<PAGE>
Filed pursuant to Rule 497(c) for
File Nos. 033-08865 and 811-04847.
ECLIPSE FINANCIAL ASSET TRUST
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
144 EAST 30TH STREET
NEW YORK, NEW YORK 10016
(800) 872-2710
IN GEORGIA (770) 631-0414
Eclipse Financial Asset Trust (the "Trust") is a no-load, open-end,
diversified management investment company. The Trust currently has four
investment portfolios: the Ultra Short Term Income Fund, the Balanced Fund, the
Growth and Income Fund and the Equity Fund (individually a "Fund" and
collectively the "Funds").
ULTRA SHORT TERM INCOME FUND: The investment objective of
the Ultra Short Term Income Fund is to seek a high level
of current income, preservation of capital and a relatively
stable net asset value. This fund is designed for the investor
who seeks a higher yield than a money market fund (and is
willing to assume some principal risk) but less fluctuation
in net asset value than a longer-term bond fund. It is not
a money market fund and may not maintain a stable net asset
value per share. The duration of the Fund will not exceed
one year. The Ultra Short Term Income Fund will generally
limit its investments to securities which, in the opinion
of the Fund's Manager, are issued by companies that are
socially responsible.
BALANCED FUND: The investment objective of the Balanced
Fund is to seek a high total return from a combination of
equity and fixed-income investments.
GROWTH AND INCOME FUND: The investment objective of the
Growth and Income Fund is to seek a high total return
consisting of both current income and realized and unrealized
capital gains from equity securities and equity-related
securities. Equity selection for the Growth and Income Fund
will be based on estimated relative intrinsic value,
expected future earnings growth and current and expected
dividend income.
EQUITY FUND: The investment objective of the Equity Fund
is to seek a high total return from equity investments.
Securities are selected and weighted in each Fund's portfolio with a
view toward achievement of its investment objective.
Towneley Capital Management, Inc. serves as Manager to the Trust.
This Statement of Additional Information is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Trust's
prospectus relating to the Funds dated May 1, 1997 (the "Prospectus"). This
Statement of Additional Information contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus, additional copies of which may be obtained
without charge by writing or telephoning the Trust at the address and telephone
number set forth above.
<PAGE>
TABLE OF CONTENTS
Page
----
Investment Policies and Risk Considerations. . . . . . . . . . . . . . 3
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . 5
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . 9
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 10
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Description of Shares. . . . . . . . . . . . . . . . . . . . . . . . . 11
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Counsel and Auditors . . . . . . . . . . . . . . . . . . . . . . . . . 17
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . 17
- 2 -
<PAGE>
INVESTMENT POLICIES AND RISK CONSIDERATIONS
INVESTMENT POLICIES APPLICABLE TO THE ULTRA SHORT TERM INCOME FUND AND THE
BALANCED FUND
FLOATING AND VARIABLE RATE NOTES
Floating and variable rate notes generally are unsecured obligations issued
by financial institutions and other entities. These obligations typically have
a stated maturity in excess of one year. The interest rate on such notes is
based on an identified interest rate index and is adjusted automatically at
specified intervals or when the index changes.
MORTGAGE-BACKED SECURITIES
GOVERNMENT GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The Ultra Short
Term Income Fund and the Balanced Fund may invest in mortgage pass-through
securities representing participation interests in pools of residential mortgage
loans originated by United States governmental or private lenders and
guaranteed, to the extent provided in such securities, by the United States
Government or one of its agencies or instrumentalities. Such securities, which
are ownership interests in the underlying mortgage loans, differ from
conventional debt securities, which provide for periodic payment of interest in
fixed amounts (usually semiannually) and principal payments at maturity or on
specified call dates. Mortgage pass-through securities provide for monthly
payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Fund may
invest include those issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the United States Government is pledged to the payment of all amounts
that may be required to be paid under any guarantee. In order to meet its
obligations under such guarantee, GNMA is authorized to borrow from the United
States Treasury with no limitations as to amount.
The GNMA Certificates will represent a pro rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one to
four-family housing units.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1939 as a United
States Government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder owned and privately managed
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to
purchase home mortgage loans from many capital market investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
- 3 -
<PAGE>
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments, on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the United States Government.
Each FNMA Certificate will represent pro rata interests in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of the purchase of
first lien, conventional, residential mortgage loans and participation interests
in such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of an FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC Certificate,
whether or not received. FHLMC also guarantees to each registered holder of an
FHLMC Certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default on
an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer, or (iii) the
expiration of any right of redemption, whichever occurs later, but in any event
no later than one year after demand has been made upon the mortgagor for
accelerated payment of principal. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by the full faith and credit
of the United States Government.
FHLMC Certificates represent pro rata interests in a group of mortgage
loans (an "FHLMC Certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one to four-family
residential properties or multifamily projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. An FHLMC Certificate group
may include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
INVESTMENT POLICIES APPLICABLE TO ALL FUNDS
WARRANTS
Each Fund may invest in warrants which entitle the holder to buy equity
securities at a specific price for a specific period of time. Warrants may be
considered more speculative than certain other types of investments in that they
do not entitle a holder to dividends or voting rights with respect to the
securities which may be purchased nor do they represent any right in the assets
of the issuing company. Also, the value of a warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date. A Fund will not,
however, purchase any warrant if, as a result of such purchase, 5% or more of
the Fund's total assets would be invested in warrants. Included in that amount,
but not to exceed 2% of the value of the Fund's total assets, may be warrants
which are not listed on the New York or American Stock Exchange. Warrants
acquired by a Fund in units or attached to securities may be deemed to be
without value.
