As filed electronically with the Securities and Exchange Commission on
April 27, 2000
(File Nos. 33-8865 and 811-4847)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 20 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 [x]
ECLIPSE FUNDS
(Exact Name of Registrant as Specified in Charter)
470 Park Avenue South, 16th Floor, New York, New York 10016
(Address of Principal Executive Offices)
Registrant's Telephone Number: 212.696.4130
Wesley G. McCain
c/o Towneley Capital Management, Inc.
470 Park Avenue South, 16th Floor
New York, New York 10016
(Name and Address of Agent for Service)
Copies to:
Joseph R. Fleming, Esq.
Dechert Price & Rhoads
Ten Post Office Square, South - Suite 1230
Boston, MA 02109
[ X ] It is proposed that this Post-Effective Amendment become effective
on May 1, 2000 pursuant to paragraph (b) of Rule 485.
<PAGE>
THIS POST-EFFECTIVE AMENDMENT NO. 20 TO THE REGISTRATION STATEMENT OF ECLIPSE
FUNDS (THE "REGISTRANT") IS FILED FOR THE PURPOSES OF UPDATING CERTAIN FINANCIAL
INFORMATION FOR ECLIPSE ULTRA SHORT TERM INCOME FUND, ECLIPSE BALANCED FUND,
ECLIPSE MID CAP VALUE FUND, AND ECLIPSE SMALL CAP VALUE FUND, EACH A SEPARATE
SERIES OF THE REGISTRANT (EACH A "FUND"), AND MAKING OTHER NON-MATERIAL CHANGES
TO THE FUNDS' DISCLOSURE DOCUMENTS.
<PAGE>
ECLIPSE FUNDS
CROSS REFERENCE SHEET
Post-Effective Amendment No. 20 contains the Prospectus and Statement
of Additional Information to be used with Eclipse Ultra Short Term Income Fund,
Eclipse Balanced Fund, Eclipse Mid Cap Value Fund, and Eclipse Small Cap Value
Fund, each a series of Eclipse Funds (the "Trust").
ITEMS REQUIRED BY FORM N-1A:
PART A:
ITEM 1 FRONT AND BACK COVER PAGES: Front and back cover pages.
ITEM 2 RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE:
Summary of Investments, Risks, and Performance.
ITEM 3 RISK/RETURN SUMMARY: FEE TABLE: Summary of Investments,
Risks, and Performance.
ITEM 4 INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND
RELATED RISKS: Summary of Investments, Risks, and Performance;
Additional Investments and Risks; How the Manager Determines
Which Securities to Buy and Sell.
ITEM 5 MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE: Not applicable.
ITEM 6 MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE: Management.
ITEM 7 SHAREHOLDER INFORMATION: Account Policies and Procedures;
How Fund Shares Are Priced, Retirement Plans, Distributions,
and Tax Consequences.
ITEM 8 DISTRIBUTION ARRANGEMENTS: Not Applicable.
ITEM 9 FINANCIAL HIGHLIGHTS INFORMATION: Summary of Investments,
Risks, and Performance.
PART B:
ITEM 10 COVER PAGE AND TABLE OF CONTENTS: Cover Page; Table of
Contents.
ITEM 11 FUND HISTORY: Fund History.
ITEM 12 DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS: Fund
History; Investment Policies and Risk Considerations;
Investment Restrictions.
ITEM 13 MANAGEMENT OF THE FUND: Management of the Funds.
ITEM 14 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES:
Ownership of Shares.
ITEM 15 INVESTMENT ADVISORY AND OTHER SERVICES: Investment Advisory
and Other Services; Counsel and Auditors.
ITEM 16 BROKERAGE ALLOCATION AND OTHER PRACTICES: Portfolio
Transactions and Brokerage.
ITEM 17 CAPITAL STOCK AND OTHER SECURITIES: Fund History;
Description of Shares; General Information.
ITEM 18 PURCHASE, REDEMPTION AND PRICING OF SHARES: Pricing of
Shares; Redemption of Shares; Retirement Plans.
ITEM 19 TAXATION OF THE FUND: Taxation.
ITEM 20 UNDERWRITERS: Not Applicable.
ITEM 21 CALCULATION OF PERFORMANCE DATA: Performance.
ITEM 22 FINANCIAL STATEMENTS: Financial Statements.
<PAGE>
<PAGE>
[ECLIPSE FUNDS LOGO]
PROSPECTUS
MAY 1, 2000
<PAGE>
ECLIPSE-REGISTERED TRADEMARK-
- --------------------------------------------------------------------------------
470 PARK AVENUE SOUTH, 16TH FLOOR, NEW YORK, NEW YORK 10016
PROSPECTUS
MAY 1, 2000
Eclipse Funds consists of four separate investment portfolios or Funds:
- Eclipse Ultra Short Term Income Fund
- Eclipse Balanced Fund
- Eclipse Mid Cap Value Fund
- Eclipse Small Cap Value Fund
Each Fund has its own investment objectives, policies, and risks, which are
discussed in this Prospectus.
- -Registered Trademark- Eclipse is a registered service mark of Eclipse Funds.
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
(This page has been left blank intentionally.)
- --------------------------------------------------------------------------------
2
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUMMARY OF INVESTMENTS, RISKS, AND PERFORMANCE.............. 4
ECLIPSE ULTRA SHORT TERM INCOME FUND.................... 4
ECLIPSE BALANCED FUND................................... 8
ECLIPSE MID CAP VALUE FUND.............................. 12
ECLIPSE SMALL CAP VALUE FUND............................ 16
ADDITIONAL INVESTMENTS & RISKS.............................. 20
HOW THE MANAGER DETERMINES WHICH SECURITIES TO BUY AND
SELL....................................................... 22
MANAGEMENT.................................................. 23
ACCOUNT POLICIES AND PROCEDURES............................. 24
HOW FUND SHARES ARE PRICED.................................. 28
RETIREMENT PLANS............................................ 28
DISTRIBUTIONS............................................... 28
TAX CONSEQUENCES............................................ 29
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
ECLIPSE ULTRA SHORT TERM INCOME FUND (ECUIX)
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS, RISKS AND PERFORMANCE
(SIDEBAR)
KEY TERMS
DURATION
WITH RESPECT TO A PARTICULAR BOND OR OTHER FIXED-INCOME SECURITY, DURATION IS
THE LENGTH OF TIME REQUIRED TO RECEIVE THE PRESENT VALUE OF ALL FUTURE INTEREST
AND PRINCIPAL PAYMENTS. WITH RESPECT TO THE FUND'S PORTFOLIO, DURATION MEANS THE
AVERAGE DURATION FOR ALL OF THE BONDS AND FIXED-INCOME SECURITIES, WEIGHTED BY
THEIR AMOUNTS. DURATION PROVIDES A MEASURE OF THE PORTFOLIO'S SENSITIVITY TO
INTEREST RATE CHANGES. FOR EXAMPLE, FOR EVERY 1% RISE IN INTEREST RATES, THE
PRICE OF A BOND WITH A DURATION OF 3 YEARS WOULD DECLINE 3%. GENERALLY, A
SHORTER DURATION INDICATES LESS SENSITIVITY THAN A LONGER DURATION.
INVESTMENT GRADE
INVESTMENT GRADE BONDS ARE EITHER RATED Baa OR BETTER BY MOODY'S OR BBB OR
BETTER BY S&P, OR ARE UNRATED BUT OF COMPARABLE QUALITY IN THE VIEW OF THE
FUND'S MANAGER.
(END SIDEBAR)
INVESTMENT GOAL
The Ultra Short Term Income Fund seeks a high level of current income, capital
preservation, and a relatively stable net asset value.
INVESTMENT APPROACH
The Fund pursues this goal by investing primarily in short-term, investment
grade, fixed-income securities (such as bonds) issued by U.S. corporations and
U.S. government agencies. The Fund selects bonds based primarily on their credit
quality and duration. In addition, the Fund:
- Invests in investment grade bonds.
- Keeps its maximum duration at 13 months.
- Maintains a laddered maturity schedule.
- Invests a maximum of 25% of its assets in any one industry.
- Buys securities issued by companies considered to be socially responsible.
MAIN RISKS
- Market risk - The Fund is not a money market fund; the price of its shares
will fluctuate as the securities in its portfolio change in value.
Consequently, your investment could be worth less than you paid when you
decide to sell. In other words, you could lose money on your investment.
- Interest rate risk - When interest rates rise, bond prices generally fall,
which can lower the share price of the Fund.
- Credit risk - Every bond and other fixed-income security comes with the
risk that the expected payments will not be received. Because the Fund
invests in investment grade securities, this credit risk is lower than
with funds which invest in lower grade debt securities. Still, there is
some credit risk.
WHO MIGHT INVEST IN THIS FUND?
- Investors who want a higher return with more fluctuation in share price
than a money market fund, less fluctuation in share price than a longer
term bond fund, and who are willing to risk principal. The bonds chosen
for the Fund tend to be less sensitive to interest rate changes than
lower-grade, longer-term debt instruments. This means that the Fund's
portfolio will tend to maintain more of its value during periods of rising
interest rates and to appreciate more slowly during periods of steeply
falling interest rates.
- Investors who want to stabilize their investment returns. While bonds
historically have produced lower returns than stocks, they are generally
less volatile than stocks. The Fund can provide a cushion against sharp
drops in the stock market. There is always the risk that bond prices and,
thus, share prices of the Fund can drop sharply when interest rates rise
sharply.
- Corporate working capital accounts, individual permanent emergency reserve
accounts, and temporary investments.
- --------------------------------------------------------------------------------
4
<PAGE>
ECLIPSE ULTRA SHORT TERM INCOME FUND
- --------------------------------------------------------------------------------
(SIDEBAR)
LADDERED MATURITY SCHEDULE
THE PORTFOLIO IS STRUCTURED SO THAT A CERTAIN PERCENTAGE OF THE SECURITIES WILL
MATURE EACH YEAR. THIS HELPS THE FUND MANAGE DURATION AND RISK, AND CREATES A
MORE CONSISTENT RETURN.
SOCIALLY RESPONSIBLE
SOCIALLY RESPONSIBLE INVESTING TAKES INTO CONSIDERATION ETHICAL AND MORAL, AS
WELL AS FINANCIAL, ASPECTS OF A COMPANY BEFORE MAKING AN INVESTMENT DECISION.
SOCIALLY RESPONSIBLE COMPANIES ARE CONSIDERED THOSE WHICH, AMONG OTHER CRITERIA,
ARE NOT INVOLVED IN SUCH INDUSTRIES AS DEFENSE, NUCLEAR ENERGY, ALCOHOL,
TOBACCO, AND GAMBLING.
(END SIDEBAR)
EVALUATING THE FUND'S PERFORMANCE
The following bar chart and table indicate some of the risks associated with
investing in the Fund. The bar chart shows variations in the Fund's annual
returns, and the table compares the Fund's average annual returns to several
market indexes. Remember, the Fund's past performance does not indicate its
future performance.
ANNUAL TOTAL RETURNS (percent, each year as of 12/31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 7.83%
1996 5.48%
1997 6.21%
1998 6.27%
1999 4.12%
</TABLE>
<TABLE>
<S> <C>
Best Quarter: Q2 1995, up 2.48%
Worst Quarter: Q2 1999, up 0.70%
</TABLE>
AVERAGE ANNUAL RETURNS (percent, all periods ending 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS
- ------------------------------------------------------------------------------------
<S> <C> <C>
Eclipse Ultra Short Term Income Fund(1)(2) 4.1% 6.0%
Salomon Brothers Treasury Bill Index - 1-Year(3) 4.1% 5.7%
Lipper Ultra Short Obligations Funds Average(4) 4.5% 5.5%
</TABLE>
1 The Fund's inception was 12/27/94; its annualized total return since inception
was 6.0%.
2 Net of management fee waived and expenses reimbursed by the Manager, expressed
as a percentage of average net assets, equivalent to: 1994, 21.94%; 1995,
1.67%; 1996, 1.20%; 1997, 1.22%; 1998, 1.20%; 1999, 0.93%.
3 This is the return of newly-issued one year Treasury bills auctioned monthly.
4 This is an average of funds which invest at least 65% of their assets in
investment grade debt issues, or better, and maintain a portfolio
dollar-weighted average maturity between 91 days and 365 days.
- --------------------------------------------------------------------------------
5
<PAGE>
ECLIPSE ULTRA SHORT TERM INCOME FUND
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
SHAREHOLDER FEES (fees paid directly from your investment)
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge (Load) Imposed
on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends and other
Distributions None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets)
<TABLE>
<CAPTION>
<S> <C>
Management Fees* 0.40%
Distribution (12b-1) Fees None
Other Expenses* 0.65%
--------
Total Annual Fund Operating Expenses* 1.05%
Fee Waiver 0.20%
--------
Net Annual Fund Operating Expenses 0.85%
</TABLE>
* MANAGEMENT FEES AND OPERATING EXPENSES: The Manager has contractually waived
0.20% of its Management Fee through December 31, 2001. In addition, the
Manager has voluntarily waived the rest of its Management Fee and partially
reimbursed the Fund for its Other Expenses. The Manager may discontinue all or
part of the voluntary waiver or reimbursement at any time. With these waivers
and reimbursement, for the most recent fiscal year, the Fund's actual Net
Annual Fund Operating Expenses were 0.12%.
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the costs of investing in other mutual funds. The example assumes that:
- You invest $10,000 in the Fund for the time periods indicated and then
redeem all your shares;
- Your investment has a 5% return each year;
- The Fund's operating expenses remain the same; and
- You reinvest dividends and distributions.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Although your actual costs may be different, under these
assumptions your costs would be: $87 $293 $540 $1,245
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
ECLIPSE ULTRA SHORT TERM INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). The information
for 1999 has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Eclipse Funds' financial statements, is included in the annual report,
which is available upon request. The information for years prior to 1999 was
audited by other independent accountants.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A SHARE
OUTSTANDING THROUGHOUT THE YEAR(A)
NET ASSET VALUE, BEGINNING OF YEAR $10.03 $10.00 $10.03 $10.20 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.63 0.59 0.64 0.71 0.57
Net gains or losses on securities (both
realized and unrealized) (0.22) 0.03 (0.03) (0.16) 0.20
------ ------ ------ ------ ------
Total from investment operations 0.41 0.62 0.61 0.55 0.77
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.63) (0.59) (0.64) (0.72) (0.57)
------ ------ ------ ------ ------
Total distributions (0.63) (0.59) (0.64) (0.72) (0.57)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $ 9.81 $10.03 $10.00 $10.03 $10.20
====== ====== ====== ====== ======
TOTAL RETURN 4.12% 6.27% 6.21% 5.48% 7.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $7,693 $8,721 $5,393 $4,461 $4,610
Ratios to average net assets:
Expenses+# 0.12% 0.05% 0.00% 0.00% 0.22%
Net investment income+ 6.11% 6.20% 6.61% 6.76% 6.92%
PORTFOLIO TURNOVER RATE 43.57% 36.02% 45.10% 46.82% 39.26%
</TABLE>
- --------------------------------------------------------------------------------
+ Net of management fee waived each year equivalent to 0.4% of average
net assets. Also net of expenses reimbursed, expressed as a percentage
of average net assets, equivalent to: 1999, 0.53%; 1998, 0.80%; 1997,
0.82%; 1996, 0.80%; 1995, 1.27%.
