As filed with the Securities and Exchange Commission on February 27, 1998
Securities Act File No. 33-8865
Investment Company Act File No. 811-4847
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
--
Post-Effective Amendment No. 17 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 16
(Check appropriate box or boxes)
ECLIPSE FUNDS
(Exact name of Registrant as Specified in Charter)
144 EAST 30TH STREET, NEW YORK, NEW YORK 10016
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (212) 696-4130
----------------------------------------------------------
Wesley G. McCain c/o Towneley Capital Management, Inc.
144 East 30th Street
New York, New York 10016
(Name and Address of Agent for Service
----------------------------------------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on May 1, 1998 pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
Title of Securities Being Registered:
Ultra Short Term Income Fund Shares of Beneficial Interest
Balance Fund Shares of Beneficial Interest
Growth and Income Fund Shares of Beneficial Interest
Equity Fund Shares of Beneficial Interest
The Registrant hereby amends the Registration Statement under the Securities
Act of 1933 on such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become effective in
accordance with provisions of Section 8(a) of the Securities Act of 1933 or
until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a), may determine.
<PAGE>
ECLIPSE FINANCIAL ASSET TRUST
CROSS REFERENCE SHEET PURSUANT TO RULE 481(A)
Form N-1A, Location in Prospectus
Item Number Caption
- --------------- ----------------------
PART A
Item 1. Cover Page. . . . . . . . . Cover Page
Item 2. Synopsis. . . . . . . . . . Prospectus Summary; Table of Fees and
Expenses
Item 3. Condensed Financial
Information . . . . . . . Financial Highlights
Item 4. General Descpription
of Registrant . . . . . . Investment Objectives, Policies and Risk
Considerations; Investment Restrictions;
General Information
Item 5. Management of the Fund. . . The Manager; Expenses of the Trust;
General Information
Item 5A. Management's Discussion
of Fund Performance . . . *
Item 6. Capital Stock and Other
Securities. . . . . . . . Dividends, Distributions and Taxes;
General Information
Item 7. Purchase of Securities
Being Offered . . . . . . How to Purchase and Redeem Shares;
Retirement Plans; Exchange Privilege
Item 8. Redemption or Repurchase. . How to Purchase and Redeem Shares
Item 9. Pending Legal
Proceedings . . . . . . . Not Applicable
- -----------------
* Contained in the annual report of Registrant.
<PAGE>
Form N-1A, Location in Prospectus
Item Number Caption
- --------------- ----------------------
PART B
Item 10. Cover Page. . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . Table of Contents
Item 12. General Information and
History . . . . . . . . . Not Applicable
Item 13. Investment Objectives and
Policies. . . . . . . . . Investment Policies and Risk
Considerations; Investment Restrictions;
Item 14. Management of the Fund. . . Management
Item 15. Control Persons and
Principal Holders of
Securities. . . . . . . . Management
Item 16. Investment Advisory and
Other Services. . . . . . Management; Counsel and Auditors
Item 17. Brokerage Allocation and
Other Practices . . . . . Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities. . . . . . . . Not Applicable
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered . . . . . . Redemption of Shares; Net Asset Value
Item 20. Tax Status. . . . . . . . . Taxation
Item 21. Underwriters. . . . . . . . Not Applicable
Item 22. Calculation of Performance
Data. . . . . . . . . . . Performance
Item 23. Financial Statements. . . . Independent Auditor's Report; Financial
Statements
<PAGE>
ECLIPSE(R)
144 East 30th Street, New York, New York 10016
PROSPECTUS
May 1, 1998
Eclipse Funds (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").
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. The Ultra Short Term Income 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's portfolio 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.
The investment objective of the Balanced Fund is to seek a high total
return from a combination of equity and fixed-income investments.
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 is based on
estimated relative intrinsic value, expected future earnings growth and
current and expected dividend income.
The investment objective of the Equity Fund is to seek a high total
return from equity investments. The Fund pursues its objective by
investing primarily in smaller capitalization companies.
Securities are selected and weighted in each Fund's portfolio with a view toward
achievement of its investment objective.
Each Fund is a separate investment portfolio having its own investment objective
and policies. A shareholder in a Fund will be entitled to his pro rata share of
all dividends and distributions paid from that Fund's assets and, upon redeeming
shares of the Fund, will receive the portion of its net assets represented by
the redeemed shares.
Towneley Capital Management, Inc. serves as Manager of the Trust.
(Continued on inside front cover)
(R) Eclipse is a registered service mark of Eclipse Funds.
Shares of the Trust are not deposits or obligations of, or guaranteed or
endorsed by, any bank or credit union, and shares of the Trust are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency.
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.
<PAGE>
(Continued from front cover)
This Prospectus sets forth concisely the information concerning the
Trust and the Funds that a prospective investor should know before investing. A
Statement of Additional Information, dated May 1, 1998 containing additional and
more detailed information about the Trust and the Funds (the "Statement of
Additional Information"), has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. It is
available without charge and can be obtained by writing or calling the
Shareholder Servicing Agent at the address and telephone number on the cover.
This Prospectus should be read and retained by investors for future
reference.
TABLE OF CONTENTS
TABLE OF FEES AND EXPENSES................................................... 3
FINANCIAL HIGHLIGHTS......................................................... 5
PROSPECTUS SUMMARY........................................................... 9
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS...................... 10
Introduction to the Trust........................................... 10
Ultra Short Term Income Fund........................................ 10
Balanced Fund....................................................... 12
Growth and Income Fund.............................................. 12
Equity Fund......................................................... 13
Investment Policies Applicable to More Than One Fund................ 14
Policies Applicable to All Funds:................................... 14
Policies Applicable to the Ultra Short Term Income Fund and the
Balanced Fund:.................................................... 16
INVESTMENT RESTRICTIONS...................................................... 22
THE MANAGER.................................................................. 23
EXPENSES OF THE TRUST........................................................ 26
HOW TO PURCHASE AND REDEEM SHARES............................................ 26
Initial Purchase of Shares.......................................... 27
Subsequent Purchases of Shares...................................... 28
General Information Regarding Redemptions........................... 28
RETIREMENT PLANS............................................................. 29
EXCHANGE PRIVILEGE........................................................... 31
DIVIDENDS, DISTRIBUTIONS AND TAXES........................................... 31
Federal Income Taxes................................................ 31
State and Local Taxes............................................... 32
NET ASSET VALUE.............................................................. 32
GENERAL INFORMATION.......................................................... 33
Description of Shares............................................... 33
Performance......................................................... 33
Custodian, Transfer Agent and Dividend Agent........................ 34
Information for Shareholders........................................ 34
APPENDIX A................................................................... 35
-2-
<PAGE>
TABLE OF FEES AND EXPENSES
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
Ultra Short
Term Income Balanced Growth and Equity
Fund Fund Income Fund Fund
---- ---- ----------- ----
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases None None None None
Sales Load Imposed on Reinvested Dividends None None None None
Deferred Sales Load None None None None
Redemption Fees None None None None
Exchange Fees None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Ultra Short
Term Income Balanced Growth and Equity
Fund Fund Income Fund Fund
---- ---- ----------- ----
Management Fees (after any fee waiver) 0.00% 0.62% 0.74% 1.00%
12b-1 Fees None None None None
Other Expenses (after any reimbursement) 0.00% 0.22% 0.20% 0.14%
Total Fund Operating Expenses (after any 0.00% 0.84% 0.94% 1.14%
reimbursement or fee waiver)
Example
You would pay the following expenses on a $1,000 investment, assuming 5% annual
return (cumulative through the end of each year):
1 year 3 years 5 years 10 years
Ultra Short Term Income Fund $0 $0 $0 $0
Balanced Fund $9 $27 $47 $104
Growth and Income Fund $10 $30 $52 $115
Equity Fund $12 $36 $63 $139
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in a Fund will
bear directly or indirectly; for a further discussion of these fees, see "The
Manager" and "Expenses of the Trust" herein.
With respect to the Ultra Short Term Income Fund, the Manager
voluntarily waived its entire fee payable ($19,113) and reimbursed the Fund for
$39,255 of the Fund's expenses for the fiscal year ended December 31, 1997;
absent such waiver and reimbursement the Fund's management fee would have been
0.40% of the Fund's average net assets and the Fund's other expenses would have
been 0.82% of average net assets (which would have resulted in total operating
expenses of 1.22% of average net assets). With respect to the Balanced Fund, the
Manager voluntarily
-3-
<PAGE>
waived $153,387 of its fee payable for the fiscal year ended December 31, 1997;
absent such waiver the management fee would have been 0.80% of average net
assets (which would have resulted in total operating expenses of 1.02% of
average net assets). With respect to the Growth and Income Fund, the Manager
voluntarily waived $82,079 of its fee payable for the fiscal year ended December
31, 1997; absent such waiver the Fund's management fee would have been 0.90% of
average net assets (which would have resulted in total operating expenses of
1.10% of average net assets). As of the date of this Prospectus, 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 Growth and Income Fund and the Balanced Fund, and to
reimburse all of the expenses of the Ultra Short Term Income Fund. The Manager
is also continuing to reimburse the Balanced Fund to the extent that operating
expenses would exceed, on an annualized basis, 0.85% of the average daily net
assets of the Fund. Also as of the date of this Prospectus, the Manager is
maintaining the expense ratio of the Growth and Income Fund at a level not to
exceed 0.95%, including certain indirect expenses.
The example should not be considered a representation of past or future
expenses; actual expenses may be greater or lesser than those shown above.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables of selected financial information of Eclipse Funds
have been audited by McGladrey & Pullen, LLP, Independent Certified Public
Accountants, whose report thereon appears in the Trust's Annual Report which is
incorporated by reference in the Statement of Additional Information. Further
information concerning investment performance is contained in the Trust's annual
report to shareholders, which is available without charge.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
ULTRA SHORT TERM INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 DECEMBER 27,1994
(INCEPTION) TO
DECEMBER 31,1994
<S> <C> <C> <C> <C>
Per share operating performance for a
share outstanding throughout the period (a)
Net asset value, beginning of period.......................... $10.03 $10.20 $10.00 $10.00
------ ------ ------ ------
Income from investment operations:
Net investment income......................................... 0.64 0.71 0.57 0.00
Net realized and unrealized gains (losses) on investments..... (0.03) (0.16) 0.20 0.00
------ ------ ---- ------
Total from investment operations........................ 0.61 0.55 0.77 0.00
---- ---- ---- ------
Less distributions:
Dividends from net investment income.......................... (0.64) (0.72) (0.57) 0.00
------ ------ ------ ------
Total distributions..................................... (0.64) (0.72) (0.57) 0.00
------ ------ ------ ------
Net asset value, end of period................................ $10.00 $10.03 $10.20 $10.00
====== ====== ====== ======
Total return.................................................. 6.21% 5.48% 7.83% 0.00%
Ratios/Supplemental data
Net assets, end of period (000)............................... $5,393 $4,461 $4,610 $621
Ratios to average net assets:
Expenses................................................... 0.00%+# 0.00%+# 0.22%+# 0.50%*+
Net investment income...................................... 6.61%+ 6.76%+ 6.92%+ 0.65%*+
Portfolio turnover rate....................................... 45.10% 46.82% 39.26% 0.00%
- ----------------------------------------------------------------------------------------------------------------------------
- ------
* Annualized.
+ Net of management fee waived equivalent to 0.4%, 0.4%, 0.4% and 0.4% of average net assets plus expenses reimbursed
equivalent to 0.82%, 0.80%, 1.27% and 21.54% of average net assets, respectively.
# Includes custodian fees paid indirectly which amounted to 0.00% and to less than 0.01% and 0.04% of average net
assets, respectively.
(a) Per share amounts for periods ended prior to December 31, 1996 have been restated to reflect a 1 for 5 share split
effective June 14, 1996.
</TABLE>
-5-
<PAGE>
BALANCED FUND
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 MAY 1, 1989
(INCEPTION)
TO
DECEMBER 31,
1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating
performance for a share
outstanding throughout
the period
Net asset value, beginning
of period............... $21.00 $20.59 $17.76 18.63 $17.37 $17.02 $14.69 $15.24 $15.00
------ ------ ------ ----- ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income...... 0.66 0.78 0.64 0.56 0.62 0.73 0.71 0.74 0.44
Net realized and unrealized
gains (losses) on
investments............. 4.14 1.85 3.39 (0.56) 2.32 1.28 2.33 (0.53) 0.23
---- ---- ---- ------ ---- ---- ---- ------ ------
Total from investment
operations......... 4.80 2.63 4.03 0.00 2.94 2.01 3.04 0.21 0.67
---- ---- ---- ---- ---- ---- ---- ------ ------
Less distributions:
Dividends from net
investment income....... (0.66) (0.78) (0.64) (0.56) (0.64) (0.73) (0.71) (0.76) (0.43)
Distributions from net
realized gains.......... (2.99) (1.44) (0.56) (0.31) (1.04) (0.93) - - -
------ ------ ------ ------ ------ ------ ------- ------- -------
Total distributions.. (3.65) (2.22) (1.20) (0.87) (1.68) (1.66) (0.71) (0.76) (0.43)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of $22.15 $21.00 $20.59 $17.76 $18.63 $17.37 $17.02 $14.69 $15.24
====== ====== ====== ====== ====== ====== ====== ====== ======
period..................
Total return............... 23.40% 12.91% 22.99% 0.01% 17.06% 12.01% 20.91% 1.45% 4.50%
Ratios/Supplemental data
Net assets, end of period $84,246 $83,825 $85,922 $27,703 $21,690 $14,044 $10,736 $4,777 $3,227
(000)...................
Ratios to average net
assets:
Expenses................ 0.84%+# 0.80%+ 0.81%+# 0.80%+ 0.69%+ 0.52%+ 0.66%+ 1.00%+ 1.00%*+
Net investment income... 2.85%+ 3.56%+ 3.62%+ 3.10%+ 3.42%+ 4.31%+ 5.03%+ 5.42%+ 5.55%*+
Portfolio turnover rate.... 46.66% 71.51% 74.72% 94.38% 65.05% 95.51% 101.51% 120.90% 23.73%
Average commission rate.... $0.0466 $0.0476 (a) (a) (a) (a) (a) (a) (a)
- ------
* Annualized.
+ Net of management fee waived equivalent to 0.2%, 0.2%, 0.3%, 0.4%, 0.5%, 0.8%, 0.8%, 0.8% and 0.8% of average net assets,
respectively, plus expenses reimbursed equivalent to 0.05% in 1990, and 0.84% during the period ended December 31, 1989,
of average net assets, respectively.
# Includes custodian fees paid indirectly, which amounted to less than 0.01% of average net assets.
(a) Disclosure of amount required for fiscal years beginning on or after September 1, 1995.
</TABLE>
-6-
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 DECEMBER 27, 1994
(INCEPTION) TO
DECEMBER 31, 1994
<S> <C> <C> <C> <C>
Per share operating performance for a share outstanding
throughout the period
Net asset value, beginning of period..................... $13.49 $12.31 $10.00 $10.00
------ ------ ------ ------
Income from investment operations:
Net investment income.................................... 0.03 0.22 0.11 0.00
Net realized and unrealized gains on investments......... 4.34 2.54 2.57 0.00
---- ------- ------- -------
Total from investment operations................... 4.37 2.76 2.68 0.00
---- ------- ------- -------
Less distributions:
Dividends from net investment income..................... (0.03) (0.23) (0.11) 0.00
Distributions from net realized gains.................... (0.07) (1.35) (0.26) 0.00
------ -------- -------- -------
Total distributions................................ (0.10) (1.58) (0.37) 0.00
------ -------- -------- -------
Net asset value, end of period........................... $17.76 $ 13.49 $ 12.31 $ 10.00
====== ======= ======= =======
Total return............................................. 32.46% 22.40% 26.82% 0.00 %
Ratios/Supplemental data
Net assets, end of period (000).......................... $109,452 $9,737 $7,960 $315
Ratios to average net assets:
Expenses.............................................. 0.94%+ 0.90%+ 1.00%+# 1.20 %*+
Net investment income................................. 0.36%+ 1.66%+ 1.57%+ (0.06)%*+
Portfolio turnover rate.................................. 51.66% 102.24% 63.16% 0.00 %
Average commission rate.................................. $0.0451 $0.0454 (a) (a)
------------------------------------------------------------------------------------------------------------------------
- ------
* Annualized.