LENDING OF PORTFOLIO SECURITIES
Each Fund may from time to time lend securities from its portfolio to
brokers or dealers, banks or other institutional investors and receive
collateral in the form of cash or United States Government obligations. Under
each Fund's current practices, the loan collateral must be maintained at all
times in an amount equal to at least 100% of the current market value
- 4 -
<PAGE>
of the loaned securities. In determining whether to lend securities to a
particular broker-dealer or financial institution, the Manager will consider all
relevant facts and circumstances, including the creditworthiness of the
broker-dealer or financial institution. A Fund may pay reasonable finders,
administrative and custodial fees in connection with a loan. A Fund will not
lend portfolio securities in excess of 20% of the value of its total assets, nor
will a Fund lend its portfolio securities to any officer, director, trustee,
employee or affiliate of the Fund or the Manager.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions which are in
addition to those described in the Prospectus. Under the following
restrictions, which may not be changed without the approval of a Fund's
shareholders, a Fund may not:
1. Purchase or otherwise acquire interests in real estate (including, in
the case of the Ultra Short Term Income Fund and the Growth and Income
Fund, interests in real estate limited partnerships) or real estate
mortgage loans, or interests in oil, gas or other mineral exploration
or development programs, except that the Ultra Short Term Income Fund
and the Balanced Fund may acquire mortgage-backed securities;
2. Sell securities short or invest in puts, calls, straddles, spreads or
combinations thereof;
3. Purchase or acquire commodities or commodity contracts;
4. Issue senior securities, except insofar as the Fund may be deemed to
have issued a senior security in connection with any permitted
borrowing;
5. Participate on a joint, or a joint and several, basis in any
securities trading account; or
6. Invest in companies for the purpose of exercising control.
In addition, each Fund has adopted certain additional investment
restrictions, including the following, which may be changed by the Board of
Trustees without shareholder approval. None of the Funds may (i) purchase or
retain the securities of any issuer if the officers, directors or trustees of
the Trust or the Trust's adviser owning beneficially more than one-half of one
percent of the securities of any issuer together own beneficially more than 5%
of such securities, or (ii) purchase the securities of other open-end investment
companies. Neither the Balanced Fund nor the Equity Fund may invest more than
5% of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years' continuous operation and
equity securities of issuers which are not readily marketable. Neither the
Growth and Income Fund nor the Ultra Short Term Income Fund may (i) invest more
than 5% of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years' continuous operation, or
(ii) invest more than 15% of the total assets in the securities of issuers which
together with any predecessors have a record of less than three years'
continuous operation or securities of issuers which are restricted as to
disposition (including for this purpose Rule 144A securities).
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust, and their principal
occupations for the past five years, are listed below. Trustees deemed to be
"interested persons" of the Trust for purposes of the Investment Company Act of
1940 are indicated by an asterisk.
WESLEY G. MCCAIN*, 54, Trustee, Chairman of the Board and President, is
the founder and has been Chairman of Towneley Capital Management, Inc. since
1971. His address is 144 East 30th Street, New York, New York 10016. Mr.
McCain is a trustee of the Van Eck Funds and the Van Eck World Wide Insurance
Trust, a director of the Peregrine Fund and is a general partner of Pharaoh
Partners, L.P., which is the general partner of Libre Partners, L.P. He is
also a Trustee of Libre Group Trust, and Chairman of Millbrook Associates,
Inc. and of Eclipse Financial Services, Inc. Mr. McCain was Chairman of
Finacor, Inc. from 1970 to 1992, and co-founder, Secretary and Treasurer of
Millbrook Advisors, Inc. from 1982 to 1989. He is a Chartered Financial
Analyst and a member of the Association for Investment Management and
Research. In addition
- 5 -
<PAGE>
to managing investment portfolios, Mr. McCain's experience includes economic and
financial consulting to a diversified corporate clientele.
SIGRID A. HESS*, 55, Trustee, Executive Vice President and Secretary, is
a Vice President of Towneley Capital Management, Inc., where she has been
employed since 1977. Her address is 144 East 30th Street, New York, New York
10016.
JOHN C. NOVOGROD, 54, Trustee, is a partner of the law firm of Schiff,
Hardin & Waite since 1995. Prior to this, he was a partner of Hughes Hubbard
& Reed from 1978 to 1986, a partner of Reboul, MacMurray, Hewitt, Maynard &
Kristol from 1986 to 1991, and a partner of Novogrod & Kurlander from 1991 to
1995. His address is 150 East 52nd Street, New York, New York 10022.
YUNG WONG, 58, Trustee, was a Director of Shaw Investment Management
(H.K.) Limited (an asset management and direct investment firm) from 1994 to
1995, and was a General Partner of Abacus Partners Limited Partnership
(general partner of a venture capital investment firm) from 1984 to 1994.
His address is 29 Alden Road, Greenwich, Connecticut 06831. Dr. Wong is also
a director of California Daily Tax Free Income Fund, Inc., Connecticut Daily
Tax Free Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund,
Inc., Florida Daily Municipal Income Fund, Inc., Institutional Daily Income
Fund, Inc., Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily
Municipal Income Fund, Inc., North Carolina Daily Municipal Income Fund,
Inc., Pennsylvania Daily Municipal Income Fund, Inc., Reich & Tang Equity
Fund, Inc., Short Term Income Fund, Inc., and a Trustee of Reich & Tang
Government Securities Trust.