# Includes expenses paid indirectly which amounted to: 1999, 0.00%; 1998,
less than 0.01%; 1997, 0.00%; 1996, less than 0.01%; 1995, 0.04%.
(a) Per share amounts for years ended prior to December 31, 1996 have been
restated to reflect a 1 for 5 share split effective June 14, 1996.
- --------------------------------------------------------------------------------
7
<PAGE>
ECLIPSE BALANCED FUND (EBALX)
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS, RISKS AND PERFORMANCE
(SIDEBAR)
KEY TERMS
DURATION
DURATION PROVIDES A MEASURE OF THE PORTFOLIO'S SENSITIVITY TO INTEREST RATE
CHANGES. SEE DISCUSSION ON PAGE 4.
FUNDAMENTAL CHARACTERISTICS
IN EVALUATING A COMPANY, THE MANAGER CONSIDERS MARGINS, ASSET TURNS, WORKING
CAPITAL, LEVERAGE, CASH FLOW, RETURNS ON EQUITY AND ASSETS, AND MANY OTHER
VARIABLES. THESE ARE FUNDAMENTAL CHARACTERISTICS.
MID CAPITALIZATION STOCKS
THESE ARE STOCKS OF U.S. COMPANIES THAT TEND TO BE WELL KNOWN, AND TO HAVE LARGE
AMOUNTS OF STOCK OUTSTANDING, SUCH AS THOSE LISTED IN THE STANDARD & POOR'S 400
AND STANDARD & POOR'S 500 INDEXES. THE FUND CONSIDERS MID CAPITALIZATION STOCKS
TO BE THOSE WITHIN THE 80TH THROUGH 95TH PERCENTILES OF COMPANIES SORTED BY
MARKET CAPITALIZATION.
TOTAL RETURN
TOTAL RETURN MEANS A COMBINATION OF INCOME AND REALIZED AND UNREALIZED CAPITAL
GAINS.
(END SIDEBAR)
INVESTMENT GOAL
The Balanced Fund seeks high total return.
INVESTMENT APPROACH
The Fund pursues this goal by investing approximately 60% of its assets in
stocks and 40% in fixed-income securities (such as bonds) and cash equivalents.
Although this 60/40 ratio may vary, the Fund will always invest at least 25% of
its assets in fixed-income securities. By holding both stocks and bonds the Fund
seeks a balance between capital gains from stock appreciation and current income
from interest and dividends.
STOCKS
The Fund generally invests in dividend-paying, mid capitalization common stocks
that the Manager determines are value stocks.
- "Value" stocks are stocks that the Manager determines (1) have strong or
improving fundamental characteristics and (2) have been overlooked by the
marketplace so that they are undervalued or "cheap" relative to the rest
of the equity market.
- In selecting stocks, the Manager applies quantitative and statistical
methods to analyze the relative quality and value of the stocks. See HOW
THE MANAGER DETERMINES WHICH SECURITIES TO BUY AND SELL.
FIXED-INCOME SECURITIES
The Fund invests in U.S. government securities and investment grade bonds issued
by U.S. corporations. It selects fixed-income securities based on their credit
quality and duration. The fixed income portion of the portfolio:
- Has an intermediate term duration which ranges from three to five years.
- Has a laddered maturity schedule.
MAIN RISKS
- Market risk - Stocks and bonds fluctuate in price. As the Fund's holdings
fluctuate, so will the price of the Fund's shares. Consequently, your
investment could be worth less than you paid when you sell. In other
words, you could lose money on your investment.
- Interest rate risk - When interest rates rise, bond prices generally fall,
which can lower the share price of the Fund.
- Credit risk - Every bond and other fixed-income security comes with the
risk that the expected payments will not be received. Because the Fund
invests in investment grade securities, this credit risk is lower than
with funds that invest in lower grade debt instruments. Still, there is
some credit risk.
WHO MIGHT INVEST IN THIS FUND?
- Moderate risk takers who want the opportunities for gain offered by the
equity market, but who also want current income from dividend-paying
stocks and from interest payments from bonds. The bonds chosen for the
Fund tend to be less sensitive to interest rate changes than lower grade,
longer term debt instruments. This means that the Fund's bond portfolio
will tend to maintain more of its value during periods of rising interest
rates and to appreciate more slowly during periods of steeply falling
interest rates.
- Investors who want a diversified portfolio of both stocks and bonds.
- Corporate pension and profit-sharing plans, individual retirement plans,
education funds, endowments, and trusts for children.
- --------------------------------------------------------------------------------
8
<PAGE>
ECLIPSE BALANCED FUND
- --------------------------------------------------------------------------------
EVALUATING THE FUND'S PERFORMANCE
The following bar chart and table indicate some of the risks associated with
investing in the Fund. The bar chart shows variations in the Fund's annual
returns; and the table compares the Fund's average annual returns to several
market indexes. Remember, the Fund's past performance does not indicate its
future performance.
ANNUAL TOTAL RETURNS (percent, each year as of 12/31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 1.45%
1991 20.91%
1992 12.01%
1993 17.06%
1994 0.01%
1995 22.99%
1996 12.91%
1997 23.40%
1998 8.03%
1999 -0.36%
</TABLE>
<TABLE>
<S> <C>
Best Quarter: Q3 1997, up 9.94%
Worst Quarter: Q3 1999, down 8.10%
</TABLE>
AVERAGE ANNUAL RETURNS (percent, all periods ending 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eclipse Balanced Fund(1) (0.4)% 13.0% 11.5%
Merrill Lynch Corporate & Govt 1-9.99 Years Bond
Index(2) 0.5% 7.1% 7.3%
Russell Mid Cap Index(3) 18.2% 21.9% 15.9%
Standard & Poor's 500 Index(4) 21.0% 28.6% 18.2%
Lipper Balanced Fund Index(5) 9.0% 16.3% 12.3%
</TABLE>
1 Net of management fee waived and expenses reimbursed by the Manager, expressed
as a percentage of average net assets, equivalent to: 1990, 0.85%; 1991, 0.8%;
1992, 0.8%; 1993, 0.5%; 1994, 0.4%; 1995, 0.3%; 1996, 0.2%; 1997, 0.2%; 1998,
0.1%.
2 This is a market capitalization weighted index including U.S. Government and
fixed coupon domestic investment grade corporate bonds with at least $100
million par amount outstanding.
3 This index measures the performance of the smallest 800 securities in the
Russell 1000 Index, ranked by total market capitalization. It provides a
measure of the mid cap sector of the market.
4 This index is a market value weighted benchmark of common stock performance.
5 This index tracks the performance of the 30 largest balanced funds, adjusted
for the reinvestment of capital gain distributions and income dividends.
- --------------------------------------------------------------------------------
9
<PAGE>
ECLIPSE BALANCED FUND
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
SHAREHOLDER FEES (fees paid directly from your investment)
<TABLE>
<S> <C>
Maximum Sales Charge (Load) Imposed
on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends and other
Distributions None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.75%
Distribution (12b-1) Fees None
Other Expenses 0.19%
-----
Total Annual Fund Operating Expenses 0.94%
</TABLE>
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the costs of investing in other mutual funds. The example assumes that:
- You invest $10,000 in the Fund for the time periods indicated and then
redeem all your shares;
- Your investment has a 5% return each year;
- The Fund's operating expenses remain the same; and
- You reinvest dividends and distributions.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Although your actual costs may be different, under these
assumptions your costs would be: $96 $300 $520 $1,155
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
ECLIPSE BALANCED FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). The information
for 1999 has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Eclipse Funds' financial statements, is included in the annual report,
which is available upon request. The information for years prior to 1999 was
audited by other independent accountants.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A
SHARE OUTSTANDING THROUGHOUT THE YEAR
NET ASSET VALUE, BEGINNING OF YEAR $21.37 $22.15 $21.00 $20.59 $17.76
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.58 0.61 0.66 0.78 0.64
Net gains or losses on securities (both
realized and unrealized) (0.68) 1.14 4.14 1.85 3.39
------ ------ ------ ------ ------
Total from investment operations (0.10) 1.75 4.80 2.63 4.03
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.58) (0.61) (0.66) (0.78) (0.64)
Distributions from net realized gains (1.16) (1.84) (2.99) (1.44) (0.56)
Distributions in excess of net realized
gains -- (0.08) -- -- --
------ ------ ------ ------ ------
Total distributions (1.74) (2.53) (3.65) (2.22) (1.20)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $19.53 $21.37 $22.15 $21.00 $20.59
====== ====== ====== ====== ======
TOTAL RETURN (0.36)% 8.03% 23.40% 12.91% 22.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $77,169 $128,865 $84,246 $83,825 $85,922
Ratios to average net assets:
Expenses+ 0.94% 0.87% 0.84%# 0.80% 0.81%#
Net investment income+ 2.61% 2.76% 2.85% 3.56% 3.62%
PORTFOLIO TURNOVER RATE 33.17% 69.85% 46.66% 71.51% 74.72%
</TABLE>
- --------------------------------------------------------------------------------
+ Net of management fee waived by the Manager, expressed as a percentage
of average net assets: 1999, 0.0%; 1998, 0.1%; 1997, 0.2%; 1996, 0.2%;
1995, 0.3%.
# Includes expenses paid indirectly, which amounted to less than 0.01% of
average net assets.
- --------------------------------------------------------------------------------
11
<PAGE>
ECLIPSE MID CAP VALUE FUND (ECGIX)
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT GOAL
The Mid Cap Value Fund seeks high total return.
INVESTMENT APPROACH
The Fund pursues this goal by investing primarily in mid capitalization common
stocks that the Manager determines are value stocks.
- "Value" stocks are stocks that the Manager determines (1) have strong or
improving fundamental characteristics and (2) have been overlooked by the
marketplace so that they are undervalued or "cheap" relative to the rest
of the equity market.
- In selecting stocks, the Manager applies quantitative and statistical
methods to analyze the relative quality and value of the stocks. See HOW
THE MANAGER DETERMINES WHICH SECURITIES TO BUY AND SELL.
MAIN RISKS
- Market risk - Stocks fluctuate in price. As the Fund's holdings fluctuate,
so will the price of the Fund's shares. Consequently, your investment
could be worth less than you paid when you decide to sell. In other words,
you could lose money on your investment.
WHO MIGHT INVEST IN THIS FUND?
- Moderate risk takers who want the opportunities offered by the equity
markets, but also want some current income.
- Investors seeking long-term capital growth.
- Corporate pension and profit-sharing plans, individual retirement plans,
education funds, endowments, and trusts for children.
- --------------------------------------------------------------------------------
12
<PAGE>
ECLIPSE MID CAP VALUE FUND
- --------------------------------------------------------------------------------
EVALUATING THE FUND'S PERFORMANCE
The following bar chart and table indicate some of the risks associated with
investing in the Fund. The bar chart shows variations in the Fund's annual
returns; the table compares the Fund's average annual returns to several market
indexes. Remember, the Fund's past performance does not indicate its future
performance.
ANNUAL TOTAL RETURNS (percent, each year as of 12/31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 26.82%
1996 22.40%
1997 32.46%
1998 10.35%
1999 0.04%
</TABLE>
<TABLE>
<S> <C>
Best Quarter: Q1 1998, up 14.81%
Worst Quarter: Q3 1998, down 14.18%
</TABLE>
AVERAGE ANNUAL RETURNS (percent, all periods ending 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS
- ------------------------------------------------------------------------------------
<S> <C> <C>
Eclipse Mid Cap Value Fund(1)(2) 0.04% 17.8%
Russell Mid Cap Index(3) 18.2% 21.9%
Standard & Poor's 500 Index(4) 21.0% 28.6%
</TABLE>
1 The Fund's inception was 12/27/94; its total annualized return since inception
was 17.8%.
2 Net of management fee waived and expenses reimbursed by the Manager, expressed
as a percentage of average net assets, equivalent to: 1994, 44.05%; 1995,
0.9%; 1996, 0.7%; 1997, 0.2%; 1998, 0.1%; 1999, 0.0%.
3 This index measures the performance of the smallest 800 securities in the
Russell 1000 Index, ranked by total market capitalization. It provides a
measure of the mid cap sector of the market.
4 This index is a market value weighted benchmark of common stock performance.
- --------------------------------------------------------------------------------
13
<PAGE>
ECLIPSE MID CAP VALUE FUND
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
SHAREHOLDER FEES (fees paid directly from your investment)
<TABLE>
<S> <C>
Maximum Sales Charge (Load) Imposed
on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends and other
Distributions None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.90%
Distribution (12b-1) Fees None
Other Expenses 0.15%
-----
Total Annual Fund Operating Expenses 1.05%
</TABLE>
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the costs of investing in other mutual funds. The example assumes that:
- You invest $10,000 in the Fund for the time periods indicated and then
redeem all your shares;
- Your investment has a 5% return each year;
- The Fund's operating expenses remain the same; and
- You reinvest dividends and distributions.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Although your actual costs may be different, under these
assumptions your costs would be: $107 $334 $579 $1,283
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
ECLIPSE MID CAP VALUE FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). The information
for 1999 has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Eclipse Funds' financial statements, is included in the annual report,
which is available upon request. The information for years prior to 1999 was
audited by other independent accountants.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A
SHARE OUTSTANDING THROUGHOUT THE YEAR
NET ASSET VALUE, BEGINNING OF YEAR $17.73 $17.76 $13.49 $12.31 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.11 0.06 0.03 0.22 0.11
Net gains or losses on securities (both
realized and unrealized gains) (0.13) 1.76 4.34 2.54 2.57
------ ------ ------ ------ ------
Total from investment operations (0.02) 1.82 4.37 2.76 2.68
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.11) (0.06) (0.03) (0.23) (0.11)
Distributions from net realized gains (1.54) (1.79) (0.07) (1.35) (0.26)
------ ------ ------ ------ ------
Total distributions (1.65) (1.85) (0.10) (1.58) (0.37)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $16.06 $17.73 $17.76 $13.49 $12.31
====== ====== ====== ====== ======
TOTAL RETURN 0.04% 10.35% 32.46% 22.40% 26.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $83,064 $124,525 $109,452 $9,737 $7,960
Ratios to average net assets:
Expenses+ 1.05% 0.98% 0.94% 0.90% 1.00%#
Net investment income+ 0.51% 0.33% 0.36% 1.66% 1.57%
PORTFOLIO TURNOVER RATE 50.65% 80.72% 51.66% 102.24% 63.16%
</TABLE>
- --------------------------------------------------------------------------------
+ Net of management fee waived, expressed as a percentage of average net
assets, equivalent to: 1999, 0.0%; 1998, 0.1%; 1997, 0.2%; 1996, 0.7%;
1995, 0.9%. Also, net of expenses reimbursed by the Manager, expressed
as a percentage of average net assets, equivalent to: 1995, 0.05%.
# Includes expenses paid indirectly, which amounted to 0.10% of average
net assets.
- --------------------------------------------------------------------------------
15
<PAGE>
ECLIPSE SMALL CAP VALUE FUND (EEQFX)
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS, RISKS AND PERFORMANCE
(SIDEBAR)
KEY TERMS
SMALL-CAPITALIZATION STOCKS
THESE ARE U.S. STOCKS OF RELATIVELY SMALL COMPANIES THAT TEND TO HAVE FEWER
SHARES OUTSTANDING AND THUS A SMALLER TRADING VOLUME THAN LARGE-CAPITALIZATION
STOCKS. THE FUND CONSIDERS SMALL-CAPITALIZATION STOCKS TO BE THE BOTTOM 80% OF
COMPANIES SORTED BY MARKET CAPITALIZATION.
