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RULE 497(e):
File Nos. 33-1922; 811-4506
THE PASADENA GROUP
OF MUTUAL FUNDS-Registered Trademark-
THE PASADENA
GLOBAL GROWTH
FUND-SM-
THE PASADENA GLOBAL GROWTH FUND (the "Fund") seeks to achieve long-term
growth of capital by investing in a globally diversified portfolio of common
stocks, which may be traded in securities markets in foreign countries and the
United States.
Roger Engemann Management Co., Inc. is the investment manager for the Fund,
a separate series of the Pasadena Investment Trust (the "Trust").
This Prospectus sets forth concisely the information about the Fund
that a prospective investor should know before investing. Please read it and
retain it for future reference. Additional information about the Fund and the
Trust is included in the Trust's Statement of Additional Information
regarding the Fund dated May 1, 1996, as it may be amended from time to time.
The Statement of Additional Information, which is incorporated by reference
into this Prospectus, has been filed with the Securities and Exchange
Commission and is available without charge upon request to the Trust at 600
North Rosemead Boulevard, Pasadena, California 91107-2133 (telephone: (818)
351-9686 or (800) 648-8050).
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS DATED MAY 1, 1996
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TABLE OF CONTENTS
Page
----
Synopsis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 1
Expense and Fee Table. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . . 4
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . .19
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . .20
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . 20
Description of the Trust . . . . . . . . . . . . . . . . . . . . . . . . .21
Shareholder Inquiries. . . . . . . . . . . . . . . . . . . . . . . . . . .21
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Backup Withholding Instructions. . . . . . . . . . . . . . . . . . . . . .22
-i-
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SYNOPSIS
The following synopsis is qualified in its entirety by the detailed
information contained elsewhere in this Prospectus or the Statement of
Additional Information.
THE FUND. The Pasadena Group of Mutual Funds consists of five separate series
(the "Funds") of the Pasadena Investment Trust (the "Trust"), a Massachusetts
business trust, organized as a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The five series are The Pasadena Growth Fund, The Pasadena Nifty
Fifty Fund, The Pasadena Balanced Return Fund, The Pasadena Global Growth Fund,
and The Pasadena Small & Mid-Cap Fund. This Prospectus relates only to The
Pasadena Global Growth Fund (the "Fund"). The Fund first began offering its
Class A shares to the public on May 1, 1996. This Prospectus covers the Fund's
Class A shares, the only class presently in issue.
THE MANAGER. Roger Engemann Management Co., Inc. (the "Manager") provides
investment advice to the Fund and manages the Fund's investments. The Manager's
annual management fee, which is computed and prorated daily, equals 1.00% of the
average daily net assets of the Fund up to $30 million, plus 0.80% of net assets
over $30 million up to $100 million, plus 0.60% of net assets over $100 million
up to $500 million, plus 0.40% of net assets over $500 million. The Manager also
performs, and/or assumes the expenses for, all of the Fund's administrative and
most shareholder services for which it receives an annual administration fee
equal to 1.05% of the average daily net assets of the Fund up to $30 million,
plus 0.85% over $30 million up to $100 million, plus 0.65% over $100 million up
to $500 million, plus 0.60% of net assets over $500 million. The combined rate
of fees is higher than that paid by most investment companies to their manager.
However, the Fund will not incur any other expenses in connection with its
normal operations other than a fee paid to dealers and others, including the
Manager and its affiliates, for servicing shareholder accounts equal to 0.25%
per annum of the Fund's average daily net assets. The management fee for the
Fund will also be subject to a more restrictive limitation imposed by the law of
a state in which the Fund is registered to sell its shares. See "Management."
PURCHASE AND REDEMPTION OF SHARES. The Fund offers its shares continuously and
redeems its shares upon a shareholder's request. Shares may be purchased
through authorized investment dealers at the public offering price next
determined after the Fund's sub-transfer agent, Boston Financial Data Services,
Inc. (the "Sub-Transfer Agent"), the Fund, or another authorized agent or
subagent of the Fund, receives a purchase order. The public offering price is
the net asset value per share plus a maximum sales charge of 5.50% of the
offering price, reduced on purchases of $50,000 or more. The minimum initial
investment is $1,000 per account ($250 for individual retirement and minor's
custodial accounts and for initial purchases under a Systematic Purchase Plan).
Minimum subsequent investments are $50. See "Purchase of Shares." The Fund will
redeem its shares upon a shareholder's request at the net asset value per share
next determined after the Sub-Transfer Agent, the Fund, or another authorized
agent or subagent of the Fund, receives a redemption request in proper form. See
"Redemption of Shares."
RISKS. Every investment carries some market risk. In addition to the risks
described under "Risk Considerations," an investment in the Fund is subject to
the inherent risk that market prices or interest rates will not correspond to
the Manager's estimation of fundamental security values or market trends. The
Fund is designed to be a long-term investment. Therefore, because the Fund's net
asset value per share will fluctuate with daily changes in the market prices of
its portfolio securities (as well as with changes in foreign currency exchange
rates for securities not traded in United States dollars), an investment in the
Fund may
1
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not be suitable for investors with specific short-term investment return
needs. The Fund's investments in foreign securities, many of which may be
denominated in foreign currencies, also present special risks. See
"Investment Objective and Policies" and "Risk Considerations."
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by any financial institution, and are not insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risk, including possible loss of
principal.
EXPENSE AND FEE TABLE
Expenses are one of several factors to consider when investing in the Fund.
The purpose of the following table is to provide an understanding of the various
costs and expenses that shareholders of the Fund will bear directly or
indirectly.
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as percentage
of offering price) . . . . . . . . . . . . . . . . . . . . . . . . . . 5.50%
Maximum Sales Charge Imposed on Reinvestment of Distributions . . . . . . .None
Deferred Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . .None
Redemption Fees*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .None
ANNUAL FUND OPERATING EXPENSES**:
(Before Fee Waivers)
Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%
Administration Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.05%
Service Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.25%
----
Total Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . 2.30%
----
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* A $10.00 fee may be charged for redemptions made by bank wire (see page
16).
** Operating expense information for the Fund reflects the current fee
schedule under the Management, Administration and Services Agreements,
respectively, assuming total net assets do not exceed $30 million. All such
fees for the fiscal year ended December 31, 1995 were waived by the
Manager.
EXAMPLE
This table illustrates the net transaction and operating expenses that
an investor in the Fund would bear directly or indirectly over
different time periods, assuming a $1,000 investment and a 5% annual
return:
1 year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 77
3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304
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THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN. IN ADDITION, FEDERAL REGULATIONS REQUIRE THE EXAMPLE TO ASSUME A 5%
ANNUAL RETURN, BUT THE ACTUAL RETURN MAY BE HIGHER OR LOWER. SEE "PURCHASE OF
SHARES" AND "MANAGEMENT."
FINANCIAL HIGHLIGHTS
The following table contains information for one Class A share of
beneficial interest outstanding throughout each period for the Fund since its
inception, which has been audited by Coopers & Lybrand L.L.P., independent
accountants. The accountants' unqualified report for each of the periods
ended December 31 appears in the Fund's audited financial statements for the
year ended December 31, 1995. The financial highlights should be read in
conjunction with the Fund's audited financial statements for the year ended
December 31, 1995, which are incorporated by reference in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Inception
(November 1,
1993)
For the Year Ended December 31, to
1995 1994 December 31, 1993
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . $ 14.06 $ 11.18 $ 10.00
-------- -------- --------
Gain from Investment Operations:
Net investment income (1,2) . . . . . . . . . . . . . . . . . . . . . . . . .24 .10 .01
Net realized and unrealized gain on investments . . . . . . . . . . . . . . . 3.11 2.78 1.17
-------- -------- --------
Total gain from investment operations . . . . . . . . . . . . . . . . . . . . 3.35 2.88 1.18
-------- -------- --------
Less Dividends:
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . (.14) -- --
-------- -------- --------
Total dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.14) -- --
-------- -------- --------
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.27 $ 14.06 $ 11.18
-------- -------- --------
-------- -------- --------
TOTAL RETURN (2,3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.84% 25.76% 11.80%
RATIOS/SUPPLEMENTAL Data:
Net assets, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $3,203,426 $140,561 $111,814
Ratio of net expenses to average net assets (2) . . . . . . . . . . . . . . . 0.0% 0.0% 0.0%(4)
Ratio of net investment income to average net assets (2) . . . . . . . . . . 1.4% 0.8% 0.8%(4)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.0% 479.3% 215.8%
</TABLE>
1 This information was prepared using the average number of shares
outstanding during each period.
2 These amounts reflect a waiver of Manager fees of $42,545, $2,784 and
$410 for the periods ended December 31, 1995, December 31, 1994 and
December 31, 1993, respectively, and the Manager's reimbursement for
income taxes totaling $13,019 during 1994. Had the waivers and
reimbursement not been made, net investment income (loss) per share,
total return (not annualized for the period ended December 31,
1993)and the ratios of net expenses and net investment income (loss)
to average net assets (annualized for the period ended December 31,
1993) would have been ($.15), 22.88%, 2.3% and (0.9%), respectively,
for the period ended December 31, 1995, ($.21), 14.40%, 10.4% (2.3% if
only normal and recurring expenses are taken into account) and (1.7%),
respectively, for the period ended December 31, 1994 and ($.03),
11.40%, 2.3% and (1.5%), respectively, for the period ended December
31, 1993.
3 Total return measures the change in the value of an investment during
the period indicated and does not include the impact of paying any
sales charge. Total return for the period from inception (November 1,
1993) through December 31, 1993 has not been annualized. Prior to May
1, 1996, the Fund's shares were not offered to the public and,
although the Fund's portfolio was managed substantially in accordance
with the investment policies described in this Prospectus during that
period, some management differences did occur due primarily to the
Fund's small asset size. Accordingly, the Fund's performance during
periods prior to May 1, 1996 may not be relevant to an
3
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assessment of the Fund's performance subsequent to such date.
Additionally, the Manager waived all management, administrative
and service fees otherwise payable to it by the Fund for the
indicated periods, which had the effect of increasing the Fund's
total return for those periods.
4 Annualized.
4
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term growth of capital. The
Fund will seek to achieve its objective through investments in a diversified
portfolio of marketable securities of companies which are organized or domiciled
in the United States and in foreign countries. Dividend or interest income will
be incidental to any investment decision.
BASIC INVESTMENT STRATEGIES
In seeking growth of capital, the Fund follows a global investment strategy
of investing primarily in common stocks of U.S. and foreign companies which may
be traded in securities markets located throughout the world. This global
investment approach seeks to take advantage of the growing investment
opportunities created by a global economy that has become more highly integrated
in economic, industrial and financial terms, resulting in an increase in growth
stocks from developed and developing countries worldwide.
The Fund will under normal market conditions invest at least 65% of its
total assets in securities of companies located in at least three different
countries, one of which may be the United States, although it may at times
invest up to 100% of its total assets in securities principally traded in
securities markets outside the United States. In unusual market
circumstances when the Manager believes that foreign investing may involve
undue risks, up to 100% of the Fund's total assets may be invested
temporarily in securities of issuers organized or domiciled in the United
States. The Fund also may invest a portion of its assets in cash or money
market instruments (up to 100% of its total assets) for temporary defensive
purposes. Securities of foreign issuers may be owned by the Fund through the
purchase of Depositary Receipts (e.g., American, European, Global,
Continental, etc.), which are traded in the United States securities markets
or foreign markets and denominated in U.S. dollars or foreign currencies.
The Fund may invest up to 100% of its total assets in Depositary Receipts.
The Fund is not required to maintain any particular geographic or currency
mix of its investments, and there is no limitation or requirement on the
percentage of its assets which may be invested in securities of companies
domiciled in any one country. The Fund is intended to provide investors with
the opportunity to invest in a portfolio of common stocks of companies located
and/or doing business throughout the world.
The Fund may invest in securities of companies located in developed
countries, as well as in emerging or developing countries, without limitation.
Emerging or developing countries may have relatively unstable governments,
economies based on only a few industries, and less developed securities
exchanges or markets which trade a small number of securities. Although prices
on these exchanges tend to be volatile, in the past they have offered greater
potential for gain, as well as loss, than exchanges in developed countries. It
is possible that certain Fund investments could be subject to foreign
expropriation or exchange control restrictions. See "Risk Considerations."
In analyzing companies for investment, the Manager generally will look for
one or more of the following characteristics: above-average earnings growth
potential; predictable and sustainable earnings growth; high profitability;
strength of management; overall financial strength; significant competitive
advantages; dominant market share; and where possible, limited regulation - all
in relation to the prevailing prices of the securities of such companies.
The Fund is permitted to invest on a worldwide basis in companies and other
organizations of any size, regardless of country of organization or place of
principal business activity.
5
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At times the Manager may judge that conditions in the international
securities markets make pursuing the Fund's basic investment strategy
inconsistent with the best interests of the Fund's shareholders. At such times
the Manager may temporarily use alternative strategies, primarily designed to
reduce fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may invest solely in equity securities traded
primarily in U.S. markets, or in domestic or foreign debt securities, preferred
stocks, cash or money market instruments, or in other securities the Manager
considers to be consistent with such defensive strategies. It is impossible to
predict when, or for how long, the Fund will use these alternative strategies.
The Fund is designed for long-term investors who can accept international
investment risk. The Fund's share price will reflect the price movements of the
different securities markets in which it is invested as well as the currencies
in which its investments are denominated. The strength or weakness of the U.S.
dollar against foreign currencies also may account for part of the Fund's
investment performance. As with any long-term investment, the value of the
Fund's shares when sold may be higher or lower than when they were purchased.
Because of the Fund's global investment policies and the investment
considerations discussed above, investment in shares of the Fund should not be
considered a complete investment program.
The Fund's investment objective is a fundamental policy which may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. Fund policies that
are not fundamental may be modified by the Trust's Board of Trustees upon prior
notice to shareholders without shareholder approval.
RISK CONSIDERATIONS
While investing in a globally diversified portfolio may reduce the risks
associated with investing in the economy of only one country - where business
cycles and other economic or political events that influence one country's
securities markets may have a lesser effect on the securities markets in other
countries - investments in foreign securities involve risks that may not be
present in securities of U.S. companies.
Because foreign securities are normally denominated and traded in foreign
currencies, the value of the assets of the Fund may be affected favorably or
unfavorably by changes in currency exchange rates and exchange control
regulations. There may be less information publicly available about a foreign
company than about a U.S. company, and the information that is available may not
be of the same quality. Foreign companies are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign companies are
less liquid and at times more volatile than securities of comparable U.S.
companies. Foreign brokerage commissions and other fees are also generally
higher than in the United States. Foreign settlement procedures and trade
regulations may involve certain risks (such as delay in payment or delivery of
securities or in the recovery of the Fund's assets held abroad) and expenses not
present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, limitations on the removal
of securities or other assets, confiscatory taxation, political, social or
financial instability, and diplomatic developments which could affect the value
of the Fund's investments in certain foreign countries. Legal remedies
available to investors in certain foreign countries may be more limited than
those available with respect to investments in the United States or in other
foreign countries. The laws of some foreign countries may limit the Fund's
ability to invest in securities of certain issuers located in those foreign
countries, and special tax considerations apply to foreign securities, including
withholding of foreign taxes on dividends and interest paid with respect to the
Fund's portfolio investments in such countries.
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A MORE DETAILED EXPLANATION OF FOREIGN INVESTMENTS, AND THE RISKS AND
SPECIAL TAX CONSIDERATIONS ASSOCIATED WITH THEM, IS INCLUDED IN THE STATEMENT OF
ADDITIONAL INFORMATION.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Fund may engage in various foreign currency exchange transactions to
protect itself against adverse changes in exchange rates. The Fund may engage
in foreign currency exchange transactions both in connection with the purchase
and sale of portfolio securities ("transaction hedging"), and to protect itself
against changes in the value of specific portfolio positions ("position
hedging"). However, because of the long-term nature of the Fund's investments,
it is not likely that the Fund regularly will engage in these types of
transactions. Accordingly, any such transactions may be limited and there can
be no assurance that even if utilized, they will be successful.
Transaction hedging is designed to protect against a change in foreign
currency exchange rates between the date on which the Fund contracts to purchase
or sell a security and the settlement date, or to "lock in" the U.S. dollar
equivalent of a dividend or interest payment in a foreign currency. The Fund
may purchase or sell a foreign currency on a spot (or cash) basis at the
prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency.
If conditions warrant, the Fund may also enter into contracts to purchase
or sell foreign currencies at a future date ("forward contracts") and purchase
and sell foreign currency futures contracts as a hedge against changes in
foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements. For transaction hedging purposes the Fund may also purchase or
sell exchange-listed and over-the-counter put and call options on foreign
currency futures contracts and on foreign currencies.