JOHN C. VAN ECK, 81, Trustee, is Chairman of the Board and President of
Van Eck Funds and Van Eck Worldwide Insurance Trust (mutual funds). He is
Chairman of Van Eck Associates Corporation, an investment adviser, and Van
Eck Securities Corporation, a broker dealer. He was Chairman of companies
and investment companies affiliated with the Van Eck Associates Corporation
from 1955 to 1991, and was director of The Henley Group, Inc. from 1986 to
1992. His address is 99 Park Avenue, New York, New York 10016.
ANTHONY W. POLIS, 53, Vice President and Treasurer, is a Vice President
of New York Life Insurance Company and a Director, Vice President and Chief
Financial Officer of NYLIFE Securities Inc. and NYLIFE Distributors, Inc. He
has also been Vice President and Chief Financial Officer of The MainStay
Funds from 1988 to the present, Treasurer of MainStay Institutional
Funds, Inc. since 1990, and Treasurer of MainStay VP Series Fund Inc.
from 1993 to the present. From 1983 through 1988, he was Vice President of
Drexel Burnham Lambert Incorporated, DBL Tax-Free Fund Inc., DBL Cash Fund
Inc., The Drexel Burnham Fund, Drexel Series Trust, Fenimore International
Fund Inc., BT Investment Trust and BT Tax Free Investment Trust and Assistant
Treasurer, Drexel Bond-Debenture Trading Fund. His address is 51 Madison
Avenue, New York, New York 10010.
SYLVIA MCCORMICK, 50, Vice President, has been employed by Towneley
Capital Management, Inc. since September, 1973. She is President of Eclipse
Financial Services, Inc., the Trust's shareholder servicing agent. Her
address is 21 Eastbrook Bend, Suite 119, Peachtree City, Georgia 30269.
A. THOMAS SMITH III, 39, Assistant Secretary, has been Assistant General
Counsel of New York Life Insurance Company since 1994. Mr. Smith was Assistant
General Counsel of the Dreyfus Corporation from 1991 to 1993. From 1989 to
1991, he was Senior Associate with Willkie, Farr & Gallagher, and from 1986 to
1988, Staff Attorney in the Chief Counsel's Office of the U.S. Securities and
Exchange Commission, Division of Investment Management. His address is 51
Madison Avenue, New York, New York 10010.
SARA L. BADLER, 36, Assistant Secretary, has been Associate Counsel of
New York Life Insurance Company since 1994. Ms. Badler worked for
Oppenheimer Management Corporation from 1987 to 1993 as Vice President and
Associate Counsel, and also worked as a consulting attorney. From 1984 to
1987 she was Associate Counsel for Damson Oil Corporation. From 1993 to 1994
she taught in New York City. Her address is 51 Madison Avenue, New York, New
York 10010.
ANTOINETTE B. CIRILLO, 43, Assistant Treasurer, has been Assistant Vice
President, Director and Senior Accountant of Mutual Fund Accounting Operations,
NYLIFE Securities Inc. from 1988 to the present, Assistant Treasurer of The
Mainstay Funds from 1992 to the present, Assistant Treasurer of MainStay
Institutional Funds, Inc. from 1992 to the present, Assistant Treasurer of
MainStay VP Series Fund, Inc. from 1993 to the present, and Assistant Vice
President of NYLIFE Distributors Inc. from 1993 to the present. She held
various positions in New York Life Insurance Company from 1987 to 1988. Her
address is 51 Madison Avenue, New York, New York 10010.
PATRICK J. FARRELL, 37, Assistant Treasurer, has been Corporate Vice
President of NYLIFE Distributors, Inc. and NYLIFE Securities, Inc. from 1996
to the present, Assistant Treasurer of MainStay Funds from 1996 to the
present, Assistant Treasurer of MainStay Institutional Funds from 1996 to the
present and Assistant Treasurer of MainStay VP Series Fund from 1996 to the
present. He was Vice President of Alliance Capital Management Corporation
from 1988 to 1996. From 1986 to 1988, he was Vice President and Associate
Manager of Drexel Burnham Lambert Incorporated. From 1983 to 1986, he was
Assistant Treasurer of Lexington Management Corporation. From 1981 to 1983
he was a Senior Accountant for Peat Marwick Mitchell & Company. His address
is 51 Madison Avenue, New York, New York 10010.
- 6 -
<PAGE>
Effective beginning in 1995, Trustees of the Trust not affiliated with
Towneley Capital Management, Inc. or NYLIFE Distributors Inc. receive from the
Trust an annual retainer of $2,000 and a fee of $750 for each Board of Trustees
meeting attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Officers of the Trust and Trustees who are
affiliated with Towneley Capital Management, Inc. or NYLIFE Distributors Inc. do
not receive compensation from the Trust. The following table sets forth
information regarding compensation of Trustees by the Trust for the fiscal year
ended December 31, 1996.
COMPENSATION TABLE
(YEAR ENDED DECEMBER 31, 1996)
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Estimated Annual Total Compensation
Name of Compensation As Part of Trust Benefits Upon From Trust
Trustee from the Trust Expenses Retirement Paid to Trustees*
- ------- -------------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Sigrid A. Hess $ 0 $0 $0 $ 0
Wesley G. McCain $ 0 $0 $0 $ 0
John C. Novogrod $5,000 $0 $0 $5,000
John C. van Eck $5,000 $0 $0 $5,000
Yung Wong $5,000 $0 $0 $5,000
</TABLE>
- ---------------
* Eclipse Financial Asset Trust includes all of the funds (or portfolios)
advised by Towneley Capital Management, Inc., and is not a related person
of any other registered investment company.
