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NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1996
EQUITY FUNDS
DIVERSIFIED EQUITY FUND
GROWTH EQUITY FUND
INCOME EQUITY FUND
FIXED INCOME FUNDS
INTERMEDIATE U.S. GOVERNMENT FUND
STABLE INCOME FUND
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NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1996
This Statement of Additional Information ("SAI") supplements the Prospectus
offering A Shares and B Shares (collectively the "Shares") of Diversified Equity
Fund, Growth Equity Fund, Income Equity Fund, Intermediate U.S. Government Fund
and Stable Income Fund (each a "Fund" and collectively the "Funds"). Each Fund
is a diversified series of Norwest Advantage Funds, a registered open-end,
management investment company (the "Trust"). This SAI should be read only in
conjunction with the Funds' Prospectus, copies of which may be obtained without
charge.
TABLE OF CONTENTS
Page
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1. Norwest Advantage Funds . . . . . . . . . . . . . A-3
2. Investment Policies . . . . . . . . . . . . . . . A-3
3. Investment Limitations. . . . . . . . . . . . . . A-15
4. Performance Data and Advertising. . . . . . . . . A-17
5. Management. . . . . . . . . . . . . . . . . . . . A-20
6. Other Information . . . . . . . . . . . . . . . . A-29
Appendix A - Description of Securities Ratings . . . . A-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY AN INVESTOR WITHOUT CHARGE BY
CONTACTING THE TRUST'S DISTRIBUTOR, FORUM FINANCIAL SERVICES, INC., TWO PORTLAND
SQUARE, PORTLAND, MAINE 04101.
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1. NORWEST ADVANTAGE FUNDS
DEFINITIONS
The Trust was originally organized under the name Prime Value Funds, Inc. as a
Maryland corporation on August 29, 1986. On July 30, 1993, pursuant to a
shareholder vote, the Trust was reorganized as a Delaware business trust. On
October 1, 1995, the Trust's name was changed from "Norwest Funds." As used in
this SAI, the following terms shall have the meanings listed:
"Adviser" shall mean each Fund's investment adviser, Norwest Investment
Management, a part of Norwest. "Advisers" shall mean, collectively, the Adviser
and Schroder.
"Board" shall mean the Board of Trustees of the Trust.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Core Trust" shall mean Core Trust (Delaware), an open-end, management
investment company registered under the 1940 Act.
"Forum" shall mean Forum Financial Services, Inc., the Trust's
administrator and distributor of the Trust's shares.
"FFC" shall mean Forum Financial Corp., the Trust's fund accountant.
"Fund" shall mean each of the thirteen separate portfolios of the Trust to
which this Statement of Additional Information relates as identified on the
cover page.
"Norwest" shall mean Norwest Bank Minnesota, N.A., a subsidiary of Norwest
Corporation.
"NRSRO" shall mean a nationally recognized statistical rating organization.
"Portfolio" shall mean International Portfolio II, Small Company Portfolio
and Index Portfolio, three separate portfolios of Core Trust.
"Schroder" shall mean Schroder Capital Management Inc., the investment
subadviser to Diversified Equity Fund and Growth Equity Fund.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Transfer Agent" shall mean Norwest acting in its capacity as transfer and
dividend disbursing agent of the Trust.
"Trust" shall mean Norwest Advantage Funds, an open-end management
investment company registered under the 1940 Act.
"U.S. Government Securities" shall mean obligations issued or guaranteed by
the United States Government, its agencies or instrumentalities.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
2. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning the Funds' investments, investment techniques and
strategies and the risks associated therewith. No Fund may make any
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investment or employ any investment technique or strategy not referenced in the
Prospectus as relates to that Fund. For example, while the SAI describes "swap"
transactions below, only those Funds whose investment policies, as described in
the Prospectus, allow the Fund to invest in swap transactions may do so.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc., Standard & Poor's Corporation and other NRSROs
are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to various types of bonds and other securities by several
NRSROs is included in Appendix A to this SAI. The Funds may use these ratings
to determine whether to purchase, sell or hold a security. However, ratings are
general and are not absolute standards of quality. Consequently, securities
with the same maturity, interest rate and rating may have different market
prices. If an issue of securities ceases to be rated or if its rating is
reduced after it is purchased by a Fund, the investment adviser or investment
subadviser of the Fund will determine whether the Fund should continue to hold
the obligation. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings. An
issuer's current financial condition may be better or worse than a rating
indicates.
CONVERTIBLE SECURITIES
A Fund may invest in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to comparable nonconvertible securities. Although no
securities investment is without some risk, investment in convertible securities
generally entails less risk than in the issuer's common stock. However, the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stocks since they have fixed income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by a comparison of its yield with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
EQUITY-LINKED SECURITIES
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Equity-linked securities are securities that are convertible into or based upon
the value of, equity securities upon certain terms and conditions. The following
are three examples of equity-linked securities. A fund may invest in the
securities described below or other similar equity-linked securities.
Preferred Equity Redemption Cumulative Stock ("PERCS") technically are preferred
stock with some characteristics of common stock. PERCS are mandatorily
convertible into common stock after a period of time, usually three years,
during which the investors' capital gains are capped, usually at 30%. Commonly,
PERCS may be redeemed by the issuer at any time or if the issuer's common stock
is trading at a specified price level or better. The redemption price starts at
the beginning of the PERCS' duration period at a price that is above the cap by
the amount of the extra dividends the PERCS holder is entitled to receive
relative to the common stock over the duration of the PERCS and declines to the
cap price shortly before maturity of the PERCS. In exchange for having the cap
on capital gains and giving the issuer the option to redeem the PERCS at any
time or at the specified common stock price level, a Fund may be compensated
with a substantially higher dividend yield than that on the underlying common
stock. Funds that seek current income find PERCS attractive because a PERCS
provides a higher dividend income than that paid with respect to a company's
common stock.
Equity-Linked Securities ("ELKS") differ from ordinary debt securities, in that
the principal amount received at maturity is not fixed but is based on the price
of the issuer's common stock. ELKS are debt securities commonly issued in fully
registered form for a term of three years under an indenture trust. At
maturity, the holder of ELKS will be entitled to receive a principal amount
equal to the lesser of a cap amount, commonly in the range of 30% to 55% greater
than the current price of the issuer's common stock, or the average closing
price per share of the issuer's common stock, subject to adjustment as a result
of certain dilution events, for the 10 trading days immediately prior to
maturity. Unlike PERCS, ELKS are commonly not subject to redemption prior to
maturity. ELKS usually bear interest during the three-year term at a
substantially higher rate than the dividend yield on the underlying common
stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, the Investment Fund
may be compensated with the higher yield, contingent on how well the underlying
common stock does. Funds that seek current income find ELKS attractive because
ELKS provide a higher dividend income than that paid with respect to a company's
common stock.
Liquid Yield Option Notes ("LYONs") differ from ordinary debt securities, in
that the amount received prior to maturity is not fixed but is based on the
price of the issuer's common stock. LYONs are zero-coupon notes that sell at a
large discount from face value. For an investment in LYONs, a Fund will not
receive any interest payments until the notes mature, typically in 15 or 20
years, when the notes are redeemed at face, or par, value. The yield on LYONs,
typically, is lower-than-market rate for debt securities of the same maturity,
due in part to the fact that the LYONs are convertible into common stock of the
issuer at any time at the option of the holder of the LYON. Commonly, LYONs are
redeemable by the issuer at any time after an initial period or if the issuer's
common stock is trading at a specified price level or better, or, at the option
of the holder, upon certain fixed dates. The redemption price typically is the
purchase price of the LYONs plus accrued original issue discount to the date of
redemption, which amounts to the lower-than-market yield. A Fund will receive
only the lower-than-market yield unless the underlying common stock increases in
value at a substantial rate. LYONs are attractive to investors when it appears
that they will increase in value due to the rise in value of the underlying
common stock.
WARRANTS
Warrants are options to purchase an equity security at a specified price
(usually representing a premium over the applicable market value of the
underlying equity security at the time of the warrant's issuance) and usually
during a specified period of time. To the extent that the market value of the
security that may be purchased upon exercise of the warrant rises above the
exercise price, the value of the warrant will tend to rise. To the extent that
the exercise price equals or exceeds the market value of such security, the
warrants will have little or no market value. If a warrant is not exercised
within the specified time period, it will become worthless and the Fund will
lose the purchase price paid for the warrant and the right to purchase the
underlying security. The Fund may not invest more than 2% of its net assets in
warrants not traded on the American or New York Stock Exchange.
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MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on Mortgage Assets (as defined in
the Prospectus) to make payments, mortgage-backed securities may contain
elements of credit enhancement. Credit enhancement falls into two categories:
(1) liquidity protection; and (2) protection against losses resulting after
default by an obligor on the underlying assets and collection of all amounts
recoverable directly from the obligor and through liquidation of the collateral.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets (usually the bank, savings association
or mortgage banker that transferred the underlying loans to the issuer of the
security), to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting after default and
liquidation 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 Funds will not pay any additional fees for
such credit enhancement, although the existence of credit enhancement may
increase the price of security.
Examples of credit enhancement arising out of the structure of the transaction
include (i) "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), (ii) creation
of "spread accounts" or "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 (iii) "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 enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that covered by
credit enhancement protection could adversely affect the return on an investment
in such a security.
OTHER GOVERNMENTAL RELATED MORTGAGE-BACKED SECURITIES
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
Government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquires such assets in its corporate capacity. These
assets include, among other things, single family and multi-family mortgage
loans, as well as commercial mortgage loans. In order to dispose of such assets
in an orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and are supported by one or more of
the types of private credit enhancements used by Private Mortgage Lenders.
It is anticipated that in the future the Federal Deposit Insurance Corporation
(which also holds mortgage loans as a conservator or receiver of insolvent banks
or in its corporate capacity) or other governmental agencies or
instrumentalities may establish vehicles for the issuance of mortgage-backed
securities that are similar in structure and in types of credit enhancements to
RTC securities.