+ Net of management fee waived equivalent to 0.2%, 0.7%, 0.9% and 0.9% of average net assets, respectively, plus expenses
reimbursed equivalent to 0.05% in 1995 and 43.15% in 1994 of average net assets.
# Includes custodian fees paid indirectly, which amounted to 0.10% of average net assets.
(a) Disclosure of amount required for fiscal years beginning on or after September 1, 1995.
</TABLE>
-7-
<PAGE>
<TABLE>
EQUITY FUND
FOR THE YEAR ENDED DECEMBER 31,
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share
operating
performance for a
share outstanding
throughout the year
Net asset value,
beginning
of year......... $13.47 $13.56 $11.82 $13.35 $13.20 $11.73 $9.07 $10.86 $10.12 $9.35
------ ------ ------ ------ ------ ------ ----- ------ ------ -----
Income from
investment
operations:
Net investment
income.......... (0.02) 0.14 0.07 0.03 0.08 0.15 0.16 0.30 0.27 0.41
Net realized and
unrealized gains
(losses) on
investments..... 4.40 3.89 2.26 (0.66) 2.17 2.12 2.66 (1.77) 1.38 0.77
---- ---- ---- ------ ---- ---- ---- ------ ---- ----
Total from
investment
operations.... 4.38 4.03 2.33 (0.63) 2.25 2.27 2.82 (1.47) 1.65 1.18
---- ---- ---- ------ ---- ---- ---- ------ ---- ----
Less distributions:
Dividends from net
investment
income.......... -- (0.14) (0.07) (0.03) (0.08) (0.15) (0.16) (0.32) (0.27) (0.41)
Distributions from
net realized
gains........... (3.66) (3.98) (0.52) (0.87) (2.02) (0.65) - - (0.64) -
------ ------ ------ ------ ------ ------ ------ ------ ------ ----
Total distributions (3.66) (4.12) (0.59) (0.90) (2.10) (0.80) (0.16) (0.32) (0.91) (0.41)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of year..... $14.19 $13.47 $13.56 $11.82 $13.35 $13.20 $11.73 $9.07 $10.86 $10.12
====== ====== ====== ====== ====== ====== ====== ===== ====== ======
Total return....... 33.30% 29.87% 19.69% (4.74)% 17.02% 19.38% 31.18% (13.64)% 16.41% 12.72%
Ratios/Supplemental data
Net assets, end of
year (000)...... $189,965 $170,747 $174,705 $195,107 $197,106 $163,170 $149,385 $110,154 $184,211 $161,250
Ratios to average
net assets:
Expenses........ 1.14%# 1.15%# 1.14%# 1.12% 1.12% 1.15% 1.18% 1.18% 1.09% 1.12%
Net investment
income....... (0.12)% 0.81% 0.45% 0.21% 0.55% 1.17% 1.48% 2.57% 2.40% 4.05%
Portfolio turnover
rate............ 55.47% 82.05% 74.40% 92.20% 101.09% 110.98% 118.58% 154.15% 45.51% 30.91%
Average commission $0.0418 $0.0431 (a) (a) (a) (a) (a) (a) (a) (a)
rate
- ------
# Includes custodian fees paid indirectly, which amounted to less than 0.01% of average net assets for each period indicated.
(a) Disclosure of amount required for fiscal years beginning on or after September 1, 1995.
</TABLE>
-8-
<PAGE>
PROSPECTUS SUMMARY
THE TRUST is a diversified management investment company whose shares are
offered without a sales load or redemption charge. The Trust currently offers
four investment portfolios: the Ultra Short Term Income Fund, the Balanced Fund,
the Growth and Income Fund and the Equity 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. The Ultra Short Term Income 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's portfolio will not exceed one year.
The 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. The investment objective of the Balanced Fund is to seek a high
total return from a combination of equity and fixed-income investments. 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 is based on estimated relative intrinsic value,
expected future earnings growth and current and expected dividend income. 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 objective. There is no assurance
that a Fund's objective will be achieved. See "Investment Objectives and
Policies."
THERE IS NO SALES LOAD. Shares may be purchased and redeemed at the next
determined net asset value.
SHARES MAY BE PURCHASED AND REDEEMED directly through the Trust's transfer agent
and custodian, Investors Fiduciary Trust Company. The minimum initial investment
for each Fund is $1,000 (unless the investor chooses the automatic investment
plan or a gift account). There is no minimum for subsequent investments. See
"How to Purchase and Redeem Shares."
THE MANAGER of the Trust is Towneley Capital Management, Inc. (the "Manager"),
which also serves as investment adviser to individuals and institutional
clients. The Funds pay management fees to the Manager at the following annual
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%
See "Manager." The management fees paid by the Balanced Fund, the
Growth and Income Fund and the Equity Fund are higher than those paid by most
mutual funds.
RISK FACTORS associated with investing in a Fund include the following. The
value of a Fund's shares will fluctuate with changes in the market value of its
portfolio securities and is consequently subject to the usual market risks of
investment. In addition, the value of the shares of the Ultra Short Term Income
Fund and the Balanced Fund, which invest in fixed-income securities (including
mortgage-backed and asset-backed securities), will fluctuate as the value of its
portfolio securities changes in response to changing market rates of interest,
principal prepayments and other factors.
The Ultra Short Term Income Fund and the Balanced Fund may invest in
securities rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or
BBB or better by Standard & Poor's Rating Group, a division of McGraw-Hill, Inc.
("S&P"). Moody's indicates that securities rated Baa, although investment grade,
have speculative elements.
-9-
<PAGE>
Each Fund may invest its assets in foreign securities which involves
considerations and risks such as the risk of adverse changes in currency
exchange rates, exchange controls, and the application of foreign tax laws,
including withholding taxes. Each Fund may invest in restricted securities which
are subject to statutory or contractual restrictions and delays on resale. Each
Fund may experience a high rate of portfolio turnover, which would involve
correspondingly greater expenses than a lower rate (which expenses must be borne
by the Fund and its shareholders), and possible substantial net short-term
capital gains.
DIVIDENDS of the net investment income of the Ultra Short Term Income Fund and
the Balanced Fund will normally be paid quarterly, and dividends of the net
investment income of the Growth and Income Fund and the Equity Fund will
normally be paid annually. Capital gain distributions, if any, will be made
annually. Income dividends and capital gain distributions paid by a Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
instructs otherwise.
See "Dividends, Distributions and Taxes."
IRA AND OTHER RETIREMENT PLANS utilizing a Fund as an investment vehicle provide
Federal income tax benefits for qualified participants. See "Retirement Plans."
EXCHANGE PRIVILEGES are offered whereby shares of the Funds may be exchanged at
their respective net asset values for each other. See "Exchange Privilege."
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
Introduction to the Trust
Eclipse Funds (the "Trust") is a no-load, open-end, diversified management
investment company commonly known as a "mutual fund" whose shares are offered in
separate series referred to as "portfolios." Because the Trust offers multiple
portfolios, it is known as a "series fund." Each portfolio is a separate pool of
assets constituting, in effect, a separate fund with its own investment
objective and policies. A shareholder in a portfolio will be entitled to his pro
rata share of all dividends and distributions paid from that portfolio's assets
and, upon redeeming shares of that portfolio, the shareholder will receive the
then current net asset value of that portfolio represented by the redeemed
shares. (See "How to Purchase and Redeem Shares.") The Trust is empowered to
establish, without shareholder approval, additional portfolios which may have
different investment objectives and policies.
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. The Ultra Short Term Income 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 Fund will pursue this objective by investing in a
diversified portfolio of investment grade, short-term fixed-income securities.
Securities are selected and weighted in the portfolio with a view toward the
achievement of this objective. The Fund's investment objective is deemed a
fundamental policy of the Fund.
It is the Fund's policy that the duration of its portfolio not exceed
one year. The duration of a fixed-income security indicates the time it will
take an investor to recoup his or her investment, and approximates the price
sensitivity of a fixed-income security to interest rate changes. It was
developed as a more precise alternative to the concept of "term to maturity."
Unlike effective maturity (which measures the final maturity dates of a bond (or
a bond portfolio)), duration incorporates a bond's interest payments, final
maturity, call features and other factors into one measure. Duration is
expressed as a measure of time in years - the longer the duration of a bond (or
a bond portfolio), the greater the impact of interest rate changes on the bond's
(or bond portfolio's) price. Generally, the higher the interest rate on a bond,
the shorter its duration will be.
The duration of the Fund is calculated by averaging the duration of
each fixed-income instrument held by the Fund with each duration "weighted"
according to the percentage of net assets that it represents. Duration takes the
-10-
<PAGE>
length of the time intervals between the present time and the time that the
interest and principal payments are scheduled or, in the case of a callable
bond, expected to be received, and weights them by the present values of the
cash to be received at each future point in time. Because duration accounts for
interest payments, a fund's duration is usually shorter than its average
maturity. Duration measures interest rate risk only and not other risks, such as
credit risk and, in the case of non-U.S. dollar denominated securities, currency
risks.
In some cases, duration cannot be calculated with certainty because
certain assumptions have to be factored into the calculation. For example, in
the case of mortgage pass-through securities (described below under "Policies
Applicable to the Ultra Short Term Income Fund and the Balanced Fund"), the
stated final maturity of such securities is generally 30 years, but current and
projected payment rates are more critical in determining the securities'
interest rate exposure. In these and other similar situations, the Fund's
Manager will use more sophisticated analytical techniques that incorporate the
anticipated economic life of a security into the determination of its interest
rate exposure.
When interest rates are falling, a portfolio with a shorter duration
generally will not generate as high a level of total return as a portfolio with
a longer duration. Conversely, when interest rates are rising, a portfolio with
a shorter duration will generally outperform longer duration portfolios. When
interest rates are flat, shorter duration portfolios generally will not generate
as high a level of total return as longer duration portfolios (assuming that
long-term interest rates are higher than short-term rates, which is commonly the
case). With respect to the composition of any fixed-income portfolio, the
shorter the duration of the portfolio, the lower the market risk and price
volatility, with however, a lower anticipated potential for total return than
for a portfolio with a longer duration. For example, in general, if a fund's
duration is one year, then a change of one percentage point in prevailing
interest rates would result in a change in the opposite direction of
approximately one percentage point in the net asset value of the fund.
The Ultra Short Term Fund will, to the extent possible, limit its
investments to securities which, in the opinion of the Fund's Manager, and based
on available information, are issued by companies that are socially responsible.
The Manager selects socially responsible portfolios using research provided by,
among others, Kinder, Lydenberg, Domini & Co., Inc. With this research, the
Manager is able to apply both inclusionary and exclusionary criteria to
companies to create a socially responsible portfolio. Investments may include
federally insured short term fixed income securities of community development
banks. In addition, the Manager attempts to enhance shareholder value through
the use of proxy research and voting. The Fund pursues its policy of making
socially responsible investments while maintaining the quality of its investment
portfolio in accordance with the guidelines set forth in this section and under
"Investment Policies Applicable to More Than One Fund."
The categories of investments which may be acquired by the Fund are
described directly below and in the section "Investment Policies Applicable to
More Than One Fund."
Foreign Issuer Obligations - The Fund may invest in fixed-income securities of
non-U.S. issuers rated AA or better by S&P and Aa2 or better by Moody's. (See
"Investment Policies Applicable to More Than One Fund - Foreign Securities.")
Bank Obligations - The Fund may invest in obligations of domestic banks and
savings and loan associations and dollar-denominated obligations of domestic
subsidiaries and branches of foreign banks, such as certificates of deposit
(including variable rate certificates of deposit) and bankers' acceptances,
provided such instruments are issued or guaranteed by an institution having
total assets in excess of one billion dollars. As noted above, the Fund may also
invest in securities issued by community development banks not meeting the
foregoing requirements provided that the entire principal amount of such
securities is federally insured.
Commercial Paper - The Fund may invest in commercial paper rated at the time of
purchase A-1 by S&P or Prime-1 by Moody's. Commercial paper represents
short-term (nine months or less) unsecured promissory notes issued in bearer
form by banks or bank holding companies, corporations and finance companies.
-11
<PAGE>
Repurchase Agreements - The Fund may also enter into repurchase agreements. A
repurchase agreement is an instrument under which an investor (e.g., the Fund)
purchases a U.S. Government security from a vendor, with an agreement by the
vendor to repurchase the security at the same price, plus interest at a
specified rate. Repurchase agreements may be entered into with member banks of
the Federal Reserve System or "primary dealers" (as designated by the Federal
Reserve Bank of New York) in U.S. Government securities. Repurchase agreements
usually have a short duration, often less than one week. In the event that a
vendor defaulted on its repurchase obligation, the Fund might suffer a loss to
the extent that the proceeds from the sale of the collateral were less than the
repurchase price. If the vendor becomes bankrupt, the Fund might be delayed, or
may incur costs or possible losses of principal and income, in selling the
collateral. The Fund will not enter into a repurchase agreement with a duration
of more than seven days if, as a result, more than 10% of the value of the
Fund's total assets would be so invested. The Fund may also invest in repurchase
agreements with a domestic bank having total assets in excess of one billion
dollars and a long-term credit rating of at least A as determined by Moody's or
S&P. Securities subject to repurchase agreements will be placed in a segregated
account and the Manager will monitor the market value of the securities plus any
accrued interest thereon so that they will at least equal the repurchase price.
Balanced Fund
The investment objective of the Balanced Fund is to seek a high total return
from a combination of equity securities and fixed-income investments (including
debt securities, convertible securities and preferred stocks.) (See "Equity
Securities" and "Fixed-Income Securities" below.) "Total return" refers to the
objective to achieve a return consisting of both dividend and interest income
and realized and unrealized capital gains. Securities are selected and weighted
in the portfolio with a view toward the achievement of this objective. The
Fund's investment objective is deemed a fundamental policy of the Fund.
The Balanced Fund has adopted as a fundamental policy that it be a
"balanced" fund; this fundamental policy cannot be changed without the approval
of shareholders. As a "balanced" fund, the Fund will invest at least 25% of the
value of its total assets in fixed-income securities. With respect to
convertible securities held by the Fund, only that portion of their value
attributable to their fixed-income characteristics will be used in calculating
the 25% figure. Subject to such restrictions, the percentage of the Fund's
assets invested in each type of security at any time shall be in accordance with
the judgment of the Manager.
Equity Securities - The equity component of the Balanced Fund will be invested
primarily in shares of companies whose average total common stock market
capitalization (price per common share multiplied by the shares outstanding) is
similar to the average total market capitalization of those stocks making up the
Standard & Poor's 500 Stock Composite Index. In selecting the equity issues to
be placed in the Fund, approximately equal weight will be given to estimated
relative intrinsic value, expected future earnings growth, and current and
expected dividend income.
Fixed-Income Securities - The fixed-income component of the Balanced Fund will
be invested in the following types of fixed-income securities: (i) U.S.