MANAGER
Pursuant to a Management Contract dated January 7, 1987 with the Trust with
respect to the Balanced Fund and the Equity Fund (the "1987 Contract") and a
Management Contract dated December 27, 1994 with the Trust with respect to the
Ultra Short Term Income Fund and the Growth and Income Fund (the "1994 Contract"
and, together with the 1987 Contract, the "Management Contracts"), Towneley
Capital Management, Inc. (the "Manager") furnishes investment programs for the
Funds, makes the day-to-day investment decisions for each Fund, executes the
purchase and sale orders for the portfolio transactions of each Fund, and
generally manages each Fund's investments. Mr. McCain, chairman and trustee of
the Trust and chairman and director of the Manager, may be deemed a "controlling
person" of the Manager on the basis of his ownership of the Manager's stock.
The 1987 Contract was approved on December 8, 1986, and the 1994 Contract
was approved on December 20, 1994, in each case by the Board of Trustees,
including a majority of the trustees who are not interested persons (as defined
in the Investment Company Act of 1940) of the Trust or the Manager. The sole
initial shareholder of the Balanced Fund and the Equity Fund approved the 1987
Contract on January 7, 1987, and the sole initial shareholder of each of the
Growth and Income Fund and the Ultra Short Term Income Fund approved the 1994
Contract on December 27, 1994. Amendments to the 1987 Contract, to provide for
the management of the Balanced Fund and to eliminate 12b-1 expenses as an
allowable expense payable by either Fund, were approved on March 15, 1989 and
March 16, 1990, respectively, by the Trust's Board of Trustees, including a
majority of the Trustees who are not interested persons (as defined in such Act)
of the Trust or the Manager. The 1987 Contract, as amended, was approved by the
public shareholders of each of the Balanced Fund and the Equity Fund at a
meeting held on June 13, 1990. The 1987 Contract and the 1994 Contract shall
continue in effect as to each Fund provided that continuance is specifically
approved annually by the Trust's Board of Trustees or by vote of such Fund's
shareholders, and in either case by a majority of the
- 7 -
<PAGE>
trustees who are not parties to the relevant Management Contract or interested
persons of any such party, by vote cast in person at a meeting called for the
purpose of voting on the relevant Management Contract.
Under the Management Contracts, the Funds pay management fees to the
Manager at the following rates, which are expressed as a percentage of the
average daily net assets of each Fund:
Ultra Short Term Income Fund 0.40%
Balanced Fund 0.80%
Growth and Income Fund 0.90%
Equity Fund 1.00%
For the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the Manager voluntarily waived fees of $27, $10,021, and
$18,414, respectively (in each case, its entire fee) for the Ultra Short Term
Income Fund.
For the fiscal years ended December 31, 1994, December 31, 1995, and
December 31, 1996, the fees payable by the Balanced Fund under the 1987
Contract were $211,682, $414,448 and $672,074, respectively. During the
years ended December 31, 1994, December 31, 1995 and December 31, 1996, the
Manager voluntarily waived fees for the Balanced Fund totalling $94,973,
$160,241, and $200,877, respectively.
For the fiscal years ended December 31, 1994 and December 31, 1995, the
Manager voluntarily waived fees of $31 and $41,173 (in each case, its entire
fee) for the Growth and Income Fund. For the fiscal year ended December 31,
1996, the fees payable by the Growth and Income Fund under the 1994 Contract
amounted to $76,816 and the Manager voluntarily waived fees totaling $57,284.
For the fiscal years ended December 31, 1994, December 31, 1995, and
December 31, 1996, the fees paid by the Equity Fund under the Management
Contract were $1,964,682, $1,860,540 and $1,657,486, respectively.
As of the date of this Statement of Additional Information, the Manager is
continuing to waive all of its fee for the Ultra Short Term Income Fund, and a
portion of its fee for the Balanced Fund and the Growth and Income Fund, and
to reimburse all of the expenses of the Ultra Short Term Income Fund. Also
as of the date of this Statement of Additional Information, the Manager is
maintaining the expense ratio of the Balanced Fund at a level not to exceed
0.85% and the expense ratio of the Growth and Income Fund at a level not to
exceed 0.90%, including certain indirect expenses.
Under the Management Contracts, the Manager is required to pay the fees of
the Trust's administrator (see "Administrator" below).
The Management Contracts can be terminated without penalty by the Trust on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Trustees,
or by the Manager on sixty days' written notice, and will automatically
terminate in the event of its assignment. The Management Contract 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 shall not be liable for any action or failure to act in accordance with
its duties thereunder.
If the Manager ceases to act as the Trust's investment adviser, or, in any
event, if the Manager requests in writing, the Trust will take action to change
its name to a name not including the word "Eclipse."
ADMINISTRATOR
Pursuant to its administration contract with the Trust, NYLIFE Distributors
Inc., a registered broker-dealer unaffiliated with the Manager (the
"Administrator"), administers all aspects of the Trust's operations except those
which are the responsibility of the Manager. The Administrator is a wholly-
owned subsidiary of New York Life Insurance Company.
Because of the services rendered to the Trust by the Manager and the
Administrator, the Trust itself requires no employees other than its officers,
none of whom receive compensation from the Trust and all of whom are employed by
the Manager or the Administrator. In connection with its responsibilities as
Administrator, the Administrator performs such supervisory, administrative, and
clerical functions as are necessary in order to provide effective administration
of the Trust, including maintaining certain books and records; authorizing the
payment of Fund expenses and maintaining control over daily cash balances;
monitoring the availability of funds for investment; overseeing and confirming
portfolio holdings with the
- 8 -
<PAGE>
Custodian and the Manager; coordinating and controlling on a daily basis the
administrative and professional services rendered to the Trust by others,
including the Manager, the Custodian, the Trust's Transfer and Dividend
Disbursing Agent, and the Trust's Shareholder Servicing Agent, as well as
accounting, auditing and other services performed for the Trust; calculating the
net asset value of the Trust's shares; providing the Trust with adequate
conference facilities for board meetings; overseeing the preparation and filing
with the Securities and Exchange Commission of the Trust's registration
statement, prospectus and statement of additional information; and preparing and
filing all required State Blue Sky filings.
