Investment Company Act Registration No. 811-4010
Securities Act Registration No. 2-90810
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 30 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 31
(Check appropriate box or boxes)
MONTEREY MUTUAL FUND
(Exact name of registrant as specified in charter)
1299 Ocean Avenue, Suite 210
Santa Monica, CA 90401 90401
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (310) 393-1424
Joseph Lloyd McAdams, Jr., Chairman
Monterey Mutual Fund
1299 Ocean Avenue, Suite 210
Santa Monica, CA 90401
(Name and address of Agent for Service)
Approximate date of proposed public offering: As soon as practicable after the
effective date of the registration statement.
It is proposed that this filing become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
|X| on March 31, 1999 pursuant to paragraph (a) (2) of rule 485
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for
a previously filed post-effective amendment
<PAGE>
P R O S P E C T U S
March 31, 1999
The PIA Income Funds
The PIA Income Funds are three no load mutual funds in the
Monterey Mutual Fund family. The PIA Income Funds are:
o PIA Short-Term Government Securities Fund
o PIA Total Return Bond Fund
o PIA Global Bond Fund
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how the PIA Income Funds invest
and the services they offer to shareholders.
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Monterey Mutual Fund
1299 Ocean Avenue
Suite 210
Santa Monica, California 90401
(800) 251-1970
TABLE OF CONTENTS
Questions Every Investor Should Ask
Before Investing in the PIA Income Funds
Fees and Expenses................................................
Investment Objective, Strategies and Risks.......................
Management of the Funds..........................................
The Funds' Share Price ..........................................
Purchasing Shares................................................
Redeeming Shares.................................................
Exchanging Shares................................................
Dividends, Distributions and Taxes...............................
Financial Highlights.............................................
The PIA Income Funds are distributed by Syndicated Capital, Inc.
<PAGE>
QUESTIONS EVERY INVESTOR SHOULD ASK BEFORE
INVESTING IN THE PIA INCOME FUNDS
1. What are the Fund's Goals?
PIA Short-Term Government Securities Fund
The Short-Term Government Fund seeks a high level of current income,
consistent with low volatility of principal through investing in
short-term, adjustable rate and floating rate securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
PIA Total Return Bond Fund
The Total Return Bond Fund seeks to maximize total return through
investing in bonds, while minimizing risk as compared to the market.
PIA Global Bond Fund
The Global Bond Fund seeks a high level of current income through
investing in bonds denominated in U.S. dollars and other currencies.
2. What are the Fund's Principal Investment Strategies?
Each of the PIA Income Funds invests primarily in debt securities,
although they differ significantly in the types of debt securities in
which they primarily invest. The table below illustrates the
differences among the PIA Income Funds.
<TABLE>
<CAPTION>
Short-Term Global Bond Total Return Bond
Government Fund Fund Fund
<S> <C> <C> <C>
1. Is investing in U.S. Yes Yes Yes
Government securities
a primary investment strategy?
2. Is investing in debt securities No Yes No
issued by foreign government
international entities or
organizations supported by
governmental entities a
primary investment strategy?
3. Is investing in debt securities No Yes Yes
issued by U.S. corporations a
primary investment strategy?
4. Is investing in mortgage-backed Yes Yes Yes
or asset-backed securities
a primary investment strategy?
</TABLE>
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<PAGE>
The PIA Income Funds also differ in the credit quality of the securities
in which they invest. The Short-Term Government Fund primarily invests in
U.S. Government securities but may also invest in securities rated A or
better by a nationally recognized rating agency. The Global Bond Fund may
invest in securities rated lower than A but will not hold more than 5% of
its assets in securities that aren't rated investment grade (at least BBB
or Baa) by a nationally recognized rating agency. The Total Return Bond
Fund also may invest in securities rated less than A, including up to 10%
of its assets in securities rated BB, Ba or B by a nationally recognized
rating agency.
The weighted average duration of the portfolios of the PIA Income Funds
will differ. Duration is a measure of a debt security's price
sensitivity. Duration takes into account a debt security's cash flows
over time including the possibility that a debt security might be prepaid
by the issuer or redeemed by the holder prior to its stated maturity
date. In contrast, maturity measures only the time until final payment is
due. The weighted average duration of the portfolios of the PIA Income
Funds will range as follows:
Short End Long End
Short-Term Government Fund 6 months 3 years
Total Return Bond Fund 1 year 10 years
Global Bond Fund 1 year 10 years
3. What are the Principal Risks in Investing in the Funds?
Investors in the PIA Income Funds may lose money. There are risks
associated with investments in the types of securities in which the Funds
invest. These risks include:
o Market Risk: The prices of the securities, in which the Funds
invest may decline for a number of reasons.
o Interest Rate Risk: In general, the value of bonds and other debt
securities rise when interest rates fall and fall when interest
rates rise. Longer term obligations are usually more sensitive to
interest rate changes than shorter term obligations. While bonds
and other debt securities normally fluctuate less in price than
common stocks, there have been extended periods of increases in
interest rates that have caused significant declines in bond
prices.
o Credit Risk: The issuers of the bonds and other debt securities
held by the Funds may not be able to make interest or principal
payments. Even if these issuers are able to make interest or
principal payments, they may suffer adverse changes in financial
condition that would lower the credit quality of the security,
leading to greater volatility in the price of the security.
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<PAGE>
o Prepayment Risk: Issuers of securities held by a Fund may be able
to prepay principal due on securities, particularly during periods
of declining interest rates. Securities subject to prepayment risk
generally offer less potential for gains when interest rates
decline, and may offer a greater potential for loss when interest
rates rise. Rising interest rates may cause prepayments to occur
at a slower than expected rate thereby increasing the average
effective maturity of the security and making the security more
sensitive to interest rate changes. Prepayment risk is a major
risk of mortgage-backed securities.
o Risks Associated with Mortgage-Back Securities: These include
Market Risk, Interest Risk, Credit Risk, Prepayment Risk as well
as the risk that the structure of certain mortgage-backed
securities may make their reaction to interest rates and other
factors difficult to predict, making their prices very volatile.
o Liquidity Risk: Lower or lack of trading volume may make it
difficult to sell securities held by the Funds at quoted market
prices.
o Currency Risk: The U.S. dollar value of foreign securities traded
in foreign currencies (and any interest earned) may be affected
favorably or unfavorably by changes in foreign currency exchange
rates. An increase in the U.S. dollar relative to these other
currencies will adversely affect a Fund.
Because of these risks prospective investors who are uncomfortable with
an investment that will increase and decrease in value should not invest
in the PIA Income Funds.
4. How have the Funds Performed?
The bar charts and tables that follow provide some indication of the
risks of investing in the PIA Short-Term Government Securities Fund and
the PIA Global Bond Fund by showing changes in each Fund's performance
from year to year and how their average annual returns over various
periods compare to the performance of the Lehman Brothers 1-3 Year U.S.
Government Bond Index with respect to the Short-Term Government Fund and
the performance of the Lehman Brothers U.S. Government Bond Index with
respect to the Global Bond Fund. Please remember that a Fund's past
performance is not necessarily an indication of its future performance.
It may perform better or worse in the future. The PIA Total Return Bond
Fund commenced operations on September 1, 1998 and has not completed a
full calendar year of operations.
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<PAGE>
[GRAPHIC OMITTED]
PIA Short-Term Government Securities Fund
(Total Return per calendar year)
10%
8.04%
6.83% 6.74% 6.77%
5%
0%
----------- ------------ ----------- ----------- ------------
- 5%
1995 1996 1997 1998
- ---------------
Note: During the four year period shown on the bar chart, the Fund's highest
total return for a quarter was 3.21% (quarter ended September 30, 1998)
and the lowest total return for a quarter was 0.49% (quarter ended
December 31, 1998).
Average Annual Total
Returns Since the inception date
(for the periods ending Past of the Fund (April 22,
December 31, 1998) Year 1994)
- ------------------------------- ----------- -----------------------------------
PIA Short-Term Government
Securities Fund 6.77% 6.73%
Lehman Brothers 1-3 Year
U.S. Government Bond Index 6.97% 6.46%
- ----------
* The Lehman Brothers 1-3 Year U.S. Government bond Index is an unmanaged
index consisting of all U.S. Treasury and agency bonds having an
effective maturity of not less than one year or more than three years
weighted according to market capitalization.
-5-
<PAGE>
PIA Global Bond Fund
(Total Return per calendar year)
10.74%
10%
5%
0%
----------- ------------
- 5%
1998
- ---------------
Note: During the one year period shown on the bar chart, the Fund's highest
total return for a quarter was 7.25% (quarter ended September 30, 1998)
and the lowest total return for a quarter was -0.13% (quarter ended
December 31, 1998).
<TABLE>
<CAPTION>
Average Annual Total Returns Since the inception date of
(for the periods ending December 31, 1998) Past Year the Fund (April 1, 1997)
- ------------------------------------------------- -------------- ------------------------------
<S> <C> <C>
PIA Global Bond Fund 10.74% 8.60%
Lehman Brothers U.S. Government Bond Index* 9.85% 11.71%
</TABLE>
- -----------
*The Lehman Brothers U.S. Government Bond Index is an unmanaged index
consisting of all U.S. Treasury and agency bonds weighted according to
market capitalization.
-6-
<PAGE>
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you
buy and hold shares of the PIA Income Funds.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
Short-Term Total Return
Government Fund Bond Fund Global Bond Fund
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)................... No Sales Charge No Sales Charge No Sales Charge
Maximum Deferred Sales Charge (Load).... No Deferred Sales No Deferred Sales No Deferred Sales
Charge Charge Charge
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends
And Distributions............................... No Sales Charge No Sales Charge No Sales Charge
Redemption Fee.................................... None None None
Exchange Fee...................................... None None None
Maximum Account Fee............................... No Account Fees No Account Fees No Account Fees
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees............................. 0.20% 0.30% 0.40%
Distribution and/or Service (12b-1) Fees.... 0.05% 0.00%* None
Other Expenses.............................. 0.21% 0.33% 0.98%
Total Annual Fund Operating Expenses........ 0.46%* 0.63%* 1.38%*
</TABLE>
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* The PIA Short-Term Government Securities Fund and the PIA Global Bond
Fund had actual Total Annual Fund Operating Expenses for the most recent
fiscal year that were less than the amounts shown. The investment
adviser, Pacific Income Advisers, Inc., reimbursed each of these Funds to
the extent necessary to insure that the Total Annual Operating Fund
Expenses did not exceed the amounts stated below. The PIA Total Return
Bond Fund did not commence operation until September 1, 1998 so it has
estimated its "Other Expenses" and "Total Annual Fund Operating
Expenses." (The Total Return Bond Fund will not pay any 12b-1 fees during
the fiscal year ending November 30, 1999, but in later fiscal years may
pay 12b-1 fees in an amount not to exceed on an annual basis 0.25% of its
average daily net assets.) Pacific Income Advisers, Inc. will reimburse
the PIA Total Return Bond Fund to the extent necessary to insure that its
Total Annual Fund Operating Expenses do not exceed 0.40%. Pacific Income
Advisers, Inc. may discontinue reimbursing the PIA Income Funds at any
time but will not do so prior to November 30, 1999. After reimbursement,
the actual "Total Annual Fund Operating Expenses" for the Short-Term
Government Fund and the Global Bond Fund and the estimated actual "Total
Annual Fund Operating Expenses" for the Total Return Bond Fund are:
Short-Term Government Fund 0.30%
Total Return Bond Fund 0.40%
Global Bond Fund 0.51%
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<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
PIA Income Funds with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in a Fund for the time
periods indicated and then redeem all of your shares at the end of these
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
Short-Term Government Fund $ 46 $144 $252 $ 567
Total Return Bond Fund $ 64 $202 $351 $ 786
Global Bond Fund $140 $437 $755 $1,657
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<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
The Short-Term Government Fund seeks a high level of current income,
consistent with low volatility of principal through investing in short-term
adjustable rate and floating rate securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. government securities").
The Total Return Bond Fund seeks to maximize total return through investing in
bonds, while minimizing risk as compared to the market. The Global Bond Fund
seeks a high level of current income through investing in bonds denominated in
U.S. dollars and other currencies. None of the PIA Income Funds may change its
investment objective without obtaining shareholder approval. Please remember
that an investment objective is not a guarantee. An investment in the PIA Income
Funds might not earn income and investors could lose money.
How We Invest Our Assets - First We Target Portfolio Duration
In assembling each Fund's portfolio, our Adviser first determines a
target duration for each Fund. The weighted average duration of the Short-Term
Government Fund will range from 6 months to 3 years and for each of the Total
Return Bond Fund and Global Bond Fund will range from 1 year to 10 years. The
actual duration for each Fund will depend on our Adviser's outlook on the shapes
of the yield curves of fixed income securities. Our Adviser, Pacific Income
Advisers, Inc., maintains a data base of historical yield curve shapes and has
developed a methodology of analyzing these shapes. It believes that deviations
from the normal yield curve, which from time to time happen, provide investors
with the opportunity to achieve above average returns on a risk-adjusted basis.
When a deviation from the normal yield curve occurs, our Adviser will have the
Funds invest in those securities which it believes will experience the largest
declines in relative yield when the yield curves "spring back" to a more normal
shape. For example
o When yield curves are relatively steep, our Adviser will increase
the Funds' weighted average duration; and
o When yield curves are flat or inverted, our Adviser will decrease
the Funds' weighted average duration.
How We Invest our Assets - Next We Allocate Among Asset Classes
PIA Short-Term Government Securities Fund
The Short-Term Government Fund primarily invests in two broad asset
classes, Mortgage-Backed Securities issued or guaranteed by the U.S. government
or its agencies and instrumentalities and other U.S. government securities. Our
Adviser will allocate the Fund's assets between these broad asset classes
depending on the relative investment attractiveness of these classes. Our
Adviser may also invest a small portion of this Fund's assets in securities
rated A or better by a national securities rating agency when the difference in
yield between similar government and non-government securities is high.
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<PAGE>
PIA Total Return Bond Fund
The Total Return Bond Fund primarily invests in three broad asset
classes, U.S. Treasury securities, Mortgage-Backed Securities and investment
grade corporate debt securities. Again our Adviser will allocate the Fund's
assets between these broad asset classes depending on the relative investment
attractiveness of these classes. The Fund will not invest in other classes of
debt securities unless our Adviser believes that on a risk adjusted basis other
asset classes are more attractive. For example the Fund may invest a small
portion (up to 10%) of its assets in debt securities rated less than investment
grade.
In determining the relative investment attractiveness of a broad asset
class, the Adviser considers risk as well as yield. Usually investing in
securities with a high yield involves more risk of loss than investing in
securities with a low yield. Our Adviser attempts to keep the Fund's portfolio
risk (or volatility) below that of the Lehman Brothers Government/Corporate Bond
Index. The two principal components of risk of a debt security are duration and
credit quality.
PIA Global Bond Fund
The Global Bond Fund invests primarily in U.S. government securities and
securities issued by foreign governments. Because the average dollar-weighted
rating of the securities held by the Global Bond Fund will normally be AA or Aa,
the Global Bond Fund invests primarily in securities issued by the G-7 nations
(United States, Canada, France, Germany, Italy, Japan and the United Kingdom) as
well as a handful of other countries like Australia or New Zealand. Our Adviser
allocates the Fund's assets among these countries depending on the relative
investment attractiveness of these countries. The Fund will not invest in other
classes of debt securities unless our Adviser believes that on a risk-adjusted
basis other asset classes are more attractive. For example the Fund may invest
in investment grade corporate debt securities and debt securities of
supranational entities. Supranational entities are entities designated or
supported by more than one government. Examples include the World Bank and the
Asian Development Bank.
In allocating this Fund's assets our Adviser emphasizes the
intermediate-term economic fundamentals of the various countries in which it
invests. While it monitors day-to-day fluctuations in particular currency and
bond markets, it does not change country allocations in response to these
fluctuations.
How We Invest Our Assets - Finally We Select Individual Securities
After having determined the target duration and allocation among asset
classes, our Adviser looks for the most attractive yields in the various asset
classes. Within each of the broad asset classes, there are numerous sectors. For
a number of reasons securities of one sector may have higher or lower yields, on
a risk-adjusted basis, than securities of another sector. Our Adviser will
attempt to take advantage of the yield differentials among sectors.
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<PAGE>
Portfolio Turnover
Our Adviser actively trades each Fund's portfolio. It does so to take
advantage of the inefficiencies of the markets for debt securities. Each Fund's
annual portfolio turnover rate may exceed 100%. (Generally speaking, a turnover
rate of 100% occurs when a Fund replaces securities valued at 100% of its
average net assets within a one year period.) Higher portfolio turnover (100% or
more) will result in a Fund incurring more transaction costs such as mark-ups or
mark-downs. Payment of these transaction costs reduce total return. Higher
portfolio turnover could result in the payment by a Fund's shareholders of
increased taxes on realized gains. Distributions to a Fund's shareholders, to
the extent they are short-term capital gains, will be taxed at ordinary income
rates for federal income tax purposes, rather than at lower capital gains rates.
Risks
There are a number of risks associated with the various securities in
which the Fund will at times invest. These include:
o Risks associated with adjustable rate and floating rate
securities. Although adjustable and floating rate debt securities
tend to be less volatile than fixed-rate debt securities, they
nevertheless fluctuate in value. A sudden and extreme increase in
prevailing interest rates may cause adjustable and fixed-rate debt
securities to decline in value because
o there may be a time lag between the increases in market
rates and an increase in the interest paid on the
adjustable or floating rate security
o there may be limitations on the permitted increases in the
interest paid on adjustable or floating rate security so
that the interest paid does not keep pace with increases in
market interest rates
o the duration of adjustable rate securities which are
Mortgage-Backed Securities may increase because of slowing
of prepayments causing investors to consider these
securities to be longer term securities.
o Risks associated with Zero Coupon U.S. Treasury Securities. Zero
coupon U.S. Treasury securities are U.S. Treasury Notes and Bonds
that have been stripped of their unmatured interest coupons by the
U.S. Department of Treasury. Zero coupon U.S. Treasury securities
are
-11-
<PAGE>
generally subject to greater fluctuation in value in response to
changing interest rates than debt obligations that pay interest
currently.
o Risks associated with Foreign Securities. In addition to currency
risk there is often less information publicly available about
foreign issuers than U.S. issuers. The securities of foreign
issuers may be less liquid and more volatile than securities of
comparable U.S. issuers. The costs associated with securities
transactions are often higher in foreign countries than in the
U.S. Foreign governments and foreign economies often are less
stable than the U.S. government and the U.S. economy.
o Risks associated with High Yield Securities. The Total Return Bond
Fund and the Global Bond Fund may invest in high yield securities.
High yield securities (or "junk bonds") provide greater income and
opportunity for gains than higher-rated securities but entail
greater risk of loss of principal. High yield securities are
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of
the obligation. The market for high yield securities is generally
thinner and less active than the market for higher quality
securities. This may limit the ability of a Fund to sell high
yield securities at the price at which it is being valued for
purposes of calculating net asset value.
MANAGEMENT OF THE FUND
Pacific Income Advisers manages the Fund's investments.
Pacific Income Advisers (the "Adviser") is the investment adviser to each
of the PIA Income Funds. The Adviser's address is:
1299 Ocean Avenue
Suite 210
Santa Monica, CA 90401
The Adviser has been in business since 1984. As the investment adviser to
each Fund, the Adviser manages the investment portfolio for the Fund. It makes
the decisions as to which securities to buy and which securities to sell. Each
Fund pays the Adviser an annual investment advisory fee equal to the following
percentages of average net assets:
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<PAGE>
PIA Short-Term Government Securities Fund 0.20%
PIA Total Return Bond Fund 0.30%
PIA Global Bond Fund 0.40%
The day-to-day management of each Fund's portfolio is conducted by a
committee of employees of the Adviser
The Adviser managed the PIA Fixed Income Group Trust which was the predecessor
to the PIA Total Return Bond Fund
On September 1, 1998 the Total Return Bond Fund acquired all of the
portfolio securities, cash and cash equivalents then owned by the PIA Fixed
Income Group Trust (the "Trust") in exchange for shares of the Total Return Bond
Fund. After the exchange, the Trust liquidated and distributed the shares of the
Total Return Bond Fund to its beneficiaries. We are providing historical
performance data of the Trust measured against the Lehman Brothers
Government/Corporate Bond Index (the "Index"). The Adviser calculated the
historical performance data in accordance with the requirements of the
Securities and Exchange Commission. Although the Adviser managed the Trust and
now manages the Total Return Bond Fund in a manner that in all material respects
is equivalent to that of the Trust in regard to policies, objectives, guidelines
and restrictions, investors should not consider the performance information to
be an indication of future performance of the Total Return Bond Fund. Investors
should not rely on the historical performance data when making a decision to
invest in the Total Return Bond Fund. The Trust was not subject to certain
investment limitations, diversification requirements and other restrictions
imposed by the Investment Company Act of 1940 and the Internal Revenue Code,
which, if applicable, may have adversely affected its performance results. The
performance information for the Trust assumes that all distributions were
reinvested and are net of management fees (which were the only expenses borne by
the Trust) equal to 0.45% per annum of average net assets. The performance
information for the Index assumes the reinvestment of income.
The performance information of the Trust and the Index is based on data
supplied by the Adviser or from statistical services, reports or other sources
which the Adviser believes are reliable. This performance information has not
been verified by any third party and is unaudited.
Annual Rates of Return
Years Ended December 31
1994 1995 1996 1997
----------------- ------------ ------------ ----------- -------------
The Trust (3.26%) 19.23% 3.49% 9.88%
The Index* (3.51%) 19.24% 2.90% 9.76%
- ---------------
*The Lehman Brothers Government/Corporate Bond Index is an unmanaged
index consisting of all U.S. Treasury and agency bonds and all SEC-registered
corporate debt weighted according to market capitalization.
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<PAGE>
Compounded Annual Rates of Return
(For the Period Ended August 31,1998
1 Year 3 Years 5 Years Since Inception June
30, 1993
------------- ----------- ------------- --------------- ----------------------
The Trust 11.49% 8.46% 6.88% 7.20%
The Index 11.42% 8.27% 6.69% 7.06%
Please remember that past performance is not necessarily an indication of future
performance. The investment return and principal value of an investment in the
Total Return Bond Fund will fluctuate, and an investor's proceeds upon
redemption may be more or less than the original cost of the shares. If the
performance of the Trust had been adjusted to reflect the estimated expenses of
the Total Return Bond Fund before reimbursement, the performance would have been
lower.
Year 2000
The Funds are addressing the "Year 2000" issue. The "Year 2000" issue
stems from the use of a two-digit format to define the year in certain
date-sensitive computer application systems rather than the use of a four digit
format. As a result, date-sensitive software programs could recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
major systems or process failures or the generation of erroneous data, which
would lead to disruptions in the Funds' business operations.
The Funds have no application systems of their own and are entirely
dependent on their service providers' systems and software. The Funds are
working with their service providers (including the Adviser, administrator,
transfer agent and custodian) to identify and remedy any Year 2000 issues.
However, the Funds cannot guarantee that all Year 2000 issues will be identified
and remedied, and the failure to successfully identify and remedy all Year 2000
issues could result in an adverse impact on the Funds.
Distribution Fees
The Short-Term Government Fund and the Total Return Bond Fund have
adopted a Distribution Plan and Agreement under Rule 12b-1 under the Investment
Company Act. This Plan allows the Short-Term Government Fund and the Total
Return Bond Fund to use part of their assets (up to 0.05% of the Short-Term
Government Fund's average daily net assets and up to 0.25% of the Total Return
Bond Fund's average daily net assets) to pay sales, distribution and other fees
for the sale of their shares and for services provided to investors. Because
these fees are paid out of a Fund's assets, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
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<PAGE>
THE FUNDS' SHARE PRICE
The price at which investors purchase shares of each Fund and at which
shareholders redeem shares of each Fund is called its net asset value. Each Fund
calculates its net asset value as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m. Eastern Time) on each day the New York
Stock Exchange is open for trading. Each Fund calculates its net asset value
based on the market prices of the securities (other than money market
instruments) it holds. Each Fund values most money market instruments it holds
at their amortized cost. Each Fund will process purchase orders that it receives
and accepts and redemption orders that it receives prior to the close of regular
trading on a day in which the New York Stock Exchange is open at the net asset
value determined later that day. It will process purchase orders that it
receives and accepts and redemption orders that it receives after the close of
regular trading at the net asset value determined at the close of regular
trading on the next day the New York Stock Exchange is open.
The Funds may hold securities that are primarily listed on foreign
exchanges that trade on weekends or other days when the Funds do not calculate
their net asset values. To the extent they do so, their net asset values may
change on days when investors cannot purchase or redeem Fund shares.
PURCHASING SHARES
How to Purchase Shares from the Fund
1. Read this Prospectus carefully
2. Determine how much you want to invest keeping in mind the
following minimums:
a. New accounts
o Individual Retirement Accounts and
qualified retirement plans $ 100
o Automatic Investment Plan $ 100
o All other accounts $1,000
b. Existing accounts
o Dividend reinvestment No Minimum
o All other accounts $50
3. Complete the Purchase Application accompanying this Prospectus,
carefully following the instructions. For additional investments,
complete the stub attached to your Fund's confirmation statements.
If you don't have the stub,
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<PAGE>
prepare a brief letter stating the registration of your account,
the name of the Fund whose shares you want to purchase and your
account number. (The Fund has additional Purchase Applications and
confirmation stubs if you need them.) If you have any questions,
please call 1-800-628-9403.
4. Make your check payable to "Monterey PIA Short-Term Government
Securities Fund", "Monterey PIA Total Return Bond Fund" or
"Monterey PIA Global Bond Fund." All checks must be drawn on U.S.
banks. Please write your account number on your check when you are
adding to an existing account. The Funds will not accept cash or
third party checks. American Data Services, Inc., the Funds'
transfer agent, will charge a $15 fee against a shareholder's
account for any payment check returned for insufficient funds. The
shareholder will also be responsible for any losses suffered by a
Fund as a result.
5. Send the application and check to:
Monterey Mutual Funds
P. O. Box 640284
Cincinnati, OH 45264
Purchasing Shares from Broker-dealers, Financial Institutions and Others
Some broker-dealers may sell shares of the PIA Income Funds. These
broker-dealers may charge investors a fee either at the time of purchase or
redemption. The fee, if charged, is retained by the broker-dealer and not
remitted to the Funds or the Adviser.
The Funds may enter into agreements with broker-dealers, financial
institutions or other service providers ("Servicing Agents") that may include
the Funds as an investment alternative in the programs they offer or administer.
Servicing agents may:
1. Become shareholders of record of the Funds. This means all
requests to purchase additional shares and all redemption requests
must be sent through the Servicing Agent. This also means that
purchases made through Servicing Agents are not subject to the
Funds' minimum purchase requirement.
2. Use procedures and impose restrictions that may be in addition to,
or different from, those applicable to investors purchasing shares
directly from the Funds.
3. Charge fees to their customers for the services they provide them.
Also, the Funds and/or the Adviser may pay fees to Servicing
Agents to compensate them for the services they provide their
customers.
4. Be allowed to purchase shares by telephone with payment to follow
the next day. If the telephone purchase is made prior to the close
of regular trading on the New York Stock Exchange, it will receive
same day pricing.
-16-
<PAGE>
5. Be authorized to accept purchase orders on behalf of the Funds.
This means that a Fund will process the purchase order at the net
asset value which is determined following the Servicing Agent's
acceptance of the customer's order.
If you decide to purchase shares through Servicing Agents, please
carefully review the program materials provided to you by the Servicing Agent.
When you purchase shares of the Funds through a Servicing Agent, it is the
responsibility of the Servicing Agent to place your order with the Funds on a
timely basis. If the Servicing Agent does not, or if it does not pay the
purchase price to the Funds within the period specified in its agreement with
the Funds, it may be held liable for any resulting fees or losses.
Other Information about Purchasing Shares of the Fund
The Funds may reject any share purchase applications for any reason. The
Funds will not accept purchase orders made by telephone unless they are from a
Servicing Agent which has an agreement with the Funds.
The Funds will issue certificates evidencing shares purchased only upon
request. The Funds will send investors a written confirmation for all purchases
of shares.
The Funds offers an automatic investment plan allowing shareholders to
make purchases on a regular and convenient basis. The Funds offer the following
retirement plans:
o Traditional IRA
o Roth IRA
Investors can obtain further information about the automatic investment
plan and the IRAs by calling the Funds at 1-800-628-9403. The Funds recommend
that investors consult with a competent financial and tax advisor regarding the
IRAs before investing through them.
REDEEMING SHARES
How to Redeem (Sell) Shares by Mail
1. Prepare a letter of instruction containing:
o the name of the Fund(s)
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
-17-
<PAGE>
o additional information that the Funds may require for
redemptions by corporations, executors, administrators,
trustees, guardians, or others who hold shares in a
fiduciary or representative capacity. Please contact the
Funds' transfer agent, American Data Services, Inc., in
advance, at 1-800-628-9403 if you have any questions.
2. Sign the letter of instruction exactly as the shares are
registered. Joint ownership accounts must be signed by all owners.
3. If there are certificates representing your shares, endorse the
certificates or execute a stock power. Again you must endorse
certificates and sign stock powers exactly as your shares are
registered.
4. Have the signatures guaranteed by a commercial bank or trust
company in the United States, a member firm of the New York Stock
Exchange or other eligible guarantor institution in the following
situations:
o The redemption proceeds are to be sent to a person other
than the person in whose name the shares are registered
o The redemption proceeds are to be sent to an address other
than the address of record
o When you purchased shares you did not complete the section
of the Purchase Application concerning signature
guarantees.
A notarized signature is not an acceptable substitute for a
signature guarantee.
5. Send the letter of instruction and certificates, if any, to:
Monterey Mutual Funds
c/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788
How to Redeem (Sell) Shares by Telephone
1. Instruct American Data Services, Inc. that you want the option of
redeeming shares by telephone. This can be done by completing the
appropriate section on the Purchase Application or by writing to
American Data Services, Inc. requesting this option. Shares
represented by certificates cannot be redeemed by telephone.
2. Assemble the same information that you would include in the letter
of instruction for a written redemption request.
-18-
<PAGE>
3. Call American Data Services, Inc. at 1-800-628-9403. Please do not
call the Funds or the Adviser.
How to Redeem (Sell) Shares by Writing Checks
(Short-Term Government Fund only)
1. Instruct American Data Services, Inc. that you want the option of
redeeming shares of the Short-Term Government Fund by writing
checks on your account. This can be done by completing the
appropriate section on the Purchase Application or by writing to
American Data Services, Inc. American Data Services, Inc. will
provide you with checks, which are free. Shares represented by
certificates cannot be redeemed by writing checks.
2. You must make your check payable in an amount equal to or larger
than $500. Please keep in mind that because the value of your
shares of the Short-Term Government Fund fluctuate, you will not
know how many shares you are redeeming. Accordingly, you should
not try to close your shareholder account by writing a check.
3. The Short-Term Government Fund may modify or terminate the check
writing privilege at any time.
How to Redeem (Sell) Shares through Servicing Agents
If your shares are held by a Servicing Agent, you must redeem your shares
through the Servicing Agent. Contact the Servicing Agent for instructions on how
to do so.
Payment of Redemption Proceeds
The redemption price per share you receive for redemption requests is the
next determined net asset value after:
1. American Data Services, Inc. receives your written request in
proper form with all required information.
2. American Data Services, Inc. receives your authorized telephone
request with all required information.
3. A Servicing Agent that has been authorized to accept redemption
requests on behalf of the Funds receives your request in
accordance with its procedures.
For those shareholders who redeem shares by mail or by telephone,
American Data Services, Inc. will mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the written request in
proper form with all required information. Those shareholders who redeem shares
through Servicing Agents will receive
-19-
<PAGE>
their redemption proceeds in accordance with the procedures established by the
Servicing Agent.
Other Redemption Considerations
When redeeming shares of the Funds, shareholders should consider the
following:
1. The redemption may result in a taxable gain.
2. Shareholders who redeem shares held in an IRA must indicate on
their redemption request whether or not to withhold federal income
taxes. If not, these redemptions will be subject to federal income
tax withholding.
3. The Funds may delay the payment of redemption proceeds for up to
seven days in all cases.
4. If you purchased shares by check, the Funds may delay the payment
of redemption proceeds until they are reasonably satisfied the
check has cleared (which may take up to 15 days from the date of
purchase).
5. American Data Services, Inc. will send the proceeds of telephone
redemptions to an address or account other than that shown on its
records only if the shareholder has sent in a written request with
signatures guaranteed.
6. The Funds reserve the right to refuse a telephone redemption
request if they believe it is advisable to do so. The Funds and
American Data Services, Inc. may modify or terminate their
procedures for telephone redemptions at any time. Neither the
Funds nor American Data Services, Inc. will be liable for
following instructions for telephone redemption transactions that
they reasonably believe to be genuine, provided they use
reasonable procedures to confirm the genuineness of the telephone
instructions. They may be liable for unauthorized transactions if
they fail to follow such procedures. These procedures include
requiring some form of personal identification prior to acting
upon the telephone instructions and recording all telephone calls.
During periods of substantial economic or market change, you may
find telephone redemptions difficult to implement. If a
shareholder cannot contact American Data Services, Inc. by
telephone, he or she should make a redemption request in writing
in the manner described earlier.
7. If your account balance falls below $500 because you redeem
shares, you will be given 60 days to make additional investments
so that your account balance is $500 or more. If you do not, the
Funds may close your account and mail the redemption proceeds to
you.
8. The Funds may pay redemption requests "in kind." This means that
the Funds will pay redemption requests entirely or partially with
securities rather than with cash.
-20-
<PAGE>
EXCHANGING SHARES
Eligible Funds
Shares of any of the PIA Income Funds may be exchanged for shares of
o Any other PIA Income Fund
Or the following Monterey Mutual Funds
- Murphy New World Technology Fund
- Murphy New World Biotechnology Fund
- Murphy New World Technology Convertibles Fund
at their relative net asset values. Shares of the PIA Income Funds may not be
exchanged for any of the Monterey Investors Funds (The Monterey Investors Funds
are the Camborne Government Income Fund, the OCM Gold Fund and the PIA Equity
Fund.) You may have a taxable gain or loss as a result of an exchange because
the Internal Revenue Code treats an exchange as a sale of shares.
How to Exchange Shares
1. Read this Prospectus and, if applicable, the Prospectus for the
Murphy New World Funds.
2. Determine the number of shares you want to exchange keeping in
mind that you must comply with the minimum investment
requirements. (The PIA Income Funds have the same minimum
requirements as the Murphy New World Funds.)
3. Call American Data Services, Inc. at 1-800-628-9403 between the
hours of 9:00 a.m. and 4:00 p.m. Eastern time on days the New York
Stock Exchange is open. (Prior to calling American Data Services,
Inc., you must instruct American Data Services, Inc. that you want
the option of exchanging shares. This can be done by completing
the appropriate section on the Purchase Application or by writing
to American Data Services, Inc. requesting this option.)
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund distributes substantially all of its net investment income
monthly and substantially all of its capital gains annually. You have two
distribution options:
o Automatic Reinvestment Option - Both dividend and capital gains
distributions will be reinvested in additional Fund Shares.
o All Cash Option - Both dividend and capital gains distributions
will be paid in cash.
-21-
<PAGE>
You may make this election on the Purchase Application. You may change your
election by writing to American Data Services, Inc. or by calling
1-800-628-9403.
Although the Short-Term Government Fund pays income dividends monthly, it
declares daily as a dividend its net investment income for that day. When you
purchase shares of the Short-Term Government Fund, you will begin to earn
dividends the first business day following your purchase. When you redeem your
shares you will receive the dividend the Short-Term Government Fund declares on
the redemption date. If you redeem all of the shares in your account, you will
receive any unpaid dividends with the redemption proceeds. If you redeem less
than all of the shares in your account, you will receive any unpaid dividends on
the next monthly payment date. The Short-Term Government Fund includes income
earned on weekends and holidays in the dividend declared on the preceding
business day.
Each Fund's distributions, whether received in cash or additional shares
of the Fund, may be subject to federal and state income tax. These distributions
may be taxed as ordinary income and capital gains (which may be taxed at
different rates depending on the length of time the Fund holds the assets
generating the capital gains). In managing the Funds, our Adviser considers the
tax effects of its investment decisions to be of secondary importance.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand a
Fund's financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by McGladrey & Pullen LLP,
whose report, along with the Funds' financial statements, are included in the
Annual Report which is available upon request.
-22-
<PAGE>
<TABLE>
<CAPTION>
PIA Short-Term Government Securities
For the Years Ended
4/22/94(1)
11/30/95 thru
11/30/98 11/30/97 11/30/96(2) (2) 11/30/94
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $10.26 $10.21 $10.12 $9.98 $10.00
----- ----- ----- ---- -----
Income from investment operations:
Net Investment Income ............................ 0.57 0.61 0.56 0.57 0.27
Net Realized and Unrealized Gain (Loss) on 0.13 0.06 0.19 0.14 (0.02)
---- ---- ---- ---- ----
Investments ......................................
Total from Investment Operations ................. 0.70 0.67 0.75 0.71 0.25
---- ---- ---- ---- ----
Less Distributions:
Dividends (from net investment income)............ (0.57) (0.61) (0.56) (0.57) (0.27)
Distributions (from net realized gains) .......... (0.01) (0.01) (0.10) (0.00) 0.00
---- ---- ---- ---- ----
Net Asset Value, End of Period ................... $10.38 $10.26 $10.21 $10.12 $9.98
====== ====== ====== ====== =====
TOTAL RETURN ..................................... 6.99% 6.56% 7.68% 7.50% 2.50%(3)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 56,989 52,912 20,464 3,405 2,041
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 0.46% 0.55% 1.19% 2.01% 3.46%(4)
After expense reimbursement ...................... 0.30% 0.30% 0.44% 0.46% 0.44%(4)
Ratio of Net Investment Income to Average Net 5.51% 5.77% 5.51% 5.71% 4.68%(4)
Assets ...........................................
Portfolio Turnover Rate .......................... 138.44% 63.08% 21.54% 164% 210%
- ---------------
(1) Commencement of Operations.
(2) Based on average shares outstanding.
(3) Not Annualized.
(4) Annualized.
</TABLE>
-23-
<PAGE>
PIA Total Return Bond
For the Period
9/1/98(1)
thru 11/30/98
Net Asset Value, Beginning of Period.............. $20.00
Income from investment operations:
Net Investment Income............................. 0.28
Net Realized and Unrealized Gain (Loss) on Investments 0.25
----
Total from Investment Operations ................. 0.53
----
Less Distributions................................