Position hedging is intended to protect against a decline relative to the
U.S. dollar in the value of the currencies in which the Fund's portfolio
securities are denominated or quoted (or against an increase in the value of the
currencies in which the securities the Fund intends to buy are denominated, when
the Fund holds cash or short-term investments). For position hedging purposes,
the Fund may purchase or sell foreign currency futures contracts, foreign
currency forward contracts and options on foreign currency futures contracts and
on foreign currencies on exchanges or in over-the-counter markets. In
connection with position hedging, the Fund may also purchase or sell foreign
currency on a spot basis.
The Fund's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency, and may at times not
involve currencies in which its portfolio securities are then denominated. The
Manager will engage in such "cross hedging" activities when it believes that
such transactions provide significant hedging opportunities for the Fund. Cross
hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability
which is the subject of the hedge.
Hedging transactions involve costs and may result in losses. The Fund will
engage in over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the Manager, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations. There is no
assurance that appropriate foreign currency exchange transactions
7
<PAGE>
will be available with respect to all currencies in which the Fund's
investments may be denominated. The Fund's ability to engage in hedging
transactions also may be limited by tax considerations, and the Fund's
hedging transactions may affect the character or amount of the Fund's
distributions.
OTHER INVESTMENT PRACTICES
The Fund may also engage to a limited extent in the following investment
practices, each of which involves certain special risks. As with foreign
currency exchange transactions, it is not expected that such practices will be
utilized to any great extent, if at all.
OPTIONS. The Fund may buy and sell put and call options for hedging
purposes, and may also seek to increase its return by writing covered put and
call options on securities it owns or in which it may invest. The Fund receives
a premium from writing a put or call option, which increases the Fund's return
if the option expires unexercised or is closed out at a net profit. When the
Fund writes a call option, it gives up the opportunity to profit from any
increase in the price of the underlying security above the exercise price of the
option and the premium received; when it writes a put option, the Fund takes the
risk that it will be required to purchase the underlying security from the
option holder at a price above the current market price of the security and the
premium received. The Fund may terminate an option that it has written prior to
its expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. The aggregate
value of the securities underlying options may not exceed 25% of the Fund's
assets. The Fund's use of these strategies also may be limited by applicable
law.
OPTIONS ON SECURITIES INDICES AND PUT AND CALL WARRANTS. The Fund may buy
and sell options on domestic and foreign securities indices for hedging
purposes. A securities index represents a numerical measure of the changes in
value of the securities comprising the index. An option on a securities index
gives the holder the right, in return for the premium paid for the option, to
buy (in the case of a call option) or sell (in the case of a put option) units
of a particular index at an agreed price during the term of the option. The
holder of the option does not receive the right to take or make delivery of the
actual securities making up the index, but has the right instead to receive a
cash settlement amount based on the change, if any, in the value of the index
during the term of the option.
Depending on the change in the value of the underlying index during the
term of the option, the holder may either exercise the option at a profit or
permit the option to expire worthless. For example, if the Fund were to sell a
call option on an index and the value of the index were to increase during the
term of the option, the holder of the index would likely exercise the option and
receive a cash payment from the Fund. If, on the other hand, the value of the
index were to decrease, the option would likely expire worthless, and the Fund
would realize a profit in the amount of the premium received by it when it sold
the option (less any transaction costs). The Fund will only purchase or sell
options on a securities index to the extent that it holds securities in its
portfolio whose price changes, in the Manager's judgment, should correlate
closely with changes in the index. The Fund will not purchase or sell options
on securities indices if as a result the sum of the premiums paid and premiums
received by the Fund on outstanding options would exceed 5% of the Fund's total
assets.
The Fund may also purchase put and call warrants issued by banks and other
financial institutions, whose values are based on the values from time to time
of one or more foreign securities indices. The Fund's use of such warrants
would be similar to its use of options on securities indices.
<PAGE>
SECURITIES LOANS AND FORWARD COMMITMENTS. The Fund may lend portfolio
securities amounting to not more than 25% of its total assets to broker-dealers,
so long as they are fully collateralized at all times. This may involve some
risk to the Fund because the other party might default on its obligation, which
would cause the Fund to be delayed or prevented from recovering the collateral.
The Fund may also purchase securities for future delivery, which may increase
its overall investment exposure and involves a risk of loss if the value of the
securities declines before the settlement date.
INVESTMENT POLICIES
In addition to the investment criteria described above, the Fund will
follow the investment policies set forth below which, unless otherwise indicated
as an operating policy, are fundamental policies. References below to certain
percentages of the Fund's total assets mean the total assets at the time the
percentage is determined.
(a) DIVERSIFICATION OF INVESTMENTS.
With respect to at least 75% of the Fund's total assets, the Fund will not
invest more than 5% of its total assets in the securities of any one issuer,
other than obligations either issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. This limitation does not apply with respect to
the remaining 25% of the Fund's total assets.
(b) CONCENTRATION OF INVESTMENTS IN AN INDUSTRY.
The Fund will not invest more than 25% of its total assets in the
securities of issuers in any one industry.
(c) LIMITATION ON PERCENTAGE OWNERSHIP OF AN ISSUER.
With respect to at least 75% of the Fund's total assets, the Fund will not
acquire more than 10% of the outstanding voting securities or of any one class
of securities of any one issuer. This limitation does not apply with respect to
the remaining 25% of the Fund's assets (the holdings by other series of the
Trust in the same issuer will be included for purposes of this limitation).
(d) UNSEASONED COMPANIES.
As a matter of operating policy, the Fund may invest to a limited extent in
securities of unseasoned companies. The Manager regards a company as unseasoned
when, for example, it is relatively new to or not yet well established in its
primary line of business. Such companies generally are smaller and younger than
companies whose shares are traded on the major stock exchanges. Accordingly,
their shares are often traded over-the-counter and their share prices may be
more volatile than those of larger, exchange-listed companies. In order to
avoid undue risks, the Fund will not invest more than 5% of its total assets in
securities of any one company with a record of fewer than three years'
continuous operation (including that of predecessors).
(e) WARRANTS.
As a matter of operating policy, the Fund will not invest more than 5% of
its net assets in warrants, subject to the restriction that not more than 2% may
be in warrants not listed on the New York or American Stock Exchanges. While
any warrants purchased by the Fund have a readily determined market value which
will
9
<PAGE>
generally move in correlation with the market price of the underlying equity
security, warrants nevertheless become worthless if they are not sold or
exercised prior to their designated expiration date.
(f) TEMPORARY DEFENSIVE INVESTMENTS.
From time to time, depending on the Manager's analysis of market and other
considerations, all or part of the assets of the Fund may be held in cash and
short-term money market instruments, including obligations of the U.S.
Government, high quality commercial paper, certificates of deposit, bankers'
acceptances, bank interest-bearing demand accounts, and repurchase agreements
secured by U.S. Government securities. All such investments will be made for
temporary defensive purposes to protect against the erosion of capital and
pending investment in other securities. In any repurchase transaction in which
the Fund engages, the Fund's position during the entire term of the repurchase
agreement will be fully collateralized.
(g) INVESTMENT IN OTHER INVESTMENT COMPANIES.
As a matter of operating policy, the Fund may invest in securities issued
by other investment companies which principally invest in securities of foreign
issuers, within the limits contained in the 1940 Act. Pursuant to such limits,
the Fund currently may not invest in such securities if, at the time of
purchase, (i) more than 5% of the Fund's total assets are invested in any one
investment company, (ii) more than 3% of the total voting stock of any one
investment company is owned by the Fund, and (iii) more than 10% of the Fund's
total assets are in the aggregate invested in such investment companies.
(h) OTHER INVESTMENT RESTRICTIONS.
The Fund has adopted additional restrictions, both fundamental and
operating, that prohibit or restrict certain investments or practices, including
the investment of not more than 15% of its net assets in illiquid securities,
prohibiting the purchase of securities of issuers in which officers or trustees
of the Trust or the Manager have certain interests, and the borrowing of not
more than 20% of its total assets for temporary or emergency purposes only.
These additional restrictions are described in the Statement of Additional
Information under "Investment Objective and Policies."
The Fund has reserved the right, if approved by the Board of Trustees, to
convert in the future to a "feeder" fund which would invest all of its assets in
a "master" fund having substantially the same investment objective, policies and
restrictions as currently exist for the Fund. Prior notice of any such action
would be given to all shareholders if and when such a proposal is approved,
although no such action has been proposed as of the date of this Prospectus.
PORTFOLIO TURNOVER. The Fund may purchase and sell securities without
regard to the length of time the security is to be held or has been held. This
factor, together with the adjustment of the investment portfolio whenever deemed
advisable, may, from time to time, result in a relatively high rate of portfolio
turnover^. (The portfolio turnover rate is computed by dividing the lesser of
total purchases or proceeds of sales effected during the period, excluding
short-term securities, by the monthly average of the value of portfolio
securities during that period.) High portfolio activity increases the Fund's
transaction costs, including brokerage commissions. See "Financial Highlights"
above.
10
<PAGE>
PURCHASE OF SHARES
Shares of the Fund are offered for purchase to the public continuously
through investment dealers at the public offering price next determined after a
purchase order in proper form is received by the Sub-Transfer Agent, the Fund,
or another authorized agent or subagent of the Fund. The public offering price
will be effective for orders received by the Sub-Transfer Agent, the Fund, or
another authorized agent or subagent of the Fund, prior to the time of the next
determination of the Fund's net asset value. Orders received after the time of
the next determination of the Fund's net asset value will be entered at the next
calculated public offering price.
The public offering price per share will be equal to the net asset value
per share, plus a sales charge, which is reduced on purchases involving amounts
of $50,000 or more, as set forth in the table below. The reduced sales charges
apply to quantity purchases made at one time by (i) an individual, (ii) members
of a family (I.E., an individual, spouse and children or grandchildren under age
21), or (iii) a trustee or fiduciary of a single trust estate or a single
fiduciary account. (See also "Rights of Accumulation" below).
<TABLE>
<CAPTION>
SALES CHARGE AS PERCENTAGE OF
-----------------------------
PUBLIC NET DEALER COMMISSION
AMOUNT OF PURCHASE OFFERING AMOUNT AS PERCENTAGE OF
AT THE PUBLIC OFFERING PRICE PRICE INVESTED THE PUBLIC OFFERING PRICE
---------------------------- --------- -------- --------------------------
<S> <C> <C> <C>
Less than $50,000. . . . . . . . . . . . . . . . . . . . . . . . . 5.50% 5.82% 5.00%
$50,000 but less than $100,000 . . . . . . . . . . . . . . . . . . 4.75% 4.99% 4.25%
$100,000 but less than $250,000. . . . . . . . . . . . . . . . . . 3.75% 3.90% 3.25%
$250,000 but less than $500,000. . . . . . . . . . . . . . . . . . 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 . . . . . . . . . . . . . . . . 2.00% 2.04% 1.75%
$1,000,000 or more . . . . . . . . . . . . . . . . . . . . . . . . None None 1.00%*
_________________
* Paid by the Manager from its own resources, as described below under
"Purchase at Net Asset Value."
</TABLE>
The Fund also will pay dealers and others, including the Manager and
Pasadena Fund Services, Inc. (the "Distributor"), a continuing service fee equal
to 0.25% per annum of the average net asset value of the Fund's shares held by
such persons in order to compensate them for providing certain services to their
clients, including processing redemption transactions and providing account
maintenance and certain information and assistance with respect to the Fund, and
responding to shareholder inquiries.
RIGHTS OF ACCUMULATION
The reduced sales charges also apply on a cumulative basis over any
period of time. Thus, the value of all shares of the Fund owned by a
shareholder (including the shareholder's own account, IRA, spousal or other
account), taken at the current net asset value, can be combined with a
current purchase of the Fund to determine the rate of sales charges
applicable to the current purchase. In order to receive the cumulative
quantity reduction, the existing shares of the Funds held by a shareholder
must be called to the attention of the Distributor at the time of the current
purchase.
11
<PAGE>
LETTER OF INTENT
An investor may qualify for an immediate reduced sales charge on a purchase
of Class A shares of any publicly-offered fund by completing a Letter of Intent
(the "Letter of Intent"), in which the investor states an intention to purchase
during the next 13 months a specified amount which, if made at one time, would
qualify for a reduced sales charge. Class A shares of any of the Funds acquired
within 90 days prior to the first order under the Letter of Intent may be used
to satisfy the intended purchase amount. The terms of the Letter of Intent
include provisions granting a security interest to the Distributor in 5% of the
amount of the investor's total intended purchase to assure that the full
applicable sales charge will be paid if the investor does not complete the
intended purchase. A minimum initial investment equal to 5% of the total
intended amount is required in the Class A shares of any of the publicly-offered
funds. Additional information regarding the Letter of Intent is provided in the
Statement of Additional Information.
PURCHASE AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value by officers,
trustees, directors and full time employees of the Trust, the Manager, the
Distributor and affiliates of such companies, by their family members, by
investment advisory clients of the Manager's affiliate, Roger Engemann &
Associates, Inc. ("REA"), who are participants in REA's "President's Circle"
program, and their family members, and by such other persons who are determined
by the Board of Trustees to have acquired shares under special circumstances not
involving any sales expense to the Fund or the Distributor. Shares of the Fund
may also be purchased at net asset value by registered broker-dealers and their
affiliates, by their registered personnel and employees and by their immediate
family members, in accordance with the internal policies and procedures of the
broker-dealer. Shares of the Fund may also be acquired at net asset value by
unit trusts, insurance companies or other separate accounts which acquire and
hold shares of the Fund as part of a program or separate offering being made by
them.
Shares of the Fund may be purchased at net asset value with no sales charge
by investors who are existing shareholders of any of the ^ Funds if their
initial purchases (excluding shares of The Pasadena Balanced Return Fund
purchased at net asset value during the special 1992 and 1993 offering periods)
were made at net asset value; purchases at net asset value apply only to
purchases for pre-existing accounts and new accounts which are directly or
indirectly beneficially owned by such shareholder. Such sales are made with the
understanding by the purchaser that the purchase is made for investment purposes
and that the shares will not be transferred or resold except through redemption
or repurchase by or on behalf of the Fund. An investor must indicate eligibility
for this privilege at the time of the investment. The Manager or Distributor
may, in its discretion, waive the minimum initial investment requirements for
certain of these investors.
Shares of the Fund may be purchased by any single purchaser at net asset
value with no sales charge in amounts of $1 million or more in one or more of
the Funds, and may also be purchased at net asset value by employee benefit
plans qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), including salary reduction plans qualified under
Section 401(k) of the Code, subject to minimum requirements with respect to
number of employees or amount of purchase which may be established from time to
time by the Distributor. Currently, the Distributor has not established any
such minimum requirements. Employee benefit plans not qualified under
Section 401(a) of the Code may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups, if any,
established by the Distributor from time to time to enable the Distributor to
realize economies of scale in its sales efforts and sales-related expenses.
12
<PAGE>
Shares of the Fund also may be purchased at net asset value by trust
companies and other financial institutions, bank trust departments and fee-based
financial planners and investment advisors, for funds or accounts over which
they exercise exclusive discretionary investment authority and which are held in
a fiduciary, agency, advisory, custodial or similar capacity. Such purchases are
subject to minimum requirements with respect to amount of purchase which may be
established by the Distributor from time to time. Currently, the Distributor has
not established any such minimum requirements. Such institutions may charge
their clients transaction or other fees connected with the purchase of Fund
shares.
If an investment in shares meeting the above-referenced requirements is
made through a dealer who has executed a dealer agreement with respect to the
Funds, the Manager may pay out of its own resources a one-time fee to such
dealers, as follows: 1.00% on purchases up through $2 million, plus 0.80% on the
next $1 million, plus 0.20% on the next $2 million, and 0.10% on the excess over
$5 million. The entire amount of such fee will be paid following settlement of
each purchase. Such transactions must be brought to the attention of the
Distributor at the time of the initial investment. In lieu of this one-time fee,
the Manager may pay out of its own resources, to dealers or other persons who
provide certain recordkeeping and administrative services related to qualified
employee benefit plans invested in the Fund, a continuing fee of up to 0.20% per
annum of the Fund's net assets represented by such investments.
PURCHASE PROCEDURE
The principal underwriter and distributor for the shares of the Fund is
Pasadena Fund Services, Inc., 600 North Rosemead Boulevard, Pasadena, California
91107-2133 (the "Distributor"). Generally, shares may be purchased only through
investment dealers that have selling agreements with the Distributor. It is the
responsibility of such investment dealers to transmit orders so they will be
received by the Distributor, in care of the Sub-Transfer Agent, on a timely
basis. Orders placed with dealers prior to that day's determination of the
Fund's offering price must be received by the Distributor (c/o the Sub-Transfer
Agent) prior to its close of business on the same day.
Investment applications, accompanied by a check, in U.S. dollars,
payable to the "Pasadena Group of Mutual Funds", should be sent by the
investment dealer to the Distributor in care of the Sub-Transfer Agent, P.O.