For providing such services, NYLIFE Distributors Inc. receives a fee from
the Manager at the annual rate of 0.15% of the average combined daily net assets
of the Balanced Fund and the Equity Fund up to $50 million, plus 0.12% of such
assets in excess of $50 million but not in excess of $100 million, plus 0.05% of
such assets in excess of $100 million but not in excess of $750 million and
0.02% of such assets in excess of $750 million. For each of the Growth and
Income Fund and the Ultra Short Term Income Fund, NYLIFE Distributors Inc.
receives from the Manager a fee equal to the greater of $50,000 per Fund or
0.10% of the Fund's average daily net assets up to $100 million. Average daily
net assets of each such Fund in excess of $100 million will be combined with
those of the Balanced Fund and the Equity Fund for purposes of the fee paid to
NYLIFE Distributors Inc. and such combined assets will be subject to the fee
schedule described above for the Balanced Fund and the Equity Fund.
The administration contract can be terminated by either party on sixty
days' written notice to the other and will terminate automatically upon the
termination of the Management Contract. The administration contract provides
that in the absence of willful misfeasance, bad faith or gross negligence on the
part of the Administrator, or of reckless disregard of its obligations
thereunder, the Administrator shall not be liable for any action or failure to
act in accordance with its duties.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities for the
Trust, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions. Purchases and sales of securities on a
securities exchange are effected through brokers who charge a commission for
their services. Brokerage commissions on United States securities exchanges are
subject to negotiation between the Manager and the broker.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of each Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of the Funds or the Manager's
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for a Fund may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, and the services furnished by such
brokers may be used by the Manager in providing investment management for a
Fund. Commission rates in the United States are established pursuant to
negotiations with the broker based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers for particular
transactions than might be charged if a different broker had been selected on
occasions when, in the Manager's opinion, this policy furthers the objective of
obtaining the most favorable price and execution. In addition, the Manager is
authorized to pay higher commissions on brokerage transactions for a Fund to
brokers in order to secure research and investment services described above,
subject to review by the Trust's Board of Trustees from time to time as to the
extent and continuation of this practice. Subject to each Fund's objective of
obtaining the most favorable price and efficient execution, the Manager may
place portfolio transactions with brokers or dealers which have been
instrumental in the sale of a Fund's shares. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Trust's
Board of Trustees.
- 9 -
<PAGE>
The Trust did not pay any brokerage commissions with respect to portfolio
transactions of the Ultra Short Term Income Fund for its fiscal period ended
December 31, 1994 (its first fiscal period) or for the fiscal years ended
December 31, 1995 and December 31, 1996.
For the fiscal year ended December 31, 1994, the Trust paid a total of
$59,360 in brokerage commissions with respect to portfolio transactions of the
Balanced Fund aggregating $38,655,269. For the fiscal year ended December 31,
1995, the Trust paid a total of $96,194 in brokerage commissions with respect to
portfolio transactions of the Balanced Fund aggregating $61,899,739. For the
fiscal year ended December 31, 1996, the Trust paid a total of $189,651 in
brokerage commissions with respect to portfolio transactions of the Balanced
Fund aggregating $105,127,014. Of such amount, $99,601 in brokerage commissions
with respect to portfolio transactions aggregating $55,647,256 was placed with
brokers or dealers who provide research and investment services.
The Trust did not pay any brokerage commissions with respect to portfolio
transactions of the Growth and Income Fund for its fiscal period ended December
31, 1994 (its first fiscal period). For the fiscal year ended December 31,
1995, the Trust paid a total of $14,791 in brokerage commissions with respect to
portfolio transactions of the Growth and Income Fund aggregating $11,335,219.
For the fiscal year ended December 31, 1996, the Trust paid a total of
$28,812 in brokerage commissions with respect to portfolio transactions of
the Growth and Income Fund aggregating $16,307,262. Of such amount, $13,217
in brokerage commissions with respect to portfolio transactions aggregating
$7,215,796 was placed with brokers or dealers who provide research and
investment services.
For the fiscal year ended December 31, 1994, the Trust paid a total of
$570,493 in brokerage commissions with respect to portfolio transactions of
the Equity Fund aggregating $283,510,543. For the fiscal year ended December
31, 1995, the Trust paid a total of $545,684 in brokerage commissions with
respect to portfolio transactions of the Equity Fund aggregating
$251,277,874. For the fiscal year ended December 31, 1996, the Trust paid a
total of $571,967 in brokerage commissions with respect to portfolio
transactions of the Equity Fund aggregating $248,806,498. Of such amount,
$312,952 in brokerage commissions with respect to portfolio transactions
aggregating $131,494,817 was placed with brokers or dealers who provide
research and investment services.