(END SIDEBAR)
INVESTMENT GOAL
The Small Cap Value Fund seeks high total return.
INVESTMENT APPROACH
The Fund pursues this goal by investing primarily in small-capitalization common
stocks that the Manager determines are value stocks.
- "Value" stocks are stocks that the Manager determines (1) have strong or
improving fundamental characteristics and (2) have been overlooked by the
marketplace so that they are undervalued or "cheap" relative to the rest
of the equity market.
- In selecting stocks, the Manager applies quantitative and statistical
methods to analyze the relative quality and price of the stocks. See HOW
THE MANAGER DETERMINES WHICH SECURITIES TO BUY AND SELL.
- The Manager seeks relatively low portfolio turnover.
MAIN RISKS
- Market risk - Stocks fluctuate in price. As the holdings fluctuate, so
will the price of the Fund's shares. Consequently, your investment could
be worth less than you paid when you decide to sell. In other words, you
could lose money on your investment.
- Small-capitalization stocks risk - Smaller capitalization stocks can be
risky. They may be more thinly traded than larger company stocks and
consequently may be more volatile. Their returns may vary significantly
from the overall stock markets.
WHO MIGHT INVEST IN THIS FUND?
- Investors with long-term investment goals of at least four to six years.
- Not market timers or short-term investors. Small-capitalization stocks
tend to be less liquid than larger-capitalization stocks. Because few
shares of a particular stock may be for sale on any given day, it can take
a long time to establish a position in a particular stock. It can also be
difficult to sell small-capitalization stocks quickly. If investors trade
excessively in Fund shares, the Manager may have to sell stock positions
before the stocks have reached their full value.
- --------------------------------------------------------------------------------
16
<PAGE>
ECLIPSE SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
EVALUATING THE FUND'S PERFORMANCE
The following bar chart and table indicate some of the risks associated with
investing in the Fund. The bar chart shows variations in the Fund's annual
returns, and the table compares the Fund's average annual returns to several
market indexes. Remember, the Fund's past performance does not indicate its
future performance.
ANNUAL TOTAL RETURNS (percent, each year as of 12/31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 -13.64%
1991 31.18%
1992 19.38%
1993 17.02%
1994 -4.74%
1995 19.69%
1996 29.87%
1997 33.30%
1998 3.40%
1999 3.05%
</TABLE>
<TABLE>
<S> <C>
Best Quarter: Q1 1991, up 19.97%
Worst Quarter: Q3 1990, down 18.80%
</TABLE>
AVERAGE ANNUAL RETURNS (percent, all periods ending 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eclipse Small Cap Value Fund 3.1% 17.2% 12.8%
Standard & Poor's Small Cap 600 Index(1) 12.4% 17.1% 13.1%
Russell 2000 Index(2) 21.3% 16.7% 13.4%
Standard & Poor's 500 Index(3) 21.0% 28.6% 18.2%
Lipper Small Cap Value Fund Index(4) 1.3% 12.2% 11.1%
</TABLE>
1 This index is a market value weighted benchmark of 600 smaller capitalization
common stocks.
2 This index tracks the smallest 2,000 companies in the Russell 3000 Index; the
Russell 3000 includes the largest 3,000 U.S. companies determined by market
capitalization.
3 This index is a market value weighted benchmark of common stock performance.
4 This index tracks the performance of the 30 largest small company value funds,
after expenses, adjusted for the reinvestment of capital gains distributions
and income dividends.
[Previously we used the Lipper Small Cap Fund Index as one of our benchmarks.
Lipper no longer provides that Index. We are now using the Lipper Small Cap
Value Index which is the most appropriate of the Lipper Small Cap Indices, and
is the one in which Lipper has placed Eclipse Small Cap Value Fund.]
- --------------------------------------------------------------------------------
17
<PAGE>
ECLIPSE SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.
SHAREHOLDER FEES (fees paid directly from your investment)
<TABLE>
<S> <C>
Maximum Sales Charge (Load) Imposed
on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends and other
Distributions None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 1.00%
Distribution (12b-1) Fees None
Other Expenses 0.18%
-----
Total Annual Fund Operating Expenses 1.18%
</TABLE>
EXAMPLE:
This example is intended to help you compare the cost of investing in the Fund
with the costs of investing in other mutual funds. The example assumes that:
- You invest $10,000 in the Fund for the time periods indicated and then
redeem all your shares;
- Your investment has a 5% return each year;
- The Fund's operating expenses remain the same; and
- You reinvest dividends and distributions.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Although your actual costs may be different, under these
assumptions your costs would be: $120 $375 $649 $1,432
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
ECLIPSE SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
This financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
information for 1999 has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Eclipse Funds' financial statements, is included in the
annual report, which is available upon request. The information for years prior
to 1999 was audited by other independent accountants.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE FOR A
SHARE OUTSTANDING THROUGHOUT THE YEAR
NET ASSET VALUE, BEGINNING OF YEAR $11.93 $14.19 $13.47 $13.56 $11.82
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.01 (0.00)* (0.02) 0.14 0.07
Net gains on securities (both realized
and unrealized gains) 0.35 0.42 4.40 3.89 2.26
------ ------ ------ ------ ------
Total from investment operations 0.36 0.42 4.38 4.03 2.33
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.01) -- -- (0.14) (0.07)
Distributions from net realized gains (0.52) (2.68) (3.66) (3.98) (0.52)
------ ------ ------ ------ ------
Total distributions (0.53) (2.68) (3.66) (4.12) (0.59)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $11.76 $11.93 $14.19 $13.47 $13.56
====== ====== ====== ====== ======
TOTAL RETURN 3.05% 3.40% 33.30% 29.87% 19.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $251,229 $201,492 $189,965 $170,747 $174,705
Ratios to average net assets:
Expenses 1.18% 1.14%# 1.14%# 1.15%# 1.14%#
Net investment income (loss) 0.05% (0.00)%** (0.12)% 0.81% 0.45%
PORTFOLIO TURNOVER RATE 56.09% 73.39% 55.47% 82.05% 74.40%
</TABLE>
- --------------------------------------------------------------------------------
* Less than one cent per share
** Less than 0.01% of average net assets
# Includes custodian fees and other expenses paid indirectly, which
amounted to less than 0.01% of average net assets for each year
indicated.
- --------------------------------------------------------------------------------
19
<PAGE>
ADDITIONAL INVESTMENTS & RISKS
- --------------------------------------------------------------------------------
(SIDEBAR)
KEY TERMS
ACTIVE TRADING
IF A FUND WERE TO REPLACE ALL OF ITS PORTFOLIO SECURITIES OVER THE COURSE OF ONE
YEAR, IT WOULD HAVE AN ANNUAL PORTFOLIO TURNOVER RATE OF 100%. A FUND WITH AN
ANNUAL PORTFOLIO TURNOVER RATE ABOVE 100% IS VIEWED AS ENGAGED IN ACTIVE
TRADING. ACTIVE TRADING MAY RESULT IN INCREASED TRANSACTIONS COSTS AND THE
REALIZATION OF GREATER NET SHORT-TERM OR LONG-TERM CAPITAL GAINS.
ASSET-BACKED SECURITIES.
ASSET-BACKED SECURITIES ARE SECURITIES WHICH ARE SUPPORTED BY RECEIVABLES SUCH
AS CREDIT CARD CHARGES AND AUTO LOANS.
FOREIGN SECURITIES
INVESTING IN FOREIGN SECURITIES MAY CREATE SPECIAL RISKS, INCLUDING THOSE
ARISING FROM POLITICAL AND ECONOMIC DEVELOPMENTS, FOREIGN EXCHANGE RATES, LESS
AVAILABLE INFORMATION, POSSIBLE IMPOSITION OF WITHHOLDING TAXES, AND LONGER
SETTLEMENT PERIODS.
ILLIQUID SECURITIES
THESE ARE SECURITIES THAT HAVE NO READY MARKET. THEY MAY BE DIFFICULT TO SELL.
LARGE-CAPITALIZATION STOCKS
THESE ARE U.S. STOCKS OF LARGE COMPANIES THAT TEND TO BE WELL KNOWN AND HAVE
LARGE AMOUNTS OF STOCK OUTSTANDING. THE FUNDS CONSIDER LARGE-CAPITALIZATION
STOCKS TO BE THE TOP 5% OF COMPANIES SORTED BY MARKET CAPITALIZATION.
LENDING ASSETS
IN A PORTFOLIO SECURITIES LENDING TRANSACTION, A FUND LENDS SECURITIES FROM ITS
PORTFOLIO TO A BROKER-DEALER (OR OTHER INSTITUTION) FOR A PERIOD OF TIME. THE
FUND RECEIVES INTEREST AND A PROMISE THAT THE SECURITIES WILL BE RETURNED ON A
FIXED DATE. THERE IS A RISK THAT THE SECURITIES MAY NOT BE RETURNED AT THE
SPECIFIED TIMES.
(END SIDEBAR)
AS MARKET AND OTHER ECONOMIC CONDITIONS WARRANT, EACH FUND MAY USE INVESTMENT
STRATEGIES TO SUPPLEMENT ITS PRINCIPAL INVESTMENT APPROACH. THIS SECTION
DISCUSSES SOME OF THOSE ADDITIONAL INVESTMENT STRATEGIES THAT EACH FUND MAY USE,
AND THEIR RISKS.
ECLIPSE ULTRA SHORT TERM INCOME FUND
- May invest up to 5% of its assets in warrants.
- May invest up to 10% of its assets in securities of foreign issuers, only
in countries the Manager considers stable and only in securities the
Manager considers high quality.
- May lend up to 20% of its assets.
- May invest up to 10% of its assets in restricted securities or illiquid
securities.
- May invest in mortgage-backed and asset-backed securities.
- May take a temporary defensive position.
ECLIPSE BALANCED FUND
- May invest up to 5% of its assets in warrants.
- May invest up to 20% of its assets in securities of foreign issuers, only
in countries the Manager considers stable and only in securities the
Manager considers high quality.
- May lend up to 20% of its assets.
- May invest up to 10% of its assets in restricted securities or illiquid
securities.
- May invest in mortgage-backed and asset-backed securities.
- May take a temporary defensive position.
- May purchase large capitalization stocks for general investment purposes
or for additional liquidity.
ECLIPSE MID CAP VALUE FUND
- May invest up to 5% of its assets in warrants.
- May invest up to 20% of its assets in securities of foreign issuers, only
in countries the Manager considers stable and only in securities the
Manager considers high quality.
- May lend up to 20% of its assets.
- May invest up to 10% of its assets in restricted securities or illiquid
securities.
- May take a temporary defensive position.
- May invest in common stock, other equity securities and in equity-related
securities, such as preferred stock (including convertible preferred
stock), and debt securities convertible into stock. The Fund normally will
invest more than 65% of its assets in common and preferred stock.
- May purchase large capitalization stocks for additional liquidity.
- May engage in active trading.
- --------------------------------------------------------------------------------
20
<PAGE>
ADDITIONAL INVESTMENTS & RISKS
- --------------------------------------------------------------------------------
(SIDEBAR)
MORTGAGE-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES ARE SECURITIES WHICH ARE SUPPORTED BY MORTGAGES. AS
MORTGAGE HOLDERS REPAY THE PRINCIPAL AND INTEREST OF THEIR MORTGAGES, INVESTORS
RECEIVE THOSE PAYMENTS. THESE SECURITIES ARE ISSUED BY SUCH ENTITIES AS FNMA
(FEDERAL NATIONAL MORTGAGE ASSOCIATION), AND OTHERS.
PREPAYMENT RISK
PREPAYMENT RISK IS A RISK ASSOCIATED WITH MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. WHEN THE UNDERLYING ASSET IS REPAID AHEAD OF SCHEDULE, THE VALUE OF
THE SECURITY TENDS TO DECLINE.
RESTRICTED SECURITIES
THESE ARE SECURITIES THAT ARE SOLD ONLY THROUGH NEGOTIATED PRIVATE TRANSACTIONS
AND NOT TO THE GENERAL PUBLIC, DUE TO CERTAIN RESTRICTIONS IMPOSED BY FEDERAL
SECURITIES LAWS. THEY CAN BE DIFFICULT TO SELL.
TEMPORARY DEFENSIVE
POSITION
IF ADVERSE BUSINESS, ECONOMIC, OR OTHER CONDITIONS ARISE, A FUND MAY TAKE A
TEMPORARY DEFENSIVE POSITION. THIS MEANS THAT THE FUND MAY INVEST TEMPORARILY,
WITHOUT LIMIT, IN CASH EQUIVALENTS. IF A FUND TAKES A TEMPORARY DEFENSIVE
POSITION, IT MAY NOT ACHIEVE ITS INVESTMENT OBJECTIVE.
WARRANTS
A WARRANT IS A SECURITY WHICH ENTITLES THE OWNER OF A BOND OR PREFERRED STOCK TO
BUY CERTAIN AMOUNTS OF COMMON STOCK AT A SPECIFIED PRICE FOR A DEFINED PERIOD.
(END SIDEBAR)
ECLIPSE SMALL CAP VALUE FUND
- May invest up to 5% of its assets in warrants.
- May invest up to 20% of its assets in securities of foreign issuers, only
in countries the Manager considers stable and only in securities the
Manager considers high quality.
- May lend up to 20% of its assets.
- May invest up to 10% of its assets in restricted securities or illiquid
securities.
- May take a temporary defensive position.
- May invest in common stock; it may also invest in other equity and equity-
related securities such as preferred stock (including convertible
preferred stock) and debt securities convertible into common stock.
- May purchase large capitalization stocks for additional liquidity.
- May engage in active trading.
- --------------------------------------------------------------------------------
21
<PAGE>
HOW THE MANAGER DETERMINES WHICH SECURITIES TO BUY AND SELL
- --------------------------------------------------------------------------------
(SIDEBAR)
KEY TERMS
UNDERVALUED
THE MANAGER EVALUATES PRICE FROM THE PERSPECTIVE OF A POTENTIAL ACQUIRER OF THE
BUSINESS. THE MEASURE OF RELATIVE VALUE IS BASED UPON RATIOS OF TOTAL MARKET
VALUE TO REVENUES, CASH FLOW, EARNINGS, AND ASSETS.
(END SIDEBAR)
DETERMINING WHICH BONDS TO BUY
The Ultra Short Term Income Fund and the Balanced Fund both invest in
fixed-income securities such as bonds. The Funds select bonds based primarily on
their credit quality and duration.
DETERMINING WHICH BONDS TO SELL
In general, a Fund will hold a bond to maturity (or call date, if applicable).
The Fund may sell the bond sooner if it falls below investment grade, or if the
Fund receives other adverse information about an issuer.
DETERMINING WHICH STOCKS TO BUY
The Balanced Fund, the Mid Cap Value Fund, and the Small Cap Value Fund all
invest in stocks. Each Fund has its own investment goal and pursues its goal in
a distinct way. The Manager decides which particular stocks to buy and which
ones to sell using a value-based approach to investing.
- The Manager purchases undervalued stocks, often referred to as "value"
stocks. Value stocks are stocks which the Manager determines (1) have
strong or improving financial accounting statement data and (2) have been
overlooked by the market and are "cheap" according to typical valuation
measures. Value stocks generally have substantial revenues and assets for
each dollar of price, but often have disappointing recent sales and
earnings growth.
