MONTEREY MUTUAL FUND
Statement of Additional Information dated August 31, 1998
This Statement of Additional Information is not a prospectus,
and it should be read in conjunction with the Prospectus of Monterey
Mutual Fund (the "Trust") relating to the Murphy New World Technology
Convertibles Series (the "Convertibles Fund") (formerly the Growth &
Income Fund), the Camborne Government Income Series (the "Government
Income Fund" or "Government Fund") (formerly the PIA-Monitrend Government
Income Fund), the OCM Gold Series (the "Gold Fund") (formerly the Gold
Fund), the PIA Equity Series (the "Equity Fund") (formerly the Growth
Fund), the Murphy New World Biotechnology Series (the "Biotechnology
Fund") (formerly the Gaming & Leisure Fund), the Murphy New World
Technology Series (the "Technology Fund"), the PIA Short-Term Government
Securities Fund (the "Short-Term Government Fund") (formerly the PIA
Adjustable Rate Government Securities Fund), the PIA Global Bond Series
(the "Global Bond Fund"), and the PIA Total Return Bond Fund (the "Total
Return Bond Fund") dated August 31, 1998; copies of the Prospectus may be
obtained from the Trust's Distributor, Syndicated Capital, Inc. (the
"Distributor", 1299 Ocean Avenue, Suite 210, Santa Monica, CA 90401. (In
this Statement of Additional Information, the nine funds may be referred
to collectively as "the Funds" or individually as "a Fund.")
Prior to December 27, 1996, the Trust was known as Monitrend
Mutual Fund.
TABLE OF CONTENTS
Cross-reference to
Page page in Prospectus
Investment Objectives and
Policies B-3 11
Investment Restrictions B-3 29
Hedging Instruments B-7 25
Possible CFTC B-8 29
Limitations on Portfolio
and Hedging Strategies
Repurchase Agreements B-9 28
U.S. Government Securities B-10 28
Portfolio Turnover B-12 27
Management B-13 30
PIA, Murphy, Orrell, Camborne B-19 30
and the Administrator
Portfolio Transactions B-23 32
and Brokerage
Distribution Plan B-26 35
Net Asset Value B-30 35
Shareholder Services B-31 34
Dividends and Tax Status B-33 38
General B-34 40
Calculation of Performance Data B-35 40
Appendix B-37 25
Description of Securities Ratings B-40 42
Financial Statements B-42 6
Investment Objectives and Policies
The investment objective of the Convertibles Fund is to maximize
total return through a combination of capital appreciation and income; the
investment objectives of the Government Income Fund are growth of capital,
whether over the short- or long-term, income and preservation of capital;
the investment objective of the Gold Fund is long-term growth of capital;
the investment objective of the Equity Fund is long-term growth of
capital; the investment objective of the Biotechnology Fund is long-term
growth of capital; the investment objective of the Technology Fund is
long-term growth of capital; the investment objectives of the Short-Term
Government Fund are income with low volatility of principal; the
investment objective of the Global Bond Fund is income, the investment
objective of the Total Return Bond Fund is to maximize total return while
minimizing risk. The portfolio and strategies with respect to the
composition of each Fund's portfolio are described in the Prospectus. The
Convertibles Fund was called the Growth & Income Fund from December 2,
1994 through December 31, 1996, the Summation Fund from March 30, 1993
through December 1, 1994, the Summation Index Fund from July 10, 1989,
through March 30, 1993 and the Standard & Poor's 100 Index Fund prior to
July 10, 1989. On May 31, 1991, a tenth series of the Trust, the Value
Allocation Series, was merged with and into the Convertibles Fund. The
Government Fund was called the PIA Monitrend Government Income Fund prior
to December 13, 1996. The OCM Gold Fund was called the Gold Fund prior to
December 13, 1996. The PIA Equity Fund was called the Growth Fund prior
to December 13, 1996. The Biotechnology Fund was called the Gaming &
Leisure Fund prior to December 20, 1996. The Short-Term Government Fund
was called the PIA Adjustable Rate Government Securities Fund prior to
December 13, 1996. The New World Technology Fund was called the
Technology Fund prior to December 13, 1996.
Investment Restrictions
The Trust has adopted the following restrictions applicable to
the various Funds as indicated below (in addition to those indicated in
the Prospectus) as fundamental policies, which may not be changed without
the approval of the holders of a "majority," as defined in the Investment
Company Act of 1940 (the "1940 Act"), of the shares of the Fund as to
which the policy change is being sought. Under the 1940 Act, approval of
the holders of a "majority" of a Fund's outstanding voting securities
means the favorable vote of the holders of the lesser of (i) 67% of its
shares represented at a meeting at which more than 50% of its outstanding
shares are represented or (ii) more than 50% of its outstanding shares.
Each of the Funds may not purchase any security, other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"), if as a result more than
5% of such Fund's total assets (taken at current value) would then be
invested in securities of a single issuer; provided, however, that 50% of
the total assets of each of the Gold Fund, the Equity Fund, the
Biotechnology Fund, the Convertibles Fund, the Global Bond Fund, the
Technology Fund and the Total Return Bond Fund may be invested without
regard to this restriction and 25% of the total assets of the Government
Fund and the Short-Term Government Fund may be invested without regard to
this restriction.
No Fund may:
1. Purchase any security if as a result the Fund would then
hold more than 10% of any class of securities of an issuer (taking all
common stock issues of an issuer as a single class, all preferred stock
issues as a single class, and all debt issues as a single class) or more
than 10% of the outstanding voting securities of an issuer.
2. Purchase any security if as a result the Fund would then
have more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) less than three years
old.
3. Invest in securities of any issuer if, to the knowledge of
the Trust, any officer or Trustee of the Trust or officer or director of
the Fund's investment adviser owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers, directors and Trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
4. Make investments for the purpose of exercising control or
management.
5. Act as underwriter except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.
6. Purchase warrants if as a result the Fund would then have
more than 5% of its total assets (taken at current value) invested in
warrants.
7. Invest in securities of other registered investment
companies, except by purchases in the open market involving only customary
brokerage commissions and as a result of which not more than 5% of its
total assets (taken at current value) would be invested in such
securities, or except as part of a merger, consolidation or other
acquisition.
8. Invest in interests in oil, gas or other mineral leases or
exploration or development programs, although it may invest in the common
stocks of companies which invest in or sponsor such programs.
9. Purchase securities on margin (but each Fund may obtain
such short-term credits as may be necessary for the clearance of
transactions and may make margin payments in connection with transactions
in futures and options, and the Convertibles Fund, the Biotechnology Fund,
the Technology Fund, the Global Bond Fund, the Short-Term Government Fund
and the Total Return Bond Fund may borrow money as set forth in Investment
Restriction No. 11).
10. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable for, without payment of any further consideration, securities
of the same issue as, and equal in amount to, the securities sold short
(short sale against-the-box), and unless not more than 25% of that Fund's
net assets (taken at current value) is held as collateral for such sales
at any one time, except that the Technology Fund may effect short sales to
the extent set forth in the Prospectus and the Biotechnology Fund and the
Convertibles Fund may effect short sales to the extent permitted by the
1940 Act.
11. Issue senior securities, borrow money or pledge its assets
except that each Fund may borrow from a bank for temporary or emergency
purposes in amounts not exceeding 5% (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed) and
pledge its assets to secure such borrowings and the Convertibles Fund, the
Biotechnology Fund, the Technology Fund, the Global Bond Fund, the Short-
Term Government Fund and the Total Return Bond Fund may borrow for
investment purposes on a secured or unsecured basis as described in the
Prospectus. (For the purpose of this restriction, collateral arrangements
with respect to the writing of options and with respect to initial and
variation margin for futures contracts are not deemed to be a pledge of
assets and neither such arrangements nor the purchase or sale of futures
contracts or purchase of related options or the sale of options on indices
are deemed to be the issuance of a senior security.)
12. Buy or sell commodities or commodity contracts except
futures and related options as described under "Investment Practices" in
the Prospectus, or real estate or interests in real estate (including
limited partnership interests). For purposes of this restriction,
Mortgage-Backed Securities as described in the Prospectus are not
considered real estate or interests in real estate.
13. Participate on a joint or joint and several basis in any
trading account in securities.
14. Purchase any security restricted as to disposition under
federal securities laws except that subject to Securities and Exchange
Commission ("SEC") limitations on investments in illiquid securities, the
Biotechnology Fund, the Convertibles Fund, the Gold Fund, the Global Bond
Fund and the Total Return Bond Fund may purchase securities restricted as
to disposition under federal securities laws without limitation.
15. Make loans, except through repurchase agreements and the
loaning of portfolio securities by the Convertibles Fund, the Gold Fund,
the Technology Fund, the Biotechnology Fund, the Global Bond Fund, the
Short-Term Government Fund and the Total Return Bond Fund as described in
the Prospectus.
16. Purchase foreign securities or currencies; this restriction
does not apply to the Gold Fund, the Equity Fund, the Technology Fund, the
Biotechnology Fund, the Global Bond Fund, the Government Fund, the
Convertibles Fund or the Total Return Bond Fund.