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either in
cash or in portfolio securities (selected in the discretion of the Board of
Trustees of the Trust and taken at their value used in determining the net asset
value per share of the particular Fund as described under "Net Asset Value"), or
partly in cash and partly in portfolio securities. However, payments will be
made wholly in cash unless the Board of Trustees believes that economic
conditions exist which would make such a practice detrimental to the best
interests of the Trust. If payment for shares redeemed is made wholly or partly
in portfolio securities, brokerage costs may be incurred by the investor in
converting the securities to cash. The Trust will not distribute in kind
portfolio securities that are not readily marketable. The Trust has filed a
formal election with the Securities and Exchange Commission pursuant to which
the Trust will only effect a redemption in portfolio securities where the
particular shareholder of record is redeeming more than $250,000 or 1% of a
Fund's total net assets, whichever is less, during any 90-day period. In the
opinion of the Trust's management, however, the amount of a redemption request
would have to be significantly greater than $250,000 or 1% of a Fund's total net
assets before a redemption wholly or partly in portfolio securities was made.
NET ASSET VALUE
For purposes of determining the net asset value per share of each Fund,
readily marketable portfolio securities listed on the New York Stock Exchange
are valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Trustees shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other securities exchanges
or admitted to trading on the National Association of Securities Dealers
Automated Quotations, Inc. ("NASDAQ") National List are valued in like manner.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price on the business day as of which such value is being
determined as reflected on the tape at the close of the exchange representing
the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Manager to
be over-the-counter, but excluding securities admitted to trading on the NASDAQ
National List, are valued at the mean of the current bid and asked prices as
reported by NASDAQ or, in the case of securities not
- 10 -
<PAGE>
quoted by NASDAQ, the National Quotation Bureau or such other comparable sources
as the Board of Trustees deems appropriate to reflect their fair market value.
Readily marketable fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed by the Trust
to reflect the fair market value of such securities. The prices provided by a
pricing service take into account institutional size trading in similar groups
of securities and any developments related to specific securities.
United States Government obligations and other debt instruments having
sixty days or less remaining until maturity are stated at amortized cost. All
other investment assets, including restricted and not readily marketable
securities, are valued in such manner as the Board of Trustees in good faith
deems appropriate to reflect their fair market value.
For purposes of determining a Fund's net asset value per share, all assets
and liabilities initially expressed in foreign currencies will be converted into
United States dollars at the mean of the bid and asked prices of such currencies
against the United States dollar last quoted by a major bank which is a regular
participant in the institutional foreign exchange markets or on the basis of a
pricing service which takes into account the quotes provided by a number of such
major banks.
DESCRIPTION OF SHARES
On April 11, 1997, there were 441,739 shares of beneficial interest of
the Ultra Short Term Income Fund outstanding; 3,879,687 shares of beneficial
interest of the Balanced Fund outstanding; 688,710 shares of beneficial
interest of the Growth and Income Fund outstanding; and 12,154,632 shares of
beneficial interest of the Equity Fund outstanding. On April 11, 1997, the
officers and trustees of the Trust as a group beneficially owned, directly or
indirectly, including the power to vote or to dispose of, less than 1% of the
outstanding shares of beneficial interest of each of the Balanced Fund and
the Equity Fund, less than 55% of the outstanding shares of beneficial
interest of the Ultra Short Term Income Fund and less than 11% of the
outstanding shares of beneficial interest in the Growth and Income Fund.
Set forth below is certain information as to persons who owned 5% or more of
the outstanding shares of the Ultra Short Term Income Fund, the Balanced Fund,
the Growth and Income Fund and the Equity Fund as of April 11, 1997:
ULTRA SHORT TERM INCOME FUND
<TABLE>
<CAPTION>
Name and Address % of Shares Nature of Ownership
- ---------------- ----------- --------------------
<S> <C> <C>
Towneley Capital Mgmt., Inc. 34.0 Beneficial
Profit Sharing Plan
144 E. 30th Street
New York, New York 10016
Towneley Capital Mgmt., Inc. 8.0 Beneficial
144 E. 30th Street
New York, New York 10016
W.G. McCain, Trustee 6.0 Beneficial
FBO Manastee River Rev. Tr.
144 E. 30th Street
New York, New York 10016
New York Foundling Hospital 5.0 Beneficial
590 Avenue of the Americas
New York, New York 10011
</TABLE>
BALANCED FUND
<TABLE>
<CAPTION>
Name and Address % of Shares Nature of Ownership
- ---------------- ----------- --------------------
<S> <C> <C>
Mac & Co. 55.0 Beneficial
Mellon Bank NA Mutual Funds
P.O. Box 3198
Pittsburgh, Pennsylvania 15230-0320
Vernat Company 7.0 Beneficial
Trust Operations
P.O. Box 800
Brattleboro, Vermont 05302
</TABLE>
- 11 -
<PAGE>
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
Name and Address % of Shares Nature of Ownership
- ---------------- ----------- --------------------
<S> <C> <C>
Jesse R. Bodine Living Trust 16.0 Beneficial
Mary Jane Bodine Living Trust
Tennants in Common
c/o Towneley Capital Management
144 E. 30th Street
New York, New York 10016
Field Nominees Limited 11.0 Beneficial
c/o Bank of NT Butterfield
14 Bermudian Rd. 00Box1735
Hamilton HM GX
Bermuda
Vernat Company 8.0 Beneficial
Trust Operations
P.O. Box 800
Brattleboro, Vermont 05302
Towneley Capital Mgmt., Inc. 6.0 Beneficial
Profit Sharing Plan
144 E. 30th Street
New York, New York 10016
</TABLE>
EQUITY FUND
<TABLE>
<CAPTION>
Name and Address % of Shares Nature of Ownership
- ---------------- ----------- --------------------
<S> <C> <C>
Allied Signal Savings Plan #7928 35.0 Beneficial
c/o State Street Bank & Trust Co.