- In selecting stocks, the Manager analyzes financial and operating data for
several thousand companies on a weekly basis, searching for companies with
improving operating characteristics but which are still cheap or
inexpensive relative to the rest of the equity market. The Manager
evaluates how company operations have performed over time and how they
have performed compared to other companies (both competitors and companies
in other industries). The Manager uses proprietary quantitative and
statistical methods to analyze fundamental data.
- To avoid concentration in a specific industry, which increases risk, the
Manager invests a maximum of 4% of a Fund's net assets in any one company
and 25% in any one industry, and it consistently re-balances its
investments.
- Under normal conditions, the Manager keeps each Fund fully invested rather
than taking temporary cash positions.
- The Manager does not attempt to time the market or to hedge returns.
- The Manager avoids initial public offerings because the companies' often
brief operating histories do not provide sufficient data to adequately
evaluate their operating trends under the Manager's proprietary analytical
methods.
- The Manager does not visit companies to avoid becoming biased by personal
impressions of the companies' management.
- The Manager does not project earnings or use earnings forecast data of
either the companies or of Wall Street analysts. Only historical, publicly
available annual and quarterly financial statistical data are used in the
analysis.
- The Manager does not use options, futures or derivatives.
DETERMINING WHICH STOCKS TO SELL
The Manager will sell a stock if its price objective has been met, if better
opportunities are identified, or if it determines the initial investment
expectations are not being met.
- --------------------------------------------------------------------------------
22
<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------
TOWNELEY CAPITAL MANAGEMENT, INC. (Towneley or the Manager), founded in 1971 by
Wesley G. McCain, serves as investment advisor for each Eclipse Fund. Towneley
currently manages $1 billion in assets including those of the Eclipse Funds.
Towneley's clients also include corporations, foundations, colleges, hospitals,
individuals, retirement plans, and hedge funds. Towneley is located at 470 Park
Avenue South, 16th Floor, New York, New York 10016. On behalf of the Funds,
Towneley provides an investment program, makes the day-to-day investment
decisions, executes purchase and sale orders, and generally manages each Fund's
investments.
In exchange for these services, each Fund pays the Manager an annual fee
calculated as a percentage of average daily net assets. Eclipse Ultra Short Term
Income Fund paid the Manager a management fee equivalent to 0.00% of its average
net assets for the fiscal year ending December 31, 1999. Under its management
contract with the Fund, the Manager is entitled to a fee at the rate of 0.40%,
of which the Manager has contractually waived 0.20% through December 31, 2001
and is currently voluntarily waiving the remaining 0.20%. The Manager may
discontinue all or part of the voluntary waiver at any time. Eclipse Balanced
Fund paid the Manager a management fee equivalent to 0.75% of its average net
assets for the fiscal year ending December 31, 1999. Eclipse Mid Cap Value Fund
paid the Manager a management fee equivalent to 0.90% of its average net assets
for the fiscal year ending December 31, 1999. Eclipse Small Cap Value Fund paid
the Manager a management fee equivalent to 1.00% of its average net assets for
the fiscal year ending December 31, 1999.
MR. MCCAIN, the founder and chairman of Towneley, directs the investment process
and co-manages the Funds. Mr. McCain holds a BBA from the University of
Michigan, an MBA from Columbia University, and an MA and PhD from Stanford
University; he is a Chartered Financial Analyst (CFA). He was formerly on the
faculty of the Graduate School of Business of Columbia University.
JOAN SABELLA, who has been with Towneley since 1978, co-manages Eclipse Ultra
Short Term Income Fund and Eclipse Balanced Fund with Mr. McCain. She is a Vice
President of Towneley and is Director of Fixed Income Research and Trading. She
holds a BBA from Baruch College and is a Certified Financial Planner (CFP).
KATHY O'CONNOR, who has been with Towneley since 1987, co-manages Eclipse Mid
Cap Value Fund and Eclipse Small Cap Value Fund with Mr. McCain. She is a Vice
President of Towneley. She holds a BBA from the University of Massachusetts, an
MBA from Babson College, and is a Chartered Financial Analyst (CFA).
- --------------------------------------------------------------------------------
23
<PAGE>
ACCOUNT POLICIES AND PROCEDURES
- --------------------------------------------------------------------------------
THE TRANSFER AGENT
All transactions in Fund shares are made through National Financial Data
Services (NFDS), transfer agent of the Funds, which accepts orders directly for
purchases, redemptions, and exchanges. The Funds do not issue share
certificates. Instead, NFDS maintains an account for each shareholder of record,
in which that shareholder's purchases, redemptions, exchanges, and distributions
are reflected.
OPENING AN ACCOUNT
There is no sales charge. There is a minimum initial investment of $1,000, a
$500 minimum initial investment for gift accounts, and a $50 per month minimum
for automatic investment accounts. Individuals, institutions, fiduciaries, and
retirement plans may invest in the Funds. Generally, if an order in proper form
is received by NFDS before 4:00 P.M., Eastern Time on a Fund's business day,
shares will be issued that day; and if it is received after 4:00 P.M. the shares
will be issued on the Fund's next business day. Each Fund reserves the right to
reject any subscription for its shares. To open an account please:
First, obtain an application.
<TABLE>
<S> <C>
Write or call ECLIPSE FINANCIAL SERVICES, INC.
P.O. Box 2196
Peachtree City, Georgia 30269
800.872.2710
Or download the application from our WWW.ECLIPSEFUND.COM
website
</TABLE>
Second, send funds by mail, bank wire, or automatic investment:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
MAIL You may open an account by mail. Mail a check payable to
"Eclipse Funds" with your completed application to:
Eclipse Funds
c/o National Financial Data Services
P.O. Box 219595
Kansas City, MO 64121
Checks are accepted subject to collection at full face value
in U.S. currency.
Third-party checks are not accepted.
- ----------------------------------------------------------------------------
</TABLE>
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24
<PAGE>
ACCOUNT POLICIES AND PROCEDURES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
BANK WIRE You may open an account using the wire system for
transmittal of money among banks by following three steps.
1. Telephone Eclipse Financial Services, Inc. at
800.872.2710 to obtain your new account number.
2. Instruct a member commercial bank to wire funds to:
National Financial Data Services
ABA 101003621
for further credit to a/c #7512554
Re: -Name of Fund-
Account Number
___________________________________________
Account Name
_____________________________________________
Social Security #/Tax ID
#________________________________
Your bank may charge your account for wiring the money. The
Funds do not charge for receipt. If you are planning to wire
funds, inform your bank early in the day so that the wire
transfer can be completed the same day.
3. Return your completed application to:
Eclipse Funds
c/o National Financial Data Services
P.O. Box 219595
Kansas City, MO 64121
- ----------------------------------------------------------------------------
AUTOMATIC You may also establish an automatic investment account. By
INVESTMENT completing the automatic investment authorization form
included with the application and sending it with a voided
check, you can direct a Fund to charge your bank account for
the monthly purchase of shares. Your account will be charged
on or about the 20th day of each month and you will receive
a confirmation of every transaction.
- ----------------------------------------------------------------------------
</TABLE>
OPENING A GIFT ACCOUNT
A Gift Account is an investment in any of the Eclipse Funds that you open for
someone special to you. This is a special way to mark a birthday, graduation,
wedding, or other occasion. You can add to the account whenever you wish, but
the person you honor with the gift (or that person's custodian) is the only one
who can make an exchange or sale.
INVESTING IN MORE THAN ONE ECLIPSE FUND
When you make your initial investment, you must state on the application the
Fund(s) in which you are investing. You may divide your investment among the
Funds in any manner you choose, as long as you meet the applicable initial
investment minimum for each Fund. You will have a separate account in each Fund
in which you invest.
MAKING ADDITIONAL PURCHASES
There is no sales charge. Once you have made an initial investment in a Fund,
you may make additional purchases of that Fund's shares for any amount.
Purchases can be made by mail, bank wire, or automatic investment.
- --------------------------------------------------------------------------------
25
<PAGE>
ACCOUNT POLICIES AND PROCEDURES
- --------------------------------------------------------------------------------
REDEEMING YOUR SHARES
You may redeem shares in a Fund by mail, telephone, or systematic withdrawal. To
redeem your shares, please:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
MAIL Send a letter to:
Eclipse Funds
c/o National Financial Data Services
P.O. Box 219595
Kansas City, MO 64121
The letter must:
- Name the Fund whose shares you want to redeem
- State the dollar amount or number of shares you want to
redeem
- Provide your account number
- Be signed in exactly the same way the account is
registered (if there is more than one registered owner,
signed by all); and
- Have signatures that are properly guaranteed. A signature
can be guaranteed by a member of or a participant in a
signature guarantee program that is a bank, broker-dealer,
municipal securities broker and dealer, government
securities broker and dealer, credit union, a member firm
of a national securities exchange, registered securities
association or clearing agency or savings association. A
signature guarantee by a savings bank or notary public
will not be accepted. Depending upon the circumstances,
additional information may be requested. For example,
corporations, administrators, executors, personal
representatives, trustees, or custodians may be required
to evidence their authority for making the redemption
request.
- ----------------------------------------------------------------------------
TELEPHONE This is the easiest way to redeem but you must have selected
this option in the original application or in a subsequent
signature-guaranteed letter.
Call 800.525.0687. Before placing the call, you should
consider the following:
- In order to redeem your shares by telephone, you must have
previously elected this option.
- The money will be mailed to your address on record with
Eclipse Funds.
- Each Fund reserves the right to limit the number of
telephone redemptions.
- Telephone redemption requests may not be modified or
canceled.
- A Fund will not be liable for following telephone
instructions that it reasonably believes to be genuine. To
confirm the genuineness of telephone instructions, a Fund
may record all telephone instructions, and it may require
some form of personal identification prior to acting upon
them. In addition, a Fund will send written confirmations
of all redemptions made by telephone. Assuming reasonable
procedures such as the above have been followed, a Fund
will not be liable for any loss, cost, or expense for
acting upon an investor's telephone instructions or for
any unauthorized telephone redemption. Consequently, the
Fund shareholder will bear this risk.
- During periods of substantial economic or market changes,
you may have difficulty reaching a Fund to make a
telephone redemption. If you cannot reach a Fund by
telephone, you may still redeem by mail.
- ----------------------------------------------------------------------------
SYSTEMATIC If you own shares in a Fund worth at least $10,000 at the
WITHDRAWAL current NAV, you may open a Systematic Withdrawal Account
from which a fixed sum will be paid to you at regular
intervals. For additional information, please contact
Eclipse Financial Services, Inc. at the address and
telephone number on the back cover.
- ----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
ACCOUNT POLICIES AND PROCEDURES
- --------------------------------------------------------------------------------
RECEIVING YOUR MONEY
Your redemption request will be processed promptly, and a check normally will be
mailed within 3 business days after NFDS has received your request. The check
will be mailed to your address of record.
Although redemption payments generally will be made in cash, under certain
circumstances, payments may be made in portfolio securities.
The Fund will not mail redemption proceeds for an account until any purchases
made by check have cleared; this may take up to 15 days. Consequently, if you
purchase shares in a Fund by check and submit a redemption request shortly
thereafter, it could take somewhat longer than normal to process your request.
In addition, your redemption request may take longer to process if Eclipse Funds
have temporarily suspended the right of redemption. A Fund may suspend the right
of redemption and postpone the date of payment for more than 7 days during any
period when (1) trading on the NYSE is restricted or the NYSE is closed, other
than customary weekend and holiday closings, (2) the SEC has by order permitted
such suspension, or (3) an emergency, as defined by rules of the SEC, exists
making disposal of portfolio investments or determination of the value of the
net assets of the Funds not reasonably practicable.
MAKING AN EXCHANGE
As a shareholder in a Fund, you are entitled to exchange some or all of those
shares for shares in any other Eclipse Fund. There is no charge for making an
exchange. If you are exchanging shares between two Funds in which you already
hold shares, the minimum exchange amount is $500. If you are making an exchange
for shares in a Fund in which you are not already invested, you must exchange
enough shares to satisfy the new Fund's initial investment minimum. Each Fund
reserves the right to reject any exchange request and to modify or discontinue
the exchange privilege at any time. You may make an exchange by mail or
telephone:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
MAIL Please send written instructions to:
Eclipse Funds
c/o National Financial Data Services
P.O. Box 219595
Kansas City, MO 64121
- ----------------------------------------------------------------------------
TELEPHONE Please call: 800.525.0687
- ----------------------------------------------------------------------------
</TABLE>
MAINTAINING AN ACCOUNT MINIMUM
If you have an account with an initial investment minimum (other than an IRA)
and your account balance falls below $500 as a result of sales you have made, a
Fund has the right to redeem the rest of your shares. This right allows the Fund
to reduce expenses. You would be given at least 30 days' notice of the date for
the scheduled redemption and would be able to purchase enough shares to meet the
initial investment minimum to prevent the redemption.
PURCHASING OR REDEEMING SHARES THROUGH A BROKER-DEALER
In addition to opening an account with the Funds directly, a shareholder may
open an account through brokerage firms or other financial institutions,
including the Manager and its affiliates. Those institutions may charge a fee
for purchasing or redeeming shares by telephone. The $1,000 minimum initial
investment described above may not apply; however, those institutions may impose
their own minimum investment amounts.
- --------------------------------------------------------------------------------
27
<PAGE>
HOW FUND SHARES ARE PRICED
- --------------------------------------------------------------------------------
Your price for purchases, redemptions, and exchanges will be the net asset value
per share (NAV) next calculated after your order is placed. NAV generally is
calculated at the close of regular trading in the New York Stock Exchange (NYSE)
(normally 4:00 P.M. Eastern time) every day the NYSE is open for trading. NAV
depends upon the value of a Fund's investments. Each Fund's investments
generally are valued at their market price, or where market prices are not
available on a particular day, at fair value. Fair value prices are calculated
according to methods determined in good faith by each Fund's Board of Trustees.
NAV is calculated as follows:
<TABLE>
<CAPTION>
Fund assets - Fund liabilities
- ------------------------------
<S> <C>
Number of shares outstanding = Net Asset Value
</TABLE>
RETIREMENT PLANS
- --------------------------------------------------------------------------------
You may invest in any of the Eclipse Funds through certain retirement plans.
There are several different types of retirement plans, including, for example,
Traditional IRAs, Roth IRAs, and SIMPLE Plans. Each type has its own rules
concerning qualifications, contributions, distributions, and tax consequences.
Additional information is contained in the SAI. Also, as always, you may write
or telephone Eclipse Funds for more information.
DISTRIBUTIONS
- --------------------------------------------------------------------------------
WHEN DISTRIBUTIONS ARE MADE
Each Fund generally makes two types of distributions to its shareholders:
- Dividend distributions from its net investment income and net short-term
capital gains.
- Capital gains distributions of any net capital gains that it has realized.
Any dividend distributions are normally paid once each quarter for the Ultra
Short Term Income Fund and the Balanced Fund, and once a year for the Mid Cap
Value Fund and the Small Cap Value Fund. Any capital gains distributions are
normally made once per year.
HOW DISTRIBUTIONS ARE MADE
You may have distributions paid in cash or reinvested in shares either by
selecting the appropriate option on your account application or by notifying
Eclipse Funds in writing. Instructions must be received by the Fund before the
record date of a distribution. Distributions will be reinvested in additional
shares of a Fund unless you instruct the Fund otherwise. The Funds do not impose
sales charges for dividend reinvestments.
