creditors; (v) an assignment (as that term is
defined in the Investment Company Act of 1940) of this Agreement; or (vi) any
circumstance which substantially impairs the performance of either party's
obligations and duties as contemplated herein.
5. STANDARD OF CARE: INDEMNIFICATION. BISYS shall use its best efforts
to insure the accuracy of all service performed under this Agreement, but shall
not be liable to the Company for any action taken or omitted by BISYS in the
absence of bad faith, willful misconduct or negligence. BISYS assumes no
responsibility hereunder, and shall not be liable for any damage, loss of data,
delay or any other loss whatsoever caused by events beyond its reasonable
control. A Fund agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or non-actions with respect to the
performance of services under this Agreement with respect to such Fund or based,
if applicable, upon information, instructions or requests with respect to such
Fund given or made to BISYS by an officer of the Company thereunto duly
authorized; provided that this indemnification shall not apply to actions or
omissions of BISYS in cases of its own willful misconduct or negligence, and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, BISYS shall give the Company written notice of
and reasonable opportunity to defend against said claim in its own name or in
the name of BISYS.
6. HEADINGS. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construct or interpret this
Agreement.
7. ASSIGNMENT. This Agreement and the rights and duties hereunder shall
not be assignable with respect to a Fund by either of the parties hereto except
by the specific written consent of the other party. This Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and their
respective successors and permitted assigns.
4
<PAGE> 5
8. GOVERNING LAW. This Agreement shall be governed by and provisions
shall be construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed all as of the day and year first above written.
SBSF FUNDS, INC.
d/b/a KEY MUTUAL FUNDS
By:_________________________________________
BISYS FUND SERVICES, INC.
By:_________________________________________
5
<PAGE> 6
Schedule A
to the Fund Accounting Agreement
between SBSF Funds, Inc. (d/b/a Key Mutual Funds)
and BISYS Fund Services, Inc.
Dated as of June 1, 1996
Name of Portfolio
- -----------------
Key Stock Index Fund
Key International Index Fund
SBSF FUNDS, INC.
d/b/a KEY MUTUAL FUNDS
By:_____________________________________
Title:__________________________________
BISYS FUND SERVICES, INC.
By:_____________________________________
Title:__________________________________
1
<PAGE> 7
Schedule B
to the Fund Accounting Agreement
between SBSF Funds, Inc. (d/b/a Key Mutual Funds)
and BISYS Fund Services, Inc.
Fund accounting fees will be determined based on a combination of
asset-based charges (subject to minimums), transaction charges, and
out-of-pocket expenses. Asset-based fees are accrued daily based upon average
total net assets of a Fund.
Asset charges per Fund - Annually
- ---------------------------------
<TABLE>
Net Assets Amounts
<S> <C>
First $100 Million .03%
Next $100 Million .02%
Over $200 Million .01% for all Funds other than
money market Funds; money market Funds
will have no incremental asset charge
when net assets exceed $500 million
($80,000 asset charge cap for each money
market Fund)
</TABLE>
Minimum Monthly Asset Charge
- ----------------------------
The above charge will be subject to a minimum monthly amount of $2,500
per taxable Fund and $3,333 per international Fund.
Transaction Charges per Fund
- ----------------------------
$5 per security transaction (including foreign exchanges, patents,
corporate actions, and margin payments).
Multiple Class Charges
- ----------------------
A $833 per month charge will be assessed for each class of shares after
the first class. This is separate from and in addition to other charges
and the minimum charge.
Out-of-Pocket Expenses
- ----------------------
Out-of-pocket expenses incurred on behalf of the Fund will be billed
monthly and include, but not be limited to:
- Payment to pricing or corporate actions vendors
- Costs in obtaining prices for non-exchange traded securities
- Postage and communication (wires, modem fees)
- Microfilming, archiving, etc.
1
<PAGE> 1
EX-99.B10
[MORRISON & FOERSTER LLP LETTERHEAD]
June 10, 1996
SBSF Funds, Inc.
45 Rockefeller Plaza
New York, NY 10111
Re: Post-Effective Amendment No. 21 to
SBSF Funds, Inc. Registration Statement on Form N-1A
Gentlemen:
We refer to Post-Effective Amendment No. 23 and Amendment No. 24 to the
Registration Statement on Form N-1A (SEC File No. 2-84920) (the "Registration
Statement") of SBSF Funds, Inc., a Maryland corporation (d/b/a Key Mutual Funds)
(the "Company"), relating to the registration of an indefinite number of shares
of common stock of two new portfolios proposed to be offered by the Company,
namely Key Stock Index Fund and Key International Index Fund (collectively, the
"Shares").
We have been requested by the Company to furnish this opinion as Exhibit 10 to
the Registration Statement.