ASSET-BACKED SECURITIES
A Fund may invest in asset-backed securities, which have structural
characteristics similar to mortgage-backed securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. Asset-backed
securities are securities that represent direct or indirect participations in,
or are secured by and payable from, assets such as motor vehicle installment
sales contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts and special
purpose corporations.
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Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution.
Asset-backed securities present certain risks that are not presented by
mortgage-backed debt securities or other securities in which a Fund may invest.
Primarily, these securities do not always have the benefit of a security
interest in comparable 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. Automobile receivables generally are secured by automobiles. Most issuers
of automobile receivables permit the loan servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and the
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
INTEREST-ONLY AND PRINCIPAL-ONLY SECURITIES
Some tranches of mortgage-backed securities, including CMOs, are structured so
that investors receive only principal payments generated by the underlying
collateral. Principal only ("POs") securities usually sell at a deep discount
from face value on the assumption that the purchaser will ultimately receive the
entire face value through scheduled payments and prepayments; however, the
market values of POs are extremely sensitive to prepayment rates, which, in
turn, vary with interest rate changes. If interest rates are falling and
prepayments accelerate, the value of the PO will increase. On the other hand,
if rates rise and prepayments slow, the value of the PO will drop.
Interest only ("IOs") securities result from the creation of POs; thus, CMOs
with PO tranches also have IO tranches. IO securities sell at a deep discount
to their "notional" principal amount, namely the principal balance used to
calculate the amount of interest due. They have no face or par value and, as
the notional principal amortizes and prepays, the IO cash-flow declines.
Unlike POs, IOs increase in value when interest rates rise and prepayment rates
slow; consequently they are often used to "hedge" portfolios against interest
rate risk. If prepayment rates are high, a Fund may receive less cash back than
it initially invested.
VARIABLE AND FLOATING RATE SECURITIES
The securities in which the Funds invest (including mortgage-backed securities)
may have variable or floating rates of interest. These securities pay interest
at rates that are adjusted periodically according to a specified formula,
usually with reference to some interest rate index or market interest rate (the
"underlying index"). The interest paid on these securities is a function
primarily of the underlying index upon which the interest rate adjustments are
based. Such adjustments minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Fund to maintain a stable net asset
value. Similar to fixed rate debt instruments, variable and floating rate
instruments are subject to changes in value based on changes in market interest
rates or changes in the issuer's creditworthiness. The rate of interest on
securities purchased by a Fund may be tied to Treasury or other government
securities or indices on those securities as well as any other rate of interest
or index. Certain variable rate securities (including mortgage-backed
securities) pay interest at a rate that that varies inversely to prevailing
short-term interest rates (sometimes referred to as inverse floaters). For
instance, upon reset the interest rate payable on a security may go down when
the underlying index has risen. During times when short-term interest rates are
relatively low as compared to long-term interest rates a Fund may attempt to
enhance its yield by purchasing inverse floaters. Certain inverse floaters may
have an interest rate mechanism that multiplies the effects of changes in the
underlying index. This form of leverage may have the effect of increasing the
volatility of the security's market value while increasing the security's, and
thus the Fund's, yield.
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There may not be an active secondary market for any particular floating or
variable rate instrument (particularly inverse floaters) which could make it
difficult for a Fund to dispose of the instrument if the issuer defaulted on its
repayment obligation during periods that the Fund is not entitled to exercise
any demand rights it may have. A Fund could, for this or other reasons, suffer
a loss with respect to an instrument. The Adviser monitors the liquidity of the
Fund's investment in variable and floating rate instruments, but there can be no
guarantee that an active secondary market will exist.
INTEREST RATE PROTECTION TRANSACTIONS
Certain Funds may enter into interest rate protection transactions, including
interest rate swaps, caps, collars and floors. Interest rate swap transactions
involve an agreement between two parties to exchange interest payment streams
that are based, for example, on variable and fixed rates that are calculated on
the basis of a specified amount of principal (the "notional principal amount")
for a specified period of time. Interest rate cap and floor transactions
involve an agreement between two parties in which the first party agrees to make
payments to the counterparty when a designated market interest rate goes above
(in the case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which the payments are
made when a designated market interest rate either goes above a designated
ceiling or goes below a designated floor on predetermined dates or during a
specified time period.
A Fund expects to enter into interest rate protection transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The Funds intend to use these transactions as a
hedge and not as a speculative investment.
A Fund may enter into interest rate protection transactions on an asset-based
basis, depending on whether it is hedging its assets or its liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these interest
rate protection transactions are entered into for good faith hedging purposes,
and inasmuch as segregated accounts will be established with respect to such
transactions, the Funds believe such obligations do not constitute senior
securities. The net amount of the excess, if any, of a Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash, U.S. Government Securities or other liquid
high grade debt obligations having an aggregate net asset value at least equal
to the accrued excess will be maintained in a segregated account by a custodian
that satisfies the requirements of the 1940 Act. The Funds also will establish
and maintain such segregated accounts with respect to its total obligations
under any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, collars and floors that are written by the
Fund.
A Fund will enter into interest rate protection transactions only with banks and
other institutions believed by the investment adviser to the Fund to present
minimal credit risks. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized and,
accordingly, they are less liquid than swaps.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve the currencies of foreign
countries. In addition, a Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of certain investment programs.
Accordingly, the value of the assets of a Fund, as measured in United States
dollars, may be affected by changes in foreign currency exchange rates and
exchange control regulations. In addition, the Fund may incur costs in
connection with conversions between various currencies. A Fund may conduct
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or by entering
into foreign currency forward contracts ("forward contracts") to purchase or
sell foreign currencies. A
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forward contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days (usually less than one
year) from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers and involve the risk that the other party to the contract may
fail to deliver currency when due, which could result in losses to the Fund. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Foreign exchange dealers realize a profit
based on the difference between the price at which they buy and sell various
currencies.
A Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, a Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when an investment adviser believes
that the currency of a particular foreign country may suffer a substantial
decline against the U.S. dollar, the Fund may enter into a forward contract to
sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a short-
term hedging strategy is highly uncertain. Forward contracts involve the risk
of inaccurate predictions of currency price movements, which may cause the Fund
to incur losses on these contracts and transaction costs. The investment
advisers do not intend to enter into forward contracts on a regular or
continuous basis, and will not do so if, as a result, a Fund will have more than
25 percent of the value of its total assets committed to such contracts or the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency.
At or before the settlement of a forward currency contract, a Fund may either
make delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
the currency through the conversion of assets of the Fund into the currency.
The Fund may close out a forward contract obligating it to purchase a foreign
currency by selling an offsetting contract. If the Fund engages in an
offsetting transaction, the Fund will incur a gain or a loss to the extent that
there has been a change in forward contract prices. Additionally, although
forward contracts may tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential
gain which might result should the value of such currency increase.
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market. The interbank market in foreign currencies is a global,
around-the-clock market.
When required by applicable regulatory guidelines, a Fund will set aside cash,
U.S. Government Securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
HEDGING AND OPTION INCOME STRATEGIES
Certain Funds may engage in certain options strategies in order to enhance the
Fund's income and may engage in certain options and futures strategies to
attempt to hedge the Fund's portfolio. The instruments in which the Funds may
invest include (i) options on fixed income securities, fixed income securities
indexes and foreign currencies, (ii)
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index, interest rate and foreign currency futures contracts ("futures
contracts"), and (iii) options on futures contracts. Use of these instruments
is subject to regulation by the SEC, the several options and futures exchanges
upon which options and futures are traded, and the CFTC.
The various strategies referred to herein and in the Prospectus are intended to
illustrate the type of strategies that are available to, and may be used by, an
investment adviser in managing a Fund's portfolio. No assurance can be given,
however, that any strategies will succeed.
The Funds will not use leverage in their option income and hedging strategies.
In the case of transactions entered into as a hedge, a Fund will hold
securities, currencies or other options or futures positions whose values are
expected to offset ("cover") its obligations thereunder. A Fund will not enter
into a hedging strategy that exposes the Fund to an obligation to another party
unless it owns either (1) an offsetting ("covered") position or (2) cash, U.S.
Government Securities or other liquid, high-grade debt securities with a value
sufficient at all times to cover its potential obligations. When required by
applicable regulatory guidelines, the Fund will set aside cash, U.S. Government
Securities or other liquid, high-grade debt securities in a segregated account
with its custodian in the prescribed amount. Any assets used for cover or held
in a segregated account cannot be sold or closed out while the hedging or option
income strategy is outstanding, unless they are replaced with similar assets.
As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS STRATEGIES
A Fund may purchase put and call options written by others and write (sell) put
and call options covering specified securities, stock index-related amounts or
currencies. A put option (sometimes called a "standby commitment") gives the
buyer of the option, upon payment of a premium, the right to deliver a specified
amount of a security or currency to the writer of the option on or before a
fixed date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of a
security or currency on or before a fixed date, at a predetermined price. The
predetermined prices may be higher or lower than the market value of the
underlying currency or security. A Fund may buy or sell both exchange-traded
and over-the-counter ("OTC") options. A Fund will purchase or write an option
only if that option is traded on a recognized U.S. options exchange or if an
investment adviser believes that a liquid secondary market for the option
exists. When a Fund purchases an OTC option, it relies on the dealer from which
it has purchased the OTC option to make or take delivery of the securities or
currency underlying the option. Failure by the dealer to do so would result in
the loss of the premium paid by the Fund as well as the loss of the expected
benefit of the transaction. OTC options and the securities underlying these
options currently are treated as illiquid securities by the Funds.
Upon selling an option, a Fund receives a premium from the purchaser of the
option. Upon purchasing an option the Fund pays a premium to the seller of the
option. The amount of premium received or paid by the Fund is based upon
certain factors, including the market price of the underlying securities index,
the relationship of the exercise price to the market price, the historical price
volatility of the underlying securities index, the option period, supply and
demand and interest rates.