Government securities; (ii) foreign government securities; (iii) investment
grade corporate fixed-income securities; and (iv) mortgage-backed and other
asset-backed securities. These securities are described under the caption
"Investment Policies Applicable to More Than One Fund."
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. As used herein,
"equity securities and equity-related securities" means common and preferred
stock (including convertible preferred stock); bonds, notes and debentures
convertible into common or preferred stock; stock purchase warrants and rights;
and depository receipts (traded in a U.S. market) for securities of foreign
issuers. Equity selection will be based on estimated relative intrinsic value,
expected future earnings growth, and current and expected dividend income.
Securities are selected and weighted in the portfolio with a view toward the
achievement of this objective. The Fund's investment objective is deemed a
fundamental policy of the Fund.
-12-
<PAGE>
In selecting the issues to be placed in the Fund, approximately equal
weight will be given to estimated relative intrinsic value, expected future
earnings growth, and current and expected dividend income; therefore, the Fund's
portfolio will exhibit characteristics of a total return, value (i.e., seeking
high net asset values relative to market price), growth and income fund. Under
normal market conditions, the Fund will invest primarily in dividend-paying
equity securities of North American businesses listed on the major exchanges or
traded in the over-the-counter market. In general, the Fund will invest
primarily in shares of companies whose average stock market capitalization
(price per common share multiplied by the shares outstanding) is comparable to
the average total market capitalization of those stocks comprising the Standard
& Poor's 500 Stock Composite Index.
The Fund expects to invest primarily in the securities of U.S. issuers,
although it may also invest up to 20% of its assets in securities of foreign
issuers, or depository receipts for such securities (which are traded in a U.S.
market), which meet the criteria for investment selection set forth above. Since
20% of the Fund's assets may consist of securities issued by foreign issuers,
the Fund may be subject to additional investment risks that are different in
some respects from those incurred by a fund which invests only in securities of
U.S. domestic issuers. (See "Investment Policies Applicable to More Than One
Fund--Foreign Securities.")
The Fund will not engage in short selling or option trading, nor will
it leverage its shares.
The Fund is subject to the usual market risks incident to its
investments and, therefore, there can be no assurance that the objective of the
Fund will be attained.
The Fund's investment objective and its investment policy of investing
under normal circumstances more than 65% of its assets in equity securities are
deemed fundamental and, therefore, may not be changed without shareholder
approval. The other investment policies of the Fund described in this section
are not deemed fundamental and may be changed by the Board of Trustees of the
Fund without shareholder approval.
Equity Fund
The investment objective of the Equity Fund is to seek a high total return from
equity securities (including for this purpose preferred stocks and debt
securities convertible into common stock). "Total return" refers to the
objective to achieve a return consisting of both income and realized and
unrealized capital gains. Securities are selected and weighted in the portfolio
with a view toward achievement of this objective. The Fund's investment
objective is deemed a fundamental policy of the Fund.
In selecting the issues to be placed in the Fund, approximately equal
weight will be given to estimated relative intrinsic value, expected future
earnings growth, and current and expected dividend income; therefore, the Fund's
portfolio will exhibit characteristics of a total return, value (i.e., seeking
high net asset values relative to market price), growth and income fund. Under
normal market conditions, the Fund will invest primarily in equity securities of
North American businesses listed on the major exchanges or traded in the
over-the-counter market. In general, the companies whose shares are to be
purchased will sell at a total common stock market capitalization (price per
common share multiplied by the shares outstanding) less than the average total
market capitalization of those stocks in the Standard & Poor's 500 Stock
Composite Index. The securities of smaller capitalization companies often
involve significantly greater risks than the securities of larger, better-known
companies. The securities of smaller capitalization companies may be thinly
traded and may be subject to greater price volatility than the market as a
whole. In addition, smaller capitalization companies are generally more
adversely affected by increased competition, and are subject to a greater risk
of bankruptcy, than larger companies. Although at times the Fund may have all of
its assets invested in smaller capitalization companies, such a policy shall not
prohibit the Fund from investing in large capitalization companies if the
Manager believes such companies have intrinsic value, growth and income
potential superior to that available from smaller capitalization companies. As a
matter of fundamental policy, the Fund is required under normal circumstances to
have more than 65% of its assets invested in equity investments.
The Fund expects to invest primarily in the securities of U.S. issuers,
although it may also invest up to 20% of its assets in securities of foreign
issuers, or depository receipts for such securities (which are traded in a U.S.
-13-
<PAGE>
market), which meet the criteria for investment selection set forth above. Since
20% of the Fund's assets may consist of securities issued by foreign issuers,
the Fund may be subject to additional investment risks that are different in
some respects from those incurred by a fund which invests only in securities of
U.S. domestic issuers. (See "Investment Policies Applicable to More Than One
Fund--Foreign Securities.")
The Fund will not engage in short selling or option trading, nor will
it leverage its shares.
The Fund is subject to the usual market risks incident to its
investments and, therefore, there can be no assurance that the objective of the
Fund will be attained.
The Fund's investment objective and its investment policy of investing
under normal circumstances more than 65% of its assets in equity securities are
deemed fundamental and, therefore, may not be changed without shareholder
approval. The other investment policies of the Fund described in this section
are not deemed fundamental and may be changed by the Board of Trustees of the
Fund without shareholder approval.
Investment Policies Applicable to More Than One Fund
The following additional investment policies are applicable to more than one
Fund and supplement those set forth above for the Funds.
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. 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 within 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 Stock Exchange or American Stock
Exchange. Warrants acquired by a Fund in units or attached to securities are
deemed to be without value.
Temporary Defensive Position; Cash Reserves - When business or financial
conditions warrant, each Fund may take a defensive position and invest
temporarily without limit in investment grade corporate debt securities or money
market instruments. Money market instruments for this purpose include U.S.
Government securities having remaining maturities of one year or less,
commercial paper rated in the highest grade by any nationally recognized rating
agency, certificates of deposit and bankers' acceptances issued by domestic
banks having total assets in excess of one billion dollars, and repurchase
agreements relating to U.S. Government securities. A repurchase agreement is an
instrument under which an investor (e.g., a Fund) purchases a U.S. Government
security from a vendor, with an agreement by the vendor to repurchase the
security at the same price, plus interest at a specified rate. Repurchase
agreements may be entered into with member banks of the Federal Reserve System
or "primary dealers" (as designated by the Federal Reserve Bank of New York) in
U.S. Government securities. See "Ultra Short Term Income Fund--Repurchase
Agreements" for a description of the characteristics and risks of repurchase
agreements.
In addition, a portion of each Fund's assets will be maintained in
money market instruments as described above in such amount as the Manager deems
appropriate for cash reserves.
Foreign Securities - Each Fund may invest in securities issued by foreign
issuers, and thus may be subject to additional risks for these securities that
are different in some respects from those incurred by a fund which invests only
in securities of U.S. domestic issuers. Such risks include future political and
economic developments, the possible imposition of foreign withholding taxes on
interest income payable on the securities, changes in foreign exchange rates
(including the possible establishment of exchange controls), the possible
seizure or naturalization of foreign deposits, or the adoption of other foreign
government restrictions which might adversely affect the payment of principal
and interest on such securities. Currency fluctuations may affect the net asset
value of a Fund irrespective of the performance of the underlying investments in
foreign issuers. A Fund will not purchase securities which it believes, at the
time of purchase, will be subject to exchange controls or withholding taxes;
however, there can be no assurance that such laws may not become applicable to
certain of a Fund's investments. In addition, there may be
-15-
<PAGE>
less publicly available information about a foreign issuer than about a domestic
issuer, and foreign issuers may not be subject to the same accounting, auditing
and financial recordkeeping standards and requirements as domestic issuers.
While each Fund generally will invest only in securities which are regularly
traded on recognized exchanges or over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly at the best available
price. Settlement periods for foreign securities, which are sometimes longer
than those of securities of U.S. issuers, may affect portfolio liquidity. These
different settlement practices may cause missed purchasing opportunities or the
loss of interest on cash positions pending further investments.
Restricted Securities (Balanced Fund and Equity Fund only) - Each Fund may
invest in restricted securities and in other assets having no ready market
(including repurchase agreements of more than seven days' duration) if such
purchases at the time thereof would not cause more than 10% of the value of the
Fund's net assets to be invested in all such restricted or not readily
marketable assets. Restricted securities may be sold only in privately
negotiated transactions, in a public offering with respect to which a
registration statement is in effect under the Securities Act or pursuant to
Rules 144 or 144A promulgated under such Act. Where registration is required, a
Fund may be obligated to pay all or part of the registration expense, and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If during such a period adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be valued in such manner as the
Board of Trustees of the Fund in good faith deems appropriate to reflect their
fair market value.
Illiquid Securities (Ultra Short Term Income Fund and Growth and Income Fund
only) - Each Fund may invest in illiquid securities, (i.e., securities having no
ready market (including repurchase agreements of more than seven days'
duration)), if such purchases at the time thereof would not cause more than 10%
of the value of the Fund's net assets to be invested in all such illiquid or not
readily marketable assets. A Fund may be unable to dispose of its holdings in
illiquid securities at acceptable prices and the disposition of such securities
may require an extended period of time. Illiquid securities may include certain
restricted securities, which may be sold only in privately negotiated
transactions, in a public offering with respect to which a registration
statement is in effect under the Securities Act or pursuant to Rules 144 or 144A
promulgated under such Act. Where registration of such securities is required, a
Fund may be obligated to pay all or part of the registration expense, and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If during such a period adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. The Manager, under the supervision of the Board of Trustees of
the Trust, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to a Fund's restriction on investing in illiquid
securities. A determination as to whether a Rule 144A security is liquid or not
is a question of fact. In making this determination, the Manager will consider
the trading markets for the specific security, taking into account the
unregistered nature of a Rule 144A security. In addition, the Manager could
consider (1) the frequency of trades and quotes, (2) the number of dealers and
potential purchasers, (3) the dealer undertakings to make a market and (4) the
nature of the security and of market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored and, if, as
a result of changed conditions, it is determined that a Rule 144A security is no
longer liquid, a Fund's holding of illiquid securities would be reviewed to
determine what steps, if any, are required to assure that the Fund does not
invest more than the maximum percentage of its assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the amount
of a Fund's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. Illiquid securities will be
valued in such manner as the Board of Trustees of the Fund in good faith deems
appropriate to reflect their fair market value.
Lending of Portfolio Securities - To increase its income, each Fund may lend its
portfolio securities to certain brokers or dealers, banks or other institutional
investors, such as insurance companies and pension funds and receive collateral
in the form of cash or United States Government obligations. In the event the
borrowing institution fails to redeliver the securities when due, or becomes
bankrupt, the Fund might be delayed, or may incur costs or possible losses of
principal and income, in selling the collateral. A Fund will not lend portfolio
securities in excess of 20% of
-15-
<PAGE>
the value of its total assets, nor will the Fund lend its portfolio securities
to any officer, director, trustee, employee or affiliate of the Fund or the
Manager.
Portfolio Turnover - The Trust anticipates that the annual portfolio turnover
rates of the Ultra Short Term Income Fund, the equity component of the Balanced
Fund, the Growth and Income Fund and the Equity Fund may exceed 100%,
respectively. (An annual portfolio turnover rate of 100% would occur, for
example, if all of the stocks in a Fund's portfolio were replaced in a period of
one year.) The annual portfolio turnover rate of the fixed-income component of
the Balanced Fund is not expected to exceed 100%. The Trust, however, has not
placed any limit on the rate of portfolio turnover with respect to any of the
Funds, and portfolio securities may be sold without regard to the time they have
been held when, in the opinion of the Manager, investment considerations warrant
such action. A high rate of portfolio turnover involves correspondingly greater
expenses than a lower rate, which expenses must be borne by the Fund and its
shareholders. High portfolio turnover also may result in the realization of
substantial net short-term capital gains.
Policies Applicable to the Ultra Short Term Income Fund and the Balanced Fund:
Government Securities - U.S. Government securities are securities issued or
guaranteed by the United States Government, its agencies or instrumentalities
and include: (i) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance, U.S. Treasury bills (maturity of one
year or less), U.S. Treasury notes (maturities of one to ten years), and (in the
case of the Balanced Fund only) U.S. Treasury bonds (generally maturities of
greater than ten years), all of which are backed by the full faith and credit of
the United States Government; and (ii) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, some of which are backed by the full
faith and credit of the U.S. Treasury (e.g., the Export-Import Bank); some of
which are supported by the right of the issuer to borrow from the U.S.
Government (e.g., obligations of the Tennessee Valley Authority and the United
States Postal Service); and some of which are backed only by the credit of the
issuer itself (e.g., obligations of the Student Loan Marketing Association).
U.S. Government securities also include government-guaranteed mortgage-backed
securities. (See "Mortgage-Backed and Asset-Backed Securities" below.)
The Ultra Short Term Income Fund and the Balanced Fund may invest in
"zero coupon" Treasury securities which are U.S. Treasury bills, notes and bonds
which have been stripped of their unmatured interest coupons and receipts or
certificates representing interests in such stripped debt obligations and
coupons. A zero coupon security pays no interest to its holder during its life.
Its value to an investor consists of the difference between its face value at
the time of maturity and the price for which it was acquired, which is generally
an amount significantly less than its face value (sometimes referred to as a
"deep discount" price).
Zero coupon Treasury securities do not entitle the holder to any
periodic payments of interest prior to maturity. Accordingly, such securities
usually trade at a deep discount from their face or par value and will be
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities which make current
distributions of interest. Current Federal tax law requires that a holder (such
as the Fund) of a zero coupon security accrue a portion of the discount at which
the security was purchased as income each year even though the Fund receives no
interest payment in cash on the security during the year.
U.S. Government securities do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. Government securities are generally lower
than the yields available from other interest bearing securities. Like other
fixed-income securities, however, the values of U.S. Government securities
change as interest rates fluctuate. When interest rates decline, the values of
U.S. Government securities can be expected to increase, and when interest rates
rise, the values of U.S. Government securities can be expected to decrease.
Stripped Corpus Interests in U.S. Treasury Securities - A number of banks and
brokerage firms have separated ("stripped") the principal portions ("corpus")
from the coupon portions of the U.S. Treasury bonds and notes and sold them
separately in the form of receipts or certificates representing undivided
interests in these instruments (which instruments are generally held by a bank
in a custodial or trust account). The Funds may invest in such
-16-
<PAGE>
receipts or certificates. The investment and risk characteristics of "zero
coupon" Treasury securities described above under "Government Securities" are
shared by such receipts or certificates. The staff of the Securities and
Exchange Commission has indicated that receipts or certificates representing
stripped corpus interests in U.S. Treasury securities sold by banks and
brokerage firms should not be deemed U.S. Government securities but rather
securities issued by the bank or brokerage firm involved.
Foreign Government and Supranational Entity Securities - The Ultra Short Term
Income Fund may invest up to 10% of its total assets, and the Balanced Fund may
invest up to 20% of its total assets, in foreign government securities of
issuers in countries considered stable by the Manager and in securities of
supranational entities. Investing in foreign government and supranational entity
securities involves considerations and possible risks not typically associated
with investing in U.S. Government securities. (See "Investment Policies
Applicable to More Than One Fund - Foreign Securities.")
Foreign government securities include debt securities issued or
guaranteed, as to payment of principal and interest, by governments,
quasi-governmental entities, governmental agencies, or other governmental
entities (collectively, the "Government Entities") denominated in foreign
currencies or in U.S. dollars (including debt securities of a Government Entity
in a country denominated in the currency of another country). The Fund's
portfolio may include government securities of a number of foreign countries or,
depending upon market conditions, those of a single country.