We have examined documents relating to the organization of the Company and the
authorization and issuance of shares of the Funds. We have also made such
inquiries of the Company and examined such questions of law as we have deemed
necessary for the purpose of rendering the opinion set forth herein. We have
assumed the genuineness of all signatures and the authenticity of all items
submitted to us as originals and the conformity with originals of all items
submitted to us as copies.
Based upon and subject to the foregoing, we are of the opinion that:
The issuance and sale of the Shares have been duly and validly authorized by
all appropriate corporate action, and assuming delivery of the Shares by sale or
in accord with the Company's dividend reinvestment plan in accordance with the
Company's then-current Registration Statement under the Securities Act of 1933,
the Shares will be validly issued, fully paid and nonassessable.
We consent to the inclusion of this opinion as an exhibit to the Registration
Statement.
In addition, we consent to the use of our name and to the reference to our
firm under the heading "Counsel" in the Prospectus, which is included as part of
the Registration Statement.
Very truly yours,
/S/ Morrison & Foerster LLP
MORRISON & FOERSTER LLP
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to us under the heading "Independent
Accountants and Reports" in the Statement of Additional Information constituting
part of this Post-Effective Amendment No. 23 to the registration statement on
Form N-1A relating to Key Stock Index Fund and Key International Index Fund (two
of the portfolios constituting the Key Mutual Funds (SBSF Funds, Inc.)).
/s/ Price Waterhouse LLP
Price Waterhouse LLP
New York, New York
June 11, 1996
<PAGE> 1
EX-99.B15(c)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
OF
SBSF FUNDS, INC.
WHEREAS, SBSF Funds, Inc. (d/b/a Key Mutual Funds) (the "Company") is
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Company desires to adopt a Plan of Distribution pursuant
to Rule 12b-1 under the Act, and the Board of Directors has determined that
there is a reasonable likelihood that adoption of this Plan of Distribution will
benefit the Company and its shareholders;
NOW, THEREFORE, the Company hereby adopts this Plan of Distribution
(the "Plan") in accordance with Rule 12b-1 under the Act on the following terms
and conditions:
1. To the extent that any portion of the fees payable under a
Shareholder Servicing Plan or any Shareholder Servicing Agreement is deemed to
be for services primarily intended to result in the sale of Fund shares, such
fees are deemed approved and may be paid pursuant to this Plan and in accordance
with Rule 12b-1 under the Act, provided that the Shareholder Servicing Plan and
Shareholder Servicing Agreements, to the extent they are deemed to relate to
services primarily intended to result in the sale of Fund shares, are approved
and otherwise treated in all respects as agreements related to the Plan.
2. This Plan shall not take effect until it has been approved by a vote
of at least a majority (as defined in the Act) of the outstanding voting
securities of the Company.
3. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Board of
Directors of the Company and (b) those Directors of the Company who are not
"interested persons" of the Company (as defined in the Act) and have no direct
or indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting (or
meetings) called for the purpose of voting on this Plan and such related
agreements.
4. This Plan shall continue in effect until the next annual meeting of
stockholders. If approved at such meeting by a vote of a majority of the
outstanding voting securities, the Plan shall continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in paragraph 3.
<PAGE> 2
5. The Distributor shall provide to the Board of Directors of the
Company and the Board of Directors shall review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made.
6. This Plan may be terminated with respect to a Fund at any time by
vote of a majority of the Rule 12b-1 Directors, or by a vote of a majority of
the outstanding voting securities of the Fund.
7. This Plan may not be amended to increase materially the amount to be
spent for distribution unless such amendment is approved in the manner provided
for initial approval in paragraph 2 hereof, and no material amendment to the
Plan shall be made unless approved in the manner provided for approval and
annual renewal in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons (as defined in the Act) of the Company
shall be committed to the discretion of the Directors who are not interested
persons.
9. The Company shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 5 hereof for a period of
not less than six years from the date of this Plan, or the agreements or such
report as the case may be, the first two years in an easily accessible place.
Dated: Adopted February 8, 1988
Amended and Restated February 21, 1995
Amended and Restated September 20, 1995
Amended and Restated May 30, 1996
<PAGE> 1
EX-99.B15(d)
KEY MUTUAL FUNDS
SHAREHOLDER SERVICING PLAN
This Shareholder Servicing Plan (the "Plan") is adopted by SBSF Funds,
Inc. (d/b/a Key Mutual Funds), a corporation organized under the laws of the
State of Maryland (the "Company"), on behalf of each Fund identified on Schedule
1 (individually, a "Fund," and collectively, the "Funds"), as amended from time
to time, subject to the following terms and conditions:
SECTION 1. ANNUAL FEES.