A Fund may purchase call options on debt securities that an investment adviser
intends to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security increases above the exercise price and
the Fund either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid. A Fund may similarly purchase put options
in order to hedge against a decline in market value of securities held in its
portfolio. The put enables the Fund to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the Fund is limited
to the option premium paid. If the market price of the underlying security is
lower than the exercise price of the put, any profit the Fund realizes on the
sale of the security would be reduced by the premium paid for the put option
less any amount for which the put may be sold.
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An investment adviser may write call options when it believes that the market
value of the underlying security will not rise to a value greater than the
exercise price plus the premium received. Call options may also be written to
provide limited protection against a decrease in the market price of a security,
in an amount equal to the call premium received less any transaction costs.
A Fund may purchase and write put and call options on fixed income security
indexes in much the same manner as the options discussed above, except that
index options may serve as a hedge against overall fluctuations in the fixed
income securities markets (or market sectors) or as a means of participating in
an anticipated price increase in those markets. The effectiveness of hedging
techniques using index options will depend on the extent to which price
movements in the index selected correlate with price movements of the securities
which are being hedged. Index options are settled exclusively in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
A Fund may take positions in options on foreign currencies in order to hedge
against the risk of foreign exchange fluctuation on foreign securities the Fund
holds in its portfolio or which it intends to purchase. Options on foreign
currencies are affected by the factors discussed in "Options Strategies" above
and "Foreign Currency Forward Transactions" which influence foreign exchange
sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring
in the interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, the Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
A Fund may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Fund
wished to terminate its potential obligation to sell securities or currencies
under a call option it had written, a call option of the same type would be
purchased by the Fund. Closing transactions essentially permit the Fund to
realize profits or limit losses on its options positions prior to the exercise
or expiration of the option. In addition:
(1) The successful use of options depends upon the investment adviser's
ability to forecast the direction of price fluctuations in the underlying
securities or currency markets, or in the case of an index option,
fluctuations in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine months. Options
that expire unexercised have no value. Unless an option purchased by a
Fund is exercised or unless a closing transaction is effected with respect
to that position, a loss will be realized in the amount of the premium
paid.
(3) A position in an exchange-listed option may be closed out only on an
exchange which provides a market for identical options. Most exchange-
listed options relate to equity securities. Exchange markets for options
on foreign currencies are relatively new and the ability to establish and
close out positions on the exchanges is subject to the maintenance of a
liquid secondary market. Closing transactions may be effected with respect
to options traded in the over-the-counter markets (currently the primary
markets for options on foreign currencies) only by negotiating directly
with the other party to the option contract or in a secondary market for
the option if such market exists. There is no assurance that a liquid
secondary market will exist for any particular option at any specific time.
If it is not possible to effect a closing transaction, a
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Fund would have to exercise the option which it purchased in order to
realize any profit. The inability to effect a closing transaction on an
option written by a Fund may result in material losses to the Fund.
(4) A Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
FUTURES STRATEGIES. A futures contract is a bilateral agreement wherein one
party agrees to accept, and the other party agrees to make, delivery of cash, an
underlying debt security or the currency as called for in the contract at a
specified future date and at a specified price. For futures contracts with
respect to an index, delivery is of an amount of cash equal to a specified
dollar amount times the difference between the index value at the time of the
contract and the close of trading of the contract.
A Fund may sell interest rate futures contracts in order to continue to receive
the income from a fixed income security, while endeavoring to avoid part of or
all of a decline in the market value of that security which would accompany an
increase in interest rates.
A Fund may purchase index futures contracts for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transactions costs, or to
seek higher investment returns when a futures contract is priced more
attractively than securities in the index.
A Fund may purchase call options on a futures contract as a means of obtaining
temporary exposure to market appreciation at limited risk. This strategy is
analogous to the purchase of a call option on an individual security, in that it
can be used as a temporary substitute for a position in the security itself.
A Fund may sell foreign currency futures contracts to hedge against possible
variations in the exchange rate of the foreign currency in relation to the U.S.
dollar. In addition, a Fund may sell foreign currency futures contracts when
the Adviser anticipates a general weakening of foreign currency exchange rates
that could adversely affect the market values of the Fund's foreign securities
holdings. A Fund may purchase a foreign currency futures contract to hedge
against an anticipated foreign exchange rate increase pending completion of
anticipated transactions. Such a purchase would serve as a temporary measure to
protect the Fund against such increase. A Fund may also purchase call or put
options on foreign currency futures contracts to obtain a fixed foreign exchange
rate at limited risk. A Fund may write call options on foreign currency
futures contracts as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING. No
price is paid upon entering into futures contracts, rather, a Fund is required
to deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash or U.S. Government Securities generally equal to 5% or
less of the contract value. This amount is known as initial margin. Subsequent
payments, called variation margin, to and from the broker, would be made on a
daily basis as the value of the futures position varies. When writing a call on
a futures contract, variation margin must be deposited in accordance with
applicable exchange rules. The initial margin in futures transactions is in the
nature of a performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination of the contract, assuming all contractual
obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In such event, it may not be possible for a Fund to close a
position, and in the event of adverse price movements, the Fund would have to
make daily cash payments of variation margin. In addition:
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(1) Successful use by a Fund of futures contracts and related options will
depend upon the Adviser's ability to predict movements in the direction of
the overall securities and currency markets, which requires different
skills and techniques than predicting changes in the prices of individual
securities. Moreover, futures contracts relate not to the current level of
the underlying instrument but to the anticipated levels at some point in
the future; thus, for example, trading of stock index futures may not
reflect the trading of the securities which are used to formulate an index
or even actual fluctuations in the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged securities or currencies due to price
distortions in the futures market or otherwise. There may be several
reasons unrelated to the value of the underlying securities or currencies
which causes this situation to occur. As a result, a correct forecast of
general market trends may still not result in successful hedging through
the use of futures contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not
be possible to close a position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash
payments of variation margin.
(4) Like other options, options on futures contracts have a limited life.
A Fund will not trade options on futures contracts on any exchange or board
of trade unless and until, in the Adviser's opinion, the market for such
options has developed sufficiently that the risks in connection with
options on futures transactions are not greater than the risks in
connection with futures transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that is
at risk. Sellers of options on futures contracts, however, must post an
initial margin and are subject to additional margin calls which could be
substantial in the event of adverse price movements.
(6) A Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
(7) Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the buying and selling of futures
generally. In addition, there are risks associated with foreign currency
futures contracts and their use as a hedging device similar to those
associated with options on foreign currencies described above. In
addition, settlement of foreign currency futures contracts must occur
within the country issuing that currency. Thus, a Fund must accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign restrictions or regulations regarding the maintenance of foreign
banking arrangements by U.S. residents, and the Fund may be required to pay
any fees, taxes or charges associated with such delivery which are assessed
in the issuing country.
COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
A Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. A Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however that in addition,
with respect to positions in commodity futures and option contracts not for bona
fide hedging purposes the Fund represents that the aggregate initial margin and
premiums required to establish these positions (subject to certain exclusions)
will not exceed 5% of the liquidation value of the Fund's assets after taking
into account unrealized profits and losses on any such contract the Fund has
entered into.
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REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
Generally, a reverse repurchase agreement enables a Fund to recover for the term
of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Funds may purchase securities on a when-issued or delayed delivery basis.
In those cases, the purchase price and the interest rate payable on the
securities are fixed on the transaction date and delivery and payment may take
place a month or more after the date of the transaction. At the time a Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction as a purchase and thereafter reflect
the value each day of such securities in determining its net asset value.
A Fund will make commitments for such when-issued transactions only when it has
the intention of actually acquiring the securities. To facilitate such
acquisitions, the Fund will maintain with its custodian a separate account with
portfolio securities in an amount at least equal to such commitments. On
delivery dates for such transactions, the Fund will meet its obligations from
maturities, sales of the securities held in the separate account or from other
available sources of cash. If a Fund chooses to dispose of the right to acquire
a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation.
DOMESTIC AND FOREIGN BANK OBLIGATIONS
A Fund may invest in fixed-time deposits, which are payable at their stated
maturity date and bear a fixed rate of interest, generally may be withdrawn on
demand by the Fund but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation
and could reduce the Fund's yield. Although fixed-time deposits do not in all
cases have a secondary market, there are no contractual restrictions on the
Fund's right to transfer a beneficial interest in the deposits to third parties.
Investments that a Fund may make in securities of foreign branches of domestic
banks and domestic and foreign branches of foreign banks may involve certain
risks, including future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on such
securities, the possible seizure or nationalization of foreign deposits,
differences from domestic banks in applicable accounting, auditing and financial
reporting standards, and the possible establishment of exchange controls or
other foreign governmental laws or restrictions applicable to the payment of
certificates of deposit or time deposits which might affect adversely the
payment of principal and interest on such securities held by the Fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
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The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to the investment adviser of each
Fund, pursuant to guidelines approved by the Board. The investment adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer. The investment
adviser monitors the liquidity of the securities in each Fund's portfolio and
reports periodically on such decisions to the Board.
TEMPORARY DEFENSIVE POSITION
When a Fund assumes a temporary defensive position, it may invest in (i) short-
term U.S. Government Securities, (ii) certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of commercial banks doing
business in the United States that have, at the time of investment, total assets
in excess of one billion dollars and that are insured by the Federal Deposit
Insurance Corporation, (iii) commercial paper of prime quality rated Prime-2 or
higher by Moody's or A-2 or higher by S&P or, if not rated, determined by the
Adviser to be of comparable quality, (iv) repurchase agreements covering any of
the securities in which the Fund may invest directly and (v) money market mutual
funds.