It is the position of the SEC (and an operating although not a
fundamental policy of each Fund) that open-end investment companies such
as the Funds should not make investments in illiquid securities if
thereafter more than 15% of the value of their net assets would be so
invested. The Short-Term Government Fund has limited its investments in
illiquid securities to 10% of the value of its net assets. The
investments included as illiquid securities are (i) those which cannot
freely be sold for legal reasons, although securities eligible to be
resold pursuant to Rule 144A under the Securities Act of 1933 may be
considered liquid; (ii) fixed time deposits subject to withdrawal
penalties, other than overnight deposits (which the Government Fund may
not own); (iii) repurchase agreements having a maturity of more than seven
days; and (iv) investments for which market quotations are not readily
available. The Funds do not expect to own any investments for which market
quotations are not available. However, illiquid securities do not include
obligations which are payable at principal amount plus accrued interest
within seven days after purchase. The Board of Trustees has delegated to
each Fund's investment adviser the day-to-day determination of the
liquidity of a security although it has retained oversight and ultimate
responsibility for such determinations. Although no definite quality
criteria are used, the Board of Trustees has directed the investment
advisers to consider such factors as (i)the nature of the market for a
security (including the institutional private resale markets); (ii) the
terms of these securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments); (iii) the availability of
market quotations; and (iv) other permissible factors. Investing in Rule
144A securities could have the effect of decreasing the liquidity of a
Fund to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
Hedging Instruments
The various hedging instruments which the Funds may use are
discussed in the Prospectus and below. The Appendix to this Statement of
Additional Information contains further information as to the
characteristics of, and the risks of transactions in, each of them.
Call Options. Except for calls written on stock indices, when a
Fund writes a call, it receives a premium and agrees to sell the related
investments to a purchaser of a call during the call period (usually not
more than nine months) at a fixed exercise price (which may differ from
the market price of the related investments) regardless of market price
changes during the call period. If the call is exercised, the Fund
forgoes any gain from an increase in the market price over the exercise
price.
To terminate its obligation on a call which it has written, the
Fund which wrote the call may purchase a call in a "closing purchase
transaction." A profit or loss will be realized depending on the amount
of option transaction costs and whether the premium previously received is
more or less than the price of the call purchased. A profit may also be
realized if the call lapses unexercised, because the Fund which wrote the
call retains the premium received. Any such profits are considered
short-term gains for federal income tax purposes and, when distributed,
are taxable as ordinary income. Except for calls on stock indices, when a
Fund buys a call, it pays a premium and has the right to buy the related
investments from a seller of a call during the call period at a fixed
exercise price. The Fund which bought the call benefits only if the
market price of the related investments is above the call price plus the
premium paid during the call period and the call is either exercised or
sold at a profit. If the call is not exercised or sold (whether or not at
a profit), it will become worthless at its expiration date, and that Fund
will lose its premium payments and the right to purchase the related
investments.
Calls on stock indices are similar to calls on equities except
that all settlements are in cash and gain or loss depends on changes in
the index in question rather than on price movements in individual
equities. When a Fund writes a call on a stock index, it receives a
premium and agrees that, during the call period, a purchaser of a call
upon exercise of the call will receive from the Fund an amount of cash if
the closing level of the stock index upon which the call is based is
greater than the exercise price of the call, which amount of cash is equal
to the difference between the closing price of the index and the exercise
price of the call times a specified multiple (the "multiplier") which
determines the total dollar value for each point of such difference. When
a Fund buys a call on a stock index it pays a premium and has the same
rights as to a writer of such a call as are indicated above as its
obligation when it writes such a call. The multiplier for a call on a
stock index performs a function similar to the unit of trading for a call
on an equity. It determines the total dollar value per contract of each
point in the difference between the exercise price of a call and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Calls on different indices may have
different multipliers.
Put Options. Except for puts on stock indices, when a Fund buys
a put, it pays a premium and has the right to sell the related investments
to a seller of a put during the put period (usually not more than nine
months) at a fixed exercise price. Buying a protective put permits that
Fund to protect itself during the put period against a decline in the
value of the related equity below the exercise price by having the right
to sell the equity through the exercise of the put. Puts on stock indices
cannot be protective, as it is impossible to buy a stock index.
Puts on stock indices are similar to puts on equities except
that all settlements are in cash and gain or loss depends on changes in
the index in question rather than on price movements in individual
equities. When a Fund buys a put on a stock index, it pays a premium and
has the right during the put period to require a seller of such a put,
upon the Fund's exercise of the put, to deliver to the Fund an amount of
cash if the closing level of the stock index upon which the put is based
is less than the exercise price of the put, which amount of cash is
determined by the multiplier, which performs the same function as
described above for calls. Buying such a put permits the Fund, if cash is
so deliverable to it during the period, either to resell the put or to
require such delivery of cash. If such cash is not so deliverable, and, as
a result the put is not exercised or resold (whether or not at a profit)
the put will become worthless at its expiration date.
When a Fund writes a put option it receives a premium and has
the same obligations as to a purchaser of such a put as are indicated
above as its rights when it purchases such a put. A profit or loss will
be realized depending on the amount of option transaction costs and
whether the premium previously received is more or less than the put
purchased in a closing purchase transaction. A profit may also be realized
if the put lapses unexercised, because the Fund retains the premium
received. Any such profits are considered short-term gains for federal
income tax purposes and, when distributed, are taxable as ordinary income.
Possible CFTC Limitations on Portfolio and Hedging Strategies
The use of Futures and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities
is referred to as having a "short futures position," and the use of such
instruments to attempt to protect against the market risk that portfolio
securities are not fully included in an increase in value is referred to
as having a "long futures position." Each Fund must operate within
certain restrictions as to its long and short positions in Futures and
options thereon under a rule ("CFTC Rule") adopted by the Commodity
Futures Trading Commission ("CFTC") under the Commodity Exchange Act (the
"CEA"), which excludes the Funds and the Trust from registration with the
CFTC as a "commodity pool operator" as defined in the CEA. Under the
restrictions, each Fund must use Futures and options thereon solely for
bona fide hedging purposes within the meaning and intent of the applicable
provisions under the CEA, provided that nonhedging positions may be
established if the initial margin and premiums required to establish such
positions do not exceed 5% of a Fund's net assets, with certain exclusions
as defined in the CFTC Rule.
Repurchase Agreements
Each Fund may enter into repurchase agreements. A repurchase
transaction occurs when, at the time a Fund purchases a security, that
Fund also resells it to the vendor (normally a commercial bank or a
broker-dealer) and must deliver the security (and/or securities
substituted for them under the repurchase agreement) to the vendor on an
agreed upon date in the future. Such securities, including any securities
so substituted, are referred to as the "Resold Securities". The Fund's
investment adviser will consider the creditworthiness of any vendor of
repurchase agreements. The resale price is in excess of the purchase
price in that it reflects an agreed upon market interest rate effective
for the period of time during which the Fund's money is invested in the
Resold Securities. The majority of these transactions run from day to
day, and the delivery pursuant to the resale typically will occur within
one to five days of the purchase. The Fund's risk is limited to the
ability of the vendor to pay the agreed-upon sum upon the delivery date;
in the event of bankruptcy or other default by the vendor, there may be
possible delays and expenses in liquidating the instrument purchased,
decline in its value and loss of interest. These risks are minimized when
the Fund holds a perfected security interest in the Resold Securities and
can therefore resell the instrument promptly. Repurchase agreements can
be considered as loans "collateralized" by the Resold Securities, such
agreements being defined as "loans" in the 1940 Act. The return on such
"collateral" may be more or less than that from the repurchase agreement.
The Resold Securities will be marked to market every business day so that
the value of the "collateral" is at least equal to the value of the loan,
including the accrued interest earned thereon. All Resold Securities will
be held by the Fund's custodian or another bank either directly or through
a securities depository.
U.S. Government Securities
As used in this Statement of Additional Information, the term
"U.S. Government securities" means securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities.
Securities issued or guaranteed by the U.S. Government include a
variety of Treasury securities (i.e., securities issued by the U.S.
Government) that differ only in their interest rates, maturities and dates
of issuance. Treasury Bills have maturities of one year or less.
Treasury Notes have maturities of one to ten years, and Treasury Bonds
generally have maturities of greater than ten years at the date of
issuance. Zero coupon Treasury securities consist of Treasury Notes and
Bonds that have been stripped of their unmatured interest coupons.
U.S. Government agencies or instrumentalities which issue or
guarantee securities include, but are not limited to, the Federal Housing
Administration, Federal National Mortgage Association, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, the Tennessee Valley
Authority, District of Columbia Armory Board, the Inter-American
Development Bank, the Asian Development Bank, the Student Loan Marketing
Association and the International Bank for Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S.
Government agencies and instrumentalities may or may not be supported by
the full faith and credit of the United States. Some are backed by the
right of the issuer to borrow from the Treasury; others by discretionary
authority of the U.S. Government to purchase the agencies' obligations;
while still others, such as the Student Loan Marketing Association, are
supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, and may not
be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment. Each Fund
investing in U.S. Government securities will invest in securities of such
instrumentality only when the Adviser is satisfied that the credit risk
with respect to any instrumentality is acceptable.
Among the U.S. Government securities that each Fund investing in
U.S. Government securities may purchase are "mortgage-backed securities"
of the Government National Mortgage Association ("Ginnie Mae" or "GNMA"),
the Federal Home Loan Mortgage Association ("Freddie Mac") and the Federal
National Mortgage Association ("Fannie Mae"). These mortgage-backed
securities include "pass-through" securities and "participation
certificates"; both are similar, representing pools of mortgages that are
assembled, with interests sold in the pool; the assembly is made by an
"issuer" which assembles the mortgages in the pool and passes through
payments of principal and interest for a fee payable to it. Payments of
principal and interest by individual mortgagors are "passed through" to
the holders of the interest in the pool. Thus, the monthly or other
regular payments on pass-through securities and participation certificates
include payments of principal (including prepayments on mortgages in the
pool) rather than only interest payments. Another type of mortgage-backed
security is the "collateralized mortgage obligation", which is similar to
a conventional bond (in that it makes fixed interest payments and has an
established maturity date) and is secured by groups of individual
mortgages. Timely payment of principal and interest on Ginnie Mae
pass-throughs is guaranteed by the full faith and credit of the United
States, but their yield is not guaranteed. Freddie Mac and Fannie Mae are
both instrumentalities of the U.S. Government, but their obligations are
not backed by the full faith and credit of the United States. It is
possible that the availability and the marketability (i.e., liquidity) of
these securities discussed in this paragraph could be adversely effected
by actions of the U.S. Government to tighten the availability of its
credit or to affect adversely the tax effects of owning them.