The Manager's determination that a particular country should be
considered stable depends on its evaluation of political and economic
developments affecting the country as well as recent experience in the markets
for government securities of the country. Examples of foreign governments which
the Manager currently considers to be stable, among others, are the governments
of Canada, Germany, Japan, Sweden and the United Kingdom. The Manager does not
believe that the credit risk inherent in the obligations of such stable foreign
governments is significantly greater than that of U.S. Government securities.
The percentage of the Fund's assets invested in foreign government securities
will vary depending on the relative yields of such securities, the economies of
the countries in which the investments are made and such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currencies to the U.S. dollar. Currency is judged on the basis
of fundamental economic criteria (e.g., relative inflation levels and trends,
growth rate forecasts, balance of payments status and economic policies) as well
as technical and political data.
Debt securities of "quasi-governmental entities" are issued by entities
owned by either a national, state or equivalent government or are obligations of
a political unit that is not backed by the national government's full faith and
credit and general taxing powers. Examples of quasi-governmental issuers
include, among others, the Province of Ontario and the City of Stockholm. The
Fund's portfolio may also include debt securities denominated in European
Currency Units of an issuer in a country in which the Fund may invest. A
European Currency Unit represents specified amounts of the currencies of certain
of the fifteen member states of the European Union.
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank, the
Asian Development Bank and the European Coal and Steel Community. The
governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and, in many cases, are committed to
make additional contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income.
Corporate Fixed-Income Securities - The Funds may invest their assets in
corporate fixed-income securities which include debt securities (including
floating and variable notes), convertible securities and preferred stock of
corporate issuers. (As noted above, for purposes of the Balanced Fund's policy
of investing at least 25% of its total assets in fixed-income securities, only
that portion of the value of convertible securities attributable to their
fixed-income
-17-
<PAGE>
characteristics will be taken into account.) Differing yields on corporate
fixed-income securities of the same maturity are a function of several factors,
including the relative financial strength of the issuers. Higher yields are
generally available from securities in the lower rating categories. The Funds
will invest in investment grade securities (securities rated at the time of
purchase Baa or better by Moody's or BBB or better by S&P), and in comparable
non-rated securities. Moody's indicates that securities rated Baa, although
investment grade, have speculative elements. S&P indicates that adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and principal for securities rated BBB than is the case
with higher-rated securities, although such securities are regarded as having an
adequate capacity to pay interest and principal. (See Appendix A hereto for a
description of corporate debt ratings.) Non-rated securities will be considered
for investment by the Funds when the Manager believes that the financial
condition of the issuers of such obligations and the protection afforded by the
terms of the obligations themselves limit the risk to the Funds to a degree
comparable to that of rated securities which are consistent with the Funds'
objective and policies. The Funds may also invest in non-Treasury zero coupon
securities and in "pay-in-kind" debentures (i.e., debt obligations the interest
on which may be paid in the form of additional obligations of the same type
rather than cash), which have both investment and risk characteristics similar
to zero coupon Treasury securities, including the risk of the untimely
disposition of portfolio securities to fund required distributions and the
resultant transaction costs. (See "Government Securities" above and "Dividends,
Distributions and Taxes" below.)
The ratings of fixed-income securities by Moody's and S&P are a
generally accepted barometer of credit risk. They are, however, subject to
certain limitations from an investor's standpoint. The rating of an issuer is
heavily weighted by past developments and does not necessarily reflect probable
future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities in each rating category. The Manager
will attempt to reduce the overall portfolio credit risk through diversification
and selection of portfolio securities based on considerations mentioned above.
In addition, it is the Ultra Short Term Income Fund's policy to dispose of a
security whose rating drops below Baa or BBB when it is practicable to do so if,
in the judgment of the Manager, such downgrade is likely to lead to a default.
Mortgage-Backed and Asset-Backed Securities - Mortgage-backed and asset-backed
securities arise through the grouping by governmental, government-related and
private organizations of loans, receivables and other assets originated by
various lenders. Interests in pools of these assets differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal paid at maturity or specified call dates. Instead,
these securities provide periodic payments which generally consist of both
interest and principal payments. The estimated life of a mortgage-backed or
asset-backed security and the average maturity of a portfolio including such
securities varies with the prepayment experience with respect to the underlying
debt instruments.
Mortgage-Backed Securities - General - Mortgage-backed securities are securities
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently three
basic types of mortgage-backed securities: (i) those issued or guaranteed by the
United States Government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"); (ii) those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or guaranteed by the
United States government or one of its instrumentalities; and (iii) those issued
by private issuers that represent an interest in or are collateralized by whole
mortgage loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement. An issuer of
mortgage-backed securities meeting certain conditions may elect to be treated as
a Real Estate Mortgage Investment Conduit (a "REMIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). (See "Dividends, Distributions and
Taxes.")
GNMAs are pass-through interests in pools of mortgage loans insured by
the Federal Housing Administration or by the Farmer's Home Administration or
guaranteed by the Veterans Administration. GNMA is a U.S. Government corporation
within the Department of Housing and Urban Development. GNMAs are backed by the
full faith and credit of the United States, which means that the U.S. Government
guarantees that interest and
-18-
<PAGE>
principal will be paid when due. FNMA is a U.S. Government-sponsored corporation
owned entirely by private stockholders. Pass-through securities issued by FNMA
are guaranteed as to timely payment of principal and interest by FNMA. FHLMC
issues mortgage-related securities representing interests in residential
mortgage loans pooled by it. FHLMC is a corporate instrumentality of the U.S.
Government. FHLMC guarantees the timely payment of interest and ultimate
collection of principal. FNMAs and FHLMCs are not backed by the full faith and
credit of the United States.
Private Mortgage Pass-Through Securities - Private mortgage pass-through
securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA
and FHLMC mortgage pass-through securities described above and are issued by
originators of, and investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Private Pass-Throughs are usually backed
by a pool of conventional fixed rate or adjustable rate mortgage loans. Since
Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of GNMA, FNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. (See "Types of Credit Support"
below.)
Types of Credit Support - Mortgage-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories - (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures ultimate payment of the obligations on
at least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional fees for such credit support, although the existence of credit
support may increase the price of a security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceeds that required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information regarding the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated could adversely affect
the return on an investment in such a security.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities -
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or Private Pass-Throughs (as such terms are
defined above) (such collateral collectively referred to herein as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the United States Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.
-19-
<PAGE>
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semiannual basis. The principal of, and interest on, the
Mortgage Assets may be allocated among the several classes of a series of a CMO
in innumerable ways. In a common structure, payments of principal, including any
principal prepayments on the Mortgage Assets, are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
The Funds may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC" Bonds). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal on such securities having the highest priority after interest
has been paid to all classes.
Stripped Mortgage-Backed Securities - Stripped mortgage-backed securities
("SMBSs") are derivative multiclass mortgage securities. SMBSs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of Mortgage
Assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on the class' yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Funds may fail to fully recoup their initial investment in these
securities even if the securities are rated AAA or Aaa. Currently, SMBSs having
an IO and PO class are generally illiquid, and, therefore, the Funds will not
invest more than 10% of the value of their net assets in such securities. (See
"Investment Restrictions" below.)
CMO Residuals - "CMO Residuals" are derivative mortgage securities
issued by agencies or instrumentalities of the United States Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing.
The cash flow generated by the Mortgage Assets underlying series of
CMOs is applied first to make required payments of principal of, and interest
on, the CMOs and, second, to pay the related administrative expenses of the
issuer. The residual in a CMO structure generally represents the interest in any
excess cash flow remaining after making the foregoing payments. Each payment of
such excess cash flow to a holder of the related CMO Residual represents
dividend or interest income and/or a return of capital. The amount of residual
cash flow resulting from a CMO will depend on, among other things, the
characteristics of the Mortgage Assets, the coupon rate of each class of CMOs,
prevailing interest rates, the amount of administrative expenses and the
prepayment experience on the Mortgage Assets. In particular, the yield to
maturity on CMO Residuals is extremely sensitive to prepayments on the related
underlying Mortgage Assets in the same manner as an IO class of a SMBS. (See
"Stripped Mortgage-Backed Securities," above.) In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO Residual will also be extremely sensitive to the
level of the index upon which
-20-
<PAGE>
interest rate adjustments are based. As described above with respect to SMBSs,
in certain circumstances, the Funds may fail to fully recoup their initial
investment in a CMO Residual.
CMO Residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
Transactions in CMO Residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO Residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities Act of 1933 (the "Securities Act"). CMO Residuals, whether or not
registered under the Securities Act, may be subject to certain restrictions on
transferability. Ownership of certain CMO Residuals imposes liability for
certain of the expenses of the related CMO issuer on the purchaser; however, the
Trust does not anticipate that it will purchase any CMO Residual that imposes
such liability on the Funds.
Asset-Backed Securities - General - The Funds also may invest in asset-backed
securities including interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. These securities
may be in the form of pass-through instruments or asset-backed bonds. The
securities, all of which are issued by non-governmental entities and carry no
direct or indirect government guarantee, are structurally similar to the
mortgage pass-through securities described above. As with mortgage-backed
securities, asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties and use similar
credit enhancement techniques. (See "Types of Credit Support" above.)
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in their respective obligations only by filing a financing statement
and by having the servicer of the obligations, which is usually the originator,
take custody thereof. In such circumstances, if the servicer were to sell the
same obligations to another party, in violation of its duty not to do so, there
is a risk that such party could acquire an interest in the obligations superior
to that of the holders of the securities. Also, although most such obligations
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to perfect such security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the obligations underlying the
securities, usually is not amended to reflect the assignment of the seller's
security interest for the benefit of the holders of the securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on those securities. In addition,
various state and federal laws give the motor vehicle owner the right to assert
against the holder of the owner's obligation certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the related securities.
Special Risk Considerations - The yield characteristics of mortgage-backed and
asset-backed securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Fund purchases such a security at a premium, a prepayment
rate that is faster than expected will reduce yield to maturity, while a
prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity. Conversely, if the Fund purchases these securities
at a discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. An acceleration in prepayments in
response to sharply falling interest rates will shorten the security's average
maturity and limit the potential appreciation in the security's value
-21-
<PAGE>
relative to a conventional debt security. As a result, mortgage-backed
securities are not as effective in locking in high long-term yields. Conversely,
in periods of sharply rising rates, prepayments generally slow, increasing the
security's average life and its potential for price depreciation. Amounts
available for reinvestment by the Fund are therefore likely to be greater during
a period of declining interest rates and, as a result, likely to be reinvested
at lower interest rates than during a period of rising interest rates.
Generally, asset-backed securities are less likely to experience substantial
prepayments than are mortgage-backed securities, primarily because the
collateral supporting asset-backed securities is of shorter maturity than
mortgage loans. However, certain of the factors that affect the rate of
prepayments on mortgage-backed securities also affect the rate of prepayments on
asset-backed securities (e.g., fluctuations in interest rates and unemployment),
although the predominant factors affecting prepayment rates on mortgage-backed
and asset-backed securities may be different during any particular period. In
periods of rapidly changing economic conditions, these factors can lead to
volatility in the value of certain types of mortgage-backed and asset-backed
securities.
The Funds' respective returns will also be affected by the yields on
instruments in which the Fund is able to reinvest the proceeds of payments and
prepayments. Accelerated prepayments on securities purchased by the Funds at a
premium also impose a risk of loss of principal because the premium may not have
been fully amortized at the time the principal is repaid in full.
New types of mortgage-backed securities and asset-backed securities are
developed and marketed from time to time. Consistent with their respective
investment limitations, the Funds expect to invest in those new types of
instruments that the Manager believes may assist the Funds in achieving their
respective investment objectives and to supplement this prospectus to
appropriately describe such instruments.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions which may not be changed
without the approval of the Fund's shareholders. Briefly, these restrictions
provide that a Fund may not:
1. Purchase the securities of any one issuer, other than the United States
Government or any of its agencies or instrumentalities if, immediately
after such purchase, more than 5% of the value of its total assets would
be invested in such issuer or the Fund would own more than 10% of the
outstanding voting securities of such issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard to such 5%
and 10% limitations;
2. Invest more than 25% of the value of its total assets in any particular
industry;
3. Purchase securities on margin, but it may obtain such short-term credits
from banks as may be necessary for the clearance of purchases and sales of
securities;
4. Make loans of its assets to any person, except for the lending of
portfolio securities, the purchase of debt securities and the entering
into of repurchase agreements as discussed under "Investment Objectives
and Policies;"
5. Borrow money except for (i) the short-term credits from banks referred to
in paragraph 3 above and (ii) borrowings from banks for temporary or
emergency purposes, including the meeting of redemption requests which
might require the unexpected disposition of securities. Borrowing in the
aggregate may not exceed 15%, and borrowing for purposes other than
meeting redemptions may not exceed 5%, of the value of the Fund's total
assets (including the amount borrowed) at the time the borrowing is made.
Outstanding borrowings will be repaid before any subsequent investments
are made;
6. Mortgage, pledge or hypothecate any of its assets, except as may be
necessary in connection with permissible borrowings mentioned in paragraph
5 above;
-22-
<PAGE>
7. Purchase the securities of any other investment company (other than
certain issuers of mortgage-backed and asset-backed securities), except by
purchase in the open market where no commission or profit to a sponsor or
dealer (other than the customary broker's commission) results from such
purchase, and except when such purchase is part of a merger, consolidation
or acquisition of assets; and
8. Act as an underwriter of securities of other issuers, except that the Fund
may acquire restricted or not readily marketable securities under
circumstances where, if such securities were sold, the Fund might be
deemed to be an underwriter for purposes of the Securities Act. The Fund
will not, however, invest (in the case of the Balanced Fund and the Equity
Fund) more than 10% of the value of its net assets in illiquid securities,
restricted securities and not readily marketable securities and repurchase
agreements of more than seven days' duration or (in the case of the Ultra
Short Term Income Fund and the Growth and Income Fund) more than 10% of
the value of its net assets in illiquid securities and repurchase
agreements of more than seven days' duration.
If a percentage restriction is adhered to at the time an investment is
made, a later change in percentage resulting from changes in the value of a
Fund's portfolio securities will not be considered a violation of the Fund's
policies or restrictions.
THE MANAGER
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The manager of the Trust is Towneley Capital Management, Inc., a
Delaware corporation founded in 1971, with its office located at 144 East 30th
Street, New York, New York 10016 (the "Manager"). The Manager was, at December
31, 1997, investment adviser for assets of approximately $1 billion. In addition
to the Trust, the Manager's clients include a limited number of corporations,
insurance companies, foundations, colleges, hospitals and individuals. Wesley G.
McCain, chairman and trustee of the Trust, has been chairman and director of the
Manager since its founding in 1971 and is primarily responsible for the
day-to-day management of the Funds' portfolios. Mr. McCain is a controlling
person of the Manager on the basis of his ownership of the Manager's stock.
Value Equity Composite (Growth and Income Fund only)
The Value Equity Composite of the Manager includes the portfolios of
all accounts of comparable size (other than portfolios below $1 million) managed
by the Manager that have an investment objective, policies and strategies
substantially similar to those of the Growth and Income Fund. The following
table represents historical performance of the Value Equity Composite. This data
compares the performance of these accounts against the Standard & Poor's 500
Index. The computed total rates of return include the impact of capital
appreciation as well as the reinvestment of interest and dividends. The table
does not indicate how the Growth and Income Fund may perform in the future.