Dividends (from net investment income)............ 0.26
----
Net Asset Value, End of Period ................... $20.27
======
TOTAL RETURN ..................................... 2.65%(2)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 24,944
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 0.63%(3)
After expense reimbursement ...................... 0.40%(3)
Ratio of Net Investment Income to Average Net Assets 5.49%(3)
Portfolio Turnover Rate .......................... 13.22%
- ---------------
(1) Commencement of Operations.
(2) Not Annualized.
(3) Annualized.
-24-
<PAGE>
<TABLE>
<CAPTION>
PIA Global Bond Fund
For the Years Ended
4/1/97(1)
thru
11/30/98 11/30/97
<S> <C> <C>
Net Asset Value, Beginning of Period.............. $20.33 $20.00
----- -----
Income from investment operations:
Net Investment Income ............................ .99 0.50
Net Realized and Unrealized Gain (Loss) on Investments 1.03 0.32
---- ----
Total from Investment Operations ................. 2.02 0.82
---- ----
Less Distributions:
Distributions (from net investment income) ....... (1.04) (0.49)
---- ------
Net Asset Value, End of Period ................... $21.31 $20.33
====== ======
TOTAL RETURN ..................................... 10.23% 4.15%(2)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 6,058 5,585
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 1.38% 2.05%(3)
After expense reimbursement ...................... 0.52% 0.51%(3)
Ratio of Net Investment Income to Average Net Assets 4.80% 4.71%(3)
Portfolio Turnover Rate .......................... 176.66% 82.47%
- ---------------
(1) Commencement of Operations.
(2) Not Annualized.
(3) Annualized.
</TABLE>
-25-
<PAGE>
To learn more about the PIA Income Funds you may want to read the PIA
Income Funds' Statement of Additional Information (or "SAI") which contains
additional information about the PIA Income Funds. The PIA Income Funds have
incorporated by reference the SAI into the Prospectus. This means that you
should consider the contents of the SAI to be part of the Prospectus.
You also may learn more about the PIA Income Funds' investments by
reading the PIA Income Funds' annual and semi-annual reports to shareholders.
The annual report includes a discussion of the market conditions and investment
strategies that significantly affected the performance of the PIA Income Funds
during their last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling
1-800-251-1970.
Prospective investors and shareholders who have questions about the PIA
Income Funds may also call the following number or write to the following
address.
Monterey Mutual Fund
1299 Ocean Avenue
Suite 210
Santa Monica, CA 90401
1-800-251-1970
The general public can review and copy information about the PIA Income
Funds (including the SAI) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. (Please call 1-800-SEC-0330 for information
on the operations of the Public Reference Room.) Reports and other information
about the PIA Income Funds are also available at the Securities and Exchange
Commission's Internet site at http://www.sec.gov and copies of this information
may be obtained, upon payment of a duplicating fee, by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the PIA Income Funds' Investment Company Act File No.,
811-04010 when seeking information about the PIA Income Funds from the
Securities and Exchange Commission.
-26-
<PAGE>
P R O S P E C T U S
March 31, 1999
The Murphy New World Funds
The Murphy New World Funds are three no load mutual funds in the Monterey
Mutual Fund family. The Murphy New World Funds are:
o Murphy New World Technology Fund
o Murphy New World Biotechnology Fund
o Murphy New World Technology Convertibles Fund
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how the Murphy New World Funds
invest and the services they offer to shareholders.
- --------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Monterey Mutual Fund
1299 Ocean Avenue
Suite 210
Santa Monica, California 90401
(800) 669-1156
TABLE OF CONTENTS
Questions Every Investor Should Ask
Before Investing in the Murphy New World Funds
Fees and Expenses................................................
Investment Objective, Strategies and Risks.......................
Management of the Funds..........................................
The Funds' Share Price ..........................................
Purchasing Shares................................................
Redeeming Shares.................................................
Exchanging Shares................................................
Dividends, Distributions and Taxes...............................
Financial Highlights.............................................
The Murphy New World Funds are distributed by Syndicated Capital, Inc.
<PAGE>
QUESTIONS EVERY INVESTOR SHOULD ASK BEFORE
INVESTING IN THE MURPHY NEW WORLD FUNDS
1. What are the Fund's Goals?
Murphy New World Technology Fund
The Technology Fund seeks long-term growth of capital through investing
primarily in equity securities of companies that its investment adviser
believes can produce products or services that provide or benefit from
advances in technology.
Murphy New World Biotechnology Fund
The Biotechnology Fund seeks long-term growth of capital through
investing primarily in equity securities of companies that its investment
adviser believes can produce products or services that provide or benefit
from advances in biotechnology.
Murphy New World Technology Convertibles Fund
The Convertibles Fund seeks to maximize total return through a
combination of capital appreciation and income. The Convertibles Fund
invests primarily in convertible securities of companies that its
investment adviser believes can produce products or services that provide
or benefit from advances in technology.
2. What are the Fund's Principal Investment Strategies?
Each of the Murphy New World Funds invests in securities of companies
that its investment adviser considers to be "technology" companies. The
investment adviser broadly defines "technology" to include but not be
limited to:
o semiconductors and electronic components
o computers, computer services, computer peripherals and software,
multimedia
o consumer electronics, electronic games, cable television, Internet
o pharmaceuticals, biotechnology, medical devices and instruments
o superconductivity, alternative energy and specialty materials
The Biotechnology Fund differs from the Technology Fund and the
Convertibles Fund in that it "concentrates" its investments in the
biotechnology sector. This means at least 25% of its assets will be
invested in securities of companies in the biotechnology
-2-
<PAGE>
sector. The investment adviser broadly defines "biotechnology" to include
but not be limited to:
o drug development, production, delivery and distribution
o agricultural and industrial biotechnology
o genetic sequencing and mapping
o biotechnology-based services and other advances resulting from
research and development programs in the medical, animal and life
sciences.
The Biotechnology Fund and the Technology Fund invest primarily in common
stocks. The Convertibles Fund invests primarily in securities convertible
into common stocks, such as convertible bonds, debentures and preferred
stocks. The Convertibles Fund may invest without limitation in lower
quality, high risk, high yielding debt securities, commonly referred to
as "junk bonds."
The investment adviser bases investment decisions for each of the Murphy
New World Funds based on company specific factors, not general economic
conditions. At any time the Murphy New World Funds may hold both "growth"
investments and "value" investments.
3. What are the Principal Risks in Investing in the Funds?
Investors in the Murphy New World Funds may lose money. There are risks
associated with investments in the types of securities in which the Funds
invest. These risks include:
o Market Risk: The prices of the securities, particularly the common
stocks, in which the Funds invests may decline for a number of
reasons. The price declines of common stocks, in particular, may
be steep, sudden and/or prolonged.
o Interest Rate Risk: In general, the value of debt securities,
including convertible securities, rise when interest rates fall
and fall when interest rates rise. Longer term obligations are
usually more sensitive to interest rate changes than shorter term
obligations. While debt securities normally fluctuate less in
price than common stocks, there have been extended periods of
increases in interest rates that have caused significant declines
in the prices of debt securities.
o Credit Risk: The issuers of debt securities held by the Funds may
not be able to make interest or principal payments. Even if these
issuers are able to make interest or principal payments, they may
suffer adverse changes in financial
-3-
<PAGE>
condition that would lower the credit quality of the security,
leading to greater volatility in the price of the security.
o Smaller Capitalization Companies Risk: Smaller capitalization
companies typically have relatively lower revenues, limited
product lines, lack of management depth and a smaller share of the
market for their products or services than larger capitalization
companies. The stocks of smaller capitalization companies tend to
have less trading volume than stocks of larger capitalization
companies. Less trading volume may make it more difficult for the
investment adviser to sell securities of smaller capitalization
companies at quoted market prices. Finally there are periods when
investing in smaller capitalization stocks falls out of favor with
investors and the stocks of smaller capitalization companies
underperform.
o Technology Companies Risk: Companies in the technology sectors
have unpredictable earnings. Products offered by companies in the
technology sectors are subject to risks of obsolescence and
intense competition. Many technology companies are subject to
extensive government regulation and may be affected by the
enforcement of patent, trademark and other intellectual property
laws. Securities of technology companies exhibit greater
volatility than the overall market.
o Non-diversification Risk: Each of the Murphy New World Funds is a
non-diversified investment company. As such they likely will
invest in fewer securities than diversified investment companies
and their performance may be more volatile. If the securities in
which the Funds invest perform poorly, the Funds could incur
greater losses than they would have had they invested in a greater
number of securities.
o Convertible Securities Risk: Convertible securities are subject to
the market risks of common stocks, while also subject to interest
rate and credit risks.
o "Junk Bond" Risk: "Junk Bonds" or high yield securities are
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of
the obligation. The market for high yield securities is generally
thinner and less active than the market for higher quality
securities. This may limit the ability of the Convertibles Fund to
sell a high yield security at the price at which it is being
valued for purposes of calculating net asset value.
Because of these risks the Fund is a suitable investment only for those
investors who have long-term investment goals. Prospective investors who
are uncomfortable with an investment that will increase and decrease in
value should not invest in any of the Murphy New World Funds.
-4-
<PAGE>
4. How have the Funds Performed?
The bar charts and tables that follow provide some indication of the
risks of investing in the Murphy New World Funds by showing changes in
each Fund's performance from year to year and how its average annual
returns over various periods compare to the performance of the Standard &
Poor's Composite Index of 500 Stocks. Please remember that each Fund's
past performance is not necessarily an indication of its future
performance. It may perform better or worse in the future.
Murphy New World Technology Fund
(Total Return per calendar year)
42.36%
40%
30%
20% 13.72%
10%
0%
------------------------------------------------------------------------
-2.90%
-10% -8.02%
-20% -17.30%
1994 1995 1996 1997 1998
- ---------------
Note: During the five year period shown on the bar chart, the Fund's highest
total return for a quarter was 24.33% (quarter ended September 30, 1997)
and the lowest total return for a quarter was -27.01% (quarter ended
December 31, 1997).
<TABLE>
<CAPTION>
Average Annual Total Returns
(for the periods ending December 31, Since the inception date of
1998) Past Year Past 5 Years the Fund (October 21, 1993)
- --------------------------------------- ------------- ------------- --------------------------------
<S> <C> <C> <C>
Murphy New World Technology Fund -8.02% 3.65% 3.29%
S&P 500* 28.58% 23.81% 23.07%
- ---------------
*The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized unmanaged index of common stock prices.
</TABLE>
-5-
<PAGE>
Murphy New World Biotechnology Fund
(Total Return per calendar year)
10%
0.95%
0%
----------------------------------
-10%
-12.60%
1997 1998
- ---------------
Note: During the two year period shown on the bar chart, the Fund's highest
total return for a quarter was 25.55% (quarter ended September 30, 1997)
and the lowest total return for a quarter was -17.93% (quarter ended
December 31, 1997).
Average Annual Total Returns
(for the periods ending December 31,
1998) Past Year Since December 20, 1996*
- --------------------------------------------------------------------------------
Murphy New World Biotechnology Fund -12.60% -3.84%
S&P 500 28.58% 29.70%
- ----------------
* The Fund's investment adviser, Murphy Investment Management, Inc., became
investment adviser on this date.
-6-
<PAGE>
Murphy New World Technology Convertibles Fund
(Total Return per calendar year)
20%
10%
1.04%
0%
--------------------------------------
-10%
-12.78%
1997 1998
- ---------------
Note: During the two year period shown on the bar chart, the Fund's highest
total return for a quarter was 3.32% (quarter ended March 31, 1997) and
the lowest total return for a quarter was -11.20% (quarter ended
September 30, 1998).
Average Annual Total Returns
(for the periods ending
December 31, 1998) Past Year Since January 1, 1997*
- ------------------------------------------------------------------------------
Murphy New World Technology
Convertibles Fund -12.78% -6.44%
S&P 500 28.58% 30.70%
- ----------------
* The Fund's investment adviser, Murphy Investment Management, Inc., became
investment adviser on this date.
-7-
<PAGE>
FEES AND EXPENSES
The table below describes the fees and expenses that you may
pay if you buy and hold shares of the Murphy New World Funds.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
Technology Fund Biotechnology Fund Convertibles Fund
Maximum Sales Charge (Load)
Imposed on Purchases (as a
<S> <C> <C> <C>
percentage of offering price)................ No Sales Charge No Sales Charge No Sales Charge
Maximum Deferred Sales Charge (Load)........... No Deferred Sales No Deferred Sales No Deferred Sales
Charge Charge Charge
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends
And Distributions............................ No Sales Charge No Sales Charge No Sales Charge
Redemption Fee................................. None None None
Exchange Fee................................... None None None
Maximum Account Fee............................ No Account Fees No Account Fees No Account Fees
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees................................ 1.00% 1.00% 0.63%
Distribution and/or Service (12b-1) Fees....... 0.25% 0.25% 0.25%
Other Expenses................................. 5.89% 2.54% 6.06%
Total Annual Fund Operating Expenses........... 7.14%* 3.79%* 6.94%*
- ---------------
* Each of the Murphy New World Funds had actual Total Fund Operating
Expenses for the most recent fiscal year that were less than the amounts
shown. The investment adviser, Murphy Investment Management, Inc.
reimbursed each Fund to the extent necessary to insure that Total Annual
Fund Operating Expenses did not exceed 2.44%. For the fiscal year ending
November 30, 1999, Murphy Investment Management, Inc. will reimburse each
Fund to the extent necessary to insure that Total Annual Operating
Expenses do not exceed 1.99%. Murphy Investment Management, Inc. may
discontinue reimbursing the Murphy New World Funds at any time but will
not do so prior to November 30, 1999.
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Murphy New World Funds with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in a Fund for the time
periods indicated and then redeem all of your shares at the end of these
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
Technology Fund $706 $2,074 $3,384 $6,421
Biotechnology Fund $381 $1,158 $1,953 $4,027
Convertibles Fund $687 $2,022 $3,306 $6,303
-8-
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
The Technology Fund's investment objective is long-term growth of capital
through investing primarily in equity securities of companies that Murphy Asset
Management, Inc. (the "Adviser") believes can produce products or services that
provide or benefit from advances in technology. The Biotechnology Fund's
investment objective is long-term growth of capital through investing primarily
in equity securities that the Adviser believes can produce products or services
that provide or benefit from advances in biotechnology. The Convertibles Fund's
investment objective is to maximize total return through a combination of
capital appreciation and income. The Convertibles Fund invests primarily in
convertible securities of companies the Adviser believes can produce products or
services that provide or benefit from advances in technology. None of the Murphy
New World Funds may change its investment objective without obtaining
shareholder approval. Please remember that an investment objective is not a
guarantee. An investment in the Murphy New World Funds might not appreciate and
investors could lose money.
Each of the Murphy New World Funds may, in response to adverse market,
economic, political or other conditions, take temporary defensive positions.
This means a Fund will invest some or all of its assets in money market
instruments (like U.S. Treasury Bills, commercial paper or repurchase
agreements). The Technology Fund and the Biotechnology Fund will not be able to
achieve their investment objective of capital appreciation to the extent that
they invest in money market instruments since these securities earn interest but
do not appreciate in value. Similarly the Convertibles Fund would not seek
capital appreciation when it invests in money market instruments. When a Fund is
not taking a temporary defensive position, it still will hold some cash and
money market instruments so that it can pay its expenses, satisfy redemption
requests or take advantage of investment opportunities.
Our Adviser believes in "bottom up" investing. This means that our
Adviser makes investment decisions on company specific factors (like new
products or changes in management) not general economic conditions (like
interest rate changes or general stock market trends). When researching
potential investments, our Adviser will, if appropriate:
o Attend trade shows
o Interview management
o Talk with competitors, suppliers and customers
o Review public filings and brokerage research
In managing the Technology Fund and the Biotechnology Fund, our Adviser
will look for companies that are growing faster than the general market. Stocks
of fast growing technology and biotechnology companies frequently have higher
price-earnings ratios than the general market. Our Adviser invests in stocks of
companies of all sizes. While our
-9-
<PAGE>
Adviser invests in fast growing companies, it takes a "value" approach to
investing. This means it looks for companies that are attractively priced
relative to their growth prospects.
In managing the Technology Fund, our Adviser will rotate investments
among the various industries of the technology sector. Our Adviser does so
because the various technology industries frequently fall in and out of favor
with investors. When an industry is out of favor with investors, the stocks of
growing companies in that industry are frequently more attractively priced than
stock of companies in the industries that are in favor with investors.
Our Adviser takes a slightly different approach in managing the
Convertibles Fund. Although it uses a "bottom up" investment approach, it
focuses more on a company's ability to meet its debt service obligations, than
on the company's growth prospects. In selecting investments for the Convertibles
Fund our Adviser considers both the attractiveness of the convertible security's
yield as well as its conversion feature. Our Adviser will purchase some
investments for the Convertibles Fund primarily because of the potential for
income and others primarily because of the potential for capital appreciation.
Portfolio Turnover
Each Fund's annual portfolio turnover rate usually will not exceed 100%.
(Generally speaking, a turnover rate of 100% occurs when a Fund replaces
securities valued at 100% of its average net assets within a one year period.)
Higher portfolio turnover (100% or more) will result in a Fund incurring more
transaction costs such as brokerage commissions or mark-ups or mark-downs.
Payment of these transaction costs reduce total return. Higher portfolio
turnover could result in the payment by a Fund's shareholders of increased taxes
on realized gains. Distributions to a Fund's shareholders, to the extent they
are short-term capital gains, will be taxed at ordinary income rates for federal
income tax purposes, rather than at lower capital gains rates.
Risks
There are a number of risks associated with the investment practices in
which the Murphy New World Funds will at times engage. These include:
o Risks associated with purchasing Put and Call Options. Our Adviser
may purchase put or call options on stock indexes to reduce or
increase a Fund's equity exposure. If a Fund purchases a put or
call option and does not exercise or sell it prior to the option's
expiration date, the Fund will realize a loss in the amount of the
entire premium paid, plus commission costs. It is possible that
there may be times when a market for a Fund's outstanding options
does not exist.
o Risks associated with Short Sales. Our Adviser may effect a "short
sale" of a security when it thinks that it will decline in
-10-
<PAGE>
value. A Fund's investment performance will suffer if a security
for which the Fund has effected a short sale appreciates in value.
A Fund's investment performance may also suffer if the Fund is
required to close out a short position earlier than it had
intended. This would occur if the securities lender requires it to
deliver the securities the Fund borrowed at the commencement of
the short sale and the Fund was unable to borrow such securities
from other securities lenders.
o Risks associated with Leverage. Our Adviser may increase each of
the Fund's ownership of securities by purchasing securities with
borrowed funds. This speculative investment practice is called
"leverage". When a Fund engages in "leverage", its net asset value
will tend to increase or decrease more than otherwise would be the
case.
-11-
<PAGE>
MANAGEMENT OF THE FUND
Murphy Investment Management, Inc. manages the Fund's investments.
Murphy Investment Management, Inc. (the "Adviser") is the investment
adviser to each of the Murphy New World Funds. The Adviser's address is:
2830 North Cabrillo Avenue
Half Moon Bay, CA 94019
As the investment adviser to the Funds, the Adviser manages the
investment portfolio of each Fund. It makes the decisions as to which securities
to buy and which securities to sell. During the last fiscal year, each Fund paid
the Adviser an annual investment advisory fee equal to the following percentages
of average net assets:
Murphy New World Biotechnology Fund 1.00%
Murphy New World Technology Fund 1.00%
Murphy Technology Convertibles Fund 0.625%
The investment advisory fee paid by the Technology Convertibles Fund is lower at
various asset levels.
John Michael Murphy is primarily responsible for the day-to-day
management of the portfolios of the Technology Fund and Biotechnology Fund. He
is these Fund's portfolio manager. Mr. Murphy has been President of the Adviser
since its organization in 1989. He has also been a portfolio manager since 1973,
a securities analyst since 1970, and the president of an investment newsletter
publisher since 1981. Gaye Elizabeth Morgenthaler is primarily responsible for
the day-to-day management of the Convertibles Fund's portfolio. She is this
Fund's portfolio manager. She has been an analyst with the Adviser since 1985.
Year 2000
The Funds are addressing the "Year 2000" issue. The "Year 2000" issue
stems from the use of a two-digit format to define the year in certain
date-sensitive computer application systems rather than the use of a four digit
format. As a result, date-sensitive software programs could recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
major systems or process failures or the generation of erroneous data, which
would lead to disruptions in the Funds' business operations.
The Funds have no application systems of their own and are entirely
dependent on their service providers' systems and software. The Funds are
working with their service providers (including the Adviser, administrator,
transfer agent and custodian) to identify and remedy any Year 2000 issues.
However, the Funds cannot guarantee that all Year 2000 issues will be identified
and remedied, and the failure to successfully identify and remedy all Year 2000
issues could result in an adverse impact on the Funds.
-12-
<PAGE>
Distribution Fees
The Funds have adopted a Distribution Plan and Agreement under Rule 12b-1
under the Investment Company Act. This Plan allows a Fund to use part of the
Fund's assets (up to 0.25% of its average daily net assets) to pay sales,
distribution and other fees for the sale of its shares and for services provided
to investors. Because these fees are paid out of a Fund's assets, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
THE FUNDS' SHARE PRICE
The price at which investors purchase shares of each Fund and at which
shareholders redeem shares of each Fund is called its net asset value. Each Fund
calculates its net asset value as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m. Eastern Time) on each day the New York
Stock Exchange is open for trading. Each Fund calculates its net asset value
based on the market prices of the securities (other than money market
instruments) it holds. Each Fund values most money market instruments it holds
at their amortized cost. Each Fund will process purchase orders that it receives
and accepts and redemption orders that it receives prior to the close of regular
trading on a day in which the New York Stock Exchange is open at the net asset
value determined later that day. It will process purchase orders that it
receives and accepts and redemption orders that it receives after the close of
regular trading at the net asset value determined at the close of regular
trading on the next day the New York Stock Exchange is open.
PURCHASING SHARES
How to Purchase Shares from the Funds
1. Read this Prospectus carefully
2. Determine how much you want to invest keeping in mind the
following minimums:
a. New accounts
o Individual Retirement Accounts and
qualified retirement plans $ 100
o Automatic Investment Plan $ 100
o All other accounts $1,000
b. Existing accounts
o Dividend reinvestment No Minimum
o All Accounts $50
-13-
<PAGE>
3. Complete the Purchase Application accompanying this Prospectus,
carefully following the instructions. For additional investments,
complete the stub attached to your Fund's confirmation statements. If you
don't have the stub, prepare a brief letter stating the registration of
your account, the name of the Fund whose shares you want to purchase and
your account number. (The Fund has additional Purchase Applications and
confirmation stubs if you need them.) If you have any questions, please
call 1-800-628-9403.
4. Make your check payable to "Monterey Murphy New World
Technology Fund," "Monterey Murphy New World Biotechnology Fund" or
"Monterey Murphy New world Technology Convertibles Fund." All checks must
be drawn on U.S. banks. Please write your account number on your check
when you are adding to an existing account. The Funds will not accept
cash or third party checks. American Data Services, Inc., the Funds'
transfer agent, will charge a $15 fee against a shareholder's account for
any payment check returned for insufficient funds. The shareholder will
also be responsible for any losses suffered by a Fund as a result.
5. Send the application and check to:
Monterey Mutual Funds
P.O. Box 640284
Cincinnati, OH 45264-0284
Purchasing Shares from Broker-dealers, Financial Institutions and Others
Some broker-dealers may sell shares of the Murphy New World Funds. These
broker-dealers may charge investors a fee either at the time of purchase or
redemption. The fee, if charged, is retained by the broker-dealer and not
remitted to the Funds or the Adviser.
The Funds may enter into agreements with broker-dealers, financial
institutions or other service providers ("Servicing Agents") that may include
the Funds as investment alternatives in the programs they offer or administer.
Servicing agents may:
1. Become shareholders of record of the Funds. This means all
requests to purchase additional shares and all redemption requests must
be sent through the Servicing Agent. This also means that purchases made
through Servicing Agents are not subject to the Funds' minimum purchase
requirement.
2. Use procedures and impose restrictions that may be in addition
to, or different from, those applicable to investors purchasing shares
directly from the Funds.
3. Charge fees to their customers for the services they provide
them. Also, the Funds and/or the Adviser may pay fees to Servicing Agents
to compensate them for the services they provide their customers.
-14-
<PAGE>
4. Be allowed to purchase shares by telephone with payment to
follow the next day. If the telephone purchase is made prior to the close
of regular trading on the New York Stock Exchange, it will receive same
day pricing.
5. Be authorized to accept purchase orders on behalf of the Funds.
This means that a Fund will process the purchase order at the net asset
value which is determined following the Servicing Agent's acceptance of
the customer's order.
If you decide to purchase shares through Servicing Agents, please
carefully review the program materials provided to you by the Servicing Agent.
When you purchase shares of the Funds through a Servicing Agent, it is the
responsibility of the Servicing Agent to place your order with the Fund on a
timely basis. If the Servicing Agent does not, or if it does not pay the
purchase price to the Funds within the period specified in its agreement with
the Funds, it may be held liable for any resulting fees or losses.
Other Information about Purchasing Shares of the Funds
The Funds may reject any share purchase applications for any reason. The
Funds will not accept purchase orders made by telephone unless they are from a
Servicing Agent which has an agreement with the Fund.
The Funds will issue certificates evidencing shares purchased only upon
request. The Funds will send investors a written confirmation for all purchases
of shares.
The Funds offers an automatic investment plan allowing shareholders to
make purchases on a regular and convenient basis. The Funds offer the following
retirement plans:
o Traditional IRA
o Roth IRA
Investors can obtain further information about the automatic investment
plan and the IRAs by calling the Funds at 1-800-628-9403. The Funds recommend
that investors consult with a competent financial and tax advisor regarding the
IRAs before investing through them.
REDEEMING SHARES
How to Redeem (Sell) Shares by Mail
1. Prepare a letter of instruction containing:
o the name of the Fund(s)
o account number(s)
o the amount of money or number of shares being redeemed
-15-
<PAGE>
o the name(s) on the account
o daytime phone number
o additional information that the Funds may require for
redemptions by corporations, executors, administrators,
trustees, guardians, or others who hold shares in a
fiduciary or representative capacity. Please contact the
Funds' transfer agent, American Data Services, Inc., in
advance, at 1-800-628-9403 if you have any questions.
2. Sign the letter of instruction exactly as the shares are
registered. Joint ownership accounts must be signed by all owners.
3. If there are certificates representing your shares, endorse the
certificates or execute a stock power. Again you must endorse
certificates and sign stock powers exactly as your shares are
registered.
4. Have the signatures guaranteed by a commercial bank or trust
company in the United States, a member firm of the New York Stock
Exchange or other eligible guarantor institution in the following
situations:
o The redemption proceeds are to be sent to a person other
than the person in whose name the shares are registered
o The redemption proceeds are to be sent to an address other
than the address of record
o When you purchased shares you did not complete the section
of Purchase Application concerning signature guarantees.
A notarized signature is not an acceptable substitute for a
signature guarantee.
5. Send the letter of instruction and certificates, if any, to:
Monterey Mutual Funds
c/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788
How to Redeem (Sell) Shares by Telephone
1. Instruct American Data Services, Inc. that you want the option of
redeeming shares by telephone. This can be done by completing the
appropriate section on the Purchase Application or by writing to
American Data Services, Inc. requesting this option. Shares
represented by certificates cannot be redeemed by telephone.
-16-
<PAGE>
2. Assemble the same information that you would include in the letter
of instruction for a written redemption request.
3. Call American Data Services, Inc. at 1-800-628-9403. Please do not
call the Fund or the Adviser.
How to Redeem (Sell) Shares through Servicing Agents
If your shares are held by a Servicing Agent, you must redeem your shares
through the Servicing Agent. Contact the Servicing Agent for instructions on how
to do so.
Payment of Redemption Proceeds
The redemption price per share you receive for redemption requests is the
next determined net asset value after:
1. American Data Services, Inc. receives your written request in
proper form with all required information.
2. American Data Services, Inc. receives your authorized telephone
request with all required information.
3. A Servicing Agent that has been authorized to accept redemption
requests on behalf of the Funds receives your request in
accordance with its procedures.
For those shareholders who redeem shares by mail or by telephone,
American Data Services, Inc. will mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption request
in proper form with all required information. Those shareholders who redeem
shares through Servicing Agents will receive their redemption proceeds in
accordance with the procedures established by the Servicing Agent.
Other Redemption Considerations
When redeeming shares of the Funds, shareholders should consider the
following:
1. The redemption may result in a taxable gain.
2. Shareholders who redeem shares held in an IRA must indicate on
their redemption request whether or not to withhold federal income
taxes. If not, these redemptions will be subject to federal income
tax withholding.
3. The Funds may delay the payment of redemption proceeds for up to
seven days in all cases.
-17-
<PAGE>
4. If you purchased shares by check, the Funds may delay the payment
of redemption proceeds until they are reasonably satisfied the
check has cleared (which may take up to 15 days from the date of
purchase).
5. American Data Services, Inc. will send the proceeds of telephone
redemptions to an address or account other than that shown on its
records only if the shareholder has sent in a written request with
signatures guaranteed.
6. The Funds reserve the right to refuse a telephone redemption
request if they believe it is advisable to do so. The Funds and
American Data Services, Inc. may modify or terminate their
procedures for telephone redemptions at any time. Neither the
Funds nor American Data Services, Inc. will be liable for
following instructions for telephone redemption transactions that
they reasonably believe to be genuine, provided they use
reasonable procedures to confirm the genuineness of the telephone
instructions. They may be liable for unauthorized transactions if
they fail to follow such procedures. These procedures include
requiring some form of personal identification prior to acting
upon the telephone instructions and recording all telephone calls.
During periods of substantial economic or market change, you may
find telephone redemptions difficult to implement. If a
shareholder cannot contact American Data Services, Inc. by
telephone, he or she should make a redemption request in writing
in the manner described earlier.
7. If your account balance falls below $500 because you redeem
shares, you will be given 60 days to make additional investments
so that your account balance is $500 or more. If you do not, the
Funds may close your account and mail the redemption proceeds to
you.
8. The Funds may pay redemption requests "in kind." This means that
the Funds will pay redemption requests entirely or partially with
securities rather than with cash.
EXCHANGING SHARES
Eligible Funds
Shares of any of the Murphy New World Funds may be exchanged for
shares of
o Any other Murphy New World Fund
o Or the following Monterey Mutual Funds
- PIA Short-Term Government Securities Fund
- PIA Global Bond Fund
- PIA Total Return Bond Fund
at their relative net asset values. Shares of the Murphy New World Funds may not
be exchanged for any of the Monterey Investors Funds (The Monterey Investors
Funds are the
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<PAGE>
Camborne Government Income Fund, the OCM Gold Fund and the PIA Equity Fund.) You
may have a taxable gain or loss as a result of an exchange because the Internal
Revenue Code treats an exchange as a sale of shares.
How to Exchange Shares
1. Read this Prospectus and, if applicable, the Prospectus for the
PIA Income Funds.
2. Determine the number of shares you want to exchange keeping in
mind that you must comply with the minimum investment
requirements. (The PIA Income Funds have the same minimum
requirements as the Murphy New World Funds.)
3. Call American Data Services, Inc. at 1-800-628-9403 between the
hours of 9:00 a.m. and 4:00 p.m. Eastern time on days the New York
Stock Exchange is open. (Prior to calling American Data Services,
Inc., you must instruct American Data Services, Inc. that you want
the option of exchanging shares. This can be done by completing
the appropriate section on the Purchase Application or by writing
to American Data Services, Inc. requesting this option.)
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund distributes substantially all of its net investment income and
substantially all of its capital gains annually. You have two distribution
options:
o Automatic Reinvestment Option - Both dividend and capital
gains distributions will be reinvested in additional Fund
Shares.
o All Cash Option - Both dividend and capital gains
distributions will be paid in cash.
You may make this election on the Purchase Application. You may change your
election by writing to American Data Services, Inc. or by calling
1-800-628-9403.
Each Fund's distributions, whether received in cash or additional shares
of the Fund, may be subject to federal and state income tax. These distributions
may be taxed as ordinary income and capital gains (which may be taxed at
different rates depending on the length of time the Fund holds the assets
generating the capital gains). In managing the Funds, our Adviser considers the
tax effects of its investment decisions to be of secondary importance.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a
Fund's financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate that an investor would have earned on
an investment in the Fund (assuming reinvestment of all
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<PAGE>
dividends and distributions). This information has been audited by McGladrey &
Pullen LLP, whose report, along with the Funds' financial statements, are
included in the Annual Report which is available upon request.
-20-
<PAGE>
<TABLE>
<CAPTION>
Murphy New World Technology Fund(1)
For the Years Ended
11/30/95
11/30/98(2) 11/30/97(2) 11/30/96(2) (2) 11/30/94
Net Asset Value, Beginning of $19.18 $20.51 $17.81 $14.35 $14.82
----- ----- ----- ----- -----
Period..............
Income from investment operations:
<S> <C> <C> <C> <C> <C>
Net Investment Loss .............................. (0.31) (0.33) (0.40) (0.32) (0.18)
Net Realized and Unrealized Gain (Loss) on (4.77) (0.40) 4.86 4.19 (0.29)
---- ---- ---- ---- ----
Investments ......................................
Total from Investment Operations ................. (5.08) (0.73) 4.46 3.87 (0.47)
---- ---- ---- ---- ----
Less Distributions:
Distributions (from net realized gains) .......... (2.46) (0.60) (1.76) (0.41) 0.00
---- ---- ---- ---- ----
Net Asset Value, End of Period ................... $11.64 $19.18 $20.51 $17.81 $14.35
====== ====== ====== ====== ======
TOTAL RETURN ..................................... (28.51%) (3.69%) 26.32% 26.95% (3.17%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 1,016 1,439 886 281 283
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 7.14% 8.13% 10.44% 18.74% 11.19%
After expense reimbursement ...................... 2.44% 2.44% 2.34% 2.44% 2.44%
Ratio of Net Investment Income (Loss) to Average (2.20%) (1.96%) (2.06%) (1.97%) (1.79%)
Net Assets .......................................
Portfolio Turnover Rate .......................... 142.89% 57.01% 17.33% 41% 29%
- ---------------
(1) Prior to December 13, 1996 Monitrend Investment Management, Inc. was
investment adviser to the Technology Fund.
(2) Based on average shares outstanding.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Murphy New World Biotechnology Fund(1)
For the Years Ended
11/30/98(2) 11/30/97(2) 11/30/96(2) 11/30/95(2) 11/30/94
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $8.07 $7.19 $6.74 $6.12 $7.99
---- ---- ---- ---- ----
Income from investment operations:
Net Investment Loss .............................. (0.15) (0.16) (0.17) (0.15) (0.08)
Net Realized and Unrealized Gain (Loss) on (1.53) (1.04) 0.62 0.77 (1.79)
---- ---- ---- ---- ----
Investments ......................................
Total from Investment Operations ................. (1.68) 0.88 0.45 0.62 (1.87)
---- ---- ---- ---- ----
Net Asset Value, End of Period ................... $6.39 $8.07 $7.19 $6.74 $6.12
===== ===== ===== ===== =====
TOTAL RETURN ..................................... (20.82%) 12.24% 6.67% 10.13% (23.40%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 3,958 2,353 231 400 824
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 3.79% 8.58% 15.28% 9.96% 6.40%
After expense reimbursement ...................... 2.44% 2.47% 2.65% 2.89% 2.89%
Ratio of Net Investment Income (Loss) to Average (2.11%) (1.98%) (2.31%) (2.18%) (1.18%)
Net Assets .......................................
Portfolio Turnover Rate .......................... 458.56% 15.09% 2.79% 37% 27%
- ---------------
(1) Prior to December 20, 1996, Monitrend Investment Management, Inc. was
investment adviser to the Biotechnology Fund. Prior to March 31, 1997 the
investment objective of the Biotechnology Fund was long-term growth of
capital through investing primarily in equity securities of companies
engaged in activities relating to the gaming and leisure industry.
(2) Based on average shares outstanding.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Murphy New World Technology Convertibles Fund(1)
For the Years Ended
11/30/98 11/30/97 11/30/96 11/30/95 11/30/94
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $26.52 $26.64 $21.42 $16.67 $17.20
----- ----- ----- ----- -----
Income from investment operations:
Net Investment Income ............................ 1.19 0.21 0.01 0.02 0.09
Net Realized and Unrealized Gain (Loss) on (5.27) (0.33) 5.23 4.82 (0.58)
------ ---- ---- ---- ----
Investments ......................................
Total from Investment Operations ................. (4.08) (0.12) 5.24 4.84 (0.49)
---- ---- ---- ---- ----
Less Distributions:
Distributions (from net investment income) ....... (0.30) 0.00 (0.02) (0.09) (0.04)
---- ---- ---- ---- ----
Net Asset Value, End of Period ................... $22.14 $26.52 $26.64 $21.42 $16.67
====== ====== ====== ====== ======
TOTAL RETURN ..................................... (15.55%) (0.45%) 24.49% 29.19% (2.86%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 1,123 1,432 1,560 1,377 1,573
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 6.94% 6.83% 5.11% 6.08% 5.46%
After expense reimbursement ...................... 2.44% 2.44% 2.26% 2.44% 2.44%
Ratio of Net Investment Income (Loss) to Average 4.64% 0.76% 0.04% 0.10% 0.46%
Net Assets .......................................
Portfolio Turnover Rate .......................... 28.90% 85.91% 80.93% 152% 0%
- ---------------
(1) Prior to February 1, 1995, Monitrend Investment Management, Inc. was the
investment adviser to the Convertibles Fund and the investment objective
of the Convertibles Fund was long-term total return from dividends and
realized and unrealized capital gains from stocks and options which
exceeds that of the Standard & Poor's 100 Index ("Index") through
investing in a portfolio of common stocks which approximately parallels
the composition of the Index and by engaging in various portfolio
strategies involving the liquidation of the portfolio or the use of
options and futures contracts to hedge proactively against adverse
changes in stock market values. Between February 1, 1995 and December 31,
1996 MidCap Associates, Inc. was the investment adviser to the
Convertibles Fund and invested primarily in common stocks included in the
S&P 500 Index.
</TABLE>
-23-
<PAGE>
To learn more about the Murphy New World Funds you may want to read the
Murphy New World Funds' Statement of Additional Information (or "SAI") which
contains additional information about the Murphy New World Funds. The Murphy New
World Funds have incorporated by reference the SAI into the Prospectus. This
means that you should consider the contents of the SAI to be part of the
Prospectus.