The average life of a GNMA certificate is likely to be
substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will usually result in the return of the greater
part of principal investment long before the maturity of the mortgages in
the pool. Foreclosures impose no risk to principal investment because of
the GNMA guarantee. Because prepayment rates of individual mortgage pools
vary widely, it is not possible to predict accurately the average life of
a particular issue of GNMA certificates. However, statistics published by
the Federal Housing Administration indicate that the average life of
single-family dwelling mortgages with 25- to 30-year maturities, the type
of mortgage backing the vast majority of GNMA certificates, is
approximately 12 years. Therefore, it is customary to treat GNMA
certificates as 30-year mortgage backed securities which prepay fully in
the twelfth year. Prepayments may increase when interest rates decline.
Certain of the mortgage loans underlying the mortgage-backed
securities in which the Funds may invest will be adjustable rate mortgage
loans ("ARMs").
There are two main categories of indices which provide the basis
for rate adjustments on ARMs: those based on U.S. Treasury securities and
those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the
one-year, three-year and five-year constant maturity Treasury rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank
Cost of Funds, the National Median Cost of Funds, the one-month, three-
month, six-month or one year London Interbank Offered Rate ("LIBOR"), the
prime rate of a specific bank, or commercial paper rates. Some indices,
such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District
Federal Home Loan Bank Cost of Funds index, tend to lag behind changes in
market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of a Fund's portfolio and therefore in the
net asset value of the Fund's shares will be a function of the length of
the interest rate reset periods and the degree of volatility in the
applicable indices.
The mortgage loans underlying other mortgage-backed securities
in which the Funds may invest will be fixed rate mortgage loans.
Generally, fixed rate mortgage loans eligible for inclusion in a mortgage
pool will bear simple interest at fixed annual rates and have original
terms to maturity ranging from 5 to 40 years. Fixed rate mortgage loans
generally provide for monthly payments of principal and interest in
substantially equal installments for the contractual term of the mortgage
note in sufficient amounts to fully amortize principal by maturity
although certain fixed rate mortgage loans provide for a large final
"balloon" payment upon maturity.
Mortgage loans are subject to a variety of state and federal
regulations designed to protect mortgagors, which may impair the ability
of the mortgage lender to enforce its rights under the mortgage documents.
These regulations include legal restraints on foreclosures, homeowner
rights of redemption after foreclosure, federal and state bankruptcy and
debtor relief laws, restrictions on enforcement of mortgage loan "due on
sale" clauses and state usury laws. Even though the Funds will invest in
Mortgage-Backed Securities which are U.S. Government securities, these
regulations may adversely affect a Fund's investments by delaying the
Fund's receipt of payments derived from principal or interest on mortgage
loans affected by such regulations.
Portfolio Turnover
See "Financial Highlights" and "Portfolio Turnover" in the
Prospectus for the definition of a portfolio turnover rate and for
information on the past rates of the Funds. As indicated in the
Prospectus the portfolio turnover of each of the Funds may vary
significantly from year to year as a result of the presence or absence of
the defensive investment positions taken by the investment adviser to the
Fund. Such a variance was evidenced during the most recent three fiscal
years where portfolio turnover was substantially higher for the
Convertibles Fund in the fiscal year ended November 30, 1995 than in the
fiscal years ended November 30, 1996 and November 30, 1997, substantially
lower for the Short-Term Government Fund in the fiscal years ended
November 30, 1996 and November 30, 1997 than in the fiscal year ended
November 30, 1995, and substantially higher for the PIA Equity Fund during
the fiscal year ended November 30, 1997 than in the fiscal years ended
November 30,1996 and November 30, 1995. With respect to the Convertibles
Fund, portfolio turnover was higher in the fiscal year ended November 30,
1995 than in the later fiscal years because effective February 1, 1995 a
change in investment objective of the Convertibles Fund resulted in a
substantial change of its investment portfolio that fiscal year. With
respect to the Short-Term Government Fund portfolio, turnover was lower
because average net assets were substantially lower in the fiscal year
ended November 30, 1995 than in the later fiscal years. With respect to
the PIA Equity Fund, portfolio turnover was higher in the fiscal year
ended November 30, 1997 than in the earlier fiscal years because the
investment approach of the PIA Equity Fund's portfolio manager involves
more trading than that of its predecessor. The PIA Equity Fund changed
investment advisers on December 13, 1996.
Management
The Trustees and officers of the Trust are:
Position with Principal occupations
Name and Address Age Fund during past five years
Joseph Lloyd 52 Chairman and Chairman of Pacific
McAdams, Jr.* Trustee Income Advisers, Inc.;
1299 Ocean Avenue Chairman, Chief
Suite 210 Executive Officer and
Santa Monica, President of
CA 90401 Syndicated Capital,
Inc. Since March
1998, Mr. McAdams has
been Chairman of the
Board, President and
Chief Executive
Officer of Answorth
Mortgage Asset
Corporation, a real
estate investment trust.
John Michael Murphy* 55 Trustee President of Murphy
2830 North Cabrillo Investment Management,
Highway Inc; President of
Half Moon Bay, Murenove, Inc., a
CA 94019 newsletter publisher.
Ann Louise 59 Trustee Sales associate for
Marinaccio Saks Fifth Avenue,
1 Norwood Road Short Hills, NJ.
Springfield,
NJ 07081
Robert I. Weisberg 51 Trustee President of Fremont
612 Ridge Road Medical Financial
Tiburon, CA 94920 Services, Inc. and
Executive Vice
President of Fremont
Financial Corporation,
Santa Monica,
California since
January 1, 1996;
President of Pro-Care
Financial Group, Inc.,
Larkspur, California
from 1994-1995;
President of Towers
Financial Corporation,
New York, New York,
1993-1994; President
of Fleet Credit
Corporation,
Providence, Rhode
Island, 1985-1993.
Beatrice P. Felix 39 Trustee Real estate sales
1011 4th Street, agent for Roland Land
#218 Realty since 1994;
Santa Monica, real estate sales
CA 90403 agent for Prudential
Realty from 1991-1994.
Heather U. Baines 55 President and President and Chief
1299 Ocean Avenue Treasurer Executive Officer of
Suite 210 Pacific Income
Santa Monica, Advisers, Inc. Since
CA 90401 March, 1998 Ms. Baines
has been Executive
Vice President of
Answorth Mortgage
Asset Corporation.
Pamela J. Watson 43 Vice President Vice President of
504 Larsson Street Pacific Income
Manhattan Beach, Advisers, Inc. since
CA 90266 1997; Chief Financial
Officer, Kleinwort
Benson Capital
Management, Inc. from
1991 to 1996. Since
March, 1998 Ms. Watson
has been Executive
Vice President, Chief
Financial Officer,
Treasurer and
Secretary of Answorth
Mortgage Asset
Corporation.
Kathie Hilton 50 Secretary Administrative
1922 Ocean Avenue Assistant for Pacific
Suite 210 Income Advisers, Inc.
Santa Monica, since 1994; prior
CA 90401 thereto owner of
Grizzly Products, a
seafood distributor.
_________________________
* "Interested" trustee, as defined in the 1940 Act.
During the fiscal year ended November 30, 1997, the Trust paid
its Trustees who are not affiliated with any of the investment advisers to
the Funds or the Distributor fees aggregating $8,500. The Trust's
standard method of compensating these trustees who are not "interested
persons" of the Trust, is to pay each such trustee an annual retainer of
$2,000 and a fee of $500 for each meeting of the Board of Trustees
attended. The Trust does not provide pension or retirement benefits to
its trustees and officers.
<TABLE>
<CAPTION>
Pension &
Retirement
Benefits Total
Aggregate Accrued as Part Estimated Compensation from
Compensation of Fund Annual Benefits Trust Paid to
Name of Person, Position from Trust Expenses upon Retirement Trustees
<S> <C> <C> <C> <C>
Joseph Lloyd McAdams, Jr.,
Chairman and Trustee 0 0 0 0
Ann Louise Marinaccio, Trustee $3,000 0 0 $3,000
Robert I. Weisberg, Trustee $2,500 0 0 $2,500
Beatrice Felix, Trustee $3,000 0 0 $3,000
Heather U. Baines, President and
Treasurer 0 0 0 0
Pamela J. Watson, Vice President 0 0 0 0
Kathy Hilton, Secretary 0 0 0 0
</TABLE>
Set forth below are the names and addresses of all holders of
shares of the Funds who as of July 17, 1998 beneficially owned more than
5% of a Fund's then outstanding shares.
Government Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
Pacific Income Advisers, Inc.
1299 Ocean Avenue, Suite 210
Santa Monica, California 90401 13,354 17.13%
Dora Elena Walker, Trustee
Hortense Daniel Evans Living Trust
dated October 1, 1988
9431 Friendly Woods Lane
Whittier, California 90605 13,104 16.81%
Donaldson, Lufkin & Jenrette
Securities Corporation
P. O. Box 2052
Jersey City, New Jersey 07303 12,938 16.60%
Richard K. Moore and
Dorothy A. Moore
8 Lorraine Avenue
Binghamton, New York 13905 6,232 7.99%
Equity Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
Howard M. Koff
c/o Imperial Trust Company
201 North Figueroa Street #610
Los Angeles, California 90012 52,272 34.61%
Pacific Income Advisers, Inc.