-23-
<PAGE>
Year Value Equity Composite* S&P 500 Index+
1975 45.23% 37.23%
1976 21.1% 23.93%
1977 -0.38% -7.16%
1978 6.88% 6.57%
1979 12.34% 18.61%
1980 22.98% 32.5%
1981 19.3% -4.92%
1982 23.9% 21.55%
1983 17.45% 22.58%
1984 11.32% 6.27%
1985 29.84% 31.73%
1986 19.72% 18.67%
1987 -3.56% 5.25%
1988 13.52% 16.61%
1989 22.77% 31.89%
1990 -0.33% -3.11%
1991 24.23% 30.47%
1992 15.57% 7.62%
1993 16.18% 10.08%
1994 0.53% 1.32%
- -------------------------
* The Value Equity Composite is a composite of fully discretionary,
separately managed accounts under the management of Towneley Capital
Management, Inc. Each account included in the Value Equity Composite has
an investment objective, policies and strategies substantially similar to
the Growth and Income Fund. (Accounts with less than $1 million in assets
are excluded.) The performance figures are net of advisory fees charged by
the Manager - the only expense of such accounts over which the Manager has
control. The use of the Growth and Income Fund's expense structure would
have lowered the performance results shown in the Value Equity composite.
The Value Equity Composite results have been prepared and presented in
compliance with the Association for Investment Management and Research
("AIMR") performance presentation standards.
+ The Standard & Poor's 500 Composite Stock Price Index is a market value
weighted benchmark of common stock performance. The index represents over
70% of the total U.S. equity market. The index is adjusted to reflect
reinvestment of dividends.
All information presented relies on data supplied by the Manager or is
derived from statistical services, reports or other sources believed by the
Trust to be reliable. The data for each period after 1985 has been audited by
Deloitte & Touche. The data for the periods during the years 1975-1985 have not
been audited. All data shown are presented in compliance with AIMR performance
presentation standards.
Investment Management Contracts
Pursuant to a Management Contract for the Balanced Fund and the Equity
Fund, dated January 7, 1987 (the "1987 Contract"), and one for the Ultra Short
Term Income Fund and the Growth and Income Fund dated December 27, 1994 (the
"1994 Contract" and, together with the 1987 Contract, the "Management
Contracts"), the Manager furnishes an investment program for each Fund, 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
-24-
<PAGE>
investments. 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.
When placing portfolio transactions, the Manager may also take into account
payments made by brokers effecting transactions for the Trust to other persons
on behalf of the Trust for services provided to it for which it would be
obligated to pay (such as custodial and professional fees).
Under the Management Contracts, the Manager provides persons
satisfactory to the Board of Trustees to serve as officers of the Trust. Such
officers, as well as certain other employees and trustees, may be directors,
officers or employees of the Manager. For its services under the Management
Contracts, the Manager receives fees from each Fund at the following annual
rates, which are expressed as a percentage of each Fund's average daily net
assets:
Ultra Short Term Income Fund 0.40%
Balanced Fund 0.80%
Growth and Income Fund 0.90%
Equity Fund 1.00%
These fees are accrued daily and paid monthly. The rates of the
management fees to be paid by the Balanced Fund, the Growth and Income Fund and
the Equity Fund are higher than the rates paid by most other registered
investment companies. The Manager may from time to time from its own funds
(other than the management fees paid by the Funds) compensate brokers and other
persons, including Eclipse Financial Services, Inc. and other affiliates of the
Manager, for providing shareholder services or assistance in distributing the
Funds' shares. Eclipse Financial Services, Inc. may, in turn, make payments out
of amounts received from the Manager to compensate brokers and other persons for
providing shareholder services.
The Trust has retained MainStay Management, Inc., a registered
broker-dealer unaffiliated with the Manager, to administer all aspects of the
Trust's operations except those which are the responsibility of the Manager. In
connection with its responsibilities as administrator, MainStay Management, Inc.
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
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, Custodian and the 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 all
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, MainStay Management, Inc.
receives a fee, computed daily and paid monthly in arrears, from the Manager
based on the average combined daily net asset value of the Funds ("Combined
Assets") to be calculated at the annual rate of 0.15% of the Combined Assets up
to $50 million, plus 0.12% of such Combined Assets in excess of $50 million but
not in excess of $100 million, plus 0.08% of such Combined Assets in excess of
$100 million but not in excess of $150 million; plus 0.05% of such Combined
Assets in excess of $150 million but not in excess of $750 million and 0.02% of
the Combined Assets in excess of $750 million. Because MainStay Management, Inc.
has been retained by the Trust, the Trust can directly supervise the performance
of its administrative functions, even though MainStay Management, Inc. receives
no compensation directly from the Trust.
Under the 1987 Contract, for the fiscal year ended December 31, 1997,
the Manager received a fee from the Equity Fund equal to 1.00% of the Fund's
average daily net assets. Under the Management Contracts, for the fiscal year
ended December 31, 1997, the Manager was entitled to receive fees from the Ultra
Short Term Income Fund in the amount of 0.40% of average daily net assets, which
fee was waived in its entirety by the Manager; from the Balanced Fund in the
amount of 0.80% of average daily net assets, of which $153,387 was voluntarily
waived by the
-25-
<PAGE>
Manager; and from the Growth and Income Fund in the amount of 0.90% of average
daily net assets, of which $82,079 was voluntarily waived by the Manager.
Year 2000
Like other investment companies, financial and business organizations
and individuals around the world, the Trust could be adversely affected if the
computer systems used by the Adviser, the Distributor or other service providers
to the Trust do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Adviser and the Distributor are taking steps that they believe are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that they use and the Adviser is taking steps to obtain reasonable
assurances that comparable steps are being taken by the Trust's other service
providers. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact to the Trust.
The Year 2000 Problem is expected to impact corporations, which may
include issuers of portfolio securities held by the Trust, to varying degrees
based upon various factors, including, but not limited to, the corporation's
industry sector and degree of technological sophistication. The Trust is unable
to predict what impact, if any, the Year 2000 Problem will have on issuers of
the portfolio securities held by the Trust.
EXPENSES OF THE TRUST
Except as set forth above under "Manager," the Trust is responsible for the
payment of its expenses. Without limitation such expenses include the fees
payable to the Manager; the organizational expenses payable to the Manager; any
brokerage fees and commissions; taxes; interest; the cost of any liability
insurance or fidelity bonds; legal and auditing fees and expenses; the fees and
certain expenses of the Trust's Custodian and Transfer and Dividend Disbursing
Agent; the fees of any trade association of which the Trust is a member; the
expenses of printing and mailing reports and notices to shareholders; filing
fees and other costs for the registration or qualification of each Fund's shares
under Federal or state securities laws; the fees and expenses involved in
registering and maintaining registration of the Trust and of each Fund's shares
with the Securities and Exchange Commission; the costs of registering the Trust
as a broker or dealer; the expenses of servicing shareholders and shareholder
accounts held by the Trust directly; and any extraordinary expenses incurred by
a Fund.
For the fiscal year ended December 31, 1997, the expenses of the Equity
Fund, including the management fee, equaled 1.14% of the Fund's average daily
net assets. For the fiscal year ended December 31, 1997, the expenses of the
Balanced Fund equaled 0.84% of the Fund's average daily net assets (net of the
management fee waived equivalent to 0.18% of average net assets). For the fiscal
year ended December 31, 1997, the expenses of the Growth and Income Fund equaled
0.94% of the Fund's average daily net assets (net of the management fee waived
equivalent to 0.16% of average net assets) and the expenses of the Ultra Short
Term Income Fund were equal to 0.00% of the Fund's average daily net assets
(after management fee waived equivalent to 0.40% of average net assets and other
expenses reimbursed equivalent to 0.82% of average net assets).
HOW TO PURCHASE AND REDEEM SHARES
Each Fund sells and redeems its shares on a continuing basis at its net asset
value and does not impose a sales charge for either sales or redemptions. All
transactions in Fund shares are effected through the Trust's transfer agent,
Investors Fiduciary Trust Company (the "Transfer Agent"), which accepts orders
for purchases and redemptions from investors directly. The minimum initial
investment in each Fund is $1,000. The minimum investment required to open an
individual retirement account is also $1,000. (See "Retirement Plans.") The Fund
minimum does not apply to automatic investment accounts (see "Automatic
Investment" below) or to gift accounts. Initial investments may be made in any
amount in excess of the applicable minimums. There is no minimum for subsequent
investments.
Shareholder accounts may be maintained through brokerage firms or other
financial institutions, including the Manager and its affiliates. Such
institutions may make arrangements for their customers to purchase and redeem
-26-
<PAGE>
Fund shares by telephone, in which event a transaction fee may be charged by the
institution (not by the Trust). In addition, the $1,000 minimum initial
investment amount does not apply to shareholder accounts maintained through such
institutions, which may impose their own minimum investment amounts.
Shares of each Fund are offered at the next determined net asset value
by the Fund as an investment vehicle for individuals, institutions, fiduciaries
and retirement plans. Prospectuses, sales material and applications may be
obtained from the Trust's shareholder servicing agent, Eclipse Financial
Services, Inc., P.O. Box 2196, Peachtree City, Georgia 30269, 1-800-872-2710 or
1-770-631-0414 (within Georgia). Orders received by Investors Fiduciary Trust
Company, the Trust's Transfer Agent, prior to 4:00 P.M., New York City time, on
a Fund business day, will result in shares being issued the same day. The price
will be based on that day's net asset value. Orders which are received after
4:00 P.M., New York City time, will not result in share issuance until the next
Fund business day.
For each shareholder of record, the Transfer Agent, as the
shareholder's agent, establishes an open account to which all shares purchased
are credited, together with any dividends and capital gain distributions which
are paid in additional shares. (See "Dividends, Distributions and Taxes.") It is
the Funds' policy not to issue share certificates.
Each Fund reserves the right to reject any subscription for its shares.
At the time of initial investment in the Trust, investors must elect on
their application the Fund(s) in which they wish to invest. Subject to each
Fund's initial investment minimums, investors may divide their investment in the
Trust among the Funds in any manner they choose. Subject to a $500 minimum,
stockholders may transfer all or a portion of their shares from one open Fund
account to another open Fund account at any time. Any transfer into a Fund in
which the stockholder does not have an open account must satisfy the Fund's
initial investment minimum. Stockholders will have a separate account with the
Trust for each Fund in which they invest.
Initial Purchase of Shares
Mail - To purchase shares of a Fund send a check made payable to "Eclipse Funds"
and a completed application to:
Eclipse Funds
c/o Investors Fiduciary Trust Company
P.O. Box 419595
Kansas City, MO 64179
IFTC will not accept third-party checks.
Checks are accepted subject to collection at full face value in United
States currency.
Bank Wire - To purchase shares of a Fund using the wire system for transmittal
of money among banks, an investor should first telephone Eclipse Financial
Services, Inc. at 1-800-872-2710 or 1-770-631-0414 (within Georgia) to obtain a
new account number.
The investor should then instruct a member commercial bank to wire
funds to:
Investors Fiduciary Trust Company
ABA 101003621
for further credit to a/c #7512554
Re: -Name of Fund-
Account Number __________________________
Account Name____________________________
Social Security #/Tax ID #___________________
Then promptly complete and mail the subscription order form to the
Transfer Agent (Investors Fiduciary Trust Company). There may be a charge by
your bank for transmitting the money by bank wire. The Transfer Agent
-27-
<PAGE>
does not charge investors in the Trust for the receipt of wire transfers. If you
are planning to wire funds, it is suggested that you instruct your bank early in
the day so the wire transfer can be accomplished the same day.
Automatic Investment - By completing the automatic investment authorization, you
can direct Eclipse Funds to charge your bank account for the monthly purchase of
shares of the Fund(s) of your choice. Your account will be charged on or about
the 20th day of each month and you will receive a confirmation of every
transaction. There is no initial minimum if you open an automatic investment
account, but the minimum monthly purchase is $50.
Subsequent Purchases of Shares
Subsequent purchases can be made by bank wire, by automatic investment or by
mailing a check as instructed above.
There is no minimum for subsequent purchases. All payments should
clearly indicate the name of the Fund whose shares are being purchased and the
shareholder's account number.
Provided that the information on the subscription order form on file
with the Trust is still applicable, a shareholder may reopen an account without
filing a new subscription order form at any time during the year the
shareholder's account is closed or during the following calendar year.
General Information Regarding Redemptions
Upon receipt by the Transfer Agent of a redemption request in proper form,
shares of each Fund will be redeemed at their next determined net asset value.
(See "Net Asset Value.") Redemption requests may be made by mail or by
telephone, and automatic withdrawals may be authorized by establishing a
Systematic Withdrawal Account as described below.
Redemption by Mail - Redemptions may be made by mail to the Transfer Agent at:
Eclipse Funds
c/o Investors Fiduciary Trust Company
P.O. Box 419595
Kansas City, MO 64179
The letter must specify the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The letter must be
signed in exactly the same way the account is registered (if there is more than
one owner of the shares, all must sign). In all cases, all the signatures on a
redemption request must be guaranteed by a bank, broker-dealer, municipal
securities broker and dealer, government securities dealer and broker, credit
union, a member firm of a national securities exchange, registered securities
association or clearing agency or savings association. The Transfer Agent may
reject redemption instructions if the guarantor is neither a member of nor a
participant in a signature guarantee program (currently known as "STAMP.")
(Signature guarantees by savings banks and notaries public are not acceptable.)
Further documentation, such as copies of corporate resolutions and instruments
of authority, may be requested from certain accounts such as corporations,
administrators, executors, personal representatives, trustees or custodians to
evidence the authority of the person or entity making the redemption request.
Redemption by Telephone - Shares of each Fund may also be sold by calling the
Transfer Agent at 1-800-525-0687. In order to utilize this procedure for
telephone redemption, a shareholder must have previously elected this procedure
in writing, which election will be reflected in the records of the Transfer
Agent, and the redemption proceeds must be mailed directly to the investor at
the address of record for that investor. To change your address of record, send
the stub of your account statement signed by all account holders, or send a
written request with signature(s) guaranteed as described above under
"Redemption by Mail" to the Transfer Agent. The Trust reserves the right to
limit the number of telephone redemptions by an investor. Once made, telephone
redemption requests may not be modified or
-28-
<PAGE>
canceled. The selling price of each share being redeemed will be the per share
net asset value next calculated by the relevant Fund after receipt by the
Transfer Agent of the telephone redemption request.
To preserve flexibility, the Trust may revise or remove the ability to
redeem shares by telephone, or may charge a fee for such service, although
currently, the Trust does not expect to charge a fee. The Trust will not be
liable for following instructions communicated by telephone that it reasonably
believes to be genuine. The Trust will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. Such procedures may
include, among others, requiring some form of personal identification prior to
acting upon telephone instructions, providing written confirmations of all such
transactions, and/or tape recording all telephone instructions. Assuming
procedures such as the above have been followed, the Trust will not be liable
for any loss, cost, or expense for acting upon an investor's telephone
instructions or for any unauthorized telephone redemption. As a result of this
policy, the investor will bear the risk of any loss unless the Trust has failed
to follow such procedure(s).
During periods of substantial economic or market changes, telephone
redemptions may be difficult to implement. If an investor is unable to contact
the Transfer Agent by telephone, shares may also be redeemed by delivering the
redemption request to the Transfer Agent by letter as previously described.
Automatic Withdrawal - If you own Fund shares worth at least $10,000 at the
current net asset value, you may create a Systematic Withdrawal Account from
which a fixed sum will be paid to you at regular intervals. Please contact
shareholder servicing for additional information.