- --------------------------------------------------------------------------------
28
<PAGE>
TAX CONSEQUENCES
- --------------------------------------------------------------------------------
FEDERAL TAX CONSEQUENCES OF HOLDING SHARES
Each Fund will distribute most of its net investment income, net short-term
capital gains and net capital gains to its shareholders. Although the Fund will
not be taxed on amounts it distributes, you may be taxed. Distributions are
taxable to most shareholders.
A particular distribution generally will be taxable as either ordinary income
(if made out of a Fund's ordinary income or net short-term capital gains) or
long-term capital gains (if made out of a Fund's net capital gains). The tax
status of any particular distribution will be the same for all of the Fund's
shareholders. It does not matter how long you have been in the Fund or whether
you reinvest or receive cash for your distributions. For example, if a Fund
designates a particular distribution as a long-term capital gains distribution,
it will be taxable to you at your long-term capital gains rate.
If a portion of a Fund's income consists of dividends paid by U.S. corporations,
a portion of the dividends paid by the Fund may be eligible for the
dividends-received deduction for corporate shareholders.
If a Fund declares a dividend in October, November, or December of a year and
distributes the dividend in January of the next year, you may be taxed as if you
received it in the year when declared rather than when received.
If you hold shares through a tax-deferred account, such as a retirement plan,
income and gains will not be taxable each year. Instead, the taxable portion of
amounts you hold in a tax-deferred account generally will be subject to tax only
once you receive a distribution from that tax-deferred account.
Each year, you will receive a statement from the Funds detailing the tax status
of any distributions for that year.
FEDERAL TAX CONSEQUENCES OF REDEEMING OR EXCHANGING SHARES
If you sell or redeem shares, you will generally realize a capital gain or loss,
which will be long-term or short-term, generally depending upon how long you
held those shares. If you exchange shares, you may be treated as if you sold
them.
STATE AND LOCAL TAXES
In addition to federal tax, distributions may be subject to state and local
taxes.
BACKUP WITHHOLDING
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax; it
is a way in which the IRS ensures it will collect taxes otherwise due. Any
amounts withheld may be credited against your U.S. federal income tax liability.
EVERYONE'S TAX SITUATION IS UNIQUE
Because everyone's tax situation is unique, you should always consult your tax
professional about federal, state, and local tax consequences to you. This tax
discussion is meant only as a general summary.
- --------------------------------------------------------------------------------
29
<PAGE>
ADDITIONAL INFORMATION on Eclipse Funds is available from the following sources:
ANNUAL AND SEMI-ANNUAL REPORTS
In the annual and semi-annual reports, you will find additional information
about the Funds' investments. In the annual report, you will also find a
discussion of the market conditions and investment strategies that significantly
affected each Fund's performance during its past fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
In the SAI, you will find additional information about the Funds. The SAI is
incorporated into this prospectus by reference, which means it is legally
considered part of this prospectus.
TO OBTAIN FREE ADDITIONAL INFORMATION OR MAKE SHAREHOLDER INQUIRIES:
TO REQUEST THE SAI OR THE FUNDS' ANNUAL OR SEMI-ANNUAL REPORTS WITHOUT
CHARGE, OR TO MAKE SHAREHOLDER INQUIRIES, PLEASE CALL OR WRITE TO:
Eclipse Financial Services, Inc.
P.O. Box 2196
Peachtree City, GA 30269
800.872.2710
VISIT ECLIPSE FUNDS WEBSITE:
www.eclipsefund.com
TO OBTAIN INFORMATION FROM THE SEC:
VISIT THE SEC PUBLIC REFERENCE ROOM:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
800.942.8090
Information about the Funds (including the SAI) is available at the SEC's
Public Reference Room. You may review the information for free, but will pay
a fee for copying. Please call the above number for details. Also, you may
request information from the Public Reference Room by mail or telephone.
Fund information is also available on the EDGAR database on the SEC's
Internet site at http://www.sec.gov, which may be obtained by electronic
request at the following e-mail address: [email protected], or by writing
the SEC's Public Reference Room at the above address. You will be charged a
fee for any reports or SAIs that are sent to you.
VISIT THE SEC WEBSITE:
www.sec.gov
[ECLIPSE FUNDS LOGO]
Investment Company Act
File No. 811-4847
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30
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
MANAGER
Towneley Capital Management, Inc.
470 Park Avenue South
16th Floor
New York, New York 10016
www.towneley.com
SHAREHOLDER
SERVICING AGENT
Eclipse Financial Services, Inc.
P.O. Box 2196
Peachtree City, Georgia 30269
Telephone: 800.872.2710
CUSTODIAN
State Street
801 Pennsylvania Avenue
Kansas City, Missouri 64105
TRANSFER AGENT
National Financial Data Services
330 West 9th Street
Kansas City, Missouri 64105
WEBSITE
Visit our website at www.eclipsefund.com
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
ECLIPSE FUNDS
470 Park Avenue South
16th Floor
New York, New York 10016
Eclipse Funds (the "Trust") is a no-load, open-end, diversified management
investment company. The Trust currently has four investment portfolios
(individually a "Fund" and collectively the "Funds"):
Eclipse Ultra Short Term Income Fund
Eclipse Balanced Fund
Eclipse Mid Cap Value Fund
Eclipse Small Cap Value Fund
Towneley Capital Management, Inc. (the "Manager" or "Towneley") serves as
investment manager to the Trust.
This Statement of Additional Information ("SAI") is not a prospectus and is
authorized for distribution solely when preceded or accompanied by the Trust's
prospectus relating to the Funds dated May 1, 2000 (the "Prospectus"). This SAI
contains additional and more detailed information than that set forth in the
Prospectus. This SAI should be read in conjunction with the Prospectus.
Additional copies of the Prospectus may be obtained without charge by writing or
telephoning:
Eclipse Financial Services, Inc.
P.O. Box 2196
Peachtree City, GA 30269
800.872.2710
770.631.0414
The financial statements contained in the Trust's Annual Report dated as of
December 31, 1999 are incorporated by reference into and are hereby deemed to be
part of this SAI.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY...................................................................3
INVESTMENT POLICIES AND RISK CONSIDERATIONS....................................3
Ultra Short Term Income Fund..........................................3
Balanced Fund.........................................................5
Mid Cap Value Fund....................................................6
Small Cap Value Fund..................................................7
Ultra Short Term Income Fund and Balanced Fund........................7
Investment Policies and Risks Applicable to All Funds................15
INVESTMENT RESTRICTIONS.......................................................17
MANAGEMENT OF THE FUNDS.......................................................19
INVESTMENT ADVISORY AND OTHER SERVICES........................................22
Transfer Agent, Dividend Disbursing Agent and Custodian..............25
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................25
DESCRIPTION OF SHARES.........................................................26
PRICING OF SHARES.............................................................26
REDEMPTION OF SHARES..........................................................27
OWNERSHIP OF SHARES...........................................................28
RETIREMENT PLANS..............................................................30
TAXATION .....................................................................31
PERFORMANCE...................................................................34
COUNSEL AND AUDITORS..........................................................38
GENERAL INFORMATION...........................................................38
FINANCIAL STATEMENTS..........................................................38
APPENDIX A....................................................................39
<PAGE>
FUND HISTORY
The Trust, a Massachusetts business trust established by an Agreement and
Declaration of Trust dated July 30, 1986, is a no-load, open-end, diversified
management investment company commonly known as a "mutual fund." 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"),
and each such portfolio may have different investment objectives and policies.
Shares of the Trust are currently offered in four separate portfolios: Eclipse
Ultra Short Term Income Fund, Eclipse Balanced Fund, Eclipse Mid Cap Value Fund
(formerly Eclipse Growth and Income Fund), and Eclipse Small Cap Value Fund
(formerly Eclipse Equity Fund). Because the Trust offers multiple portfolios, it
is commonly referred to as a "series fund." Each Fund is a separate pool of
assets constituting, in effect, a separate fund with its own investment
objective and policies.
INVESTMENT POLICIES AND RISK CONSIDERATIONS
Descriptions in this SAI of a particular investment practice or technique in
which a Fund may engage or a financial instrument which a Fund may purchase are
meant to describe the spectrum of investments that the Manager, in its
discretion, might, but is not required to, use in managing a Fund's portfolio
assets. The Manager may, in its discretion, at any time employ such practice,
technique or instrument for one or more Funds but not for all Funds advised by
it. Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible, or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
a Fund but, to the extent employed, could from time to time have a material
impact on that Fund's performance.
Investment Policies and Risks Applicable to the Ultra Short Term Income Fund
Investment Objective
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 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. Investors in the Fund are therefore
subject to a greater risk of loss of principal than shareholders of a money
market fund. The Fund's investment objective is deemed a fundamental policy of
the Fund.
Investment Approach
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. It is the Fund's policy that the effective weighted average maturity
and duration of its portfolio not exceed 36 months. Under normal market
conditions, the duration of the Fund's portfolio will not exceed 13 months. 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." 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 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 "Investment Policies
and Risks 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.
Foreign Issuer Obligations
The Fund may invest in fixed-income securities of non-U.S. issuers rated AA
or better by Standard & Poor's Corporation ("S&P") and Aa2 or better by
Moody's Investors Service, Inc. ("Moody's").
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.
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.
Investment Policies and Risks Applicable to the Balanced Fund
Investment Objective
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.
Investment Approach
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 senior 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 in shares of mid- to
large-capitalization companies. The Fund ranks all U.S. publicly traded
companies based on market capitalization. The 5% with the highest market
capitalization are considered large. The next 15% are considered
mid-capitalization companies and the balance of the universe is considered
small. As the stock market and the economic environment change, companies once
considered large-capitalization may become mid- or small-capitalization or vice
versa. 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. Estimated
relative intrinsic value is a ranking of the ratio of the market value to
economic book value. The economic book value, or intrinsic value, is a valuation
concept that attempts to adjust historical financial data to reflect true
economic worth.
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 and Risks
Applicable to the Ultra Short Term Income Fund and the Balanced Fund."
Investment Policies and Risks Applicable to the Mid Cap Value Fund
Investment Objective
The investment objective of the Mid Cap Value 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
(see "Balanced Fund" above), 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.
Investment Approach
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. The Fund will invest primarily in shares
of mid-capitalization companies, and may also invest in shares of larger
capitalization companies for additional liquidity. The Fund ranks all U.S.
publicly traded companies based on market capitalization. The 5% with the
highest market capitalization are considered large. The next 15% are considered
mid-capitalization companies and the balance of the universe is considered
small. As the stock market and the economic environment change, companies once
considered large-capitalization may become mid- or small-capitalization or vice
versa.
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 and Risks Applicable to All
Funds--Foreign Securities.")
The Fund will neither 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 Trust's Board of Trustees (the "Board")
without shareholder approval.
Investment Policies and Risks Applicable to the Small Cap Value Fund
Investment Objective
The investment objective of the Small Cap Value 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.
Investment Approach
In selecting the issues to be placed in the Fund, approximately equal weight
will be given to estimated relative intrinsic value (see "Investment Policies
and Risks Applicable to Balanced Fund" above), 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 total 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. 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 and Risks Applicable to All
Funds--Foreign Securities.")
The Fund will neither 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 without shareholder approval.
Investment Policies and Risks Applicable to the Ultra Short Term Income Fund and
the Balanced Fund
The Ultra Short Term Income Fund and the Balanced Fund may also invest in the
following types of securities.
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 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 (the "SEC") 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 and Risks Applicable to All Funds--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
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 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 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 - General
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.")
Government Guaranteed Mortgage Pass-Through Securities - General
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 (i) GNMA, (ii) FNMA and (iii) FHLMC. 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 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.
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.
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.
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.
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.
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.
Mortgage-Backed and Asset Backed 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 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.
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.
Investment Policies and Risks Applicable to All Funds
Each Fund may also invest in the following types of securities.
Illiquid and Restricted Securities
The Balanced Fund and the Small Cap Value 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 of 1933, as
amended (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, 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 in good faith
deems appropriate to reflect their fair market value.
The Ultra Short Term Income Fund and the Mid Cap Value 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 in good faith deems appropriate to
reflect their fair market value.
Warrants
Each Fund may invest in warrants which entitle the holder to buy equity
securities at a specific price for a specific period of time. Warrants may be
considered more speculative than certain other types of investments in that they
do not entitle a holder to dividends or voting rights with respect to the
securities which may be purchased nor do they represent any right in the assets
of the issuing company. Also, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to the expiration date. A Fund will not, however,
purchase any warrant if, as a result of such purchase, 5% or more of the Fund's
total assets would be invested in warrants. Included in that amount, but not to
exceed 2% of the value of the Fund's total assets, may be warrants which are not
listed on the New York or American Stock Exchange. Warrants acquired by a Fund
in units or attached to securities may be deemed to be without value.
Lending of Portfolio Securities
Each Fund may from time to time lend securities from its portfolio to brokers or
dealers, banks or other institutional investors and receive collateral in the
form of cash or United States Government obligations. Under each Fund's current
practices, the loan collateral must be maintained at all times in an amount
equal to at least 100% of the current market value 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. 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.
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 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.
Portfolio Turnover
Portfolio turnover rate is the percentage of a Fund's investments (either its
entire portfolio or a component thereof, such as an equity component or
fixed-income component) that is replaced in one fiscal year. For example, a fund
that replaces its entire portfolio in one year would have a portfolio turnover
rate of 100%. The annual portfolio turnover rates of the Ultra Short Term Income
Fund, the equity component of the Balanced Fund, the Mid Cap Value Fund and the
Small Cap Value Fund may exceed 100%. (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
following table shows that, for each of the last two years, the portfolio
turnover rate for each Fund was well below 100%:
1999 1998
---- ----
Ultra Short Term Income Fund 43.57% 36.02%
Balanced Fund 33.17% 69.85%
Mid Cap Value Fund 50.65% 80.72%
Small Cap Value Fund 56.09% 73.39%
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.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions which may not be changed
without the approval of the Fund's shareholders, by a vote of a majority of its
outstanding voting shares, as defined in the 1940 Act. Briefly, these
restrictions provide that a Fund may not:
1. Issue senior securities, except insofar as the Fund may be
deemed to have issued a senior security in connection with
any permitted borrowing;
2. Borrow money except for (i) the short-term credits from banks
referred to in paragraph 9 below 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;
3. 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 Small Cap
Value 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 Mid Cap Value Fund) more than 10% of the
value of its net assets in illiquid securities and repurchase
agreements of more than seven days' duration;
4. 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;
5. Invest more than 25% of the value of its total assets in any
one industry;
6. Purchase or otherwise acquire interests in real estate
(including, in the case of the Ultra Short Term Income Fund
and the Mid Cap Value 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;
7. Purchase or acquire commodities or commodity contracts;
8. 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
herein.
9. 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;
10. Mortgage, pledge or hypothecate any of its assets, except
as may be necessary in connection with permissible borrowings
mentioned in paragraph 2 above;
11. 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;
12. Sell securities short or invest in puts, calls, straddles,
spreads or combinations thereof;
13. Participate on a joint, or a joint and several, basis in any
securities trading account; or
14. 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 without shareholder
approval. None of the Funds may purchase or retain the securities of any issuer
if the Trust's officers, directors or trustees ("Trustees") 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. Neither
the Balanced Fund nor the Small Cap Value 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 Mid Cap
Value 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).
If a percentage restriction described in this section 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.
MANAGEMENT OF THE FUNDS
Responsibilities of Board of Trustees
The Trust's Board of Trustees is responsible for the overall management of the
Trust, including general supervision and review of each Fund's investment
activities. The Board, in turn, elects the officers who are responsible for
administering the Trust's day-to-day operations.