1299 Ocean Avenue, Suite 210
Santa Monica, California 90401 9,462 6.27%
Technology Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
Jerry B. Torrance and
Carmen Ortiz, Trustees
The Torrance-Ortiz Living Trust
dated December 1, 1994
1176 Lone Pine Lane
San Jose, California 95120 8,909 9.77%
Steven H. & Anita H. Kaplan, Trustees
Kaplan Family Trust dated
April 13, 1986
P.O. Box 15
Sea Ranch, California 95497 5,700 6.25%
Biotechnology Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
Gentleness, Ltd.
Lyford Cay
P.O. Box N-7776
Nassau, Bahamas 270,635 44.96%
Murenove, Inc.
P. O. Box 308
Half Moon Bay, California 94019 37,432 6.22%
Donaldson, Lufkin & Jenrette
Securities Corporation
P.O. Box 2052
Jersey City, New Jersey 07303 34,102 5.67%
Short-Term Government Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
United Food & Commercial Workers Arizona
Health and Welfare Trust
c/o Michael Gallaga
Southwest Service Administrators, Inc.
1990 West Camelback, Suite 306
Phoenix, Arizona 85015 1,492,792 26.82%
Arizona State University Foundation
Box 875005
Tempe, Arizona 85287 783,000 14.06%
UFCW 1995 Health & Welfare Fund
1800 Phoenix Blvd., Suite 310
Atlanta, Georgia 30349 663,928 11.93%
Foodmaker Master Retirement Trust
FBO: The Northern Trust Company, Trustee
P.O. Box 92956
Chicago, Illinois 60675 507,315 9.11%
Union's 2nd Employer's Health &
Welfare Trust Fund
c/o Michael Gallaga
1990 W. Camelback, Suite 306
Phoenix, Arizona 85015 303,506 5.45%
Patterson & Co.
P.O. Box 7829
Philadelphia, Pennsylvania 19101 292,968 5.26%
Gold Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
Donaldson, Lufkin & Jenrette
Securities Corporation
P.O. Box 2052
Jersey City, New Jersey 07303 467,463 37.39%
Richard W. Stevenson
8787 Shoreham Drive #607
Los Angeles, California 90069 67,335 5.39%
Convertibles Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
James Lear
100 Bush Street #1000
San Francisco, California 94104 3,033 5.86%
Emil Wasil
14761 Indian Creek Drive
Middlebury Heights, Ohio 44130 2,848 5.50%
Global Bond Fund
Name and Address of Number of Percent of
Beneficial Owner Shares Class
San Antonio Fire & Police Pension Fund
311 Roosevelt Avenue
San Antonio, Texas 78210 231,906 82.02%
Donaldson, Lufkin & Jenrette
Securities Corporation
P. O. Box 2052
Jersey City, New Jersey 07303 22,883 8.09%
Repub & Co.
c/o Imperial Trust Company
201 North Figueroa Street #610
Los Angeles, California 90012 17,054 6.03%
No other person owns of record or is known to the Trust to own
beneficially 5% or more of the outstanding securities of any Fund. The
United Food & Commercial Workers Arizona Health and Welfare Trust
"controls" (as that term is defined in the 1940 Act) the Short-Term
Government Fund, the San Antonio Fire & Police Pension Fund "controls" the
Global Bond Fund, Howard M. Koff "controls" the Equity Fund and
Gentleness, Ltd. "controls" the Biotechnology Fund. The United Food &
Commercial Workers Arizona Health and Welfare Trust also "controls" the
Trust. The shares owned by Donaldson, Lufkin & Jenrette Securities
Corporation, the Pershing Securities Division of Donaldson, Lufkin &
Jenrette Securities Corporation, Patterson & Co. and Repub & Co. are owned
of record only.
All trustees and officers of the Trust as a group beneficially
own the following securities of the Funds as of July 17, 1998:
Name of Fund Number of Shares Percent of Class
Government Fund 13,355* 17.13%
Equity Fund 9,462* 3.87%
Technology Fund 0 0
Short-Term Government Fund 242,423** 4.36%
Gold Fund 0 0
Biotechnology Fund 37,433*** 6.22%
Convertibles Fund 1,886*** 3.64%
Global Bond Fund 5,282* 1.87%
_________________________
* Consists solely of shares owned by Pacific Income Advisers, Inc.
which is controlled by Joseph Lloyd McAdams, Jr. and Heather U.
Baines.
** Consists solely of shares owned by Pacific Income Advisers, Inc. and
Joseph Lloyd McAdams, Jr.
*** Consists solely of shares owned by Murenove, Inc. which is controlled
by John Michael Murphy.
PIA, Murphy, Orrell, Camborne and the Administrator
Pacific Income Advisers, Inc. ("PIA") is the investment adviser
to the Short-Term Government Fund, the Government Fund, the Equity Fund,
the Global Bond Fund and the Total Return Bond Fund. Joseph Lloyd
McAdams, Jr., John Graves and Heather U. Baines own all of the outstanding
stock of PIA. Prior to December 13, 1996, Monitrend Investment
Management, Inc. ("MIMI") was investment adviser to the Equity Fund and
manager to the Short-Term Government Fund and Government Fund. Prior to
December 13, 1996, Robert L. Bender, Inc. was sub-adviser to the Equity
Fund.
Murphy Investment Management, Inc. (formerly known as Negative
Beta Associates, Inc.) ("Murphy") is the investment adviser to the
Biotechnology Fund, the Technology Fund and the Convertibles Fund. John
Michael Murphy and Ms. Gaye Elizabeth Morgenthaler own all of the
outstanding stock of Murphy. Prior to December 13, 1996, MIMI was the
investment adviser to the Technology Fund and Murphy was sub-adviser to
the Technology Fund. Prior to December 20, 1996, MIMI was investment
adviser to the Biotechnology Fund. Prior to December 31, 1996, MidCap
Associates, Inc. was the investment adviser to the Convertibles Fund and
MIMI was sub-adviser to the Convertibles Fund.
Orrell Capital Management, a division of Orrell and Company,
Inc. ("Orrell"), is the investment adviser to the Gold Fund. Gregory M.
Orrell is the President and sole shareholder of Orrell. Prior to December
13, 1996, MIMI was the investment adviser to the Gold Fund and from
January 31, 1991 to August 17, 1996 was the sub-adviser to the Gold Fund.
Kensington Capital Management, Inc. was investment adviser to the Gold
Fund from January 31, 1991 to August 17, 1994.
Camborne Advisors, Inc. ("Camborne") is the sub-adviser to the
Government Fund. Camborne is a privately-held corporation which is wholly
owned by Camborne Investment Corporation. Camborne became the sub-adviser
to the Government Fund on December 13, 1996.
Under the investment advisory agreements applicable to the
Funds, the investment adviser thereto is paid a fee computed daily and
payable monthly, at an annual rate expressed as a percentage of the
applicable Fund's average daily net assets. The applicable fee rates are
as follows:
Fund Fee Rate Average Daily Net Assets
Short-Term Government Fund 0.20% All asset levels
Biotechnology Fund 1.00% All asset levels
Convertibles Fund 0.625% 0 to $150 million
0.50% $150 million to $250 million
0.375% Over $250 million
Government Fund 0.40% All asset levels
Gold Fund 1.00% 0 to $50 million
0.875% $50 million to $75 million
0.75% $75 million to $100 million
0.625% $100 million to $150 million
0.50% $150 million to $250 million
0.375% Over $250 million
Technology Fund 1.00% All asset levels
Equity Fund 1.00% 0 to $50 million
0.875% $50 million to $75 million
0.75% $75 million to $100 million
0.625% $100 million to $150 million
0.50% $150 million to $250 million
0.375% Over $250 million
Global Bond Fund 0.40% All asset levels
Total Return Bond Fund 0.30% All asset levels
Pursuant to the sub-advisory agreement applicable to the Government Fund,
PIA pays Camborne a fee computed daily and payable monthly, at an annual
rate of 0.20% of the Government Fund's average daily net assets.
Under the investment advisory agreements applicable to the
Funds, the investment adviser thereto is responsible for reimbursing the
applicable Fund to the extent necessary to permit the Fund to maintain the
expense limitations set forth in the Trust's current prospectus. Expense
reimbursement obligations are calculated daily and paid monthly, at an
annual rate expressed as a percentage of the applicable Fund's average
daily net assets. The applicable expense limitations are as follows:
Fund Expense Limitation
Short-Term Government Fund 0.30%
Biotechnology Fund 2.44%
Convertibles Fund 2.44%
Government Fund 1.10%
Gold Fund 2.44%
Technology Fund 2.44%
Equity Fund 1.80%
Global Bond Fund 0.51%
Total Return Bond Fund 0.40%
Pursuant to the sub-advisory agreement applicable to the Government Fund,
Camborne will reimburse PIA if PIA is required to make reimbursement to
the Government Fund.