Box 8505, Boston, Massachusetts 02266-8505. No subscriptions will be
accepted without payment. Third party checks will only be accepted if they
are payable to an existing shareholder of the Fund who is an individual and
if they are endorsed over to the Pasadena Group of Mutual Funds. When
purchases are made by check or periodic automatic investment, redemptions
will not be allowed until the investment being redeemed has been in the
account for at least 15 calendar days. For direct purchases by an investment
dealer for its client, payment for the shares purchased must be received by
the dealer. Full and fractional shares will be issued for the amount of the
purchase.
The minimum initial investment for the Fund is $1,000 per account ($250 for
individual retirement accounts and custodial accounts for minors under the
Uniform Transfers to Minors Act and for the initial purchase under a Systematic
Purchase Plan). Minimum additional investments are $50. The Manager or
Distributor may, in its discretion, waive the minimum initial investment
requirements for individual retirement accounts, Keogh Plans, employee benefit
plans, or other systematic or periodic purchase plans.
The Fund and the Distributor each reserves the right in its sole discretion
to reject any purchase order in whole or in part, and may suspend the offering
of the Fund's shares at any time. For investors wishing to purchase shares by
wire, please call the Fund or your investment dealer for information on the
procedures to be followed.
13
<PAGE>
SHAREHOLDERS' OPEN ACCOUNTS
When an investor purchases shares in the Fund, the Fund opens a
Shareholder's Open Account for that investor or for the investment dealer
holding the Fund's shares for the investor. Any additional shares purchased are
likewise credited to the Shareholder's Open Account.
The Fund maintains a continuous permanent record of each Shareholder's Open
Account and sends a written statement of every transaction in the account,
including information concerning the status of the account. These statements
provide an annual record of investments in shares of the Fund, which are held
for the shareholder in uncertificated form by the Fund's transfer agent. No
share certificates are issued.
SYSTEMATIC PURCHASE PLAN
Under the Fund's Systematic Purchase Plan, a shareholder may arrange to
make additional purchases (minimum $50) of Fund shares automatically on a
monthly basis by electronic funds transfer from the shareholder's checking
account if the bank which maintains the account is a member of the Automated
Clearing House, or by preauthorized checks drawn on the shareholder's bank
account. A shareholder may, of course, terminate the program at any time.
Shareholders may obtain more information concerning this program, including
the application form, from their investment dealer or the Fund.
The market value of the shares of the Fund is subject to fluctuation.
Before undertaking any plan for systematic investment, the investor should keep
in mind that such a program does not assure a profit or protect against a loss.
RETIREMENT PLANS
Individuals may purchase shares of the Fund through an Individual
Retirement Plan ("IRA") available from the Fund or through other established
retirement plans. An IRA using a trust account maintained by Pasadena National
Trust Company, an affiliate of the Manager, is available with no separate fees.
PURCHASING SHARES:
------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
------------------------------------------------------------------------------
By mail See "Purchase Procedures" for $50 minimum for subsequent
initial minimum requirements. purchases. Complete the
Complete account application form at the bottom of a
in its entirety, sign and recent account statement,
return with your check made make your check payable to
payable to the Pasadena the Pasadena Group of Mutual
Group of Mutual Funds address Funds, write your account
listed on the account number on the check and mail
application. in the envelope provided
with your account statement.
------------------------------------------------------------------------------
14
<PAGE>
------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
------------------------------------------------------------------------------
By wire Not currently available Instruct your bank to wire
funds to:
State Street Bank and
Trust
Boston, MA
ABA #011000028
DDA #99046526
Also reference:
- Name of Pasadena
Fund
- Fund account
number
------------------------------------------------------------------------------
By contacting Visit any investment dealer Mail directly to your
your investment who is registered in the investment dealer's address
dealer state where the purchase is printed on your account
made and who has a sales statements, or to the
agreement with Pasadena Fund Sub-Transfer Agent at P.O.
Services, Inc. Box 8505, Boston, MA
02266-8505
------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for the Class A shares of the other
Funds on the basis of their relative net asset values (with no sales charge
or exchange fee) at the time of the exchange. Shares of the Fund may not be
exchanged for shares of another Fund unless the amount exchanged satisfies
the other Fund's minimum investment requirement. Exchanges may only be made
in states where shares of the ^ Funds are qualified for sale, and
shareholders should note that an exchange may result in recognition of a gain
or loss for income tax purposes. Exchange privileges may be modified or
suspended by the Fund upon 60-days' prior notice to shareholders.
Telephone Exchange Privilege. Investors will be deemed to have elected the
telephone exchange privilege unless they indicate to the contrary by marking the
appropriate section of the investment application. By electing the telephone
exchange privilege, investors authorize the Fund to act upon instructions by
telephone to exchange shares for the Fund account for which such service has
been authorized. (See "Telephone Redemption Privilege" below for information
regarding the use of telephone authorizations).
GENERAL
Shares of the Fund may, on a one-time only basis by any shareholder, be
repurchased at the then current net asset value with no sales charge up to the
amount of any redemption of such shares by the shareholder within the prior
60-day period. Telephone orders from dealers and requests for information from
dealers or shareholders will be recorded for the protection of the Fund.
The Distributor, at its expense, will from time to time also provide
additional compensation to dealers who sell shares of any of the
publicly-offered funds. Compensation may include financial assistance to
dealers in connection with conferences, sales training or promotional programs
for their employees, seminars for the public, advertising campaigns regarding
any of the publicly-offered funds and/or other dealer-sponsored special events.
In some instances, this compensation will be made available only to dealers
whose representatives have sold or are
15
<PAGE>
expected to sell significant amounts of such shares. Dealers may not use
sales of any of the publicly-offered funds' shares to qualify for this
compensation to the extent such may be prohibited by the laws or regulations
of any state or any self-regulatory agency, such as the National Association
of Securities Dealers, Inc. ("NASD"). Compensation may include payment for
travel expenses, including lodging at luxury resorts, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the United States for meetings or
seminars of a business nature.
REDEMPTION OF SHARES
The Fund will redeem all or any portion of a shareholder's account when
requested, subject to prior collection by the Fund's custodian of the purchase
price of the shares being redeemed. The redemption price will be the net asset
value per share next determined after receipt in proper form of the redemption
request by the Sub-Transfer Agent, the Fund, or another authorized agent or
subagent of the Fund. See "Determination of Net Asset Value."
Shareholders may redeem shares by sending a signed request for redemption
to their investment dealer or to the Fund c/o Boston Financial Data Services,
Inc., P.O. Box 8505, Boston, Massachusetts 02266-8505. The signature on such
request must be guaranteed by an eligible guarantor institution, unless the
proceeds are less than $50,000 and are payable to the shareholder and sent to
the address on the Fund's records (provided that the shareholder's address of
record has not been changed with the preceding 30 days). Corporations,
partnerships, trusts and other fiduciaries may be required to furnish further
documentation, such as certified copies of trust documents, corporate
resolutions, or tax waivers for redemption purposes. Investment dealers holding
shares of the Fund for the account of their clients may also require the Fund to
repurchase such shares at the next determined net asset value.
A wire transfer procedure is available for redemptions made directly
through the Fund, which permits the proceeds of a redemption of the Fund's
shares to be wired to a designated bank account on the second business day
following the redemption. A shareholder desiring to redeem shares by this
procedure must provide the Sub-Transfer Agent with a written authorization,
including specific bank account information, which instructs the Sub-Transfer
Agent to honor wire redemption requests. A fee of $10 may be deducted from the
proceeds of each redemption to cover the costs of the wire transfer. This
privilege may be modified or terminated at any time by the Fund or the
Sub-Transfer Agent upon notice to shareholders.
A telephone redemption privilege is available to shareholders. A
shareholder will be deemed to have elected the telephone redemption privilege
unless he or she indicates to the contrary by marking the appropriate section of
the investment application. By electing the telephone redemption privilege,
shareholders authorize the Fund or the Sub-Transfer Agent to act upon
instructions by telephone, which are reasonably believed to be genuine, to
redeem shares from the Fund account for which such service has been authorized
and, in the case of wire redemptions, to transfer the proceeds to the bank or
other account designated in the prior authorization. Shareholders agree that
neither the Fund nor the Sub-Transfer Agent will be liable for any loss, expense
or cost suffered or incurred by shareholders arising out of any telephone
redemption or exchange request, including any fraudulent or unauthorized
requests, if reasonable procedures are followed. In an effort to confirm that
telephone requests are genuine, the Fund employs reasonable procedures, which
include requesting the taxpayer identification number and other information
known only to the shareholder, and recording the telephone instructions.
16
<PAGE>
Because of the expense of maintaining small accounts, the Fund, at its
option, may redeem accounts with a market value of $800 or less as a result of
redemptions, after prior written notice of at least 60 days to provide the
shareholder an opportunity to purchase sufficient additional shares to bring the
account up to a value of at least $1000 ($200 and $250, respectively, for
accounts requiring an initial minimum investment of $250).
SYSTEMATIC WITHDRAWAL PLAN
Under a Systematic Withdrawal Plan, a shareholder with an account value in
the Fund of $10,000 or more may receive (or send to a third party) periodic
payments of $100 or more from the shareholder's account in the Fund on a monthly
or quarterly basis. (Minimum account value for quarterly withdrawals is $5,000.)
Shares of the Fund will be redeemed as necessary in order to meet withdrawal
payments. Dividends and distributions on shares held in a Systematic Withdrawal
Plan account will be reinvested in additional shares at net asset value.
Purchases of additional shares concurrently with periodic withdrawals from
the shareholder's account may be disadvantageous because of sales charges
applied when purchases are made, and because some or all of any loss on
redemption may be disallowed under certain "wash sales" rules for federal income
tax purposes. While a Systematic Withdrawal Plan is in effect, each additional
purchase of the Fund's shares must be equal to at least three times the
scheduled annual withdrawals or $5,000, whichever is less. Shareholders should
recognize that, to the extent withdrawals exceed purchases plus any dividends
and distributions reinvested, the value of their account will be reduced and
ultimately may be exhausted. Each withdrawal may result in gain or loss for
federal or state income tax purposes.
To initiate a Systematic Withdrawal Plan, a shareholder should complete the
authorization form which may be obtained from the Fund or the shareholder's
investment dealer. The Fund and the Sub-Transfer Agent reserve the right to
modify or terminate this privilege at any time upon notice to the shareholder,
and the Plan will terminate automatically if the value of the shareholder's
shares in the Fund is reduced below $800, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder.
REDEEMING SHARES:
------------------------------------------------------------------------------
METHOD PROCEDURE
------------------------------------------------------------------------------
By writing to The Pasadena Group Send a letter of instruction specifying the
of Mutual Funds c/o the name of the Fund, the number of shares or
Sub-Transfer Agent, P.O. dollar amount to be sold, your name and
Box 8505, Boston, Massachusetts account number. For redemptions over
02266-8505 $50,000, and for certain redemptions of
$50,000 or less (trusts, corporations,
partnerships and retirement plans),
additional documentation may be required
and your signature must be guaranteed by a
bank, savings association, credit union, or
member firm of a domestic stock exchange or
the National Association of Securities
Dealers, Inc., that is an eligible
guarantor institution. You should verify
with the institution that it is an eligible
guarantor prior to signing. Notarization
by a Notary Public is not an acceptable
signature guarantee.
17
<PAGE>
------------------------------------------------------------------------------
METHOD PROCEDURE
------------------------------------------------------------------------------
By contacting your investment If you redeem shares through your
dealer investment dealer, you may be charged for
this service. Shares held for you in your
investment dealer's street name must be
redeemed through the dealer.
------------------------------------------------------------------------------
By telephone-contact one of our If you have previously authorized telephone
Mutual Fund Representatives at privileges on your account application, you
(800) 648-8050 may redeem up to $50,000 per account over
the telephone, provided the check is made
payable to the shareholder(s) of record and
is sent to the address of record (the
address must have been in effect for at
least 30 days prior to the redemption).
Certain accounts cannot be processed over
the telephone (trusts, corporations,
partnerships and retirement plans) since
additional documentation may be required.
------------------------------------------------------------------------------
By wire Any redemption request that has been
received in proper order, may be wired to
the shareholder(s) bank provided the
information has been previously placed in
the computer, or if accompanied by a
signature guaranteed letter requesting that
funds be wired. A fee of $10 may be deducted
from the proceeds of each redemption to
cover the costs of the wire transfer.
------------------------------------------------------------------------------
MANAGEMENT
The Board of Trustees of the Trust oversees the business and affairs of the
Fund and exercises all powers normally associated with running a business. The
Board has delegated the management and administration of the Fund's day-to-day
operations to the Trust's officers and the Manager.
INVESTMENT MANAGEMENT AND ADMINISTRATIVE SERVICES
The Manager is Roger Engemann Management Co., Inc., a California
corporation whose office is located at 600 North Rosemead Boulevard, Pasadena,
California 91107-2101. The Manager's telephone numbers are (818) 351-9686 and
(800) 882-2855 (toll-free).
Roger Engemann & Associates, Inc. ("REA"), which is a wholly owned
subsidiary of Pasadena Capital Corporation, owns 93.5% of the Manager's capital
stock. Roger Engemann, controlling shareholder of Pasadena Capital Corporation,
is the Chairman of the Board and President of REA, the Manager and the Trust.
REA has been engaged in the investment management business since 1969, and
provides investment counseling services to retirement plans, colleges,
corporations, trusts and individuals. The portfolio managers, research analysts
18
<PAGE>
and supporting staff are substantially the same for both the Manager and REA.
Combined assets under management by the Manager and REA as of December 31,
1995, were approximately $4.4 billion.
Roger Engemann, James E. Mair and John S. Tilson are primarily responsible
for the day-to-day management of the Fund. Mr. Engemann has been president of
the Manager since its organization in 1985, and has been president of REA since
its inception. Messrs. Mair and Tilson are both Executive Vice Presidents and
Managing Directors of Portfolio Management of the Manager, and both have been
with the Manager since 1985 and with REA since 1983. Messrs. Engemann and Mair
have been Chartered Financial Analysts ("CFAs") since 1972, and Mr. Tilson has
been a CFA since 1974.
The Manager serves under an investment management agreement (the
"Management Agreement") with the Trust on behalf of the Fund. Under the
Management Agreement, the Manager furnishes investment advice and investment
management services with respect to the Fund's portfolio of securities and
investments, provides personnel, office space, facilities and equipment as may
be needed by the Fund in its day-to-day operations, and provides the officers of
the Trust. The Manager also provides the Fund with fund accounting, including
assistance and personnel necessary to price the portfolio securities of the
Fund, calculates the Fund's net asset value, and maintains the books and records
of the Fund's investment portfolio as required by applicable law. The Manager
also performs, under an administration agreement (the "Administration
Agreement"), all of the administrative and shareholder servicing for the Fund
and pays for all other normal operating expenses of the Fund, except for the
fees and expenses associated with investment management and the service fees
paid by the Fund to dealers and others.
The Manager may consider a number of factors in determining which brokers
or dealers to use for the Fund's portfolio transactions. While these are more
fully discussed in the Statement of Additional Information, the factors may
include, but are not limited to, the reasonableness of commissions, the quality
of services and executions, sales of the Fund's shares, and the availability of
research which the Manager and its affiliates may lawfully and appropriately use
in their investment advisory capacity.
MANAGEMENT AND ADMINISTRATION FEES AND EXPENSES
For the services provided under the Management Agreement, the Manager
receives a management fee from the Fund (paid monthly) computed and prorated on
a daily basis equal to the annual rate of 1.00% of the Fund's average daily net
assets up to $30 million, plus 0.80% of net assets over $30 million up to
$100 million, plus 0.60% of net assets over $100 million up to $500 million,
plus 0.40% of net assets over $500 million. The Manager also receives under the
Administration Agreement an administration fee from the Fund equal to 1.05% per
annum of the Fund's average daily net assets up to $30 million, plus 0.85% per
annum of net assets over $30 million up to $100 million, plus 0.65% per annum of
net assets over $100 million up to $500 million, plus 0.60% of net assets over
$500 million.
The combined rate of fees is higher than that paid to most other managers
of investment companies. However, the Manager, in its capacity as administrator
of the Fund, bears the cost for all normal operating expenses of the Fund
(except for the fees and expenses, including brokerage, associated with
investment management services, and the fees paid to dealers and others
providing services to shareholder accounts), which are normally paid directly by
other investment companies, such as compensation of the Trust's trustees, cost
of shareholder reports, insurance, and all fees and expenses of the Fund's
transfer agent and sub-transfer agent, dividend disbursing agent, custodian,
auditors, accountants, attorneys and other parties performing services or
operational functions for the Fund. As a result, the Fund will not incur any
expenses in connection with its normal operations other than the fees described
above. (See "Expense and Fee Table" on page 2)
19
<PAGE>
During the fiscal years ended December 31, 1995 and 1994, the Manager
waived and absorbed all management and administration fees otherwise payable by
the Fund to the Manager. Also, see the Statement of Additional Information --
"Investment Management and Administrative Services."