Shareholder Services Fee. Each Fund may pay to the distributor of its
shares (the "Distributor") or financial institutions that provide certain
services to the Funds, a shareholder services fee under the Plan at an annual
rate not to exceed 0.25% of the average daily net assets of the Fund
attributable to the Distributor or financial institution (the "Services Fee").
Adjustment to Fees. Any Fund may pay a Services Fee to the Distributor
or financial institution at a lesser rate than the fee specified in Section 1
hereof as agreed upon by the Board of Directors and the Distributor or financial
institution and approved in the manner specified in Section 3 of this Plan.
Payment of Fees. The Services Fee will be calculated daily and paid
monthly by each Fund at the annual rates indicated above.
SECTION 2. EXPENSES COVERED BY THE PLAN.
Services Fees may be used by the Distributor or financial institution
for payments to financial institutions and persons who provide administrative
and support services to their customers who may from time to time beneficially
own shares, which may include (i) establishing and maintaining accounts and
records relating to shareholders; (ii) processing dividend and distribution
payments from the Fund on behalf of shareholders; (iii) providing information
periodically to shareholders showing their positions in shares and integrating
such statements with those of other transactions and balances in shareholders'
other accounts serviced by such financial institution; (iv) arranging for bank
wires; (v) responding to shareholder inquiries relating to the services
performed; (vi) responding to routine inquiries from shareholders concerning
their investments; (vii) providing subaccounting with respect to shares
beneficially owned by shareholders, or the information to the Fund necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from the Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to
shareholders; (ix) assisting in processing purchase, exchange and redemption
requests from shareholders and in placing such orders with our service
contractors; (x) assisting shareholders in changing dividend options, account
designations and addresses; (xi) providing shareholders with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; and (xii) providing
<PAGE> 2
such other similar services as the Fund may reasonably request to the extent the
Distributor or financial institution is permitted to do so under applicable
statutes, rules and regulations.
SECTION 3. APPROVAL OF DIRECTORS.
The Plan will take effect when approved by a majority of both (a) the
full Board of Directors of the Company and (b) those Directors who are not
interested persons of the Company and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to it (the
"Qualified Directors"), cast in person at a meeting called for the purpose of
voting on the Plan. Agreements related to the Plan will take effect when duly
executed by the parties thereto, subject to such approvals as may be required by
any Rule 12b-1 Plan that may be in effect with respect thereto.
SECTION 4. CONTINUANCE OF THE PLAN.
The Plan will continue in effect for one year from its effective date,
and thereafter for successive twelve-month periods; provided, however, that such
continuance is specifically approved at least annually by the Directors of the
Company and by a majority of the Qualified Directors.
SECTION 5. TERMINATION.
The Plan may be terminated at any time with respect to a Fund (i) by
the Company without the payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Fund or (ii) by a vote of the Qualified
Directors. The Plan may remain in effect with respect to a Fund even if the Plan
has been terminated in accordance with this Section 5 with respect to any other
Fund.
SECTION 6. AMENDMENTS.
No amendment that materially increases the amount to be paid under the
Plan may be made unless approved by the Company's Board of Directors in the
manner described in Section 3 above.
SECTION 7. SELECTION OF CERTAIN DIRECTORS.
While the Plan is in effect, the selection and nomination of the
Company's Directors who are not interested persons of the Fund will be committed
to the discretion of the Directors then in office who are not interested persons
of the Company.
SECTION 8. WRITTEN REPORTS.
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by a Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Company's Board of Directors, and the Board
2
<PAGE> 3
will review, at least quarterly, written reports which set out the amounts
expended under the Plan and the purposes for which those expenditures were made.
SECTION 9. PRESERVATION OF MATERIALS.
The Company will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 8 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
SECTION 10. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange Commission.
Adopted: May 30, 1996
Effective: July 1, 1996
3
<PAGE> 4
SCHEDULE I
----------
__________, 1996
This Shareholder Servicing Plan shall be adopted with respect to the
following Funds of Key Mutual Funds:
4
<PAGE> 5
SHAREHOLDER SERVICING AGREEMENT
KEY MUTUAL FUNDS
45 ROCKEFELLER PLAZA
NEW YORK, NY 10111
To: __________________
We (the "Company") wish to enter into this Servicing Agreement with you
concerning the provision of support services to your clients ("Clients") who may
from time to time beneficially own shares ("Shares") of the Funds (the "Funds")
offered by us.