The Total Return Bond Fund did not commence operations until
August 31, 1998. As a result of expense limitations, all investment
advisory, sub-advisory and management fees otherwise payable by the Funds
were waived and the following reimbursements were made to the Funds:
Reimbursements in
Fiscal Fees Addition to Fee
Fund Year End Waived Waivers
Government Fund 1997 $ 3,896 $53,280
1996 $ 3,924 $41,485
1995 $ 3,724 $39,367
Short-Term Government 1997 $71,513 $ 5,159
Fund 1996 $18,898 $21,965
1995 $ 7,978 $26,878
Equity Fund 1997 $14,391 $47,468
1996 $ 5,136 $43,620
1995 $ 5,226 $41,794
Gold Fund 1997 $17,249 $40,332
1996 $12,617 $35,235
1995 $ 4,929 $44,462
Convertibles Fund 1997 $ 9,617 $57,525
1996 $ 9,258 $33,053
1995 $ 9,067 $43,437
Biotechnology Fund 1997 $11,584 $57,882
1996 $ 4,318 $39,312
1995 $ 8,098 $37,592
Technology Fund 1997 $12,512 $58,801
1996 $ 5,774 $41,127
1995 $ 2,629 $40,101
Global Bond Fund 1997 $10,607 $30,356
All reimbursements made with respect to the Short-Term Government Fund and
the Global Bond Fund were made by PIA. With respect to the other Funds,
all reimbursements made during the fiscal year ended November 30, 1995
were made by MIMI. During the fiscal years ended November 30, 1996 and
November 30, 1997, PIA reimbursed the Equity Fund for excess expenses,
Murphy reimbursed the Convertibles Fund, the Biotechnology Fund and the
Technology Fund for excess expenses, and Orrell reimbursed the Gold Fund
for excess expenses.
Each investment advisory agreement and the sub-advisory
agreement provides that the investment adviser or the sub-adviser, as the
case may be, shall not be liable to the Fund in question for any error of
judgment by the investment adviser or the sub-adviser or for any loss
sustained by that Fund except in the case of wilful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
The Total Return Bond Fund did not commence operations until
August 31, 1998. During the fiscal years ended November 30, 1997,
November 30, 1996 and November 30, 1995, the Trust's Administrator,
American Data Services, Inc., received the following fees from the Funds:
Fund 1997 1996 1995
Convertibles Fund $18,081 $14,407 $18,274
Government Fund $15,585 $15,582 $16,671
Gold Fund $16,848 $16,325 $13,939
Equity Fund $16,848 $15,637 $14,704
Biotechnology Fund $16,963 $15,841 $14,954
Technology Fund $16,418 $16,238 $14,026
Short-Term Government Fund $21,930 $15,435 $ 9,773
Global Bond Fund $ 9,389 N/A N/A
Portfolio Transactions and Brokerage
Under each investment advisory agreement, the investment adviser
thereto is responsible for decisions to buy and sell securities for the
Fund in question, broker-dealer selection, and negotiation of brokerage
commission rates. (These activities of the investment advisers are
subject to the control of the Trust's Board of Trustees, as are all of the
activities of the investment advisers under the investment advisory
agreements. The primary consideration of the investment advisers in
effecting a securities transaction will be execution at the most favorable
securities price. Each agreement also contains the provisions summarized
below. The Trust understands that a substantial amount of the portfolio
transactions of the Fund in question may be transacted with primary market
makers acting as principal on a net basis, with no brokerage commissions
being paid by the Fund. Such principal transactions may, however, result
in a profit to market makers. In certain instances the investment adviser
may make purchases of underwritten issues for the Fund at prices which
include underwriting fees.
In selecting a broker-dealer to execute each particular
transaction, the investment adviser will take the following into
consideration: the best net price available; the reliability, integrity
and financial condition of the broker-dealers; the size of and difficulty
in executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Funds on a continuing
basis. Accordingly, the price to a Fund in any transaction may be less
favorable than that available from another broker-dealer if the difference
is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies as the Board of Trustees may
determine, the investment adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by the investment advisory
agreement in question or otherwise solely by reason of its having caused a
Fund to pay a broker or dealer that provides brokerage or research
services to the investment adviser an amount of commission for effecting a
portfolio transaction in excess of the amount of commission another broker
or dealer would have charged for effecting that transaction, if the
investment adviser determined in good faith that such amount of commission
was 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 investment adviser's overall
responsibilities with respect to the Trust or other accounts for which the
investment adviser has investment discretion. The investment advisers are
further authorized to allocate the orders placed by it on behalf of the
Funds to such brokers or dealers who also provide research or statistical
material, or other services, to the Trust, the investment adviser or any
affiliate of the foregoing. Such allocation shall be in such amounts and
proportions as the investment adviser shall determine and the investment
adviser shall report on such allocations regularly to the Funds,
indicating the broker-dealers to whom such allocations have been made and
the basis therefor. The investment advisers are authorized to consider
sales of shares as a factor in the selection of brokers or dealers to
execute portfolio transactions, subject to the requirements of best
execution, i.e. that such brokers or dealers are able to execute the order
promptly and at the best obtainable securities price.
The investment advisory agreements permit the investment adviser
to direct brokerage to Syndicated Capital, Inc., the Distributor of each
of the Funds, but only if they reasonably believe the commissions and
transaction quality are comparable to that available from other brokers.
Syndicated Capital, Inc. when acting as a broker for the Funds in any of
its portfolio transactions executed on a securities exchange of which it
is a member, will act in accordance with regulations adopted by the
Securities and Exchange Commission under Section 11(a) of the Securities
Exchange Act of 1934 and the rules of such exchanges. The Distributor is
wholly-owned by Joseph Lloyd McAdams, Jr.
None of the Short-Term Government Fund, the Government Fund and
the Global Bond Fund paid any brokerage commissions during the three
fiscal years ended November 30, 1997. During the fiscal years ended
November 30, 1997, November 30, 1996 and November 30, 1995 the Gold Fund
paid brokerage commissions of $8,709, $15,150 and $6,807, respectively,
and the Convertibles Fund paid brokerage commissions of $4,237, $9,158 and
$14,152, respectively. During the fiscal years ended November 30, 1997,
November 30, 1996 and November 30, 1995, the Equity Fund paid brokerage
commissions of $7,782, $1,452 and $2,145, respectively. During the fiscal
years ended November 30, 1997, November 30, 1996 and November 30, 1995 the
Biotechnology Fund paid brokerage commissions of $4,424, $1,140 and
$1,411, respectively, and the Technology Fund paid brokerage commissions
of $4,211, $5,204 and $1,550, respectively. All of the brokers to whom
commissions were paid provided research services to the Fund's investment
advisers. The research services discussed above may be in written form or
through direct contact with individuals and may include information as to
particular companies and securities as well as market economic or
institutional areas and information assisting the Fund in the valuation of
its investments. The Total Return Bond Fund did not commence operations
until August 31, 1998.
The following table sets forth information concerning brokerage
commissions paid by the Funds to the Distributor during the fiscal years
ended November 30, 1997, November 30, 1996 and November 30, 1995. (No
other Fund paid brokerage commissions to the Distributor during such
fiscal years.)
Gold Fund
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
November 30, November 30, November 30,
1997 1996 1995
Commissions Paid to
Distributor $120 $510 0
Total Commissions Paid $ 8,709 $15,230 0
% Paid to Distributor 1.38% 3.34% N/A
Dollar Amount of
Transactions on which
Commissions Were Paid to
Distributor $64,125 $81,313 0
Total Dollar Amount of
Transactions on which
Commissions Were Paid $1,385,499 $1,703,604 0
% of Transactions
Involving Commission
Payments to Distributor 4.63% 4.77% N/A
Convertibles Fund
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
November 30, November 30, November 30,
1997 1996 1995
Commissions Paid to
Distributor 0 $122 0
Total Commissions Paid 0 $9,158 0
% Paid to Distributor N/A 1.33% N/A
Dollar Amount of
Transactions on which
Commissions Were Paid to
Distributor 0 $48,211 0
Total Dollar Amount of
Transactions on which
Commissions Were Paid 0 $2,368,740 0
% of Transactions
Involving Commission
Payments to Distributor N/A 2.04% N/A
Technology Fund
Fiscal Year Fiscal Year
Ended Fiscal Year Ended
November 30, Ended November November 30,
1997 30, 1996 1995
Commissions Paid to
Distributor $198 0 0
Total Commissions Paid $4,211 0 0
% Paid to Distributor 4.70% N/A N/A
Dollar Amount of
Transactions on which
Commissions Were Paid
to Distributor $79,818 0 0
Biotechnology Fund
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
November 30, November 30, November 30,
1997 1998 1995
Total Dollar Amount of
Transactions on which
Commissions Were Paid $509,984 0 0
% of Transactions
Involving Commission
Payments to Distributor 15.65% N/A N/A
Distribution Plan
The Trust's Distribution Plan and Agreement ("Plan") is the
written plan contemplated by Rule 12b-1 (the "Rule") under the 1940 Act.
The Plan contains the following definitions. "Qualified
Recipient" shall mean any broker-dealer or other "person" (as that term is
defined in the 1940 Act) which (i) has rendered distribution assistance
(whether direct, administrative or both) in the distribution of the
Trust's shares, (ii) furnishes the Distributor (on behalf of the Trust)
with such information as the Distributor shall reasonably request to
answer such questions as may arise and (iii) has been selected by the
Distributor to receive payments under the Plan. "Qualified Holdings"
means all shares of the Trust beneficially owned by (i) a Qualified
Recipient, (ii) the customers (brokerage or other) of a Qualified
Recipient, (iii) the clients (investment advisory or other) of a Qualified
Recipient, (iv) the accounts as to which a Qualified Recipient has a
fiduciary or custodial relationship, and (v) the members of a Qualified
Recipient, if such Qualified Recipient is an association or union;
provided that the Qualified Recipient shall have been instrumental in the
purchase of such shares by, or shall have provided administrative
assistance to, such customers, clients, accounts or members in relation
thereto. The Distributor is authorized to make final and binding
decisions as to all matters relating to Qualified Holdings and Qualified
Recipients, including but not limited to (i) the identity of Qualified
Recipients; (ii) whether or not any Trust shares are to be considered as
Qualified Holdings of any particular Qualified Recipient; and (iii) what
Trust shares, if any, are to be attributed to a particular Qualified
Recipient, to a different Qualified Recipient or to no Qualified
Recipient. "Qualified Trustees" means the Trustees of the Trust who are
not interested persons, as defined in the 1940 Act, of the Trust and who
have no direct or indirect financial interest in the operation of the Plan
or any agreement related to the Plan. While the Plan is in effect, the
selection and nomination of Qualified Trustees is committed to the
discretion of such Qualified Trustees. Nothing in the Plan shall prevent
the involvement of others in such selection and nomination if the final
decision on any such selection and nomination is approved by a majority of
such Qualified Trustees. "Permitted Payments" means payments by the
Distributor to Qualified Recipients as permitted by the Plan.