The Funds may invest in the securities of other investment companies within the
limits prescribed by the 1940 Act. Under normal circumstances, each Fund
intends to invest less than 5% of the value of its net assets in the securities
of other investment companies. In addition to the Fund's expenses (including
the various fees), as a shareholder in another investment company, a Fund would
bear its pro rata portion of the other investment company's expenses (including
fees).
3. INVESTMENT LIMITATIONS
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of a
Fund's assets or purchases and redemptions of shares will not be considered a
violation of the limitation.
FUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are fundamental
policies of the Fund and cannot be changed without the affirmative vote of a
majority of the Fund's outstanding voting securities (as defined in the
Prospectus).
(1) Diversification: With respect to 75 percent of its assets, the Fund
may not purchase a security other than a U.S. Government Security if, as a
result, more than five percent of the Fund's total assets would be invested
in the securities of a single issuer or the Fund would own more than ten
percent of the outstanding voting securities of any single issuer;
provided, however, that each Fund may invest all or a portion of its assets
in another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
(2) Concentration: The Fund may not purchase securities if, immediately
after the purchase, more than 25 percent of the value of the Fund's total
assets would be invested in the securities of issuers conducting their
principal business activities in the same industry; provided, however, that
there is no limit on investments in U.S. Government Securities, repurchase
agreements covering U.S. Government Securities, foreign government
securities, mortgage related or housing-related securities, municipal
securities, and issuers domiciled in a single country; that financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance and diversified
finance); that utility companies are classified according to their services
(for example, gas, gas transmission, electric and gas, electric and
telephone); that will each invest more than 25 percent of the value of the
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Fund's total assets in obligations of domestic and foreign financial
institutions and their holding companies; and that each Fund may invest all
of a portion of its assets in another diversified, open-end management
investment company with substantially the same investment objective,
policies and restrictions as the Fund.
(3) Borrowing: Each Fund may borrow money for temporary or emergency
purposes, including the meeting of redemption requests; but not in excess
of 33 1/3 percent of the value of the Fund's total assets (as computed
immediately after the borrowing).
(4) Issuance of Senior Securities: The Fund may not issue senior
securities except to the extent permitted by the 1940 Act.
(5) Underwriting Activities: The Fund may not underwrite securities of
other issuers, except to the extent that the Fund may be considered to be
acting as an underwriter in connection with the disposition of portfolio
securities.
(6) Making Loans: The Fund may not make loans, except the Funds may enter
into repurchase agreements, purchase debt securities that are otherwise
permitted investments and lend portfolio securities.
(7) Purchases and Sales of Real Estate: The Fund may not purchase or sell
real estate, any interest therein or real estate limited partnership
interests, except that the Fund may invest in debt obligations secured by
real estate or interests therein or securities issued by companies that
invest in real estate or interests therein.
(8) Purchases and Sales of Commodities: The Fund may not purchase or sell
physical commodities or contracts, options or options on contracts to
purchase or sell physical commodities, provided that currencies and
currency-related contracts and contracts on indices are not deemed to be
physical commodities.
NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are not
fundamental policies of the Fund and may be changed by the Board.
(1) Borrowing: Borrowing for other than temporary or emergency purposes
or meeting redemption requests is limited to five percent of the value of
each Funds total assets except in the case of Intermediate U.S. Government
Fund, and Managed Fixed Income Fund. Where a Fund establishes a segregated
account to limit the amount of leveraging of the Fund with respect to
certain investment techniques, the Fund does not treat those techniques as
involving borrowings fro purposes of this limitation.
(2) Illiquid Securities: No Fund may acquire securities or invest in
repurchase agreements with respect to any securities if, as a result, more
than (i) fifteen percent of the Fund's net assets (taken at current value)
would be invested in repurchase agreements not entitling the holder to
payment of principal within seven days and in securities which are not
readily marketable, including securities that are not readily marketable by
virtue of restrictions on the sale of such securities to the public without
registration under the Securities Act of 1933 ("Restricted Securities") or
(ii) ten percent of the Fund's total assets would be invested in Restricted
Securities.
(3) Other Investment Companies: The Fund may not invest in securities of
another investment company, except to the extent permitted by the 1940 Act.
(4) Margin and Short Sales: Except for Intermediate U.S. Government Fund,
a Fund may not purchase securities on margin or make short sales of
securities (except short sales against the box) except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities. A Fund may make margin deposits in connection with
permitted transactions in options and futures contracts. A Fund may not
enter short sales if, as a result, more that 25% of the value of the Fund's
total assets would
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be so invested, or such a position would represent more than 2% of the
outstanding voting securities of any single issuer or class of an issuer.
(5) Unseasoned Issuers: The Fund may not invest in securities (other than
fully-collateralized debt obligations) issued by companies that have
conducted continuous operations for less than three years, including the
operations of predecessors, unless guaranteed as to principal and interest
by an issuer in whose securities the Fund could invest, if, as a result,
more than five percent of the value of the Fund's total assets would be so
invested; provided, that the Fund may invest all of a portion of its assets
in another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
(6) Pledging: The Fund may not pledge, mortgage, hypothecate or encumber
any of its assets except to secure permitted borrowings.
(7) Investments by Officers and Trustees: The Fund may not invest in or
hold securities of any issuer if, to the Trust's knowledge, officers and
trustees of the Trust or an investment adviser to the Fund, individually
owning beneficially more than one-half of one percent of the securities of
the issuer, in the aggregate own more than five percent of the issuer's
securities.
(8) Oil, Gas and Mineral Investments: The Fund may not invest in
interests in oil and gas or interests in other mineral exploration or
development programs, including oil, gas and other mineral leases and the
Fund may not invest in real estate limited partnerships.
(9) Securities With Voting Rights: No Fixed Income Fund may purchase
securities having voting rights, except securities of other investment
companies.
(10) Warrants: Each Fund may not purchase warrants if, as a result, more
that 5% of the value of the Fund's total assets would be so invested.
(11) Options: Each Fund may not purchase an option if, as a result, more
that 5% of the value of the Fund's total assets would be so invested.
4. PERFORMANCE DATA AND ADVERTISING
Quotations of performance may from time to time be used in advertisements, sales
literature, shareholder reports or other communications to shareholders or
prospective investors. All performance information supplied by the Funds is
historical and is not intended to indicate future returns. Each Fund's yield and
total return fluctuate in response to market conditions and other factors. The
value of a Fund's shares when redeemed may be more or less than their original
cost.
In performance advertising the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Inc., Lipper Analytical Services, Inc., or other companies which track the
investment performance of investment companies ("Fund Tracking Companies").
Each Fund may also compare any of its performance information with the
performance of recognized stock, bond and other indexes, including but not
limited to Standard & Poor's 500 Composite Stock Index, Russell 2000 Index,
Morgan Stanley - Europe, Australian and Far East Index, Lehman Brothers
Intermediate Government Index, Lehman Brothers Intermediate Government/Corporate
Index, Salomon Brothers Bond Index, Shearson Lehman Bond Index, the Dow Jones
Industrial Average, U.S. Treasury bonds, bills or notes and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. The Funds
may refer to general market performances over past time periods such as those
published by Ibbotson Associates (for instance, its "Stocks, Bonds, Bills and
Inflation Yearbook"). In addition, the Funds may refer in such materials to
mutual fund performance rankings and other data published by Fund Tracking
Companies. Performance advertising may also refer to discussions of the Funds
and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
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SEC YIELD CALCULATIONS
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that each Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return on
the Fund's shares. Also, Norwest and others may charge the various retirement
plans or other shareholders that invest in a Fund fees in connection with an
investment in a Fund, which will have the effect of reducing the Fund's net
yield to those shareholders. The yields of a Fund are not fixed or guaranteed,
and an investment in a Fund is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of a Fund with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to
compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
Standardized yields for the Funds used in advertising are computed by dividing a
Fund's interest income (in accordance with specific standardized rules) for a
given 30 days or one month period, net of expenses, by the average number of
shares entitled to receive distributions during the period, dividing this figure
by the Fund's net asset value per share at the end of the period and annualizing
the result (assuming compounding of income in accordance with specific
standardized rules) in order to arrive at an annual percentage rate. In
general, interest income is reduced with respect to municipal securities
purchased at a premium over their par value by subtracting a portion of the
premium from income on a daily basis. In general, interest income is increased
with respect to municipal securities purchased at original issue at a discount
by adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from these calculations.
Income calculated for the purpose of determining each Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in a Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)to the nth power = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their
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components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration. Period total return is calculated according to the following
formula:
PT = (ERV/P-1)
Where:
PT = period total return.
The other definitions are the same as in average annual total return
above.
OTHER ADVERTISEMENT MATTERS
The Funds may advertise other forms of performance. For example, the Funds may
quote unaveraged or cumulative total returns reflecting the change in the value
of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration a Fund's front-end sales charge or contingent deferred
sales charge; excluding sales charges from a total return calculation produces a
higher return figure.
The Funds may also include various information in their advertisements.
Information included in a Fund's advertisements may include, but is not limited
to (i) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity, (ii) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents, (iv)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quartile or daily), (v) information
relating to inflation and its effects on the dollar; for example, after ten
years the purchasing power of $25,000 would shrink to $16,621, $14,968, $13,465
and $12,100, respectively, if the annual rates of inflation were 4%, 5%, 6% and
7%, respectively, (vi) information regarding the effects of automatic investment
and systematic withdrawal plans, including the principle of dollar cost
averaging, (vii) descriptions of the Funds' portfolio managers and the portfolio
management staff of the Advisers or summaries of the views of the portfolio
managers with respect to the financial markets, (viii) the results of a
hypothetical investment in a Fund over a given number of years, including the
amount that the investment would be at the end of the period, (ix) the effects
of earning Federally and, if applicable, state tax-exempt income from a Fund or
investing in a tax-deferred account, such as an individual retirement account or
Section 401(k) pension plan and (x) the net asset value, net assets or number of
shareholders of a Fund as of one or more dates.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the
$90 interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of any Fund's performance.