You also may learn more about the Murphy New World Funds' investments by
reading the Murphy New World Funds' annual and semi-annual reports to
shareholders. The annual report includes a discussion of the market conditions
and investment strategies that significantly affected the performance of the
Murphy New World Funds during their last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling
1-800-251-1970.
Prospective investors and shareholders who have questions about the
Murphy New World Funds may also call the following number or write to the
following address.
Monterey Mutual Fund
1299 Ocean Avenue
Suite 210
Santa Monica, CA 90401
1-800-251-1970
The general public can review and copy information about the Murphy New
World Funds (including the SAI) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. (Please call 1-800-SEC-0330 for
information on the operations of the Public Reference Room.) Reports and other
information about the Murphy New World Funds are also available at the
Securities and Exchange Commission's Internet site at http://www.sec.gov and
copies of this information may be obtained, upon payment of a duplicating fee,
by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the Murphy New World Funds' Investment Company Act File
No., 811-04010, when seeking information about the Murphy New World Funds from
the Securities and Exchange Commission.
-24-
<PAGE>
P R O S P E C T U S
March 31, 1999
The Monterey Investors Funds
The Monterey Investors Funds are three mutual funds in the Monterey
Mutual Fund family. The Monterey Investors Funds are:
o Camborne Government Income Fund
o OCM Gold Fund
o PIA Equity Fund
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how the Monterey Investors Funds
invest and the services they offer to shareholders.
- --------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Monterey Mutual Fund
1299 Ocean Avenue
Suite 210
Santa Monica, California 90401
(800) 251-1970
TABLE OF CONTENTS
Questions Every Investor Should Ask
Before Investing in the Monterey Investors Funds
Fees and Expenses................................................
Investment Objective, Strategies and Risks.......................
Management of the Funds..........................................
The Funds' Share Price ..........................................
Purchasing Shares................................................
Redeeming Shares.................................................
Exchanging Shares................................................
Dividends, Distributions and Taxes...............................
Financial Highlights.............................................
The Monterey Investors Funds are distributed by Syndicated Capital, Inc.
<PAGE>
QUESTIONS EVERY INVESTOR SHOULD ASK BEFORE
INVESTING IN THE MONTEREY INVESTORS FUNDS
1. What are the Fund's Goals?
Camborne Government Income Fund
The Government Fund seeks growth of capital, whether over the short or
long-term, income and preservation of capital. The Government Fund
primarily invests in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
OCM Gold Fund
The Gold Fund seeks long-term growth of capital through investing
primarily in equity securities of domestic and foreign companies engaged
in activities related to gold and precious metals.
PIA Equity Fund
The Equity Fund seeks long-term growth of capital. The Equity Fund
primarily invests in common stocks of U.S. companies.
2. What are the Fund's Principal Investment Strategies?
Camborne Government Income Fund
The Government Fund invests primarily in U.S. Government securities,
although it may also invest in other debt securities rated at least A by
a nationally recognized rating agency. The Government Fund will
o increase the proportion of its assets in U.S. Government
securities when the yield differential between U.S.
Government securities and other debt securities narrow
o decrease the proportion of its assets in U.S. Government
securities when the yield differential between U.S.
Government securities and other debt securities increases
(Normally U.S. Government securities will have lower yields than other
debt securities having identical maturities.)
The Government Fund will allocate its assets between longer and shorter
term securities based on its investment adviser's outlook on changes in
yield curves. When the yield
-2-
<PAGE>
curves are relatively steep, the Government Fund's portfolio will likely
consist of securities having shorter than average maturities. When the
yield curves are flat or inverted, the Government Fund's portfolio will
likely consist of securities having shorter than average maturities.
OCM Gold Fund
The Gold Fund mainly invests in common stocks. The Gold Fund's investment
adviser bases investment decisions on company specific factors, not
general economic conditions. Under normal market conditions, it will
invest in
o Major gold producers, intermediate gold producers and
junior gold producers
o Exploration and development companies
o Producers of other precious metals
o Royalty companies
PIA Equity Fund
The Equity Fund primarily invests in common stocks of U.S. companies. The
Equity Fund invests in common stocks of issuers that its investment
adviser anticipates will have earnings which grow at a higher than
average rate. These stocks may exhibit some or all of the following
characteristics:
o relative price earnings ratio less than that anticipated in
the future
o relative dividend yield greater than anticipated in the
future
o increasing returns on equity
o increasing operating margins
o below average debt to equity ratio
3. What are the Principal Risks in Investing in the Funds?
Camborne Government Fund
Investors in the Government Fund may lose money. There are risks
associated with investments in the types of securities in which the Fund
invests. These risks include:
o Market Risk: The prices of the securities, in which the
Fund invests may decline for a number of reasons.
-3-
<PAGE>
o Interest Rate Risk: In general, the value of bonds and
other debt securities rise when interest rates fall and
fall when interest rates rise. Longer term obligations are
usually more sensitive to interest rate changes than
shorter term obligations. The Fund may invest in zero
coupon U.S. Treasury securities which are generally subject
to greater fluctuation in value due to changing interest
rates than debt obligations which pay interest currently.
While bonds and other debt securities normally fluctuate
less in price than common stocks, there have been extended
periods of increases in interest rates that have caused
significant declines in bond prices.
o Credit Risk: The issuers of the bonds and other debt
securities held by the Fund may not be able to make
interest or principal payments. Even if these issuers are
able to make interest or principal payments, they may
suffer adverse changes in financial condition that would
lower the credit quality of the security, leading to
greater volatility in the price of the security.
o Prepayment Risk: Issuers of securities held by the Fund may
be able to prepay principal due on securities, particularly
during periods of declining interest rates. Securities
subject to prepayment risk generally offer less potential
for gains when interest rates decline, and may offer a
greater potential for loss when interest rates rise. Rising
interest rates may cause prepayments to occur at a slower
than expected rate thereby increasing the average life of
the security and making the security more sensitive to
interest rate changes. Prepayment risk is a major risk of
mortgage-backed securities.
Because of these risks, prospective investors who are uncomfortable with an
investment that will increase and decrease in value should not invest in the
Government Fund.
Gold Fund
Investors in the Gold Fund may lose money. There are risks associated with
investments in the types of securities in which the Fund invests. These risks
include:
o Market Risk: The prices of the securities, particularly the
common stocks, in which the Fund invests may decline for a
number of reasons. The price declines of common stocks, in
particular, may be steep, sudden and/or prolonged.
o Smaller Capitalization Companies Risk: Smaller
capitalization companies typically have relatively lower
revenues, limited product lines, lack of management depth
and a smaller share of the market for their products or
services than larger capitalization companies. The
-4-
<PAGE>
stocks of smaller capitalization companies tend to have
less trading volume than stocks of larger capitalization
companies. Less trading volume may make it more difficult
for the investment adviser to sell stocks of smaller
capitalization companies at quoted market prices. Finally
there are periods when investing in smaller capitalization
stocks falls out of favor with investors and the stocks of
smaller capitalization companies underperform.
o Precious Metals Producers Risk: The prices of securities of
gold and precious metals producers have been subject to
substantial price fluctuations over short periods of time
and may be affected by unpredictable international monetary
and political developments such as currency devaluations or
revaluations, economic and social conditions within a
country, trade imbalances, or trade or currency
restrictions between countries. The prices of gold and
other precious metals have declined in recent years
adversely affecting the market prices of the securities of
gold and precious metals producers.
o Non-diversification Risk: The Fund is a non-diversified
investment company. As such it likely will invest in fewer
securities than diversified investment companies and its
performance may be more volatile. If the securities in
which the Fund invests perform poorly, the Fund could incur
greater losses than it would have had it invested in a
greater number of securities.
o Foreign Investment Risks: These risks associated with
investing in foreign common stocks are in addition to the
risks associated with investing in U.S. common stocks.
Currency Risk: The U.S. dollar value of foreign securities
traded in foreign currencies (and any dividends and
interest earned) may be affected unfavorably by changes in
foreign currency exchange rates. An increase in the U.S.
dollar relative to the foreign currencies in which
securities held by the Fund are traded will adversely
affect the Fund.
Country Risk: Political, social or economic events in a
country may adversely affect the Fund's investments in the
country.
Regulation Risk: Investors in a foreign securities market
may not be afforded the same protections as investors in
U.S. securities markets. Also it may be more difficult,
-5-
<PAGE>
costly and slower to enforce legal rights of the Fund in
foreign countries.
Liquidity Risk: Foreign securities markets tend to have
less trading volume and are more volatile than U.S.
securities markets. Less trading volume makes it more
difficult to sell foreign securities at quoted prices.
Because of these risks the Gold Fund is a suitable investment only for
those investors who have long-term investment goals. Prospective
investors who are uncomfortable with an investment that will increase and
decrease in value should not invest in the Gold Fund.
PIA Equity Fund
Investors in the Equity Fund may lose money. There are risks associated
with investments in the types of securities in which the Fund invests.
These risks include:
o Market Risk: The prices of the securities, particularly the
common stocks, in which the Fund invests may decline for a
number of reasons. The price declines of common stocks, in
particular, may be steep, sudden and/or prolonged.
o Smaller Capitalization Companies Risk: Smaller
capitalization companies typically have relatively lower
revenues, limited product lines, lack of management depth
and a smaller share of the market for their products or
services than larger capitalization companies. The stocks
of smaller capitalization companies tend to have less
trading volume than stocks of larger capitalization
companies. Less trading volume may make it more difficult
for the investment adviser to sell stock of smaller
capitalization companies at quoted market prices. Finally
there are periods when investing in smaller capitalization
stocks falls out of favor with investors and the stocks of
smaller capitalization companies underperform.
o Non-diversification Risk: The Fund is a non-diversified
investment company. As such it likely will invest in fewer
securities than diversified investment companies and its
performance may be more volatile. If the securities in
which the Fund invests perform poorly, the Fund could incur
greater losses than it would have had it invested in a
greater number of securities.
Because of these risks the Equity Fund is a suitable investment only for
those investors who have long-term investment goals. Prospective
investors who are uncomfortable with an investment that will increase or
decrease in value should not invest in the Equity Fund.
-6-
<PAGE>
4. How have the Funds Performed?
The bar charts and tables that follow provide some indication of the
risks of investing in the Monterey Investors Funds by showing changes in
each Fund's performance from year to year and how their average annual
returns over various periods compare to the Lehman Brothers U.S.
Government Bond Index with respect to the Camborne Government Income
Fund, the Standard & Poor's Composite Index of 500 Stocks with respect to
the OCM Gold Fund and the PIA Equity Fund, and the Philadelphia Stock
Exchange Gold & Silver Index ("XAU Index") with respect to the OCM Gold
Fund. Please remember that a Fund's past performance is not necessarily
an indication of its future performance. It may perform better or worse
in the future.
Camborne Government Income Fund
(Total Return per calendar year)
20%
16.51%
15%
12.25% 11.13%
10% 8.06%
5%
1.71%
0%
- --------------------------------------------------------------------------------
-3.37%
- 5%
1993 1994 1995 1996 1997 1998
- ---------------
Note: During the six year period shown on the bar chart, the Fund's highest
total return for a quarter was 5.27% (quarter ended June 30, 1995) and
the lowest total return for a quarter was -3.15% (quarter ended March 31,
1994). The results do not reflect a sales charge. If they did, the
returns would have been lower.
Average Annual Total Returns
(for the periods ending Since November 1,
December 31, 1998) Past Year Past 5 Years 1992*
- -------------------------------------------------------------------------------
Camborne Government Income
Fund** 3.19% 5.60% 6.81%
Lehman Brothers U.S. Government
Bond Index*** 9.85% 7.19% 7.80%
* The Fund's investment adviser, Pacific Income Advisers, Inc., became
investment adviser on this date.
** These results reflect the maximum sales charge of 4.50%.
*** The Lehman Brothers U.S. Government Bond Index is an unmanaged index
consisting of all U.S. Treasury and agency bonds weighted according to
market capitalization.
-7-
<PAGE>
OCM Gold Fund
(Total Return per calendar year)
10%
0%
------------------------------------------
-6.73%
-10%
-20%
-30%
-37.50%
-40%
1997 1998
- ---------------
Note: During the two year period shown on the bar chart, the Fund's highest
total return for a quarter was 10.77% (quarter ended March 31, 1998) and
the lowest total return for a quarter was -39.71% (quarter ended December
31, 1998). The results do not reflect a sales charge. If they did, the
returns would have been lower.
Average Annual Total Returns
(for the periods ending Since December 13,
December 31, 1998) Past Year 1996*
- -----------------------------------------------------------------------
OCM Gold Fund** -11.01% -25.38%
S&P 500*** 28.58% 30.77%
XAU Index**** -11.70% -24.63%
* The Fund's investment adviser, Orell and Company, Inc., became investment
adviser on this date.
** These results reflect the maximum sales charge of 4.50%.
*** The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized unmanaged index of common stock prices.
**** The XAU Index is a capitalization-weighted index featuring eleven widely
held securities in the gold and silver mining and production industry or
companies investing in such mining and production companies.
-8-
<PAGE>
PIA Equity Fund
(Total Return per calendar year)
20%
19.44%
10%
0%
------------------------------
-4.62%
-10%
1997 1998
- ---------------
Note: During the five year period shown on the bar chart, the Fund's highest
total return for a quarter was 15.14% (quarter ended June 30, 1997) and
the lowest total return for a quarter was -20.57% (quarter ended
September 30, 1998). The results do not reflect a sales charge. If they
did, the returns would have been lower.
Average Annual Total Returns
(for the periods ending
December 31, 1998) Past Year Since December 13, 1996*
- --------------------------------------------------------------------------------
PIA Equity Fund** -8.91% 2.12%
S&P 500 28.58% 30.77%
* The Fund's investment adviser, Pacific Investment Adviser's, Inc., became
investment adviser on this date.
** These results reflect the maximum sales charge of 4.50%.
-9-
<PAGE>
<TABLE>
<CAPTION>
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you
buy and hold shares of the Monterey Investors Funds.
SHAREHOLDER FEES (fees paid directly from your investment)
Government Fund Gold Fund Equity Fund
Maximum Sales Charge (Load)
Imposed on Purchases (as a
<S> <C> <C> <C>
percentage of offering price)................... 4.50% 4.50% 4.50%
Maximum Deferred Sales Charge (Load).............. No Deferred Sales No Deferred Sales No Deferred Sales
Charge Charge Charge
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends
And Distributions............................... No Sales Charge No Sales Charge No Sales Charge
Redemption Fee.................................... None None None
Exchange Fee...................................... None None None
Maximum Account Fee............................... No Account Fee No Account Fee No Account Fee
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees................................... 0.40% 1.00% 1.00%
Distribution and/or Service (12b-1) Fees.......... 0.10% 0.99% 0.25%
Other Expenses.................................... 4.23% 1.33% 1.96%
Total Annual Fund Operating Expenses.............. 4.73%* 3.32% 3.21%
- ---------------
* Each of the Camborne Government Income Fund, OCM Gold Fund and the PIA
Equity Fund had actual Total Annual Fund Operating Expenses for the most
recent fiscal year that were less than the amounts shown. The investment
advisers to each of the Monterey Investors Funds reimbursed each Fund to
the extent necessary to insure that Total Annual Fund Operating Expenses
did not exceed the following amounts:
</TABLE>
Fund Amount Investment Adviser
Government Fund 1.10% Pacific Income Advisers, Inc.
Gold Fund 2.44% Orrell and Company, Inc.
Equity Fund 2.14% Pacific Income Advisers, Inc.
(Camborne Advisers, Inc. reimbursed Pacific Income Advisers, Inc. for the
reimbursements Pacific Income Advisers, Inc. made to the Government
Fund.)
Pacific Income Advisers, Inc. and Orrell and Company, Inc. may
discontinue reimbursing the Monterey Investors Funds at any time but will
not do so prior to November 30, 1999. For the fiscal year ending November
30, 1999, Pacific Income Advisers, Inc. will reimburse the Equity Fund to
the extent necessary to insure that the total Annual Fund Operating
Expenses do not exceed 1.80%.
-10-
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in a Fund for the time
periods indicated and then redeem all of your shares at the end of these
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
Government Fund $902 $1,811 $2,724 $5,029
Gold Fund $770 $1,425 $2,103 $3,900
Equity Fund $759 $1,395 $2,053 $3,804
-11-
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
CAMBORNE GOVERNMENT INCOME FUND
The Government Fund seeks growth of capital, whether over the short or
long-term, income and preservation of capital. The Government Fund primarily
invests in securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. The Government Fund may not change its investment
objective without obtaining shareholder approval. Please remember that an
investment objective is not a guarantee. An investment in the Government Fund
might not appreciate and investors may lose money.
How We Invest Our Assets
First, we target portfolio duration. The weighted average duration of the
Government Fund will range from 1 to 10 years. Duration is a measure of a debt
security's price sensitivity. Duration takes into account a debt security's cash
flows over time including the possibility that a debt security might be prepaid
by the issuer or redeemed by the holder prior to its stated maturity date. In
contrast, maturity measures only the time until final payment is due.
The actual duration for the Government Fund will depend on the outlook of
our investment adviser, Pacific Income Advisers, Inc. ("PIA"), on the shapes of
the yield curves of fixed income securities. PIA maintains a data base of
historical yield curve shapes and has developed a methodology of analyzing these
shapes. It believes that deviations from the normal yield curve, which from time
to time happen, provide investors with the opportunity to achieve above average
returns on a risk-adjusted basis. When a deviation from the normal yield curve
occurs, PIA will have the Government Fund invest in those securities which it
believes will experience the largest declines in relative yield when the yield
curves "spring back" to a more normal shape. For example.
o When yield curves are relatively steep, PIA will increase the
Government Fund's weighted average duration; and
o When yield curves are flat or inverted, PIA will decrease the
Government Fund's weighted average duration.
Next, we allocate among asset classes. The Government Fund primarily
invests in securities issued or guaranteed by the U.S. government or its
agencies and instrumentalities ("U.S. government securities"). However it may
also invest in corporate debt securities rated A or better by a national
securities rating agency. When the yield differential between government and
non-government sectors is narrow, PIA will in most situations structure the
Fund's portfolio so that substantially all of the Government Fund's assets are
invested in U.S. government securities. Conversely, when the differential is
high, PIA might invest up to a third of the Government Fund's assets in
corporate debt securities.
-12-
<PAGE>
Finally, we select individual securities. After having determined the
target duration and allocation between asset classes, PIA looks for the most
attractive yields in the asset classes. Within each of the broad asset classes,
there are numerous sectors. For a number of reasons securities of one sector may
have higher or lower yields, on a risk-adjusted basis, than securities of
another sector. PIA will attempt to take advantage of the yield differential
among sectors.
Portfolio Turnover
PIA actively trades the Government Fund's portfolio. It does so to take
advantage of the inefficiencies of the markets for debt securities. The
Government Fund's annual portfolio turnover rate may exceed 100%. (Generally
speaking, a turnover rate of 100% occurs when the Government Fund replaces
securities valued at 100% of its average net assets within a one year period.)
Higher portfolio turnover (100% or more) will result in the Government Fund
incurring more transaction costs such as mark-ups or mark-downs. Payment of
these transaction costs reduce total return. Higher portfolio turnover could
result in the payment by the Government Fund's shareholders of increased taxes
on realized gains. Distributions to the Government Fund's shareholders, to the
extent they are short-term capital gains, will be taxed at ordinary income rates
for federal income tax purposes, rather than at lower capital gains rates.
OCM GOLD FUND
The Gold Fund seeks long-term growth of capital through investing
primarily in equity securities of domestic and foreign companies engaged in
activities related to gold and precious metals. The Gold Fund may not change its
investment objective without obtaining shareholder approval. Please remember
that an investment objective is not a guarantee. An investment in the Gold Fund
might not appreciate and investors may lose money.
The Gold Fund may, in response to adverse markets, economic, political or
other conditions, take temporary defensive positions. This means the Gold Fund
will invest some or all of its assets in money market instruments (like U.S.
Treasury Bills, commercial paper or repurchase agreements). The Gold Fund will
not be able to achieve its investment objective of capital appreciation to the
extent that it invests in money market instruments since these securities earn
interest, but do not appreciate in value.
How We Invest Our Assets.
In investing the Gold Fund's assets, our investment adviser, Orrell
Capital Management ("OCM"), first considers the price of gold and whether it
expects the price of gold to increase or decrease. OCM primarily invests in
common stocks of major gold producers because their prices tend to be sensitive
to changes in the price of gold. OCM believes that because of gold's monetary
value, securities of gold mining companies offer an opportunity to achieve
long-term growth of capital and to protect wealth against eroding monetary
values. Because of OCM's emphasis on gold's monetary value, the Gold Fund will
-13-
<PAGE>
only invest a small portion of its assets in securities of companies producing
other precious metals.
In addition to investing in common stocks of major gold producers, the
Gold Fund will also invest in common stocks of intermediate gold producers,
junior gold producers and exploration and development companies. The Gold Fund
may also purchase gold, silver, platinum and palladium bullion as well as gold
or silver coins. When the Gold Fund purchases coins, it purchases coins for
their metallic value, not for their currency or numismatic value.
OCM is a "bottom up" investor. This means it makes investment decisions
on company specific factors. Among the company's specific factors OCM considers
are:
o sales and earnings growth
o the extent of ore holdings
o efficiency of mining operations
o melting and refinery costs
o capital adequacy to maintain and expand operations
Since the price of gold is a key factor affecting the revenues of gold
producers, OCM must consider the price of gold in its "bottom up" analysis. For
example, many exploration and development companies become significantly more
attractive investments as the price of gold rises.
Portfolio Turnover.
The Gold Fund's annual portfolio turnover rate usually will not exceed
100%. Generally speaking, a turnover rate of 100% occurs when the Gold Fund
replaces securities valued at 100% of its average net assets within a one year
period. Higher portfolio turnover (100% or more) will result in the Gold Fund
incurring more transaction costs such as brokerage commissions or mark-ups or
mark-downs. Payment of these transaction costs reduce total return. Higher
portfolio turnover could result in the payment by a Gold Fund's shareholders of
increased taxes on realized gains. Distributions to a Gold Fund's shareholders,
to the extent they are short-term capital gains, will be taxed at ordinary
income rates for federal income tax purposes, rather than at lower capital gains
rates.
Risks.
There are a number of risks associated with an investment in the Gold
Fund. These include:
o Additional Risks Associated with Precious Metals Producers: Our
Adviser primarily invests in common stocks whose price is
sensitive to
-14-
<PAGE>
changes in the price of gold. The market prices of these common
stocks may be more volatile than the prices of common stocks in
general because of their sensitivity to changes in the price of
gold. The price of gold may change substantially over short
periods of time because of economic, political or other conditions
affecting one of the four major gold producers outside of the
United States (Australia, Canada, South Africa and the former
U.S.S.R.). The price of gold may also change substantially because
of unpredictable monetary policies and economic and political
conditions in countries throughout the world. For example,
countries may decide to reduce their gold reserves and increase
their currency reserves, which could cause the price of gold to
decline.
o Concentration Risk: Because the Gold Fund concentrates its
investments in gold producers, a development adversely affecting
that industry (for example, changes in the mining laws which
increase production costs) would have a greater adverse effect on
the Gold Fund than it would if the Gold Fund invested in a number
of different industries.
o South African Risks: The Gold Fund invests in South African
companies. These investments may be subject to somewhat greater
risk than investments in companies of countries with more stable
political profiles.
PIA EQUITY FUND
The Equity Fund seeks long-term growth of capital. The Equity Fund may
not change its investment objective without obtaining shareholder approval.
Please remember that an investment objective is not a guarantee. An investment
in the Equity Fund might not appreciate and investors may lose money.
The Equity Fund may, in response to adverse markets, economic, political
or other conditions, take temporary defensive positions. This means the Equity
Fund will invest some or all of its assets in money market instruments (like
U.S. Treasury Bills, commercial paper or repurchase agreements). The Equity Fund
will not be able to achieve its investment objective of capital appreciation to
the extent that it invests in money market instruments since these securities
earn interest, but do not appreciate in value.
How We Invest Our Assets
In investing the Equity Fund's assets, PIA looks for seasoned smaller
companies. The Equity Fund primarily invests in dividend paying common stocks of
U.S. companies. The Equity Fund primarily invests in smaller capitalization
companies (companies with a market capitalization of $2 billion or less).
Because the Equity Fund invests primarily in dividend paying common stocks, it
frequently will choose not to invest in stocks that have
-15-
<PAGE>
rapidly appreciating stock prices. These stocks frequently have high
price/earnings multiples and do not pay dividends.
PIA is a "bottom up" investor. This means it makes investment decisions
on company specific factors. PIA looks for stocks that it believes will have
earnings which grow at a higher than average rate. These stocks may exhibit some
or all of the following characteristics:
o relative price earnings ratio less than that anticipated in the
future
o relative dividend yield greater than anticipated in the future
o increasing returns on equity
o increasing operating margins
o below average debt to equity ratio.
PIA may invest in stocks in any industry.
Portfolio Turnover
PIA actively trades the Equity Fund's portfolio. The Equity Fund's annual
portfolio turnover rate may exceed 100%. (Generally speaking, a turnover rate of
100% occurs when the Equity Fund replaces securities valued at 100% of its
average net assets within a one year period.) Higher portfolio turnover (100% or
more) will result in the Equity Fund incurring more transaction costs such as
brokerage commissions or mark-ups or mark-downs. Payment of these transaction
costs reduce total return. Higher portfolio turnover could result in the payment
by the Equity Fund's shareholders of increased taxes on realized gains.
Distributions to the Equity Fund's shareholders, to the extent they are
short-term capital gains, will be taxed at ordinary income rates for federal
income tax purposes, rather than at lower capital gains rates.
-16-
<PAGE>
MANAGEMENT OF THE FUND
Pacific Income Advisers, Inc. manages the investments of the Government Fund and
the Equity Fund.
Pacific Income Advisers, Inc. (the "PIA") is the investment adviser to
the Government Fund and the Equity Fund. PIA's address is:
1299 Ocean Avenue
Suite 210
Santa Monica, CA 90401
PIA has been in business since 1984. As the investment adviser to the
Government Fund and the Equity Fund, PIA manages the investment portfolio of
each of these Funds. It makes the decisions as to which securities to buy and
which securities to sell. The Government Fund pays PIA an annual investment
advisory fee equal to 0.4% of its average net assets, and the Equity Fund pays
PIA an annual investment advisory fee equal to 1.0% of its average net assets.
The investment advisory fee paid by the Equity Fund is lower at various asset
levels.
The day-to-day management of the portfolios of the Government Fund and
the Equity Fund is conducted by a committee of employees of PIA.
Camborne Advisers, Inc. is the Sub-Adviser of the Government Fund
Camborne Advisers, Inc. ("Camborne") acts as sub-adviser to the
Government Fund. Camborne's address is:
10670 North Central Expressway
Suite 405
Dallas, TX 75231
Camborne has been in business since 1994. As the sub-adviser to the
Government Fund, Camborne furnishes regular advice to PIA regarding those
economic and market factors which influence the decisions of PIA as to which
securities to buy and which securities to sell. Camborne will also from time to
time provide advice as to transactions in specific securities. Although Camborne
will provide investment advise to PIA, PIA will make the final decision as to
the securities to be purchased and sold for the Government Fund. PIA pays
Camborne an annual sub-advisory fee equal to 0.2% of the Government Fund's
average net assets.
Orrell Capital Management manages the Gold Fund's investments.
Orrell Capital Management, a division of Orrell and Company, Inc. ("OCM")
is the Gold Fund's investment adviser. OCM's address is:
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<PAGE>
6601 Koll Center Parkway
Suite 132
Pleasanton, CA 94566
OCM has been in business since 1984. As the investment adviser to the
Gold Fund, OCM manages the investment portfolio for the Gold Fund. It makes the
decisions as to which securities to buy and which securities to sell. The Gold
Fund pays OCM an annual advisory fee equal to 1.0% of its average net assets.
The fee is lower at various asset levels.
Gregory M. Orrell is primarily responsible for the day-to-day management
of the Gold Fund's portfolio. He is the Gold Fund's portfolio manager. Mr.
Orrell has been President of OCM since 1984.
Year 2000
The Funds are addressing the "Year 2000" issue. The "Year 2000" issue
stems from the use of a two-digit format to define the year in certain
date-sensitive computer application systems rather than the use of a four digit
format. As a result, date-sensitive software programs could recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
major systems or process failures or the generation of erroneous data, which
would lead to disruptions in the Funds' business operations.
The Funds have no application systems of their own and are entirely
dependent on their service providers' systems and software. The Funds are
working with their service providers (including their investment advisers,
administrator, transfer agent and custodian) to identify and remedy any Year
2000 issues. However, the Funds cannot guarantee that all Year 2000 issues will
be identified and remedied, and the failure to successfully identify and remedy
all Year 2000 issues could result in an adverse impact on the Funds.
Distribution Fees
The Funds have adopted a Distribution Plan and Agreement under Rule 12b-1
under the Investment Company Act. This Plan allows a Fund to use part of the
Fund's assets (up to 0.10% of the Government Fund's average daily net assets, up
to 0.25% of the Equity Fund's average daily net assets and up to 0.99% of the
Gold Fund's average daily net assets) to pay sales, distribution and other fees
for the sale of their shares and for services provided to investors. Because
these fees are paid out of a Fund's assets, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
THE FUND'S SHARE PRICE
The price at which investors purchase shares of the Monterey Investors
Funds is called its offering price. The price at which shareholders redeem
shares of the Monterey Investors Funds is called its net asset value. The
offering price is equal to the net asset value at the time of purchase, plus any
applicable sales charge. Each Fund calculates its net asset value as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m.
-18-
<PAGE>
Eastern Time) on each day the New York Stock Exchange is open for trading. Each
Fund calculates its net asset value based on the market prices of the securities
(other than money market instruments) it holds. It values most money market
instruments it holds at their amortized cost. Each Fund will process purchase
orders that it receives and accepts and redemption orders that it receives prior
to the close of regular trading on a day in which the New York Stock Exchange is
open at the offering price (for purchases) and net asset value (for redemptions)
determined later that day. It will process purchase orders that it receives and
accepts and redemption orders that it receives after the close of regular
trading at the offering price (for purchases) and net asset value (for
redemptions) determined at the close of regular trading on the next day the New
York Stock Exchange is open.
The Funds may hold securities that are primarily listed on foreign
exchanges that trade on weekends or other days when the Funds do not calculate
their net asset values. To the extent they do so, their net asset values may
change on days when investors cannot purchase or redeem Fund shares.
Sales Charges
The following table shows the amount of the sales charge you would pay
when you purchase shares of the Monterey Investors Funds:
Sales Charge
As a Percentage of
Amount of Purchase Offering Price Amount Invested
Less than $100,000 4.50% 4.71%
$100,000 to $249,999 3.00% 3.09%
$250,000 to $499,999 2.50% 2.56%
$500,00 to $999,999 2.00% 2.04%
$1,000,000 or more None None
Reducing the Sales Charge
You may be able to reduce or waive the sales charges on your Monterey
Investors Funds purchases through an "accumulation right" or through a statement
of intent. Both your broker or the distributor will explain to you how the
accumulation right and the state of intent operate.
Net Asset Value Purchase
You may purchase shares of the Monterey Investors Funds at net asset
value (without a sales charge) if you:
o Invest $1,000,000 or more in the Monterey Investors Funds.
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<PAGE>
o Purchase Monterey Investors Fund shares using the proceeds from
the redemption, within the previous sixty days, of shares of
another mutual fund or interest in a commodity pool.
o Purchase Monterey Investors Fund shares in an amount not exceeding
the amount of Monterey Investors Fund shares which you previously
owned and redeemed.
o Or members of your family are:
1 Officers or trustees of Monterey Mutual Funds
2 Officers, directors, consultants to and employees or
customers of the Distributor, any selected dealer or any
Monterey Mutual Fund.
o Are a publisher or subscriber to certain investment advisory
newsletters.
o An investment adviser investing on behalf of your discretionary
accounts.
PURCHASING SHARES
How to Purchase Shares from the Fund
1. Read this Prospectus carefully
2. Determine how much you want to invest keeping in mind the
following minimums:
a. New accounts
o Individual Retirement Accounts
and qualified retirement plans $ 100
o Automatic Investment Plan $ 100
o All other accounts $1,000
b. Existing accounts
o Dividend reinvestment No Minimum
o All accounts $50
3. Complete the Purchase Application accompanying this Prospectus,
carefully following the instructions. For additional investments,
complete the stub
-20-
<PAGE>
attached to your Fund's confirmation statements. If you don't have
the stub, prepare a brief letter stating the registration of your
account, the name of the Fund whose shares you want to purchase
and your account number. (The Fund has additional Purchase
Applications and confirmation stubs if you need them.) If you have
any questions, please call 1-800-628-9403.
4. Make your check payable to "Monterey Camborne Government Income
Fund", "Monterey OCM Gold Fund", or "Monterey PIA Equity Fund".
All checks must be drawn on U.S. banks. Please write your account
number on your check when you are adding to an existing account.
The Fund will not accept cash or third party checks. American Data
Services, Inc., the Funds' transfer agent, will charge a $15 fee
against a shareholder's account for any payment check returned for
insufficient funds. The shareholder will also be responsible for
any losses suffered by a Fund as a result.
5. Send the application and check to:
Monterey Mutual Funds
P.O. Box 640284
Cincinnati, OH 45264-0284
Purchasing Shares from Selected Dealers
You may purchase shares of the Monterey Investors Funds through brokers
or dealers ("Selected Dealers") who have a sales agreement with our distributor,
Syndicated Capital, Inc. Selected Dealers may use procedures and impose
restrictions that may be in addition to, or different from, those applicable to
investors purchasing directly from the Funds. The Selected Dealers may charge
fees to their customers for the services they provide them.
If you place a purchase order with a Selected Dealer prior to the close
of regular trading on the New York Stock Exchange and the Selected Dealer
forwards the order to the Funds' transfer agent prior to 6:00 P.M. Eastern Time
that day, the Funds will process your purchase order at the offering price
determined that day. The Selected Dealer is responsible for placing purchase
orders promptly with the transfer agent and for forwarding payment within three
business days.
Other Information about Purchasing Shares of the Fund
The Fund may reject any share purchase applications for any reason. The
Funds will not accept purchase orders made by telephone, unless they are from a
Selected Dealer which has an agreement with the Funds.
The Funds will issue certificates evidencing shares purchased only upon
request. The Funds will send investors a written confirmation for all purchases
of shares.
-21-
<PAGE>
The Funds offer an automatic investment plan allowing shareholders to
make purchases on a regular and convenient basis. The Funds offer the following
retirement plans:
o Traditional IRA
o Roth IRA
Investors can obtain further information about the automatic investment
plan. And the IRAs by calling the Funds at 1-800-628-9403. The Funds recommend
that investors consult with a competent financial and tax advisor regarding the
IRAs before investing through them.
REDEEMING SHARES
How to Redeem (Sell) Shares by Mail
1. Prepare a letter of instruction containing:
o The name of the Fund(s)
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Funds may require for
redemptions by corporations, executors, administrators,
trustees, guardians, or others who hold shares in a
fiduciary or representative capacity. Please contact the
Funds' transfer agent, American Data Services, Inc., in
advance, at 1-800-628-9403 if you have any questions.
2. Sign the letter of instruction exactly as the shares are
registered. Joint ownership accounts must be signed by all owners.
3. If there are certificates representing your shares, endorse the
certificates or execute a stock power. Again you must endorse
certificates and sign stock powers exactly as your shares are
registered.
4. Have the signatures guaranteed by a commercial bank or trust
company in the United States, a member firm of the New York Stock
Exchange or other eligible guarantor institution in the following
situations:
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<PAGE>
o The redemption proceeds are to be sent to a person other
than the person in whose name the shares are registered
o The redemption proceeds are to be sent to an address other
than the address of record
o When you purchased shares you did not complete the section
of the Purchase Application concerning signature
guarantees.
A notarized signature is not an acceptable substitute for a
signature guarantee.
5. Send the letter of instruction and certificates to:
Monterey Mutual Funds
c/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788
How to Redeem (Sell) Shares by Telephone
1. Instruct American Data Services, Inc. that you want the option of
redeeming shares by telephone. This can be done by completing the
appropriate section on the Purchase Application or by writing to
American Data Services, Inc. requesting this option. Shares
represented by certificates cannot be redeemed by telephone.
2. Assemble the same information that you would include in the letter
of instruction for a written redemption request.
3. Call American Data Services, Inc. at 1-800-628-9403. Please do not
call the Funds, PIA or OCM.
How to Redeem (Sell) Shares through Selected Dealers
You may redeem your shares through Selected Dealers. (If your shares are
held of record by the Selected Dealer, you must redeem them through the Selected
Dealer.) If you place a redemption order with a Selected Dealer prior to the
close of regular trading on the New York Stock Exchange and the Selected Dealer
forwards the order to the Funds' transfer agent prior to 6:00 P.M. Eastern Time
that day, the Funds will process your redemption order at the net asset value
determined that day. The Selected Dealer is responsible for placing redemption
orders promptly with the transfer agent and for forwarding stock certificates,
stock powers and other necessary documents within three business days. The Funds
will send the proceeds either to you or to the Selected Dealer depending on the
instructions of the Selected Dealer.
-23-
<PAGE>
Payment of Redemption Proceeds
The redemption price per share you receive for redemption requests is the
next determined net asset value after:
1. American Data Services, Inc. receives your written request in
proper form with all required information.
2. American Data Services, Inc. receives your authorized telephone
request with all required information.
3. A Selected Dealer that has been authorized to accept redemption
requests on behalf of the Funds receives your request in
accordance with its procedures and promptly forwards your
redemption request to American Data Services, Inc.
For those shareholders who redeem shares by mail or telephone, American
Data Services, Inc. will mail a check in the amount of the redemption proceeds
no later than the seventh day after it receives the redemption request in proper
form with all required information. Those shareholders who redeem shares through
Selected Dealers will receive their redemption proceeds in accordance with the
procedures established by the Selected Dealer.
Other Redemption Considerations
When redeeming shares of the Funds, shareholders should consider the
following:
1. The redemption may result in a taxable gain.
2. Shareholders who redeem shares held in an IRA must indicate on
their redemption request whether or not to withhold federal income
taxes. If not, these redemptions will be subject to federal income
tax withholding.
3. The Funds may delay the payment of redemption proceeds for up to
seven days in all cases.
4. If you purchased shares by check, the Funds may delay the payment
of redemption proceeds until it is reasonably satisfied the check
has cleared (which may take up to 15 days from the date of
purchase).
5. American Data Services, Inc. will send the proceeds of telephone
redemptions to an address or account other than that shown on its
records only if the shareholder has sent in a written request with
signatures guaranteed.