The Plan authorizes the Distributor to make Permitted Payments
to any Qualified Recipient on either or both of the following bases: (a)
as reimbursement for direct expenses incurred in the course of
distributing Trust shares or providing administrative assistance to the
Trust or its shareholders, including, but not limited to, advertising,
printing and mailing promotional material, telephone calls and lines,
computer terminals, and personnel; and/or (b) at a rate specified by the
Distributor with respect to the Qualified Recipient in question based on
the average value of the Qualified Holdings of such Qualified Recipient.
The Distributor may make Permitted Payments in any amount to any Qualified
Recipient, provided that (i) the total amount of all Permitted Payments
made during a fiscal year to all Qualified Recipients (whether made under
(a) and/or (b) above) do not exceed, in that fiscal year of the Trust, the
aggregate of 0.99% of the daily net assets of the Gold Fund; 0.25% of the
daily net assets of the Biotechnology Fund, the Technology Fund, the
Equity Fund, the Convertibles Fund and the Total Return Bond Fund; 0.10%
of the daily net assets of the Government Fund; and 0.05% of the daily net
assets of the Short-Term Government Fund in that fiscal year; and (ii) a
majority of the Qualified Trustees may at any time decrease or limit the
aggregate amount of all Permitted Payments or decrease or limit the amount
payable to any Qualified Recipient. (The Global Bond Fund will not make
any payments pursuant to the Plan and the Total Return Bond Fund will not
make any payments pursuant to the Plan during the fiscal year ending
November 30, 1998 but may in subsequent years subject to the limitations
set forth herein.) The Trust will reimburse the Distributor from the
assets of the Trust for such Permitted Payments within such limit, but
either the Distributor or one or more investment advisers to the Trust
shall bear any Permitted Payments beyond such limits.
The Plan also authorizes the Distributor to purchase advertising
for shares of the Trust, to pay for sales literature and other promotional
material, and to make payments to sales personnel affiliated with it. Any
such advertising and sales material may include references to other
open-end investment companies or other investments and any salesmen so
paid are not required to devote their time solely to the sale of Trust
shares. Any such expenses ("Permitted Expenses") made during a fiscal
year of the Trust shall be reimbursed or paid by the Trust from the assets
of the Trust, except that the combined amount of reimbursement or payment
of Permitted Expenses together with the Permitted Payments made pursuant
to the Plan by the Trust shall not, in the aggregate, in any fiscal year
of the Trust exceed 0.99% of the daily net assets of the Gold Fund; 0.25%
of the daily net assets of the Biotechnology Fund, the Technology Fund,
the Equity Fund, the Convertibles Fund and the Total Return Bond Fund;
0.10% of the daily net assets of the Government Fund; and 0.05% of the
daily net assets of the Short-Term Government Fund in such year and either
the Distributor or one or more investment advisers to the Trust shall bear
any such expenses beyond such limit. As indicated above, no payments
under the Plan will be made by the Global Bond Fund nor, in the fiscal
year ending November 30, 1998, the Total Return Bond Fund. No such
reimbursement may be made for Permitted Expenses or Permitted Payments for
fiscal years prior to the fiscal year in question or in contemplation of
future Permitted Expenses or Permitted Payments.
The Plan states that if and to the extent that any of the
payments by the Trust from the assets of the Trust listed below are
considered to be "primarily intended to result in the sale of shares"
issued by the Trust within the meaning of the Rule, such payments by the
Trust are authorized without limit under the Plan and shall not be
included in the limitations contained in the Plan: (i) the costs of the
preparation, printing and mailing of all required reports and notices to
shareholders, irrespective of whether such reports or notices contain or
are accompanied by material intended to result in the sale of shares of
the Trust or other funds or other investments; (ii) the costs of
preparing, printing and mailing of all prospectuses to shareholders; (iii)
the costs of preparing, printing and mailing of any proxy statements and
proxies, irrespective of whether any such proxy statement includes any
item relating to, or directed other funds or other investments; (ii) the
costs of preparing, printing and mailing of all prospectuses to
shareholders; (iii) the costs of preparing, printing and mailing of any
proxy statements and proxies, irrespective of whether any such proxy
statement includes any item relating to, or directed toward, the sale of
the Trust's shares; (iv) all legal and accounting fees relating to the
preparation of any such reports, prospectuses, proxies and proxy
statements; (v) all fees and expenses relating to the qualification of the
Trust and/or its shares under the securities or "Blue-Sky" law of any
jurisdiction; (vi) all fees under the 1940 Act and the Securities Act of
1933, including fees in connection with any application for exemption
relating to or directed toward the sale of the Trust's shares; (vii) all
fees and assessments of the Investment Company Institute or any successor
organization, irrespective of whether some of its activities are designed
to provide sales assistance; (viii) all costs of preparing and mailing
confirmations of shares sold or redeemed or share certificates, and
reports of share balances; and (ix) all costs of responding to telephone
or mail inquiries of shareholders.
The Plan also states that it is recognized that the costs of
distribution of the Trust's shares are expected to exceed the sum of
Permitted Payments, Permitted Expenses and the portions of sales charges
on Trust shares retained by the Distributor ("Excess Distribution Costs")
and that the profits, if any, of the common owners of the Distributor and
any investment adviser are dependent primarily on the advisory fees paid
by the Funds. If and to the extent that any investment advisory fees paid
by the Fund might, in view of any Excess Distribution Costs, be considered
as indirectly financing any activity which is primarily intended to result
in the sale of shares issued by the Fund, the payment of such fees is
authorized under the Plan. The Plan states that in taking any action
contemplated by Section 15 of the 1940 Act as to any investment advisory
contract to which a Fund is a party, the Board of Trustees, including
Trustees who are not "interested persons," as defined in the 1940 Act,
shall, in acting on the terms of any such contract, apply the "fiduciary
duty" standard contained in Sections 36(a) and 36(b) of the 1940 Act.
The Plan requires that while it is in effect, the Distributor
shall report in writing at least quarterly to the Board of Trustees, and
the Board shall review, the following: (i) the amounts of all Permitted
Payments, the identity of the recipients of each such Payment; the basis
on which each such recipient was chosen as a Qualified Recipient and the
basis on which the amount of the Permitted Payment to such Qualified
Recipient was made; (ii) the amounts of Permitted Expenses and the purpose
of each such Expense; and (iii) all costs of the other payments specified
in the Plan (making estimates of such costs where necessary or desirable),
in each case during the preceding calendar or fiscal quarter.
The aggregate Permitted Payments and Permitted Expenses paid or
accrued by the Government Fund, the Gold Fund, the Convertibles Fund, the
Equity Fund, the Biotechnology Fund, the Technology Fund and the Short-
Term Government Fund during the fiscal year ended November 30, 1997 were
$974, $17,076, $7,713, $10,845, $3,650, $5,488 and $15,298, respectively.
Of such amounts $22,607 was paid to Qualified Recipients and the remaining
$38,437 was paid to Syndicated Capital, Inc., the distributor of the
Funds.
The Plan was approved (i) by a vote of the Board of Trustees and
of the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on the Plan; and (ii) by a vote of holders of a
"majority" (as defined in the 1940 Act) of the outstanding voting
securities of each Fund. The Plan, unless terminated as hereinafter
provided, shall continue in effect from year to year only so long as such
continuance is specifically approved at least annually by the Board of
Trustees and its Qualified Trustees cast in person at a meeting called for
the purpose of voting on such continuance. The Plan may be terminated
with respect to a Fund at any time by a vote of a majority of the
Qualified Trustees or by the vote of the holders of a "majority" (as
defined in the 1940 Act) of the outstanding voting securities of the Fund.
The Plan may not be amended to increase materially the amount of payments
to be made without shareholder approval, as set forth in (ii) above, and
all amendments must be and have been approved in the manner set forth
under (i) above.
Net Asset Value
In determining the net asset value of a Fund's shares, common
stocks that are listed on national securities exchanges or the NASDAQ
Stock Market are valued at the last sale price as of the close of trading,
or, in the absence of recorded sales, at the average of readily available
closing bid and asked prices on such exchanges. Unlisted securities held
by a Fund that are not included in the NASDAQ Stock Market are valued at
the average of the quoted bid and asked prices in the over-the-counter
market. Securities and other assets for which market quotations are not
readily available are valued by appraisal at their fair value as
determined in good faith by the investment adviser under procedures
established by and under the general supervision and responsibility of the
Trust's Board of Trustees. Short-term investments which mature in less
than 60 days are valued at amortized cost (unless the Board of Trustees
determines that this method does not represent fair value), if their
original maturity was 60 days or less, or by amortizing the value as of
the 61st day prior to maturity, if their original term to maturity
exceeded 60 days. Options traded on national securities exchanges are
valued at the average of the closing quoted bid and asked prices on such
exchanges and Futures and options thereon, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such
commodities exchanges.
When a Fund writes a call or a put, an amount equal to the
premium received is included in the Statement of Assets and Liabilities as
an asset, and an equivalent amount is included in the liability section.