The Funds may advertise information regarding the effects of automatic
investment and systematic withdrawal plans, including the principle of dollar
cost averaging. In a dollar cost averaging program, an investor invests a fixed
dollar amount in a Fund at period intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not ensure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
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<PAGE>
Systematic Share Shares
Period Investment Price Purchased
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
Total Invested $600 Average Price $15.17 Total Shares 41.81
In connection with its advertisements each Fund may provide "shareholders
letters" which serve to provide shareholders or investors an introduction into
the Fund's, the Trust's or any of the Trust's service provider's policies or
business practices. For instance, advertisements may provide for a message from
Norwest or its parent corporation that Norwest has more than 60 years been
committed to quality products and outstanding service in order to assist its
customers in meeting their financial goals and the reasons Norwest believes that
it has been successful as a national financial service firm.
5. MANAGEMENT
TRUSTEES AND OFFICERS
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer and David R. Keffer are brothers.
John Y. Keffer, Chairman and President.*
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Financial Corp. (a registered transfer agent), Forum
Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Director, Trustee and officer of various registered investment companies
for which Forum Financial Services, Inc. serves as manager, administrator
and/or distributor. His address is 61 Broadway, New York, New York 10006.
Robert C. Brown, Trustee.*
Director, Federal Farm Credit Banks Funding Corporation and Farm Credit
System Financial Assistance Corp. Prior thereto, he was Manager of the
Capital Markets Group, Norwest Corporation (a multi-bank holding company
and parent of Norwest) until 1991. His address is 1431 Landings Place,
Sarasota, Florida 34231.
Donald H. Burkhardt, Trustee.
Principal, The Burkhardt Law Firm. His address is 777 South Steele Street,
Denver, Colorado 80209.
James C. Harris, Trustee.
President and sole Director of James C. Harris & Co., Inc. (a financial
consulting firm). Mr. Harris is also a liquidating Trustee and former
Director of First Midwest Corporation, a small business investment company.
His address is 6950 France Avenue South, Minneapolis, Minnesota 55435.
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<PAGE>
Richard M. Leach, Trustee.
Chief Executive Officer, Tee Box Company (a golf equipment manufacturer),
since January 1994 and President of Richard M. Leach Associates (a
financial consulting firm) since 1992. Prior thereto, Mr. Leach was Senior
Adviser of Taylor Investments (a registered investment adviser), a Director
of Mountainview Broadcasting (a radio station) and Managing Director,
Digital Techniques, Inc. (an interactive video design and manufacturing
company). His address is P.O. Box 1888, New London, New Hampshire 03257.
Timothy J. Penny, Trustee
Senior Counselor to the public relations firm Himle-Horner since 1994.
Prior thereto Mr. Penny was the Representative to the United States
Congress from Minnesota's First Congressional District. His address is 500
North State Street, Waseca, Minnesota 56095.
Donald C. Willeke, Trustee
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
Michael D. Martins, Vice President and Treasurer
Fund Accounting Manager, Forum Financial Corp., with which he has been
associated since 1995. Prior thereto, Mr. Martins was at the audit firm of
Deloitte & Touche LLP. Mr. Martins is also an officer of various
registered investment companies for which Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
David I. Goldstein, Vice President and Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also an officer of various
registered investment companies for which Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
David R. Keffer, Vice President, Assistant Secretary and Assistant Treasurer.
Chief Financial Officer, Forum Financial Services, Inc. Mr. Keffer is also
an officer of various registered investment companies for which Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is 61 Broadway, New York, New York 10006.
Sara M. Clark, Vice President and Assistant Treasurer.
Managing Director, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, from 1991 to 1994 Ms. Clark was
Controller of Wright Express Corporation (a national credit card company)
and for six years prior thereto was employed at Deloitte & Touche LLP as an
accountant. Ms. Clark is also an officer of various registered investment
companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
Thomas G. Sheehan, Vice President and Assistant Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1993. Prior thereto, Mr. Sheehan was Special Counsel to the Division
of Investment Management of the SEC. Mr. Sheehan is also an officer of
various registered investment companies for which Forum Financial Services,
Inc. serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
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<PAGE>
Renee A. Walker, Assistant Secretary.
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, Ms. Walker was an administrator at
Longwood Partners (the manager of a hedge fund partnership) for a year.
After graduating for college, from 1991 to 1993 Ms. Walker was a sales
representative assistant at PaineWebber Incorporated (a broker-dealer).
Her address is Two Portland Square, Portland, Maine 04101.
Christopher J. Kelley, Assistant Secretary.
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto and subsequent to attending law
school, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His address is Two Portland Square, Portland, Maine
04101.
COMPENSATION OF TRUSTEES AND OFFICERS
Effective June 1, 1995 each Trustee of the Trust is paid a quarterly retained
fee for the Trustee's service to the Trust and to Norwest Select Funds, a
separate registered open-end management investment company for which each
Trustee serves as trustee. of $4,000. In addition, each Trustee is paid $3,000
for each Board meeting attended (whether in person or by electronic
communication) and is paid $1,000 for each Committee meeting attended on a date
when a Board meeting is not held. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. Mr. Keffer
received no compensation for his services as Trustee for the past year and no
officer of the Trust is compensated by the Trust. In addition, Mr. Keffer
currently is not compensated or reimbursed for his expenses in serving as
Trustee. Prior to June 1, 1995 Trustee of the Trust was paid $1,000 for each
Board meeting attended (whether in person or by electronic communication) plus
$100 per active portfolio of the Trust and was paid $1,000 for each Committee
meeting attended on a date when a Board meeting is not held.
Mr. Burkhart, Chairman of the Trust's and Norwest Select Funds' audit
committees, receives additional compensation of $5,000 from the Trust and $1,000
form Norwest Select Funds for his services as Chairman. Mr. Penny was appointed
a Trustee in January 1996 and, accordingly, was not paid any compensation during
the Trust's last fiscal year.
As of October 1, 1995, the Trustees and officers of the Trust in the aggregate
owned less than 1% of the outstanding shares of the Fund.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Select Funds, combined. Information is
presented for the year ended October 31, 1995, the Funds' fiscal year end. Other
funds of the Trust have a May 31 fiscal year end.
Total Compensation From
Total Compensation the Trust and Norwest
from the Trust Select Funds
-------------- -----------
Mr. Brown $23,565 $26,177
Mr. Burkhart $29,909 $33,023
Mr. Harris $22,567 $25,177
Mr. Leach $22,566 $25,177
Mr. Willeke $14,000 $14,000
Neither the Trust or Norwest Select Funds has adopted any from of retirement
plan covering Trustees or officers.
TRUSTEES AND OFFICERS OF CORE TRUST
The Trustees and officers of Core Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of Core Trust is indicated by an asterisk.
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<PAGE>
Mr. John Y. Keffer, Mr. David R. Keffer and Messrs. Goldstein, Martins and
Sheehan, officers of Core Trust, all currently serve as officers of the Trust.
Accordingly, for background information pertaining to these officers, see
"Trustees and Officers of the Trust" above.
John Y. Keffer*, Chairman and President.
Costas Azariadis, Trustee.
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee.
Managing Director, Forum Financial Services, Inc. since September 1991.
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is Two Portland Square, Portland, Maine
04101.
J. Michael Parish, Trustee.
Partner at the law firm of Winthrop Stimson Putnam & Roberts since 1989.
Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby & MacRae, a law
firm of which he was a member from 1974 to 1989. His address is 40 Wall
Street, New York, New York 10005.
Michael D. Martins, Treasurer
David R. Keffer, Vice President, Assistant Secretary and Assistant Treasurer.
David I. Goldstein, Secretary.
Thomas G. Sheehan, Assistant Secretary.
Max Berueffy, Assistant Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since May 1994. For seven years prior to that, Mr. Berueffy held various
positions on the staff of the U.S. Securities and Exchange Commission. His
last position was Senior Special Counsel in the Division of Investment
Management. Mr. Berueffy is also an officer of various registered invest-
ment companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
INVESTMENT ADVISORY SERVICES
NORWEST INVESTMENT MANAGEMENT
Norwest Investment Management, a part of Norwest Bank Minnesota, N.A., is
required to furnish at its expense all services, facilities and personnel
necessary in connection with managing each Fund's investments and effecting
portfolio transactions for each Fund. Under its advisory agreements, Norwest
may delegate its responsibilities to any investment subadviser approved by the
Board with respect to all or a portion of the assets of a Fund.
The Advisory Agreement between each Fund and Norwest will continue in effect
only if such continuance is specifically approved at least annually by the Board
or by vote of the shareholders of the Fund, and in either case by a majority of
the Trustees who are not parties to the Advisory Agreement or interested persons
of any such party, at a meeting called for the purpose of voting on the Advisory
Agreement.
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<PAGE>
The Advisory Agreement with respect to a Fund is terminable without penalty by
the Fund with respect to that Fund on 60 days written notice when authorized
either by vote of the Fund's shareholders or by a vote of a majority of the
Board, or by the Adviser on not more than 60 days nor less than 30 days written
notice, and will automatically terminate in the event of its assignment. The
Advisory Agreements also provide that, with respect to each Fund, neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any act or omission in the performance of its or their duties to
the Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of the Adviser's or their duties or by reason of reckless disregard
of its or their obligations and duties under the Advisory Agreement. The
Advisory Agreements provide that the Adviser may render service to others.
In addition to receiving its advisory fee from the Funds, Norwest may also act
and be compensated as investment manager for its clients with respect to assets
which are invested in a Fund. In some instances Norwest may elect to credit
against any investment management, custodial or other fee received from, or
rebate to, a client who is also a shareholder in the Fund an amount equal to all
or a portion of the fees received by Norwest or any affiliate of Norwest from a
Fund with respect to the client's assets invested in the Fund.