The maximum operating expenses of the Fund also will be limited by
applicable state securities laws where shares of the Fund are sold. This
limitation may be removed or modified in the future without prior notice to
shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund intends to declare a dividend equal to
substantially all of its net investment income (including any net short-term
capital gains realized by the Fund and any net realized foreign currency gains
and losses, if any) and a distribution of substantially all net realized
long-term capital gains at least once each calendar year, typically in December.
Unless a shareholder has previously requested in writing that payment be
made in cash, dividends and capital gain distributions are ^ reinvested in
additional shares of the Fund at a purchase price equal to the net asset value
per share (without any sales charge) as of 4:15 p.m., Eastern Time, on the
dividend or distribution reinvestment date. Each shareholder's account is
subsequently credited with the purchased shares on the dividend or distribution
payment date. A shareholder may change his or her election at any time prior to
the record date for a particular dividend or distribution by written request.
Shareholders may not receive immediate confirmation of automatic dividend
and capital gain reinvestment transactions, but may instead receive confirmation
of such transactions in a periodic statement. Shareholders can also obtain
information on their accounts by calling the telephone number listed below under
"Shareholder Inquiries."
Any dividend or distribution paid by the Fund reduces the net asset value
per share by the per share amount of the dividend or distribution. Therefore, a
dividend or distribution paid shortly after a purchase of shares by an investor
would represent, in substance, a partial return of capital to the shareholder
(to the extent it is paid on the shares so purchased), even though it would be
subject to income taxes, as discussed below.
TAXES. The Fund intends to qualify and to elect to be taxed as a regulated
investment company under Subchapter M of the Code ^, but did not qualify as such
for its initial tax year ending October 31, 1994, or for its tax period
November 1, 1994 to December 31, 1994. The Fund did qualify as a regulated
investment company for the fiscal year ending December 31, 1995. By satisfying
certain requirements relating to the sources of the Fund's income and the
diversification of its assets and by distributing substantially all of its net
investment income and net realized capital gains for each fiscal year, in
addition to meeting other requirements imposed by the Code, the Fund will not be
subject to any federal income taxes, to the extent its earnings are
distributed^. The Manager has paid all applicable taxes to which the Fund was
subject due to its failure to qualify as a regulated investment company during
1993 and 1994 (including all taxes related to the Fund's "built-in" gains in its
assets held on January 1, 1995).
Dividends and capital gain distributions of the Fund, whether reinvested in
additional shares or received in cash, will be subject to current federal income
tax, except to tax-exempt shareholders which have not borrowed to purchase or
carry Fund shares. Dividends of net investment income and the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. Distributions of the excess of net
20
<PAGE>
long-term capital gains over net short-term capital losses are treated as
long-term capital gains regardless of how long a shareholder has held shares
of the Fund.
Under certain circumstances, depending on the percentage of Fund assets
invested in foreign securities, the Fund may be able to elect to pass-through to
its shareholders the pro-rata portion of income or other taxes paid by the Fund
to foreign governments during a year, which would then allow the shareholders to
deduct or claim a foreign tax credit for such amount.
Distributions will be taxable in the year in which they are received except
for certain distributions received in January, which will be taxable as if
received the prior December. Shareholders will be informed annually of the
amount and nature of the Fund's distributions, the portion, if any, that
qualifies for the corporate dividends-received deduction, the portion, if any,
that should be treated as a return of capital, and the amount, if any, of income
tax withheld or foreign taxes eligible for "pass through" to shareholders.
The foregoing discussion has been prepared by the management of the Fund,
and does not purport to be a complete description of all tax implications of an
investment in the Fund. Heller, Ehrman, White & McAuliffe, legal counsel to the
Fund, has expressed no opinion in respect thereof. Additional information about
taxes is set forth in the Statement of Additional Information. Shareholders
should consult their own advisers concerning the application of federal, state
and local tax laws to their particular situations.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined as of 4:15 p.m., Eastern
Time, on each day the New York Stock Exchange is open and during which a
purchase subscription or redemption request is received (or at such earlier time
as the Exchange may close). Net asset value per share is calculated by dividing
the total value of the Fund's investments and other assets, less all
liabilities, by the number of Fund shares outstanding. For this calculation, the
Fund's assets include accrued dividends (from their ex-dividend date) and
interest, and liabilities include accrued expenses.
In valuing the Fund's assets for calculating net asset value, portfolio
securities with readily available market quotations are valued at their market
value and other assets are valued in such manner as the Board of Trustees deems
appropriate to reflect their fair value. Foreign securities quoted in foreign
currencies are translated into U.S. dollars at the then-current exchange rates
or at such other value as the Board of Trustees may determine in computing net
asset value. As a result, fluctuations in the value of such currencies in
relation to the U.S. dollar will affect the net asset value of Fund shares even
though there may be no change in the market value of such securities. See the
Statement of Additional Information under "Purchase, Redemption, and Pricing of
Fund Shares" for more detailed information on the valuation of the Fund's
assets.
PERFORMANCE INFORMATION
From time to time, the Fund may publish its total return in advertisements
and communications to investors. Total return information will include the
Fund's total return over the most recent fiscal year and over the period from
the Fund's inception of operations. The Fund also may advertise aggregate and
average total return information over different periods of time. The Fund's
total return will be based upon the value of the shares acquired through a
hypothetical $1,000 investment (at the maximum public offering price) at the
beginning of the specified period and the net asset value of such shares at the
end of the period, assuming reinvestment of all distributions at net asset
value. The Fund also may publish a cumulative return over a specified period
based on
21
<PAGE>
the change in net asset value over such period. In addition, the Fund may
publish a distribution rate in prospective investor communications preceded
or accompanied by a copy of the current Prospectus. The current distribution
rate for the Fund will be calculated by dividing the maximum offering price
per share into the annualization of the total distributions made by the Fund
during the stated period. In each case, distribution rates and total return
figures will reflect all recurring charges against the Fund's income. In
addition, the Fund may compare its performance to various indices of
investment performance published by third parties.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's performance for any
prior period should not be considered as a representation of what an investor's
total return may be in any future period. For further information, including the
formula and an example of the total return calculation, see the Statement of
Additional Information.
The Annual Report to Shareholders and subsequent Semi-Annual Report to
Shareholders, if applicable, contain additional performance information
respecting the Fund. A copy of each Report is available without charge upon
request to the Fund at the address or telephone number set forth on the front
page of this Prospectus.
DESCRIPTION OF THE TRUST
The Fund is a series of the Trust, which was organized as a Massachusetts
business trust on May 28, 1986. The Trust's Agreement and Declaration of Trust
permits the Board of Trustees to issue an unlimited number of full and
fractional shares of beneficial interest without par value, which may be issued
in any number of series (called funds). The assets and liabilities of each
series are separate and distinct from any other series. Currently, the Trust
issues redeemable shares in five series (the "Funds"): The Pasadena Growth Fund,
The Pasadena Nifty Fifty Fund, The Pasadena Balanced Return Fund, The Pasadena
Small & Mid-Cap Fund and The Pasadena Global Growth Fund. The Board of Trustees
from time to time may authorize additional series or the termination of existing
series of the Trust. Each of the Funds is authorized to issue Class A, Class B
and Class C shares. The Fund currently offers only Class A shares. This
Prospectus covers only Class A shares of the Fund. The shares of the Funds are
offered in separate prospectuses. Shares issued by the Fund have no preemptive,
conversion, or sinking rights. Shareholders have equal and exclusive rights as
to dividends and distributions as declared by the Fund and to the net assets of
the Fund upon liquidation or dissolution.
Shareholders of the Fund, as a separate series of the Trust, vote
separately on matters affecting only the Fund (E.G., approval of the Management
Agreement); shareholders of all the Funds vote as a single class on matters
affecting all the Funds jointly or the Trust as a whole (E.G., election or
removal of Trustees). Voting rights are not cumulative, so the holders of more
than 50% of the shares of all the Funds voting in any election of Trustees, can,
if they choose to do so, elect all of the Trustees. While the Funds are not
required to, nor do they intend to, hold annual meetings of shareholders, such
meetings may be called by the Trustees in their discretion or upon demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing or removing Trustees.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to the Pasadena Group Service
Center at 600 North Rosemead Boulevard, Pasadena, California 91107-2133
(telephone toll free: (800) 648-8050).
22
<PAGE>
GENERAL INFORMATION
State Street Bank and Trust Company serves as Custodian of the Fund's
assets.
Pasadena National Trust Company ("PNTC"), which is wholly-owned by Mr.
Roger Engemann, is the Transfer and Dividend Disbursing Agent for the Fund.
PNTC has entered into a Sub-Transfer Agency and Service Agreement with State
Street Bank and Trust Company, which will perform (through its affiliate, Boston
Financial Data Services, Inc.) on behalf of PNTC certain of the shareholder
accounting, recordkeeping and administrative functions required by the Fund.
Coopers & Lybrand L.L.P. serves as independent auditors for the Fund.
Reports containing financial statements, at least one of which will be audited,
will be sent to shareholders twice during each fiscal year of the Fund, which
ends on December 31. Only one copy of each report may be sent to shareholders
at the same address, and statements for accounts having the same address may be
consolidated in single mailings unless otherwise requested.
The validity of the shares offered by the Prospectus will be passed on by
Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California
94104.
Shares of the Fund may be purchased by one or more investment funds
organized outside the jurisdiction of the United States, whose shares are
offered to investors who are not residents or citizens of the United States.
The percentage of the Fund's shares owned by such offshore fund will be
disclosed in this Prospectus and/or the Statement of Additional Information, as
it may be amended from time to time. To the extent the number of shares of the
Fund owned by any such offshore fund becomes a significant percentage of the
Fund's outstanding shares, a risk to the Fund may exist to the extent the Fund
is forced to liquidate portfolio securities quickly to meet any significant
redemption requests by the offshore fund. However, as of the date of this
Prospectus no such ownership exists, and even in the event a substantial
percentage of the Fund's outstanding shares subsequently are held by such an
offshore fund, the ability of the Fund to redeem its shares in kind (as
described in the Statement of Additional Information) should substantially
reduce any adverse effect on the Fund of any significant redemption of Fund
shares by the offshore fund.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and information
or representations not herein contained, if given or made, must not be relied
upon as having been authorized by the Fund. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy securities in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
As of March 31, 1996, Pasadena Capital Corporation owned 95.5% of the
Fund's outstanding shares and is therefore a "control" person of the Fund as
defined in the 1940 Act. The Pasadena Capital Corporation Employee Stock
Ownership Plan owned the Fund's remaining outstanding shares on that date.
BACKUP WITHHOLDING INSTRUCTIONS
You are required by law to provide the Fund with your correct social
security or taxpayer identification number (each a "TIN"), regardless of whether
you file tax returns. Failure to do so may subject you to certain penalties.
Failure to provide your correct TIN and to complete the section of the
Investment Application entitled "Taxpayer Identification Number Certification
and Signature(s)" could result in backup withholding by the Fund of federal
23
<PAGE>
income tax at the rate of 31% with respect to distributions, redemptions and
other payments made with respect to your account.
Any tax withheld may be credited against taxes owed on your federal income
tax return.
If you do not have a TIN, you should apply for one immediately by
contacting your local office of the Social Security Administration or the IRS.
Backup withholding could apply to payments made to your account while you are
awaiting receipt of a TIN.
Special rules apply for certain entities. For example, for an account
established under the Uniform Transfers to Minors Act, the TIN of the minor
should be furnished.
If you have been notified by the IRS that you are subject to backup
withholding because you have failed to report interest or dividend income on
your tax return and you have not been notified by the IRS that such withholding
should cease, you should strike clause (2) of the section entitled "Taxpayer
Identification Number Certification and Signature(s)." If you are an exempt
recipient, you should furnish your TIN and check the appropriate box in that
section. Exempt recipients include corporations, financial institutions,
registered securities and commodities dealers and others.
For further information regarding backup withholding, see Section 3406 of
the Code and consult your tax adviser.
24
<PAGE>
RULE 497(e):
File Nos. 33-1922; 811-4506
THE PASADENA GLOBAL GROWTH FUND
600 North Rosemead Boulevard
Pasadena, California 91107-2133
1-800-648-8050 (Toll-Free)
1-818-351-9686
----------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
The Pasadena Investment Trust (the "Trust") is a diversified, open-end
management investment company offering redeemable shares of beneficial interest
in five separate series. This Statement of Additional Information relates only
to one of the series, The Pasadena Global Growth Fund (the "Fund"). Separate
Statements of Additional Information relate to the other series.
The Fund's investment objective is long-term growth of capital, which it
seeks to achieve through investments in a globally diversified portfolio of
securities.
This Statement of Additional Information is not a prospectus. It contains
information which supplements the Prospectus for the Fund dated May 1, 1996, as
it may be amended from time to time. This Statement of Additional Information
is to be read in conjunction with such Prospectus, which is hereinafter referred
to as the "Prospectus." Some of the information required in this Statement of
Additional Information has been included in the Prospectus. A copy of the
Prospectus may be obtained from the Trust, 600 North Rosemead Boulevard,
Pasadena, California 91107-2133.
B-1
<PAGE>
TABLE OF CONTENTS
PAGE
The Trust.................................................B-2
Investment Objective and Policies.........................B-2
Management of the Trust...................................B-24
Investment Management and Administrative Services.........B-28
Brokerage Allocation and Other Practices..................B-31
Principal Underwriter.....................................B-33
Purchase, Redemption, and Pricing of Fund Shares..........B-33
Distributions and Tax Status..............................B-38
Performance Information...................................B-42
General...................................................B-44
Financial Statements......................................B-45
THE TRUST
The Pasadena Investment Trust (the "Trust") is an open-end diversified
management investment company organized as a Massachusetts business trust. The
Trust issues shares of beneficial interest in five series (the "Funds"). Each
of the Funds has a separate investment objective and policies and maintains a
totally separate investment portfolio. Each of the Funds is authorized to issue
three classes of shares (Class A, Class B and Class C shares). This Statement
of Additional Information relates solely to the Class A shares of one of the
series, The Pasadena Global Growth Fund (the "Fund"). The Fund currently issues
only Class A shares.
INVESTMENT OBJECTIVE AND POLICIES
The following information concerning the investment objective and policies
of the Fund supplements the Prospectus. The information contained in the
Prospectus relating to the Fund's Investment Objective and Policies is
incorporated herein by reference.
FOREIGN SECURITIES
The Fund may invest (directly and/or through Depositary Receipts) in
securities principally traded in markets outside the United States. Foreign
investments can be affected favorably or unfavorably by changes in currency
exchange rates and in exchange control regulations. There may be less publicly
available
B-2
<PAGE>
information about a foreign company than about a U.S. company, and the
information available may not be of the same quality. Foreign companies also
may not be subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities of
some foreign companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the United States.
Investments in foreign securities can involve other risks different from
those affecting U.S. investments, including local political or economic
developments, expropriation or nationalization of assets and imposition of
withholding taxes on dividend or interest payments. To hedge against possible
variations in currency exchange rates, the Fund may purchase and sell forward
currency exchange contracts. These represent agreements to purchase or sell
specified currencies at specified dates and prices. The Fund will only purchase
and sell forward foreign currency exchange contracts in amounts which the
Manager deems appropriate to hedge existing or anticipated portfolio positions
and will not use such forward contracts for speculative purposes. Foreign
securities, like other assets of the Fund, will be held by the Fund's custodian
or by an authorized subcustodian.
FOREIGN CURRENCY TRANSACTIONS
In general, as described below, the Fund may engage in certain foreign
currency exchange and option transactions. These transactions involve
investment risks and transaction costs to which the Fund would not be subject
absent the use of these strategies. If the Manager's predictions of movements
in the direction of securities prices or currency exchange rates are inaccurate,
the adverse consequences to the Fund may leave the Fund in a worse position than
if it had not used such strategies. Risks inherent in the use of option and
foreign currency forward and futures contracts include: (1) dependence on the
Manager's ability correctly to predict movements in the direction of securities
prices and currency exchange rates; (2) imperfect correlation between the price
of options and futures contracts and movements in the prices of the securities
or currencies being hedged; (3) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; and (5) the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences. The Fund's ability to enter into
futures contracts is also limited by the requirements of the Internal Revenue
Code of 1986, as amended (the "Code") for qualification as a regulated
investment company.
The Fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Fund may write covered put and
B-3
<PAGE>
call options on foreign currencies for the purpose of increasing its return.