This amount is "marked-to-market" to reflect the current market value of
the call or put. If a call a Fund wrote is exercised, the proceeds it
receives on the sale of the related investment by it are increased by the
amount of the premium it received. If a put a Fund wrote is exercised,
the amount it pays to purchase the related investment is decreased by the
amount of the premium received. If a call a Fund purchased is exercised
by it, the amount it pays to purchase the related investment is increased
by the amount of the premium it paid. If a put a Fund purchased is
exercised by it, the amount it receives on its sale of the related
investment is reduced by the amount of the premium it paid. If a call or
put written by a Fund expires, it has a gain in the amount of the premium;
if that Fund enters into a closing transaction, it will have a gain or
loss depending on whether the premium was more or less than the cost of
the closing transaction.
Shareholder Services
Statement of Intent. Reduced sales charges are available to
purchasers who enter into a written Statement of Intent providing for the
purchase, within a thirteen-month period, of shares of the Equity Fund,
the Gold Fund or the Government Fund. All shares of any of the Equity
Fund, the Gold Fund or the Government Fund previously purchased and still
owned are also included in determining the applicable reduction.
A Statement of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments in the Equity
Fund, the Gold Fund or the Government Fund over a thirteen-month period.
The investment made during the period will receive the reduced sales
commission applicable to the amount represented by the goal, as if it were
a single investment. Shares totaling 5% of the dollar amount of the
Statement of Intent will be held in escrow by the Transfer Agent in the
name of the purchaser. The effective date of a Statement of Intent may be
back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Statement of Intent goal.
The Statement of Intent does not obligate the investor to
purchase, nor a Fund to sell, the indicated amount. In the event the
Statement of Intent goal is not achieved within the thirteen-month period,
the purchaser is required to pay the difference between the sales
commission otherwise applicable to the purchases made during this period
and sales charges actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient
escrowed shares to obtain such difference. If the goal is exceeded in an
amount which qualifies for a lower sales commission, a price adjustment is
made by refunding to the purchaser the amount of excess sales commission,
if any, paid during the thirteen-month period. Investors electing to
purchase shares of a Fund pursuant to a Statement of Intent should
carefully read such Statement of Intent.
Systematic Withdrawal Plan. A Systematic Withdrawal Plan is
available for shareholders having shares of a Fund with a minimum value of
$10,000, based upon the offering price. The Systematic Withdrawal Plan
provides for monthly or quarterly checks in any amount not less than $100
(which amount is not necessarily recommended).
Dividends and capital gains distributions on shares held under
the Systematic Withdrawal Plan are invested in additional full and
fractional shares at net asset value. The Transfer Agent acts as agent
for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the periodic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time, and, while no fee is
currently charged, the Distributor reserves the right to initiate a fee of
up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends,
yield, or income. If periodic withdrawals continuously exceed reinvested
dividends and capital gains distributions, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. Although the shareholder may purchase additional shares when
participating in the Systematic Withdrawal Plan, withdrawals made
concurrently with purchases of additional shares of the Gold Fund, the
Equity Fund and the Government Fund are inadvisable because of the sales
charges applicable to the purchase of additional shares.
Pre-authorized Check Investment. A shareholder who wishes to
make additional investments in a Fund on a regular basis may do so by
authorizing the Distributor to deduct a fixed amount each month from the
shareholder's checking account at his or her bank. This amount will
automatically be invested in that Fund on the same day that the
preauthorized check is issued. The shareholder will receive a
confirmation from the Fund, and the checking account statement will show
the amount charged. The form necessary to begin this service is available
from the Distributor.
Tax Sheltered Retirement Plans. Through the Distributor,
retirement plans are either available or expected to be available for use
by the self-employed (Keogh Plans), Individual Retirement Accounts
(including SEP-IRAs) and "tax-sheltered accounts" under Section 403(b)(7)
of the Code. Adoption of such plans should be on advice of legal counsel
or tax advisers.
For further information regarding plan administration, custodial
fees and other details, investors should contact the Distributor.
Investments at Net Asset Value. The Trust permits investors to
purchase shares of the Gold Fund, the Equity Fund and the Government Fund
at net asset value, using the proceeds from certain redemptions of shares
of other mutual funds. (All purchases of the Technology Fund, the
Biotechnology Fund, the Convertibles Fund, the Short-Term Government Fund,
the Global Bond Fund and the Total Return Bond Fund are at net asset
value.) The reason for permitting such sales at net asset value is that
the Distributor believes that these investors have already become informed
about the advantages of investing in mutual funds and accordingly the
sales effort is significantly less. The Distribution Plan is expected to
provide adequate compensation to dealers for assisting these investors in
purchasing shares of the Funds.
As stated in the Prospectus, the Gold Fund, the Government Fund
and the Equity Fund may sell shares at net asset value to officers and
Trustees of the Trust and certain other affiliated persons and members of
their families as well as customers of PIA, Murphy, Orrell, Camborne and
the Distributor, and to certain publishers of investment advisory
newsletters and their subscribers and certain investment advisers on
behalf of their discretionary accounts. The reason for permitting such
investments without a sales charge is that the Distributor incurs no
material sales expense in connection therewith.
Former shareholders of the Gold Fund, the Equity Fund and the
Government Fund may also purchase shares of the Gold Fund, the Equity Fund
and the Government Fund at net asset value up to an amount not exceeding
their prior investment in all of such Funds. When making a purchase at
net asset value pursuant to this provision, the former shareholder should
forward to the Trust's transfer agent a copy of an account statement
showing the prior investment in these Funds.
Dividends and Tax Status
If the Trust's management, in its sole discretion, deems it in
the best interest of the Gold Fund, the Biotechnology Fund, the Global
Bond Fund, the Convertibles Fund, the Total Return Bond Fund or the
Technology Fund and their respective shareholders to do so, such Funds may
each invest more than 50% of its total assets in securities of foreign
corporations. In that case, such Funds will be able to elect to take
advantage of the provisions of Section 853 of the Code. Under the
provisions of Section 853, a shareholder will be treated as receiving an
additional distribution from the Fund in the amount indicated in a notice
furnished to him as his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's
investments. However, the shareholder may, subject to certain
limitations, take the amount of such foreign taxes withheld as a credit
against his federal income tax (including, subject to limitations, the
alternative minimum tax) or, alternatively, may treat the foreign tax
withheld as a deduction from his gross income in computing his taxable
income if that should be to his advantage. In substance, this policy
enables the shareholder to benefit from the same foreign tax credit or
deduction that he would have received if he had directly owned the foreign
securities and had paid foreign income tax on the income therefrom. Such
foreign tax credit is subject to certain limitations, and each shareholder
is referred to his tax adviser with respect to the availability of the
foreign tax credit to him.
General
The Trust's Declaration of Trust permits its Trustees to issue
an unlimited number of full and fractional shares of beneficial interest
and to divide or combine the shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interest in a
Fund. Each share represents an interest in a Fund proportionately equal
to the interest of each other share. Upon the Trust's liquidation, all
shareholders of a Fund would share pro rata in its net assets available
for distribution to shareholders. If they deem it advisable and in the
best interests of shareholders, the Board of Trustees may create
additional classes of shares which may differ from each other only as to
dividends or (as is the case with the Funds) each of which has separate
assets and liabilities (in which case any such class would have a
designation including the word "Series"). Shares of each class (including
the Funds) are entitled to vote as a class only to the extent required by
the 1940 Act or as permitted by the Trustees. Income and operating
expenses are allocated fairly among the classes by the Trustees.
The Funds' custodian, Star Bank, N.A., Cincinnati, Ohio, is
responsible for holding the Funds' assets. American Data Services, Inc.,
the Trust's Administrator, maintains the Funds' accounting records and
calculates daily the net asset value of the Funds' shares.
The Trust's independent accountants, McGladrey & Pullen, LLP,
examine the Fund's annual financial statements and assist in the
preparation of certain reports to the Securities and Exchange Commission.
The Total Return Bond Fund did not commence operations until
August 31, 1998. During the three fiscal years ended November 30, 1997,
the aggregate dollar amount of sales charges on the sales of shares of the
Funds and the amount retained by the Fund's distributor were as follows:
<TABLE>
<CAPTION>
Years Ended November 30
1997 1996 1995
Sales Amount Sales Amount Sales Amount
Fund Charge Retained Charge Retained Charge Retained
<S> <C> <C> <C> <C> <C> <C>
Short-Term Government
Fund $ 62 $ 0 $ 63 $ 39 $ 0 $ 0
Government Fund $ 0 $ 0 $ 0 $ 0 $2,291 $ 201
Gold Fund $ 7,660 $2,241 $22,796 $5,788 $ 29 $ 3
Convertibles Fund $ 90 $ 10 $ 103 $ 12 $ 135 $ 15
Equity Fund $ 945 $ 212 $ 1,841 $ 316 $ 502 $ 67
Biotechnology Fund $ 691 $ 75 $ 123 $ 44 $ 445 $ 65
Technology Fund $ 373 $ 40 $ 3,372 $ 414 $ 158 $ 17
Global Bond Fund $ 0 $ 0 N/A N/A N/A N/A
</TABLE>
Calculation of Performance Data
Convertibles Fund
Average annual total return:
for the one-year period ended November 30, 1997: (0.45)%
for the five-year period ended November 30, 1997: 7.83%
for the period February 5, 1988 - November 30, 1997: 4.55%
Government Fund
Average annual total return:
for the one-year period ended November 30, 1997: 4.78%
for the five-year period ended November 30, 1997: 6.55%
for the ten-year period ended November 30, 1997: 6.49%
Gold Fund
Average annual total return:
for the one-year period ended November 30, 1997: (41.45)%
for the five-year period ended November 30, 1997: (13.13)%
for the period February 5, 1988 - November 30, 1997: (12.13)%
Equity Fund
Average annual total return:
for the one-year period ended November 30, 1997: 5.04%
for the five-year period ended November 30, 1997 8.68%
for the period April 1, 1992 - November 30, 1997: 10.01%
Biotechnology Fund
Average annual total return:
for the one-year period ended November 30, 1997: 12.27%
for the period October 20, 1993 - November 30, 1997: 0.21%
Technology Fund
Average annual total return:
for the one-year period ended November 30, 1997: (3.70)%
for the period October 20, 1993 - November 30, 1997: 10.12%
Short-Term Government Fund
Average annual total return:
for the one-year period ended November 30, 1997: 6.56%
for the period April 22, 1994 - November 30, 1997: 6.69%
Global Bond Fund
Total return:
for the period April 1, 1997 - November 30, 1997: 4.15%
Average total return is calculated according to the following
formula:
n
P(1+T) =ERV
where P=a hypothetical initial payment of $1,000; T=average annual total
return; n= number of years; and ERV = ending redeemable value of the
hypothetical initial payment of $1,000 made at the beginning of the period
shown. The maximum sales load was deducted from the initial $1,000
investment and all dividends and distributions were assumed to have been
reinvested at the appropriate net asset value per share.