Background of 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 1940 Act are indicated by
an asterisk.
<TABLE>
<CAPTION>
=============================== =================== ==================================================================
Name, Age, Address Position(s) Held Principal Occupation(s) During Past Five Years
With Fund
=============================== =================== ==================================================================
<S> <C> <C>
Wesley G. McCain* (57) Trustee, Chairman Mr. McCain is the founder and has been Chairman of Towneley
470 Park Avenue South of the Board and Capital Management, Inc. since 1971. Mr. McCain is a trustee of
16th Floor President the Van Eck Funds and the Van Eck World Wide Insurance Trust,
New York, NY 10016 and a director of the Van Eck/Chubb Funds, Inc. He is a member
of Pacific Exchange Stock and Options. He was a director of the
Peregrine Fund from 1995 to 1998. He 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., a member of Pharaoh
Partners (Cayman) LDC, and Chairman of Millbrook Associates,
Inc. and of Eclipse Financial Services, Inc. He is a Chartered
Financial Analyst and a member of the 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* (58) Trustee, Ms. Hess is a Vice President of Towneley Capital Management,
470 Park Avenue South 16th Executive Vice Inc., where she has been employed since 1977.
Floor President and
New York, NY 10016 Secretary
John C. Novogrod (57) Trustee Mr. Novogrod is a partner of the law firm of Kirkland & Ellis
153 East 53rd Street since 1997. Prior to this, he was a partner of Novogrod &
New York, NY 10022 Kurlander from 1991 to 1995, and a partner of Schiff, Hardin &
Waite from 1995 to 1997.
Yung Wong (61) Trustee Mr. Wong is a Director of Back Bay Funds, Inc., a California
29 Alden Road Daily Tax Free Income Fund, Inc., Connecticut Daily Tax Free
Greenwich, CT 06831 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., Virginia Daily Municipal Income
Fund, Inc., Georgia Daily Municipal Income Fund, Inc., and PAX
World Money Market Fund, Inc. He is also a trustee of Florida
Daily Municipal Income Fund, Institutional Daily Income Fund,
and Pennsylvania Daily Municipal Income Fund. Dr. Wong was a
Director of Shaw Investment Management (H.K.) Limited (an asset
management and direct investment firm) from 1994 to 1995.
John C. Van Eck (84) Trustee Mr. Van Eck is Chairman of the Board and President of Van Eck
99 Park Avenue Funds and Van Eck Worldwide Insurance Trust (mutual funds). He
New York, NY 10016 is Chairman of Van Eck Associates Corporation, an investment
adviser, and Van Eck Securities Corporation, a broker dealer.
John A. Flanagan (53) Vice President, Mr. Flanagan has been Vice President, New York Life Insurance
51 Madison Avenue Treasurer Company, 1999 to the present; Vice President and Chief Financial
New York, NY 10010 Officer, The MainStay Funds, 1999 to the present; Treasurer,
Principal Financial and Accounting Officer, MainStay
Institutional Funds Inc., 1999 to the present ; Treasurer,
MainStay VP Series Fund, Inc., 1999 to the present; Director,
Vice President and Chief Financial Officer, MainStay Management
LLC, 1999 to the present; Director, Vice President and Chief
Financial Officer, MainStay Shareholder Services LLC, 1999 to
the present; Senior Vice President and Chief Financial Officer,
NYLIFE Distributors Inc., 1999 to the present; Treasurer, Strong
Funds and Senior Vice President, Strong Capital Management,
Inc., 1997 to 1998; Partner, predecessor to
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand, L.L.P.).
Sylvia McCormick (53) 21 Vice President Ms. McCormick has been employed by Towneley Capital Management,
Eastbrook Bend Inc. since 1973. She is President of Eclipse Financial
Suite 119 Services, Inc., the Trust's shareholder servicing agent.
Peachtree City, GA 30269
Antoinette B. Cirillo (46) Assistant Ms. Cirillo has been Assistant Treasurer of The MainStay Funds
51 Madison Avenue Treasurer from 1992 to the present, Assistant Treasurer of MainStay
New York, NY 10010 Institutional Funds, Inc. from 1992 to the present, and
Assistant Treasurer of MainStay VP Series Fund,
Inc. from 1993 to the present, and was Corporate
Vice President, Assistant Vice President, Director and
Senior Accountant of Mutual Fund Accounting Operations,
NYLIFE Distributors, Inc. and MainStay Management LLP
from 1988 to 1999. She held various positions in New
York Life Insurance Company from 1987 to 1988.
Patrick J. Farrell (40) Assistant Mr. Farrell has been Vice President, Corporate Vice President
51 Madison Avenue Treasurer and Assistant Treasurer of NYLIFE Distributors, Inc. and
New York, NY 10010 MainStay Management LLP 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.
</TABLE>
Code of Ethics
A code of ethics has been adopted pursuant to Rule 17j-1 under the 1940 Act
("Code of Ethics") that is designed to identify and address certain conflicts of
interest between personal investment activities and the interests of the
Manager's investment advisory clients such as the Funds. The Code of Ethics,
which applies to portfolio managers, investment personnel and others involved in
the investment advisory process, permits personal securities transactions,
including securities that may be purchased or held by the Funds, subject to
certain restrictions. For instance, the Code imposes time periods during which
personal transactions may not be made in certain securities, and requires, among
other things, the submission of duplicate broker confirmations and quarterly
reporting of securities transactions.
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================================
Compensation Table
(Year Ended December 31, 1999)
Pension or
Aggregate Retirement Benefits Estimated Annual Total Compensation
Compensation from Accrued As Part of Benefits Upon From Trust Paid to
Name of Trustee the Trust* Trust Expenses Retirement 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>
* Trustees of the Trust not affiliated with Towneley Capital Management, Inc. or
MainStay Management LLC receive from the Trust an annual retainer of $2,000 and
a fee of $750 for each Board 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 LLC 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, 1999.
INVESTMENT ADVISORY AND OTHER SERVICES
Manager
Pursuant to a Management Contract for the Balanced Fund and the Small Cap Value
Fund, dated January 7, 1987 (the "1987 Contract"), and one for the Ultra Short
Term Income Fund and the Mid Cap Value 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
investments. Mr. McCain, chairman and Trustee of the Trust and chairman and
director of the Manager, may be deemed a "controlling person" of the Manager on
the basis of his ownership of the Manager's stock.
The 1987 Contract was approved on December 8, 1986, and the 1994 Contract was
approved on December 20, 1994, in each case by the Board, 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 Small Cap Value Fund approved the 1987 Contract on January 7, 1987, and the
sole initial shareholder of each of the Mid Cap Value 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 Board,
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 Small
Cap Value 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 Board 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 Manager provides persons satisfactory to the
Board 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, accrued daily and payable monthly, 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 0.75%
Mid Cap Value Fund 0.90%
Small Cap Value Fund 1.00%
Under the Management Contracts, for the fiscal year ended December 31, 1999, the
Manager received a fee from the Balanced Fund equal to 0.75% of the Fund's
average daily net assets, from the Mid Cap Value Fund equal to 0.90% of the
Fund's average daily net assets, and from the Small Cap Value Fund equal to
1.00% of the Fund's average daily net assets. Under the 1994 Contract, for the
fiscal year ended December 31, 1999, 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, of which the Manager contractually waived 0.20% and voluntarily
waived the remainder of its fee. The Manager has contractually agreed to waive
fees of 0.20% of the Ultra Short Term Income Fund's average daily net assets
through December 31, 2001, and is currently voluntarily waiving the remaining
0.20%. The Manager may discontinue all or part of the voluntary waiver at any
time.
For the fiscal years ended December 31, 1997, December 31, 1998 and December 31,
1999, the Manager voluntarily waived fees of $19,113, $27,820 and $32,290,
respectively, (in each case, its entire fee) for the Ultra Short Term Income
Fund.
For the fiscal years ended December 31, 1997, December 31, 1998 and December 31,
1999, the fees payable by the Balanced Fund under the 1987 Contract were
$681,825, $779,459, and $673,283, respectively. During the years ended December
31, 1997 and December 31, 1998, the Manager voluntarily waived fees for the
Balanced Fund totaling $153,387 and $136,778, respectively.
For the fiscal years ended December 31, 1997, December 31, 1998 and December 31,
1999, the fees payable by the Mid Cap Value Fund under the 1994 Contract were
$470,307, $1,038,228, and $918,205, respectively, and the Manager voluntarily
waived fees totaling $82,079 in 1997 and $70,826 in 1998.
For the fiscal years ended December 31, 1997, December 31, 1998 and December 31,
1999, the fees paid by the Small Cap Value Fund under the Management Contract
were $1,781,313, $1,978,256, and $2,183,901, respectively.
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.
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, or by the Manager on 60
days' written notice, and will automatically terminate in the event of its
assignment. The Management Contracts provide that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Manager, or of
reckless disregard of its obligations thereunder, the Manager shall not be
liable for any action or failure to act in accordance with its duties
thereunder.
If the Manager ceases to act as the Trust's investment adviser, or, in any
event, if the Manager requests in writing, the Trust will take action to change
its name to a name not including the word "Eclipse."
Administrator
The Trust has retained MainStay Management LLC (the "Administrator"), 300
Interpace Parkway, Building A, Parsippany, NJ 07054, 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. The
Administrator is a wholly-owned subsidiary of New York Life Insurance Company.
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 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 SEC 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, the Administrator 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. In addition, for any Fund, the Manager shall pay the Administrator
a monthly fee of $625 until such time as the Fund's average daily net asset
value during the preceding month exceeded $20 million. For the fiscal years
ended December 31, 1997, December 31, 1998, and December 31, 1999, the
Administrator received $302,223, $316,284, and $316,631, respectively, from the
Manager for the Funds.
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.
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.
Transfer Agent, Dividend Disbursing Agent and Custodian
National Financial Data Services (NFDS), 330 West 9th Street, Kansas City,
Missouri 64105 is the transfer agent, dividend disbursing agent, and registrar
for the shares of the Funds. NFDS performs data processing and administrative
services necessary for the maintenance of shareholder accounts. State Street,
801 Pennsylvania Avenue, Kansas City, Missouri 64105, is the custodian for
assets held by the Funds.
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 U.S. securities exchanges are subject
to negotiation between the Manager and the broker.
In the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of each Fund, the Manager is required
to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of the Funds or the Manager's
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for a Fund may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, and the services furnished by such
brokers may be used by the Manager in providing investment management for a
Fund. Commission rates in the United States are established pursuant to
negotiations with the broker based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers for particular
transactions than might be charged if a different broker had been selected on
occasions when, in the Manager's opinion, this policy furthers the objective of
obtaining the most favorable price and execution. In addition, the Manager is
authorized to pay higher commissions on brokerage transactions for a Fund to
brokers in order to secure research and investment services described above,
subject to review by the Board from time to time as to the extent and
continuation of this practice. Subject to the primary consideration of obtaining
the most favorable price and efficient execution for each Fund, the Manager may
place portfolio transactions with brokers or dealers which have been
instrumental in the sale of a Fund's shares. In addition, subject to the primary
consideration of obtaining the most favorable price and efficient execution for
each Fund, the Manager may take into account payments made by brokers effecting
transactions for the Trust to other persons on behalf of the Trust for services
provides to the Trust which the Trust would otherwise be obligated to pay (such
as custodial, shareholder servicing, and professional fees). The allocation of
orders among brokers and the commission rates paid are reviewed periodically by
the Board.
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, 1997, December 31, 1998, and December 31, 1999.
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. For the fiscal year ended December 31, 1998, the
Trust paid a total of $134,156 in brokerage commissions with respect to
portfolio transactions of the Balanced Fund aggregating $92,974,609. For the
fiscal year ended December 31, 1999, the Trust paid a total of $109,621 in
brokerage commissions with respect to portfolio transactions of the Balanced
Fund aggregating $71,514,631. Of such amount, $100,071 in brokerage commissions
with respect to portfolio transactions aggregating $63,129,553 was placed with
brokers or dealers who provide research and investment services.
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 Mid Cap
Value Fund aggregating $64,065,778. For the fiscal year ended December 31, 1998,
the Trust paid a total of $232,585 in brokerage commissions with respect to
portfolio transactions of the Mid Cap Value Fund aggregating $155,541,175. For
the fiscal year ended December 31, 1999, the Trust paid a total of $190,381 in
brokerage commissions with respect to portfolio transactions of the Mid Cap
Value Fund aggregating $126,202,558. Of such amount, $162,736 in brokerage
commissions with respect to portfolio transactions aggregating $109,601,735 was
placed with brokers or dealers who provide research and investment services.
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 Small Cap
Value Fund aggregating $173,861,420. For the fiscal year ended December 31,
1998, the Trust paid a total of $455,544 in brokerage commissions with respect
to portfolio transactions of the Small Cap Value Fund aggregating $213,001,442.
For the fiscal year ended December 31, 1999, the Trust paid a total of $494,637
in brokerage commissions with respect to portfolio transactions of the Small Cap
Value Fund aggregating $193,773,912. Of such amount, $189,811 in brokerage
commissions with respect to portfolio transactions aggregating $72,575,150 was
placed with brokers or dealers who provide research and investment services.
DESCRIPTION OF SHARES
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
that portfolio, the shareholder will receive the then current net asset value of
that portfolio represented by the redeemed shares.
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 Fund's
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.
PRICING OF SHARES
Fund Shares are priced at the net asset value per share next determined after
the purchase, redemption or exchange order is placed.
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 regular trading on 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 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 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 purchased 60
days before maturity are stated at amortized cost if their term to maturity at
purchase was 60 days or less. All other investment assets, including restricted
and not readily marketable securities, are valued in such manner as the Board 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.
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either in cash
or in portfolio securities (selected at the discretion of the Board and taken at
their value used in determining the net asset value per share of the particular
Fund described under "Net Asset Value"), or partly in cash and partly in
portfolio securities. Payments will be made in cash unless the Board determines
that making cash payments would be 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 SEC pursuant to which the Trust
will only effect a redemption in portfolio securities if 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 would be made.
OWNERSHIP OF SHARES
Management Ownership
On April 1, 2000, there were 686,328 shares of beneficial interest of the Ultra
Short Term Income Fund outstanding; 3,550,682 shares of beneficial interest of
the Balanced Fund outstanding; 4,340,833 shares of beneficial interest of the
Mid Cap Value Fund outstanding; and 17,951,649 shares of beneficial interest of
the Small Cap Value Fund outstanding. On April 1, 2000, 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 Small Cap Value Fund, less than 1% of the
outstanding shares of beneficial interest of the Balanced Fund, less than 1% of
the outstanding shares of beneficial interest of the Ultra Short Term Income
Fund, and less than 1% of the outstanding shares of beneficial interest of the
Mid Cap Value Fund.
Five Percent Owners
A person who owns beneficially, either directly or through one or more
controlled companies, more than 25% of the voting securities of a Fund is
considered a "control person" of that Fund; a person who owns of record or who
is known by the Fund to own beneficially 5% or more of any class of a Fund's
shares is considered a "principal holder" of that Fund. The following table
provides 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
Mid Cap Value Fund, and the Small Cap Value Fund as of March 31, 2000.
<TABLE>
<CAPTION>
===================================================================================================================================
===================================================================================================================================
Name and Address % of Shares Nature of Ownership
Ultra Short Term Income Fund
<S> <C> <C>
FTC & Co. 47.33 Beneficial
DataLynx House Account
P.O. Box 173136
Denver, CO 80217-3136
Hopke Partnership TCM 17.88 Beneficial
c/o Rochdale Securities Corp.