Master Trust Division
P.O. Box 1992
Boston, Massachusetts 02105
Delta Airlines, Inc., TCM 20.0 Beneficial
c/o Harris Trust & Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
Strafe & Co. 5.0 Beneficial
F/A/O in Nibco
235 West Schrock Rd.
Westerville, OH 43081
</TABLE>
TAXATION
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify as a regulated investment company, each Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) derive less than 30% of its gross income from the
sale or other disposition of certain assets (namely, (i) stock or securities,
(ii) options, futures, and forward contracts (other than those on foreign
currencies), and (iii) foreign currencies (including options, futures, and
forward contracts on such currencies) not directly related to the Fund's
principal business of investing in stock or securities (or options and futures
with respect to stocks or securities)) held less than 3 months; (c) diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items (including receivables), U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and not
greater than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its total assets is invested in the securities
of any one issuer (other than U.S. Government securities or the securities of
other regulated investment companies); and (d) distribute at least 90% of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of net long-term capital
losses) each taxable year.
As a regulated investment company, each Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. Each Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, each Fund must distribute during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the one-year period ending on October 31 of the calendar year, and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution will be treated as paid on
December 31 of the current calendar year if it is declared by a Fund in October,
November or December with a record date in such a month and paid by the Fund
during January of the following calendar year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To prevent application of the excise tax, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
- 12 -
<PAGE>
DISTRIBUTIONS
Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because a portion of the
income of each of the Balanced Fund, the Growth and Income Fund and the Equity
Fund may consist of dividends paid by U.S. corporations, a portion of the
dividends paid by each such Fund is expected to be eligible for the corporate
dividends-received deduction. Distributions of net capital gains, if any,
designated as capital gain dividends are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund's shares, and are not
eligible for the dividends-received deduction. Shareholders receiving
distributions in the form of additional shares, rather than cash, generally will
have a cost basis in each such share equal to the net asset value of a share of
the relevant Fund on the reinvestment date. Shareholders will be notified
annually as to the U.S. federal tax status of distributions, and shareholders
receiving distributions in the form of additional shares will receive a report
as to the net asset value of those shares.
CURRENCY FLUCTUATIONS - "SECTION 988" GAINS OR LOSSES
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
SALE OF SHARES
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
INVESTMENTS IN REAL ESTATE MORTGAGE INVESTMENT CONDUITS
The Ultra Short Term Income Fund and the Balanced Fund may invest in
residual interests in real estate mortgage investment conduits ("REMICs").
Under Treasury regulations that have not yet been issued, but may apply
retroactively, a portion of the Funds' income that is attributable to a residual
interest in a REMIC (referred to in the Code as an "excess inclusion") will be
subject to federal income tax in all events. These regulations are also
expected to provide that excess inclusion income of a regulated investment
company, such as the Funds, will be allocated to shareholders of the regulated
investment company in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related REMIC
residual interest directly. In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a limited
exception for certain thrift institutions), (ii) will constitute unrelated
business taxable income to entities (including a qualified pension plan, an
individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt
entity) subject to tax on unrelated business income, thereby potentially
requiring such an entity that is allocated excess inclusion income, and
otherwise might not be required to file a tax return, to file a tax return and
pay tax on such income, and (iii) in the case of a foreign shareholder, will not
qualify for any reduction in U.S. federal withholding tax. In addition, if at
any time during any taxable year a "disqualified organization" (as defined in
the Code) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that portion
of its excess inclusion income for the taxable year that is allocable to the
disqualified organization, multiplied by the highest federal income tax rate
imposed on corporations. It is anticipated that only a small portion, if any,
of the assets of the Ultra Short Term Income Fund and the Balanced Fund will
consist of residual interests in REMICs.
- 13 -
<PAGE>
ZERO COUPON SECURITIES
Investments by the Ultra Short Term Income Fund and the Balanced Fund in
zero coupon securities will result in income to the Funds equal to a portion of
the excess of the face value of the securities over their issue price (the
"original issue discount") each year that the securities are held, even though
the Funds receive no cash interest payments. This income is included in
determining the amount of income which the Funds must distribute to maintain
their status as regulated investment companies and to avoid the payment of
federal income tax and the 4% excise tax.
MARKET DISCOUNT BONDS
Gain derived by the Ultra Short Term Income Fund or by the Balanced Fund
from the disposition of any market discount bonds (I.E., bonds purchased other
than at original issue, where the face value of the bonds exceeds their purchase
price) held by the Funds will be taxed as ordinary income to the extent of the
accrued market discount on the bonds, unless the Funds elect to include the
market discount in income as it accrues.
PASSIVE FOREIGN INVESTMENT COMPANIES
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income tax rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
A Fund may be able to make an election, in lieu of being taxable in the
manner described above, to include annually in income its pro rata share of the
ordinary earnings and net capital gain of the foreign investment company,
regardless of whether it actually received any distributions from the foreign
company. These amounts would be included in the Fund's investment company
taxable income and net capital gain which, to the extent distributed by the Fund
as ordinary or capital gain dividends, as the case may be, would not be taxable
to the Fund. In order to make this election, the Fund would be required to
obtain certain annual information from the foreign investment companies in which
it invests, which in many cases may be difficult to obtain. Alternatively, the
Fund may be eligible to elect to mark to market its foreign investment company
stock, resulting in the stock being treated as sold at fair market value on the
last business day of each taxable year. Any resulting gain would be reported as
ordinary income, and any resulting loss would not be recognized. If this
election were made, the special rules described above with respect to excess
distributions and dispositions would still apply.