Generally, the Fund may engage in both "transaction hedging" and "position
hedging." When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables,
generally arising in connection with the purchase or sale of portfolio
securities. The Fund will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging, the Fund will attempt to protect itself
against a possible loss resulting from an adverse change in the exchange rate
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
The Fund may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The Fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the Fund may also purchase exchange-listed
and over-the-counter put and call options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives the Fund
the right to assume a short position in the futures contract until the
expiration of the option. A put option on a currency gives the Fund the right
to sell the currency at an exercise price until the expiration of the option. A
call option on a futures contract gives the Fund the right to assume a long
position in the futures contract until the expiration of the option. A call
option on a currency gives the Fund the right to purchase the currency at the
exercise price until the expiration of the option.
When it engages in position hedging, the Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the values of currency for securities which the Fund expects to purchase, when
the Fund holds cash or short-term investments). In connection with position
hedging, the Fund may purchase put or call options on foreign currency and on
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The Fund may also purchase or sell foreign currency
on a spot basis.
B-4
<PAGE>
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio 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 dates the currency exchange transactions are
entered into and the dates they mature.
It is also impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security or securities being hedged is less than the
amount of foreign currency the Fund is obligated to deliver and a decision is
made to sell the security or securities and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security or
securities if the market value of such security or securities exceeds the amount
of foreign currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.
The Fund may seek to increase its return or to offset some of the costs of
hedging against fluctuations in currency exchange rates by writing covered put
options and covered call options on foreign currencies. The Fund receives a
premium from writing a put or call option, which increases the Fund's current
return if the option expires unexercised or is closed out at a net profit. The
Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written.
The Fund's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. The
Manager will engage in such "cross hedging" activities when it believes that
such transactions provide significant hedging opportunities for the Fund. Cross
hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability
which is the subject of the hedge.
B-5
<PAGE>
The Fund is not a commodity pool. The Fund's transactions in futures and
options thereon as described herein will constitute bona fide hedging or other
permissible transactions under regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Fund may not engage in such
transactions if the sum of the amount of initial margin deposits and premiums
paid for unexpired futures and options thereon would exceed 5% of the value of
the Fund's assets, with certain exclusions as defined in the applicable CFTC
rules.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
The holder of a cancelable forward contract has the unilateral right to cancel
the contract at maturity by paying a specified fee. The contracts are traded in
the interbank 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. A
foreign currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a future date at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund either may
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Although the Fund intends to purchase or sell foreign currency futures
contracts only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a market on an exchange or board of
trade will exist for any
B-6
<PAGE>
particular contract or at any particular time. In such event, it may not be
possible to close a futures position and, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin.
FOREIGN CURRENCY OPTIONS. In general, options on foreign currencies
operate similarly to options on securities and are subject to many similar
risks. Foreign currency options are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Options are traded not only on the currencies of individual
nations, but also on the European Currency Unit, which is composed of amounts of
a number of currencies and is the official medium of exchange of the European
Community's European Monetary System.
The Fund will only purchase or write foreign currency options when the
Fund's Manager believes that a liquid market exists for such options. There can
be, however, no assurance that a liquid market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors which influence foreign exchange rates and investments
generally.
The value of any currency, including U.S. dollars and foreign currencies,
may be affected by complex political and economic factors applicable to the
issuing country. In addition, the exchange rates of foreign currencies (and
therefore the values of foreign currency options) may be affected significantly,
fixed, or supported directly or indirectly, by U.S. and foreign government
actions. Government intervention may increase risks involved in purchasing or
selling foreign currency options, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option reflects the value of an exchange
rate, which in turn reflects relative values of two currencies, generally the
U.S. dollar and the foreign currency in question. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the exercise of foreign currency
options, investors may be disadvantaged by having to deal in an odd-lot market
for the underlying foreign currencies in connection with options at prices that
are less favorable than for round lots. Foreign governmental restrictions or
taxes could result in adverse changes in the cost of acquiring or disposing of
foreign currencies.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect
B-7
<PAGE>
exchange rates for smaller odd-lot transactions (less than $1 million) where
rates may be less favorable. The interbank market in foreign currencies is a
global, around-the-clock market. To the extent that options markets are closed
while the markets for the underlying currencies remain open, significant price
and rate movements may take place in the underlying markets that cannot be
reflected in the options markets.
SETTLEMENT PROCEDURES. Settlement procedures relating to the Fund's
investments in foreign securities and to the Fund's foreign currency exchange
transactions may be more complex than settlements with respect to investments in
debt or equity securities of U.S. issuers, and may involve certain risks not
present in the Fund's domestic investments. For example, settlement of
transactions involving foreign securities or foreign currency may occur within a
foreign country, and the Fund may be required to accept or make delivery of the
underlying securities or currency in conformity with any applicable U.S. or
foreign restrictions or regulations, and may be required to pay any fees, taxes
or charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
Settlement procedures in many foreign countries are less established than those
in the United States, and some foreign country settlement periods can be
significantly longer than those in the United States.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The Fund may write covered put options and
covered call options on optionable securities held in its portfolio, when in the
opinion of the Fund's Manager such transactions are consistent with the Fund's
investment objective and policies. Call options written by the Fund give the
purchaser the right to buy the underlying securities from the Fund at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Fund at a stated price.
The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund
will hold cash and/or high-grade short-term debt obligations equal to the price
to be paid if the option is exercised. In addition,
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the Fund will be considered to have covered a put or call option if and to the
extent that it holds an option that offsets some or all of the risk of the
option it has written. The Fund may write combinations of covered puts and
calls on the same underlying security.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration of the
option, current interest rates, and the effect of supply and demand in the
options market and in the market for the underlying security. By writing a call
option, the Fund limits its opportunity to profit from any increase in the
market value of the underlying security above the exercise price of the option
but continues to bear the risk of a decline in the value of the underlying
security. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price higher than
its then-current market value, resulting in a potential capital loss unless the
security subsequently appreciates in value.
The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction, in which it
purchases an offsetting option. The Fund realizes a profit or loss from a
closing transaction if the cost of the transaction (option premium plus
transaction costs) is less or more than the premium received from writing the
option. Because increases in the market price of a call option generally
reflect increases in the market price of the security underlying the option, any
loss resulting from a closing purchase transaction may be offset in whole or in
part by unrealized appreciation of the underlying security owned by the Fund.
If the Fund writes a call option but does not own the underlying security,
and when it writes a put option, the Fund may be required to deposit cash or
securities with its broker as "margin," or collateral, for its obligation to buy
or sell the underlying security. As the value of the underlying security
varies, the Fund may have to deposit additional margin with the broker. Margin
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
PURCHASING PUT OPTIONS. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option because the Fund,
as holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying
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security's market price. In order for a put option to be profitable, the market
price of the underlying security must decline sufficiently below the exercise
price to cover the premium and transaction costs. By using put options in this
manner, the Fund will reduce any profit it might otherwise have realized from
appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
PURCHASING CALL OPTIONS. The Fund may purchase call options to hedge
against an increase in the price of securities that the Fund wants ultimately to
buy. Such hedge protection is provided during the life of the call option
because the Fund, as holder of the call option, is able to buy the underlying
security at the exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be profitable, the
market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Fund's options strategies depends on the ability
of the Fund's Manager to forecast correctly interest rate and market movements.
For example, if the Fund were to write a call option based on the Manager's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Manager's expectations that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.
When the Fund purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Fund will lose part or all
of its investment in the option. This contrasts with an investment by the Fund
in the underlying security, since the Fund will not realize a loss if the
security's price does not change.
The effective use of options also depends on the Fund's ability to
terminate option positions when the Fund's Manager deems it desirable to do so.
There is no assurance that the Fund will be able to effect closing transactions
at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, the Fund could
no longer engage in closing transactions. Lack of
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investor interest might adversely affect the liquidity of the market for
particular options or series of options. A market may discontinue trading of a
particular option or options generally. In addition, a market could become
temporarily unavailable if unusual events -- such as volume in excess of trading
or clearing capability -- were to interrupt its normal operations.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Fund as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Fund, as option
writer, would remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed when trading in the option has also been
halted, the Fund as purchaser or writer of an option will be locked into its
position until one of the two restrictions has been lifted. If the Options
Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration.
Special risks are presented by internationally traded options. Because of
time differences between the United States and various foreign countries, and
because different holidays are observed in different countries, foreign options
markets may be open for trading during hours or on days when U.S. markets are
closed. As a result, option premiums may not reflect the current prices of the
underlying interest in the United States.
OVER-THE-COUNTER OPTIONS
The Staff of the Division of Investment Management (the "Staff") of the
Securities and Exchange Commission ("SEC") has taken the position that
over-the-counter ("OTC") options
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purchased by the Fund and assets held to cover OTC options written by the Fund
are illiquid securities. Although the Staff has indicated that it is continuing
to evaluate this issue, pending further developments, the Fund intends to enter
into OTC options transactions only with primary dealers in U.S. Government
securities and, in the case of OTC options written by the Fund, only pursuant to
agreements that will assure that the Fund will at all times have the right to
repurchase the option written by it from the dealer at a specified formula
price. The Fund will treat the amount by which such formula price exceeds the
amount, if any, by which the option may be "in-the-money" as an illiquid
investment. It is the present policy of the Fund not to enter into any OTC
option transaction if, as a result, more than 15% of the Fund's net assets would
be invested in (i) illiquid investments (determined under the foregoing formula)
relating to OTC options written by the Fund, (ii) OTC options purchased by the
Fund, (iii) all other securities which are not readily marketable, and (iv)
repurchase agreements maturing in more than seven days. (See "Other Investment
Restrictions - (16).")
FUTURES CONTRACTS AND RELATED OPTIONS
A financial futures contract sale creates an obligation by the seller to
deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the CFTC, and must be
executed through a futures commission merchant or brokerage firm which is a
member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out a futures contract sale is effected by purchasing a futures contract
for the same aggregate amount of the specific type of financial instrument or
commodity with the same delivery date. If the price of the initial sale of the
futures contract exceeds the price of the offsetting purchase, the seller is
paid the difference and realizes a gain. Conversely, if the price of the
offsetting purchase exceeds the price of the initial sale, the seller realizes a
loss. Similarly, the closing out of a futures contract purchase is effected by
the purchaser's entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the purchaser realizes a gain, and if the
purchase price exceeds the offsetting sale price, he realizes a
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loss. Futures contracts traded on an exchange approved by the CFTC are "marked
to market" at the end of each year, whether or not they are closed out. In
general, 40% of the gain or loss arising from the closing out or marking to
market of a futures contract traded on an exchange approved by the CFTC is
treated as short-term capital gain or loss, and 60% is treated as long-term
capital gain or loss.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of cash and/or
U.S. Government securities. This amount is known as "initial margin." The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds to finance the transactions. Rather, initial margin is
similar to a performance bond or good faith deposit which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage
costs.
Subsequent payments, called "variation margin," to and from the broker (or
the custodian) are made on a daily basis as the price of the underlying security
or commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to the market." For
example, when the Fund has purchased a futures contract on a security and the
price of the underlying security has risen, that position would increase in
value and the Fund would receive from the broker a variation margin payment
based on that increase in value. Conversely, when the Fund has purchased a
security futures contract and the price of the underlying security has declined,
the position would be less valuable and the Fund would be required to make a
variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a hedge position
then currently held by the Fund. The Fund may close its positions by taking
opposite positions which will operate to terminate the Fund's position in the
futures contracts. Final determinations of variation margin are then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or a gain. Such closing transactions involve additional
commission costs.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write put and call
options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on future contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the
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option. The Fund may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, the Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, the Fund may purchase call options or write put options
on futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the Fund
expects to purchase. Such options generally operate in the same manner as
options purchased or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate its position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements similar to those described above in connection with the
discussion of futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS.
Successful use of futures contracts by the Fund is subject to the Manager's
ability to predict movements in the direction of interest rates and other
factors affecting securities markets. For example, if the Fund has hedged
against the possibility of decline in the values of its investments and the
values of its investments increase instead, the Fund will lose part or all of
the benefit of the increase through payments of daily maintenance margin. The
Fund may have to sell investments at a time when it may be disadvantageous to do
so in order to meet margin requirements.
Compared to the purchase or sale of futures contracts, the purchase of put
or call options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
put or call option on a futures contract would result in a loss to the Fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the prices of the hedged investments. The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.
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To reduce or eliminate a hedge position held by the Fund, the Fund may seek
to close out a position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options; (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange for such contracts or options (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Fund may also purchase and sell options on
index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index ("S&P
500") is composed of 500 selected common stocks, most of which are listed on the
New York Stock Exchange. The S&P 500 assigns relative weightings to the common
stocks included in the index, and the value fluctuates with changes in the
market values of those common stocks. In the case of the S&P 500, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). A stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Fund enters into
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a futures contract to buy 500 units of the S&P 500 at a specified future date at
a contract price of $150 and the S&P 500 is at $154 on that future date, the
Fund will gain $2,000 (500 units x gain of $4 per unit). If the Fund enters
into a futures contract to sell 500 units of the stock index at a specified
future date at a contract price of $150 and the S&P 500 is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2 per unit).
There are several risks in connection with the use by the Fund of index
futures as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the index futures and movements
in the prices of securities which are the subject of the hedge. The Fund's
Manager will, however, when engaging in this type of activity, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Fund for hedging purposes is also
subject to the Manager's ability to predict movements in the direction of the
market. It is possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Fund's portfolio may
decline. If this occurred, the Fund would lose money on the futures and also
experience a decline in value in its portfolio securities. It is also possible
that, if the Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of those securities it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
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
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market
are less onerous than margin requirements in the securities market, and as a
result the futures market may attract more speculators than the securities
market does. Increased participation by speculators in the
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futures market may also cause temporary price distortions. Due to the
possibility of price distortions in the futures market and also because of the
imperfect correlation between movements in the index and movements in the prices
of index futures, even a correct forecast of general market trends may not
result in a successful hedging transaction over a short time period.
OPTIONS ON STOCK INDEX FUTURES. Options on stock index futures are similar
to options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing put and call options on index futures, the
Fund may purchase and sell put and call options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
INDEX WARRANTS
The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant; if the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The
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holder of a warrant would not be entitled to any payments from the issuer at any
time when, in the case of a call warrant, the exercise price is greater than the
value of the underlying index, or, in the case of a put warrant, the exercise
price is less than the value of the underlying index. If the Fund were not to
exercise an index warrant prior to its expiration, then the Fund would lose the
amount of the purchase price paid by it for the warrant.
The Fund will normally use index warrants in a manner similar to its use of
options on securities indices. The risks of the Fund's use of index warrants
are generally similar to those relating to its use of index options. Unlike
most index options, however, index warrants are issued in limited amounts and
are not obligations of a regulated clearing agency, but are backed only by the
credit of the bank or other institution which issues the warrant. Also, index
warrants generally have longer terms than index options. Although the Fund will
normally invest only in exchange-listed warrants, index warrants are not likely
to be as liquid as certain index options backed by a recognized clearing agency.
In addition, the terms of index warrants may limit the Fund's ability to
exercise the warrants at such time, or in such quantities, as the Fund would
otherwise wish to do.
REPURCHASE AGREEMENTS
The Fund may, for temporary defensive purposes, invest its assets in
eligible U.S. Government securities and concurrently enter into repurchase
agreements with respect to such securities. Under such agreements, the seller
of the security agrees to repurchase it at a mutually agreed upon time and
price. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government security itself. Such
repurchase agreements will be made only with banks with assets of $1 billion or
more that are insured by the Federal Deposit Insurance Corporation or with
Government securities dealers recognized as primary dealers by the Federal
Reserve Board and registered as broker-dealers with the SEC or exempt from such
registration. In addition, to the extent the Fund has over $10 million in
assets, the Fund will limit the amount of its transactions with any one bank or
Government securities dealer to a maximum of 25% of its assets. Any repurchase
agreements entered into by the Fund will be of short duration, from overnight to
one week, although the underlying securities generally have longer maturities.
The Fund may not enter into a repurchase agreement with more than seven days to
maturity if, as a result, more than 15% of the value of the Fund's net assets
would be invested in such repurchase agreements and other illiquid assets.
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For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
agreement, the Fund may encounter delays and incur costs before being able to
sell the security. Delays may involve loss of interest or a decline in price of
the U.S. Government security. If a court characterizes the transaction as a
loan and the Fund has not perfected a security interest in the U.S. Government
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of the seller. As an unsecured
creditor, the Fund would be at risk of losing some or all of the principal and
income involved in the transaction. As with any unsecured debt instrument
purchased for a Fund, the Manager seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the obligor, in this
case the seller of the U.S. Government security.
Apart from the risk of bankruptcy or insolvency proceedings, there is also
the risk that the seller may fail to repurchase the security. However, the Fund
will always receive as collateral for any repurchase agreement to which it is a
party U.S. Government securities acceptable to it, the market value of which is
equal to at least 100% of the amount invested by the Fund plus accrued interest,
and the Fund will make payment against such securities only upon physical
delivery or evidence of book entry transfer to the account of its Custodian or
other entity authorized by the Trust's Board of Trustees to have custody for
purposes of repurchase agreement transactions. If the market value of the U.S.