6. The Funds reserve the right to refuse a telephone redemption
request if they believe it is advisable to do so. The Funds and
American Data Services, Inc. may modify or terminate their
procedures for telephone redemptions at any time. Neither the
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<PAGE>
Funds nor American Data Services, Inc. will be liable for
following instructions for telephone redemption transactions that
they reasonably believe to be genuine, provided they use
reasonable procedures to confirm the genuineness of the telephone
instructions. They may be liable for unauthorized transactions if
they fail to follow such procedures. These procedures include
requiring some form of personal identification prior to acting
upon the telephone instructions and recording all telephone calls.
During periods of substantial economic or market change, you may
find telephone redemptions difficult to implement. If a
shareholder cannot contact American Data Services, Inc. by
telephone, he or she should make a redemption request in writing
in the manner described earlier.
7. If your account balance falls below $500 because you redeem
shares, you will be given 60 days to make additional investments
so that your account balance is $500 or more. If you do not, the
Funds may close your account and mail the redemption proceeds to
you.
8. The Funds may pay redemption requests "in kind". This means that
the Funds will pay redemption requests entirely or partially with
securities rather than cash.
EXCHANGING SHARES
Eligible Funds
Shares of any of the Monterey Investors Funds may be exchanged for
shares of
o Any other Monterey Investors Fund
o Or the following Monterey Mutual Funds
- PIA Short-Term Government Securities Fund
- PIA Global Bond Fund
- PIA Total Return Bond Fund
- Murphy New World Technology Fund
- Murphy New World Biotechnology Fund
- Murphy New World Technology Convertibles Fund
at their relative net asset values. You may have a taxable gain or loss as a
result of an exchange because the Internal Revenue Code treats an exchange as a
sale of shares.
How to Exchange Shares
1. Read this Prospectus and, if applicable, the Prospectus for the
PIA Income Funds or the Murphy New World Funds.
2. Determine the number of shares you want to exchange keeping in
mind that you must comply with the minimum investment
requirements. (The PIA Income Funds
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<PAGE>
and the Murphy New World Funds have the same minimum requirements
as the Monterey Investors Funds.)
3. Call American Data Services, Inc. at 1-800-628-9403 between the
hours of 9:00 a.m. and 4:00 p.m. Eastern time on days the New York
Stock Exchange is open. (Prior to calling American Data Services,
Inc., you must instruct American Data Services, Inc. that you want
the option of exchanging shares. This can be done by completing
the appropriate section on the Purchase Application or by writing
to American Data Services, Inc. requesting this option.)
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Government Fund distributes substantially all of its net investment
income monthly and substantially all of its capital gains annually. Each of the
Gold Fund and the Government Fund distributes substantially all of its net
investment income annually and substantially all of its capital gains annually.
You have two distribution options:
o Automatic Reinvestment Option - Both dividend and capital gains
distributions will be reinvested in additional Fund Shares.
o All Cash Option - Both dividend and capital gains distributions
will be paid in cash.
You may make this election on the Purchase Application. You may change your
election by writing to American Data Services, Inc. or by calling
1-800-628-9403.
Each Fund's distributions, whether received in cash or additional shares
of the Fund, may be subject to federal and state income tax. These distributions
may be taxed as ordinary income and capital gains (which may be taxed at
different rates depending on the length of time the Fund holds the assets
generating the capital gains). In managing the Funds, each of our investment
advisers considers the tax effects of its investment decisions to be of
secondary importance.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand a
Fund's financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by McGladrey & Pullen LLP,
whose report, along with the Funds' financial statements, are included in the
Annual Report which is available upon request.
-26-
<PAGE>
<TABLE>
<CAPTION>
Camborne Government Income Fund
For the Years Ended
11/30/98 11/30/97 11/30/96 11/30/95 11/30/94
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $14.00 $13.59 $13.88 $12.76 $14.16
------ ----- ----- ----- -----
Income from investment operations:
Net Investment Income ............................ 0.87 0.89 0.73 0.81 0.87
Net Realized and Unrealized Gain (Loss) on 0.31 0.38 (0.28) 1.12 (1.39)
---- ---- ------ ----
Investments ......................................
Total from Investment Operations ................. 1.18 1.27 0.45 1.93 (0.52)
---- ---- ---- ---- ----
Less Distributions:
Distributions (from net investment income) ....... (0.90) (0.86) (0.74) (0.81) (0.88)
---- ---- ---- ------
Net Asset Value, End of Period ................... $14.28 $14.00 $13.59 $13.88 $12.76
====== ====== ====== ====== ======
TOTAL RETURN(1) .................................. 8.68% 9.70% 3.42% 15.56% (3.75%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 1,022 961 1,293 947 882
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 4.73% 6.98% 5.68% 5.73% 5.52%
After expense reimbursement ...................... 1.10% 1.10% 1.07% 1.10% 1.10%
Ratio of Net Investment Income to Average Net 6.15% 6.53% 5.35% 6.04% 6.47%
Assets ...........................................
Portfolio Turnover Rate .......................... 122.44% 111.26% 129.17% 91% 66%
- ---------------
(1) Total return does not reflect sales loads charged by the Government Fund.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OCM Gold Fund (1)
For the Years Ended
11/30/95
11/30/98 11/30/97(2) 11/30/96(2) (2) 11/30/94
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $5.09 $8.29 $5.91 $5.87 $11.94
---- ---- ---- ---- -----
Income from investment operations:
Net Investment Loss .............................. (0.03) (0.09) (0.15) (0.09) (0.15)
Net Realized and Unrealized Gain (Loss) on (0.08) (3.11) 2.53 0.13 (5.92)
---- ---- ---- ---- ----
Investments ......................................
Total from Investment Operations ................. (0.11) (3.20) 2.38 0.04 (6.07)
---- ---- ---- ---- ----
Net Asset Value, End of Period ................... $4.98 $5.09 $8.29 $5.91 $5.87
===== ===== ===== ===== =====
TOTAL RETURN(3)................................... (2.16%) (38.60%) 40.27% 0.68% (50.84%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 8,251 1,627 1,531 421 1,274
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 3.32% 5.78% 6.15% 12.52% 5.58%
After expense reimbursement ...................... 2.44% 2.44% 2.37% 2.44% 2.45%
Ratio of Net Investment Income (Loss) to Average (0.96%) (1.60%) (1.72%) (1.57%) (1.26%)
Net Assets .......................................
Portfolio Turnover Rate .......................... 1.73% 17.68% 35.70% 16% 229%
- ---------------
(1) Prior to December 13, 1996 Monitrend Investment Management, Inc. was
investment adviser to the Gold Fund, except for the period from December
1, 1993 through August 17, 1994 when Kensington Capital Management, Inc.
was the investment adviser.
(2) Based on average shares outstanding.
(3) Total return does not reflect sales loads charged by the Gold Fund.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PIA Equity Fund(1)
For the Years Ended
11/30/95
11/30/98 11/30/97(2) 11/30/96(2) (2) 11/30/94
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $20.79 $19.63 $15.36 $11.12 $13.35
----- ----- ----- ----- -----
Income from investment operations:
Net Investment Loss .............................. 0.06 (1.21) (0.37) (0.24) (0.52)
Net Realized and Unrealized Gain (Loss) on (0.91) 3.05 4.64 4.48 (1.71)
---- ---- ---- ---- ----
Investments ......................................
Total from Investment Operations ................. (0.85) 1.84 4.27 4.24 (2.23)
---- ---- ---- ---- ----
Less Distributions:
Distributions (from net realized gains) .......... (2.40) (0.68) (0.00) (0.00) 0.00
---- ---- ---- ---- ----
Net Asset Value, End of Period ................... $17.54 $20.79 $19.63 $15.36 $11.12
====== ====== ====== ====== ======
TOTAL RETURN(3) .................................. (4.86%) 9.96% 27.80% 38.13% (16.70%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in 000s) .............. 2,257 2,777 715 526 610
Ratio of Expenses to Average Net Assets:
Before expense reimbursement ..................... 3.21% 6.71% 11.73% 11.44% 8.52%
After expense reimbursement ...................... 2.14% 2.43% 2.25% 2.44% 2.44%
Ratio of Net Investment Income (Loss) to Average .23% (0.06%) (2.07%) (2.21%) (2.22%)
Net Assets .......................................
Portfolio Turnover Rate .......................... 135.49% 139.57% 41.22% 24% 27%
- ---------------
(1) Prior to December 13, 1996 Monitrend Investment Management, Inc. was
investment adviser to the Equity Fund.
(2) Based on average shares outstanding.
(3) Total return does not reflect sales loads charged by the Equity Fund.
</TABLE>
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<PAGE>
To learn more about the Monterey Investors Funds you may want to read the
Monterey Investors Funds' Statement of Additional Information (or "SAI") which
contains additional information about the Monterey Investors Funds. The Monterey
Investors Funds have incorporated by reference the SAI into the Prospectus. This
means that you should consider the contents of the SAI to be part of the
Prospectus.
You also may learn more about Monterey Investors Funds' investments by
reading the Monterey Investors Funds' annual and semi-annual reports to
shareholders. The annual report includes a discussion of the market conditions
and investment strategies that significantly affected the performance of the
Monterey Investors Funds during their last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling
1-800-251-1970.
Prospective investors and shareholders who have questions about the
Monterey Investors Funds may also call the following number or write to the
following address.
Monterey Mutual Fund
1299 Ocean Avenue
Suite 210
Santa Monica, CA 90401
1-800-251-1970
The general public can review and copy information about the Monterey
Investors Funds (including the SAI) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. (Please call 1-800-SEC-0330 for
information on the operations of the Public Reference Room.) Reports and other
information about the Monterey Investors Funds are also available at the
Securities and Exchange Commission's Internet site at http://www.sec.gov and
copies of this information may be obtained, upon payment of a duplicating fee,
by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the Monterey Investors Funds' Investment Company Act File
No., 811-04010, when seeking information about the Monterey Investors Funds from
the Securities and Exchange Commission.
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<PAGE>
MONTEREY MUTUAL FUND
Statement of Additional Information dated March 31, 1999
For the PIA Income Funds
PIA SHORT-TERM GOVERNMENT SECURITIES FUND
PIA GLOBAL BOND FUND
PIA TOTAL RETURN BOND FUND
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the Prospectus dated March 31, 1999 of
Monterey Mutual Fund (the "Trust") relating to the PIA Income Funds. The PIA
Income Funds are the PIA Short-Term Government Securities Fund (the "Short-Term
Government Fund"), the PIA Global Bond Fund (the "Global Bond Fund") and the PIA
Total Return Bond Fund (the "Total Return Bond Fund"). 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.
The following financial statements are incorporated by reference to the
Annual Report, dated November 30, 1998, of Monterey Mutual Fund (File No.
811-4010) as filed with the Securities and Exchange Commission on January 28,
1999.
Schedule of Investments
PIA Short-Term Government Securities Fund
PIA Global Bond Fund
PIA Total Return Bond Fund
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Independent Auditors Report
Shareholders may obtain a copy of the Annual Report, without charge, by
calling (800) 251-1970.
B-1
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY AND CLASSIFICATION 4
Investment Restrictions 4
Illiquid Securities 6
Leverage 6
Lending Portfolio Securities 7
Hedging Instruments 7
Options on Securities 8
Debt Futures 9
Options on Debt Futures 10
Possible CFTC Limitations on Portfolio and Hedging Strategies 11
Special Risks of Hedging Strategies 11
Limitations on Options and Futures 11
Temporary Investments 12
U.S. Government Securities and Mortgage-Backed Securities 12
High Yield and Other Securities 17
When Issued and Delayed-Delivery Securities 18
Foreign Securities 19
Portfolio Turnover 22
MANAGEMENT 23
The Adviser and the Administrator 27
Portfolio Transactions and Brokerage 29
Distribution Plan 30
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NET ASSET VALUE 33
SHAREHOLDER SERVICES 35
TAXES 36
General 36
Rule 17a-7 Transactions 37
Taxation of Hedging Instruments 37
Foreign Taxes 38
Back-up Withholding 39
GENERAL INFORMATION 39
SALES CHARGES 40
CALCULATION OF PERFORMANCE DATA 41
DESCRIPTION OF SECURITIES RATINGS 43
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FUND HISTORY AND CLASSIFICATION
Monterey Mutual Fund (the "Trust") is an open-end management investment
company consisting of nine separate portfolios. This Statement of Additional
Information provides information on three of the portfolios, the PIA Income
Funds. Of the PIA Income Funds, the Short-Term Government Fund is diversified
and the Global Bond Fund and the Total Return Bond Fund are non-diversified.
Monterey Mutual Fund was organized as a Massachusetts business trust on January
6, 1984. Prior to December 27,1996 the Trust was known as "Monitrend Mutual
Fund." The Short-Term Government Fund was called the "PIA Adjustable Rate
Government Securities Fund" prior to December 20, 1996.
Investment Restrictions
The Trust has adopted the following restrictions applicable to the PIA
Income Funds 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 Global
Bond Fund and the Total Return Bond Fund may be invested without regard to this
restriction and 25% of the total assets of 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.
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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
each of the Funds 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 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.
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 each Fund may borrow for investment purposes on a secured or
unsecured basis. (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 or real estate or interests in real estate (including limited
partnership interests). For purposes of this restriction, Mortgage-Backed
Securities are not considered real estate or interests in real estate.
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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 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.
16. Purchase foreign securities or currencies; this restriction does not
apply to the Global Bond Fund or the Total Return Bond Fund.
Illiquid Securities
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; (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 the Funds'
investment adviser, Pacific Income Advisers, Inc. (the "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
Adviser to consider such factors as (i) the nature of the market for a security
(including the institutional private resale markets); (ii) the terms of the
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.
Leverage
From time to time each Fund may increase its ownership of securities by
borrowing on a secured or unsecured basis at fixed and floating rates of
interest and investing the borrowed funds. It is not anticipated that any of the
Funds will use its borrowing power to an extent greater than 25% of the value of
its assets. Borrowings will be made only from
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banks and only to the extent that the value of the assets of the Fund in
question, less its liabilities other than borrowings, is equal to at least 300%
of all borrowings, after giving effect to the proposed borrowing. If the value
of the assets of the Fund in question so computed should fail to meet the 300%
asset coverage requirement, the Fund is required within three days to reduce its
bank debt to the extent necessary to meet such 300% coverage. Since
substantially all of the assets of the Funds fluctuate in value, but borrowing
obligations may be fixed, the net asset value per share of the Funds will
correspondingly tend to increase and decrease in value more than otherwise would
be the case.
Lending Portfolio Securities
Each of the Funds may, to increase its income, lend its securities on a
short- or long-term basis to brokers, dealers and financial institutions if (i)
the loan is collateralized in accordance with applicable regulatory guidelines
(the "Guidelines") and (ii) after any loan, the value of the securities loaned
does not exceed 25% of the value of its total assets. Under the present
Guidelines (which are subject to change) the loan collateral must be, on each
business day, at least equal to the value of the loaned securities and must
consist of cash, bank letters of credit or U.S. Government securities. To be
acceptable as collateral, a letter of credit must obligate a bank to pay amounts
demanded by the Fund in question if the demand meets the terms of the letter of
credit. Such terms and the issuing bank would have to be satisfactory to the
Fund in question. Any loan might be secured by any one or more of the three
types of collateral.
The Fund in question receives amounts equal to the interest or other
distributions on loaned securities and also receives one or more of the
negotiated loan fees, interest on securities used as collateral or interest on
the securities purchased with such collateral, either of which type of interest
may be shared with the borrower. The Funds may also pay reasonable finder's,
custodian's and administrative fees but only to persons not affiliated with the
Trust. A Fund will not have the right to vote securities on loan, but the terms
of the loans will permit the Funds to terminate the loan and thus reacquire the
loaned securities on three days notice.
The primary risk in securities lending is a default by the borrower
during a sharp rise in price of the borrowed security resulting in a deficiency
in the collateral posted by the borrower. Each Fund will seek to minimize this
risk by requiring that the value of the securities loaned be computed each day
and additional collateral be furnished each day if required.
Hedging Instruments
Each of the Funds may engage in hedging. Hedging may be used in an
attempt to (i) protect against declines or possible declines in the market
values of securities held in a Fund's portfolio ("short hedging") or (ii)
establish a position in the securities markets as a substitute for purchase of
individual securities ("long hedging"). A Fund so authorized may engage in short
hedging in an attempt to protect that Fund's value against anticipated downward
trends in the securities markets or engage in long hedging as a substitute for
the
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purchase of securities, which may then be purchased in an orderly fashion. It is
expected that when a Fund is engaging in long hedging, it would, in the normal
course, purchase securities and terminate the hedging position, but under
unusual market conditions such a hedging position may be terminated without the
corresponding purchase of securities. The various hedging instruments which the
Funds may use are discussed below.
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.
Call Options on Securities. 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
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premium received. All call options written by the Funds must be "covered." For a
call to be "covered" (i) the Fund must own the underlying security or have an
absolute and immediate right to acquire that security without payment of
additional cash consideration; (ii) the Fund must maintain in a segregated
account cash or liquid securities adequate to purchase the security; or (iii)
any combination of (i) or (ii).
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.
Put Options on Securities. 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 investment below the exercise
price by having the right to sell the investment through the exercise of the
put.
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. All put options written by the Funds must be
"covered." For a put to be "covered", the Fund must maintain in a segregated
account cash or liquid securities equal to the option price.
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.
Debt Futures are futures contracts on debt securities. 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
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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. Each Fund will set aside in a segregated account
cash or liquid securities sufficient to cover its obligations under each futures
contract that it has entered into.
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. 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 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 Debt Futures
Options on Futures are similar to options on securities, except that the
related investment is not a security, 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
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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.
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.
Special Risks of Hedging Strategies
Participation in the options or futures markets involves investment risks
and transactions costs to which a Fund would not be subject absent the use of
these strategies. In particular, the loss from investing in futures contracts is
potentially unlimited. If the Adviser's prediction of movements in the direction
of the securities and interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of futures contracts and
options on futures contracts include: (1) dependence on the Adviser's ability to
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices of
the securities being hedged; (3) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; and
(4) the possible absence of a liquid secondary market for any particular
instrument at any time.
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
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order the liquidations of positions found to be in excess of these limits, and
it may impose certain sanctions.
Temporary Investments
Each Fund may invest in cash and money market securities. The Funds may
do so to have assets available to pay expenses, satisfy redemption requests or
take advantage of investment opportunities. Money market securities include
treasury bills, short-term investment-grade fixed-income securities, bankers'
acceptances, commercial paper, commercial paper master notes and repurchase
agreements.
The Funds may invest in commercial paper or commercial paper master notes
rated, at the time of purchase, within the two highest rating categories by a
nationally recognized securities rating organization (NSRO).
Each Fund may enter into repurchase agreements. A repurchase agreement
transaction occurs when, at the time a Fund purchases a security, that Fund
agrees to resell it to the vendor (normally a commercial bank or a
broker-dealer) on an agreed upon date in the future. Such securities are
referred to as the "Resold Securities". The 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 and Mortgage-Backed 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
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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 Sates, 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
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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 affected 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 investment characteristics of adjustable and fixed rate
Mortgage-Backed Securities differ from those of traditional fixed income
securities. The major differences include the payment of interest and principal
on Mortgage-Backed Securities on a more frequent (usually monthly) schedule, and
the possibility that principal may be prepaid at any time due to prepayments on
the underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. As a result, if a Fund purchases
Mortgage-Backed Securities at a premium, a faster than expected prepayment rate
will reduce both the market value and the yield to maturity from those which
were anticipated. A prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and market value. Conversely, if
a Fund purchases Mortgage-Backed Securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity and market value.
Prepayments on a pool of mortgage loans are influenced by a variety of
factors, including economic conditions, changes in mortgagors' housing needs,
job transfer, unemployment, mortgagors' net equity in the mortgage properties
and servicing decisions. The timing and level of prepayments cannot be
predicted. Generally, however, prepayments on adjustable rate mortgage loans and
fixed rate mortgage loans will increase during a period of falling mortgage
interest rates and decrease during a period of rising mortgage interest rates.
Accordingly, the amounts of prepayments available for reinvestment by a Fund are
likely to be greater during a period of declining mortgage interest rates. If
general interest rates also decline, such prepayments are likely to be
reinvested at lower interest rates than the Fund was earning on the
Mortgage-Backed Securities that were prepaid.
Certain mortgage loans underlying the Mortgage-Backed Securities in which
the Funds may invest will be adjustable rate mortgage loans ("ARMs"). ARMs
eligible for inclusion in a mortgage pool will generally provide for a fixed
initial mortgage interest rate for a specified period of time. Thereafter, the
interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index Rate"). The
adjusted rate would be equal to the Index Rate plus a gross margin, which is a
fixed percentage spread over the Index Rate established for each ARM at the time
of its origination.
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 or
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
B-14
<PAGE>
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.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such
ARMs. Certain ARMs may also be subject to limitations on the maximum amount by
which the Mortgage Interest Rate may adjust for any single adjustment period
(the "Maximum Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may
provide instead or as well for limitations on changes in the monthly payment on
such ARMs. Limitations on monthly payments can result in monthly payments which
are greater or less than the amount necessary to amortize a Negatively
Amortizing ARM by its maturity at the Mortgage Interest Rate in effect in any
particular month. In the event that a monthly payment is not sufficient to pay
the interest accruing on a Negatively Amortizing ARM, any such excess interest
is added to the principal balance of the loan, causing negative amortization,
and is repaid through future monthly payments. It may take borrowers under
Negatively Amortizing ARMs longer periods of time to achieve equity and may
increase the likelihood of default by such borrowers. In the event that a
monthly payment exceeds the sum of the interest accrued at the applicable
Mortgage Interest Rate and the principal payment which would have been necessary
to amortize the outstanding principal balance over the remaining term of the
loan, the excess (or "accelerated amortization") further reduces the principal
balance of the ARM. Negatively Amortizing ARMs do not provide for the extension
of their original maturity to accommodate changes in their Mortgage Interest
Rate. As a result, unless there is a periodic recalculation of the payment
amount (which there generally is), the final payment may be substantially larger
than the other payments. These limitations on periodic increases in interest
rates and on changes in monthly payments protect borrowers from unlimited
interest rate and payment increases.
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.
CMOs are issued in multiple classes. Each class of CMOs, often referred
to as a "tranche," is issued at a specific adjustable or fixed interest rate and
must be fully retired no
B-15
<PAGE>
later than its final distribution date. Principal prepayments on the mortgage
loans or other assets ("Mortgage Assets") underlying the CMOs may cause some or
all of the class of CMOs to be retired substantially earlier than their final
distribution dates. Generally interest is paid or accrued on all classes of CMOs
on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs in various ways. In certain structures (known
as "sequential pay" CMOs), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs
in the order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs include, among others, "parallel pay" CMOs.
Parallel pay CMOs are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
Each Fund may invest in stripped Mortgage-Backed U.S. Government
securities ("SMBS"). SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
Mortgage Assets. A common type of SMBS will have one class receiving all of the
interest from the Mortgage Assets, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying Mortgage
Assets experience greater than anticipated prepayments of principal, a Fund may
fail to fully recover its initial investment in these securities. Certain SMBS
may not be readily marketable and will be considered illiquid for purposes of a
Fund's limitation on investments in illiquid securities. Whether SMBS are liquid
or illiquid will be determined in accordance with guidelines established by the
Trust's Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yield on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
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.
B-16
<PAGE>
High Yield and Other Securities
Each Fund may invest in corporate debt securities, including bonds and
debentures (which are long-term) and notes (which may be short or long-term).
These debt securities may be rated investment grade by Standard & Poor's
Corporation ("Standard & Poor's") or Moody's Investors Service, Inc.
("Moody's"). Securities rated BBB by Standard & Poor's or Baa by Moody's,
although investment grade, exhibit speculative characteristics and are more
sensitive than higher rated securities to changes in economic conditions. The
Short-Term Government Fund will not invest in securities that are not rated at
least A by Standard & Poor's or Moody's. The Total Return Bond Fund and the
Global Bond Fund may also invest in securities that are rated below investment
grade. Investments in high yield securities (i.e., less than investment grade),
while providing greater income and opportunity for gain than investments in
higher-rated securities, entail relatively greater risk of loss of income or
principal. Lower-grade obligations are commonly referred to as "junk bonds".
Market prices of high-yield, lower-grade obligations may fluctuate more than
market prices of higher-rated securities. Lower grade, fixed income securities
tend to reflect short-term corporate and market developments to a greater extent
than higher-rated obligations which, assuming no change in their fundamental
quality, react primarily to fluctuations in the general level of interest rates.
The high yield market at times is subject to substantial volatility. An
economic downturn or increase in interest rates may have a more significant
effect on high yield securities and their markets, as well as on the ability of
securities' issuers to repay principal and interest. Issuers of high yield
securities may be of low creditworthiness and the high yield securities may be
subordinated to the claims of senior lenders. During periods of economic
downturn or rising interest rates the issuers of high yield securities may have
greater potential for insolvency and a higher incidence of high yield bond
defaults may be experienced.
The prices of high yield securities have been found to be less sensitive
to interest rate changes than higher-rated investments but are more sensitive to
adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issuer
of a high yield security owned by the Total Return Bond Fund or the Global Bond
Fund defaults, the Fund may incur additional expenses in seeking recovery.
Periods of economic uncertainty and changes can be expected to result in
increased volatility of market prices of high yield securities and a Fund's net
asset value. Yields on high yield securities will fluctuate over time.
Furthermore, in the case of high yield securities structured as zero coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes and therefor tend to be more volatile than the market
prices of securities which pay interest periodically and in cash.
Certain securities held by a Fund including high yield securities, may
contain redemption or call provisions. If an issuer exercises these provisions
in a declining interest
B-17
<PAGE>
rate market, the Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for the investor. Conversely, a high
yield security's value will decrease in a rising interest rate market, as will
the value of the Fund's net assets.
The secondary market for high yield securities may at times become less
liquid or respond to adverse publicity or investor perceptions making it more
difficult for the Total Return Bond Fund or the Global Bond Fund to value
accurately high yield securities or dispose of them. To the extent the Total
Return Bond Fund or the Global Bond Fund owns or may acquire illiquid or
restricted high yield securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity
difficulties, and judgment will play a greater role in valuation because there
is less reliable and objective data available.
Special tax considerations are associated with investing in high yield
bonds structured as zero coupon or pay-in-kind securities. The Total Return Bond
Fund or the Global Bond Fund will report the interest on these securities as
income even though it receives no cash interest until the security's maturity or
payment date. Further, each Fund must distribute substantially all of its income
to its shareholders to qualify for pass-through treatment under the tax law.
Accordingly, a Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash or may have to borrow to satisfy
distribution requirements.
Credit ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield securities. Since credit rating agencies
may fail to timely change the credit ratings to reflect subsequent events, the
Adviser should monitor the issuers of high yield securities in the portfolio to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to attempt to assure the
securities' liquidity so the Funds can meet redemption requests. To the extent
that the Total Return Bond Fund or the Global Bond Fund invests in high yield
securities, the achievement of its investment objectives may be more dependent
on the Adviser's credit analysis than is the case for higher quality bonds. Each
Fund may retain a portfolio security whose rating has been changed.
When Issued and Delayed-Delivery Securities
To ensure the availability of suitable securities for their portfolios,
each Fund may purchase when-issued or delayed delivery securities. When-issued
transactions arise when securities are purchased by a Fund with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Fund at the time of entering into the
transaction. When-issued securities represent securities that have been
authorized but not yet issued. Each Fund may also purchase securities on a
forward commitment or delayed delivery basis. In a forward commitment
transaction, a Fund contracts to purchase securities for a fixed price at a
future date beyond customary settlement time. The Fund is required to hold and
maintain in a segregated account until the settlement date, cash or other liquid
assets in an amount sufficient to meet the purchase price. Alternatively, the
Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. The
B-18
<PAGE>
purchase of securities on a when-issued or forward commitment basis involves a
risk of loss if the value of the security to be purchased declines prior to the
settlement date. Although the Funds would generally purchase securities on a
when-issued or forward commitment basis with the intention of actually acquiring
securities for its portfolio, they may dispose of a when-issued security or
forward commitment prior to settlement if the Adviser deems it appropriate to do
so.
Each Fund may enter into mortgage "dollar rolls" in which a Fund sells
Mortgage-Backed Securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Fund forgoes
principal and interest paid on the Mortgage-Backed Securities. The Fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction. The Funds will only
enter into covered rolls. Covered rolls are not treated as a borrowing or other
senior security.
Foreign Securities
The Total Return Bond Fund and the Global Bond Fund, but not the
Short-Term Government Fund, may invest in securities of foreign issuers. There
are risks in investing in foreign securities. Foreign economies may differ from
the U.S. economy; individual foreign companies may differ from domestic
companies in the same industry; foreign currencies may be stronger or weaker
than the U.S. dollar.
An investment may be affected by changes in currency rates and in
exchange control regulations, and the Total Return Bond Fund and the Global Bond
Fund may incur transaction costs in exchanging currencies. For example, at times
when the assets of a Fund are invested in securities denominated in foreign
currencies, investors can expect that the value of such investments will tend to
increase when the value of the U.S. dollar is decreasing against such
currencies. Conversely, a tendency toward a decline in the value of such
investments can be expected when the value of the U.S. dollar is increasing
against such currencies.
Foreign companies are frequently not subject to accounting and financial
reporting standards applicable to domestic companies, and there may be less
information available about foreign issuers. Securities of foreign issuers are
generally less liquid and more volatile than those of comparable domestic
issuers. There is frequently less government regulation of broker-dealers and
issuers than in the United States. The costs associated with securities
transactions are generally higher than in the United States. In addition,
investments in foreign countries are subject to the possibility of
expropriation, confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect the value of those
investments.
B-19
<PAGE>
Most foreign securities owned by the Total Return Bond Fund or the Global
Bond Fund are held by foreign subcustodians that satisfy certain eligibility
requirements. However, foreign subcustodian arrangements are significantly more
expensive than domestic custody. In addition, foreign settlement of securities
transactions is subject to local law and custom that is not, generally, as well
established or as reliable as U.S. regulation and custom applicable to
settlements of securities transactions and, accordingly, there is generally
perceived to be a greater risk of loss in connection with securities
transactions in many foreign countries.
The Total Return Bond Fund and the Global Bond Fund may invest in
securities of companies in countries with emerging economies or securities
markets ("Emerging Markets"). Investment in Emerging Markets involves risks in
addition to those generally associated with investments in foreign securities.
Political and economic structures in many Emerging Markets may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristics of more developed
countries. As a result, the risks described above relating to investments in
foreign securities, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of the investments of the Total Return Bond
Fund or the Global Bond Fund and the availability to a Fund of additional
investments in such Emerging Markets. The small size and inexperience of the
securities markets in certain Emerging Markets and the limited volume of trading
in securities in those markets may make a Fund's investments in such countries
less liquid and more volatile than investments in countries with more developed
securities markets (such as the U.S., Japan and most Western European
countries).
To manage the currency risk accompanying investments in foreign
securities and to facilities the purchase and sale of foreign securities, the
Total Return Bond Fund and Global Bond Fund may engage in foreign currency
transactions on a spot (cash) basis at the spot rate prevailing in the foreign
currency exchange market or through entering into contracts to purchase or sell
foreign currencies at a future date ("forward foreign currency" contracts or
"forward" contracts).
A forward foreign currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are principally traded in the inter-bank
market conducted directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit
requirement and no commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security ("transaction hedging"). By entering into a forward
contract for the purchase or sale of a fixed amount of U.S. dollars equal to the
amount of foreign currency involved in the underlying security transaction, the
Fund can protect itself against a possible loss, resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
B-20
<PAGE>
currency during the period between the date the security is purchased or sold
and the date on which the payment is made or received.
When the Adviser believes that a particular foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a forward
contract to sell a fixed amount of the foreign currency approximating the value
of some or all of the portfolio securities of the Total Return Bond Fund and the
Global Bond Fund denominated in such foreign currency ("position hedging"). The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult and the successful execution of a
short-term hedging strategy is highly uncertain. A Fund will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's securities or other assets
denominated in that currency. Under normal circumstances, the Adviser considers
the long-term prospects for a particular currency and incorporate the prospect
into its overall long-term diversification strategies. The Adviser believes that
it is important to have the flexibility to enter into such forward contracts
when it determines that the best interests of a Fund will be served.
At the maturity of a forward contract, a Fund may either sell the
portfolio securities and make delivery of the foreign currency, or it may retain
the securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of foreign currency.
If a Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a forward contract to sell the
foreign currency. Should forward prices decline during the period when the Fund
entered into the forward contract for the sale of a foreign currency and the
date it entered into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
Shareholders should note that: (1) foreign currency hedge transactions do
not protect against or eliminate fluctuations in the prices of particular
portfolio securities (i.e., if the price of such securities declines due to an
issuer's deteriorating credit situation); and (2) it is impossible to forecast
with precision the market value of securities at the expiration of a forward
contract. Accordingly, a Fund may have to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of a Fund's securities is less than the amount of the foreign currency upon
expiration of the contract.
B-21
<PAGE>
Conversely, a Fund may have to sell some of its foreign currency received upon
the sale of a portfolio security if the market value of the Fund's securities
exceed the amount of foreign currency the Fund is obligated to deliver. A Fund's
dealings in forward foreign currency exchange contracts will be limited to the
transactions described above.
Although the Total Return Bond Fund and the Global Bond Fund value their
assets daily in terms of U.S. dollars, they do not intend to convert their
holdings of foreign currencies into U.S. dollars on a daily basis. A Fund will
do so from time to time and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they realize a profit based on the difference (the "spread") between
the prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
The Total Return Bond Fund and the Global Bond Fund may purchase and sell
currency futures and purchase and write currency options to increase or decrease
their exposure to different foreign currencies. The uses and risks of currency
options and futures are similar to options and futures relating to securities or
indices, as discussed above. Currency futures contracts are similar to forward
foreign currency contracts, except that they are traded on exchanges (and have
margin requirements) and are standardized as to contract size and delivery date.
Most currency futures contracts call for payment or delivery in U.S. dollars.
The underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency and the purchaser of a currency put obtains the right to
sell the underlying currency.
Currency futures and options values can be expected to correlate with
exchange rates, but may not reflect other factors that affect the value of the
respective Fund's investments. A currency hedge, for example, should protect a
Yen-dominated security from a decline in the Yen, but will not protect a
particular Fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of a Fund's foreign-denominated
investments change in response to many factors other than exchange rates, it may
not be possible to match the amount of currency options and futures to the value
for the Fund's investments exactly over time.
Portfolio Turnover
See "Financial Highlights" Turnover" in the Prospectus for information on
the past portfolio turnover rates of the Funds. As indicated in the Prospectus
the portfolio turnover of each of the Funds may vary significantly from year to
year.
B-22
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
The Trustees and officers of the Trust are:
Principal occupations
<S> <C> <C> <C>
Name and Address Age Position with Fund during past five years
Joseph Lloyd McAdams, Jr.* 53 Chairman and Trustee Chairman of Pacific Income Advisers,
1299 Ocean Avenue Inc.; Chairman, Chief Executive
Suite 210 Officer and President of Syndicated
Santa Monica, CA 90401 Capital, Inc. Since March 1998, Mr.
McAdams has been Chairman of the
Board, President and Chief Executive
Officer of Anworth Mortgage Asset
Corporation, a real estate investment
trust.
John Michael Murphy* 57 Trustee President of Murphy Investment
2830 North Cabrillo Highway Management, Inc; President of
Half Moon Bay, CA 94019 Murenove, Inc., a newsletter publisher.
Ann Louise Marinaccio 59 Trustee Sales associate for Saks Fifth Avenue,
1 Norwood Road Short Hills, NJ.
Springfield, NJ 07081
Robert I. Weisberg 52 Trustee President of Fremont Medical Financial
612 Ridge Road Services, Inc. and Executive Vice
Tiburon, CA 94920 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 agent for Roland
1011 4th Street, #218 Land Realty since 1994; real estate
Santa Monica, CA 90403 sales agent for Prudential Realty from
1991-1994.
Heather U. Baines 57 President and Treasurer President and Chief Executive Officer
1299 Ocean Avenue of Pacific Income Advisers, Inc.
Suite 210 Since March, 1998 Ms. Baines has been
Santa Monica, CA 90401 Executive Vice President of Anworth
Mortgage Asset Corporation.
Pamela J. Watson 43 Vice President Vice President of Pacific Income
504 Larsson Street Advisers, Inc. since 1997; Chief
Manhattan Beach, CA 90266 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 Anworth Mortgage Asset
Corporation.
Kathie Hilton 51 Secretary Administrative Assistant for Pacific
1922 Ocean Avenue Income Advisers, Inc. since 1994;
Suite 210 prior thereto owner of Grizzly
Santa Monica, CA 90401 Products, a seafood distributor.
- --------
* "Interested" trustee, as defined in the 1940 Act.
</TABLE>
B-23
<PAGE>
During the fiscal year ended November 30, 1998, the Trust paid its
Trustees who are not affiliated with any of the investment advisers to any of
the Monterey Mutual Funds or the Distributor fees aggregating $12,000. 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
also reimburses such Trustees for their reasonable travel expenses incurred in
attending meetings of the Board of Trustees. The Trust does not provide pension
or retirement benefits to its trustees and officers.
<TABLE>
<CAPTION>
Pension &
Retirement Total
Benefits Compensation
Aggregate Accrued as Estimated Annual from Trust
Compensation Part of Fund Benefits upon Paid to
Name of Person, Position from Trust Expenses Retirement Trustees
- ------------------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Joseph Lloyd McAdams, Jr., 0 0 0 0
Chairman and Trustee
Ann Louise Marinaccio, Trustee $4,000 0 0 $4,000
Robert I. Weisberg, Trustee $4,000 0 0 $4,000
Beatrice Felix, Trustee $4,000 0 0 $4,000
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>
B-24
<PAGE>
Set forth below are the names and addresses of all holders of
shares of the PIA Income Funds who as of December 31, 1998 beneficially owned
more than 5% of a Fund's then outstanding shares.
<TABLE>
<CAPTION>
Short-Term Government Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
United Food & Commercial Workers Arizona
Health and Welfare Trust
c/o Michael Gallaga
Southwest Service Administrators, Inc.