Payment of Proceeds - Checks for redemption proceeds normally will be mailed
within three business days, but will not be mailed until all checks in payment
for the purchase of the shares to be redeemed have been cleared, which may take
up to 15 days. Unless other instructions are given, a check for the proceeds of
a redemption will be sent to the shareholder's address of record and generally
will be mailed within three business days after receipt of the request.
The Trust may suspend the right of redemption and postpone the date of
payment for more than seven days during any period when (i) trading on the New
York Stock Exchange is restricted or the Exchange is closed, other than
customary weekend and holiday closings, (ii) the Securities and Exchange
Commission has by order permitted such suspension or (iii) an emergency, as
defined by rules of the Securities and Exchange Commission, exists making
disposal of portfolio investments or determination of the value of the net
assets of the Funds not reasonably practicable. The proceeds of a redemption may
be more or less than the amount invested and, therefore, a redemption may result
in a gain or loss for income tax purposes.
Redemption at the Option of the Fund - To be in a position to eliminate
excessive expenses, the Trust reserves the right to redeem upon not less than 30
days' notice all shares of a Fund in an account (other than an individual
retirement account) which has a value below $500 as a result of voluntary
redemptions. However, a shareholder will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.
RETIREMENT PLANS
Recent federal tax legislation has expanded the types of individual retirement
accounts ("IRAs") available to individuals for tax deferred retirement savings.
In addition to "traditional" IRAs established under Code Section 408, there are
Roth IRAs governed by Code Section 408A and SIMPLE IRAs established under Code
Section 408(p). Contributions to each of these types of IRAs are subject to
differing limitations. In addition, distributions from each type of IRA are
subject to differing restrictions. The following is a very general description
of each type of IRA.
Traditional IRAs
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
must commence. Depending upon the circumstances of the individual, contributions
to a traditional IRA may be made on a deductible or non-deductible basis. Each
Fund has available a form of traditional IRA for investment in each Fund's
shares. Individuals earning compensation, including earnings
-29-
<PAGE>
from self-employment, generally may make IRA contributions of up to $2,000
annually. However, the deductibility of an individual's IRA contribution may be
reduced or eliminated if the individual or, in the case of a married individual,
either the individual or the individual's spouse is an active participant in an
employer-sponsored retirement plan. Generally if a taxpayer is not covered by an
employer-sponsored retirement plan, the amount the taxpayer may deduct for
federal income tax purposes in a year for contributions to an IRA is the lesser
of $2,000 or the taxpayer's compensation for the year. If the taxpayer is
covered by an employer-sponsored retirement plan, the amount of IRA
contributions the taxpayer may deduct in a year may be reduced or eliminated
based on the taxpayer's adjusted gross income for the year. The adjusted gross
income level at which a single taxpayer's deduction for 1997 is affected,
$25,000, will increase annually to $50,000 in the year 2005. The adjusted gross
income level at which the deduction for a married taxpayer (who does not file a
separate return) is affected, $40,000, will increase annually to $80,000 in the
year 2007. If the taxpayer is married, files a separate return, and is covered
by a qualified retirement plan, the taxpayer may not make a deductible
contribution to an IRA if the taxpayer's income exceeds $10,000. If the taxpayer
is not covered by an employer-sponsored retirement plan, but the taxpayer's
spouse is, the amount the taxpayer may deduct for IRA contributions will be
phased out if the taxpayer's adjusted gross income is between $150,000 and
$160,000. In addition, an individual with a non-working spouse may establish a
separate IRA for the spouse and annually contribute a total of up to $4,000 to
the two IRAs, provided that no more than $2,000 may be contributed to the IRA of
either spouse. The minimum investment required to open an IRA with the Fund is
$1,000.
Withdrawals from a traditional IRA, other than that portion, if any, of
the withdrawal considered to be a return of the investor's non-deductible IRA
contributions, are taxed as ordinary income when received. Such withdrawals may
be made without penalty after the participant reaches age 59 1/2, and must
commence shortly after age 70 1/2. Withdrawals before age 59 1/2 or the failure
to commence withdrawals on a timely basis after age 70 1/2 may involve the
payment of certain penalties.
SIMPLE Individual Retirement Annuities
The Small Business Job Protection Act of 1996 created a new retirement plan, the
Savings Incentive Match Plan of Employees of Small Employers ("SIMPLE Plans").
Depending upon the type of SIMPLE Plan, employers may deposit the plan
contributions into a single trust or into SIMPLE individual retirement accounts
("SIMPLE IRAs") established by each participant. Contributions to a SIMPLE IRA
may be either salary deferral contributions or employer contributions.
Roth IRAs
Section 408A of the Code permits eligible individuals to establish a Roth IRA, a
new type of IRA which becomes available in 1998. Contributions to a Roth IRA are
not deductible, but withdrawals that meet certain requirements are not subject
to federal income tax. In general, Roth IRAs are subject to certain required
distribution rules on the death of the account owner. The Roth IRA, like the
traditional IRA is subject to a $2,000 ($4,000 for a married couple)
contribution limit (taking into account both Roth IRA and traditional IRA
contributions). The maximum contribution that can be made is phased-out for
taxpayers with adjusted gross income between $95,000 and $110,000 ($150,000 and
$160,000 if married and filing jointly).
Shares of either Fund may also be a suitable investment for assets of
"section 403(b) accounts" and other types of qualified pension or profit-sharing
plans, including cash or deferred or salary reduction "section 401(k) plans"
which give participants the right to defer portions of their compensation for
investment on a tax-deferred basis until distributions are made from the plans.
Persons desiring information concerning investments by IRAs and other
retirement plans should write or telephone the Trust.
-30-
<PAGE>
EXCHANGE PRIVILEGE
Shareholders of any Fund are entitled to exchange some or all of their shares
for any other Fund. An exchange of shares in a Fund pursuant to the exchange
privilege may result in a shareholder realizing a taxable gain or loss for
income tax purposes.
There is no charge for the exchange privilege or limitation as to
frequency of exchanges. The minimum amount for an exchange is $500, except that
shareholders who are establishing a new account with an investment company or a
portfolio through the exchange privilege must insure that a sufficient number of
shares are exchanged to meet the minimum initial investment required for the
portfolio into which the exchange is being made.
Instructions for exchanges may be made in writing to Investors
Fiduciary Trust Company at the appropriate address listed above or, for
shareholders with telephone exchange, by calling Investors Fiduciary Trust
Company at l-800-525-0687. The Trust reserves the right to reject any exchange
request and may modify or terminate the exchange privilege at any time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each dividend and capital gains distribution, if any, declared by a Fund on its
outstanding shares will, at the election of each shareholder, be paid in cash or
in additional shares of the Fund having an aggregate net asset value as of the
payment date of such dividend or distribution equal to the cash amount of such
dividend or distribution. Election to receive dividends and distributions in
cash or shares is made at the time shares are subscribed for and may be changed
by notifying the Fund in writing at any time prior to the record date for a
particular dividend or distribution. If the shareholder makes no election, the
Fund will make the distribution in shares. There is no sales or other charge in
connection with the reinvestment of dividends and capital gains distributions.
While it is the intention of the Funds to distribute to their
respective shareholders substantially all of each fiscal year's net income
(quarterly with respect to the Ultra Short Term Income Fund and the Balanced
Fund, and annually with respect to the Growth and Income Fund and the Equity
Fund) and net realized capital gains, if any (annually with respect to all of
the Funds), the amount and time of any such distribution must necessarily depend
upon the realization by the Fund of income and capital gains from investments.
There is no fixed dividend rate, and there can be no assurance that a Fund will
pay any dividends or realize any capital gains.
The following discussion is intended for general information only. An
investor should consult with his or her own tax adviser as to the tax
consequences of an investment in a Fund, including the status of distributions
from each Fund under applicable state or local law.
Federal Income Taxes
Each of the Funds intends to qualify for tax treatment as a "regulated
investment company" under the Code. Qualification as a regulated investment
company generally relieves a Fund of Federal income tax on that part of its net
ordinary income and net realized capital gains which it pays out to its
shareholders.
Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. In the case of corporate shareholders, dividends paid by the Balanced
Fund, the Growth and Income Fund and the Equity Fund may be eligible for the
dividends-received deduction, to the extent that the Fund's income is derived
from qualifying dividends received by the Fund from domestic corporations.
Distributions of the excess of net long-term capital gains over net short-term
capital losses which are designated by a Fund as capital gain dividends are
taxable to the shareholders at a maximum 20% or 28% capital gains rate
(depending on the Fund's holding period for the assets giving rise to the gain),
irrespective of the length of time a shareholder may have held his shares. Such
capital gains distributions are not eligible for the dividends-received
deduction referred to above. Dividends are taxable to shareholders in the same
manner whether received in cash or reinvested in additional Fund shares.
-31-
<PAGE>
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.
Each year each Fund will notify shareholders of the tax status of
dividends and distributions.
Investments by the Ultra Short Term Income Fund and the Balanced Fund
in zero coupon securities will result in income to the Fund each year equal to a
portion of the excess of the face value of the securities over their issue
price, even though the Fund receives no cash interest payments from the
securities.
Both the Ultra Short Term Income Fund and the Balanced Fund may invest
in residual interests in REMICs. Under Treasury regulations that have not yet
been issued, but may apply retroactively, a portion of the Fund's 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 require the Fund to allocate any excess
inclusion income to its shareholders in proportion to the dividends received by
them, with the same consequences as if the shareholders held the REMIC residual
interests directly. In general, excess inclusion income (i) cannot be offset by
net operating losses, (ii) is unrelated business taxable income, thereby
potentially requiring tax-exempt entities to file a tax return and pay tax on
the income, and (iii) in the case of a foreign shareholder, will not qualify for
a reduced rate of U.S. federal withholding tax. It is anticipated that only a
small portion, if any, of the assets of the Ultra Short Term Income Fund and of
the Balanced Fund will consist of residual interests in REMICs.
Upon the sale or other disposition of shares of a Fund, or upon receipt
of a distribution in complete liquidation of a Fund, a shareholder generally
will realize a capital gain or loss which may be eligible for reduced capital
gains rates, generally depending upon the shareholder's holding period for the
shares.
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. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.
Further information relating to tax consequences is contained in the
Statement of Additional Information.
State and Local Taxes
Fund distributions may be subject to state and local taxes. Investors should
consult their own tax advisers regarding the particular tax consequences of an
investment in a Fund.
NET ASSET VALUE
The Trust determines the net asset value per share of each Fund as of 4:00 P.M.,
New York City time, by dividing the value of the Fund's net assets (i.e., the
value of its securities and other assets less its liabilities, including
expenses payable or accrued but excluding capital stock and surplus) by the
number of shares outstanding at the time the determination is made. The Trust
determines each Fund's net asset value on each Trust business day. Trust
business day for this purpose means weekdays (Monday through Friday) except
customary national business holidays and Good Friday. Purchases and redemptions
will be effected at the time of determination of net asset value next following
the receipt of any purchase or redemption order. (See "How to Purchase and
Redeem Shares.")
Portfolio securities for which market quotations are readily available
(including asset-backed securities) are valued at market value. All other
investment assets of each Fund are valued in such manner as the Board of
Trustees of the Trust in good faith deems appropriate to reflect their fair
value.
-32-
<PAGE>
GENERAL INFORMATION
Description of Shares
The Ultra Short Term Income Fund, the Balanced Fund, the Growth and Income Fund
and the Equity Fund are portfolios of Eclipse Funds, a Massachusetts business
trust established by an Agreement and Declaration of Trust dated July 30, 1986.
The Trust has an unlimited authorized number of shares of beneficial interest
which may, without shareholder approval, be divided into any number of
portfolios of shares (also sometimes referred to as classes, or series, of
shares), subject to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust's shares are entitled to one vote per share
with proportional voting for fractional shares. There are no conversion or
preemptive rights in connection with any shares of the Trust. All shares when
issued in accordance with the terms of the offering will be fully paid and
non-assessable. Shares of each Fund are redeemable at net asset value, at the
option of the shareholders.
As a Massachusetts business trust, the Trust is not required to hold
annual shareholder meetings. Procedures for calling a shareholders meeting for
the removal of Trustees of the Trust, similar to those set forth in Section
16(c) of the 1940 Act, are available to shareholders of the Trust.
Performance
From time to time, a Fund may advertise its "average annual total return" over
various periods of time. This total return figure shows the average percentage
change in value of an investment in a Fund from the beginning date of the
measuring period to the ending date of the measuring period. The figure reflects
changes in the price of a Fund's shares and assumes that any income, dividends
and/or capital gains distributions made by the Fund during the period are
reinvested in shares of the Fund. Figures will be given for recent one-, five-
and ten-year periods (when applicable), and may be given for other periods as
well (such as from commencement of the Fund's operations, or on a year-by-year
basis). When considering "average" total return figures for periods longer than
one year, investors should note that a Fund's annual total return for any one
year in the period might have been greater or less than the average for the
entire period. A Fund also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund for the specific period (again reflecting changes in the Fund's share price
and assuming reinvestment of dividends and distributions). Aggregate total
returns may be shown by means of schedules, charts or graphs, and may indicate
subtotals of the various components of total return (that is, the change in
value of initial investment, income dividends and capital gains distributions).
A Fund 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 a 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 indices (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.
From time to time, the Ultra Short Term Income Fund and the Balanced
Fund may advertise their respective 30-day "yields." The yield of the Fund
refers to the income generated by an investment in the Fund over the 30-day
period identified in the advertisement and is computed by dividing the net
investment income per share earned by the Fund during the period by the net
asset value per share on the last day of the period. This income is "annualized"
by assuming that the amount of income is generated each month over a one-year
period and is compounded semi-annually. The annualized income is then shown as a
percentage of the net asset value.
In reports or other communications to shareholders of a Fund or in
advertising materials, the Fund may compare its performance with that of other
mutual funds as listed in the rankings prepared by Lipper Analytical
-33-
<PAGE>
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications. It is important to note that yield and total
return figures are based on historical earnings and are not intended to indicate
future performance. Comparative performance information may be used from time to
time in advertising the Fund's 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 Statement of Additional
Information further describes the methods used to determine a Fund's
performance.
Custodian, Transfer Agent and Dividend Agent
Investors Fiduciary Trust Company, P.O. Box 419595, Kansas City, Missouri 64179
is custodian, transfer agent and dividend agent for the shares of the Trust.
Investors Fiduciary Trust Company does not assist in and is not responsible for
investment decisions involving assets of the Funds.
Information for Shareholders
All shareholder inquiries should be directed to Eclipse Financial Services,
Inc., P.O. Box 2196, Peachtree City, Georgia, 30269 (1-800-872-2710 outside
Georgia or 1-770-631-0414 within Georgia).
The Trust sends to all its shareholders semiannual unaudited and annual
audited reports, including a list of investment securities held.
-34-
<PAGE>
APPENDIX A
BOND RATINGS
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Unrated: When no rating has been assigned or when no rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemptions; or for other reasons.
Note: Those bonds in the Aa, A and Baa groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1 and Baa-1.
-35-
<PAGE>
Standard & Poor's Corporation
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in the highest rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
<PAGE>
ECLIPSE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
144 East 30th Street
New York, New York 10016
(800) 872-2710
In Georgia (770) 631-0414
Eclipse Funds (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's
portfolio 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. The Fund
pursues its objective by investing primarily in smaller
capitalization companies.
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, 1998 (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.............................................................. 11
DESCRIPTION OF SHARES........................................................ 11
TAXATION .................................................................... 13
PERFORMANCE.................................................................. 15
COUNSEL AND AUDITORS......................................................... 18
GENERAL INFORMATION.......................................................... 18
FINANCIAL STATEMENTS......................................................... 18
-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
-4-
<PAGE>
practices, the loan collateral must be maintained at all times in an amount
equal to at least 100% of the current market value 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, as amended ("1940 Act"), are indicated by an asterisk.