The advisory fees are accrued daily and paid monthly. Norwest, in its sole
discretion, may waive all or any portion of its advisory fee with respect to
each Fund. Norwest has agreed to reimburse the Trust for certain of each Fund's
operating expenses (exclusive of interest, taxes and brokerage fees,
organization expenses and, if applicable, distribution expenses, all to the
extent permitted by applicable state law or regulation) which in any year exceed
the limits prescribed by any state in which the Fund's shares are qualified for
sale. The Trust may elect not to qualify its shares for sale in every state.
For the purpose of this obligation to reimburse expenses, a Fund's annual
expenses are estimated and accrued daily, and any appropriate estimated payments
will be made by Norwest monthly. Subject to these obligations, the Trust pays
for all of its expenses.
Subject to the obligations of Norwest to reimburse the Trust for its excess
expenses as described above, the Trust has, under the Investment Advisory
Agreements, confirmed its obligation to pay all its other expenses, including:
(i) interest charges, taxes, brokerage fees and commissions; (ii) certain
insurance premiums; (iii) fees, interest charges and expenses of the Trust's
custodian, transfer agent and dividend disbursing agent; (iv) fees of pricing,
interest, dividend, credit and other reporting services; (v) costs of membership
in trade associations; (vi) telecommunications expenses; (vii) auditing, legal
and compliance expenses; (viii) costs of the Trust's formation and maintaining
its existence; (ix) costs of preparing and printing the Trust's prospectuses,
statements of additional information, account application forms and shareholder
reports and delivering them to existing and prospective shareholders; (x) costs
of maintaining books of original entry for portfolio and fund accounting and
other required books and accounts and of calculating the net asset value of
shares of the Trust; (xi) costs of reproduction, stationery and supplies; (xii)
compensation of the Trust's trustees, officers and employees who are not
employees of the Adviser, Forum Financial Services, Inc. or affiliated persons
of the Adviser or Forum Financial Services, Inc. and costs of other personnel
performing services for the Trust; (xiii) costs of corporate meetings; (xiv)
registration fees and related expenses for registration with the SEC and the
securities regulatory authorities of other countries in which the Trust's shares
are sold; (xv) state securities law registration fees and related expenses;
(xvi) fees and out-of-pocket expenses payable to Forum Financial Services, Inc.
under any distribution, management or similar agreement; (xvii) and all other
fees and expenses paid by the Trust pursuant to any distribution or shareholder
service plan adopted pursuant to Rule 12b-1 under the Act.
The following table shows the dollar amount of fees payable under the Investment
Advisory Agreements between Norwest and the Trust with respect to each Fund, the
amount of fee that was waived by Norwest, if any, and the actual fee received by
Norwest. The data is for the past fiscal year.
Fee Fee Fee
Payable Waived Retained
------- ------ --------
Diversified Equity Fund 3,737,147 0 3,737,147
Growth Equity Fund 3,961,897 0 3,961,897
Income Equity Fund 187,584 0 187,584
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Intermediate U.S. Government Fund 160,764 0 160,764
Stable Income Fund 114,429 0 114,429
SUBADVISORY ARRANGEMENTS
With respect to each of, Diversified Equity Fund and Growth Equity Fund (the
Funds that may invest in international securities), Norwest and the Trust have
entered into Subadvisory Agreements with Schroder.
Schroder makes investment decisions for each of the Funds listed above and
continuously reviews, supervises and administers each Fund's investment program
with respect to that portion, if any, of the respective Fund's portfolio that
Norwest has so delegated. Schroder is required to furnish at its own expense
all services, facilities and personnel necessary in connection with managing of
each Fund's investments and effecting portfolio transactions for each Fund (to
the extent of Norwest's delegation).
The Subadvisory Agreements among those Funds, Norwest and the Subadviser will
continue in effect only if such continuance is specifically approved at least
annually by the Board or by vote of the shareholders of the Fund, and in either
case by a majority of the Trustees who are not parties to the Subadvisory
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the Subadvisory Agreement.
The Subadvisory Agreement with respect to a Fund is terminable without penalty
by the Fund with respect to that Fund on 60 days written notice when authorized
either by vote of the Fund's shareholders or by a vote of a majority of the
Board, or by the Subadviser on not more than 60 days nor less than 30 days
written notice, and will automatically terminate in the event of its assignment.
The Subadvisory Agreements also provide that, with respect to each Fund, neither
the Subadviser nor its personnel shall be liable for any error of judgment or
mistake of law or for any act or omission in the performance of its or their
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of the Subadviser's or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Subadvisory Agreement. The Subadvisory Agreements provide that the Subadviser
may render services to others.
The Subadvisory fees are accrued daily and paid monthly. Each Subadviser, in
its sole discretion, may waive all or any portion of its subadvisory fee with
respect to each Fund.
ADMINISTRATION
Forum supervises the overall management of the Trust (which includes, among
other responsibilities, negotiation of contracts and fees with, and monitoring
of performance and billing of, the Trust's transfer agent and custodian and
arranging for maintenance of books and records of the Trust) and provides the
Trust with general office facilities pursuant to a Management Agreement.
The Management Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by the shareholders and,
in either case, by a majority of the Trustees who are not parties to the
Management Agreement or interested persons of any such party.
The Management Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to any Fund by vote of that Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Management Agreement also provides that, with respect to
each Fund, neither Forum nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the performance of its
or their duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of Forum's or their duties or by reason of
reckless disregard of its or their obligations and duties under the Management
Agreement.
The following table shows the dollar amount of fees payable under the Management
Agreement between Forum and the Trust with respect to each Fund, the amount of
fee that was waived by Forum, if any, and the actual fee received by Forum. The
data is for the past fiscal year.
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<PAGE>
Fee Fee Fee
Payable Waived Retained
------- ------ --------
Diversified Equity Fund 574,946 287,473 287,473
Growth Equity Fund 440,211 286,137 154,074
Income Equity Fund 37,517 37,517 0
Intermediate U.S. Government Fund 48,716 48,716 0
Stable Income Fund 38,143 38,143 0
DISTRIBUTION
Forum also acts as distributor of the shares of the Fund. Forum acts as
distributor of the Funds pursuant to a Distribution Services Agreement with the
Trust. Forum distributes shares of each Fund on a "best efforts" basis under
which it is required to take and pay for only such shares as may be sold.
Under the Distribution Services Agreement, the Trust has agreed to indemnify,
defend and hold Forum, and any person who controls Forum within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which Forum or any such controlling person may incur,
under the 1933 Act, or under common law or otherwise, arising out of or based
upon any alleged untrue statement of a material fact contained in the Trust's
Registration Statement or a Fund's Prospectus or Statement of Additional
Information in effect from time to time under the 1933 Act or arising out of or
based upon any alleged omission to state a material fact required to be stated
in any one thereof or necessary to make the statements in any one thereof not
misleading. Forum is not, however, protected against any liability to the Trust
or its shareholders to which Forum would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of Forum's reckless disregard of its obligations and duties
under the Distribution Services Agreement.
With respect to each Fund, the Distribution Services Agreement will continue in
effect only if such continuance is specifically approved at least annually by
the Board or by the shareholders and, in either case, by a majority of the
Trustees who are not parties to the Distribution Services Agreement or
interested persons of any such party and, with respect to each class of a Fund
for which there is an effective plan of distribution adopted pursuant to Rule
12b-1, who do not have any direct or indirect financial interest in any
distribution plan of the Fund or in any agreement related to the distribution
plan cast in person at a meeting called for the purpose of voting on such
approval.
The Distribution Services Agreement terminates automatically if assigned. With
respect to each Fund, the Distribution Services Agreement may be terminated at
any time without the payment of any penalty (i) by the Board or by a vote of the
Fund's shareholders or, with respect to each class of a Fund for which there is
an effective plan of distribution adopted pursuant to Rule 12b-1, a majority of
Trustees who do not have any direct or indirect financial interest in any such
plan or in any agreements related to the plan, on 60 days' written notice to
Forum or (ii) by Forum on 60 days' written notice to the Trust.
Under the Distribution Services Agreement, Forum receives, and may reallow to
certain financial institutions, the initial sales charges assessed on purchases
of A Shares of the Funds. With respect to B Shares of each Fund, the Funds have
adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") which authorizes the payment to Forum under the Distribution Services
Agreement of a distribution services fee, which may not exceed an annual rate of
0.75%, and a maintenance fee in an amount equal to 0.25%, of the average daily
net assets of the Fund attributable to the B Shares.
The Plan provides that all written agreements relating to the Plan must be in a
form satisfactory to the Board. In addition, the Plan requires the Trust and
Forum to prepare, at least quarterly, written reports setting forth all amounts
expended for distribution purposes by the Funds and Forum pursuant to the Plan
and identifying the distribution activities for which those expenditures were
made.
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<PAGE>
The Plan permits the Board to authorize each Fund to assume the uncovered
distribution charges or unreimbursed distribution expenses of another
registered investment company or series thereof upon merger or combination
with, or acquisition of, substantially all of the assets of that registered
investment company or series.
The Plan is "semi-enhanced" in that under the circumstances described below,
payments to Forum under the Plan continue while there are outstanding
uncovered distribution charges. In the event that (i) the Plan is not
terminated but Forum (or any subsequent distributor) is replaced or terminated
as distributor of a Fund's B Shares, (ii) the Plan is terminated and a Fund
adopts a distribution plan relating to a class of shares of the Fund that has
a sales load structure substantially similar (as defined in the Plan) to that
of the B Shares or (iii) the Plan is terminated and the Trust alters the
terms of the contingent deferred sales charges applicable to B Shares of a
Fund outstanding at the time of such termination, the Fund will continue to
pay distribution services fees to Forum (or any subsequent distributor of the
Fund's B Shares) but only with respect to sales that occurred prior to any
replacement or termination. Except as described above, in the event that the
Plan is terminated with respect to a Fund, the Fund will cease paying any
distribution services fees. Uncovered distribution charges are equivalent to
all sales commissions previously due (plus interest), less amounts received
pursuant to the Plan and all contingent deferred sales charges previously
paid to Forum.