Government security subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
U.S. Government security to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that the Fund will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities, however.
SECURITIES LOANS
The Fund may make secured loans of its portfolio securities amounting to
not more than 25% of its total assets, thereby increasing its total return. The
risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. As a matter of
policy, securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral consisting of cash or
high-grade short-term debt obligations at least equal at all times to the value
of the securities on loan, "marked-to-market"
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daily. The borrower pays to the Fund an amount equal to any dividends or
interest received on securities lent. The Fund retains all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. Although voting rights, or rights to consent, with respect to the
loaned securities pass to the borrower, the Fund retains the right to call the
loans at any time on reasonable notice, and it will do so to enable the Fund to
exercise the voting rights on any matters materially affecting the investment.
The Fund may also call such loans in order to sell securities.
FORWARD COMMITMENTS
The Fund may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Fund holds, and maintains until settlement date in a segregated account, cash or
high-grade debt obligations in an amount sufficient to meet the purchase price,
or if the Fund enters into offsetting contracts for the forward sale of other
securities it owns. Forward commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the Fund's other assets. Where such
purchases are made through dealers, the Fund relies on the dealer to consummate
the sale. The dealer's failure to do so may result in the loss to the Fund of
an advantageous yield or price. Although the Fund will generally enter into
forward commitments with the intention of acquiring securities for its portfolio
or for delivery pursuant to options contracts it has entered into, the Fund may
dispose of a commitment prior to settlement if the Manager deems it appropriate
to do so. The Fund may realize short-term profits or losses upon the sale of
forward commitments.
DEPOSITARY RECEIPTS
The Fund may invest some or all of its assets in the securities of foreign
issuers in the form of Depositary Receipts ("DRs"), e.g., American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs"), Continental Depositary Receipts ("CDRs"), or other forms of
DRs. DRs are receipts typically issued by a United States or foreign bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. The Fund may invest in DRs through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the underlying security and a depository, whereas a depository may
establish an unsponsored facility without participation by the issuer of the
deposited security. The depository of unsponsored DRs generally bears all the
costs of such facilities and the depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the
B-20
<PAGE>
deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.
ILLIQUID SECURITIES
The Fund may invest up to 15% of the value of its net assets in securities
as to which a liquid trading market does not exist, provided such investments
are consistent with the Fund's objective and other policies. Such securities
may include securities that are not readily marketable, such as certain
securities that are subject to legal or contractual restrictions on resale,
repurchase agreements providing for settlement in more than seven days after
notice, certain options traded in the over-the-counter market and securities
used to cover such options. As to these securities, the Fund is subject to a
risk that should the Fund desire to sell them when a ready buyer is not
available at a price the Fund deems representative of their value, the value of
the Fund could be adversely affected. When purchasing securities that have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
and are not readily marketable, the Fund will endeavor to obtain the right to
registration at the expense of the issuer. Generally, there will be a lapse of
time between the Fund's decision to sell any such security and the registration
of the security permitting sale. During any such period, the price of the
securities will be subject to market fluctuations. However, if a substantial
market of qualified institutional buyers develops pursuant to Rule 144A under
the 1933 Act for certain unregistered securities held by the Fund, the Fund
intends to treat such securities as liquid securities in accordance with
procedures approved by the Trust's Board of Trustees. Because it is not
possible to predict with any assurance how the market for restricted securities
pursuant to Rule 144A will develop, the Board of Trustees has directed the
Manager to monitor carefully any Fund investments in such securities with
particular regard to trading activity, availability or reliable price
information and other relevant information. To the extent that, for a period of
time, qualified institutional buyers cease purchasing such restricted securities
pursuant to Rule 144A, the Fund's investing in such securities may have the
effect of increasing the level of illiquidity in the Fund's portfolio during
such period.
OTHER INVESTMENT RESTRICTIONS
Unless otherwise noted as an operating policy, the following restrictions
have been adopted as matters of fundamental policy for the Fund. These
fundamental policies may not be changed without the approval of the lesser of
(i) two-thirds or more of the voting securities present at a duly held meeting
at which at least 50% of the outstanding voting securities of the Fund are
present in person or by proxy, or (ii) more than one-half of the outstanding
voting securities of the Fund. The Fund MAY NOT:
B-21
<PAGE>
(1) With respect to 75% of the Fund's total assets, purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of the Fund's
total assets would be invested in securities of any one issuer.
(2) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of its
portfolio securities, and may make margin payments in connection with
transactions in permissible futures and options contracts) or make short sales.
(3) With respect to 75% of the Fund's total assets, acquire more than 10%
of any one class of securities of an issuer. (For this purpose all common
stocks of an issuer are regarded as a single class, and all preferred stocks of
an issuer are regarded as a single class.)
(4) With respect to 75% of the Fund's total assets, acquire more than 10%
of the outstanding voting securities of any one issuer.
(5) Borrow money in excess of 20% of its total assets (taken at cost) and
then only as a temporary measure for extraordinary or emergency reasons and not
for investment. (The Fund may borrow only from banks and immediately after any
such borrowings there must be an asset coverage [total assets of the Fund
including the amount borrowed less liabilities other than such borrowings] of at
least 300% of the amount of all borrowings. In the event that, due to market
decline or other reasons, such asset coverage should at any time fall below
300%, the Fund is required within three days, not including Sundays and
holidays, to reduce the amount of its borrowings to the extent necessary to
cause the asset coverage of such borrowings to be at least 300%. If this should
happen, the Fund may have to sell securities at a time when it would be
disadvantageous to do so.)
(6) Pledge more than 25% of its total assets (taken at cost) in connection
with permissible borrowings. For the purposes of this restriction, the deposit
of underlying securities and other assets in connection with the writing of put
and call options and collateral arrangements with respect to margin for currency
futures contracts are not deemed to be a pledge of assets.
(7) Invest more than 5% of its total assets in securities of any one
issuer which, together with any predecessor, has been in continuous operation
for less than three years.
(8) Invest in securities of any company, if officers and Trustees of the
Trust and officers and directors of the Manager who beneficially own more than
0.5% of the shares or securities of that company collectively own more than 5%
of such securities.
B-22
<PAGE>
(9) Make loans, except (a) by purchase of marketable bonds, debentures,
commercial paper or corporate notes, and similar marketable evidences of
indebtedness which are a part of an issue to the public or to financial
institutions, (b) by entry into repurchase agreements, or (c) through the
lending of its portfolio securities with respect to not more than 25% of its
total assets.
(10) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts or commodities or commodity contracts, except for transactions in
futures contracts and options thereon entered into for hedging purposes.
(11) Act as an underwriter except to the extent that, in connection with
the disposition of its portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws.
(12) Make investments for the purpose of gaining control of a company's
management. (This is an operating policy.)
(13) Concentrate its investments in particular industries and in no event
invest more than 25% of the value of its total assets in any one industry.
(14) As a matter of operating policy, engage in puts, calls, straddles,
spreads or any combination thereof, except that, to the extent described in the
Prospectus and this Statement of Additional Information, the Fund may buy and
sell put and call options (and any combination thereof) on securities, on
financial futures contracts, on securities indices, on currency futures
contracts and on foreign currencies and may buy and sell put and call warrants,
the values of which are based upon securities indices.
(15) As a matter of operating policy, purchase warrants if as a result its
warrant holdings, valued at the lower of cost or market, would exceed 5% of the
Fund's net assets, with no more than 2% of net assets in warrants not listed on
the New York or American Stock Exchanges.
(16) Invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the Fund, or by a person designated by the
Trustees of the Fund, to make such determinations pursuant to procedures adopted
by the Trustees to be readily marketable), and (c) repurchase agreements
maturing in more than seven days, if, as a result, more than 15% of the Fund's
net assets (taken at current value) would be invested in the aggregate in
securities described in (a), (b) and (c) above.
B-23
<PAGE>
(17) Purchase or sell real property (including limited partnership
interests), except that the Fund may (a) purchase or sell readily marketable
interests in real estate investment trusts or readily marketable securities of
companies which invest in real estate, (b) purchase or sell securities that are
secured by interests in real estate or interests therein, or (c) acquire real
estate through exercise of its rights as a holder of obligations secured by real
estate or interests therein or sell real estate so acquired.
(18) Participate on a joint or joint and several basis in any securities
trading account. (This is an operating policy.)
(19) Purchase the securities of any other investment company except (a)
within the limits of the 1940 Act, (b) in a public offering or in the open
market or in privately negotiated transactions where, in either case, to the
best information of the Fund, no commission, profit or sales charge to a sponsor
or dealer (other than a customary broker's commission or underwriting discount)
results from such purchase, or (c) if such purchase is part of a merger,
consolidation, or acquisition of assets.
The Fund, notwithstanding any other investment policy or limitation
(whether or not fundamental), may invest all of its assets in the securities or
beneficial interests of a single pooled investment fund having substantially the
same objective, policies and limitations as the Fund.
Some of the practices referred to above, even if approved by shareholders,
are subject to restrictions contained in the 1940 Act. In addition to the
restrictions described above, the Fund may from time to time agree to additional
investment restrictions for purposes of compliance with the securities laws of
those states and foreign jurisdictions where the Fund intends to offer or sell
its shares. Any such additional restrictions that would have a material bearing
on a Fund's operations will be reflected in the Prospectus or a Prospectus
supplement and may require shareholder approval.
Portfolio Turnover. As stated in the Prospectus, the Fund may purchase and
sell securities without regard to the length of time the security is to be held
or has been held. The portfolio turnover rates for 1995 and 1994 were 29.0% and
479.3%, respectively. The decrease in the Fund's portfolio turnover rate during
1995 is primarily due to a decrease in the amount of short-term portfolio trades
by the Fund.
MANAGEMENT OF THE TRUST
The Trustees of the Trust have been appointed for an indefinite term. They
are responsible for the overall management of the Trust, including general
supervision and review of the Fund's investment activities. The Trustees, in
turn, elect the
B-24
<PAGE>
officers of the Trust who are responsible for administering the day-to-day
operations of the Trust and the Fund. The current Trustees and officers of the
Trust and their principal occupations during the last five years are the
following:
Positions(s) Held Principal Occupation(s)
Name, Address and Age With the Trust During Past Five Years
- --------------------- ----------------- ----------------------
ROGER ENGEMANN(*) Chairman of the President of Roger
600 North Rosemead Board, President and Engemann & Associates,
Boulevard Trustee Inc, an investment
Pasadena, management firm, since
California 91107 1972, and the Manager
(55) since 1985. President
and a Director of
Pasadena Capital
Corporation.
JOHN S. TILSON(*) Chief Financial Executive Vice
600 North Rosemead Officer, Secretary President, Portfolio
Boulevard and Trustee Manager and Securities
Pasadena, Analyst with Roger
California 91107 Engemann & Associates,
(52) Inc. since 1983 and
the Manager since
1985. Officer and a
Director of Pasadena
Capital Corporation.
BARRY E. MCKINLEY Trustee Certified Public
201 South Lake Accountant; head of
Avenue, Suite 400 B.E. McKinley &
Pasadena, Associates since its
California 91101 inception in 1971.
(60)
ROBERT L. PETERSON Trustee Private investor.
P.O. Box 80784 From 1988 - 1995,
San Marino, Regional Manager for
California 91118 Commercial Real Estate
(58) Brokerage in the
Pasadena office of Jon
Douglas Company.
Prior thereto he was
associated with the
real estate brokerage
firm of R.A. Rowan &
Co.
B-25
<PAGE>
Positions(s) Held Principal Occupation(s)
Name, Address and Age With the Trust During Past Five Years
- --------------------- ----------------- ----------------------
MICHAEL STOLPER(*)+ Trustee President of Stolper
525 "B" Street, and Company, Inc., an
Suite 1080 investment advisor and
San Diego, broker-dealer since
California 92101 1975, and President of
(50) Seaport Venturers,
Inc., a venture
capital firm since
1982. Director of
Pasadena Capital
Corporation since
February 1994.
RICHARD C. TAYLOR Trustee President of Richard
2485 Huntington Taylor Company,
Drive, #2 Inc., a food
San Marino, ingredients broker,
California 91108 since 1987.
(49)
ANGELA WONG Trustee Since 1986, Ms. Wong
11355 West Olympic has been of counsel to
Boulevard the law firm of
Los Angeles, Manatt, Phelps,
California 90064 Phillips & Kantor,
(44) specializing in
employee benefits.
RICHARD A. WATSON Controller - Fund Vice President and
600 North Rosemead Accounting and Controller - Fund
Boulevard Assistant Secretary Accounting of Roger
Pasadena, Engemann Management
California 91107 Co., Inc. From
(42) September 1988 to June
1993, Mutual Fund
Operations Manager of
The Pasadena Group of
Mutual Funds and Chief
Financial Officer of
Roger Engemann
Management Co., Inc.
A Director of Pasadena
Capital Corporation.
Prior thereto,
Mr. Watson was an
Audit Manager with
Coopers & Lybrand.
- ---------------
(*)TRUSTEE WHO IS AN "INTERESTED PERSON," AS DEFINED IN THE 1940 ACT.
B-26
<PAGE>
+ MR. STOLPER IS ALSO A DIRECTOR OF BDI INVESTMENT COMPANY, A REGISTERED
INVESTMENT COMPANY THAT INVESTS PRIMARILY IN TAX-EXEMPT SECURITIES; OF MERIDIAN
FUND, INC., A REGISTERED INVESTMENT COMPANY THAT NORMALLY INVESTS PRIMARILY IN
EQUITY SECURITIES; AND OF JANUS CAPITAL CORPORATION SINCE 1984, WHICH MANAGES
THE JANUS GROUP OF MUTUAL FUNDS.
As shown in the following table, the Manager pays the fees of the Trustees
who are not affiliated with the Manager, which currently are $1,250 per quarter
plus $1,250 for each meeting attended. The officers of the Trust and the
Trustees affiliated with the Manager receive no direct compensation for
performing the duties of such offices, except that Mr. Stolper receives fees
from the Manager at the same rates as the disinterested Trustees. However,
those officers and Trustees who are affiliated with the Manager may receive
remuneration indirectly because the Manager receives management and
administration fees from the Fund. The table provides information regarding all
Funds in The Pasadena Group of Mutual Funds for the fiscal year ended December
31, 1995.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Respecting
Benefits Estimated Registrant
Accrued As Annual And
Name of Part of Benefits Fund Complex
Person, Aggregate Fund Upon Paid to
Position Compensation Expenses Retirement Trustees
-------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C>
Roger Engemann None None None None
Chairman of the
Board, President
and Trustee
John S. Tilson None None None None
Chief Financial
Officer, Secretary
and Trustee
Barry E. McKinley $10,000 None None $10,000
Trustee
Robert L. Peterson $10,000 None None $10,000
Trustee
Michael Stolper $10,000 None None $10,000
Trustee
Richard C. Taylor $10,000 None None $10,000
Trustee
Angela Wong $10,000 None None $10,000
Trustee
Richard A. Watson None None None None
Controller-Fund
Accounting and
Assistant Secretary
</TABLE>
B-27
<PAGE>
INVESTMENT MANAGEMENT AND ADMINISTRATIVE SERVICES
The following information concerning the investment management and
administrative services provided to the Fund supplements the information
contained in the section in the Prospectus entitled "Management."
INVESTMENT MANAGEMENT AGREEMENT. The Manager, Roger Engemann Management
Co., Inc., has entered into an Investment Management Agreement (the "Management
Agreement") with the Trust, on behalf of each of the series of the Trust,
including the Fund, to provide investment advice and investment management
services with respect to the assets of the Fund, provide personnel, office
space, facilities and equipment as may be needed by the Fund in its day-to-day
operations, provide the officers of the Trust, and provide the Fund with fund
accounting, including assistance and personnel necessary to price the portfolio
securities of the Fund, calculate the Fund's net asset value, and maintain the
books and records of the Fund's investment portfolio as required by applicable
law. The Management Agreement has been approved by the Board of Trustees of the
Trust with respect to the Fund, including a majority of the Trustees who are not
a party to the Management Agreement or interested persons of a party to the
Management Agreement, and by a majority of the outstanding voting shares of the
Fund.
The Management Agreement dated March 1, 1993, currently is in effect
through February 28, 1997. The Management Agreement may be continued thereafter
for successive periods not to exceed one year, provided that such continuance is
specifically approved annually by a vote of a majority of the Fund's outstanding
voting securities or by the Board of Trustees, and by the vote of a majority of
the Trustees who are not parties to the Management Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval.
EXPENSES. Except as set forth in the separate Administration Agreement
discussed below, the Manager is not responsible under the Management Agreement
for any expenses related to the operation of the Fund.