Wesley G. McCain*, 55, 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 Van Eck/Chubb Funds, Inc. and 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, a director of
Libre Investments (Cayman) Ltd. and Chairman of Millbrook Associates, Inc. and
of Eclipse Financial Services, Inc. He is a Chartered Financial Analyst and a
member of the
-5-
<PAGE>
Association for Investment Management and Research. In addition to managing
investment portfolios, Mr. McCain's experience includes economic and financial
consulting to a diversified corporate clientele.
Sigrid A. Hess*, 56, 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, 55, Trustee, is a partner of the law firm of Kirkland &
Ellis since 1997. 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, a partner of Novogrod & Kurlander from 1991 to 1995, and a partner
of Schiff, Hardin & Waite from 1995 to 1997. His address is 153 East 53nd
Street, New York, New York 10022.
Yung Wong, 59, 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 Back Bay
Funds, California Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Income Fund, Inc., Daily Tax Free Income Fund, Inc., Delafield Fund, Inc.,
Michigan Daily Tax Free Income Fund, Inc., New Jersey Daily Municipal Income
Fund, Inc., North Carolina Daily Municipal Income Fund, Inc., Reich & Tang
Equity Fund, Inc., Short Term Income Fund, Inc., and Virginia Daily Municipal
Income Fund, Inc. He is also a trustee of Florida Daily Municipal Income Fund,
Institutional Daily Income Fund and Pennsylvania Daily Municipal Income Fund.
John C. Van Eck, 82, 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 is President of the Asia Dynasty Fund, Global
Balanced Fund, and Emerging Markets Growth Fund Series of Van Eck Funds and the
Worldwide Balanced Fund and Worldwide Emerging Markets Fund Series of Van Eck
Worldwide Insurance Trust. He was Chairman of companies and investment companies
affiliated with the Van Eck Associates Corporation from 1955 to 1991. His
address is 99 Park Avenue, New York, New York 10016.
Anthony W. Polis, 54, Vice President and Treasurer, is a Vice President of
New York Life Insurance Company, a Director, Vice President and Chief Financial
Officer of NYLIFE Securities Inc. and NYLIFE Distributors, Inc. and a treasurer
of MainStay Management, 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, 51, 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, 40, 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, 37, 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, 44, 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
-6-
<PAGE>
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 Treasurer from 1997 to
present and Assistant Vice President from 1993 to present of MainStay
Management, Inc. 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, 38, Assistant Treasurer, has been Corporate Vice
President and Assistant Treasurer of MainStay Management, Inc. and Corporate
Vice President of 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.
Trustees of the Trust not affiliated with Towneley Capital Management, Inc.
or MainStay Management, 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 MainStay Management, 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, 1997.
Compensation Table
(Year Ended December 31, 1997)
<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 Funds 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.
-7-
<PAGE>
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 1940 Act) 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 the 1940 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 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, 1995, December 31, 1996 and
December 31, 1997, the Manager voluntarily waived fees of $10,021, $18,414 and
$19,113, respectively (in each case, its entire fee) for the Ultra Short Term
Income Fund.
For the fiscal years ended December 31, 1995, December 31, 1996 and
December 31, 1997, the fees payable by the Balanced Fund under the 1987 Contract
were $414,448, $672,074 and $681,825, respectively. During the years ended
December 31, 1995, December 31, 1996 and December 31, 1997, the Manager
voluntarily waived fees for the Balanced Fund totaling $160,241, $200,877 and
$153,387, respectively.
For the fiscal year ended December 31, 1995, the Manager voluntarily waived
fees of $41,173 (its entire fee) for the Growth and Income Fund. For the fiscal
years ended December 31, 1996 and December 31, 1997, the fees payable by the
Growth and Income Fund under the 1994 Contract amounted to $76,816 and $470,307,
respectively, and the Manager voluntarily waived fees totaling $57,284 and
$82,079, respectively.
For the fiscal years ended December 31, 1995, December 31, 1996 and
December 31, 1997, the fees paid by the Equity Fund under the Management
Contract were $1,860,540, $1,657,486 and $1,781,313 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 0.95%,
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
60 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 60 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.
-8-
<PAGE>
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, MainStay
Management, 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 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, MainStay Management, Inc. receives a fee,
computed daily and paid monthly in arrears, from the Manager based on the
average combined daily net asset value of the Funds ("Combined Assets") to be
calculated at the annual rate of 0.15% of the Combined Assets up to $50 million,
plus 0.12% of such Combined Assets in excess of $50 million but not in excess of
$100 million, plus 0.08% of such Combined Assets in excess of $100 million but
not in excess of $150 million; plus 0.05% of such Combined Assets in excess of
$150 million but not in excess of $750 million and 0.02% of the Combined Assets
in excess of $750 million.
The administration contract can be terminated by either party on 60 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
-9-
<PAGE>
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 Manager may also take into
account payments made by brokers effecting transactions for the Trust to other
persons on behalf of the Trust for services provided to it for which it would be
obligated to pay (such as custodial and professional fees). The allocation of
orders among brokers and the commission rates paid are reviewed periodically by
the Trust's Board of Trustees.
The Trust did not pay any brokerage commissions with respect to portfolio
transactions of the Ultra Short Term Income Fund for the fiscal years ended
December 31, 1995, December 31, 1996 and December 31, 1997.
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. For the
fiscal year ended December 31, 1997, the Trust paid a total of $116,356 in
brokerage commissions with respect to portfolio transactions of the Balanced
Fund aggregating $68,814,572. Of such amount, $58,904 in brokerage commissions
with respect to portfolio transactions aggregating $34,352,465 was placed with
brokers or dealers who provide research and investment services.
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. For the fiscal year ended December 31, 1997, the Trust paid a total
of $104,373 in brokerage commissions with respect to portfolio transactions of
the Growth and Income Fund aggregating $64,065,778. Of such amount, $50,977 in
brokerage commissions with respect to portfolio transactions aggregating
$28,010,846 was placed with brokers or dealers who provide research and
investment services.
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. For the
fiscal year ended December 31, 1997, the Trust paid a total of $418,585 in
brokerage commissions with respect to portfolio transactions of the Equity Fund
aggregating $173,861,420. Of such amount, $177,443 in brokerage commissions with
respect to portfolio transactions aggregating $62,191,087 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.
-10-
<PAGE>
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 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 60
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 February 12, 1998, there were 546,339 shares of beneficial interest of
the Ultra Short Term Income Fund outstanding; 3,847,157 shares of beneficial
interest of the Balanced Fund outstanding; 5,960,833 shares of beneficial
interest of the Growth and Income Fund outstanding; and 13,479,785 shares of
beneficial interest of the Equity Fund outstanding. On February 12, 1998, 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 the Equity Fund, less than 3% of
the outstanding shares of beneficial interest of the Balanced Fund, less than
49% of the outstanding shares of beneficial interest of the Ultra Short Term
Income Fund and less than 16% of the outstanding shares of beneficial interest
of 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 February 12, 1998:
ULTRA SHORT TERM INCOME FUND
<TABLE>
<CAPTION>
Name and Address % of Shares Nature of Ownership
<S> <C> <C>
Towneley Capital Mgmt., Inc. 30.0 Beneficial
Profit Sharing Plan
144 E. 30th Street
New York, New York 10016
Towneley Capital Mgmt., Inc. 7.0 Beneficial
144 E. 30th Street
New York, New York 10016
-11-
<PAGE>
Richard C. Dalsemer 7.0 Beneficial
2554 Santa Lucia Avenue
Carmel, California 93923-9105
W.G. McCain, Trustee 5.0 Beneficial
FBO Manastee River Rev. Tr.
144 E. 30th Street
New York, New York 10016
John C. Van Eck 5.0 Beneficial
270 River Road
Briarcliff Manor, New York 10510-2416
BALANCED FUND
Name and Address % of Shares Nature of Ownership
Mac & Co. 53.0 Beneficial
Mellon Bank NA Mutual Funds
P.O. Box 3198
Pittsburgh, Pennsylvania 15230-0320
Vernat Company 8.0 Beneficial
Trust Department
P.O. Box 800
Brattleboro, Vermont 05302-0800
GROWTH AND INCOME FUND
Name and Address % of Shares Nature of Ownership
American Express Trust Company 88.0% Beneficial
American Express Retirement Services
FBO NIBCO 401(K)
P.O. Box 534
Minnepolois, Minnesota 55440-0534
EQUITY FUND
Name and Address % of Shares Nature of Ownership
Allied Signal Savings Plan #7928 29.0 Beneficial
c/o State Street Bank & Trust Co.
Master Trust Division
P.O. Box 1992
Boston, Massachusetts 02106-1992
Delta Airlines, Inc., TCM 23.0 Beneficial
c/o Citibank NA
410 North Westshore Boulevard
Tampa, Florida 33607
Charles Schwab & Co. Inc. 5.0 Beneficial
Mutual Funds Department
101 Montgomery Street
San Francisco, California 94104-4122
</TABLE>
-12-
<PAGE>
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) 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 (c) 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.
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 at a maximum 20% or 28% capital
gains rate (depending on the Fund's holding period for the assets giving rise to
the 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.
-13-
<PAGE>
Sale of Shares
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which may be eligible for reduced capital gains
rates, 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.
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
-14-
<PAGE>
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 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;
any resulting loss and any loss from an actual disposition of such stock would
be reported as ordinary loss to the extent of any net mark-to-market gains
periodically included in income. 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.
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 Securities and Exchange Commission
("SEC"). The formula can be expressed as follows:
-15-
<PAGE>
YIELD = 2[(a-b + 1)6 - 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:
P(1 + T)n = 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
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.
-16-
<PAGE>
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, 1997 December 31, 1997
<S> <C> <C>
Average Annual
Compounded Total Return 6.21% 6.48%
Principal Only
Performance (0.30)% 0.00%
</TABLE>
<TABLE>
BALANCED FUND
---------------------------------------------------------------------------
<CAPTION>
FUND
Twelve Months Five Years Inception
Ended Ended (May 1, 1989) to
December 31, 1997 December 31, 1997 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Average Annual
Compounded Total Return 23.40% 14.94% 12.97%
Principal Only
Performance 5.48% 4.98% 4.60%
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
---------------------------------------------------------------------------
Inception
Year Ended (December 27, 1994) to
December 31, 1997 December 31, 1997
<S> <C> <C>
Average Annual
Compounded Total Return 32.46% 27.05%
Principal Only
Performance 31.65% 21.10%
</TABLE>
<TABLE>
<CAPTION>
EQUITY FUND
----------------------------------------------------------------------------------------------
Twelve Months Five Years Ten Years Inception
Ended Ended Ended (January 31, 1987) to
December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
----------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Average Annual
Compounded Total Return 33.30% 18.22% 15.15% 13.48%
Principal Only
Performance 5.35% 1.46% 4.26% 3.24%
</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.
-17-
<PAGE>
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, 1997, including notes thereto, are incorporated by reference in this
Statement of Additional Information from the Trust's Annual Report dated as of
December 31, 1997. 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).
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits.
(a) Financial Statements
Included in Prospectus; Financial Highlights.
Included in the Statement of Additional Information; All Financial
Statements are incorporated by reference to the Annual Report to
Shareholders for the year ended December 31, 1997.
Annual Report
Page Reference
--------------
Independent Auditors' Report - January 31, 1998 . . . . . . . . . [38]
Statements of Net Assets - December 31, 1997. . . . . . . . . . .
Ultra Short Term Income Fund. . . . . . . . . . . . . . . . . . [12]
Balanced Fund . . . . . . . . . . . . . . . . . . . . . . . . . [14]
Growth and Income Fund. . . . . . . . . . . . . . . . . . . . . [20]
Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . . . [23]
Statements of Operations - year ended December 31, 1997 . . . . . [28]
Statements of Changes in Net Assets - years ended . . . . . . . .
December 31, 1997 and December 31, 1996 . . . . . . . . . . . . [29]
Notes to Financial Statements . . . . . . . . . . . . . . . . . . [31]
(b) Exhibits:
(1) (a) Copy of Agreement and Declaration of Trust of the Registrant
(Exhibit 1 to Registration Statement on Form N-1A filed on
September 19, 1986 (File Nos. 33-8865 and 811-4847) and
incorporated herein by reference).
(b) Copy of First Amendment of Eclipse Financial Asset Trust
(formerly Eclipse Equity Trust) (Exhibit 1(b) to Pre-
Effective Amendment No. 1 to Registration Statement on Form
N-1A filed on January 9, 1987 (File Nos. 33-8865 and 811-
4847) and incorporated herein by reference).
(c) Form of Certificate of Designation of Eclipse Financial
Asset Trust relating to the Ultra Short Term Income Fund and
the Growth and Income Fund (Exhibit 1(c) to Post Effective
Amendment No. 12 to Registration Statement on Form N-1A
filed on October 13, 1994 (File Nos. 33-8865 and 811-4847)
and incorporated herein by reference).
(d) Copy of Second Amendment of Eclipse Funds (formerly Eclipse
Financial Asset Trust).
C-1
<PAGE>
(2) Copy of the By-laws of the Registrant (Exhibit 2 to Registration
Statement on Form N-1A filed on September 19, 1986 (File Nos. 33-
8865 and 811-4847) and incorporated herein by reference).
(5) (a) Copy of Amended Management Contract between the Registrant
and Towneley Capital Management, Inc. (Exhibit 5 to Post-
Effective Amendment No. 6 to Registration Statement on Form
N-1A filed on April 30, 1990 (File Nos. 33-8865 and 811-
4847) and incorporated herein by reference).
(b) Form of Management Contract between the Registrant and
Towneley Capital Management, Inc. relating to the Ultra
Short Term Income Fund and the Growth and Income Fund
(Exhibit 5 to Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A filed on October 13,
1994 (File Nos. 33-8865 and 811-4847) and incorporated
herein by reference).
(8) (a) Copy of Custody Agreement between the Registrant and
Investors Fiduciary Trust Company. (Exhibit 8 to Post-
Effective Amendment No. 6 to Registration Statement on Form
N-1A filed on April 30, 1990 (File Nos. 33-8865 and 811-
4847) and incorporated herein by reference).
(b) Copy of Transfer Agency Agreement between the Registrant and
Investors Fiduciary Trust Company. (Exhibit 8 to Post-
Effective Amendment No. 6 to Registration Statement on Form
N-1A filed on April 30, 1990 (File Nos. 33-8865 and 811-
4847) and incorporated herein by reference).
(9) Copy of Administration Contract between the Registrant and NYLIFE
Securities Inc. (Exhibit 9 to Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A filed on April 30, 1991 (File
Nos. 33-8865 and 811-4847) and incorporated herein by reference.)
(10) Opinion of Messrs. Seward & Kissel (Exhibit 10(a) to Pre-
Effective Amendment No. 1 to Registration Statement on Form N-1A
filed on January 9, 1987 (File Nos. 33-8865 and 811-4847) and
incorporated herein by reference).
C-2
<PAGE>
(11) (a) Opinion of Messrs. Sullivan & Worcester (Exhibit 11(a) to
Pre-Effective Amendment No. 1 to Registration Statement on
Form N-1A filed on January 9, 1987 (File Nos. 33-8865 and
811-4847) and incorporated herein by reference).
(b) Consent of Independent Auditors.