1990 West Camelback, Suite 306
<S> <C> <C>
Phoenix, Arizona 85015 1,542,687 30.04%
UFCW 1995 Health & Welfare Fund
1800 Phoenix Blvd., Suite 310
Atlanta, Georgia 30349 695,026 13.54%
Arizona State University Foundation
P.O. Box 875005
Tempe, Arizona 85287 627,924 12.23%
Foodmaker Master Retirement Trust
FBO: The Northern Trust Company, Trustee
P.O. Box 92956 504,621 9.83%
Chicago, Illinois 60675
Byrd & Co.
c/o First Union National Bank
530 Walnut Street 292,968 5.71%
Philadelphia, Pennsylvania 19101
Union's 2nd Employer's Health & Welfare
Trust Fund
c/o Michael Gallaga
1990 W. Camelback, Suite 306 289,416 5.64%
Phoenix, Arizona 85015
B-25
<PAGE>
Total Return Bond Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
Santa Barbara Botanic Garden, Inc.
1212 Mission Canyon Road
<S> <C> <C>
Santa Barbara, California 93105 567,245 29.72%
Arizona State University Foundation
P.O. Box 875005
Tempe, Arizona 85287 277,680 22.47%
Pacific Income Advisers, Inc.
1299 Ocean Avenue, Suite 210
Santa Monica, California 90401 128,590 10.41%
Heard Museum
The Endowment Fund
22 East Monte Vista Road
Phoenix, Arizona 85004 94,260 7.63%
Rogers Investment Partnership
315 West Hueneme Road
Camarillo, California 93012 94,240 7.63%
Imperial Trust Company
FBO Fritzinger Marital Trust
201 North Figueroa Street #610
Los Angeles, California 90001 94,192 7.62%
Global Bond Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
San Antonio Fire & Police Pension Fund
311 Roosevelt Avenue
San Antonio, Texas 78210 239,014 83.78%
Donaldson, Lufkin & Jenrette
Securities Corporation
P.O. Box 2052
Jersey City, New Jersey 07303 21,227 7.44%
Repub & Co.
c/o Imperial Trust Company
201 North Figueroa Street #610
Los Angeles, California 90001 17,577 6.16%
</TABLE>
B-26
<PAGE>
No other person owns of record or is known to the Trust to own beneficially 5%
or more of the outstanding securities of any of the PIA Income Funds. The United
Food & Commercial Workers Arizona Health and Welfare Trust also "controls" (as
that term is defined in the 1940 Act) the Short-Term Government Fund, Santa
Barbara Botanic Garden, Inc. "controls" the Total Return Bond Fund, and the San
Antonio Fire & Police Pension Fund "controls" the Global Bond Fund. None of such
persons controls the Trust. The shares owned by Donaldson, Lufkin & Jenrette
Securities Corporation, Byrd & 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 PIA Income Funds as of December 31 1998:
Name of Fund Number of Shares Percent of Class
Short-Term Government Fund 16,442* 0.32%
Total Return Bond Fund 128,590* 10.41%
Global Bond Fund 5,443** 1.91%
- -------------------------
* Consists solely of shares owned by Pacific Income Advisers, Inc. (which
is controlled by Heather U. Baines and Joseph Lloyd McAdams, Jr.) and
Joseph Lloyd McAdams, Jr.
** Consists solely of shares owned by Pacific Income Advisers, Inc.
The Adviser and the Administrator
Pacific Income Advisers, Inc. (the "Adviser") is the investment adviser
to the Short-Term Government Fund, the Total Return Bond Fund and the Global
Bond Fund. Joseph Lloyd McAdams, Jr., John Graves and Heather U. Baines own all
of the outstanding stock of PIA. Prior to December 31, 1996, Monitrend
Investment Management, Inc. was investment adviser to the Short-term Government
Fund.
Under the investment advisory agreements applicable to the PIA
Income Funds, the Adviser 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
Total Return Bond Fund 0.30% All asset levels
Global Bond Fund 0.40% All asset levels
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<PAGE>
Under the investment advisory agreements applicable to the PIA Income
Funds, the Adviser is responsible for reimbursing each Fund to the extent
necessary to permit the Fund to maintain the expense limitations set forth
below. 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%
Total Return Bond Fund 0.40%`
Global Bond Fund 0.51%
As a result of expense limitations, all (except where indicated)
investment advisory fees otherwise payable by the Funds were waived and the
following reimbursements were made to the Funds:
<TABLE>
<CAPTION>
Reimbursements in
Fund Fiscal Year End Total Fees Fees Waived Addition to Fee Waivers
- ---- --------------- ---------- ----------- -----------------------
<S> <C> <C> <C> <C>
Short-Term Government Fund 1998 $112,629 $90,595 $0
1997 $ 71,513 $71,513 $ 5,159
1996 $ 18,898 $18,898 $21,965
Total Return Bond Fund 1998 $ 17,310 $13,344 $0
Global Bond Fund 1998 $ 25,181 $25,181 $28,982
1997 $ 10,607 $10,607 $30,356
</TABLE>
Each Fund's investment advisory agreement provides that the Adviser shall
not be liable to the Fund in question for any error of judgment by the Adviser
or for any loss sustained by that Fund except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
American Data Services, Inc., a corporation organized under the laws of
the State of New York (the "Administrator"), administers the day to day
operations of each Fund and serves as fund accountant to each Fund, subject to
the overall supervision of the Trust's Board of Trustees. The Administrator
maintains each Fund's books and records, other than those records maintained by
the Fund's custodian, oversees the Trust's insurance relationships, participates
in the preparation of tax returns, proxy statements and reports, prepares
documents necessary for the maintenance of the Trust's registration with the
various states, responds or oversees the response to communications from
shareholders and broker-dealers, oversees relationships between the Trust and
its custodian and calculates each Fund's net asset value. For its services as
administrator and fund accountant, the Administrator is paid a fee, computed
daily and paid monthly, by each Fund at the rate of 0.10% per year of the
average daily net assets of that Fund, subject to a minimum monthly fee of
approximately $1,072 per Fund.
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<PAGE>
During the fiscal years ended November 30, 1998, November 30, 1997 and
November 30, 1996, the Administrator received the following fees from the PIA
Income Funds for administration and fund accounting services:
Fund 1996 1997 1998
- ---- ---- ---- ----
Short-Term Government Fund $15,435 $21,930 $43,942
Total Return Bond Fund N/A N/A $ 5,000
Global Bond Fund N/A $ 9,389 $15,779
Portfolio Transactions and Brokerage
Under each Fund's investment advisory agreement, the Adviser 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 Adviser are subject to the control of the Trust's Board of
Trustees, as are all of the activities of the Adviser under the investment
advisory agreements.) The primary consideration of the Adviser 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 PIA
Income Funds may be transacted with primary market makers acting as principal on
a net basis, with no brokerage commissions being paid by the Funds. Such
principal transactions may, however, result in a profit to market makers. In
certain instances the Adviser may make purchases of underwritten issues for a
Fund at prices which include underwriting fees.
In selecting a broker-dealer to execute each particular transaction, the
Adviser will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the
broker-dealer; 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 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 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 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 Adviser's overall responsibilities with respect to
the Trust or other accounts for which the Adviser has investment discretion. The
Adviser is 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 Adviser or any
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<PAGE>
affiliate of the foregoing. Such allocation shall be in such amounts and
proportions as the Adviser shall determine and the 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 Adviser is 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 Adviser to direct brokerage
to Syndicated Capital, Inc., the Distributor of each of the Funds, but only if
it reasonably believes 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 Funds paid any brokerage commissions during the three fiscal
years ended November 30, 1998.
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
B-30
<PAGE>
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, 0.05% of the daily net assets of the Short-Term Government Fund and
0.25% of the daily net assets of the Total Return Bond Fund; 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, 1999 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 the Adviser 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 0.05% of the daily net assets of the
Short-Term Government Fund and 0.25% of the daily net assets of the Total Return
Bond Fund. Either the Distributor or the Adviser 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, 1999, 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.
B-31
<PAGE>
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
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 shares of the PIA Income Funds are expected to exceed the sum of
Permitted Payments and Permitted Expenses ("Excess Distribution Costs") and that
the profits, if any, of the Adviser are dependent primarily on the advisory fees
paid by the Funds. If and to the extent that any investment advisory fees paid
by a 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 Short-Term Government Fund and the Total Return Bond Fund during the
fiscal year
B-32
<PAGE>
ended November 30, 1998 were $28,157 and $0.00, respectively. Of the amounts
paid by the Short-Term Government Fund, $27,430 was paid to Qualified Recipients
and the remaining $727 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
The net asset value of each of the Funds will be determined as of the
close of regular trading (4:00 P.M. Eastern Time) on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for trading
Monday through Friday except New Year's Day, Dr. Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period. Each Fund's net asset value is equal to the quotient
obtained by dividing the value of its net assets (its assets less its
liabilities) by the number of shares outstanding.
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 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,
B-33
<PAGE>
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.
The Funds price foreign securities in terms of U.S. dollars at the
official exchange rate. Alternatively, they may price these securities at the
average of the current bid and asked price of such currencies against the dollar
last quoted by a major bank that is a regular participant in the foreign
exchange market, or on the basis of a pricing service that takes into account
the quotes provided by a number of such major banks. If the Funds do not have
either of these alternatives available to them or the alternatives do not
provide a suitable method for converting a foreign currency into U.S. dollars,
the Board of Trustees in good faith will establish a conversion rate for such
currency.
Generally, U.S. Government securities and other fixed income securities
complete trading at various times prior to the close of the New York Stock
Exchange. For purposes of computing net asset value, the Funds use the market
value of such securities as of the time their trading day ends. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the New York Stock Exchange, which events will not be reflected in
the computation of a Fund's net asset value. It is currently the policy of the
Funds that events affecting the valuation of Fund securities occurring between
such times and the close of the New York Stock Exchange, even if material, will
not be reflected in such net asset value.
Foreign securities trading may not take place on all days when the New
York Stock Exchange is open, or may take place on Saturdays and other days when
the New York Stock Exchange is not open and a Fund's net asset value is not
calculated. When determining net asset value, the Funds value foreign securities
primarily listed and/or traded in foreign markets at their market value as of
the close of the last primary market where the securities traded. Securities
trading in European countries and Pacific Rim countries is normally completed
well before 4:00 P.M. Eastern Time. It is currently the policy of the Funds that
events affecting the valuation of Fund securities occurring between the time its
net asset value
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<PAGE>
is determined and the close of the New York Stock Exchange, even if material,
will not be reflected in such net asset value.
Each Fund reserves the right to suspend or postpone redemptions during
any period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission, or that the Exchange is
closed for other than customary weekend and holiday closings; (b) the Securities
and Exchange Commission has by order permitted such suspension; or (c) an
emergency, as determined by the Securities and Exchange Commission, exists,
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable.
SHAREHOLDER SERVICES
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 net asset value. 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.
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.
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<PAGE>
For further information regarding plan administration, custodial fees and
other details, investors should contact the Distributor.
TAXES
General
The Funds intend to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The discussion that follows is
not intended to be a full discussion of present or proposed federal income tax
laws and the effect of such laws on an investor. Investors are urged to consult
with their tax advisers for a complete review of the tax ramifications of an
investment in the Funds.
If a Fund fails to qualify as a regulated investment company under
Subchapter M in any fiscal year, it will be treated as a corporation for federal
income tax purposes. As such that Fund would be required to pay income taxes on
its net investment income and net realized capital gains, if any, at the rates
generally applicable to corporations. Shareholders in a Fund that did not
qualify as a regulated investment company under Subchapter M would not be liable
for income tax on that Fund's net investment income or net realized gains in
their individual capacities. Distributions to shareholders, whether from that
Fund's net investment income or net realized capital gains, would be treated as
taxable dividends to the extent of current or accumulated earnings and profits
of that Fund.
Dividends from a Fund's net investment income, including short-term
capital gains, are taxable to shareholders as ordinary income, while
distributions of net capital gain are taxable as long-term capital gain
regardless of the shareholder's holding period for the shares. Such dividends
and distributions are taxable to shareholders whether received in cash or in
additional shares. The 70% dividends-received deduction for corporations will
apply to dividends from a Fund's net investment income, subject to proportionate
reductions if the aggregate dividends received by the Fund from domestic
corporations in any year are less than 100% of the distribution of net
investment company income taxable made by the Fund. Since all or substantially
all of the income of the Funds is derived from interest payments to it, none of
the dividends of the Funds will qualify for the deduction.
Any dividend or capital gain distribution paid shortly after a purchase
of shares of a Fund, will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution. Furthermore,
if the net asset value of the shares of a Fund immediately after a dividend or
distribution is less than the cost of such shares to the shareholder, the
dividend or distribution will be taxable to the shareholder even though it
results in a return of capital to him.
Redemption of shares will generally result in a capital gain or loss for
income tax purposes. Such capital gain or loss will be long term or short term,
depending upon the shareholder's holding period for the shares. However, if a
loss is realized on shares held for six months or less, and the investor
received a capital gain distribution during that period, then
B-36
<PAGE>
such loss is treated as a long-term capital loss to the extent of the capital
gain distribution received.
Rule 17a-7 Transactions
The Funds have adopted procedures pursuant to Rule 17a-7 under the 1940
Act pursuant to which each of the Funds may effect a purchase and sale
transaction with an affiliated person of the Funds (or an affiliated person of
such an affiliated person) in which a Fund issues its shares in exchange for
securities which are permitted investments for the Funds. For purposes of
determining the number of shares to be issued, the securities to be exchanged
will be valued in accordance with Rule 17a-7. Certain of the transactions may be
tax-free with the result that the funds acquire unrealized appreciation. Most
Rule 17a-7 transactions will not be tax-free.
Taxation of Hedging Instruments
If a call option written by a Fund expires, the amount of the premium
received by the Fund for the option will be short-term capital gain. If a Fund
enters into a closing transaction with respect to the option, any gain or loss
realized by a Fund as a result of the transaction will be short-term capital
gain or loss. If the holder of a call option exercises the holder's right under
the option, any gain or loss realized by the Fund upon the sale of the
underlying security or futures contract pursuant to such exercise will be
short-term or long-term capital gain or loss to the Fund depending on the Fund's
holding period for the underlying security or futures contract, and the amount
of the premium received will be added to the proceeds of sale for purposes of
determining the amount of the capital gain or loss.
With respect to call options purchased by a Fund, the Fund will realize
short-term or long-term capital gain or loss if such option is sold and will
realize short-term or long-term capital loss if the option is allowed to expire
depending on the Fund's holding period for the call option. If such a call
option is exercised, the amount paid by a Fund for the option will be added to
the basis of the security or futures contract so acquired.
Gains and losses resulting from the expiration, exercise or closing of
futures contracts will be treated as long-term capital gain or loss to the
extent of 60% thereof and short-term capital gain or loss to the extent of 40%
thereof (hereinafter "blended gain or loss") for determining the character of
distributions. In addition, futures contracts held by a Fund on the last day of
a fiscal year will be treated as sold for market value ("marked to market" on
that date, and gain or loss recognized as a result of such deemed sale will be
blended gain or loss. The realized gain or loss on the ultimate disposition of
the futures contract will be increased or decreased to take into consideration
the prior marked to market gains and losses.
A Fund may acquire put options. Under the Code, put options on securities
are taxed similar to short sales. If a Fund owns the underlying security or
acquires the underlying security before closing the option position, the
Straddle Rules may apply and the option positions may be subject to certain
modified short sale rules. If a Fund exercises or allows a put option to expire,
the Fund will be considered to have closed a short sale. A Fund will
B-37
<PAGE>
generally have a short-term gain or loss on the closing of an option position.
The determination of the length of the holding period is dependent on the
holding period of the security used to exercise that put option. If a Fund sells
the put option without exercising it, its holding period will be the holding
period of the option.
Foreign Taxes
The Total Return Bond Fund and the Global Bond Fund may be subject to
foreign withholding taxes on income and gains derived from its investments
outside the U.S. Such taxes would reduce the return on a Fund's investments. Tax
treaties between certain countries and the U.S. may reduce or eliminate such
taxes. If more than 50% of the value of the Total Return Bond Fund or Global
Bond Fund's total assets at the close of any taxable year consist of securities
of foreign corporations, the Fund may elect, for U.S. federal income tax
purposes, to treat any foreign country income or withholding taxes paid by the
Fund that can be treated as income taxes under U.S. income tax principles, as
paid by its shareholders. For any year that a Fund makes such an election, each
of its shareholders will be required to include in his income (in addition to
taxable dividends actually received) his allocable share of such taxes paid by
the Fund and will be entitled, subject to certain limitations, to credit his
portion of these foreign taxes against his U.S. federal income tax due, if any,
or to deduct it (as an itemized deduction) from his U.S. taxable income, if any.
Generally, credit for foreign taxes is subject to the limitation that it may not
exceed the shareholder's U.S. tax attributable to his foreign source taxable
income.
If the pass through election described above is made, the source of a
Fund's income flows through to its shareholders. Certain gains from the sale of
securities and currency fluctuations will not be treated as foreign source
taxable income. In addition, this foreign tax credit limitation must be applied
separately to certain categories of foreign source income, one of which is
foreign source "passive income." For this purpose, foreign "passive income"
includes dividends, interest, capital gains and certain foreign currency gains.
As a consequence, certain shareholders may not be able to claim a foreign tax
credit for the full amount of their proportionate share of the foreign tax paid
by the fund.
The foreign tax credit can be used to offset only 90% of the alternative
minimum tax (as computed under the Code for purposes of this limitation) imposed
on corporations and individuals. If a Fund does not make the pass through
election described above, the foreign taxes it pays will reduce its income and
distributions by the Fund will be treated as U.S. source income.
Each shareholder will be notified within 60 days after the close of each
Fund's taxable year whether, pursuant to the election described above, the
foreign taxes paid by the Fund will be treated as paid by its shareholders for
that year and, if so, such notification will designate: (i) such shareholder's
portion of the foreign taxes paid; and (ii) the portion of the Fund's dividends
and distributions that represent income derived from foreign sources.
B-38
<PAGE>
Back-up Withholding
Federal law requires the Funds to withhold 31% of a shareholder's
reportable payments (which include dividends, capital gains distributions and
redemption proceeds) for shareholders who have not properly certified that the
Social Security or other Taxpayer Identification Number they provide is correct
and that the shareholder is not subject to back-up withholding.
GENERAL INFORMATION
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. The
holders of shares have no preemptive or conversion rights. 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 all of the Monterey Mutual Funds) each of
which has separate assets and liabilities.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares) and may vote in the election of Trustees
and on other matters submitted to meetings of shareholders. It is not
contemplated that regular annual meetings of shareholders will be held. Rule
18f-2 under the 1940 Act provides that matters submitted to shareholders be
approved by a majority of the outstanding securities of each Fund, unless it is
clear that the interest of each Fund in the matter are identical or the matter
does not affect a Fund. However, the rule exempts the ratification of the
selection of accountants and the election of Trustees from the separate voting
requirements.
Income, direct liabilities and direct operating expenses of each Fund
will be allocated directly to each Fund, and general liabilities and expenses of
the Trust will be allocated among the Funds in proportion to the total net
assets of each Fund, on a pro rata basis among the Funds or as otherwise
determined by the Board of Trustees.
The By-Laws provide that the Trust's shareholders have the right, upon
the declaration in writing or vote of more than two-thirds of its outstanding
shares, to remove a Trustee. The Trustees will call a meeting of shareholders to
vote on the removal of a Trustee upon the written request of the record holders
of ten percent of the Trust's shares. In addition, ten shareholders holding the
lesser of $25,000 worth or one percent of the Trust's shares may advise the
Trustees in writing that they wish to communicate with other shareholders for
the purpose of requesting a meeting to remove a Trustee. The Trustees will then,
if requested by the applicants, mail at the applicants' expense the applicants'
communication to all other shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of more than
50% of its outstanding shares. The Trust may be terminated upon the sale of its
assets to another issuer, if such sale is approved by the vote of the holders
B-39
<PAGE>
of more than 50% of the outstanding shares of each Fund, or upon liquidation and
distribution of its assets, if so approved. If not so terminated, the Trust will
continue indefinitely.
Shares of the Trust when issued are fully paid and non-assessable. The
Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for its acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust
and satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust such as the Trust to be held personally liable as a
partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations, which obligations are limited by the 1940 Act.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
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.
SALES CHARGES
(A sales charge was imposed on the sale of shares of the Short-Term
Government Fund throughout the fiscal year ended November 30, 1996 and part of
the fiscal year ended November 30, 1997.) During the three fiscal years ended
November 30, 1998, the aggregate dollar amount of sales charges on the sales of
shares of the PIA Income Funds and the amount retained by the Funds' distributor
were as follows:
B-40
<PAGE>
<TABLE>
<CAPTION>
Years Ended November 30
--------------------------------------------------------------------------
1996 1997 1998
----------- ------------- ------------ ----------- ----------- -----------
Sales Amount Sales Amount Sales Amount
Fund Charge Retained Charge Retained Charge Retained
---- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Government Fund $ 63 $ 39 $ 62 $ 0 $ 0 $ 0
Total Return Bond Fund N/A N/A N/A N/A $ 0 $ 0
Global Bond Fund N/A N/A $ 0 $ 0 $ 0 $ 0
</TABLE>
CALCULATION OF PERFORMANCE DATA
From time to time each of the Funds may quote its average annual total
return ("standardized return") in advertisements or promotional materials.
Advertisements and promotional materials reflecting standardized return
("performance advertisements") will show percentage rates reflecting the average
annual change in the value of an assumed initial investment in that Fund of
$1,000 at the end of one, five and ten year periods. If such periods have not
yet elapsed, data will be given as of the end of a shorter period corresponding
to the period of existence of the Fund. Standardized return assumes the
reinvestment of all dividends and capital gain distributions, but does not take
into account any federal or state income taxes that may be payable upon
redemption. The formula the Funds use in calculating standardized return is
described below.
The Funds also may refer in advertising and promotional materials to
their yield. The yield of each Fund shows the rate of income that it earns on
its investments, expressed as a percentage of the net asset value of the Fund's
shares. Each Fund calculates yield by determining the dividend and interest
income it earned from its portfolio investments for a specified thirty-day
period (net of expenses), dividing such income by the average number of Fund
shares outstanding, and expressing the result as an annualized percentage based
on the net asset value at the end of that thirty day period. Yield accounting
methods differ from the methods used for other accounting purposes; accordingly,
the yields of the Funds may not equal the dividend income actually paid to
investors or the income reported in the financial statements of the Funds. The
formula the Funds use in calculating yield is set forth below.
In addition to standardized return, performance advertisements also may
include other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same or different periods as those
for which standardized return is quoted and may consist of aggregate or average
annual percentage rates of return, actual year by year rates or any combination
thereof.
All data included in performance advertisements will reflect past
performance and will not necessarily be indicative of future results. The
investment return and principal value of an investment in a Fund will fluctuate,
and an investor's proceeds upon redeeming Fund shares may be more or less than
the original cost of the shares.
B-41
<PAGE>
The standardized returns of each of the Funds is set forth below:
Short-term Government Fund
Average annual total return:
for the one-year period ended November 30, 1998: 6.99%
for the period April 22, 1994 - November 30, 1998: 6.76%
Total Return Bond Fund
Total return:
for the period September 1, 1998 - November 30, 1998: 2.65%
Global Bond Fund
Average annual total return:
for the one-year period ended November 30, 1998: 10.23%
for the period April 1, 1997 - November 30, 1998: 8.63%
Average total return is calculated according to the following formula:
P(1+T)n=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 (none) 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 Total Return Bond Fund also may refer in advertising and promotional
materials to the combined average annual total return of the Total Return Bond
Fund and the PIA Fixed Income Group Trust (the "Trust"). On September 1, 1998
the Total Return Bond Fund acquired all of the portfolio securities, cash and
cash equivalents then owned by the Trust in exchange for shares of the Total
Return Bond Fund. Although the Adviser managed the Trust and now manages the
Total Return Bond Fund in a manner that in all material respects is equivalent
to that of the Trust in regard to policies, objectives, guidelines and
restrictions, the following performance information should not be viewed as an
indication of future performance of the Total Return Bond Fund. The Trust was
not subject to certain investment limitations, diversification requirements and
other restrictions imposed by the 1940 Act or the Code, which, if applicable,
may have adversely affected its performance results.
B-42
<PAGE>
Total Return Bond Fund and the Trust
Average annual total return:
for the one-year period ended November 30, 1998: 10.30%
for the five-year period ended November 30, 1998: 7.59%
for the period June 30, 1993 - November 30, 1998: 7.38%
The Short-Term Government Fund's yield for the one month period ended
November 30, 1998 was 5.28%, the Total Return Bond Fund's yield for the one
month period ended November 30, 1998 was 5.77% and the Global Bond Fund's yield
for the one month period ended November 30, 1998 was 4.29%. Yields will
fluctuate as market conditions change. The yield of each of the Funds is
calculated according to the following formula:
YIELD = 2 [OBJECT OMITTED]
[OBJECT OMITTED]
Where: a= dividends and interest earned during the period.
b= expenses accrued for the period (net of
reimbursements).
c= the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d= the maximum offering price per share on the last day
of the period.
All of the foregoing information (total return and yield) reflect expense
reimbursements made to the Funds.
DESCRIPTION OF SECURITIES RATINGS
Each Fund may invest in securities rated by Standard & Poor's Corporation
(Standard & Poor's), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Credit Rating Co. ("Duff & Phelps") or IBAC. A brief description of the rating
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.
B-43
<PAGE>
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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o 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.
B-44
<PAGE>
STANDARD & POOR'S RATINGS FOR CORPORATE BONDS
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, Debt rated "BB," "B,", "CCC," "CC" and "C" is regarded as having
CCC. predominantly speculative characteristics with respect to capacity to
CC, C pay interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposure to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
would lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BBB" or "BBB-"
rating.
B Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
B-45
<PAGE>
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" or "CCC-" rating.
C The rating "C" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CC" or "CC-" debt rating. The
"C" rating may be used to cover a situation where bankruptcy petition
has been filed, but debt service payments are continued.
STANDARD & POOR'S CHARACTERISTICS OF SOVEREIGN DEBT OF FOREIGN COUNTRIES
AAA Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances.
Prosperous and resilient economies, high per capital incomes.
Low fiscal deficits and government debt, low inflation
Low external debt.
AA Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances.
Tightly integrated into global trade and financial system.
Differ from AAAs only to a small degree because:
o Economies are smaller, less prosperous and generally
more vulnerable to adverse external influences (e.g.,
protection and terms of trade shocks)
o More variable fiscal deficits, government debt and
inflation.
o Moderate to high external debt.
A Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change.
Established trend of integration into global trade and financial
system.
Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade
shocks).
Usually rapid growth in output and per capita incomes.
Manageable through variable fiscal deficits, government debt and
inflation.
Usually low but variable debt.
B-46
<PAGE>
BBB Political factors a source of significant uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change.
Integration into global trade and financial system growing but
untested.
Economies less prosperous and often more vulnerable to adverse external
influences.
Variable to high fiscal deficits, government debt and inflation.
High and variable external debt.
BB Political factors a source of major uncertainty, either because system
is in transition or due to external threats, or both, often in
environment of rapid economic and social change.
Integration into global trade and financial system growing but
untested.
Low to moderate income developing economies, but variable performance
and quite vulnerable to adverse external influences.
Variable to high fiscal deficits, government debt and inflation.
Very high and variable debt, often graduates of Brady Plan but track
record not well established.
MOODY'S RATINGS FOR BONDS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be
B-47
<PAGE>
lacking or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
many be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DUFF & PHELPS RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN RELATED ISSUERS
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.
B-48
<PAGE>
SOVEREIGN, SUBNATIONAL AND SOVEREIGN RELATED ISSUERS
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
substantially
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
A Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
-----------------------------
In the case of sovereign, subnational and sovereign related issuers,
the Funds use the rating service's foreign currency or domestic (local) currency
rating depending upon how a security in a Fund's portfolio is denominated. In
the case where a Fund holds a security denominated in a domestic (local)
currency and the rating service does not provide a domestic (local) currency
rating for the issuer, a Fund will use the foreign currency rating for the
issuer; in the case where a Fund holds a security denominated in a foreign
currency and the rating service does not provide a foreign currency rating for
the issuer, a Fund will treat the security as being unrated.
B-49
<PAGE>
MONTEREY MUTUAL FUND
Statement of Additional Information dated March 31, 1999
For the Murphy New World Funds
MURPHY NEW WORLD TECHNOLOGY FUND
MURPHY NEW WORLD BIOTECHNOLOGY FUND
MURPHY NEW WORLD TECHNOLOGY CONVERTIBLES FUND
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the Prospectus dated March 31, 1999 of
Monterey Mutual Fund (the "Trust") relating to the Murphy New World Funds. The
Murphy New World Funds are the Murphy New World Technology Fund (the "Technology
Fund"), the Murphy New World Biotechnology Fund (the "Biotechnology Fund") and
the Murphy New World Technology Convertibles Fund (the "Convertibles Fund").
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.
The following financial statements are incorporated by reference to the
Annual Report, dated November 30, 1998, of Monterey Mutual Fund (File No.
811-4010) as filed with the Securities and Exchange Commission on January 28,
1999.
Schedule of Investments
Murphy New World Technology Fund
Murphy New World Biotechnology Fund
Murphy New World Technology Convertibles Fund
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Independent Auditors Report
Shareholders may obtain a copy of the Annual Report, without charge, by
calling (800) 669-1156.
B-1
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY AND CLASSIFICATION 4
Investment Restrictions 4
Illiquid Securities 6
Leverage 6
Lending Portfolio Securities 7
Hedging Instruments 7
Options on Securities 8
Stock Index Options 9
Stock Index Futures and Debt Futures 10
Options on Stock Index Futures and Debt Futures 11
Possible CFTC Limitations on Portfolio and Hedging Strategies 11
Special Risks of Hedging Strategies 12
Limitations on Options and Futures 12
Short Sales 12
Temporary Investments 13
Warrants 13
High Yield Convertible Securities 14
Depository Receipts 15
Foreign Securities 16
Portfolio Turnover 19
MANAGEMENT 19
The Adviser and the Administrator 23
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<PAGE>
Portfolio Transactions and Brokerage 25
Distribution Plan 27
NET ASSET VALUE 30
SHAREHOLDER SERVICES 32
TAXES 33
General 33
Rule 17a-7 Transactions 34
Taxation of Hedging Instruments 34
Foreign Taxes 35
Back-up Withholding 36
GENERAL INFORMATION 36
SALES CHARGES 37
CALCULATION OF PERFORMANCE DATA 38
DESCRIPTION OF SECURITIES RATINGS 39
B-3
<PAGE>
FUND HISTORY AND CLASSIFICATION
Monterey Mutual Fund (the "Trust") is an open-end management investment
company consisting of nine separate portfolios. This Statement of Additional
Information provides information on three of the portfolios, the Murphy New
World Funds. None of the Murphy New World Funds is diversified. Monterey Mutual
Fund was organized as a Massachusetts business trust on January 6, 1984. Prior
to December 27,1996 the Trust was known as "Monitrend Mutual Fund." The
Technology Fund was called the "Monitrend Technology Fund" prior to December 13,
1996. The Biotechnology Fund was called the "Monitrend Gaming & Leisure Fund"
prior to December 20, 1996. The Convertibles Fund was called the "Monitrend
Summation Fund" from March 30, 1993 through December 1, 1994 and the "Monitrend
Growth & Income Fund" from December 2, 1994 through December 31, 1996.
Investment Restrictions
The Trust has adopted the following restrictions applicable to the
Murphy New World Funds 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 Funds 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
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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
each of the Funds may borrow money as set forth in Investment Restriction No.
11).
10. Make short sales of securities or maintain a short position except
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 each Fund may borrow for investment purposes on a secured or
unsecured basis. (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 or real estate or interests in real estate (including limited
partnership interests). For purposes of this restriction, Mortgage-Backed
Securities 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.
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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 and the Convertibles 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.
Illiquid Securities
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 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; (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 the Funds' investment adviser, Murphy Asset
Management, Inc. (the "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 Adviser to consider such factors as (i) the nature
of the market for a security (including the institutional private resale
markets); (ii) the terms of the 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.
Leverage
From time to time each Fund may increase its ownership of securities by
borrowing on a secured or unsecured basis at fixed and floating rates of
interest and investing the borrowed funds. It is not anticipated that any of the
Funds will use its borrowing power to an extent greater than 25% of the value of
its assets. Borrowings will be made only from banks and only to the extent that
the value of the assets of the Fund in question, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings, after giving effect to
the proposed borrowing. If the value of the assets of the Fund in question so
computed should fail to meet the 300% asset coverage requirement, the Fund is
required within three days to reduce its bank debt to the extent necessary to
meet such 300% coverage. Since substantially all of the assets of the Funds
fluctuate in value, but borrowing obligations may be
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fixed, the net asset value per share of the Funds will correspondingly tend to
increase and decrease in value more than otherwise would be the case.
Lending Portfolio Securities
Each of the Funds may, to increase its income, lend its securities on a
short- or long-term basis to brokers, dealers and financial institutions if (i)
the loan is collateralized in accordance with applicable regulatory guidelines
(the "Guidelines") and (ii) after any loan, the value of the securities loaned
does not exceed 25% of the value of its total assets. Under the present
Guidelines (which are subject to change) the loan collateral must be, on each
business day, at least equal to the value of the loaned securities and must
consist of cash, bank letters of credit or U.S. Government securities. To be
acceptable as collateral, a letter of credit must obligate a bank to pay amounts
demanded by the Fund in question if the demand meets the terms of the letter of
credit. Such terms and the issuing bank would have to be satisfactory to the
Fund in question. Any loan might be secured by any one or more of the three
types of collateral.
The Fund in question receives amounts equal to the interest or other
distributions on loaned securities and also receives one or more of the
negotiated loan fees, interest on securities used as collateral or interest on
the securities purchased with such collateral, either of which type of interest
may be shared with the borrower. The Funds may also pay reasonable finder's,
custodian's and administrative fees but only to persons not affiliated with the
Trust. A Fund will not have the right to vote securities on loan, but the terms
of the loans will permit the Funds to terminate the loan and thus reacquire the
loaned securities on three days notice.
The primary risk in securities lending is a default by the borrower
during a sharp rise in price of the borrowed security resulting in a deficiency
in the collateral posted by the borrower. Each Fund will seek to minimize this
risk by requiring that the value of the securities loaned be computed each day
and additional collateral be furnished each day if required.
Hedging Instruments
Each of the Funds may engage in hedging. Hedging may be used in an
attempt to (i) protect against declines or possible declines in the market
values of securities held in a Fund's portfolio ("short hedging") or (ii)
establish a position in the securities markets as a substitute for purchase of
individual securities ("long hedging"). A Fund so authorized may engage in short
hedging in an attempt to protect that Fund's value against anticipated downward
trends in the securities markets or engage in long hedging as a substitute for
the purchase of securities, which may then be purchased in an orderly fashion.
It is expected that when a Fund is engaging in long hedging, it would, in the
normal course, purchase securities and terminate the hedging position, but under
unusual market conditions such a hedging position may be terminated without the
corresponding purchase of securities. The various hedging instruments which the
Funds may use are discussed below.
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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.
Call Options on Securities. 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.
All call options written by the Funds must be "covered." For a call to be
"covered" (i) the Fund must own the underlying security or have an absolute and
immediate right to acquire that security without payment of additional cash
consideration; or (ii) the Fund must maintain in a segregated account cash or
liquid securities adequate to purchase the security; or (iii) any combination of
(i) or (ii).
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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.
Put Options on Securities. 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 investment below the
exercise price by having the right to sell the investment through the exercise
of the put.
The Convertibles Fund may write put options. When it does, 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. All put options
written by the Convertibles Fund must be "covered." For a put to be "covered",
the Convertibles Fund must maintain in a segregated account cash or liquid
securities equal to the option price.
Stock Index Options
Options on stock indices are based on the same principles as options on
securities, described above. The main difference is that the underlying
instrument is a stock index, rather than an individual security. 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, buyers and writers of index options are subject to additional risks
unique to index options.
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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.
All calls on stock indices written by the Funds must be covered as must puts on
stock indices written by the Convertibles Fund.
Stock Index Futures and Debt Futures
Each of the Funds may invest in futures contracts on stock indices
("Stock Index Futures") and options on Stock Index Futures. The Convertibles
Fund, but not the Technology Fund or the Biotechnology Fund, may invest in
futures contracts and debt securities ("Debt Futures") or options on 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.
Each Fund will set aside in a segregate account cash or liquid securities
sufficient to cover its obligations under each futures contract that it has
entered into.
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.
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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 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 securities, except that
the related investment is not a security, 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.
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
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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.
Special Risks of Hedging Strategies
Participation in the options or futures markets involves investment
risks and transactions costs to which a Fund would not be subject absent the use
of these strategies. In particular, the loss from investing in futures contracts
is potentially unlimited. If the Adviser's prediction of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of futures contracts
and options on futures contracts include: (1) dependence on the Adviser's
ability to predict correctly movements in the direction of interest rates,
securities prices and currency markets; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in the
prices of the securities being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
and (4) the possible absence of a liquid secondary market for any particular
instrument at any time.
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.
Short Sales
Each Fund may seek to realize additional gains through effecting short
sales of securities. Short selling involves the sale of borrowed securities. At
the time a short sale is effected, a Fund incurs an obligation to replace the
security borrowed at whatever its price may be at the time the Fund purchases it
for delivery to the lender. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay the lender amounts equal to any dividend
or interest which accrue during the period of the loan. To borrow the security,
the Fund also may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin
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requirements, until the short position is closed. Until a Fund closes its short
position or replaces the borrowed security, the Fund will: (a) maintain a
segregated account containing cash or liquid securities at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short; or (b)
otherwise cover the Fund's short position. No more than 25% of the value of a
Fund's net assets will be, when added together, (a) deposited as collateral for
the obligation to replace securities borrowed to effect short sales, and (b)
allocated to segregated accounts in connection with short sales.
Temporary Investments
Each Fund may invest in cash and money market securities. The Funds may
do so when taking a temporary defensive position or to have assets available to
pay expenses, satisfy redemption requests or take advantage of investment
opportunities. Money market securities include treasury bills, short-term
investment-grade fixed-income securities, bankers' acceptances, commercial
paper, commercial paper master notes and repurchase agreements.
The Funds may invest in commercial paper or commercial paper master
notes rated, at the time of purchase, within the two highest rating categories
by a nationally recognized securities rating organization (NSRO).
Each Fund may enter into repurchase agreements. A repurchase agreement
transaction occurs when, at the time a Fund purchases a security, that Fund
agrees to resell it to the vendor (normally a commercial bank or a
broker-dealer) on an agreed upon date in the future. Such securities are
referred to as the "Resold Securities". The 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.