570 Lexington Avenue Floor 8
New York, NY 10022-6837
Richard C. Dalsemer 5.95 Record
2554 Santa Lucia Avenue
Carmel, CA 93923-9105
Balanced Fund
Mellon Bank as Trustee 56.13 Beneficial
Agent Omnibus
135 Santilli Way
Everett, MA 02149-1906
FTC & Co. 12.18 Beneficial
DataLynx House Account
P.O. Box 173136
Denver, CO 80217-3136
Vernat Company 9.34 Beneficial
Trust Department
P.O. Box 800
Brattleboro, VT 05302-0800
Mid Cap Value Fund
American Express Trust Company 73.28 Beneficial
American Express Retirement Services
FBO NIBCO 401(K)
ATTN Chris Hunt N10/996
P.O. Box 534
Minneapolis, MN 55440-0534
FTC & Co. 7.78 Beneficial
DataLynx House Account
PO Box 2052
Jersey City, NJ 07303-2052
Small Cap Value Fund
National Financial Services Corp 23.78 Beneficial
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
Charles Schwab & Co. Inc. 20.16 Beneficial
Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
The Northern Trust Company TTEE 5.80 Beneficial
Guident Corporation
FBD Master Investment Trust U/A 3-22-99
P.O. Box 92-956
Chicago, IL 60675-2956
Boston Safe Deposit & Trust TTEE 6.32 Beneficial
TWA Pilots DAP/401(k) Plan U/A Date 10-1-92
Attn: Jennifer Lacoria
135 Santilli Highway
Everett, MA. 02149-1906
</TABLE>
RETIREMENT PLANS
Under recent federal tax law, there are several types of individual retirement
accounts ("IRAs") available to individuals for tax deferred retirement savings,
including "traditional" IRAs established under Code Section 408, 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 of
those types of IRAs.
Traditional IRAs
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and the time when distributions
must commence. An individual who has not reached age 70 1/2 and who receives
compensation or earned income is eligible to contribute to a traditional IRA.
Any eligible individual may contribute up to the lesser of $2,000 or 100% of his
or her compensation or earned income to an IRA each year. The contribution will
be fully deductible if neither the individual nor his or her spouse is an active
participant in an employer's retirement plan. If an individual is (or has a
spouse who is) an active participant in an employer-sponsored retirement plan,
the amount, if any, of IRA contributions that are deductible by such an
individual is determined by the individual's (or, if married filing jointly, the
couple's) adjusted gross income for the year. Even if an individual's
contributions to an IRA for a taxable year are not deductible, the individual
nonetheless may make nondeductible contributions up to the $2,000, or 100% of
earned income limit for that year. A higher-earning spouse also may contribute
up to $2,000 per year to the lower-earning spouse's IRA, whether or not the
lower-earning spouse has compensation or earned income, as long as the spouses'
joint earned income is at least equal to the combined amount of the spouses' IRA
contributions for the year. In addition, an individual may roll over to an IRA
distributions from certain qualified retirement plans, IRAs, or Code Section
403(b) plans that qualify as eligible rollover distributions, that are rolled
over directly or within 60 days of the distribution, and that satisfy the other
requirements applicable to rollovers. 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 individual reaches age 59 1/2, and must
commence shortly after age 70 1/2. Withdrawals taken before the individual
reaches age 59 1/2 will be subject to a penalty tax unless an exception applies;
some of those exceptions include distributions upon death or disability,
distributions paid over the individual's life or life expectancy, amounts used
to pay for certain deductible medical expenses, qualified higher education
expenses or first-time homebuyer expenses, and amounts withdrawn by certain
unemployed individuals not in excess of amounts paid for certain health
insurance premiums. Failure to take withdrawals after the individual reaches age
70 1/2 also may subject the individual to a penalty tax.
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.
Contributions to a Roth IRA are not deductible, but withdrawals that meet
certain requirements are not subject to federal income tax. Contributions to a
Roth IRA may be made even after the individual for whom the account is
maintained has reached age 70 1/2. 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). An individual whose adjusted gross income exceeds the maximum
phase-out amount cannot contribute to a Roth IRA. No distributions are required
to be taken prior to the death of the original account holder. An individual
whose income is less than $100,000 (who is not married filing separately) may
roll over amounts from an existing traditional IRA into a Roth IRA. However, the
individual will be subject to federal income tax on the taxable amount that is
rolled over from the traditional IRA.
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's shareholder
servicing agent: Eclipse Financial Services, Inc., P.O. Box 2196, Peachtree
City, GA 30269, 800.872.2710 or 770.631.0414.
TAXATION
The following is a general discussion of certain tax rules thought to be
applicable with respect to the Fund. It is merely a summary and is not an
exhaustive discussion of all possible situations or of all potentially
applicable taxes. Accordingly, shareholders and prospective shareholders should
consult a competent tax adviser about the tax consequences to them of investing
in the Fund.
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under Subchapter M of 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; and (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).
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 that it distributes to shareholders, if at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest
and the excess of any net short-term capital gains over net long-term capital
losses) each taxable year is distributed. 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.
If for any taxable year a Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of earnings and
profits, and would be eligible for the dividends received deduction for
corporations, in the case of corporate shareholders.
Distributions
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 Mid Cap Value Fund and the Small Cap Value 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.
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 Mid Cap Value Fund and the Small Cap Value Fund
may consist of dividends paid by U.S. corporations, a portion of the dividends
paid by each such Fund is expected to be eligible for the corporate
dividends-received deduction. Distributions of net capital gains, if any,
designated as capital gain dividends are taxable as long-term capital gains,
regardless of how long the shareholder has held the Fund's shares, and are not
eligible for the dividends-received deduction. Shareholders receiving
distributions in the form of additional shares, rather than cash, generally will
have a cost basis in each such share equal to the net asset value of a share of
the relevant Fund on the reinvestment date. Shareholders will be notified
annually as to the U.S. federal tax status of distributions, and shareholders
receiving distributions in the form of additional shares will receive a report
as to the net asset value of those shares.
Currency Fluctuations - "Section 988" Gains or Losses
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
Sale of Shares
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which may be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Investments in Real Estate Mortgage Investment Conduits
The Ultra Short Term Income Fund and the Balanced Fund may invest in residual
interests in 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, namely,
foreign corporations which may be classified under the Code as passive foreign
investment companies ("PFICs"), 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. In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute investment-type assets,
or 75% or more of its gross income is investment-type income. If the Fund
receives a so-called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of the excess distribution, whether
or not the corresponding income is distributed by the Fund to shareholders. In
general, under the PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which a Fund held the PFIC shares. The
Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. The Fund may elect to mark to market its PFIC shares, resulting in the
shares 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 the shares would be
reported as ordinary loss to the extent of any net gains reported in prior
years. Under another election that currently is available in some circumstances,
the Fund generally would be required to include in its gross income its share of
the earnings of a PFIC on a current basis, regardless of whether distributions
are received from the PFIC in a given year.
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, quotations of the Funds' "performance" may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures are described below along with explanations
of how they are calculated.
General
From time to time, a Fund may quote its "average annual total return" over
various periods of time in advertisements or in reports and other communications
to shareholders. 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 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.
Yield
A Fund's 30-day yield figure is calculated according to a formula prescribed by
the SEC. The formula can be expressed as follows:
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
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 Mid Cap Value Fund and the Small Cap Value Fund.
<TABLE>
<CAPTION>
Ultra Short Term Income Fund
Inception
Year Ended (December 27, 1994)
December 31, 1999 to December 31, 1999
<S> <C> <C>
Average Annual Compounded 4.12% 5.97%
Total Return
Principal Only Performance (2.19)% (0.38)%
</TABLE>
<TABLE>
<CAPTION>
Balanced Fund
Year Ended Five Years Ended Ten Years Ended
December 31, 1999 December 31, 1999 December 31, 1999
<S> <C> <C> <C>
Average Annual Compounded (0.36)% 13.03% 11.49%
Total Return
Principal Only Performance (8.61)% 1.92% 2.50%
</TABLE>
<TABLE>
<CAPTION>
Mid Cap Value Fund
Inception
Year Ended (December 27, 1994)
December 31, 1999 to December 31, 1999
<S> <C> <C>
Average Annual Compounded 0.04% 17.80%
Total Return
Principal Only Performance (9.42)% 9.94%
</TABLE>
<TABLE>
<CAPTION>
Small Cap Value Fund
Year Ended Five Years Ended Ten Years Ended
December 31, 1999 December 31, 1999 December 31, 1999
<S> <C> <C> <C>
Average Annual Compounded 3.05% 17.16% 12.78%
Total Return
Principal Only Performance (1.42)% (0.10)% 0.80%
</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. 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. An investor's principal invested in a Fund is not fixed and will
fluctuate in response to prevailing market conditions.
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of the Trust are passed
upon by Dechert Price & Rhoads, Ten Post Office Square South, Boston, MA 02109.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, independent 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, 1999,
including notes thereto, are incorporated by reference in this Statement of
Additional Information from the Trust's Annual Report dated as of December 31,
1999. The Trust will furnish, without charge, a copy of such Annual Report to
Shareholders on request. All such requests should be directed to Fund's
shareholder servicing agent: Eclipse Financial Services, Inc., P.O. Box 2196,
Peachtree City, GA 30269, 800.872.2710 or 770.631.0414.
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.
<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>
PART C OTHER INFORMATION
Item 23 Exhibits:
(a) Articles of Incorporation:
(1) 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).
(2) 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).
(3) 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).
(4) Copy of Second Amendment of Eclipse Funds (formerly Eclipse
Financial Asset Trust) (Exhibit (b)(1)(d) to Post Effective
Amendment No. 17 to Registration Statement on Form N-1A
filed on February 27, 1998 (File Nos. 33-8865 and 811-4847)
and incorporated herein by reference).
(5) Copy of Certificate of Redesignation of Series relating to
Mid Cap Value Fund (formerly Growth and Income Fund) and
Small Cap Value Fund (formerly Equity Fund) (Exhibit (a)(5)
to Post Effective Amendment No. 19 to Registration Statement
on Form N-1A filed on April 30, 1999 (File Nos. 33-8865 and
811-4847) and incorporated herein by reference).
(b) By-laws:
(1) 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).
(c) Instruments Defining the Rights of Security Holders:
Not Applicable.
(d) Investment Advisory Contracts:
(1) 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).
(2) 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).
(3) Copy of Amendment to Management Contract dated January 7,
1987, as amended between the Registrant and Towneley Capital
Management, Inc. relating to the Eclipse Ultra Short Term
Income Fund, Eclipse Balanced Fund, Eclipse Mid Cap Value
Fund (formerly Growth and Income Fund), and Eclipse Small
Cap Value Fund (formerly Equity Fund) (Exhibit (d)(3) to
Post-Effective Amendment No. 19 to Registration Statement on
Form N-1A filed on April 30, 1999 (File Nos. 33-8865 and
811-4847) and incorporated herein by reference).
(e) Underwriting Contracts:
Not Applicable.
(f) Bonus or Profit Sharing Contracts:
Not Applicable.
(g) Custodian Agreements:
(1) 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).
(h) Other Material Contracts:
(1) 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).
(2) 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).
(3) Copy of Fee Waiver Between Registrant and Towneley Capital
Management, Inc., with respect to Eclipse Ultra Short Term
Income Fund (Exhibit (h)(3) to Post-Effective Amendment No.
19 to Registration Statement on Form N-1A filed on April 30,
1999 (File Nos. 33-8865 and 811-4847) and incorporated
herein by reference).
(i) Legal Opinions
(1) 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).
(2) 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).
(3) Opinion and Consent of Dechert Price & Rhoads, filed with
this Post-Effective Amendment No. 20.
(j) Other Opinions:
(1)(a) Consent and Report of PricewaterhouseCoopers LLP,
Independent Accountants, filed with this Post-Effective
Amendment No. 20.
(1)(b) Consent and Report of McGladrey & Pullen, LLP,
Registrant's former independent accountants, filed with this
Post-Effective Amendment No. 20.
(k) Omitted Financial Statements:
Not Applicable.
(l) Initial Capital Agreements:
(1) 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).
(m) Rule 12B-1 Plan:
Not Applicable.
(n) Rule 18F-3 Plan:
Not Applicable.
(p) Code of Ethics:
(1) Copy of Code of Ethics of Registrant and Towneley Capital
Management, Inc. filed with this Post-Effective Amendment
No. 20.
Item 24 Persons Controlled by or Under Common Control with the Funds:
No such person.
Item 25 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 26 Business and Other Connections of the Investment Adviser:
The descriptions of Towneley Capital Management, Inc. under the
captions "Management" in the Prospectus and "Manager" 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. He
was a director of the Peregrine Fund from 1995 to 1998. He 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., a member of
Pharaoh Partners (Cayman) LDC, and Chairman of Millbrook Associates,
Inc. and of Eclipse Financial Services, Inc.
Item 27 Principal Underwriters:
Not Applicable.
Item 28 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 State Street, 801
Pennsylvania Avenue, Kansas City, Missouri, 64105, the Registrant's
custodian.
Item 29 Management Services:
Not Applicable.
Item 30 Undertakings:
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 20 to
the Registration Statement pursuant to Rule 485(b) under the Securities Act of
1993 and has duly caused this Post-Effective Amendment No. 20 to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and State of New York, on the 27th day
of April, 2000.
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. 20 to its Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
(1) Principal
Executive Officer:
/S/WESLEY G. MCCAIN President April 27, 2000
-------------------
Wesley G. McCain
(2) Principal Financial
and Accounting Officer:
/S/JOHN A. FLANAGAN Treasurer April 27, 2000
-------------------
John A. Flanagan
(3) Majority Trustees:
/S/WESLEY G. MCCAIN Trustee April 27, 2000
-------------------
Wesley G. McCain
/S/SIGRID A. HESS Trustee April 27, 2000
-----------------
Sigrid A. Hess
___________*_____________ Trustee April 27, 2000
John C. Van Eck
___________*_____________ Trustee April 27, 2000
Yung Wong
*BY /S/WESLEY G. MCCAIN
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Wesley G. McCain
Attorney-in-fact
* Executed pursuant to powers of attorney filed with Registrant's
Post-Effective Amendment No. 1 to its Registration Statement on Form
N-1A filed on July 2, 1987 (File Nos. 33-8865 and 811-4847).
<PAGE>
EXHIBIT INDEX
(i)(3) Opinion of Legal Counsel.
(j)(1)(a) Consent and Report of Independent Accountants.
(j)(1)(b) Consent and Report of Former Independent Accountants.
(p) Code of Ethics.
EXHIBIT (i)(3)
[Dechert Price & Rhoads letterhead]
April 27, 2000
Eclipse Funds
470 Park Avenue South
16th Floor
New York, New York 10016
Dear Sirs:
As counsel for Eclipse Funds (the "Trust"), we are familiar with the
registration of the Trust under the Investment Company Act of 1940, as amended
(the "1940 Act") (File No. 811-4847), and Post-Effective Amendment No. 20 to the
Trust's registration statement relating to the shares of beneficial interest
(the "Shares") of each of Eclipse Ultra Short Term Income Fund, Eclipse Balanced
Fund, Eclipse Mid Cap Value Fund, and Eclipse Small Cap Value Fund (each, a
"Fund") being filed under the Securities Act of 1933, as amended (File No.
33-8865) ("Post-Effective Amendment No. 20"). We have also examined such other
records of the Trust, agreements, documents and instruments as we deemed
appropriate.