The Plan provides that, with respect to each class of each Fund to which it
applies, it will remain in effect for one year from the date of its adoption and
thereafter may continue in effect for successive annual periods provided it is
approved by the shareholders of the respective class or by the Board, including
a majority of trustees who are not interested persons of the Trust and who have
no direct or indirect interest in the operation of the Plan, the Distribution
Services Agreement or any agreement related to the Plan. The Plan further
provides that it may not be amended to increase materially the costs which may
be borne by the Trust for distribution pursuant to the Plan without shareholder
approval and that other material amendments to the Plan must be approved by the
trustees in the manner described in the preceding sentence. The Plan may be
terminated at any time by a vote of the Board or by the shareholders of the
respective classes.
As of the date hereof, the Trust had not yet commenced operations with respect
to A Shares and B Shares of the Funds. Thus, Forum had not yet received any fee
for its distribution services with respect to each Fund's B Shares nor any sales
charges with respect to sales of each Fund's A Shares.
TRANSFER AGENT
Norwest acts as Transfer Agent of the Trust pursuant to a Transfer Agency
Agreement. The Transfer Agency Agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by a vote
of the shareholders of the Trust and in either case by a majority of the
Trustees who are not parties to the Transfer Agency Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
Transfer Agency Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are:
(1) answering customer inquiries regarding account status and history, the
manner in which purchases and redemptions of shares of the Fund may be effected
and certain other matters pertaining to the Fund; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, (4) assisting in processing purchase and redemption
transactions and receiving wired funds; (5) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (6) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (7) furnishing periodic statements and confirmations of
purchases and redemptions; (8) transmitting proxy statements, annual reports,
prospectuses and other communications from the Trust to its shareholders; (9)
receiving, tabulating and transmitting to the Trust proxies executed by
shareholders with respect to meetings of shareholders of the Trust; and (10)
providing such other related services as the Trust or a shareholder may request.
For its services, the Transfer Agent receives from the Trust, with respect to
each Fund a fee computed and paid monthly at the annual rate of 0.25% of the
Fund's average daily net assets (or, in those Funds with more than one class,
the Fund's average daily net assets attributable to the class).
CUSTODIAN
Pursuant to a Custodian Agreement, Norwest acts as the custodian of the Trust's
assets. The custodian's responsibilities include safeguarding and controlling
the Trust's cash and securities, determining income and collecting interest on
Fund investments. For these services, the custodian receives no fee. The
custodian receives a separate fee for performing certain functions in connection
with loans of portfolio securities.
Pursuant to rules adopted under the 1940 Act, each Fund may maintain its foreign
securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Fund; the reputation of the institution in its national market;
the political and economic stability of the country in which the institution is
located; and further risks of potential nationalization or expropriation of Fund
assets. The custodian employs qualified foreign subcustodians to provide
custody of the Funds' foreign assets in accordance with applicable regulations.
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A Fund will not pay custodian fees to the extent the Fund invests in shares of
another registered investment company. Where the Fund's investments consists
solely of such shares, the Fund will pay no custodian fees directly
The Chase Manhattan Bank, N.A. serves as custodian to International Portfolio II
of Core Trust and is compensated by Core Trust with respect to that Portfolio.
Norwest serves as custodian of Small Company Portfolio and Index Portfolio of
Core Trust and receives no compensation for its services to those Portfolios.
PORTFOLIO ACCOUNTING
Forum Financial Corp., an affiliate of Forum, performs portfolio accounting
services for each Fund pursuant to a Fund Accounting Agreement with the Trust.
The Fund Accounting Agreement will continue in effect only if such continuance
is specifically approved at least annually by the Board or by a vote of the
shareholders of the Trust and in either case by a majority of the Trustees who
are not parties to the Fund Accounting Agreement or interested persons of any
such party, at a meeting called for the purpose of voting on the Fund Accounting
Agreement.
Under its agreement, FFC prepares maintains books and records of each Fund on
behalf of the Trust that are required to be maintained under the 1940 Act,
calculates the net asset value per share of each Fund (and class thereof) and
dividends and capital gain distributions and prepares periodic reports to
shareholders and the SEC. For its services, FFC receives from the Trust with
respect to each Fund a fee of $36,000 per year plus, for each class of the Fund
above one, $6,000 per year. In addition, FFC is paid an additional $12,000 per
year with respect to tax-free money market Funds, global and international Funds
and Funds with more than 25% of their total assets invested in asset backed
securities, that have more than 100 security positions or that have a monthly
portfolio turnover rate of 10% or greater.
FFC is required to use its best judgment and efforts in rendering fund
accounting services and is not be liable to the Trust for any action or inaction
in the absence of bad faith, willful misconduct or gross negligence. FFC is not
responsible or liable for any failure or delay in performance of its fund
accounting obligations arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control and the Trust has agreed to
indemnify and hold harmless FFC, its employees, agents, officers and directors
against and from any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character arising out of or in any way related to FFC's actions
taken or failures to act with respect to a Fund or based, if applicable, upon
information, instructions or requests with respect to a Fund given or made to
FFC by an officer of the Trust duly authorized. This indemnification does not
apply to FFC's actions taken or failures to act in cases of FFC's own bad faith,
willful misconduct or gross negligence.
The following table shows the dollar amount of fees payable to FFC for its
portfolio accounting services with respect to each Fund, the amount of fee that
was waived by FFC, if any, and the actual fee received by FFC. The data is for
the past fiscal year.
Fee Fee Fee
Payable Waived Retained
------- ------ --------
Diversified Equity Fund 34,700 0 34,700
Growth Equity Fund 34,700 0 34,700
Income Equity Fund 34,700 0 34,700
Intermediate U.S. Government Fund 52,700 0 52,700
Stable Income Fund 51,700 0 51,700
FFC performs similar services for each Portfolio and, in addition, acts as each
Portfolio's transfer agent.
EXPENSES
The Trust may elect not to qualify its shares for sale in every state. The
Adviser has agreed to reimburse the Trust for certain of the operating expenses
of the Funds (exclusive of interest, taxes, brokerage, fees and organization
expenses, all to the extent permitted by applicable state law or regulation)
which in any year exceed the limits
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prescribed by any state in which the Fund's shares are qualified for sale.
Forum believes that currently the most restrictive expense ratio limitation
imposed by any state is 2-1/2% of the first $30 million of each Fund's average
net assets, 2% of the next $70 million of its average net assets and 1-1/2% of
its average net assets in excess of $100 million. For the purpose of this
obligation to reimburse expenses, a Fund's annual expenses are estimated and
accrued daily, and any appropriate estimated payments will be made by the
Adviser or the manager and distributor monthly.
Subject to the obligations of Norwest to reimburse the Trust for its excess
expenses as described above, the Trust has, under the Investment Advisory
Agreements, confirmed its obligation to pay all its other expenses, including:
(i) interest charges, taxes, brokerage fees and commissions; (ii) certain
insurance premiums; (iii) fees, interest charges and expenses of the Trust's
custodian, transfer agent and dividend disbursing agent; (iv) telecommunications
expenses; (v) auditing, legal and compliance expenses; (vi) costs of the Trust's
formation and maintaining its existence; (vii) costs of preparing and printing
the Trust's prospectuses, statements of additional information, account
application forms and shareholder reports and delivering them to existing and
prospective shareholders; (viii) costs of maintaining books of original entry
for portfolio and fund accounting and other required books and accounts and of
calculating the net asset value of shares of the Trust; (ix) costs of
reproduction, stationery and supplies; (x) compensation of the Trust's trustees,
officers and employees and costs of other personnel performing services for the
Trust who are not officers of the Adviser, Forum Financial Services, Inc. or
affiliated persons of the Adviser or Forum Financial Services, Inc.; (xi) costs
of corporate meetings; (xii) registration fees and related expenses for
registration with the SEC and the securities regulatory authorities of other
countries in which the Trust's shares are sold; (xiii) state securities law
registration fees and related expenses; (xiv) fees and out-of-pocket expenses
payable to Forum Financial Services, Inc. under any distribution, management or
similar agreement; (xv) and all other fees and expenses paid by the Trust
pursuant to any distribution or shareholder service plan adopted pursuant to
Rule 12b-1 under the Act.
6. OTHER INFORMATION
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of all Funds are sold on a continuous basis by the distributor.
Set forth below is an example of the method of computing the offering price of
the Funds' A Shares. All other shares of the Trust are offered at their next
determined net asset value. The example assumes a purchase of A Shares of a
hypothetical fund ("Fund Q") in an amount such that the purchase would be
subject to the fund's maximum sales charge (in this case, 4.5%) at a price based
on a hypothetical net asset value per share of A Shares of the fund. Offering
price is determined as follows: Net asset value per share times the sum of one
(1) plus the sales charge expressed as a percentage (for example 4.5% would
equal 0.045).
Net Asset Offering
Value Per Share Price
--------------- -----
Fund Q 11.48 12.00
STATEMENT OF INTENTION
As more fully described in the Prospectus, investors may obtain reduced sales
charges with respect to the purchase of A Shares of the Funds by means of a
written Statement of Intention, which expresses the investor's intention to
invest not less than $100,000 within a period of 13 months in A Shares of a
Fund. The Statement of Intention is not a binding obligation upon the investor
to purchase the full amount indicated. A Shares purchased with the first 5% of
such amount will be held subject to a registered pledge (while remaining
registered in the name of the investor) to secure payment of the higher sales
charge applicable to the shares actually purchased if the full amount indicated
is not purchased, and such pledged shares will be involuntarily redeemed to pay
the additional sales charge, if necessary. When the full amount indicated has
been purchased, the shares will be released from pledge.