FOREIGN WITHHOLDING TAXES
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
BACKUP WITHHOLDING
Each Fund may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Corporate shareholders and certain other shareholders
specified in the Code generally are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability.
- 14 -
<PAGE>
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a Fund
may be different from those described herein. Foreign shareholders are advised
to consult their own tax advisers as to the particular tax consequences to them
of an investment in a Fund.
OTHER TAXATION
Fund shareholders may be subject to state, local and foreign taxes on their
Fund distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations may be exempt from taxation.
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund.
PERFORMANCE
From time to time, the Trust may quote a Fund's total return or yield in
advertisements or in reports and other communications to shareholders. A Fund's
performance will vary from time to time depending upon market conditions, the
composition of its portfolio and its operating expenses. Consequently, any
given performance quotation should not be considered representative of a Fund's
performance for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in a Fund with certain bank deposits or other investments that pay a
fixed yield for a stated period of time. Investors comparing a Fund's
performance with that of other mutual funds should give consideration to the
quality and maturity of the respective investment companies' portfolio
securities.
YIELD
A Fund's 30-day yield figure described in the Prospectus is calculated
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
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 reimbursement).
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.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations purchased by the Ultra Short Term Income Fund or by
the Balanced Fund at a discount or premium, the formula generally calls for
amortization of the discount or premium; the amortization schedule will be
adjusted monthly to reflect changes in the market values of the debt
obligations.
AVERAGE ANNUAL TOTAL RETURN
The Funds' "average annual total return" figures described below and in the
Prospectus are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
- 15 -
<PAGE>
AGGREGATE TOTAL RETURNS
The Funds' aggregate total return figures described in the Prospectus
represent the cumulative change in the value of an investment in the Fund for
the specified period and are computed by the following formula.
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
Comparative performance information may be used from time to time in advertising
the Funds' shares, including data from Lipper Analytical Services, Inc., the
Standard & Poor's Index of 500 Stocks, the Dow Jones Industrial Average and
other industry publications.
The Trust may also distribute sales literature or publish advertisements
containing "principal only" performance information for a Fund that relates to
various time periods (on both an average annual and cumulative basis).
"Principal only" performance information is not total return but a measure of
performance, expressed as a percentage, that excludes from its computation
income dividends and capital gains distributions paid on the Fund's shares.
Such quotations in effect reflect only changes in the value over time of a
single share of the Fund without taking into account the compounding effect of
reinvested dividends or distributions. "Principal only" quotations may be a
useful comparison with changes in certain stock indexes (which are unmanaged)
that do not reflect reinvestment of dividends on the stocks comprising the
index. Any sales literature or advertisements containing "principal only"
performance information will be accompanied by standard performance information
relating to the same time periods.
The following are average annual total return and principal only
performance for the indicated time periods for each of the Ultra Short Term
Income Fund, the Balanced Fund, the Growth and Income Fund and the Equity Fund.
<TABLE>
<CAPTION>
ULTRA SHORT TERM INCOME FUND
------------------------------------------
Inception
(December 27, 1994)
Year Ended to
December 31, 1996 December 31, 1996
----------------- -------------------
<S> <C> <C>
Average Annual
Compounded Total Return 5.48% 6.61%
Principal Only
Performance (1.67)% 0.15%
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND
---------------------------------------------------------
Twelve Months Five Years Inception
Ended Ended (May 1, 1989) to
December 31, 1996 December 31, 1996 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Average Annual
Compounded Total Return 12.91% 12.74% 11.68%
Principal Only
Performance 1.99% 4.29% 4.48%
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
------------------------------------------
Inception
(December 27, 1994)
Year Ended to
December 31, 1996 December 31, 1996
----------------- -------------------
<S> <C> <C>
Average Annual
Compounded Total Return 22.40% 24.42%
Principal Only
Performance 9.59% 16.05%
</TABLE>
<TABLE>
<CAPTION>
EQUITY FUND
---------------------------------------------------------
Twelve Months Five Years Inception
Ended Ended (May 1, 1989) to
December 31, 1996 December 31, 1996 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Average Annual
Compounded Total Return 29.87% 15.65% 11.66%
Principal Only
Performance (0.66)% 2.80% 3.03%
</TABLE>
A Fund's investment performance is not fixed and will fluctuate in response
to prevailing market conditions or as a function of the type and quality of the
securities in the Fund's portfolio and the Fund's expenses. Performance
information is useful in reviewing the Fund's results but such information may
not provide a basis for comparison with bank deposits or other investments which
pay a fixed return for a stated period of time. An investor's principal
invested in a Fund is not fixed and will fluctuate in response to prevailing
market conditions.
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of the Trust are
passed upon by Dechert Price & Rhoads, 30 Rockefeller Plaza, New York, New York
10112.
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017,
independent certified public accountants, have been selected as auditors for the
Trust.
GENERAL INFORMATION
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required to use its property to protect or
compensate the shareholder. On request, the Trust will defend any claim made
and pay any judgment against a shareholder for any act or obligation of the
Trust. Therefore, financial loss resulting from liability as a shareholder will
occur only if the Trust itself cannot meet its obligations to indemnify
shareholders and pay judgments against them.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the year ended December 31,
1996, including notes thereto, are incorporated by reference in this
Statement of Additional Information from the Trust's Annual Report dated as of
December 31, 1996. The Trust will furnish, without charge, a copy of such
Annual Report to Shareholders on request. All such requests should be
directed to the Fund at 144 East 30th Street, New York, New York 10016,
(800)872-2710 (in Georgia, (770)631-0414).
- 17 -