Under the Management Agreement, the Fund is responsible and has assumed the
obligation for paying all of its expenses, including but not limited to:
(i) brokerage and commission expenses, (ii) federal, state, or local taxes,
including issue and transfer taxes, incurred by or levied on the Fund,
(iii) interest charges on borrowings, (iv) charges and expenses of the Fund's
custodian and transfer agent, (v) payment of all investment advisory and
management fees, (vi) insurance premiums on the Fund's property and personnel,
including the fidelity bond and liability insurance for officers and Trustees,
(vii) printing and mailing of all reports, including semi-annual and annual
reports, prospectuses, and statements of additional information to existing
shareholders, (viii) fees and expenses of registering
B-28
<PAGE>
the Fund's shares under the federal securities laws and of qualifying its shares
under applicable state securities (Blue Sky) laws subsequent to the Fund's
initial fiscal period, including expenses attendant upon renewing and increasing
such registrations and qualifications, (ix) legal fees and expenses,
(x) auditing expenses, including auditing fees of independent public
accountants, (xi) all costs associated with shareholders meetings and the
preparation and dissemination of proxy solicitation materials, except for
meetings called solely for the Manager's benefit, (xii) payments due under the
Administration Agreement between the Trust and the Manager, (xiii) dues and
other costs of membership in industry associations, subject to the approval of
any such membership by the Board of Trustees, (xiv) service fees paid to dealers
and other shareholder service providers pursuant to Services Agreements between
the Trust and such service providers, and (xv) any extraordinary and
non-recurring expenses, except as otherwise prescribed therein.
As compensation for its services under the Management Agreement, the
Manager is paid a monthly fee at an annual rate equal to 1.0% of the Fund's
average daily net assets up to $30 million, which rate is reduced at higher
levels of net assets as set forth in the Prospectus. For the periods ended
December 31, 1993, 1994 and 1995, the Manager was entitled to receive fees under
the Management Agreement in the amounts of $178, $1,210 and $18,498,
respectively. The Manager has waived receipt of all such fees.
The Management Agreement is terminable on 60-days' written notice by vote
of a majority of the Fund's outstanding shares, by vote of a majority of the
Board of Trustees, or by the Manager on 60-days' written notice. The Management
Agreement automatically terminates in the event of its assignment under the 1940
Act. The Management Agreement provides that in the absence of willful
misfeasance, bad faith, or gross negligence on the part of the Manager, or of
reckless disregard of its obligations thereunder, the Manager is not liable for
any action or failure to act in accordance with its duties.
ADMINISTRATION AGREEMENT. The Manager also has entered into an
Administration Agreement with the Trust on behalf of each series of the Trust,
including the Fund. Under the Administration Agreement, the Manager, in its
capacity as Administrator (a) furnishes the Fund with various administrative and
shareholder services including, but not limited to (i) preparing and
distributing all shareholder reports, (ii) preparing all tax returns and other
regulatory filings, and (iii) Blue Sky compliance services, and (b) pays for all
of the normal operating fees and expenses of the Fund, except for the fees and
expenses related to the services to be provided by the Manager under the
Investment Management Agreement, the fees under the Administration Agreement,
the services fees paid under the Services Agreements, and brokerage and
commission expenses. As compensation for its services and obligations under the
B-29
<PAGE>
Administration Agreement, the Administrator is paid a monthly fee at an annual
rate equal to 1.05% of the Fund's average daily net assets up to $30 million,
which rate is reduced at higher levels of net assets. The Administration
Agreement dated March 1, 1993, was approved by the Board of Trustees of the
Trust, including a majority of the Trustees who are not parties to the
Administration Agreement, and continues in effect until terminated by either
party on 60-days' written notice. For the periods ended December 31, 1993, 1994
and 1995, the Manager was entitled to receive fees pursuant to the
Administration Agreement in the amounts of $187, $1,271 and $19,423,
respectively. The Manager has waived receipt of all such fees.
SERVICES AGREEMENTS. Under the Services Agreements, the Fund will pay a
continuing service fee to service providers, in an amount, computed and
prorated on a daily basis, equal to 0.25% per annum of the Fund's average
daily net assets, which will include the Manager or Pasadena Fund Services,
Inc. (the "Distributor"), for shareholder accounts not serviced by other
service providers. Such amounts are compensation for providing certain
services to clients owning shares of the Fund, including personal services
such as processing purchase and redemption transactions, assisting in change
of address requests and similar administrative details, and providing other
information and assistance with respect to the Fund, including responding to
shareholder inquiries. For the periods ended December 31, 1993, 1994 and
1995, service fees in the amounts of $45, $303 and $4,624, respectively, were
payable by the Fund to the Manager. The Manager has waived receipt of all
such fees.
Notwithstanding the above-described division of expenses, the Manager will
reduce its fees to the Fund under the Management Agreement for the amount, if
any, by which the Fund's annual operating expenses, expressed as a percentage of
average daily net assets, exceeds the most restrictive limitation imposed by any
state in which the Fund's shares are then qualified for sale. Currently the
most restrictive such limitation is 2-1/2% of the first $30 million of average
daily net assets of the Fund, plus 2% of the next $70 million, plus 1-1/2% of
the average daily net assets in excess of $100 million. Operating expenses for
these purposes include the Manager's management and administration fee but do
not include any taxes, interest, brokerage commissions, expenses incurred in
connection with any merger or reorganization, and, with the prior written
approval of any state securities commission requiring the same, any
extraordinary expenses, such as litigation. The Manager also may at its
discretion from time to time pay other Fund expenses from its own resources in
excess of that required by the most restrictive applicable state limitation or
reduce or waive the management fee of the Fund.
The Manager also may act as an investment adviser to other persons,
entities, and corporations, including other investment companies and the Trust's
other series. Personnel of the Manager
B-30
<PAGE>
are affiliated with another investment adviser that has numerous advisory
clients and will devote portions of their time to such clients.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager, in connection with advising the Fund on its portfolio
decisions and subject to instructions of the Board of Trustees, will select the
broker or dealer for the Fund's portfolio transactions. In executing the Fund's
portfolio transactions, the Manager seeks to obtain the total costs or proceeds
in each transaction which are most favorable under all the circumstances, taking
into account such factors as the net economic result to the Fund (involving both
price paid or received and any commission or spread and other costs paid), the
efficiency of the transaction execution, the ability to effect the transaction
when a large block of securities is involved, the known practices of brokers and
their availability to execute possibly difficult transactions in the future, and
the financial strength and stability of the broker or dealer. While the Manager
generally seeks reasonably competitive commission rates or spreads as part of
this policy, the Fund may not necessarily pay the lowest commission or spread
available for a particular transaction.
The Fund and the Manager may direct portfolio transactions to persons or
firms because of research and investment services provided by such persons or
firms if the commissions or spreads on the transactions are reasonable in
relation to the value of the investment information provided. Among such
research and investment services are those that brokerage houses customarily
provide to institutional investors and include statistical and economic data and
research reports on companies and industries. Such research provides lawful and
appropriate assistance to the Manager in the performance of its investment
decision-making responsibilities. The Manager may use these services in
connection with all of its investment activities, and some services obtained in
connection with the Fund's transactions may be used in connection with other
investment advisory clients of the Manager, including other mutual funds, other
series of the Trust, or the Manager's affiliates.
The Fund may invest in securities that are traded exclusively in the
over-the-counter market. It may also purchase securities listed on a national
securities exchange through the "third market" (I.E., through markets other than
the exchanges on which the securities are listed). When executing transactions
in the over-the-counter market or the third market, the Manager will seek to
execute transactions through brokers or dealers that, in the Manager's opinion,
will provide the best overall price and execution so that the resultant price to
the Fund is as favorable as possible under prevailing market conditions.
B-31
<PAGE>
The Fund does not allocate brokerage business in return for sales of its
shares, although such sales may be a factor in selecting broker-dealers for
portfolio transactions, provided the Fund is receiving best execution. Neither
the Manager, the Distributor nor any affiliated person thereof will participate
in commissions or spreads paid by the Fund to brokers or dealers nor will they
receive any reciprocal business, directly or indirectly, as a result of such
commissions or spreads.
Stolper & Company, Inc., of which Michael Stolper, a Trustee of the Trust
and a Director of Pasadena Capital Corporation, is the sole shareholder, has in
the past received brokerage business from Roger Engemann & Associates, Inc.
Mr. Stolper owns 6.5% of the Manager. Stolper & Company, Inc. assists its
clients in selecting an investment adviser and offers a service measuring the
performance of investment advisers, in return for which the client pays cash or
directs the investment adviser to execute a portion of the brokerage business
through Bear, Stearns & Company for the credit of Stolper & Company, Inc.
Stolper & Company, Inc. and Roger Engemann & Associates, Inc. anticipate that
such brokerage allocation from Roger Engemann & Associates, Inc. will continue.
However, neither Michael Stolper nor Stolper & Company, Inc. will receive or
participate in commissions paid by the Fund nor receive any reciprocal business
as a result of commissions paid by the Fund, although the Fund may pay usual and
customary brokerage commissions to Bear, Stearns & Company for brokerage
business by the Fund.
It is possible that purchases or sales of securities for the Fund also may
be considered for other clients of the Manager or its affiliates, including the
other series of the Trust. Any transactions in such securities at or about the
same time will be allocated among the participating Funds and such other clients
in a manner deemed equitable to all by the Manager, taking into account the
respective sizes of the Fund or Funds and the other clients' accounts, and the
amount of securities to be purchased or sold. It is recognized that it is
possible that in some cases this procedure could have a detrimental effect on
the price or volume of the security so far as the Fund is concerned. However,
in other cases, it is possible that the ability to participate in volume
transactions and to negotiate lower commissions will be beneficial to the Fund.
The Board of Trustees of the Trust periodically monitors the operation of
these brokerage policies by reviewing the allocation of brokerage orders. The
total brokerage commissions paid by the Fund during 1993, 1994 and 1995 were
$3,218, $10,627 and $4,931, respectively. The amounts shown for 1993 and 1994
include mark-ups paid by the Fund on principal trades.
B-32
<PAGE>
PRINCIPAL UNDERWRITER
Pasadena Fund Services, Inc. (the "Distributor") acts as the principal
underwriter for the shares of the Fund. The Distributor intends to use its best
efforts to distribute the Fund's shares, primarily through investment dealers,
and is not obligated to purchase or distribute any specified number of shares.
An underwriting agreement (the "Underwriting Agreement") dated August 12,
1994, between the Trust, on behalf of each of the Funds, and the Distributor is
currently in effect through February 28, 1997. The Underwriting Agreement
shall continue in effect thereafter for periods not exceeding one year if
approved at least annually by (i) the Board of Trustees or a vote of a majority
of the outstanding shares of the Trust (as defined in the 1940 Act) and (ii) a
majority of the Trustees who are not interested persons of any such party, in
each case by vote cast in person at a meeting called for the purpose of voting
on such approval. The Underwriting Agreement may be terminated without penalty
by the parties thereto upon 60-days' written notice, and would be automatically
terminated in the event of its assignment as defined in the 1940 Act. All sales
of Fund shares prior to the date of this Statement of Additional Information
were privately placed at net asset value, and therefore the Distributor did not
receive any front-end sales charges in connection with such sales.
The Distributor is responsible for certain expenses of distribution of the
shares of the Fund, including advertising expenses, costs of printing sales
material and prospectuses used to offer shares to the public and expenses of
preparing and printing amendments to the Trust's registration statement if the
amendment is necessitated by the actions of the Distributor. In some instances
dealers may receive 100% of the sales charge for sales of shares of the Fund and
may, therefore, be deemed "underwriters" under the Securities Act of 1933, as
amended.
The Distributor is a wholly-owned subsidiary of Pasadena Capital
Corporation.
PURCHASE, REDEMPTION, AND PRICING OF FUND SHARES
Reference is made to the information under the captions "Purchase of
Shares," "Redemption of Shares," "Determination of Net Asset Value," and
"Dividends, Distributions, and Taxes" in the Prospectus. The Prospectus sets
forth certain minimum investment and other requirements. From time to time, the
Fund's management in its discretion may elect to waive such requirements in
connection with individual purchases and sales. The following is additional
information regarding purchase, redemption, and pricing of Fund shares:
B-33
<PAGE>
DETERMINATION OF NET ASSET VALUE. The net asset value of the Fund is
determined once daily as of 4:15 p.m. New York City Time on each day the New
York Stock Exchange (the "Exchange") is open for trading (or such earlier time
if the Exchange closes early for any reason). Portfolio securities will be
priced at 4:00 p.m., at the close of trading on the Exchange, and any equity
options or futures contracts and index options will be priced as of their close
of trading on the same days, at 4:10 p.m. and 4:15 p.m, respectively. It is
expected that during 1996 the Exchange will be closed on Saturdays and Sundays
and for Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas and New Year's. The Fund does not expect to
determine the net asset value of its shares on any day when the Exchange is not
open for trading even if there is sufficient market movement with respect to its
portfolio securities in other markets on such days to materially affect the net
asset value per share.
In valuing the Fund's assets for the purpose of calculating net asset
value, portfolio securities listed on a national securities exchange or on
Nasdaq for which market quotations are readily available are valued at the last
sale price on the exchange or Nasdaq on the day as of which such value is being
determined. If there has been no sale on such exchange or on Nasdaq on such
day, the security is valued at the last sale price on the business day the
security was last traded. Trading in certain securities (such as foreign
securities) may be substantially completed each day at various times prior to
the close of the Exchange. The values of these securities used in determining
the net asset value of the Fund's shares are computed as of such times and
included in the pricing at 4:00 p.m. Securities traded only in the
over-the-counter market, and not on Nasdaq, for which market quotations are
readily available are valued at the current or last bid price. If no bid price
is quoted on such day, the security is valued by such method as the Board of
Trustees shall determine in good faith to reflect the security's fair value.
All other assets of the Fund are valued in such manner as the Board of Trustees
in good faith deems appropriate to reflect their fair value.
U.S. Government securities are traded in the over-the-counter market and
will be valued as follows: securities having a maturity of 60 days or less will
be valued at cost with interest accrued or discount amortized to date of
valuation included in the interest receivable; securities having a maturity of
more than 60 days and for which market quotations are readily available will be
valued at the last reported bid price; securities having a maturity of over 60
days and for which market quotations are not readily available will be valued on
the basis of market quotations for securities of comparable maturity, quality
and type. Securities for which reliable quotations are not readily available
and all other assets will be valued at their respective fair value as determined
in good faith by, or under procedures established by, the Board of Trustees.
The
B-34
<PAGE>
Funds may utilize a pricing service, bank, or broker/dealer experienced in such
matters to perform any of the pricing functions under procedures approved by the
Board of Trustees.
Reliable market quotations may not be considered to be readily available
for certain U.S. and foreign securities. These investments are stated at fair
value in accordance with procedures approved by the Trustees.
If any securities held by the Fund are restricted as to resale, the Fund's
Manager will determine their fair value following procedures approved by the
Board of Trustees. The Trustees periodically review such valuations and
procedures. The fair value of such securities is generally determined as the
amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to analytical data relating to
the investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by the Fund
in connection with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the market value of
any unrestricted securities of the same class (both at the time of purchase and
at the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Occasionally, events affecting the values of the Fund's securities may
occur between the times at which the values are determined and the close of
trading on the Exchange, and the effect of these events will not be reflected in
the computation of the Fund's net asset value. If events materially affecting
the value of such securities occur during such period, then their valuation may
be adjusted to reflect their fair value as of the close of trading on the
Exchange as determined in good faith by, or under procedures established by, the
Board of Trustees.
PURCHASE OF SHARES. If an order for the purchase of the Fund's shares,
together with payment in proper form, is received by Boston Financial Data
Services, Inc. (the "Sub-Transfer Agent"), the Fund, or another authorized agent
or subagent of the Fund, before 4:15 p.m., New York City time, Fund shares will
be purchased at the public offering price (I.E., net asset value plus the
applicable sales charge set forth in the Fund's Prospectus) determined on that
day. Otherwise, Fund shares will be purchased at the offering price determined
as of the close of trading on the next business day. It is the responsibility
of any securities firm to transmit orders placed through it so that they will be
received by the Sub-Transfer Agent on a timely basis as described in the
Prospectus. If an application for the purchase of shares of the Fund is
received by the Sub-Transfer
B-35
<PAGE>
Agent, the Fund, or another authorized agent or subagent of the Fund, without
the appointment of an investment dealer, the Distributor intends to assign the
account to an investment dealer, which may include the Distributor, for
servicing and pay the applicable dealer concession to such firm or retain it
where the Distributor is the dealer of record. The appointment of a dealer of
record does not change or affect in any way the price at which shares of the
Fund are purchased or the rights of the shareholder, and the shareholder may
change at any time the designation of the dealer of record to any other dealer
by written notice to the Fund.