Warrants
Each of the Funds may purchase warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified
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number of shares of the corporation at a specified price for a specified period
of time. Like options, warrants involve certain risks, including the chance that
a Fund could lose the purchase value of the warrant if the warrant is not
exercised prior to its expiration. Warrants also involve the risk that the
effective price paid for the warrant when added to the subscription price of the
related security may be greater than the value of the subscribed security's
market price. To manage risk, no more than 5% of each Fund's net assets, valued
at the time of investment, will be invested in warrants.
High Yield Convertible Securities
The Technology Fund and the Biotechnology Fund may invest in
convertible securities when the Adviser believes the underlying common stock is
a suitable investment for the Fund and when the convertible security offers
greater potential for total return because of its higher yield. Convertible
securities are bonds or preferred stocks that may be converted (exchanged) into
common stock of the issuing company within a certain period of time, for a
specified number of shares. The Convertibles Fund primarily will invest in
convertible securities.
Investments in high yield, high risk, lower-rated convertible
securities are commonly known as "junk bonds." Investments in such securities
are subject to greater credit risks than higher rated securities. Debt
securities rated below investment grade have greater risks of default than
investment grade debt securities, including medium grade debt securities, and
may in fact, be in default. Issuers of "junk bonds" must offer higher yields to
compensate for the greater risk of default on the payment of principal and
interest.
The market for high yield convertible securities is subject to
substantial volatility. An economic downturn or increase in interest rates may
have a more significant effect on high yield convertible securities and their
markets, as well as on the ability of securities' issuers to repay principal and
interest, than on higher-rated securities and their issuers. Issuers of high
yield convertible securities may be of low creditworthiness and the high yield
convertible securities may be subordinated to the claims of senior lenders.
During periods of economic downturn or rising interest rates the issuers of high
yield convertible securities may have greater potential for insolvency and a
higher incidence of high yield bond defaults may be experienced. From 1989 to
1991, the percentage of high yield securities that defaulted rose significantly
above prior default levels. The default rate has decreased subsequently.
The prices of high yield convertible securities have been found to be
less sensitive to interest rate changes than higher-rated investments but are
more sensitive to adverse economic changes or individual corporate developments
because of their lower credit quality. During an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. If the issuer of a high
yield convertible security owned by a Fund defaults, the Fund may incur
additional expenses in seeking recovery. Periods of
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economic uncertainty and changes can be expected to result in increased
volatility of market prices of high yield convertible securities and a Fund's
net asset value. Yields on high yield convertible securities will fluctuate over
time. Furthermore, in the case of high yield convertible securities structured
as zero coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than market prices of securities which pay interest periodically and in cash.
The secondary market for high yield convertible securities may at times
become less liquid or respond to adverse publicity or investor perceptions
making it more difficult for a Fund to value accurately high yield convertible
securities or dispose of them. To the extent a Fund owns or may acquire illiquid
or restricted high yield convertible securities, these securities may involve
special registration responsibilities, liabilities and costs, and liquidity
difficulties, and judgment will play a greater role in valuation because there
is less reliable and objective data available.
Special tax considerations are associated with investing in high yield
bonds structured as zero coupon or pay-in-kind securities. A Fund will report
the interest on these securities as income even though it receives no cash
interest until the security's maturity or payment date. Further, each Fund must
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under the tax law. Accordingly, a Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash or may have to borrow to satisfy distribution requirements.
Credit ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield convertible securities. Since credit
rating agencies may fail to timely change the credit ratings to reflect
subsequent events, the Adviser monitors the issuers of high-yield convertible
securities in the portfolio to determine if the issuers will have sufficient
cash flows and profits to meet required principal and interest payments, and to
attempt to assure the securities' liquidity so the Funds can meet redemption
requests. To the extent that a Fund invests in high yield convertible
securities, the achievement of its investment objective may be more dependent on
the Adviser's own credit analysis than is the case for higher quality bonds. A
Fund may retain a portfolio security whose rating has been changed.
Depository Receipts
Each of the Funds may invest in American Depository Receipts ("ADRs").
ADR facilities may be either "sponsored" or "unsponsored." While similar,
distinctions exist relating to the rights and duties of ADR holders and market
practices. A depository may establish an unsponsored facility without the
participation by or consent of the issuer of the deposited securities, although
a letter of non-objection from the issuer is often requested. Holders of
unsponsored ADRs generally bear all the costs of such facility, which can
include deposit and withdrawal fees, currency conversion fees and other service
fees. The depository of an unsponsored facility may be under no duty to
distribute shareholder communications from the issuer or to pass through voting
rights. Issuers of unsponsored ADRs are not obligated to disclose material
information in the U.S. and, therefore, there may not be a
B-15
<PAGE>
correlation between such information and the market value of the ADR. Sponsored
facilities enter into an agreement with the issuer that sets out rights and
duties of the issuer, the depository and the ADR holder. This agreement also
allocates fees among the parties. Most sponsored agreements also provide that
the depository will distribute shareholder notices, voting instruments and other
communications. Each of the Funds may invest in sponsored and unsponsored ADRs.
In addition to ADRs, each of the Funds may hold foreign securities in
the form of American Depository Shares ("ADSs"), Global Depository Receipts
("GDRs") and European Depository Receipts ("EDRs"), or other securities
convertible into foreign securities. These receipts may not be denominated in
the same currency as the underlying securities. Generally, American banks or
trust companies issue ADRs and ADSs, which evidence ownership of underlying
foreign securities. GDRs represent global offerings where an issuer issues two
securities simultaneously in two markets, usually publicly in a non-U.S. market
and privately in the U.S. market. EDRs (sometimes called Continental Depository
Receipts ("CDRs")) are similar to ADRs, but usually issued in Europe. Typically
issued by foreign banks or trust companies, EDRs and CDRs evidence ownership of
foreign securities. Generally, ADRs and ADSs in registered form trade in the
U.S. securities markets, GDRs in the U.S. and European markets, and EDRs and
CDRs (in bearer form) in European markets.
Foreign Securities
Each Fund may invest in securities of foreign issuers. There are risks
in investing in foreign securities. Foreign economies may differ from the U.S.
economy; individual foreign companies may differ from domestic companies in the
same industry; foreign currencies may be stronger or weaker than the U.S.
dollar.
An investment may be affected by changes in currency rates and in
exchange control regulations, and the Funds may incur transaction costs in
exchanging currencies. For example, at times when the assets of a Fund are
invested in securities denominated in foreign currencies, investors can expect
that the value of such investments will tend to increase when the value of the
U.S. dollar is decreasing against such currencies. Conversely, a tendency toward
a decline in the value of such investments can be expected when the value of the
U.S. dollar is increasing against such currencies.
Foreign companies are frequently not subject to accounting and
financial reporting standards applicable to domestic companies, and there may be
less information available about foreign issuers. Foreign stock markets have
substantially less volume than the New York Stock Exchange, and securities of
foreign issuers are generally less liquid and more volatile than those of
comparable domestic issuers. There is frequently less government regulation of
exchanges, broker-dealers and issuers than in the United States. Brokerage
commissions in foreign countries are generally fixed, and other transactions
costs related to securities exchanges are generally higher than in the United
States. In addition, investments in foreign countries are subject to the
possibility of expropriation, confiscatory taxation, political
B-16
<PAGE>
or social instability or diplomatic developments that could adversely affect the
value of those investments.
Most foreign securities owned by the Funds are held by foreign
subcustodians that satisfy certain eligibility requirements. However, foreign
subcustodian arrangements are significantly more expensive than domestic
custody. In addition, foreign settlement of securities transactions is subject
to local law and custom that is not, generally, as well established or as
reliable as U.S. regulation and custom applicable to settlements of securities
transactions and, accordingly, there is generally perceived to be a greater risk
of loss in connection with securities transactions in many foreign countries.
Each Fund may invest in securities of companies in countries with
emerging economies or securities markets ("Emerging Markets"). Investment in
Emerging Markets involves risks in addition to those generally associated with
investments in foreign securities. Political and economic structures in many
Emerging Markets may be undergoing significant evolution and rapid development,
and such countries may lack the social, political and economic stability
characteristics of more developed countries. As a result, the risks described
above relating to investments in foreign securities, including the risks of
nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the values of a Fund's
investments and the availability to a Fund of additional investments in such
Emerging Markets. The small size and inexperience of the securities markets in
certain Emerging Markets and the limited volume of trading in securities in
those markets may make a Fund's investments in such countries less liquid and
more volatile than investments in countries with more developed securities
markets (such as the U.S., Japan and most Western European countries).
To manage the currency risk accompanying investments in foreign
securities and to facilities the purchase and sale of foreign securities, each
Fund may engage in foreign currency transactions on a spot (cash) basis at the
spot rate prevailing in the foreign currency exchange market or through entering
into contracts to purchase or sell foreign currencies at a future date ("forward
foreign currency" contracts or "forward" contracts).
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are principally traded in the
inter-bank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement and no commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security ("transaction hedging"). By entering into a forward
contract for the purchase or sale of a fixed amount of U.S. dollars equal to the
amount of foreign currency involved in the underlying security transaction, the
Fund can protect itself against a possible loss, resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
B-17
<PAGE>
currency during the period between the date the security is purchased or sold
and the date on which the payment is made or received.
When the Adviser believes that a particular foreign currency may suffer
a substantial decline against the U.S. dollar, it may enter into a forward
contract to sell a fixed amount of the foreign currency approximating the value
of some or all of a Fund's portfolio securities denominated in such foreign
currency ("position hedging") The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult and the
successful execution of a short-term hedging strategy is highly uncertain. A
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the Fund
to deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency. Under normal
circumstances, the Adviser considers the long-term prospects for a particular
currency and incorporate the prospect into its overall long-term diversification
strategies. The Adviser believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
a Fund will be served.
At the maturity of a forward contract, a Fund may either sell the
portfolio securities and make delivery of the foreign currency, or it may retain
the securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of foreign currency.
If a Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a forward contract to sell the
foreign currency. Should forward prices decline during the period when the Fund
entered into the forward contract for the sale of a foreign currency and the
date it entered into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
Shareholders should note that: (1) foreign currency hedge transactions
do not protect against or eliminate fluctuations in the prices of particular
portfolio securities (i.e., if the price of such securities declines due to an
issuer's deteriorating credit situation); and (2) it is impossible to forecast
with precision the market value of securities at the expiration of a forward
contract. Accordingly, a Fund may have to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of a Fund's securities is less than the amount of the foreign currency upon
expiration of the contract.
B-18
<PAGE>
Conversely, a Fund may have to sell some of its foreign currency received upon
the sale of a portfolio security if the market value of the Fund's securities
exceed the amount of foreign currency the Fund is obligated to deliver. A Fund's
dealings in forward foreign currency exchange contracts will be limited to the
transactions described above.
Although the Funds value their assets daily in terms of U.S. dollars,
they do not intend to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. A Fund will do so from time to time and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Portfolio Turnover
See "Financial Highlights" in the Prospectus for information on the
past portfolio turnover rates of the Funds. As indicated in the Prospectus the
portfolio turnover of each of the Funds may vary significantly from year to
year. Such a variance was evidenced during the most recent three fiscal years
where portfolio turnover was substantially higher during the fiscal year ended
November 30, 1998 than in the fiscal years ended November 30, 1997 and November
30, 1996. Portfolio turnover was higher during the fiscal year ended November
30, 1998 than in the earlier fiscal years because the markets were more volatile
in such year prompting the Adviser to engage in more trading.
<TABLE>
<CAPTION>
MANAGEMENT
The Trustees and officers of the Trust are:
Principal occupations
Name and Address Age Position with Fund during past five years
<S> <C> <C> <C>
Joseph Lloyd McAdams, Jr.* 53 Chairman and Trustee Chairman of Pacific Income Advisers,
1299 Ocean Avenue Inc.; Chairman, Chief Executive
Suite 210 Officer and President of Syndicated
Santa Monica, CA 90401 Capital, Inc. Since March 1998, Mr.
McAdams has been Chairman of the
Board, President and Chief Executive
Officer of Anworth Mortgage Asset
Corporation, a real estate investment
trust.
John Michael Murphy* 57 Trustee President of Murphy Investment
2830 North Cabrillo Highway Management, Inc; President of
Half Moon Bay, CA 94019 Murenove, Inc., a newsletter publisher.
Ann Louise Marinaccio 59 Trustee Sales associate for Saks Fifth Avenue,
1 Norwood Road Short Hills, NJ.
Springfield, NJ 07081
- --------
* "Interested" trustee, as defined in the 1940 Act.
B-19
<PAGE>
Principal occupations
Name and Address Age Position with Fund during past five years
<S> <C> <C> <C>
Robert I. Weisberg 52 Trustee President of Fremont Medical Financial
612 Ridge Road Services, Inc. and Executive Vice
Tiburon, CA 94920 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 agent for Roland
1011 4th Street, #218 Land Realty since 1994; real estate
Santa Monica, CA 90403 sales agent for Prudential Realty from
1991-1994.
Heather U. Baines 57 President and Treasurer President and Chief Executive Officer
1299 Ocean Avenue of Pacific Income Advisers, Inc.
Suite 210 Since March, 1998 Ms. Baines has been
Santa Monica, CA 90401 Executive Vice President of Anworth
Mortgage Asset Corporation.
Pamela J. Watson 43 Vice President Vice President of Pacific Income
504 Larsson Street Advisers, Inc. since 1997; Chief
Manhattan Beach, CA 90266 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 Anworth Mortgage Asset
Corporation.
Kathie Hilton 51 Secretary Administrative Assistant for Pacific
1922 Ocean Avenue Income Advisers, Inc. since 1994;
Suite 210 prior thereto owner of Grizzly
Santa Monica, CA 90401 Products, a seafood distributor.
- --------
* "Interested" trustee, as defined in the 1940 Act.
</TABLE>
During the fiscal year ended November 30, 1998, the Trust paid its
Trustees who are not affiliated with any of the investment advisers to any of
the Monterey Mutual Funds or the Distributor fees aggregating $12,000. 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
also reimburses such Trustees for their reasonable travel expenses incurred in
attending meetings of the Board of Trustees. The Trust does not provide pension
or retirement benefits to its trustees and officers.
B-20
<PAGE>
<TABLE>
<CAPTION>
Pension &
Retirement Total
Benefits Compensation
Aggregate Accrued as Estimated Annual from Trust
Compensation Part of Fund Benefits upon Paid to
Name of Person, Position from Trust Expenses Retirement Trustees
- ------------------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Joseph Lloyd McAdams, Jr., 0 0 0 0
Chairman and Trustee
Ann Louise Marinaccio, Trustee $4,000 0 0 $4,000
Robert I. Weisberg, Trustee $4,000 0 0 $4,000
Beatrice Felix, Trustee $4,000 0 0 $4,000
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 Murphy New World Funds who as of December 31, 1998 beneficially owned more
than 5% of a Fund's then outstanding shares.
Technology Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, California 94104 13,066 14.45%
Steven H. & Anita H. Kaplan, Trustees
Kaplan Family Trust dated
April 13, 1986
P.O. Box 15
Sea Ranch, California 95497 5,700 6.30%
B-21
<PAGE>
Biotechnology Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
Gentleness, Ltd.
Lyford Cay
P.O. Box N-7776
Nassau, Bahamas 270,635 43.61%
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, California 94104 44,964 7.25%
Murenove, Inc.
P. O. Box 308
Half Moon Bay, California 94019 37,432 6.03%
Donaldson, Lufkin & Jenrette
Securities Corporation
P.O. Box 2052
Jersey City, New Jersey 07303 33,685 5.43%
Convertibles Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
James Lear
100 Bush Street #1000
San Francisco, California 94104 3,191 6.03%
Emil Wasil
14761 Indian Creek Drive
Middlebury Heights, Ohio 44130 2,997 5.67%
No other person owns of record or is known to the Trust to own beneficially 5%
or more of the outstanding securities of any of the Murphy New World Funds.
Gentleness, Ltd. "controls" (as that term is defined in the 1940 Act) the
Biotechnology Fund, but does not control the Trust. The shares owned by
Donaldson, Lufkin & Jenrette Securities Corporation are owned of record only.
B-22
<PAGE>
All trustees and officers of the Trust as a group beneficially own the
following securities of the Murphy New World Funds as of December 31 1998:
Name of Fund Number of Shares Percent of Class
Technology Fund 0 0
Biotechnology Fund 37,432* 6.03%
Convertibles Fund 1,984* 3.75%
- -------------------------
* Consists solely of shares owned by Murenove, Inc. which is controlled by
John Michael Murphy.
The Adviser and the Administrator
Murphy Investment Management, Inc. (formerly known as Negative Beta
Associates, Inc.) (the "Adviser") 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 the Adviser.
Prior to December 13, 1996, Monitrend Investment Management, Inc. ("MIMI") was
the investment adviser to the Technology Fund and the Adviser 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.
Under the investment advisory agreements applicable to the Murphy New
World Funds, the Adviser 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
Technology Fund 1.00% 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
Under the investment advisory agreements applicable to the Murphy New
World Funds, the Adviser is responsible for reimbursing each Fund to the extent
necessary to permit the Fund to maintain the expense limitations set forth
below. 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:
B-23
<PAGE>
Fund Expense Limitation
Technology Fund 1.99%*
Biotechnology Fund 1.99%*
Convertibles Fund 1.99%*
- -----------------
* Prior to December 1, 1998 the applicable expense limitation for each of
the Funds was 2.44%.
As a result of expense limitations, all investment advisory fees
otherwise payable by the Funds were waived and the following reimbursements were
made to the Funds:
Reimbursements in
Fund Fiscal Year End Fees Waived* Addition to Fee Waivers*
Technology Fund 1998 $12,250 $45,300
1997 $12,512 $58,801
1996 $ 5,774 $41,127
Biotechnology Fund 1998 $34,450 $12,118
1997 $11,584 $57,882
1996 $ 4,318 $39,312
Convertibles Fund 1998 $ 8,227 $50,557
1997 $ 9,617 $57,525
1996 $ 9,258 $33,053
- ---------------------------
* Prior to December 1, 1998 the applicable expense limitation for each of
the Funds was 2.44%.
Each Fund's investment advisory agreement provides that the Adviser
shall not be liable to the Fund in question for any error of judgment by the
Adviser or for any loss sustained by that Fund except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
American Data Services, Inc., a corporation organized under the laws of
the State of New York (the "Administrator"), administers the day to day
operations of each Fund and serves as fund accountant to each Fund, subject to
the overall supervision of the Trust's Board of Trustees. The Administrator
maintains each Fund's books and records, other than those records maintained by
the Fund's custodian, oversees the Trust's insurance relationships, participates
in the preparation of tax returns, proxy statements and reports, prepares
documents necessary for the maintenance of the Trust's registration with the
various states, responds or oversees the response to communications from
shareholders and broker-dealers, oversees relationships between the Trust and
its custodian and calculates each Fund's net asset value. For its services as
administrator and fund accountant, the Administrator is paid a fee, computed
daily and paid monthly, by each Fund at the rate of 0.10% per year of the
average daily net assets of that Fund, subject to a minimum monthly fee of
approximately $1,072 per Fund.
B-24
<PAGE>
During the fiscal years ended November 30, 1998, November 30, 1997 and
November 30, 1996, the Administrator received the following fees from the Murphy
New World Funds for administration and fund accounting services:
Fund 1996 1997 1998
- ---- ---- ---- ----
Technology Fund $16,238 $16,418 $19,920
Biotechnology Fund $15,841 $16,963 $18,368
Convertibles Fund $14,407 $18,081 $18,472
Portfolio Transactions and Brokerage
Under each Fund's investment advisory agreement, the Adviser 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 Adviser are subject to the control of the Trust's Board of
Trustees, as are all of the activities of the Adviser under the investment
advisory agreements.) The primary consideration of the Adviser 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 each of
the Murphy New World Funds may be transacted with primary market makers acting
as principal on a net basis, with no brokerage commissions being paid by the
Funds. Such principal transactions may, however, result in a profit to market
makers. In certain instances the Adviser may make purchases of underwritten
issues for a Fund at prices which include underwriting fees.
In selecting a broker-dealer to execute each particular transaction,
the Adviser will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the
broker-dealer; 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 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 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 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 Adviser's overall responsibilities with respect to
the Trust or other accounts for which the Adviser has investment discretion. The
Adviser is 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 Adviser or any
B-25
<PAGE>
affiliate of the foregoing. Such allocation shall be in such amounts and
proportions as the Adviser shall determine and the 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 Adviser is 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 Adviser to direct
brokerage to Syndicated Capital, Inc., the Distributor of each of the Funds, but
only if it reasonably believes 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.
During the fiscal years ended November 30, 1996, 1997 and 1998 the
Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Technology Fund
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Commissions Paid to Distributor $0 $198 $0
Total Commissions Paid $5,204 $4,286 $3,775
% Paid to Distributor N/A 4.62% N/A
Total Dollar Amount of Transactions on which Commissions
Were Paid to Distributor $0 $80,016 $0
Total Dollar Amount of Transactions on Which Commissions
Were Paid $641,554 $903,285 $1,089,484
% of Transactions Involving Commission Payments to
Distributor N/A 8.86% N/A
Biotechnology Fund
1996 1997 1998
---- ---- ----
Commissions Paid to Distributor $0 $0 $0
Total Commissions Paid $1,140 $4,424 $3,421
% Paid to Distributor N/A N/A N/A
Total Dollar Amount of Transactions on which
Commissions Were Paid to Distributor $0 $0 $0
Total Dollar Amount of Transactions on Which Commissions
Were Paid $274,835 $1,177,748 $6,624,410
% of Transactions Involving Commission Payments to
Distributor N/A N/A N/A
B-26
<PAGE>
Convertibles Fund
1996 1997 1998
---- ---- ----
Commissions Paid to Distributor $122 $152 $0
Total Commissions Paid $9,158 $4,286 $445
% Paid to Distributor 1.33% 3.55% N/A
Total Dollar Amount of Transactions on which Commissions
Were Paid to Distributor $48,211 $33,370 $0
Total Dollar Amount of Transactions on Which Commissions
Were Paid $2,368,740 $1,507,979 $120,541
% of Transactions Involving Commission Payments to
Distributor 2.04% 2.21% N/A
</TABLE>
All of the brokers to whom commissions were paid (other than the
Distributor) provided research services to the Adviser. 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 ideas and information
assisting the Funds in the valuation of their investments.
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
B-27
<PAGE>
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, 0.25% of the daily net assets of any of the Murphy New World Funds 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 Trust will reimburse
the Distributor from the assets of the Trust for such Permitted Payments within
such limit, but either the Distributor or the Adviser 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 0.25% of the daily net assets of any of the
Murphy New World Funds in such year and either the Distributor or the Adviser
shall bear any such expenses beyond such limit. 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
B-28
<PAGE>
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 shares of the Murphy New World Funds are expected to exceed
the sum of Permitted Payments and Permitted Expenses ("Excess Distribution
Costs") and that the profits, if any, of the Adviser are dependent primarily on
the advisory fees paid by the Funds. If and to the extent that any investment
advisory fees paid by a 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 each of the Technology Fund, the Biotechnology Fund and the Convertibles Fund
during the fiscal year ended November 30, 1998 were as set forth below:
<TABLE>
<CAPTION>
Reimbursement of Expenses Incurred
Payments to Qualified Recipients by Distributor
(Permitted Payments) (Permitted Expenses)
<S> <C> <C>
Technology Fund $2,560 $502
Biotechnology Fund $8,170 $442
Convertibles Fund $2,476 $ 88
</TABLE>
B-29
<PAGE>
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
The net asset value of each of the Funds will be determined as of the
close of regular trading (4:00 P.M. Eastern Time) on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for trading
Monday through Friday except New Year's Day, Dr. Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period. Each Fund's net asset value is equal to the quotient
obtained by dividing the value of its net assets (its assets less its
liabilities) by the number of shares outstanding.
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 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.
B-30
<PAGE>
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.
The Funds price foreign securities in terms of U.S. dollars at the
official exchange rate. Alternatively, they may price these securities at the
average of the current bid and asked price of such currencies against the dollar
last quoted by a major bank that is a regular participant in the foreign
exchange market, or on the basis of a pricing service that takes into account
the quotes provided by a number of such major banks. If the Funds do not have
either of these alternatives available to them or the alternatives do not
provide a suitable method for converting a foreign currency into U.S. dollars,
the Board of Trustees in good faith will establish a conversion rate for such
currency.
Generally, U.S. government securities and other fixed income securities
complete trading at various times prior to the close of the New York Stock
Exchange. For purposes of computing net asset value, the Funds use the market
value of such securities as of the time their trading day ends. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the New York Stock Exchange, which events will not be reflected in
the computation of a Fund's net asset value. It is currently the policy of the
Funds that events affecting the valuation of Fund securities occurring between
such times and the close of the New York Stock Exchange, even if material, will
not be reflected in such net asset value.
Foreign securities trading may not take place on all days when the New
York Stock Exchange is open, or may take place on Saturdays and other days when
the New York Stock Exchange is not open and a Fund's net asset value is not
calculated. When determining net asset value, the Funds value foreign securities
primarily listed and/or traded in foreign markets at their market value as of
the close of the last primary market where the securities traded. Securities
trading in European countries and Pacific Rim countries is normally completed
well before 4:00 P.M. Eastern Time. It is currently the policy of the Funds that
events affecting the valuation of Fund securities occurring between the time its
net asset value is determined and the close of the New York Stock Exchange, even
if material, will not be reflected in such net asset value.
B-31
<PAGE>
Each Fund reserves the right to suspend or postpone redemptions during
any period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission, or that the Exchange is
closed for other than customary weekend and holiday closings; (b) the Securities
and Exchange Commission has by order permitted such suspension; or (c) an
emergency, as determined by the Securities and Exchange Commission, exists,
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable.
SHAREHOLDER SERVICES
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 net asset value. 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.
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.
B-32
<PAGE>
TAXES
General
The Funds intend to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The discussion that follows is
not intended to be a full discussion of present or proposed federal income tax
laws and the effect of such laws on an investor. Investors are urged to consult
with their tax advisers for a complete review of the tax ramifications of an
investment in the Funds.
If a Fund fails to qualify as a regulated investment company under
Subchapter M in any fiscal year, it will be treated as a corporation for federal
income tax purposes. As such that Fund would be required to pay income taxes on
its net investment income and net realized capital gains, if any, at the rates
generally applicable to corporations. Shareholders in a Fund that did not
qualify as a regulated investment company under Subchapter M would not be liable
for income tax on that Fund's net investment income or net realized gains in
their individual capacities. Distributions to shareholders, whether from that
Fund's net investment income or net realized capital gains, would be treated as
taxable dividends to the extent of current or accumulated earnings and profits
of that Fund.
Dividends from a Fund's net investment income, including short-term
capital gains, are taxable to shareholders as ordinary income, while
distributions of net capital gain are taxable as long-term capital gain
regardless of the shareholder's holding period for the shares. Such dividends
and distributions are taxable to shareholders whether received in cash or in
additional shares. The 70% dividends-received deduction for corporations will
apply to dividends from a Fund's net investment income, subject to proportionate
reductions if the aggregate dividends received by the Fund from domestic
corporations in any year are less than 100% of the distribution of net
investment company income taxable made by the Fund.
Any dividend or capital gain distribution paid shortly after a purchase
of shares of a Fund, will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution. Furthermore,
if the net asset value of the shares of a Fund immediately after a dividend or
distribution is less than the cost of such shares to the shareholder, the
dividend or distribution will be taxable to the shareholder even though it
results in a return of capital to him.
Redemption of shares will generally result in a capital gain or loss
for income tax purposes. Such capital gain or loss will be long term or short
term, depending upon the shareholder's holding period for the shares. However,
if a loss is realized on shares held for six months or less, and the investor
received a capital gain distribution during that period, then such loss is
treated as a long-term capital loss to the extent of the capital gain
distribution received.
B-33
<PAGE>
Rule 17a-7 Transactions
The Funds have adopted procedures pursuant to Rule 17a-7 under the 1940
Act pursuant to which each of the Funds may effect a purchase and sale
transaction with an affiliated person of the Funds (or an affiliated person of
such an affiliated person) in which a Fund issues its shares in exchange for
securities which are permitted investments for the Funds. For purposes of
determining the number of shares to be issued, the securities to be exchanged
will be valued in accordance with Rule 17a-7. Certain of the transactions may be
tax-free with the result that the Funds acquire unrealized appreciation. Most
Rule 17a-7 transactions will not be tax-free.
Taxation of Hedging Instruments
If a call option written by a Fund expires, the amount of the premium
received by the Fund for the option will be short-term capital gain. If a Fund
enters into a closing transaction with respect to the option, any gain or loss
realized by a Fund as a result of the transaction will be short-term capital
gain or loss. If the holder of a call option exercises the holder's right under
the option, any gain or loss realized by the Fund upon the sale of the
underlying security or futures contract pursuant to such exercise will be
short-term or long-term capital gain or loss to the Fund depending on the Fund's
holding period for the underlying security or futures contract, and the amount
of the premium received will be added to the proceeds of sale for purposes of
determining the amount of the capital gain or loss.
With respect to call options purchased by a Fund, the Fund will realize
short-term or long-term capital gain or loss if such option is sold and will
realize short-term or long-term capital loss if the option is allowed to expire
depending on the Fund's holding period for the call option. If such a call
option is exercised, the amount paid by a Fund for the option will be added to
the basis of the stock or futures contract so acquired.
A Fund may purchase or write options on stock indexes. Options on
"broadbased" stock indexes are generally classified as "nonequity options" under
the Code. Gains and losses resulting from the expiration, exercise or closing of
such nonequity options and on futures contracts will be treated as long-term
capital gain or loss to the extent of 60% thereof and short-term capital gain or
loss to the extent of 40% thereof (hereinafter "blended gain or loss") for
determining the character of distributions. In addition, nonequity options and
futures contracts held by a Fund on the last day of a fiscal year will be
treated as sold for market value ("marked to market") on that date, and gain or
loss recognized as a result of such deemed sale will be blended gain or loss.
The realized gain or loss on the ultimate disposition of the option will be
increased or decreased to take into consideration the prior marked to market
gains and losses.
The trading strategies of a Fund involving nonequity options on stock
indexes may constitute "straddle" transactions. "Straddles" may affect the
short-term or long-term holding period of such instruments for distributions
characterization.
B-34
<PAGE>
A Fund may acquire put options. Under the Code, put options on stocks
are taxed similar to short sales. If a Fund owns the underlying security or
acquires the underlying security before closing the option position, the
Straddle Rules may apply and the option positions may be subject to certain
modified short sale rules. If a Fund exercises or allows a put option to expire,
the Fund will be considered to have closed a short sale. A Fund will generally
have a short-term gain or loss on the closing of an option position. The
determination of the length of the holding period is dependent on the holding
period of the stock used to exercise that put option. If a Fund sells the put
option without exercising it, its holding period will be the holding period of
the option.
Foreign Taxes
Each of the Funds may be subject to foreign withholding taxes on income
and gains derived from its investments outside the U.S. Such taxes would reduce
the return on a Fund's investments. Tax treaties between certain countries and
the U.S. may reduce or eliminate such taxes. If more than 50% of the value of a
Fund's total assets at the close of any taxable year consist of stocks or
securities of foreign corporations, the Fund may elect, for U.S. federal income
tax purposes, to treat any foreign country income or withholding taxes paid by
the Fund that can be treated as income taxes under U.S. income tax principles,
as paid by its shareholders. For any year that a Fund makes such an election,
each of its shareholders will be required to include in his income (in addition
to taxable dividends actually received) his allocable share of such taxes paid
by the Fund and will be entitled, subject to certain limitations, to credit his
portion of these foreign taxes against his U.S. federal income tax due, if any,
or to deduct it (as an itemized deduction) from his U.S. taxable income, if any.
Generally, credit for foreign taxes is subject to the limitation that it may not
exceed the shareholder's U.S. tax attributable to his foreign source taxable
income.
If the pass through election described above is made, the source of a
Fund's income flows through to its shareholders. Certain gains from the sale of
securities and currency fluctuations will not be treated as foreign source
taxable income. In addition, this foreign tax credit limitation must be applied
separately to certain categories of foreign source income, one of which is
foreign source "passive income." For this purpose, foreign "passive income"
includes dividends, interest, capital gains and certain foreign currency gains.
As a consequence, certain shareholders may not be able to claim a foreign tax
credit for the full amount of their proportionate share of the foreign tax paid
by the Fund.
The foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If a Fund does not make the
pass through election described above, the foreign taxes it pays will reduce its
income and distributions by the Fund will be treated as U.S. source income.
Each shareholder will be notified within 60 days after the close of
each Fund's taxable year whether, pursuant to the election described above, the
foreign taxes paid by the Fund will be treated as paid by its shareholders for
that year and, if so, such notification will
B-35
<PAGE>
designate: (i) such shareholder's portion of the foreign taxes paid; and (ii)
the portion of the Fund's dividends and distributions that represent income
derived from foreign sources.
Back-up Withholding
Federal law requires the Funds to withhold 31% of a shareholder's
reportable payments (which include dividends, capital gains distributions and
redemption proceeds) for shareholders who have not properly certified that the
Social Security or other Taxpayer Identification Number they provide is correct
and that the shareholder is not subject to back-up withholding.
GENERAL INFORMATION
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. The
holders of shares have no preemptive or conversion rights.
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 all of the Monterey
Mutual Funds) each of which has separate assets and liabilities.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares) and may vote in the election of Trustees
and on other matters submitted to meetings of shareholders. It is not
contemplated that regular annual meetings of shareholders will be held. Rule
18f-2 under the 1940 Act provides that matters submitted to shareholders be
approved by a majority of the outstanding securities of each Fund, unless it is
clear that the interest of each Fund in the matter are identical or the matter
does not affect a Fund. However, the rule exempts the ratification of the
selection of accountants and the election of Trustees from the separate voting
requirements.
Income, direct liabilities and direct operating expenses of each Fund
will be allocated directly to each Fund, and general liabilities and expenses of
the Trust will be allocated among the Funds in proportion to the total net
assets of each Fund, on a pro rata basis among the Funds or as otherwise
determined by the Board of Trustees.
The By-Laws provide that the Trust's shareholders have the right, upon
the declaration in writing or vote of more than two-thirds of its outstanding
shares, to remove a Trustee. The Trustees will call a meeting of shareholders to
vote on the removal of a Trustee upon the written request of the record holders
of ten percent of the Trust's shares. In addition, ten shareholders holding the
lesser of $25,000 worth or one percent of the Trust's shares may advise the
Trustees in writing that they wish to communicate with other shareholders for
the
B-36
<PAGE>
purpose of requesting a meeting to remove a Trustee. The Trustees will then, if
requested by the applicants, mail at the applicants' expense the applicants'
communication to all other shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of more than
50% of its outstanding shares. The Trust may be terminated upon the sale of its
assets to another issuer, if such sale is approved by the vote of the holders of
more than 50% of the outstanding shares of each Fund, or upon liquidation and
distribution of its assets, if so approved. If not so terminated, the Trust will
continue indefinitely.
Shares of the Trust when issued are fully paid and non-assessable. The
Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for its acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust
and satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust such as the Trust to be held personally liable as a
partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations, which obligations are limited by the 1940 Act.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
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.
SALES CHARGES
(A sales charge was imposed on the sale of shares of the Murphy New
World Funds throughout the fiscal year ended November 30, 1996 and part of the
fiscal year ended November 30, 1997.) During the three fiscal years ended
November 30, 1998, the aggregate dollar amount of sales charges on the sales of
shares of the Murphy New World Funds and the amount retained by the Funds'
distributor were as follows:
B-37
<PAGE>
<TABLE>
<CAPTION>
Years Ended November 30
--------------------------------------------------------------------------
1996 1997 1998
----------- ------------- ------------ ----------- ----------- -----------
Sales Amount Sales Amount Sales Amount
Fund Charge Retained Charge Retained Charge Retained
---- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Technology Fund $ 3,372 $ 414 $ 373 $ 40 $ 0 $ 0
Biotechnology Fund $ 123 $ 44 $ 691 $ 75 $ 0 $ 0
Convertibles Fund $ 103 $ 12 $ 90 $ 10 $ 0 $ 0
</TABLE>
CALCULATION OF PERFORMANCE DATA
From time to time each of the Funds may quote its average annual total
return ("standardized return") in advertisements or promotional materials.
Advertisements and promotional materials reflecting standardized return
("performance advertisements") will show percentage rates reflecting the average
annual change in the value of an assumed initial investment in that Fund of
$1,000 at the end of one, five and ten year periods. If such periods have not
yet elapsed, data will be given as of the end of a shorter period corresponding
to the period of existence of the Fund. Standardized return assumes the
reinvestment of all dividends and capital gain distributions, but does not take
into account any federal or state income taxes that may be payable upon
redemption. The formula the Funds use in calculating standardized return is
described below.
In addition to standardized return, performance advertisements also may
include other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same or different periods as those
for which standardized return is quoted and may consist of aggregate or average
annual percentage rates of return, actual year by year rates or any combination
thereof.
All data included in performance advertisements will reflect past
performance and will not necessarily be indicative of future results. The
investment return and principal value of an investment in a Fund will fluctuate,
and an investor's proceeds upon redeeming Fund shares may be more or less than
the original cost of the shares.
The standardized returns of each of the Funds is set forth below:
Technology Fund
Average annual total return:
for the one-year period ended November 30, 1998: -28.51%
for the five-year period ended November 30, 1998: 1.47%
for the period October 20, 1993 - November 30, 1998: 1.20%
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Biotechnology Fund
Average annual total return:
for the one-year period ended November 30, 1998: -20.82%
for the five-year period ended November 30, 1998: -4.37%
for the period October 20, 1993 - November 30, 1998: -4.30%
Convertibles Fund
Average annual total return:
for the one-year period ended November 30, 1998: -15.55%
for the five-year period ended November 30, 1998 5.60%
for the ten-year period ended November 30, 1998: 4.02%
Average total return is calculated according to the following formula:
P(1+T)n=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 (none) 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 foregoing information reflects
expense reimbursements made to the Funds.
DESCRIPTION OF SECURITIES RATINGS
Each of the Funds may invest in securities rated by Standard & Poor's
Corporation (Standard & Poor's) or by Moody's Investors Service, Inc.
("Moody's"). A brief description of the rating 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".
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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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o 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.
STANDARD & POOR'S RATINGS FOR CORPORATE BONDS
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, Debt rated "BB," "B,", "CCC," "CC" and "C" is regarded as having
CCC. predominantly speculative characteristics with respect to capacity to
CC, C pay interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposure to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
would lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BBB" or "BBB-"
rating.
B Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
CC The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" or "CCC-" rating.