Based upon the foregoing, it is our opinion that the Shares have been
duly authorized and, when issued and sold at the public offering price
contemplated by the Prospectus for each Fund and delivered by the Trust against
receipt of the net asset value of the Shares, will be issued as fully paid and
nonassessable Shares of the Trust.
We consent to the filing of this opinion on behalf of the Trust with
the Securities and Exchange Commission in connection with the filing of
Post-Effective Amendment No. 20.
Very truly yours,
DECHERT PRICE & RHOADS
EXHIBIT (j)(1)(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated January 31, 2000, relating to the
financial statements and financial highlights which appear in the December 31,
2000 Annual Report to Shareholders of Eclipse Funds, which are also incorporated
by reference into the Registration Statement. We also consent to the references
to us under the headings "Financial Highlights" and "Counsel and Auditors" in
such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
April 26, 2000
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Report of Independent Accountants
To the Board of Trustees and Shareholders of
Eclipse Funds
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Eclipse Ultra Short Term Income Fund, the Eclipse Balanced Fund, the Eclipse
Mid Cap Value Fund, and the Eclipse Small Cap Value Fund, series of Eclipse
Funds, (hereafter referred to as the "Funds") at December 31, 1999, and the
results of each of their operations, the changes in each of their net assets and
the financial highlights for the year then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above. The financial statements for the year ended
December 31, 1998, including the financial highlights for each of the four years
in the period then ended, were audited by other independent accountants whose
report dated January 28, 1999 expressed an unqualified opinion on those
financial statements.
PricewaterhouseCoopers LLP
New York, New York
January 31, 2000
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 28, 1999, on the financial
statements of Eclipse Funds referred to in the Post-Effective Amendment. to the
Registration Statement on Form N-1A as filed with the Securities and Exchange
Commission.
McGladrey & Pullen, LLP
New York, New York
April 26, 2000
<PAGE>
INDEPENDENT AUDITOR'S REPORT
THE BOARD OF TRUSTEES AND SHAREHOLDERS
ECLIPSE FUNDS
We have audited the accompanying statement of changes in net assets for the year
ended December 31, 1998 and the financial highlights for each of the four years
in the period ended December 31, 1998 of the Ultra Short Term Income Fund, the
Balanced Fund, the Mid Cap Value Fund (formerly the Growth and Income Fund), and
the Small Cap Value Fund (formerly the Equity Fund) series of the Eclipse Funds.
This financial statement and the financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on this
financial statement and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statement and financial highlights referred to
above present fairly, in all material respects, the changes in its net assets
and the financial highlights of the Ultra Short Term Income Fund, the Balanced
Fund, the Mid Cap Value Fund, and the Small Cap Value Fund series of the Eclipse
Funds for the periods indicated, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 28, 1999
EXHIBIT (p)
CODE OF ETHICS
TOWNELEY CAPITAL MANAGEMENT, INC.
ECLIPSE FUNDS
Towneley Capital Management, Inc. and Eclipse Funds each subscribes to the ethos
that it is the obligation of the entity and its employees to, at all times,
place the interests of its clients and shareholders, respectively, first.
Towneley and Eclipse each acknowledges that it is unlawful for any of its
affiliated persons in connection with the direct or indirect purchase or sale by
that person of a security held or to be acquired by Eclipse to (i) employ any
device, scheme, or artifice to defraud Eclipse, (ii) to make any untrue
statement of a material fact to Eclipse or to omit to state a material fact
necessary in order to make the statements made to Eclipse, in light of the
circumstances under which they are made, not misleading, (iii) engage in any
act, practice or course of business that operates or would operate as a fraud or
deceit on Eclipse, or (iv) engage in any manipulative practice with respect to
Eclipse.
All personal securities transactions must be conducted consistent with these
principles; any actual or potential conflict of interest must be avoided. To
this end, we have adopted the following policies:
RESTRICTIONS
1. Initial Public Offerings (IPOs)
Investment personnel are prohibited from purchasing or otherwise
acquiring any securities in an initial public offering (IPO).
2. Private Placements
(a) The purchase by investment personnel of any securities in a
private placement requires prior approval from the
designated compliance person. This prior approval will take
into consideration, among other factors, whether the
investment opportunity should be reserved for a client
(including Eclipse and its shareholders), and whether the
opportunity is being offered to the individual because of
his or her position with Towneley.
(b) Investment personnel who have been authorized to acquire
securities in a private placement are required to disclose
to the Investment Committee that investment when they take
part in any subsequent consideration of an investment in the
issuer on behalf of Eclipse or another client.
(c ) In such circumstances, the decision to purchase securities
of the issuer for Eclipse or another client will be subject
to an independent review by investment personnel with no
personal interest in the matter.
3. Blackout Periods
(a) No access person may execute a securities transaction on a
day during which any investment company has a pending buy or
sell order in that same security until that order is
executed or withdrawn.
(b) No portfolio manager may buy or sell a security within seven
calendar days before and after an investment company that he
or she manages trades in that security. Any profits realized
on trades within the proscribed periods will be required to
be disgorged, and paid to Eclipse for the benefit of its
shareholders, to other client accounts, or to charity as
appropriate and practicable.
4. Short -Term Trading Profits
As a rule, no investment personnel may profit from the purchase
and sale, or sale and purchase of the same or equivalent
securities within 60 calendar days. Under certain circumstances
(e.g., tax considerations, personal necessity to raise cash) the
Chairman of the Investment Committee may, from time to time,
permit a short-term trade to be effected without penalty.
5. Gifts
No investment personnel may receive any gift or anything of more
than minimal value from any person or entity that does business
with or on behalf of Towneley or of Eclipse.
6. Service as Director
No investment personnel may serve on the boards of directors of
publicly traded companies without prior authorization from the
designated compliance person. This authorization will be based
upon a determination that the board service would be consistent
with the interests of our clients, including Eclipse and its
shareholders. In the relatively small number of instances in
which board service is authorized, investment personnel serving
as directors will be isolated and excluded from investment-making
decisions involving those companies.
<PAGE>
COMPLIANCE PROCEDURES; REPORTING
1. Preclearance of Trades
All access persons must "preclear" all trades a) in excess of
$25,000 and b) for securities not in the Standard & Poor's 500
Index.
2. Records of Securities Transactions
All employees must provide or arrange for the provision of copies
of all of their brokerage statements and trade confirmations to
the designated compliance person.
3. Post Trade Monitoring
All employees must report trades of securities quarterly to the
designated compliance person.
4. Disclosure of Personal Holdings by Access Persons
The designated compliance person will identify all access persons
who are required to make the following reports under this Code of
Ethics and inform those persons of their reporting obligation.
(a) Initial Holdings Reports. No later than ten days after
becoming an access person, an access person must report to the
designated compliance person the title, number of shares, and
principal amount of each security in which the access person has
any direct or indirect beneficial ownership when the person
becomes an access person; the name of any broker, dealer, or bank
with whom the access person maintains an account in which
securities are held; and the date that the report is submitted.
Exception to Initial Holdings Report Requirement
Any person who has become an Access Person before March 1, 2000
need not file an Initial Holdings Report, but must file the first
of his or her Annual Holdings Report (defined below) no later
than September 1, 2000.
(b) Quarterly Transaction Reports. No later than ten days after
the end of a calendar quarter, an access person must report to
the designated compliance person with respect to any transaction
during the quarter in a security which the access person had any
direct or indirect beneficial ownership the date of the
transaction, the title, the interest rate and maturity date (if
applicable), the number of shares and principal amount of each
security; the nature of the transaction (i.e., purchase, sale, or
other type of acquisition or disposition); the price of the
security at which the transaction was effected; the name of the
broker, dealer or bank with whom or through which the transaction
was effected; and the date that the report is submitted.
Exception to Quarterly Transaction Report Requirement
To the extent trade confirmations or account statements
containing the information set forth above are received by the
designated compliance person in the time period required, an
access person need not make the requisite Quarterly Transaction
Report.
(c) Annual Holdings Reports. Each access person annually shall
provide the following information (which information must be
current as of a date no more than thirty days before the report
is submitted): the title, number of shares and principal amount
of each security in which the access person had any direct or
indirect beneficial ownership; the name of any broker, dealer, or
bank with whom the access person maintains an account in which
any securities are hold for the direct or indirect benefit of the
access person; and the date the report is submitted.
Disclaiming Beneficial Ownership
Any of the foregoing reports may contain a statement that the
report will not be construed as an admission that the person
making the report has any direct or indirect beneficial ownership
in the security to which the report relates.
General Exceptions to Disclosure of Personal Holdings
(a) An access person does not need to report on transactions
effected for and securities held in any account over which the
person has no direct or indirect influence or control.
(b) Each of the Independent Trustees of Eclipse need not make (I)
an Initial Holdings Report and an Annual Holdings Report and (ii)
a Quarterly Transaction Report, unless the Trustee knew or, in
the ordinary course of fulfilling his or her official duties as a
Trustee, should have known that during the 15-day period
immediately before or after the Trustee's security transaction,
Eclipse purchased or sold the same security, or Eclipse or
Towneley considered purchasing or selling that security.
It is recognized that Independent Trustees receive reports of
portfolio transactions of Eclipse several weeks, at the earliest,
after the trades have been executed. They receive no reports of
open orders. Therefore, such Trustees generally will not be
required to report their securities transactions.
5. Annual Certification of Compliance with Code of Ethics
All access persons are required to certify annually that they
have read and understood the code of ethics, and to recognize
that they are subject thereto. Furthermore, access persons are
required to certify annually that they have complied with the
requirements of the Code of Ethics and that they have disclosed
or reported all personal securities transactions required to be
disclosed or reported pursuant to the requirements of the Code.
<PAGE>
ADOPTION AND APPROVAL OF THIS CODE OF ETHICS
1. The Board of Trustees of Eclipse, including a majority of the Independent
Trustees, must approve this Code of Ethics and any material changes thereto
based on a determination that the Code contains provisions reasonably
necessary to prevent access persons from engaging in any conduct prohibited
by rule 17j-1(b) under the 1940 Act.
2. Before approving this Code, the Board must receive a certification from
Towneley that it has adopted procedures reasonably necessary to prevent
access persons from violating the Code.
3. The Board must approve a material change to this Code no later than six
months after adoption of the change.
4. Before retaining the services of an investment advisor or principal
underwriter for Eclipse, the Board must approve that entity's code of
ethics.
ADMINISTRATION OF THIS CODE OF ETHICS
1. Towneley and Eclipse will use reasonable diligence and institute procedures
reasonably necessary to prevent violation of this Code of Ethics. These
procedures will provide for, among other things, review of the Initial,
Quarterly, and Annual Holdings Reports by the designated compliance person
or other appropriate management or compliance personnel with an eye towards
identifying potentially abusive or inappropriate trading patterns or
practices of access persons.
2. No less frequently than annually, Towneley must furnish to the Board of
Trustees of Eclipse, and the Board must consider, a written report that
(a) describes any issues arising under the Code of Ethics or related
procedures since the last report to the Board, including, but not
limited to, information about any significant conflicts of interest
that arose involving personal investment policies, any material
violations of this Code and any sanctions imposed in response to those
violations; and
(b) certifies that the procedures adopted in connection with this Code
are reasonably necessary to prevent access persons from violating the
Code.
RECORDKEEPING REQUIREMENTS
Towneley and Eclipse, as appropriate, will each maintain records in the manner
and to the extent set forth below at its principal place of business, and will
make these records available to the SEC or any representative of the SEC at any
time and from time to time for reasonable periodic, special or other
examination:
1. A copy of this Code of Ethics, or any version that at any time within the
past five years was in effect, will be maintained in an easily accessible
place;
2. A record of any violation of this Code, and of any action taken as a result
of the violation, will be maintained in an easily accessible place for at
least five years after the end of the fiscal year in which the violation
occurs;
3. A copy of each report made by an access person pursuant to this Code,
including any information provided in lieu of the reports, will be
maintained for at least five years after the end of the fiscal year in
which the report is made or the information is provided, the first two
years in an easily accessible place;
4. A record of all access persons, currently or within the past five years,
who are or were required to make reports under this Code, or who are or
were responsible for reviewing these reports, must be maintained in an
easily accessible place; and
5. A copy of each report provided annually to the Eclipse Board of Trustees
regarding the administration of this Code must be maintained for at least
five years after the end of the fiscal year in which it is made, the first
two years in an easily accessible place.
Towneley will maintain a record of any decision, and the reasons supporting the
decision, to approve any transaction requiring preclearance under this Code, for
at least five years after the end of the fiscal year in which the approval is
granted.
<PAGE>
DEFINITIONS
1940 ACT: The Investment Company Act of 1940, as amended.
ACCESS PERSONS: Any director/trustee or officer of Towneley or Eclipse or any
employee of either who, in connection with his or her regular functions or
duties, makes, participates in, or obtains information regarding the purchase or
sale of securities by Eclipse, or whose functions relate to the making of any
recommendations with respect to the purchases or sales. Also, any natural person
controlling Towneley or Eclipse who obtains information concerning
recommendations made to Eclipse regarding the purchase or sale of securities by
Eclipse.
BENEFICIAL OWNERSHIP: "Beneficial Ownership" generally means having a direct or
indirect pecuniary interest in a security and is legally defined to be
beneficial ownership as used in rule 16a-1(a)(2) under section 16 of the
Securities Exchange Act of 1934, as amended. Beneficial ownership is presumed
regarding securities and accounts held in the name of a spouse or any other
family member living in the same household. Beneficial ownership also extends to
transactions by entities over which a person has ownership, voting or investment
control, including corporations (and similar entities), trusts and foundations.
DESIGNATED COMPLIANCE PERSON: The Towneley employee designated from time to time
to oversee compliance with this Code of Ethics.
INDEPENDENT TRUSTEES: Those Trustees of Eclipse who are not "interested persons"
of Eclipse within the meaning of section 2(a)(19) of the 1940 Act.
INVESTMENT PERSONNEL: Any employee of Towneley or Eclipse (or any company
controlling either entity) who, in connection with his or her regular functions
or duties, makes or participates in making recommendations regarding the
purchase or sale of securities by Eclipse. Also, any natural person who controls
Towneley or Eclipse and who obtains information concerning recommendations made
to Eclipse regarding the purchase or sale of securities by Eclipse.
PORTFOLIO MANAGERS: Those who determine securities to be purchased and sold.
PRIVATE PLACEMENTS: Offerings that are exempt from registration under the
Securities Act of 1933, as amended (the "1933 Act"), pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505, or rule 506 under the 1933 Act.
SEC: US Securities and Exchange Commission.
SECURITIES: Equities and equity-related securities (including options, warrants
and other securities convertible into or exchangeable for another security), and
bonds. Open-end mutual funds, direct obligations of the US Government, bankers'
acceptances, bank certificates of deposit, commercial paper and high quality
short-term debt instruments, including repurchase agreements, are not considered
securities for reporting purposes. "High quality short-term debt instrument"
means any instrument that has a maturity at issuance of less than 366 days and
that is rated in one of the two highest rating categories by a Nationally
Recognized Statistical Rating Organization (NRSRO).
SECURITY HELD OR TO BE ACQUIRED: (i) Any security which, within the most recent
15 days (a) is or has been held by Eclipse, or (b) is being or has been
considered by Eclipse or Towneley for purchase by Eclipse, and (ii) any option
to purchase or sell, and any security convertible into or exchangeable for,
another security.