The Government Fund's yield for the one-month period ended
November 30, 1997 was 5.51%, the Short-Term Government Fund's yield for
the one month period ended November 30, 1997 was 5.91% and the Global Bond
Fund's yield for the one month period ended November 30, 1997 was 4.66%.
Yields will fluctuate as market conditions change. The yield of the
Government Fund, the Short-Term Government Fund and the Global Bond Fund
is calculated according to the following formula:
a-b
YIELD = 2[(--- + 1)6 - 1]
cd
Where: a = interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
All of the foregoing information (total return and yield)
reflect expense reimbursements made to the Funds. The Total Return Bond
Fund did not commence operations until August 31, 1998.
Appendix
Options on Securities
An option is a legal contract that gives the buyer (who then
becomes the holder) the right to buy, in the case of a call, or sell, in
the case of a put, a specified amount of the underlying security at the
option price at any time before the option expires. The buyer of a call
obtains, in exchange for a premium that is paid to a seller, or "writer,"
of a call, the right to purchase the underlying security. The buyer of a
put obtains the right to sell the underlying security to a writer of a
put, likewise in exchange for a premium. Options have standardized terms,
including the exercise price and expiration time; listed options are
traded on national securities exchanges that provide a secondary market in
which holders or writers can close out their positions by offsetting sales
and purchases. The premium paid to a writer is not a down payment; it is
a nonrefundable payment from a buyer to a seller for the rights conveyed
by the option. A premium has two components: the intrinsic value and the
time value. The intrinsic value represents the difference between the
current price of the securities and the exercise price at which the
securities will be sold pursuant to the terms of the option. The time
value is the sum of money investors are willing to pay for the option in
the hope that, at some time before expiration, it will increase in value
because of a change in the price of the underlying security.
One risk of any put or call that is held is that the put or call
is a wasting asset. If it is not sold or exercised prior to its
expiration, it becomes worthless. The time value component of the premium
decreases as the option approaches expiration, and the holder may lose all
or a large part of the premium paid. In addition, there can be no
guarantee that a liquid secondary market will exist on a given exchange,
in order for an option position to be closed out. Furthermore, if trading
is halted in an underlying security, the trading of options is usually
halted as well. In the event that an option cannot be traded, the only
alternative to the holder is to exercise the option.
Stock Index Futures and Debt Futures
A futures contract is a commitment to buy or sell a specific
product at a currently determined market price, for delivery at a
predetermined future date. The futures contract is uniform as to
quantity, quality and delivery time for a specified underlying product.
The commitment is executed in a designated contract market -- a futures
exchange -- that maintains facilities for continuous trading. The buyer
and seller of the futures contract are both required to make a deposit of
cash or U.S. Treasury Bills with their brokers equal to a varying
specified percentage of the contract amount; the deposit is known as
initial margin. Since ownership of the underlying product is not being
transferred, the margin deposit is not a down payment; it is a security
deposit to protect against nonperformance of the contract. No credit is
being extended, and no interest expense accrues on the non-margined value
of the contract. The contract is marked to market every day, and the
profits and losses resulting from the daily change are reflected in the
accounts of the buyer and seller of the contract. A profit in excess of
the initial deposit can be withdrawn, but a loss may require an additional
payment, known as variation margin, if the loss causes the equity in the
account to fall below an established maintenance level.
To liquidate a futures position before the contract expiration
date, a buyer simply sells the contract, and the seller of the contract
simply buys the contract, on the futures exchange. Stock Index Futures
are settled at maturity not by delivery of the stocks making up the index,
but by cash settlement. However, the entire value of the contract does
not change hands; only the gains and losses on the contract since the
preceding day are credited and debited to the accounts of the buyers and
sellers, just as on every other preceding trading day, and the positions
are closed out.
One risk in employing Futures to attempt to protect against
declines in the value of the securities held by a Fund is the prospect
that the prices of Futures will correlate imperfectly with the behavior of
the market value of that Fund's securities. The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures
of those markets, are subject to distortions. First, all participants in
the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through off-setting transactions
which could distort the normal relationship between the cash and futures
markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
distortion. The liquidity of the Futures being considered for purchase or
sale by a Fund will be a factor in their selection by the investment
adviser. Third, from the point of view of speculators the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation
by speculators in the futures market may cause temporary price
distortions.
It is possible that, where a Fund has sold Futures in a short
hedge, the market may advance but the value of the securities held by the
Fund in question may decline. If this occurred, that Fund would lose
money on the Future and also experience a decline in the value of its
securities. Where Futures are purchased in a long hedge, it is possible
that the market may decline; if the Fund in question then concludes not to
invest in securities at that time because of concern as to possible
further market decline or for other reasons, that Fund will realize a loss
on the Future that is not offset by a reduction in the price of any
securities purchased.
Options on Stock Index Futures and Debt Futures
Options on Futures are similar to options on stocks, except that
the related investment is not a stock, but a Future. Thus, the buyer of a
call option obtains the right to purchase a Future at a specified price
during the life of the option, and the buyer of a put option obtains the
right to sell a Future at a specified price during the life of the option.
The options are traded on an expiration cycle based on the expiration
cycle of the underlying Future.
The risks of options on Futures are similar to those of options
on securities and also include the risks inherent in the underlying
Futures.
Stock Index Options
Options on stock indices are based on the same principles as
listed stock options, described above. The main difference is that the
underlying instrument is a stock index, rather than an individual stock.
Furthermore, settlement of the option is made, not in the stocks that make
up the index, but in cash. The amount of cash is the difference between
the closing price of the index on the exercise date and the exercise price
of the option, expressed in dollars, times a specified multiple (the
"multiplier").
A variety of index options are currently available, and
proposals for several more are pending. Some options involve indices that
are not limited to any particular industry or segment of the market, and
such an index is referred to as a "broadly based stock market index."
Others, particularly the newer options, involve stocks in a designated
industry or group of industries, and such an index is referred to as an
"industry index" or "market segment index." In selecting an option to
hedge a Fund's portfolio, the investment adviser may use either an option
based on a broadly based stock market index, or one or more options on
market segment indices, or a combination of both, in order to attempt to
obtain the proper degree of correlation between the indices and the Fund's
portfolio.
In addition to the risks of options generally and the risk of
imperfect correlation, discussed above, buyers and writers of index
options are subject to additional risks unique to index options. Because
exercises of index options are settled in cash, call writers cannot
provide precisely in advance for their potential settlement obligations by
holding the underlying securities. In addition, there is the risk that
the value of the Fund's portfolio may decline between the time that a call
written by that Fund is exercised and the time that it is able to sell
equities. Even if an index call written by it were "covered" by another
index call held by it, because a writer is not notified of exercise until
at least the following business day, the Fund is exposed to the risk of
market changes between the day of exercise and the day that it is notified
of the exercise. If a Fund holds an index option and chooses to exercise
it, the level of the underlying index may change between the time the Fund
exercises the option and the market closing.
Limitations on Options and Futures
Transactions in options by a Fund will be subject to limitations
established by each of the exchanges governing the maximum number of
options which may be written or held by a single investor or group of
investors acting in concert, regardless of whether the options are written
or held on the same or different exchanges or are written or held in one
or more accounts or through one or more brokers. Thus, the number of
options which a Fund may write or hold may be affected by options written
or held by other investment advisory clients of the Adviser and its
affiliates. Position limits also apply to Futures. An exchange may order
the liquidations of positions found to be in excess of these limits, and
it may impose certain sanctions.
Description of Securities Ratings
As set forth in the Prospectus, each of the Funds may invest in
commercial paper and commercial paper master notes rated A-1 or better by
Standard & Poor's Corporation ("Standard & Poor's) or Prime-1 or better by
Moody's Investors Service, Inc. ("Moody's"). A brief description of the
ratings symbols and their meanings follows.
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
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 issuers designed "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
designation.
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.
Obligations relying upon support mechanisms such as letters-of-credit and
bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment ability of rated
issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions)
have a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
FINANCIAL STATEMENTS
The following financial statements are incorporated by reference
to the Annual Report, dated November 30, 1997 of the Trust (File
No. 811-4010) as filed with the Securities and Exchange Commission on
January 30, 1998:
- Schedule of Investments for each Fund (other than the Total
Return Bond Fund)
- Statement of Assets and Liabilities for each Fund (other
than the Total Return Bond Fund)
- Statement of Operations for each Fund (other than the Total
Return Bond Fund)
- Statement of Changes in Net Assets for each Fund (other
than the Total Return Bond Fund)
- Notes to Financial Statements
- Financial Highlights for each Fund (other than the Total
Return Bond Fund)
- Independent Auditor's Report