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C The rating "C" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CC" or "CC-" debt rating. The
"C" rating may be used to cover a situation where bankruptcy petition
has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized. MOODY'S
RATINGS FOR BONDS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rate Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
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B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
many be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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MONTEREY MUTUAL FUND
Statement of Additional Information dated March 31, 1999
For the Monterey Investors Funds
CAMBORNE GOVERNMENT INCOME FUND
OCM GOLD FUND
PIA EQUITY FUND
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the Prospectus dated March 31, 1999 of
Monterey Mutual Fund (the "Trust") relating to the Monterey Investors Funds. The
Monterey Investors Funds are the Camborne Government Income Fund (the
"Government Fund"), the OCM Gold Fund (the "Gold Fund") and the PIA Equity Fund
(the "Equity Fund"). 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.
The following financial statements are incorporated by reference to the
Annual Report, dated November 30, 1998, of Monterey Mutual Fund (File No.
811-4010) as filed with the Securities and Exchange Commission on January 28,
1999.
Schedule of Investments
Camborne Government Income Fund
OCM Gold Fund
PIA Equity Fund
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Independent Auditors Report
Shareholders may obtain a copy of the Annual Report, without charge, by
calling (800) 251-1970.
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TABLE OF CONTENTS
Page
FUND HISTORY AND CLASSIFICATION 4
Investment Restrictions 4
Illiquid Securities 6
Lending Portfolio Securities 6
Hedging Instruments 7
Options on Securities 7
Stock Index Options 9
Stock Index Futures and Debt Futures 9
Options on Stock Index Futures and Debt Futures 11
Possible CFTC Limitations on Portfolio and Hedging Strategies 11
Special Risks of Hedging Strategies 11
Limitations on Options and Futures 12
Temporary Investments 12
U.S. Government Securities and Mortgage-Backed Securities 13
Depository Receipts 17
Foreign Securities 18
When Issued and Delayed-Delivery Securities 20
Portfolio Turnover 21
MANAGEMENT 22
PIA, OCM, Camborne and the Administrator 25
Portfolio Transactions and Brokerage 28
Distribution Plan 30
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NET ASSET VALUE 33
SHAREHOLDER SERVICES 35
TAXES 38
General 38
Rule 17a-7 Transactions 39
Taxation of Hedging Instruments 39
Back-up Withholding 41
GENERAL INFORMATION 41
SALES CHARGES 43
CALCULATION OF PERFORMANCE DATA 43
DESCRIPTION OF SECURITIES RATINGS 45
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FUND HISTORY AND CLASSIFICATION
Monterey Mutual Fund (the "Trust") is an open-end management investment
company consisting of nine separate portfolios. This Statement of Additional
Information provides information on three of the portfolios, the Monterey
Investors Funds. Of the Monterey Investors Funds, the Government Fund is
diversified and the Gold Fund and Equity Fund are non-diversified. Monterey
Mutual Fund was organized as a Massachusetts business trust on January 6, 1984.
Prior to December 27, 1996 the Trust was known as "Monitrend Mutual Fund." The
Government Fund was called the "PIA Monitrend Government Fund" prior to December
13, 1996. The Gold Fund was called the "Monitrend Gold Fund" prior to December
13, 1996. The Equity Fund was called the "Monitrend Growth Fund" prior to
December 20, 1996.
Investment Restrictions
The Trust has adopted the following restrictions applicable to the
Monterey Investors Funds 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
and the Equity Fund may be invested without regard to this restriction and 25%
of the total assets of the 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
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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).
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.
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. (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 or real estate or interests in real estate (including limited
partnership interests). For purposes of this restriction, Mortgage-Backed
Securities are not considered real estate or interests in real estate.
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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 Gold 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 Gold Fund.
Illiquid Securities
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 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; (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 the Funds' investment advisers 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 the
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.
Lending Portfolio Securities
The Gold Fund may, to increase its income, lend its securities on a
short- or long-term basis to brokers, dealers and financial institutions if (i)
the loan is collateralized in accordance with applicable regulatory guidelines
(the "Guidelines") and (ii) after any loan, the value of the securities loaned
does not exceed 25% of the value of its total assets. Under the present
Guidelines (which are subject to change) the loan collateral must be, on each
business day, at least equal to the value of the loaned securities and must
consist of cash, bank letters of credit or U.S. Government securities. To be
acceptable as collateral, a letter of credit must obligate a bank to pay amounts
demanded by the Gold Fund if the demand meets the terms of
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the letter of credit. Such terms and the issuing bank would have to be
satisfactory to the Gold Fund. Any loan might be secured by any one or more of
the three types of collateral.
The Gold Fund receives amounts equal to the interest or other
distributions on loaned securities and also receives one or more of the
negotiated loan fees, interest on securities used as collateral or interest on
the securities purchased with such collateral, either of which type of interest
may be shared with the borrower. The Gold Fund may also pay reasonable finder's,
custodian's and administrative fees but only to persons not affiliated with the
Trust. The Gold Fund will not have the right to vote securities on loan, but the
terms of the loans will permit the Gold Fund to terminate the loan and thus
reacquire the loaned securities on three days notice.
The primary risk in securities lending is a default by the borrower
during a sharp rise in price of the borrowed security resulting in a deficiency
in the collateral posted by the borrower. The Gold Fund will seek to minimize
this risk by requiring that the value of the securities loaned be computed each
day and additional collateral be furnished each day if required.
Hedging Instruments
Each of the Funds may engage in hedging. Hedging may be used in an
attempt to (i) protect against declines or possible declines in the market
values of securities held in a Fund's portfolio ("short hedging") or (ii)
establish a position in the securities markets as a substitute for purchase of
individual securities ("long hedging"). A Fund so authorized may engage in short
hedging in an attempt to protect that Fund's value against anticipated downward
trends in the securities markets or engage in long hedging as a substitute for
the purchase of securities, which may then be purchased in an orderly fashion.
It is expected that when a Fund is engaging in long hedging, it would, in the
normal course, purchase securities and terminate the hedging position, but under
unusual market conditions such a hedging position may be terminated without the
corresponding purchase of securities. The various hedging instruments which the
Funds may use are discussed below.
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
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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.
Call Options on Securities. 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.
All call options written by the Funds must be "covered." For a call to be
"covered" (i) the Fund must own the underlying security or have an absolute and
immediate right to acquire that security without payment of additional cash
consideration; (ii) the Fund must maintain in a segregated account cash or
liquid securities adequate to purchase the security; or (iii) any combination of
(i) or (ii).
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.
Put Options on Securities. 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 investment below the
exercise price by having the right to sell the investment through the exercise
of the put. None of the Funds may write put options.
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Stock Index Options
Options on stock indices are based on the same principles as options on
securities, described above. The main difference is that the underlying
instrument is a stock index, rather than an individual security.. 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 the Equity Fund's portfolio, PIA 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 Equity Fund's
portfolio. (The Government Fund and the Gold Fund may not invest in stock index
options.)
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 Equity Fund's portfolio may
decline between the time that a call written by the Equity 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 Equity 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 the Equity Fund holds an index option
and chooses to exercise it, the level of the underlying index may change between
the time the Equity Fund exercises the option and the market closing. All calls
on stock indices written by the Equity Fund must be covered.
Stock Index Futures and Debt Futures
The Equity Fund, but not the Government Fund or the Gold Fund, may
invest in futures contracts on stock indices ("Stock Index Futures") and options
on Stock Index Futures. The Government Fund, but not the Gold Fund or the Equity
Fund, may invest in futures contracts on debt securities ("Debt Futures") or
options on 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
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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. Each Fund will set aside in a segregate account
cash or liquid securities sufficient to cover its obligations under each futures
contract that it has entered into.
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.
B-10
<PAGE>
Options on Stock Index Futures and Debt Futures
Options on Futures are similar to options on securities, except that
the related investment is not a security, 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.
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.
Special Risks of Hedging Strategies
Participation in the options or futures markets involves investment
risks and transactions costs to which a Fund would not be subject absent the use
of these strategies. In particular, the loss from investing in futures contracts
is potentially unlimited. If PIA's prediction of movements in the direction of
the securities and interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of futures contracts and
options on futures contracts include: (1) dependence on PIA's ability to predict
correctly movements in the direction of interest rates, securities prices and
currency markets; (2) imperfect correlation between the price of options and
futures contracts and options thereon and movements in the prices of the
securities being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; and (4) the
possible absence of a liquid secondary market for any particular instrument at
any time.
B-11
<PAGE>
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 PIA 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.
Temporary Investments
Each Fund may invest in cash and money market securities. The Gold and
Equity Funds may do so when taking a temporary defensive position and all Funds
may do so to have assets available to pay expenses, satisfy redemption requests
or take advantage of investment opportunities. Money market securities include
Treasury Bills, short-term investment-grade fixed-income securities, bankers'
acceptances, commercial paper, commercial paper master notes and repurchase
agreements.
The Funds may invest in commercial paper or commercial paper master
notes rated, at the time of purchase, within the two highest rating categories
by a nationally recognized securities rating organization (NSRO).
Each Fund may enter into repurchase agreements. A repurchase agreement
transaction occurs when, at the time a Fund purchases a security, that Fund
agrees to resell it to the vendor (normally a commercial bank or a
broker-dealer) on an agreed upon date in the future. Such securities are
referred to as the "Resold Securities". Each 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.
B-12
<PAGE>
U.S. Government Securities and Mortgage-Backed 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
B-13
<PAGE>
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 affected 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 investment characteristics of adjustable and fixed rate
Mortgage-Backed Securities differ from those of traditional fixed income
securities. The major differences include the payment of interest and principal
on Mortgage-Backed Securities on a more frequent (usually monthly) schedule, and
the possibility that principal may be prepaid at any time due to prepayments on
the underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. As a result, if the Government Fund
purchases Mortgage-Backed Securities at a premium, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
Conversely, if the Government Fund purchases Mortgage-Backed Securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity and market value.
Prepayments on a pool of mortgage loans are influenced by a variety of
factors, including economic conditions, changes in mortgagors' housing needs,
job transfer, unemployment, mortgagors' net equity in the mortgage properties
and servicing decisions. The timing and level of prepayments cannot be
predicted. Generally, however, prepayments on adjustable rate mortgage loans and
fixed rate mortgage loans will increase during a period of falling mortgage
interest rates and decrease during a period of rising mortgage interest rates.
Accordingly, the amounts of prepayments available for reinvestment by the
Government Fund are likely to be greater during a period of declining mortgage
interest rates. If general interest rates also decline, such prepayments are
likely to be reinvested at lower interest rates than the Government Fund was
earning on the Mortgage-Backed Securities that were prepaid.
Certain of the mortgage loans underlying the Mortgage-Backed Securities
in which the Funds may invest will be adjustable rate mortgage loans ("ARMs").
ARMs eligible for inclusion in a mortgage pool will generally provide for a
fixed initial mortgage interest rate for a specified period of time. Thereafter,
the interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index
B-14
<PAGE>
Rate"). The adjusted rate would be equal to the Index Rate plus a gross margin,
which is a fixed percentage spread over the Index Rate established for each ARM
at the time of its origination.
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 or 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.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such
ARMs. Certain ARMs may also be subject to limitations on the maximum amount by
which the Mortgage Interest Rate may adjust for any single adjustment period
(the "Maximum Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may
provide instead or as well for limitations on changes in the monthly payment on
such ARMs. Limitations on monthly payments can result in monthly payments which
are greater or less than the amount necessary to amortize a Negatively
Amortizing ARM by its maturity at the Mortgage Interest Rate in effect in any
particular month. In the event that a monthly payment is not sufficient to pay
the interest accruing on a Negatively Amortizing ARM, any such excess interest
is added to the principal balance of the loan, causing negative amortization,
and is repaid through future monthly payments. It may take borrowers under
Negatively Amortizing ARMs longer periods of time to achieve equity and may
increase the likelihood of default by such borrowers. In the event that a
monthly payment exceeds the sum of the interest accrued at the applicable
Mortgage Interest Rate and the principal payment which would have been necessary
to amortize the outstanding principal balance over the remaining term of the
loan, the excess (or "accelerated amortization") further reduces the principal
balance of the ARM. Negatively Amortizing ARMs do not provide for the extension
of their original maturity to accommodate changes in their Mortgage Interest
Rate. As a result, unless there is a periodic recalculation of the payment
amount (which there generally is), the final payment may be substantially larger
than the other payments. These limitations on periodic increases in interest
rates and on changes in monthly payments protect borrowers from unlimited
interest rate and payment increases.
B-15
<PAGE>
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.
CMOs are issued in multiple classes. Each class of CMOs, often referred
to as a "tranche," is issued at a specific adjustable or fixed interest rate and
must be fully retired no later than its final distribution date. Principal
prepayments on the mortgage loans or other assets ("Mortgage Assets") underlying
the CMOs may cause some or all of the class of CMOs to be retired substantially
earlier than their final distribution dates. Generally interest is paid or
accrued on all classes of CMOs on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs in various ways. In certain structures (known
as "sequential pay" CMOs), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs
in the order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs include, among others, "parallel pay"
CMOs. Parallel pay CMOs are those which are structured to apply principal
payments and prepayments of the Mortgage Assets to two or more classes
concurrently on a proportionate or disproportionate basis. These simultaneous
payments are taken into account in calculating the final distribution date of
each class.
The Government Fund may invest in stripped Mortgage-Backed U.S.
Government securities ("SMBS"). SMBS are usually structured with two classes
that receive different proportions of the interest and principal distributions
from a pool of Mortgage Assets. A common type of SMBS will have one class
receiving all of the interest from the Mortgage Assets, while the other class
will receive all of the principal. However, in some instances, one class will
receive some of the interest and most of the principal while the other class
will receive most of the interest and the remainder of the principal. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Government Fund may fail to fully recover its initial investment
in these securities. Certain SMBS may not be readily marketable and will be
considered illiquid for purposes of the Government Fund's limitation on
investments in illiquid securities. Whether SMBS are liquid or illiquid will be
determined in accordance with guidelines established by the Trust's Board of
Trustees. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yield on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields
B-16
<PAGE>
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
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.
Depository Receipts
The Gold and Equity Funds may invest in American Depository Receipts
("ADRs"). ADR facilities may be either "sponsored" or "unsponsored." While
similar, distinctions exist relating to the rights and duties of ADR holders and
market practices. A depository may establish an unsponsored facility without the
participation by or consent of the issuer of the deposited securities, although
a letter of non-objection from the issuer is often requested. Holders of
unsponsored ADRs generally bear all the costs of such facility, which can
include deposit and withdrawal fees, currency conversion fees and other service
fees. The depository of an unsponsored facility may be under no duty to
distribute shareholder communications from the issuer or to pass through voting
rights. Issuers of unsponsored ADRs are not obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation between
such information and the market value of the ADR. Sponsored facilities enter
into an agreement with the issuer that sets out rights and duties of the issuer,
the depository and the ADR holder. This agreement also allocates fees among the
parties. Most sponsored agreements also provide that the depository will
distribute shareholder notices, voting instruments and other communications.
Each of the Funds may invest in sponsored and unsponsored ADRs.
In addition to ADRs, the Gold and Equity Funds may hold foreign
securities in the form of American Depository Shares ("ADSs"), Global Depository
Receipts ("GDRs") and European Depository Receipts ("EDRs"), or other securities
convertible into foreign securities. These receipts may not be denominated in
the same currency as the underlying securities. Generally, American banks or
trust companies issue ADRs and ADSs, which evidence ownership of underlying
foreign securities. GDRs represent global offerings where an issuer issues two
securities simultaneously in two markets, usually publicly in a non-U.S. market
and privately in the U.S. market. EDRs (sometimes called Continental Depository
Receipts ("CDRs")) are similar to ADRs, but usually issued in Europe. Typically
issued by foreign banks or trust companies, EDRs and CDRs evidence ownership of
foreign securities. Generally, ADRs and ADSs in registered form trade in the
U.S. securities markets, GDRs in the U.S. and European markets, and EDRs and
CDRs (in bearer form) in European markets.
B-17
<PAGE>
Foreign Securities
Each Fund may invest in securities of foreign issuers, provided that
the Equity Fund may not invest more than 10% of its total assets in securities
of foreign issuers and the Government Fund may not invest more than 35% of its
total assets in securities of foreign issuers. There are risks in investing in
foreign securities. Foreign economies may differ from the U.S. economy;
individual foreign companies may differ from domestic companies in the same
industry; foreign currencies may be stronger or weaker than the U.S. dollar.
An investment may be affected by changes in currency rates and in
exchange control regulations, and the Funds may incur transaction costs in
exchanging currencies. For example, at times when the assets of a Fund are
invested in securities denominated in foreign currencies, investors can expect
that the value of such investments will tend to increase when the value of U.S.
dollars is decreasing against such currencies. Conversely, a tendency toward a
decline in the value of such investments can be expected when the value of the
U.S. dollar is increasing against such currencies.
Foreign companies are frequently not subject to accounting and
financial reporting standards applicable to domestic companies, and there may be
less information available about foreign issuers. Foreign stock markets have
substantially less volume than the New York Stock Exchange, and securities of
foreign issuers are generally less liquid and more volatile than those of
comparable domestic issuers. There is frequently less government regulation of
exchanges, broker-dealers and issuers than in the United States. Brokerage
commissions in foreign countries are generally fixed, and other transactions
costs related to securities exchanges are generally higher than in the United
States. In addition, investments in foreign countries are subject to the
possibility of expropriation, confiscatory taxation, political or social
instability or diplomatic developments that could adversely affect the value of
those investments.
Most foreign securities owned by the Funds are held by foreign
subcustodians that satisfy certain eligibility requirements. However, foreign
subcustodian arrangements are significantly more expensive than domestic
custody. In addition, foreign settlement of securities transactions is subject
to local law and custom that is not, generally, as well established or as
reliable as U.S. regulation and custom applicable to settlements of securities
transactions and, accordingly, there is generally perceived to be a greater risk
of loss in connection with securities transactions in many foreign countries.
The Gold Fund may invest in securities of companies in countries with
emerging economies or securities markets ("Emerging Markets"). Investment in
Emerging Markets involves risks in addition to those generally associated with
investments in foreign securities. Political and economic structures in many
Emerging Markets may be undergoing significant evolution and rapid development,
and such countries may lack the social, political and economic stability
characteristics of more developed countries. As a result, the risks described
above relating to investments in foreign securities, including the risks of
nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social
B-18
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developments may affect the values of the Gold Fund's investments and the
availability to the Gold Fund of additional investments in such Emerging
Markets. The small size and inexperience of the securities markets in certain
Emerging Markets and the limited volume of trading in securities in those
markets may make the Gold Fund's investments in such countries less liquid and
more volatile than investments in countries with more developed securities
markets (such as the U.S., Japan and most Western European countries).
To manage the currency risk accompanying investments in foreign
securities and to facilities the purchase and sale of foreign securities, each
Fund may engage in foreign currency transactions on a spot (cash) basis at the
spot rate prevailing in the foreign currency exchange market or through entering
into contracts to purchase or sell foreign currencies at a future date ("forward
foreign currency" contracts or "forward" contracts).
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are principally traded in the
inter-bank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement and no commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security ("transaction hedging"). By entering into a forward
contract for the purchase or sale of a fixed amount of U.S. dollars equal to the
amount of foreign currency involved in the underlying security transaction, the
Fund can protect itself against a possible loss, resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which the payment is made or received.
When an investment adviser believes that a particular foreign currency
may suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell a fixed amount of the foreign currency approximating
the value of some or all of a Fund's portfolio securities denominated in such
foreign currency ("position hedging") The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
The projection of short-term currency market movement is extremely difficult and
the successful execution of a short-term hedging strategy is highly uncertain. A
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the Fund
to deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency. Under normal
circumstances, the investment advisers consider the long-term prospects for a
particular currency and incorporate the prospect into their overall long-term
diversification strategies. The investment advisers believe
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that it is important to have the flexibility to enter into such forward
contracts when they determine that the best interests of a Fund will be served.
At the maturity of a forward contract, a Fund may either sell the
portfolio securities and make delivery of the foreign currency, or it may retain
the securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of foreign currency.
If a Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a forward contract to sell the
foreign currency. Should forward prices decline during the period when the Fund
entered into the forward contract for the sale of a foreign currency and the
date it entered into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
Shareholders should note that: (1) foreign currency hedge transactions
do not protect against or eliminate fluctuations in the prices of particular
portfolio securities (i.e., if the price of such securities declines due to an
issuer's deteriorating credit situation); and (2) it is impossible to forecast
with precision the market value of securities at the expiration of a forward
contract. Accordingly, a Fund may have to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of a Fund's securities is less than the amount of the foreign currency upon
expiration of the contract. Conversely, a Fund may have to sell some of its
foreign currency received upon the sale of a portfolio security if the market
value of the Fund's securities exceed the amount of foreign currency the Fund is
obligated to deliver. A Fund's dealings in forward foreign currency exchange
contracts will be limited to the transactions described above.
Although the Funds value their assets daily in terms of U.S. dollars,
they do not intend to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. A Fund will do so from time to time and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
When Issued and Delayed-Delivery Securities
To ensure the availability of suitable securities for its portfolio,
the Government Fund may purchase when-issued or delayed delivery securities.
When-issued transactions arise when securities are purchased by the Government
Fund with payment and delivery taking place
B-20
<PAGE>
in the future in order to secure what is considered to be an advantageous price
and yield to the Government Fund at the time of entering into the transaction.
When-issued securities represent securities that have been authorized but not
yet issued. The Fund may also purchase securities on a forward commitment or
delayed delivery basis. In a forward commitment transaction, the Government Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. The Government Fund is required to hold and maintain
in a segregated account until the settlement date, cash or other liquid assets
in an amount sufficient to meet the purchase price. Alternatively, the
Government Fund may enter into offsetting contracts for the forward sale of
other securities that it owns. The purchase of securities on a when-issued or
forward commitment basis involves a risk of loss if the value of the security to
be purchased declines prior to the settlement date. Although the Government Fund
would generally purchase securities on a when-issued or forward commitment basis
with the intention of actually acquiring securities for its portfolio, the
Government Fund may dispose of a when-issued security or forward commitment
prior to settlement if its investment adviser deems it appropriate to do so.
The Government Fund may enter into mortgage "dollar rolls" in which the
Government Fund sells Mortgage-Backed Securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar (same
type, coupon and maturity) securities on a specified future date. During the
roll period, the Government Fund forgoes principal and interest paid on the
Mortgage-Backed Securities. The Government Fund is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop") as well as by the interest earned on
the cash proceeds of the initial sale. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. The Government Fund will only enter into covered rolls.
Covered rolls are not treated as a borrowing or other senior security.
Portfolio Turnover
See "Financial Highlights" in the Prospectus for information on the
past portfolio turnover rates of the Funds. As indicated in the Prospectus the
portfolio turnover of each of the Funds may vary significantly from year to
year. Such a variance was evidenced during the most recent three fiscal years
where portfolio turnover was substantially lower for the Equity Fund during the
fiscal year ended November 30, 1996 than in the fiscal years ended November 30,
1997 and November 30, 1998. Portfolio turnover was lower in the fiscal year
ended November 30, 1996 than in the later fiscal years because the investment
approach of the Equity Fund's investment adviser during that year involved less
trading than that of its successor. The Equity Fund changed investment advisers
on December 13, 1996.
B-21
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
The Trustees and officers of the Trust are:
Principal occupations
Name and Address Age Position with Fund during past five years
<S> <C> <C> <C>
Joseph Lloyd McAdams, Jr.* 53 Chairman and Trustee Chairman of Pacific Income Advisers,
1299 Ocean Avenue Inc.; Chairman, Chief Executive
Suite 210 Officer and President of Syndicated
Santa Monica, CA 90401 Capital, Inc. Since March 1998, Mr.
McAdams has been Chairman of the
Board, President and Chief Executive
Officer of Anworth Mortgage Asset
Corporation, a real estate investment
trust.
John Michael Murphy* 57 Trustee President of Murphy Investment
2830 North Cabrillo Highway Management, Inc; President of
Half Moon Bay, CA 94019 Murenove, Inc., a newsletter publisher.
Ann Louise Marinaccio 59 Trustee Sales associate for Saks Fifth Avenue,
1 Norwood Road Short Hills, NJ.
Springfield, NJ 07081
Robert I. Weisberg 52 Trustee President of Fremont Medical Financial
612 Ridge Road Services, Inc. and Executive Vice
Tiburon, CA 94920 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 40 Trustee Real estate sales agent for Roland
1011 4th Street, #218 Land Realty since 1994; real estate
Santa Monica, CA 90403 sales agent for Prudential Realty from
1991-1994.
Heather U. Baines 57 President and Treasurer President and Chief Executive Officer
1299 Ocean Avenue of Pacific Income Advisers, Inc.
Suite 210 Since March, 1998 Ms. Baines has been
Santa Monica, CA 90401 Executive Vice President of Anworth
Mortgage Asset Corporation.
Pamela J. Watson 43 Vice President Vice President of Pacific Income
504 Larsson Street Advisers, Inc. since 1997; Chief
Manhattan Beach, CA 90266 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 Anworth Mortgage Asset
Corporation.
Kathie Hilton 51 Secretary Administrative Assistant for Pacific
1922 Ocean Avenue Income Advisers, Inc. since 1994;
Suite 210 prior thereto owner of Grizzly
Santa Monica, CA 90401 Products, a seafood distributor.
- --------
* Interested" trustee, as defined in the 1940 Act.
</TABLE>
B-22
<PAGE>
During the fiscal year ended November 30, 1998, the Trust paid its
Trustees who are not affiliated with any of the investment advisers to any of
the Monterey Mutual Funds or the Distributor fees aggregating $12,000. 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
also reimburses such Trustees for their reasonable travel expenses incurred in
attending meetings of the Board of Trustees. The Trust does not provide pension
or retirement benefits to its trustees and officers.
<TABLE>
<CAPTION>
Pension &
Retirement Total
Benefits Compensation
Aggregate Accrued as Estimated Annual from Trust
Compensation Part of Fund Benefits upon Paid to
Name of Person, Position from Trust Expenses Retirement Trustees
- ------------------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Joseph Lloyd McAdams, Jr., 0 0 0 0
Chairman and Trustee
Ann Louise Marinaccio, Trustee $4,000 0 0 $4,000
Robert I. Weisberg, Trustee $4,000 0 0 $4,000
Beatrice Felix, Trustee $4,000 0 0 $4,000
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>
B-23
<PAGE>
Set forth below are the names and addresses of all holders of shares of
the Monterey Investors Funds who as of December 31, 1998 beneficially owned more
than 5% of a Fund's then outstanding shares.
Government Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
Pacific Income Advisers, Inc.
1299 Ocean Avenue, Suite 210
Santa Monica, CA 90401 13,780 19.23%
Dora Elena Walker, Trustee
Hortense Daniel Evans Living Trust
Dated October 1, 1988
9431 Friendly Woods Lane
Whittier, California 90605 12,434 17.38%
Donaldson, Lufkin & Jenrette
Securities Corporation
P.O. Box 2052
Jersey City, New Jersey 07303 8,324 11.61%
Richard K. Moore and
Dorothy A. Moore
8 Lorraine Avenue
Binghamton, New York 13905 6,431 8.97%
Gold Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
Donaldson, Lufkin & Jenrette
Securities Corporation
P.O. Box 2052
Jersey City, New Jersey 07303 551,542 31.39%
B-24
<PAGE>
Equity Fund
Name and Address of Number of Shares Percent of Class
Beneficial Owner
Repub & Co.
c/o Imperial Trust Company
201 North Figueroa Street #610
Los Angeles, California 90012 58,548 43.65%
Pacific Income Advisers, Inc.
1299 Ocean Avenue, Suite 210
Santa Monica, California 90401 10,520* 7.84%
No other person owns of record or is known to the Trust to own beneficially 5%
or more of the outstanding securities of any of the Monterey Investors Funds.
The shares owned by Donaldson, Lufkin & Jenrette Securities Corporation 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 December 31 1998:
Name of Fund Number of Shares Percent of Class
Government Fund 13,780* 19.23%
Gold Fund 0 0
Equity Fund 10,520* 7.84%
- -------------------------
* Consists solely of shares owned by Pacific Income Advisers, Inc. which is
controlled by Joseph Lloyd McAdams, Jr. and Heather U. Baines.
PIA, OCM, Camborne and the Administrator
Pacific Income Advisers, Inc. ("PIA") is the investment adviser to the
Government Fund and the Equity 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 the investment adviser
to the Equity Fund and manager to the Government Fund. Prior to December 13,
1996, Robert L. Bender, Inc. was sub-adviser to the Equity Fund.
Orrell Capital Management, a division of Orrell and Company, Inc.
("OCM"), is the investment adviser to the Gold Fund. Gregory M. Orrell is the
President and sole shareholder of OCM. Prior to December 13, 1996, MIMI was the
investment adviser to the Gold Fund and from January 31, 1991 to August 17, 1994
was the sub-adviser to the Gold
B-25
<PAGE>
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 Monterey
Investors 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
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
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
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 Monterey
Investors 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 below. 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:
B-26
<PAGE>
Fund Expense Limitation
Government Fund 1.10%
Gold Fund 2.44%
Equity Fund 1.80%*
- ----------------
* For the fiscal years ending November 30, 1996, 1997, and 1998 the
applicable expense limitations were 2.14%, 2.43% and 2.25%, respectively.
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.
As a result of expense limitations, all (except where
indicated) investment advisory, sub-advisory and management fees otherwise
payable by the Funds were waived and the following reimbursements were made to
the Funds:
<TABLE>
<CAPTION>
Reimbursements in
Fiscal Year Addition to Fee
Fund End Total Fees Fees Waived Fees Retained Waivers
<S> <C> <C> <C> <C> <C>
Government Fund 1998 $ 4,406 $ 4,406 $0 $35,547
1997 $ 3,896 $ 3,896 $0 $53,280
1996 $ 3,924 $ 3,924 $0 $41,485
Gold Fund 1998 $57,341 $50,546 $6,795 $0
1997 $17,249 $17,249 $0 $40,332
1996 $12,617 $12,617 $0 $35,235
Equity Fund 1998 $33,406 $33,406 $0 $ 2,346
1997 $14,391 $14,391 $0 $47,468
1996 $ 5,136 $ 5,136 $0 $43,620
</TABLE>
All reimbursements made with respect to the Government Fund and the Equity Fund
were made by PIA. All reimbursements made with respect to the Gold Fund were
made by OCM. Camborne reimbursed PIA for the reimbursements PIA made to the
Government Fund.
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 willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
American Data Services, Inc., a corporation organized under the laws of
the State of New York (the "Administrator"), administers the day to day
operations of each Fund and serves as fund accountant to each Fund, subject to
the overall supervision of the Trust's Board of Trustees. The Administrator
maintains each Fund's books and records, other than
B-27
<PAGE>
those records maintained by the Fund's custodian, oversees the Trust's insurance
relationships, participates in the preparation of tax returns, proxy statements
and reports, prepares documents necessary for the maintenance of the Trust's
registration with the various states, responds or oversees the response to
communications from shareholders and broker-dealers, oversees relationships
between the Trust and its custodian and calculates each Fund's net asset value.
For its services as administrator and fund accountant, the Administrator is paid
a fee, computed daily and paid monthly, by each Fund at the rate of 0.10% per
year of the average daily net assets of that Fund, subject to a minimum monthly
fee of approximately $1,072 per Fund.
During the fiscal years ended November 30, 1998, November 30, 1997 and
November 30, 1996, the Administrator received the following fees from the
Monterey Investors Funds for administration and fund accounting services:
Fund 1996 1997 1998
- ---- ---- ---- ----
Government Fund $15,582 $15,585 $14,473
Gold Fund $16,325 $16,848 $19,300
Equity Fund $15,637 $16,848 $15,210
Portfolio Transactions and Brokerage
Under each of the investment advisory agreements applicable to the
Monterey Investors Funds, 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 each of the Funds may be transacted with primary
market makers acting as principal on a net basis, with no brokerage commissions
being paid by the Funds. 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 a 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-dealer; 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
B-28
<PAGE>
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 advisers
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 advisers 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.
The Government Fund did not pay any brokerage commissions during the
three fiscal years ended November 30, 1998.
During the fiscal years ended November 30, 1996, 1997 and 1998 the Gold
Fund and the Equity Fund paid brokerage commissions as follows:
B-29
<PAGE>
<TABLE>
<CAPTION>
Gold Fund
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Commissions Paid to Distributor $510 $120 $0
Total Commissions Paid $15,230 $8,709 $34,868
% Paid to Distributor 3.34% 1.38% N/A
Total Dollar Amount of Transactions on which Commissions $81,313 $64,125 $0
Were Paid to Distributor
Total Dollar Amount of Transactions on Which Commissions $1,703,604 $1,385,499 $5,663,990
WerePaid
% of Transactions Involving Commission Payments to 4.77% 4.63% N/A
Distributor
Equity Fund
1996 1997 1998
---- ---- ----
Commissions Paid to Distributor $0 $0 $0
Total Commissions Paid $1,452 $7,782 $13,624
% Paid to Distributor N/A N/A N/A
Total Dollar Amount of Transactions on which Commissions $0 $0 $0
Were Paid to Distributor
Total Dollar Amount of Transactions on Which Commissions Were $443,143 $3,445,213 $7,821,226
Paid
% of Transactions Involving Commission Payments to N/A N/A N/A
Distributor
</TABLE>
All of the brokers to whom commissions were paid (other than the Distributor)
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 ideas and information
assisting the Fund in the valuation of its investments.
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
B-30
<PAGE>
(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, 0.10% of the daily net assets of the Government Fund, 0.99% of the
daily net assets of the Gold Fund and 0.25% of the daily net assets of the
Equity Fund; 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 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 of PIA or OCM 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
B-31
<PAGE>
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 0.10% of the daily net assets of the Government Fund, 0.99% of the daily
net assets of the Gold Fund, and 0.25% of the daily net assets of the Equity
Fund and either the Distributor or one or more of PIA or OCM shall bear any such
expenses beyond such limit. 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 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 shares of the Monterey Investors Funds are expected to
exceed the sum of Permitted Payments, Permitted Expenses and the portions of
sales charges on shares of the Monterey Investors Funds retained by the
Distributor ("Excess Distribution Costs") and that the profits, if any, of PIA
and OCM are dependent primarily on the advisory fees paid by the Funds. If and
to the extent that any investment advisory fees paid by a 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
B-32
<PAGE>
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 and the Equity Fund during the fiscal year
ended November 30, 1998 were as set forth below:
Payments to Qualified Reimbursements of Expenses
Recipients Incurred by Distributor
(Permitted Payments) (Permitted Expenses)
Government Fund $ 577 $ 524
Gold Fund $42,941 $13,526*
Equity Fund $ 7,568 $ 782
- -----------------
* Includes $13,000 the Distributor paid to a third-party broker-dealer for
expenses it incurred.
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
The net asset value of each of the Funds will be determined as of the
close of regular trading (4:00 P.M. Eastern Time) on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for trading
Monday through Friday except New Year's Day, Dr. Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period.
B-33
<PAGE>
Each Fund's net asset value is equal to the quotient obtained by
dividing the value of its net assets (its assets less its liabilities) by the
number of shares outstanding. Each Fund's offering price is equal to the sum
obtained by adding the applicable sales charge or load to the net asset value.
The excess of the offering price over the net amount invested is paid to the
Distributor, each Fund's principal underwriter.
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 advisers 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.
The Funds price foreign securities in terms of U.S. dollars at the
official exchange rate. Alternatively, they may price these securities at the
average of the current bid and asked price of such currencies against the dollar
last quoted by a major bank that is a regular participant in the foreign
exchange market, or on the basis of a pricing service that takes into account
the quotes provided by a number of such major banks. If the Funds do not have
either of these alternatives available to them or the alternatives do not
provide a suitable method for converting a foreign currency into U.S. dollars,
the Board of Trustees in good faith will establish a conversion rate for such
currency.
B-34
<PAGE>
Generally, U.S. Government securities and other fixed income securities
complete trading at various times prior to the close of the New York Stock
Exchange. For purposes of computing net asset value, the Funds use the market
value of such securities as of the time their trading day ends. Occasionally,
events affecting the value of such securities may occur between such times and
the close of the New York Stock Exchange, which events will not be reflected in
the computation of a Fund's net asset value. It is currently the policy of the
Funds that events affecting the valuation of Fund securities between such times
and the close of the New York Stock Exchange, even if material, will not be
reflected in such net asset value.
Foreign securities trading may not take place on all days when the New
York Stock Exchange is open, or may take place on Saturdays and other days when
the New York Stock Exchange is not open and a Fund's net asset value is not
calculated. When determining net asset value, the Funds value foreign securities
primarily listed and/or traded in foreign markets at their market value as of
the close of the last primary market where the securities traded. Securities
trading in European countries and Pacific Rim countries is normally completed
well before 4:00 P.M. Eastern Time. It is currently the policy of the Funds that
events affecting the valuation of Fund securities occurring between the time its
net asset value is determined and the close of the New York Stock Exchange, even
if material, will not be reflected in such net asset value.
Each Fund reserves the right to suspend or postpone redemptions during
any period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission, or that the Exchange is
closed for other than customary weekend and holiday closings; (b) the Securities
and Exchange Commission has by order permitted such suspension; or (c) an
emergency, as determined by the Securities and Exchange Commission, exists,
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable.
SHAREHOLDER SERVICES
Selected Dealer Reallowances. The Distributor will reallow to Selected
Dealers a portion of the front-end sales load in accordance with the following
schedule:
Amount of Purchase Sales Load as a Percentage of Reallowance to
Offering Price Selected Dealers
Less than $100,000 4.50% 4.00%
$100,000 to $249,999 3.00% 2.75%
$250,000 to $499,999 2.50% 2.25%
$500,000 to $999,999 2.00% 1.75%
$1,000,000 or more 0% 0%
Right of Accumulation. A reduced sales charge applies to any purchase
of shares of any of the Government Fund, the Gold Fund or the Equity Fund that
is purchased with a sales charge where an investor's then current aggregate
investment is $100,000 or more. "Aggregate investment" means the total of (i)
the dollar amount of the then current purchase of
B-35
<PAGE>
shares of a Fund; and (ii) the value (based on current net asset value) of
previously purchased and beneficially owned shares of any of the Funds on which
a sales charge had been paid.
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 Government Fund, the Gold Fund or the
Equity Fund. All shares of any of these Funds 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 Funds 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
the Funds 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
B-36
<PAGE>
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 Government Fund, the Gold Fund and the Equity Fund at net asset
value, using the proceeds from certain redemptions of shares of other mutual
funds. 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.
The Government Fund, the Gold 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, OCM, 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 Government Fund, the Gold Fund and the
Equity Fund may also purchase shares of the Funds 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.