The terms and conditions of this Servicing Agreement are as follows:
SECTION 1. You agree to provide the following support services to
Clients who may from time to time beneficially own Shares:(1) (i) establishing
and maintaining accounts and records relating to Clients that invest in Shares;
(ii) processing dividend and distribution payments from us on behalf of Clients;
(iii) providing information periodically to Clients showing their positions in
Shares and integrating such statements with those of other transactions and
balances in Clients' other accounts serviced by you; (iv) arranging for bank
wires; (v) responding to Client inquiries relating to the services performed by
you; (vi) responding to routine inquiries from Clients concerning their
investments in Shares; (vii) providing subaccounting with respect to Shares
beneficially owned by Clients, or the information to us necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Clients; (ix)
assisting in processing purchase, exchange and redemption requests from Clients
and in placing such orders with our service contractors; (x) assisting Clients
in changing dividend options, account designations and addresses; (xi) providing
Clients with a service that invests the assets of their accounts in Shares
pursuant to specific or pre-authorized instructions; and (xii) providing such
other similar services as we may reasonably request to the extent you are
permitted to do so under applicable statutes, rules and regulations.
SECTION 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the aforementioned
services and assistance to Clients.
SECTION 3. Neither you nor any of your officers, employees or agents
are authorized to make any representations concerning us or the Shares except
those contained in our then current prospectuses and statements of additional
information, copies of which will be supplied by us to you, or in such
supplemental literature or advertising as may be authorized by us in writing.
- --------
1 Services may be modified or omitted in a particular case and items renumbered.
<PAGE> 6
SECTION 4. For all purposes of this Agreement you will be deemed to be
an independent contractor, and will have no authority to act as agent for us in
any matter or in any respect. By your written acceptance of this Agreement, you
agree to and do release, indemnify and hold us harmless from and against any and
all direct or indirect liabilities or losses resulting from requests,
directions, actions, or inactions of or by you or your officers, employees or
agents regarding your responsibilities hereunder or the purchase, redemption,
transfer or registration of Shares (or orders relating to the same) by or on
behalf of Clients. You and your employees will, upon request, be available
during normal business hours to consult with us or our designees concerning the
performance of your responsibilities under this Agreement.
SECTION 5. In consideration of the services and facilities provided by
you hereunder, we will pay to you, and you will accept as full payment therefor,
a fee at the annual rate of ______ one-hundredths of one percent (.____%) of the
average daily net asset value of the shares beneficially owned by your Clients
for whom you are the dealer of record or holder of record or with whom you have
a servicing relationship (the "Clients' Shares"), which fee will be computed
daily (on the basis of a 360-day year) and payable monthly. For purposes of
determining the fees payable under this Section 5, the average daily net asset
value of the Clients' Shares will be computed in the manner specified in our
Registration Statement (as the same is in effect from time to time) in
connection with the computation of the net asset value of Shares for purposes of
purchases and redemptions. By your written acceptance of this Agreement, you
agree to and do waive such portion of any fee payable to you hereunder to the
extent necessary to assure that such fee and other expenses required to be
accrued by us on any day with respect to the Clients' Shares in any Fund that
declares its net investment income as a dividend to shareholders on a daily
basis does not exceed the income to be accrued by us to such Shares on that day.
The fee rate stated above may be prospectively increased or decreased by us, in
our sole discretion, at any time upon notice to you. Further, we may, in our
discretion and without notice, suspend or withdraw the sale of Shares, including
the sale of Shares to you for the account of any Client or Clients.
SECTION 6. Any person authorized to direct the disposition of monies
paid or payable by us pursuant to this Agreement will provide to our Board of
Directors, and our directors will review, at least quarterly, a written report
of the amounts so expended and the purposes for which such expenditures were
made. In addition, you will furnish us or our designees with such information as
we or they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to our Board of Directors concerning this Agreement and
the monies paid or payable by us pursuant hereto, as well as any other reports
or filings that may be required by law.
SECTION 7. We may enter into other similar Servicing Agreements with
any other person or persons without your consent.
2
<PAGE> 7
SECTION 8. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) the compensation payable to you in connection with
the investment of your Clients' assets in Shares will be disclosed by you to
your Clients, will be authorized by your Clients and will not be excessive; and
(ii) the series provided by you under this Agreement will in no event be
primarily intended to result in the sale of Shares.
SECTION 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue automatically for successive annual
periods provided such continuance is specifically approved at least annually by
us in the manner described in Section 12. This Agreement is terminable without
penalty at any time by us (which termination may be by a vote of a majority of
the Disinterested Directors as defined in Section 12) or by you upon written
notice to the other party hereto.
SECTION 10. All notices and other communications to either you or us
will be duly given if mailed, telegraphed, telefaxed or transmitted by similar
telecommunication device to the appropriate address stated herein, or to such
other address as either party shall so provide the other.
SECTION 11. This Agreement will be construed in accordance with the
laws of the State of Ohio and is non-assignable by the parties hereto.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us, c/o BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio
43219-3035.
Very truly yours,
SBSF Funds, Inc.
(d/b/a Key Mutual Funds)
Date: ________________________ By: _________________________________
(Authorized Officer)
Title:
Accepted and Agreed to:
Date: ________________________ By: _________________________________
(Authorized Officer)
Title:
3