(13) Investment representation letter of initial purchaser of shares
of beneficial interest of the Registrant (Exhibit 13 to Pre-
Effective Amendment No. 1 to Registration Statement on Form N-1A
filed on January 9, 1987 (File Nos. 33-8865 and 811-4847) and
incorporated herein by reference).
(16) Schedule for computation of each performance quotation provided
in response to Item 22.
(17) Financial Data Schedules.
Other Exhibits: Powers of Attorney of Ms. Hess and Messrs. McCain,
Van Eck and Wong (Other Exhibits to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A filed on July 2, 1987 (File Nos. 33-8865
and 811-4847) and incorporated herein by reference).
ITEM 25. Persons Controlled by or under Common Control with Registrant.
No such person.
ITEM 26. Number of Holders of Securities.
The following information is furnished as of January 31, 1998:
(1) (2)
Number of Record
Title of Class Holders
--------------------------------------------- ----------------
Equity Fund Shares of Beneficial
Interest, par value $.01 per share 871
Balanced Fund Shares of Beneficial
Interest, par value $.01 per share 927
Growth and Income Fund Shares of Beneficial
Interest, par value $.01 per share 333
Ultra Short Term Income Fund Shares of
Beneficial Interest, par value $.01
per share 87
C-3
<PAGE>
ITEM 27. Indemnification
Registrant incorporates herein by reference the response to Item 27 of
the Registration Statement on Form N-1A filed with the Commission on September
19, 1986.
ITEM 28. Business and Other Connections of Investment Adviser.
The description of Towneley Capital Management, Inc. under the captions
"The Manager" in the Prospectus and "Management" in the Statement of
Additional Information constituting Parts A and B, respectively, of this
Registration Statement are incorporated herein by reference.
Wesley G. McCain, the sole director of Towneley Capital Management, Inc.,
is also a trustee of the Van Eck Funds, and the Van Eck World Wide Insurance
Trust, a director of the Van Eck/Chubb Funds, Inc. and the Peregrine Fund, and
is a general partner of Pharaoh Partners, L.P. He is also a Trustee of Libre
Group Trust, a director of Libre Investments (Cayman) Ltd. and Chairman of
Millbrook Associates, Inc. and of Eclipse Financial Services Inc.
ITEM 29. Principal Underwriters.
Not Applicable.
ITEM 30. Location of Accounts and Records.
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder are maintained at the offices of NYLIFE Securities Inc., 51 Madison
Avenue, New York, New York 10010. Additional records are maintained at the
offices of Investors Fiduciary Trust Company, P.O. Box 419595, Kansas City,
Missouri, 64179, the Registrant's custodian.
ITEM 31. Management Services.
Not applicable.
ITEM 32. Undertakings.
The Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of Trustee or Trustees when
requested to do so by the holders of at least 10% of the Registrant's
outstanding shares, and in connection with such meeting to comply with the
shareholders communications provisions of Section 16(c) of the Investment
Company Act of 1940.
The Registrant undertakes to furnish to each person to whom a
Prospectus is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 17 to its Registration Statement to be signed on its
bahalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 27th day of February, 1998.
Eclipse Funds
By: /s/ Wesley G. McCain
-------------------------------
Wesley G. McCain,
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 17 to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- --------------- -----------------
(1) Principal
Executive Officer
/s/ Wesley G. McCain President February 27, 1998
----------------------
Wesley G. McCain
(2) Principal Financial
and Accounting Officer
/s/ Anthony Polis Treasurer February 27, 1998
----------------------
Anthony Polis
(3) Majority Trustees:
/s/ Wesley G. McCain Trustee February 27, 1998
----------------------
Wesley G. McCain
Sigrid A. Hess* Trustee
John C. Van Eck* Trustee
Yung Wong* Trustee
*By: /s/ Wesley G. McCain
--------------------
Wesley G. McCain as
Attorney-in-fact
<PAGE>
Exhibits
- --------
99.1(d) Second Amendment of Declaration of Trust
99.11(b) Consent of Independent Certified Public Accountants
99.16 Schedule of Computations
99.27 Financial Data Schedules
Exhibit 1(d)
SECOND AMENDMENT
OF
ECLIPSE FUNDS
(formerly "ECLIPSE FINANCIAL ASSET TRUST")
This AMENDMENT, (the "Amendment"), made on and as of this 1st day of
December, 1997, by the Trustees whos signatures are set forth below,
W I T N E S S E T H T H A T:
- - - - - - - - - - - - - -
WHEREAS, the Agreement and Declaration of Trust (the "Declaration") of
Eclipse Equity Trust (the "Trust"), a trust with transferable shares under the
laws of Massachusetts, was signed and delivered by Bryna g. Tyson of Brookline,
Massachusetts, as settlor, and Thomas E. Weesner, of Boston, Massachusetts, as
trustee, at One Post Office Square, City of Boston, in the County of Suffolk and
Commonwealth of Massachusetts on July 30, 1986, and thereafter filed in the
offices of the Secretary of The Commonwealth of Massachusetts and the Clerk of
the City of Boston; and
WHEREAS, such Declaration was amended on October 2, 1986 to change the name
of such Trust from "Eclipse Equity Trust" to "Eclipse Financial Asset Trust"
(the "First Amendment") and the First Amendment was thereafter filed in the
offices of the Secretary of The Commonwealth of Massachusetts and the Clerk of
the City of Boston; and
WHEREAS, Section 9.3 of the Declaration provides certain procedures for the
amendment thereof; and
WHEREAS, the number of Trustees now in office is five (5); and
WHEREAS, the Trustees have determined that it is desirable and in the best
interest of the Trust and its shareholders that the Declaration be further
amended as herein provided,
NOW, THEREFORE, the undersigned, being all of the Trustees of the Trust, do
hereby consent, pursuant to Section 9.3 of the Declaration, to the amendment of
the Declaration as follows:
The name of the Trust as heretofore specified is hereby changed to
"ECLIPSE FUNDS"
-------------
and so far as may be practicable the Trustees shall
conduct Trust's activities, execute all documents
and sue or be sued under that name.
<PAGE>
IN WITNESS WHEREOF, the undersigned, being a majority of the Trustees, have
hereunto set their hands and seals, all as of the day and year first above
written.
/s/ Wesley G. McCain
-------------------------------
Wesley G. McCain, Trustee
/s/ Sigrid A. Hess
-------------------------------
Sigrid A. Hess, Trustee
/s/ John C. Novogrod
-------------------------------
John C. Novogrod, Trustee
-------------------------------
John C. Van Eck, Trustee
-------------------------------
Yung Wong, Trustee
Exhibit 11(b)
[LETTERHEAD]
CONSENT OF INDPENDENT AUDITORS
We hereby consent to the use of our report dated January 30, 1998 on the
financial statements of the Ultra Short Term Income Fund, the Balanced Fund, the
Growth and Income Fund, and the Equity Fund series of Eclipse Funds incorporated
by reference therein, in Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A as filed with the Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the
caption "Financial Highlights" and in the Statement of Additional Information
under the caption "Counsel and Auditors."
/s/ McGladrey & Pullen, LLP
------------------------------
McGladrey & Pullen, LLP
New York, New York
February 26, 1998
ECLIPSE FUNDS
Principal Only Performance Calculation
- --------------------------------------
T = Total Return
P = A hypothetical initial investment at $10.00 per share for the Ultra
Short Term Income Fund (adjusted for a 5 for 1 reverse split in
June, 1996), $15.00 per share for the Balanced Fund, $10.00 per share
for the Growth and Income Fund, and $10.02 per share for the Equity
Fund
BV = Value of a hypothetical share at beginning of relevant period
ERV = Ending redeemable value of a hypothetical share
N = Number of years
Ultra Short Term Income Fund
- ----------------------------
Year Ended December 31, 1997
T = (ERV - BV)/BV
T = ($10.00 - $10.03)/10.03 = (0.30%)
Three Years (Inception) Ended December 31, 1997
T = N(ERV/BV) - 1
T = 3.00($10.00/$10.00) - 1 = 0%
Balanced Fund
- -------------
Year Ended December 31, 1997
T = (ERV - BV)/BV
T = ($22.15 - $21.00)/$21.00 = 5.48%
Five Years Ended December 31, 1997
T = N(ERV/BV) - 1
T = 5.00($22.15/$17.37) - 1 = 4.98%
Inception to December 31, 1997
T = N(ERV/P) - 1
T = 8.67($22.15/$15.00) - 1 = 4.60%
Eclipse Growth and Income Fund
- ------------------------------
Year Ended December 31, 1997
T = (ERV - BV)/BV
T = ($17.76 - $13.49)/$13.49 = 31.65%
Three Years Ended December 31, 1997
T = N(ERV/BV) - 1
T = 3.00($17.76/$10.00) - 1 = 21.10%
<PAGE>
Eclipse Equity Fund
- -------------------
Year Ended December 31, 1997
T = (ERV - BV)/BV
T = ($14.19 - $13.47)/$13.47 = 5.35%
Five Years Ended December 31, 1997
T = N(ERV/BV) - 1
T = 5.00($14.19/$13.20) - 1 = 1.46%
Ten Years Ended December 31, 1997
T = N(ERV/BV) - 1
T = 10.00($14.19/$9.35) - 1 = 4.26%
Inception to December 31, 1997
T = N(ERV/P) - 1
T = 10.92($14.19/$10.02) - 1 = 3.24%
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802209
<NAME> ECLIPSE FUNDS
<SERIES>
<NUMBER> 1
<NAME> ECLIPSE EQUITY FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 146,432,107
<INVESTMENTS-AT-VALUE> 191,999,068
<RECEIVABLES> 1,636,828
<ASSETS-OTHER> 193,776
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 193,829,672
<PAYABLE-FOR-SECURITIES> 982,279
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,882,442
<TOTAL-LIABILITIES> 3,864,721
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,384,771
<SHARES-COMMON-STOCK> 13,390,434
<SHARES-COMMON-PRIOR> 12,671,399
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13,219
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,566,961
<NET-ASSETS> 189,964,951
<DIVIDEND-INCOME> 1,664,229
<INTEREST-INCOME> 153,310
<OTHER-INCOME> 0
<EXPENSES-NET> 2,022,959
<NET-INVESTMENT-INCOME> (205,420)
<REALIZED-GAINS-CURRENT> 39,214,295
<APPREC-INCREASE-CURRENT> 10,587,723
<NET-CHANGE-FROM-OPS> 49,596,598
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (39,161,849)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,515,115
<NUMBER-OF-SHARES-REDEEMED> (3,598,851)
<SHARES-REINVESTED> 2,802,771
<NET-CHANGE-IN-ASSETS> 19,218,208
<ACCUMULATED-NII-PRIOR> 7,178
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,781,313
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,024,367
<AVERAGE-NET-ASSETS> 178,131,275
<PER-SHARE-NAV-BEGIN> 13.470
<PER-SHARE-NII> (0.020)
<PER-SHARE-GAIN-APPREC> 4.400
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> (3.660)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.190
<EXPENSE-RATIO> 1.140
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802209
<NAME> ECLIPSE FUNDS
<SERIES>
<NUMBER> 2
<NAME> ECLIPSE BALANCED FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 74,649,869
<INVESTMENTS-AT-VALUE> 88,055,719
<RECEIVABLES> 770,180
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 88,825,899
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,579,833
<TOTAL-LIABILITIES> 4,579,833
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 70,840,216
<SHARES-COMMON-STOCK> 3,803,313
<SHARES-COMMON-PRIOR> 3,991,125
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,405,850
<NET-ASSETS> 84,246,066
<DIVIDEND-INCOME> 802,693
<INTEREST-INCOME> 2,344,887
<OTHER-INCOME> 0
<EXPENSES-NET> 716,061
<NET-INVESTMENT-INCOME> 2,431,319
<REALIZED-GAINS-CURRENT> 10,408,969
<APPREC-INCREASE-CURRENT> 5,041,636
<NET-CHANGE-FROM-OPS> 17,881,924
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,431,857)
<DISTRIBUTIONS-OF-GAINS> (10,409,079)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 449,370
<NUMBER-OF-SHARES-REDEEMED> (1,217,823)
<SHARES-REINVESTED> 580,641
<NET-CHANGE-IN-ASSETS> 420,905
<ACCUMULATED-NII-PRIOR> 278
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 681,825
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 870,527
<AVERAGE-NET-ASSETS> 85,228,184
<PER-SHARE-NAV-BEGIN> 21.000
<PER-SHARE-NII> 0.660
<PER-SHARE-GAIN-APPREC> 4.140
<PER-SHARE-DIVIDEND> (0.660)
<PER-SHARE-DISTRIBUTIONS> (2.990)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 22.150
<EXPENSE-RATIO> 0.840
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802209
<NAME> ECLIPSE FUNDS
<SERIES>
<NUMBER> 3
<NAME> ECLIPSE ULTRA SHORT TERM INCOME FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5,360,579
<INVESTMENTS-AT-VALUE> 5,349,441
<RECEIVABLES> 79,373
<ASSETS-OTHER> 4,692
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,433,506
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,302
<TOTAL-LIABILITIES> 40,302
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,472,001
<SHARES-COMMON-STOCK> 539,140
<SHARES-COMMON-PRIOR> 444,718
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (67,659)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,138)
<NET-ASSETS> 5,393,204
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 315,984
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 315,984
<REALIZED-GAINS-CURRENT> (30,742)
<APPREC-INCREASE-CURRENT> 4,876
<NET-CHANGE-FROM-OPS> 290,118
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (316,187)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 207,569
<NUMBER-OF-SHARES-REDEEMED> (142,566)
<SHARES-REINVESTED> 29,419
<NET-CHANGE-IN-ASSETS> 932,683
<ACCUMULATED-NII-PRIOR> 173
<ACCUMULATED-GAINS-PRIOR> (36,917)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,113
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,368
<AVERAGE-NET-ASSETS> 4,778,296
<PER-SHARE-NAV-BEGIN> 10.030
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> (0.030)
<PER-SHARE-DIVIDEND> (0.640)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.000
<EXPENSE-RATIO> 0.000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802209
<NAME> ECLIPSE FUNDS
<SERIES>
<NUMBER> 4
<NAME> ECLIPSE GROWTH AND INCOME FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 97,655,142
<INVESTMENTS-AT-VALUE> 109,776,042
<RECEIVABLES> 107,536
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 109,883,578
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 431,971
<TOTAL-LIABILITIES> 431,971
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 97,330,697
<SHARES-COMMON-STOCK> 6,161,320
<SHARES-COMMON-PRIOR> 721,722
<ACCUMULATED-NII-CURRENT> 10
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,120,900
<NET-ASSETS> 109,451,607
<DIVIDEND-INCOME> 608,518
<INTEREST-INCOME> 75,130
<OTHER-INCOME> 0
<EXPENSES-NET> 493,820
<NET-INVESTMENT-INCOME> 189,828
<REALIZED-GAINS-CURRENT> 456,275
<APPREC-INCREASE-CURRENT> 10,537,440
<NET-CHANGE-FROM-OPS> 11,183,543
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (190,015)
<DISTRIBUTIONS-OF-GAINS> (456,282)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,817,969
<NUMBER-OF-SHARES-REDEEMED> (415,771)
<SHARES-REINVESTED> 37,400
<NET-CHANGE-IN-ASSETS> 99,714,517
<ACCUMULATED-NII-PRIOR> 147
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 470,307
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 575,899
<AVERAGE-NET-ASSETS> 52,256,347
<PER-SHARE-NAV-BEGIN> 13,490
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 4.340
<PER-SHARE-DIVIDEND> (0.030)
<PER-SHARE-DISTRIBUTIONS> (0.070)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 17.760
<EXPENSE-RATIO> 0.940
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