B-37
<PAGE>
TAXES
General
The Funds intend to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The discussion that follows is
not intended to be a full discussion of present or proposed federal income tax
laws and the effect of such laws on an investor. Investors are urged to consult
with their tax advisers for a complete review of the tax ramifications of an
investment in the Funds.
If a Fund fails to qualify as a regulated investment company under
Subchapter M in any fiscal year, it will be treated as a corporation for federal
income tax purposes. As such that Fund would be required to pay income taxes on
its net investment income and net realized capital gains, if any, at the rates
generally applicable to corporations. Shareholders in a Fund that did not
qualify as a regulated investment company under Subchapter M would not be liable
for income tax on that Fund's net investment income or net realized gains in
their individual capacities. Distributions to shareholders, whether from that
Fund's net investment income or net realized capital gains, would be treated as
taxable dividends to the extent of current or accumulated earnings and profits
of that Fund.
To reduce the risk that the Gold Fund's investments in gold, silver,
platinum and palladium bullion may result in the Gold Fund's failure to satisfy
the requirements of Subchapter M, OCM will endeavor to manage the Gold Fund's
portfolio so that (i) less than 10% of the Gold Fund's gross income each year
will be derived from its investments in gold, silver, platinum and palladium
bullion, and (ii) less than 50% of the value of the Gold Fund's assets, at the
end of each quarter, will be invested in gold, silver, platinum and palladium
bullion.
Dividends from a Fund's net investment income, including short-term
capital gains, are taxable to shareholders as ordinary income, while
distributions of net capital gain are taxable as long-term capital gain
regardless of the shareholder's holding period for the shares. Such dividends
and distributions are taxable to shareholders whether received in cash or in
additional shares. The 70% dividends-received deduction for corporations will
apply to dividends from a Fund's net investment income, subject to proportionate
reductions if the aggregate dividends received by the Fund from domestic
corporations in any year are less than 100% of the distribution of net
investment company income taxable made by the Fund. Since substantially all of
the income of the Government Fund is derived from interest payments to it, none
of the dividends of the Government Fund will qualify for the deduction.
Any dividend or capital gain distribution paid shortly after a purchase
of shares of a Fund, will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution. Furthermore,
if the net asset value of the shares of a Fund immediately after a dividend or
distribution is less than the cost of such shares to the shareholder, the
dividend or distribution will be taxable to the shareholder even though it
results in a return of capital to him.
B-38
<PAGE>
Redemption of shares will generally result in a capital gain or loss
for income tax purposes. Such capital gain or loss will be long term or short
term, depending upon the shareholder's holding period for the shares. However,
if a loss is realized on shares held for six months or less, and the investor
received a capital gain distribution during that period, then such loss is
treated as a long-term capital loss to the extent of the capital gain
distribution received. A shareholder's basis in Fund shares which are exchanged
within 90 days of purchase pursuant to the exchange privilege or reinvestment
option will not include the sales charge with respect thereto and such sales
charge will be added to the basis of the shares purchased pursuant to the
exchange privilege or reinvestment option.
Rule 17a-7 Transactions
The Funds have adopted procedures pursuant to Rule 17a-7 under the 1940
Act pursuant to which each of the Funds may effect a purchase and sale
transaction with an affiliated person of the Funds (or an affiliated person of
such an affiliated person) in which a Fund issues its shares in exchange for
securities which are permitted investments for the Funds. For purposes of
determining the number of shares to be issued, the securities to be exchanged
will be valued in accordance with Rule 17a-7. Certain of the transactions may be
tax-free with the result that the Funds acquire unrealized appreciation. Most
Rule 17a-7 transactions will not be tax-free.
Taxation of Hedging Instruments
If a call option written by a Fund expires, the amount of the premium
received by the Fund for the option will be short-term capital gain. If a Fund
enters into a closing transaction with respect to the option, any gain or loss
realized by a Fund as a result of the transaction will be short-term capital
gain or loss. If the holder of a call option exercises the holder's right under
the option, any gain or loss realized by the Fund upon the sale of the
underlying security or futures contract pursuant to such exercise will be
short-term or long-term capital gain or loss to the Fund depending on the Fund's
holding period for the underlying security or futures contract, and the amount
of the premium received will be added to the proceeds of sale for purposes of
determining the amount of the capital gain or loss.
With respect to call options purchased by a Fund, the Fund will realize
short-term or long-term capital gain or loss if such option is sold and will
realize short-term or long-term capital loss if the option is allowed to expire
depending on the Fund's holding period for the call option. If such a call
option is exercised, the amount paid by a Fund for the option will be added to
the basis of the security or futures contract so acquired.
The Equity Fund may purchase or write options on stock indexes. Options
on "broadbased" stock indexes are generally classified as "nonequity options"
under the Code. Gains and losses resulting from the expiration, exercise or
closing of such nonequity options and on futures contracts will be treated as
long-term capital gain or loss to the extent of 60% thereof and short-term
capital gain or loss to the extent of 40% thereof (hereinafter "blended gain or
loss") for determining the character of distributions. In addition, nonequity
options held by the Equity Fund and futures contracts held by any Fund on the
last day of a fiscal year
B-39
<PAGE>
will be treated as sold for market value ("marked to market") on that date, and
gain or loss recognized as a result of such deemed sale will be blended gain or
loss. The realized gain or loss on the ultimate disposition of the option or
futures contract will be increased or decreased to take into consideration the
prior marked to market gains and losses.
The trading strategies of the Equity Fund involving nonequity options
on stock indexes may constitute "straddle" transactions. "Straddles" may affect
the short-term or long-term holding period of such instruments for distributions
characterization.
A Fund may acquire put options. Under the Code, put options on
securities are taxed similar to short sales. If a Fund owns the underlying
security or acquires the underlying security before closing the option position,
the Straddle Rules may apply and the option positions may be subject to certain
modified short sale rules. If a Fund exercises or allows a put option to expire,
the Fund will be considered to have closed a short sale. A Fund will generally
have a short-term gain or loss on the closing of an option position. The
determination of the length of the holding period is dependent on the holding
period of the stock used to exercise that put option. If a Fund sells the put
option without exercising it, its holding period will be the holding period of
the option.
Each of the Funds may be subject to foreign withholding taxes on income
and gains derived from its investments outside the U.S. Such taxes would reduce
the return on a Fund's investments. Tax treaties between certain countries and
the U.S. may reduce or eliminate such taxes. If more than 50% of the value of
the Gold Fund's total assets at the close of any taxable year consist of
securities of foreign corporations, the Gold Fund may elect, for U.S. federal
income tax purposes, to treat any foreign country income or withholding taxes
paid by the Gold Fund that can be treated as income taxes under U.S. income tax
principles, as paid by its shareholders. For any year that the Gold Fund makes
such an election, each of its shareholders will be required to include in his
income (in addition to taxable dividends actually received) his allocable share
of such taxes paid by the Gold Fund and will be entitled, subject to certain
limitations, to credit his portion of these foreign taxes against his U.S.
federal income tax due, if any, or to deduct it (as an itemized deduction) from
his U.S. taxable income, if any. Generally, credit for foreign taxes is subject
to the limitation that it may not exceed the shareholder's U.S. tax attributable
to his foreign source taxable income.
If the pass through election described above is made, the source of the
Gold Fund's income flows through to its shareholders. Certain gains from the
sale of securities and currency fluctuations will not be treated as foreign
source taxable income. In addition, this foreign tax credit limitation must be
applied separately to certain categories of foreign source income, one of which
is foreign source "passive income." For this purpose, foreign "passive income"
includes dividends, interest, capital gains and certain foreign currency gains.
As a consequence, certain shareholders may not be able to claim a foreign tax
credit for the full amount of their proportionate share of the foreign tax paid
by the Gold Fund.
The foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on
B-40
<PAGE>
corporations and individuals. If the Gold Fund does not make the pass through
election described above, the foreign taxes it pays will reduce its income and
distributions by the Fund will be treated as U.S. source income.
Each shareholder will be notified within 60 days after the close of the
Gold Fund's taxable year whether, pursuant to the election described above, the
foreign taxes paid by the Gold Fund will be treated as paid by its shareholders
for that year and, if so, such notification will designate: (i) such
shareholder's portion of the foreign taxes paid; and (ii) the portion of the
Gold Fund's dividends and distributions that represent income derived from
foreign sources.
Back-up Withholding
Federal law requires the Funds to withhold 31% of a shareholder's
reportable payments (which include dividends, capital gains distributions and
redemption proceeds) for shareholders who have not properly certified that the
Social Security or other Taxpayer Identification Number they provide is correct
and that the shareholder is not subject to back-up withholding.
GENERAL INFORMATION
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. The
holders of shares have no preemptive or conversion rights. 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 all of the Monterey Mutual Funds) each of
which has separate assets and liabilities.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares) and may vote in the election of Trustees
and on other matters submitted to meetings of shareholders. It is not
contemplated that regular annual meetings of shareholders will be held. Rule
18f-2 under the 1940 Act provides that matters submitted to shareholders be
approved by a majority of the outstanding securities of each Fund, unless it is
clear that the interest of each Fund in the matter are identical or the matter
does not affect a Fund. However, the rule exempts the ratification of the
selection of accountants and the election of Trustees from the separate voting
requirements.
Income, direct liabilities and direct operating expenses of each Fund
will be allocated directly to each Fund, and general liabilities and expenses of
the Trust will be allocated among the Funds in proportion to the total net
assets of each Fund, on a pro rata basis among the Funds or as otherwise
determined by the Board of Trustees.
B-41
<PAGE>
The By-Laws provide that the Trust's shareholders have the right, upon
the declaration in writing or vote of more than two-thirds of its outstanding
shares, to remove a Trustee. The Trustees will call a meeting of shareholders to
vote on the removal of a Trustee upon the written request of the record holders
of ten percent of the Trust's shares. In addition, ten shareholders holding the
lesser of $25,000 worth or one percent of the Trust's shares may advise the
Trustees in writing that they wish to communicate with other shareholders for
the purpose of requesting a meeting to remove a Trustee. The Trustees will then,
if requested by the applicants, mail at the applicants' expense the applicants'
communication to all other shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of more than
50% of its outstanding shares. The Trust may be terminated upon the sale of its
assets to another issuer, if such sale is approved by the vote of the holders of
more than 50% of the outstanding shares of each Fund, or upon liquidation and
distribution of its assets, if so approved. If not so terminated, the Trust will
continue indefinitely.
Shares of the Trust when issued are fully paid and non-assessable. The
Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for its acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust
and satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust such as the Trust to be held personally liable as a
partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations, which obligations are limited by the 1940 Act.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
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.
B-42
<PAGE>
SALES CHARGES
During the three fiscal years ended November 30, 1998, the aggregate
dollar amount of sales charges on the sales of shares of the Monterey Investors
Funds and the amount retained by the Funds' distributor were as follows:
<TABLE>
<CAPTION>
Years Ended November 30
----------------------------------------------------------------------------
1996 1997 1998
------------ ------------- ------------ ----------- ------------ -----------
Sales Amount Sales Amount Sales Amount
Fund Charge Retained Charge Retained Charge Retained
---- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Government Fund $ 0 $ 0 $ 0 $ 0 $ 2 $ 0
Gold Fund $22,796 $ 5,788 $ 7,660 $ 2,241 $80,863 $8,686
Equity Fund $ 1,841 $ 316 $ 945 $ 212 $ 1,556 $ 169
</TABLE>
CALCULATION OF PERFORMANCE DATA
From time to time each of the Funds may quote its average annual total
return ("standardized return") in advertisements or promotional materials.
Advertisements and promotional materials reflecting standardized return
("performance advertisements") will show percentage rates reflecting the average
annual change in the value of an assumed initial investment in that Fund of
$1,000 at the end of one, five and ten year periods reduced by the maximum
applicable sales charge. If such periods have not yet elapsed, data will be
given as of the end of a shorter period corresponding to the period of existence
of the Fund. Standardized return assumes the reinvestment of all dividends and
capital gain distributions, but does not take into account any federal or state
income taxes that may be payable upon redemption. The formula the Funds use in
calculating standardized return is described below.
The Government Fund also may refer in advertising and promotional
materials to its yield. The yield of the Government Fund shows the rate of
income that it earns on its investments, expressed as a percentage of the
offering price of the Fund's shares. The Government Fund calculates yield by
determining the interest income it earned from its portfolio investments for a
specified thirty-day period (net of expenses), dividing such income by the
average number of Fund shares outstanding, and expressing the result as an
annualized percentage based on the offering price at the end of that thirty day
period. Yield accounting methods differ from the methods used for other
accounting purposes; accordingly, the yields of the Government Fund may not
equal the dividend income actually paid to investors or the income reported in
the financial statements of the Government Fund. The formula the Government Fund
uses in calculating yield is set forth below.
In addition to standardized return, performance advertisements also may
include other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same or different periods as those
for which standardized return is quoted and may consist of aggregate or average
annual percentage rates of return, actual year by year rates or any combination
thereof.
B-43
<PAGE>
All data included in performance advertisements will reflect past
performance and will not necessarily be indicative of future results. The
investment return and principal value of an investment in a Fund will fluctuate,
and an investor's proceeds upon redeeming Fund shares may be more or less than
the original cost of the shares.
The standardized returns of each of the Funds is set forth below:
Government Fund
Average annual total return:
for the one-year period ended November 30, 1998: 3.79%
for the five-year period ended November 30, 1998: 5.54%
for the ten-year period ended November 30, 1998: 5.91%
Gold Fund
Average annual total return:
for the one-year period ended November 30, 1998: -6.57%
for the five-year period ended November 30, 1998: -16.79%
for the ten-year period ended November 30, 1998: -11.24%
Equity Fund
Average annual total return:
for the one-year period ended November 30, 1998: -9.14%
for the five-year period ended November 30, 1998 7.99%
for the period April 1, 1992 - November 30, 1998: 7.64%
Average total return is calculated according to the following formula:
P(1+T)n=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 (4.50%) 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,
1998 was 6.01%. Yields will fluctuate as market conditions change. The yield of
the Government Fund is calculated according to the following formula:
YIELD = 2 [OBJECT OMITTED]
B-44
<PAGE>
Where: a= dividends and interest earned during the
period.
b= expenses accrued for the period (net of
reimbursements).
c= the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d= the maximum offering price per share on the
last day of the period.
All of the foregoing information (total return and yield) reflect
expense reimbursements made to the Funds.
DESCRIPTION OF SECURITIES RATINGS
The Government Fund may invest in securities rated by Standard & Poor's
Corporation (Standard & Poor's) or by Moody's Investors Service, Inc.
("Moody's"). A brief description of the rating 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:
B-45
<PAGE>
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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o 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.
STANDARD & POOR'S RATINGS FOR CORPORATE BONDS
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
B-46
<PAGE>
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
STANDARD & POOR'S CHARACTERISTICS OF SOVEREIGN DEBT OF FOREIGN COUNTRIES
AAA Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances.
Prosperous and resilient economies, high per capital incomes.
Low fiscal deficits and government debt, low inflation
Low external debt.
AA Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances.
Tightly integrated into global trade and financial system.
Differ from AAAs only to a small degree because:
o Economies are smaller, less prosperous and generally more
vulnerable to adverse external influences (e.g., protection
and terms of trade shocks)
o More variable fiscal deficits, government debt and inflation.
o Moderate to high external debt. A Politics evolving toward
more open, predictable forms of governance in environment of
rapid economic and social change.
Established trend of integration into global trade and financial
system.
Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade
shocks).
Usually rapid growth in output and per capita incomes.
Manageable through variable fiscal deficits, government debt and
inflation.
Usually low but variable debt.
BBB Political factors a source of significant uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change.
Integration into global trade and financial system growing but
untested.
Economies less prosperous and often more vulnerable to adverse external
influences.
B-47
<PAGE>
Variable to high fiscal deficits, government debt and inflation.
High and variable external debt. MOODY'S RATINGS FOR BONDS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rate Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
In the case of sovereign, subnational and sovereign related issuers,
the Government Fund uses the rating service's foreign currency or domestic
(local) currency rating depending upon how a security in its portfolio is
denominated. In the case where the Government Fund holds a security denominated
in a domestic (local) currency and the rating service does not provide a
domestic (local) currency rating for the issuer, the Government Fund will use
the foreign currency rating for the issuer; in the case where the Government
Fund holds a security denominated in a foreign currency and the rating service
does not provide a foreign currency rating for the issuer, the Government Fund
will treat the security as being unrated.
B-48
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) Declaration of Trust with amendments(3)
(b) By-laws(3)
(c) Not applicable
(d) (i) Investment Advisory Agreement (Short-Term Government
Fund)(3)
(ii) Investment Advisory Agreement (Global Bond Fund)(2)
(iii) Investment Advisory Agreement (Gold Fund)(2)
(iv) Investment Advisory Agreement (Biotechnology
Fund)(2)
(v) Investment Advisory Agreement (Technology Fund)(2)
(vi) Investment Advisory Agreement (Convertibles Fund)(2)
(vii) Investment Advisory Agreement (Equity Fund)(2)
(viii) Investment Advisory Agreement (Government Fund)(2)
(ix) Sub-Advisory Agreement (Government Fund)(2)
(x) Investment Advisory Agreement (Total Return Bond
Fund)(4)
(e) Distribution Agreement, Distribution Plan Agreement and
Sales Agreement(1)
(f) Not applicable
(g) Custody Agreement(3)
(h) (i) Administrative Service Agreement(3)
(ii) Fund Accounting Service Agreement(3)
(iii) Transfer Agency and Service Agreement (3)
(i) Opinion and Consent of Foley & Lardner
(j) Consent of McGladrey & Pullen, LLP
(k) Not applicable
(l) Investment letters(3)
(m) Revised Distribution Plan(3)
S-1
<PAGE>
(n) Financial Data Schedules
(o) None
- ---------------------
(1) Previously filed as an exhibit to Post-Effective Amendment No. 23 to the
Registration Statement and incorporated by reference thereto. Post-Effective
Amendment No. 23 was filed on May 31, 1996 and its accession number is
0000897069-96-000153.
(2) Previously filed as an exhibit to Post-Effective Amendment No. 24 to the
Registration Statement and incorporated by reference thereto. Post-Effective
Amendment No. 24 was filed on January 13, 1997 and its accession number is
0000897069-97-000006.
(3) Previously filed as an exhibit to Post-Effective Amendment No. 26 to the
Registration Statement and incorporated by reference thereto. Post-Effective
Amendment No. 26 was filed on September 30, 1997 and its accession number is
0000897069-97-000401.
(4) Previously filed as an exhibit to Post-Effective Amendment No. 29 to the
Registration Statement and incorporated by reference thereto. Post-Effective
Amendment No. 29 was filed on August 7, 1998 and its accession number is
0000897069-98-000403.
Item 24. Persons Controlled by or under Common Control with the Fund
As of December 31, 1998, Registrant did not control any person and was
not under common control with any other person.
Item 25. Indemnification
Section 12 of Article SEVENTH of Registrant's Declaration of Trust,
states as follows:
"(c) (1) As used in this paragraph the following terms shall have the
meanings set forth below:
"(i) the term "indemnitee" shall mean any present or former Trustee,
officer or employee of the Trust, any present or former Trustee or
officer of another trust or corporation whose securities are or were
owned by the Trust or of which the Trust is or was a creditor and who
served or serves in such capacity at the request of the Trust, any
present or former investment adviser, sub-adviser or principal
underwriter of the Trust and the heirs, executors, administrators,
successors and assigns of any of the foregoing; however, whenever conduct
by an indemnitee is referred to, the conduct shall be that of the
original indemnitee rather than that of the heir, executor,
administrator, successor or assignee;
S-2
<PAGE>
(ii) the term "covered proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which an indemnitee is or was a party
or is threatened to be made a party by reason of the fact or facts under
which he or it is an indemnitee as defined above;
(iii) the term "disabling conduct" shall mean willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of the office in question;
(iv) the term "covered expenses" shall mean expenses (including
attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by an indemnitee in connection with a
covered proceeding; and
(v) the term "adjudication of liability" shall mean, as to any covered
proceeding and as to any indemnitee, an adverse determination as to the
indemnitee whether by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent.
"(d) The Trust shall not indemnify any indemnitee for any covered
expenses in any covered proceeding if there has been an adjudication of
liability against such indemnitee expressly based on a finding of disabling
conduct."
"(e) Except as set forth in (d) above, the Trust shall indemnify any
indemnitee for covered expenses in any covered proceeding, whether or not there
is an adjudication of liability as to such indemnitee, if a determination has
been made that the indemnitee was not liable by reason of disabling conduct by
(i) a final decision of the court or other body before which covered proceeding
was brought; or (ii) in the absence of such decision, a reasonable
determination, based on a review of the facts, by either (a) the vote of a
majority of a quorum of Trustees who are neither "interested persons", as
defined in the 1940 Act nor parties to the covered proceeding or (b) an
independent legal counsel in a written opinion; provided that such Trustees or
counsel, in reaching such determination, may but need not presume the absence of
disabling conduct on the part of the indemnitee by reason of the manner in which
the covered proceeding was terminated."
"(f) Covered expenses incurred by an indemnitee in connection with a
covered proceeding shall be advanced by the Trust to an indemnitee prior to the
final disposition of a covered proceeding upon the request of the indemnitee for
such advance and the undertaking by or on behalf of the indemnitee to repay the
advance unless it is ultimately determined that the indemnitee is entitled to
indemnification thereunder, but only if one or more of the following is the
case: (i) the indemnitee shall provide a security for such undertaking; (ii) the
Trust shall be insured against losses arising out of any lawful advances; or
(iii) there shall have been a determination, based on a review of the readily
available facts (as opposed to a full trial-type inquiry) that there is a reason
to believe that the indemnitee ultimately will be found entitled to
indemnification by either independent legal counsel in a written opinion or by
the
S-3
<PAGE>
vote of a majority of a quorum of trustees who are neither "interested persons"
as defined in the 1940 Act nor parties to the covered proceeding."
"(g) Nothing herein shall be deemed to affect the right of the Trust
and/or any indemnitee to acquire and pay for any insurance covering any or all
indemnitees to the extent permitted by the 1940 Act or to affect any other
indemnification rights to which any indemnitee may be entitled to the extent
permitted by the 1940 Act."
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 26. Business and Other Connections of Investment Adviser
Pacific Income Advisers, Inc. ("PIA") is the investment adviser of
Registrant's Short-Term Government, Equity, Government, Global Bond and Total
Return Bond portfolios. Orrell and Company, Inc. ("Orrell") is the investment
adviser to Registrant's Gold portfolio. Murphy Investment Management, Inc.
("Murphy") is the investment adviser to Registrant's Biotechnology, Technology
and Convertibles portfolios. Camborne Advisors Inc. ("Camborne") is the
sub-adviser to Registrant's Government portfolio. For information as to the
business, profession, vocation or employment of a substantial nature of PIA,
Orrell, Murphy, Camborne and their directors and officers, reference is made to
Part B of the Registration Statement.
Item 27. Principal Underwriters
Syndicated Capital, Inc. is the distributor of the shares of the
Registrant.
(a) Not applicable
(b) The officers and directors of Syndicated Capital, Inc. are as
follows:
S-4
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------------------------- -----------------------------------
(1) (2) (3)
Name and Principal Business Address Positions and Offices with Positions and Offices with
Underwriter Registrant
- ---------------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Joseph Lloyd McAdams, Jr. Chairman, Chairman
1299 Ocean Avenue Suite 210 Santa Monica, CEO and and Trustee
CA 90401 President
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of Registrant,
Registrant's Custodian and Registrant's Administrator as follows: the documents
required to be maintained by paragraphs (5), (6), (7), (10) and (11) of Rule
31a-1(b) will be maintained by the Registrant, the documents required to be
maintained by paragraph (4) of Rule 31a-1(b) will be maintained by Registrant's
Administrator and all other records will be maintained by the Custodian.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
S-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Monica and State of California on the 27th day
of January, 1999.
Monterey Mutual Fund
(Registrant)
By: /s/ Joseph Lloyd McAdams, Jr.
Joseph Lloyd McAdams, Jr.
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Joseph Lloyd McAdams, Jr. Principal Executive, January 27, 1999
- --------------------------------
Joseph Lloyd McAdams, Jr. Financial and Accounting
Officer and Trustee
Trustee January __, 1999
John Michael Murphy
/s/ Ann Louise Marinaccio Trustee January 27, 1999
- --------------------------------
Ann Louise Marinaccio
Trustee January __, 1999
Robert I. Weisberg
/s/ Beatrice Felix Trustee January 27, 1999
Beatrice P. Felix
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
(1) Declaration of Trust, with amendments*
(2) Registrant's By-Laws*
(3) None
(4) None
(5) (a) Investment Advisory Agreement*
(Short-Term Government Fund)
(b) Investment Advisory Agreement*
(Global Bond Fund)
(c) Investment Advisory Agreement*
(Gold Fund)
(d) Investment Advisory Agreement*
(Biotechnology Fund)
(e) Investment Advisory Agreement*
(Technology Fund)
(f) Investment Advisory Agreement*
(Convertibles Fund)
(g) Investment Advisory Agreement*
(Equity Fund)
(h) Investment Advisory Agreement*
(Government Fund)
(i) Sub-Advisory Agreement*
(Government Income Fund)
(j) Investment Advisory Agreement*
(Total Return Bond Fund)
(6) Distribution Agreement, Distribution Plan Agreement and
Sales Agreement*
- ----------------
* Incorporated by reference
<PAGE>
(7) None
(8) Custody Agreement*
(9) (a) Administration Service Agreement*
(b) Fund Accounting Service Agreement*
(c) Transfer Agency and Service Agreement*
(10) Opinion and Consent of Counsel
(11) Consent of McGladrey & Pullen, LLP
(12) None
(13) Investment Letters*
(14) Individual Retirement Account Application*
(15) Distribution Plan*
(16) Schedule for Computation of Performance Data Contained in
Part B*
(17) Financial Data Schedules
(18) None
- --------
* Incorporated by reference
F O L E Y & L A R D N E R
CHICAGO FIRSTAR CENTER SACRAMENTO
DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO
JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO
LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE
MADISON FACSIMILE (414) 297-4900 TAMPA
MILWAUKEE WASHINGTON, D.C.
ORLANDO WEST PALM BEACH
January 29, 1999
Monterey Mutual Fund
1299 Ocean Avenue
Santa Monica, CA 90401
Ladies & Gentlemen:
We have acted as counsel for you in connection with the preparation of
an Amended Registration Statement on Form N-1A relating to the sale by you of an
indefinite amount of Monterey Mutual Fund units of beneficial interest (such
units of beneficial interest being hereinafter referred to as the "Shares") in
the manner set forth in the Amended Registration Statement to which reference is
made. In this connection we have examined: (a) the Amended Registration
Statement on Form N-1A; (b) your Declaration of Trust and Bylaws, as amended to
date; (c) Trust proceedings relative to the authorization for issuance of the
Shares; and (d) such other proceedings, documents and records as we have deemed
necessary to enable us to render this opinion.
Based upon the foregoing, we are of the opinion that the Shares when
sold as contemplated in the Amended Registration Statement will be legally
issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Amended Registration Statement on Form N-1A. In giving this consent, we do not
admit that we are experts within the meaning of Section 11 of the Securities Act
of 1933, as amended, or within the category of persons whose consent is required
by Section 7 of said Act.
Very truly yours,
/S/ FOLEY & LARDNER
FOLEY & LARDNER
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 8, 1999 on the
financial statements of the PIA Short-Term Government Fund, the Camborne
Government Income Fund, the PIA Equity Fund, the Murphy New World Technology
Convertibles Fund, the Murphy New World Technology Fund, the Murphy New World
Biotechnology Fund, the OCM Gold Fund, the PIA Global Bond Fund and the PIA
Total Return Bond Fund series of Monterey Mutual Fund referred to therein, which
is incorporated by reference in the Statement of Additional Information, in
Post-Effective Amendment No. 30 to the Registration Statement on Form N-1A as
filed with the Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under
the caption "Financial Highlights" and in the Statement of Additional
Information under the caption "General Information".
McGLADREY & PULLEN, LLP
New York, New York
January 28, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MURPHY NEW WORLD TECHNOLOGY CONVERTIBLES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 1292281
<INVESTMENTS-AT-VALUE> 1102074
<RECEIVABLES> 30072
<ASSETS-OTHER> 10652
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1142298
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19651
<TOTAL-LIABILITIES> 19651
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2196692
<SHARES-COMMON-STOCK> 50729
<SHARES-COMMON-PRIOR> 54104
<ACCUMULATED-NII-CURRENT> 56284
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (939622)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (190207)
<NET-ASSETS> 1123147
<DIVIDEND-INCOME> 2587
<INTEREST-INCOME> 89903
<OTHER-INCOME> 0
<EXPENSES-NET> 31862
<NET-INVESTMENT-INCOME> 60628
<REALIZED-GAINS-CURRENT> (103913)
<APPREC-INCREASE-CURRENT> (167308)
<NET-CHANGE-FROM-OPS> (210593)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 16073
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1830
<NUMBER-OF-SHARES-REDEEMED> 5786
<SHARES-REINVESTED> 581
<NET-CHANGE-IN-ASSETS> (311449)
<ACCUMULATED-NII-PRIOR> 11730
<ACCUMULATED-GAINS-PRIOR> (835710)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8227
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 90646
<AVERAGE-NET-ASSETS> 1304929
<PER-SHARE-NAV-BEGIN> 26.52
<PER-SHARE-NII> 1.19
<PER-SHARE-GAIN-APPREC> (5.27)
<PER-SHARE-DIVIDEND> (.30)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.14
<EXPENSE-RATIO> 2.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> OCM GOLD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 9323838
<INVESTMENTS-AT-VALUE> 8290902
<RECEIVABLES> 28079
<ASSETS-OTHER> 24509
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8335490
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84230
<TOTAL-LIABILITIES> 84230
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11739936
<SHARES-COMMON-STOCK> 1656526
<SHARES-COMMON-PRIOR> 319957
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2445740)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1042936)
<NET-ASSETS> 8251260
<DIVIDEND-INCOME> 38026
<INTEREST-INCOME> 46680
<OTHER-INCOME> 0
<EXPENSES-NET> 139912
<NET-INVESTMENT-INCOME> (55206)
<REALIZED-GAINS-CURRENT> (364267)
<APPREC-INCREASE-CURRENT> 209137
<NET-CHANGE-FROM-OPS> (210336)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1375985
<NUMBER-OF-SHARES-REDEEMED> 39416
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6623940
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2081473)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 57341
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 190458
<AVERAGE-NET-ASSETS> 5752114
<PER-SHARE-NAV-BEGIN> 5.09
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> (.08)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.98
<EXPENSE-RATIO> 2.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> CAMBORNE GOVERNMENT INCOME
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 949760
<INVESTMENTS-AT-VALUE> 1005966
<RECEIVABLES> 16523
<ASSETS-OTHER> 13495
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1035984
<PAYABLE-FOR-SECURITIES> 0
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<NET-INVESTMENT-INCOME> 67756
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<DISTRIBUTIONS-OF-INCOME> 69700
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<NUMBER-OF-SHARES-SOLD> 12886
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<ACCUMULATED-NII-PRIOR> 2581
<ACCUMULATED-GAINS-PRIOR> (321271)
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<AVERAGE-NET-ASSETS> 1101744
<PER-SHARE-NAV-BEGIN> 14.00
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<PER-SHARE-DIVIDEND> (.90)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> PIA EQUITY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 2432041
<INVESTMENTS-AT-VALUE> 2254386
<RECEIVABLES> 5006
<ASSETS-OTHER> 9824
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<TOTAL-ASSETS> 2269216
<PAYABLE-FOR-SECURITIES> 0
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<TOTAL-LIABILITIES> 12421
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2241262
<SHARES-COMMON-STOCK> 128643
<SHARES-COMMON-PRIOR> 133589
<ACCUMULATED-NII-CURRENT> 7689
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 185472
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (177628)
<NET-ASSETS> 2250795
<DIVIDEND-INCOME> 73898
<INTEREST-INCOME> 5120
<OTHER-INCOME> 0
<EXPENSES-NET> 71329
<NET-INVESTMENT-INCOME> 7689
<REALIZED-GAINS-CURRENT> 176175
<APPREC-INCREASE-CURRENT> (317246)
<NET-CHANGE-FROM-OPS> (133382)
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 320265
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<NUMBER-OF-SHARES-SOLD> 111105
<NUMBER-OF-SHARES-REDEEMED> 128755
<SHARES-REINVESTED> 12704
<NET-CHANGE-IN-ASSETS> (520154)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 329694
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 107081
<AVERAGE-NET-ASSETS> 3339216
<PER-SHARE-NAV-BEGIN> 20.79
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> (.91)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2.40)
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<EXPENSE-RATIO> 2.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> MURPHY NEW WORLD BIOTECHNOLOGY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 4445106
<INVESTMENTS-AT-VALUE> 3917558
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<TOTAL-ASSETS> 3998396
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 39962
<TOTAL-LIABILITIES> 39962
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4680751
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<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> (224769)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (497548)
<NET-ASSETS> 3958436
<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 84058
<NET-INVESTMENT-INCOME> (72811)
<REALIZED-GAINS-CURRENT> (119271)
<APPREC-INCREASE-CURRENT> (594378)
<NET-CHANGE-FROM-OPS> (786460)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 406645
<NUMBER-OF-SHARES-REDEEMED> 79194
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1605445
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (105498)
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 34450
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<GROSS-EXPENSE> 130626
<AVERAGE-NET-ASSETS> 3449325
<PER-SHARE-NAV-BEGIN> 8.07
<PER-SHARE-NII> (.15)
<PER-SHARE-GAIN-APPREC> (1.53)
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<EXPENSE-RATIO> 2.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> MURPHY NEW WORLD TECHNOLOGY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 1427056
<INVESTMENTS-AT-VALUE> 985948
<RECEIVABLES> 1782
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1028839
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<OTHER-ITEMS-LIABILITIES> 13300
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<ACCUMULATED-NET-GAINS> (57307)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (441108)
<NET-ASSETS> 1015539
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<EXPENSES-NET> 29891
<NET-INVESTMENT-INCOME> (26953)
<REALIZED-GAINS-CURRENT> (65179)
<APPREC-INCREASE-CURRENT> (321157)
<NET-CHANGE-FROM-OPS> (413289)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 50527
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<SHARES-REINVESTED> 12431
<NET-CHANGE-IN-ASSETS> (423483)
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 87441
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<PER-SHARE-NAV-BEGIN> 19.18
<PER-SHARE-NII> (.31)
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<PER-SHARE-DISTRIBUTIONS> (2.46)
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> PIA SHORT TERM GOVERNMENT SECURITIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 55644411
<INVESTMENTS-AT-VALUE> 56405386
<RECEIVABLES> 613897
<ASSETS-OTHER> 6940
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57026221
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37123
<TOTAL-LIABILITIES> 37123
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55969063
<SHARES-COMMON-STOCK> 5990027
<SHARES-COMMON-PRIOR> 5159215
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 279062
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 760973
<NET-ASSETS> 56989098
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3274232
<OTHER-INCOME> 0
<EXPENSES-NET> 171814
<NET-INVESTMENT-INCOME> 3102918
<REALIZED-GAINS-CURRENT> 284717
<APPREC-INCREASE-CURRENT> 501366
<NET-CHANGE-FROM-OPS> 3888501
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3101418
<DISTRIBUTIONS-OF-GAINS> 50168
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<NUMBER-OF-SHARES-SOLD> 1325769
<NUMBER-OF-SHARES-REDEEMED> 1296941
<SHARES-REINVESTED> 301984
<NET-CHANGE-IN-ASSETS> 8076812
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 44513
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 112629
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 262409
<AVERAGE-NET-ASSETS> 56336033
<PER-SHARE-NAV-BEGIN> 10.26
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .13
<PER-SHARE-DIVIDEND> (.57)
<PER-SHARE-DISTRIBUTIONS> (.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.38
<EXPENSE-RATIO> .30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> PIA GLOBAL BOND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 5743112
<INVESTMENTS-AT-VALUE> 5952271
<RECEIVABLES> 113246
<ASSETS-OTHER> 4655
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6070172
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12451
<TOTAL-LIABILITIES> 12451
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5816113
<SHARES-COMMON-STOCK> 284218
<SHARES-COMMON-PRIOR> 274760
<ACCUMULATED-NII-CURRENT> 4675
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 26236
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 210697
<NET-ASSETS> 6057721
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 334983
<OTHER-INCOME> 0
<EXPENSES-NET> 32908
<NET-INVESTMENT-INCOME> 302075
<REALIZED-GAINS-CURRENT> 62461
<APPREC-INCREASE-CURRENT> 226129
<NET-CHANGE-FROM-OPS> 590665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 313779
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 77100
<NUMBER-OF-SHARES-REDEEMED> 82376
<SHARES-REINVESTED> 14734
<NET-CHANGE-IN-ASSETS> 9458
<ACCUMULATED-NII-PRIOR> 4096
<ACCUMULATED-GAINS-PRIOR> (23939)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25181
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 87071
<AVERAGE-NET-ASSETS> 6290341
<PER-SHARE-NAV-BEGIN> 20.33
<PER-SHARE-NII> .99
<PER-SHARE-GAIN-APPREC> 1.03
<PER-SHARE-DIVIDEND> (1.04)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.31
<EXPENSE-RATIO> .51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> PIA TOTAL RETURN BOND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 25582491
<INVESTMENTS-AT-VALUE> 25801828
<RECEIVABLES> 298853
<ASSETS-OTHER> 2013
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26102694
<PAYABLE-FOR-SECURITIES> 1108147
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50712
<TOTAL-LIABILITIES> 11588590
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24674517
<SHARES-COMMON-STOCK> 1230672
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 10044
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 39937
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 219337
<NET-ASSETS> 24943835
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 339633
<OTHER-INCOME> 0
<EXPENSES-NET> 23080
<NET-INVESTMENT-INCOME> 316553
<REALIZED-GAINS-CURRENT> 39937
<APPREC-INCREASE-CURRENT> 219337
<NET-CHANGE-FROM-OPS> 575827
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 306509
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1225259
<NUMBER-OF-SHARES-REDEEMED> 5635
<SHARES-REINVESTED> 11048
<NET-CHANGE-IN-ASSETS> 24943835
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17310
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 36424
<AVERAGE-NET-ASSETS> 23417137
<PER-SHARE-NAV-BEGIN> 20.00
<PER-SHARE-NII> .27
<PER-SHARE-GAIN-APPREC> .26
<PER-SHARE-DIVIDEND> (.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.27
<EXPENSE-RATIO> .40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