Certain family members of officers, trustees, directors and full-time
employees of the Trust, the Manager, the Distributor and their affiliates and
such other persons who are determined by the Board of Trustees under
circumstances not involving any sales expense to the Fund or the Distributor may
purchase shares of the Fund at net asset value. Family members are defined as
current spouse, children, parents, grandchildren, grandparents, uncles, aunts,
siblings, nephews, nieces, step relatives, relations at law and cousins.
LETTER OF INTENT. An investor may qualify for an immediate reduced sales
charge on its purchase of shares of any of the Funds by completing a Letter of
Intent (the "Letter of Intent" or "Letter"), in which the investor states its
intention to purchase during the following 13 months a specified amount which,
if made at one time, would qualify for a reduced sales charge. A minimum
initial investment equal to 5% of such specified amount is required in one of
the Funds. After the investor files the Letter of Intent, each additional
investment made in any of the Funds will be entitled to the sales charge
applicable to the level of investment indicated in the Letter of Intent as
described above. Sales charge reductions based upon purchases in more than one
of the Funds will be included in the Letter of Intent only if notification is
given to the Distributor that the investment qualifies for a discount.
Investments in any of the Funds within 90 days before the Letter of Intent is
filed will be counted towards completion of the Letter of Intent but will not be
entitled to a retroactive downward adjustment of sales charge. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased during the period.
The Letter of Intent requires that five percent (5%) of the amount of the
total intended purchase will be reserved in shares of the Fund, registered in
the investor's name, to assure that the full applicable sales charge will be
paid if the investor does not complete the intended purchase. However, the
reserved shares will be included in the total shares owned as reflected on the
monthly statement, and any income and capital gain distributions on the reserved
shares will be paid as directed. The reserved shares will not be available for
disposal by the
B-36
<PAGE>
investor until the Letter of Intent has been completed, or the higher sales
charge paid. If the total purchases equal or exceed the amount specified under
the Letter, the reserved shares will be deposited to the investor's Open
Account. If the total amount of purchases equals or exceeds the amount
specified under the Letter and is an amount which would qualify for a further
quantity discount, a retroactive price adjustment will also be made by the
Distributor and the dealer through whom purchases were made pursuant to the
Letter of Intent (to reflect such further quantity discount) on purchases made
after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases are less than the amount specified under the Letter, the investor will
remit to the Distributor an amount equal to the difference in the dollar amount
of sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single time. Upon such remittance, the reserved shares held for the
investor's account will be deposited to its Open Account. If within 20 days
after written request such difference in sales charge is not paid, the
redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account
prior to fulfillment of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption and the balance will be
forwarded to the investor.
By completing the Letter of Intent, the investor grants to the Distributor
a security interest in the reserved shares and agrees to irrevocably appoint the
Distributor as its attorney-in-fact to surrender for redemption any or all
shares with full power of substitution. This power of attorney is coupled with
an interest. The investor or its dealer must inform the Distributor that this
Letter of Intent is in effect each time a purchase is made.
REDEMPTION OF SHARES. The right of redemption may not be suspended and the
date of payment upon redemption postponed for more than seven days (or such
shorter period as may be required by applicable law or regulation) after a
shareholder's redemption request made in accordance with the procedures set
forth in the Prospectus, except for any period during which the Exchange is
closed (other than customary weekend and holiday closings) or during which the
SEC determines that trading thereon is restricted, or for any period during
which an emergency (as determined by the SEC) exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
as a result of which it is not reasonably practicable for the Fund fairly to
determine the value of its net assets, or for such other period as the SEC may
by order permit for the protection of security holders of the Fund.
B-37
<PAGE>
The Fund may pay the redemption price either in cash or in portfolio
securities of the Fund (selected in the discretion of the Board of Trustees and
taken at their value used in determining net asset value), or partly in cash and
partly in portfolio securities. As a practice, the Fund will redeem shares
wholly in cash unless the Board of Trustees believes that economic conditions
make cash redemption detrimental to the Fund's interests. If payment for
redeemed shares is made wholly or partly in portfolio securities, the
shareholder will ordinarily incur brokerage costs in converting the securities
to cash. The Trust has filed a formal election with the SEC stating that the
Fund may effect a redemption in portfolio securities provided it pays
redemptions in cash during any 90-day period for any shareholder equal to the
lesser of $250,000 or 1% of the Fund's total net assets at the beginning of such
period. The Fund currently expects, however, that the amount of a redemption
request would have to be significantly greater than $250,000 or 1% of total net
assets before the Fund would make a redemption in portfolio securities. Any
such in-kind redemptions will be subject to receipt by the Fund of any necessary
regulatory approvals.
DISTRIBUTIONS AND TAX STATUS
Reference is made to the information contained under the caption
"Dividends, Distributions, and Taxes" in the Prospectus, which is incorporated
herein by reference. The following is additional information with reference to
the Fund's distributions and tax status:
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and pay income dividends and any capital gain
distributions at least once a year as stated in the Prospectus.
Each shareholder may elect either to receive dividends and distributions in
cash or to have them reinvested in additional whole or fractional shares of the
Fund. The election to receive dividends and distributions in cash or shares is
made at the time of the subscription order. A shareholder may change such
election at any time prior to the record date for a particular dividend or
distribution by written request to the Fund. The value of whole and fractional
shares shall be computed in accordance with the provisions of "Determination of
Net Asset Value." No sales or other types of charge will be assessed in
connection with the reinvestment of dividends and capital gain distributions.
TAXES
The Fund is treated as a separate entity for federal income tax purposes.
The Fund intends to qualify and to elect to be
B-38
<PAGE>
taxed as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The Fund did not qualify to be
treated as a "regulated investment company" during 1993 and 1994, but did so
qualify during 1995 . See "Dividends, Distributions and Taxes" in the
Prospectus. Qualification as a "regulated investment company" does not involve
supervision of the Fund's management or investment practices or policies by any
governmental agency. By distributing substantially all of its net investment
income and realized net capital gains for any fiscal year and by satisfying
certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income
taxes, to the extent its earnings are distributed, or excise taxes based on net
income, with respect to such year.
Dividends of net investment income (including any net realized short-term
capital gains) paid by the Fund are taxable to the recipient shareholders as
ordinary income. In the case of corporate shareholders, such distributions may
qualify for the corporate dividends-received deduction to the extent the Fund
designates the amount distributed as a qualifying dividend. The aggregate amount
so designated cannot, however, exceed the aggregate amount of qualifying
dividends received by the Fund for its taxable year. In view of the Fund's
investment policies, it is expected that dividends from domestic corporations
will be part of the Fund's gross income and that, accordingly, part of such
distributions by the Fund may be eligible for the dividends-received deduction
for corporate shareholders; however, the portion of the Fund's gross income
attributable to qualifying dividends is largely dependent on the Fund's
investment activities for a particular year and therefore cannot be predicted
with any certainty. Availability of the dividends-received deduction is
subject to certain holding period and debt-financing limitations. Also, to the
extent that the Fund's assets are invested in foreign securities, such
dividends-received deduction would not be applicable.
Distributions of net capital gains (I.E., the excess of net long-term
capital gains over net short-term capital losses) by the Fund are taxable to the
recipient shareholders as long-term capital gain, without regard to the length
of time a shareholder has held Fund shares. Capital gain distributions are not
eligible for the dividends-received deduction referred to in the preceding
paragraph. Any loss on a sale or exchange of shares held for six months or less
will be treated as long-term capital loss to the extent of such long-term
capital gain distributions with respect to those shares.
Exchanges and redemptions of shares of the Fund may result in gains or
losses for tax purposes to the extent of the difference between the proceeds
from the shares disposed of and the shareholder's adjusted tax basis for such
shares. If a shareholder of the Fund exercises the exchange privilege with
B-39
<PAGE>
other Funds in the Trust within 90 days of acquiring shares in the Fund, any
loss that would otherwise be recognized on the exchange will be reduced (or any
gain increased) to the extent the sales charge paid on the purchase of the
shares surrendered reduces any sales charge that would be payable on the
purchase of the new shares in the absence of the exchange privilege. Instead,
the amount of the reduction in loss (or increase in gain) will be treated as an
amount paid for the new shares.
CERTAIN FOREIGN CURRENCY-RELATED TRANSACTIONS. Foreign exchange gains and
losses realized by the Fund in connection with certain transactions involving
foreign currency-denominated securities are subject to Section 988 of the Code,
which will generally cause such gains and losses to be treated as ordinary
income and losses rather than capital gains and losses and may affect the
amount, timing and character of distributions to shareholders.
HEDGING TRANSACTIONS. If the Fund engages in hedging transactions,
including hedging transactions in options, futures contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
mark-to-market, straddle, wash sale, and short sale rules), the effect of which
may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities, or convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing, and character of distributions to
shareholders. The Fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interests of the
Fund's shareholders.
Certain of the Fund's hedging activities (including its transactions, if
any, in foreign currencies or foreign currency-denominated instruments) are
likely to produce a difference between its book income and its taxable income.
If the Fund's book income exceeds its taxable income, the distribution (if any)
of such excess will be treated as a dividend to the extent of the Fund's
remaining earnings and profits, and thereafter as a return of capital or as gain
from the sale or exchange of a capital asset, as the case may be. If the Fund's
book income is less than its taxable income, the Fund could be required to make
distributions exceeding book income to qualify as a regulated investment company
that is accorded special tax treatment under Subchapter M of the Code.
Under one of the requirements for qualification as a "regulated investment
company" under the Code, the Fund will be limited in selling assets held or
considered under Code rules to have been held for less than three months, and in
engaging in certain hedging transactions (including hedging transactions in
options and futures) that in some circumstances could cause certain Fund assets
to be treated as held for less than three months.
B-40
<PAGE>
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. Any investment by the Fund
in securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Fund to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, the Fund may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
CERTAIN FOREIGN ISSUES. If more than 50% of the Fund's assets at year-end
consist of securities of foreign corporations, the Fund may qualify for and make
the election permitted under Section 853 of the Code so that shareholders will
be able to claim a credit or deduction on their income tax returns for, and will
be required to treat as part of the amount distributed to them, their pro rata
portion of qualified taxes paid by the Fund to foreign countries (which taxes
relate primarily to investment income). A shareholder's ability to claim such a
foreign tax credit will be subject to certain limitations imposed by the Code,
as a result of which a shareholder may not be able to use currently a credit for
the full amount of foreign tax so paid by the Fund. Shareholders who do not
itemize deductions on their federal income tax returns may claim a credit (but
no deduction) for such foreign taxes.
Investment by the Fund in certain "passive foreign investment companies"
could subject the Fund to additional U.S. federal income tax or other charge on
the proceeds from the disposition of its investment in such a company; however,
this tax can be avoided by making an election to mark such investments to market
annually or to treat the passive foreign investment company as a "qualified
electing fund" which passes its annual income through to the Fund regardless of
whether the company makes distributions.
A shareholder of the Fund who does not fall within one of certain exempt
categories may be subject to backup withholding at the rate of 31% with respect
to dividends and capital gain distributions paid to shareholders or reinvested
by the Fund and other amounts distributed by the Fund, including proceeds of
redemptions, unless such shareholder provides a social security or taxpayer
identification number, certifies as to exemption from backup withholding, and
otherwise complies with applicable requirements of the Code.
Reports containing appropriate federal income tax information (relating to
the tax status of dividends and capital gain distributions by the Fund) will be
furnished to each shareholder following the close of the calendar year during
which the payments are made.
The discussions herein and in the Prospectus have been prepared by the
management of the Trust, are general by nature and do not purport to be a
complete description of all tax
B-41
<PAGE>
implications of an investment in the Fund. Heller, Ehrman, White & McAuliffe,
the Trust's counsel, has expressed no opinion in respect thereof. Investors
should consult their own tax advisers for further details and for the
application of federal, state and local tax laws to their particular situations.
PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in advertisements
and investor communications. Total return may be stated for any relevant period
as specified in the advertisement or communication. Any statements of total
return or other performance data on the Fund will be accompanied by information
on the Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations. The
Fund may also advertise aggregate and average total return information over
different periods of time.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital
appreciation and depreciation for the stated period, according to the following
formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which
the maximum sales charge is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase
at the end of the period
Aggregate total return is calculated in a similar manner, except that the
results are not annualized. Each calculation assumes the maximum sales charge
is deducted from the initial $1,000 investment at the time it is made and that
all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
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<PAGE>
The average annual compounded rates of return, or total return, for the
Fund's Class A shares for the indicated periods ended December 31, 1995 were as
follows:
ONE YEAR(*) Inception
(November 1, 1993)
to
December 31, 1995(*)
------------------
17.40% 25.85%
- ---------------
(*) Prior to May 1, 1996, the Fund's shares were not offered to the public
and, although the Fund's portfolio was managed substantially in accordance
with the investment policies described in its current Prospectus during
that period, some management differences did occur due primarily to the
Fund's small asset size. Accordingly, the Fund's performance during
periods prior to May 1, 1996 may not be relevant to an assessment of the
Fund's performance subsequent to such date. Additionally, the Manager
waived all management, administrative and service fees otherwise payable to
it by the Fund during 1993, 1994 and 1995, which had the effect of
increasing the Fund's total return for those periods.
The yield computation is determined by dividing the net investment income
per share earned during the period by the maximum offering price per share on
the last day of the period and annualizing the resulting figure, according to
the following formula:
6
Yield = 2 [((a-b) + 1) -1]
------
cd
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.
Yield calculations assume the maximum sales charge applicable to the Fund.
Actual yield may be affected by variances in sales charges on investments.
Until such time as this Statement of Additional Information is amended to
include the amount of yield for the Fund for an appropriate 30-day
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<PAGE>
period, the amount of such yield will not be advertised on behalf of the Fund.
The Fund may also, from time to time, include a reference to its current
distribution rate in investor communications and sales literature preceded or
accompanied by a prospectus for the Fund, reflecting the amounts actually
distributed to shareholders which could include capital gains and other items of
income, as well as interest and dividend income received by the Fund and
distributed to shareholders. All calculations of the Fund's distribution rate
are based on the distributions per share which are declared, but not necessarily
paid, during the fiscal year. The distribution rate is determined by dividing
the distributions declared during the period by the maximum offering price per
share on the last day of the period and annualizing the resulting figure. The
distribution rate does not reflect capital appreciation or depreciation in the
price of the Fund's shares and should not be confused with yield or considered
to be a complete indicator of the return to the investor on his investment.
The performance of the Fund may be compared to that of various indices of
investment performance published by third parties (including, for example and
not limited to, the Dow Jones Industrial Index, Standard & Poor's 500 Stock
Index, Nasdaq Composite Index, the Value Line Arithmetic Index, the Value Line
Geometric Index, Russell 1000, Russell 2000, Russell 3000, Wilshire 4500,
Wilshire 5000, various EAFAE Indices, Lipper Non-Government Money Market Average
and Lipper Government Money Market Average). Furthermore, the Fund's standard
performance may also be compared to the Fund's performance calculated as if no
sales charges were deducted.
From time to time, information concerning the Fund's performance by
independent sources such as Morningstar, Lipper Analytical Services, Inc. and
other organizations may also be used in advertisements and in information
furnished to present or prospective investors in the Fund.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's current yield, total
return or distribution rate for any period should not be considered as a
representation of what an investment may earn or what an investor's total
return, yield or distribution rate may be in any future period.
GENERAL
The Fund is a separate and distinct series of the Pasadena Investment
Trust, a Massachusetts business trust. The shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. However, the Trust's Agreement and
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<PAGE>
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust and the Fund. The Declaration of Trust also
provides for indemnification and reimbursement of expenses out of Trust assets,
including the Fund, for any shareholder held personally liable for obligations
of the Trust. The Declaration of Trust 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. All such
rights are limited to the assets of the Fund of which a shareholder holds
shares. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees, and agents to cover possible tort and other liabilities.
Furthermore, the activities of the Trust as an investment company as
distinguished from an operating company would not likely give rise to
liabilities in excess of the Trust's total assets. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to the unlikely circumstances in which both inadequate insurance exists
and the Trust itself is unable to meet its obligations.
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such a registration does not involve supervision
of the management or policies of the Fund. The Prospectus and this Statement of
Additional Information omit certain information contained in the Registration
Statement of the Trust filed with the Securities and Exchange Commission.
Copies of such information may be obtained from the Commission upon payment of
the prescribed fee.
As of March 31, 1996, Pasadena Capital Corporation and the Pasadena
Capital Corporation Employee Stock Ownership Plan, 600 N. Rosemead Boulevard,
Pasadena, California 91107, owned 95.5% and 4.5%, respectively, of the Fund's
outstanding shares.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated herein by
reference to such financial statements which have been filed with the Securities
and Exchange Commission. Any person wishing to receive such financial
statements should call or write to the Trust to obtain a free copy.
B-45