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<PAGE>
EXCHANGES
By making an exchange, the investor authorizes the Trust's transfer agent to act
on telephonic instructions from any person representing himself or herself to be
the investor and believed by the Trust's transfer agent to be genuine. The
records of the Trust's transfer agent of such instructions are binding. The
exchange procedures may be modified or terminated at any time upon appropriate
notice to shareholders. For Federal income tax purposes, exchanges are treated
as sales on which a purchaser will realize a capital gain or loss depending on
whether the value of the shares redeemed is more or less than his basis in such
shares at the time of such transaction.
Shareholders of A Shares may purchase, with the proceeds from a redemption of
all or part of their shares, A Shares of the other funds of the Trust that offer
A Shares or Investor class shares ("Investor Shares") of Ready Cash Investment
Fund or Municipal Money Market Fund, two money market portfolios of the Trust.
Shareholders of B Shares may purchase, with the proceeds from a redemption of
all or part of their shares, B Shares of the other funds of the Trust that offer
B Shares or Exchange class shares ("Exchange Shares") of Ready Cash Investment
Fund.
Shareholders of Investor Shares of Ready Cash Investment Fund and Municipal
Money Market Fund may purchase, with the proceeds from a redemption of all or
part of their shares, Investor Shares of the other Fund or A Shares of the funds
of the Trust that offer A Shares. Shareholders of Exchange Shares of Ready Cash
Investment Fund may purchase, with the proceeds from a redemption of all or part
of their shares, B Shares of the funds of the Trust that offer B Shares.
Shareholders of A Shares or Investor Shares making an exchange will be subject
to the applicable sales charge of any A Shares acquired in the exchange;
provided, that the sales charge charged with respect to the acquired shares will
be assessed at a rate that is equal to the excess (if any) of the rate of the
sales charge that would be applicable to the acquired shares in the absence of
an exchange over the rate of the sales charge previously paid on the exchanged
shares. For purposes of the preceding sentence, A Shares acquired through the
reinvestment of dividends or distributions are deemed to have been acquired
with a sales charge rate equal to that paid on the shares on which the dividend
or distribution was paid.
In addition, A Shares and Investor Shares acquired by a previous exchange
transaction involving shares on which a sales charge has directly or indirectly
been paid (e.g., shares purchased with a sales charge or issued in connection
with an exchange transaction involving shares that had been purchased with a
sales charge), as well as additional shares acquired through reinvestment of
dividends or distributions on such shares will be treated as if they had been
acquired subject to that sales charge.
B Shares may be exchanged without the payment of any contingent deferred sales
charge; however, B Shares or Exchange Shares acquired as a result of such
exchange and subsequently redeemed will nonetheless be subject to the contingent
deferred sales charge applicable to the original B Shares as if those shares
were being redeemed at that time. Exchange Shares may be exchanged without the
payment of any contingent deferred sales charge; however, B Shares acquired as a
result of such exchange and subsequently redeemed will nonetheless be subject to
the contingent deferred sales charge applicable to the Exchange Shares as if
those shares were being redeemed at that time.
REDEMPTIONS
In addition to the situations described in the Prospectus with respect to the
redemptions of shares, the Trust may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to a Fund's shares as provided in the Prospectus from time to time.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partially in portfolio securities if the Board determines that
payment in cash would be detrimental to the best interests of the Fund. If
payment for shares redeemed is made wholly or partially in portfolio securities,
brokerage costs may be incurred by the shareholder in converting the securities
to cash. The Trust has filed a formal election with the SEC pursuant to
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which a Fund will only effect a redemption in portfolio securities if the
particular shareholder is redeeming more than $250,000 or 1% of the Fund's total
net assets, whichever is less, during any 90-day period.
CONTINGENT DEFERRED SALES CHARGE (A SHARES)
Certain A Shares of the Funds on which no initial sales charge was assessed,
that are redeemed within specified periods after the purchase date will be
subject to a contingent deferred sales charge upon redemption.
RIGHT OF ACCUMULATION. Contingent deferred sales charges may be charged on
redemptions of A Shares purchased pursuant to the Cumulative Quantity Discount
(Right of Accumulation). The contingent deferred sales charge will apply to A
Shares purchased if the value of those shares on the date of purchase plus the
net asset value of any Investor Shares held by the shareholder (as of the close
of business on the previous Fund Business Day) of all A Shares held by the
shareholder exceed $1,000,000. For example, if a shareholder has made prior
purchases of A Shares which now have a value of $900,000, the purchase of
$150,000 of A Shares will not be subject to an initial sales charge but will be
subject to the contingent deferred sales charge. The $900,000 of A Shares is
not subject to the contingent deferred sales charge.
STATEMENT OF INTENTION. Contingent deferred sales charges may be charged on
redemptions of A Shares purchased pursuant to a Statement of Intention ("SOI").
The contingent deferred sales charge will not apply to SOIs of under $1,000,000
and will not be applied to SOIs for a greater amount if the shareholder never
purchases $1,000,000 or more of A Shares under the SOI. If a shareholder
purchases $1,000,000 or more under an SOI, the contingent deferred sales charge
will apply with respect to the entire amount purchased. The holding period for
each A Share, however, shall be determined from the date the share was
purchased. If the shareholder redeems A Shares during the period that the SOI
is in effect, a contingent deferred sales charge will be charged at the time the
shareholder has purchased $1,000,000 or more worth of A Shares pursuant to the
SOI and will be assessed at the rate applicable in the case of a single purchase
of the minimum amount specified in the SOI. If the shareholder purchases less
than the amount specified under the SOI, an additional contingent deferred sales
charge may be assessed in respect of A Shares previously redeemed based on the
amount actually purchased pursuant to the SOI.
A Shares purchased by a shareholder within 60 days following the redemption by
the shareholder of A Shares in the same Fund with a value at least equal to the
A Shares being purchased will not be subject to a contingent deferred sales
charge; provided, however, that this exemption is not applicable to more than
two purchases within a 12-month period.
CONTINGENT DEFERRED SALES CHARGE (A SHARES AND B SHARES)
With respect to A Shares and B Shares of the Funds, certain redemptions are not
subject to any contingent deferred sales charge. No contingent deferred sales
charge is imposed on (i) redemptions of shares acquired through the
reinvestment of dividends and distributions, (ii) involuntary redemptions by a
Fund of shareholder accounts with low account balances, (iii) redemptions of
shares following the death or disability of a shareholder if the Fund is
notified within one year of the shareholder's death or disability, (iv)
redemptions to effect a distribution (other than a lump sum distribution) from
an IRA, Keogh plan or Section 403(b) custodial account or from a qualified
retirement plan. For these purposes, the term disability shall have the meaning
ascribed thereto in Section 72(m)(7) of the Code. Under that provision, a
person is considered disabled if the person is unable to engage in any
substantial activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of long-continued
and indefinite duration. Appropriate documentation satisfactory to the Fund is
required to substantiate any shareholder death or disability.
CONVERSION OF B SHARES
The conversion of Exchange Shares to Investor Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the distribution services fee with respect to the Exchange Shares
does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Code, and (ii) the conversion of Exchange
Shares to Investor Shares does not constitute a taxable event under Federal
income tax law. The conversion of Exchange Shares to Investor Shares may be
suspended if such an opinion is no longer available at
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<PAGE>
the time the conversion is to occur. In that event, no further conversions of
Exchange Shares would occur, and shares might continue to be subject to a
distribution services fee for an indefinite period, which may extend beyond the
specified number of years for conversion of the original B Shares.
DETERMINATION OF NET ASSET VALUE
Securities owned by a Fund for which market quotations are readily available are
valued at current market value. The Funds value their securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the
security is valued at the mean of the last bid and asked prices. All other
securities for which over-the-counter market quotations are readily available
generally are valued at the mean of the current bid and asked prices. When
market quotations are not readily available, securities are valued at fair value
as determined in good faith by the Board. Debt securities may be valued on the
basis of valuations furnished by pricing services which utilize electronic data
processing techniques to determine valuations for normal institutional-size
trading units of debt securities, without regard to sale or bid prices, when
such valuations are believed to more accurately reflect the fair market value of
such securities. All assets and liabilities of a Fund denominated in foreign
currencies are 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.
Under procedures adopted by the Board, a net asset value for a Fund later
determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at a net asset value determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original net asset value and the recalculated net
asset value divided by the recalculated net asset value is 0.005 (1/2 of 1%) or
less or shareholder transactions are otherwise insubstantially affected, further
action is not required.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds will be made independently from those for any
other client account or investment company that is or may in the future become
managed by the Adviser or its affiliates. Investment decisions are the product
of many factors including basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as is possible,
averaged as to price and allocated between such clients in a manner which, in
the respective Adviser's opinion, is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients. In addition, when purchases or sales of the
same security for the Fund and other client accounts managed by the Advisers
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantages available to large denomination purchases or
sales.
Purchases and sales of fixed income portfolio securities are generally effected
as principal transactions. These securities are normally purchased directly
from the issuer or from an underwriter or market maker for the securities.
There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and ask prices. In the case of
securities traded in the foreign and domestic over-the-counter markets, there is
generally no stated commission, but the price usually includes an undisclosed
commission or markup. In underwritten offerings, the price includes a disclosed
fixed commission or discount.
Purchases and sales of equity securities on exchanges are generally effected
through brokers who charge commissions. Allocations of transactions to brokers
and dealers and the frequency of transactions are determined by the Advisers in
their best judgment and in a manner deemed to be in the best interest of
shareholders of the Funds rather than by any formula. The primary consideration
is prompt execution of orders in an effective manner and at the most favorable
price available to the Fund. In transactions on stock exchanges in the United
States, these
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commissions are negotiated, whereas on foreign stock exchanges these commissions
are generally fixed. Where transactions are executed in the over-the-counter
market, the Fund will seek to deal with the primary market makers; but when
necessary in order to obtain best execution, it will utilize the services of
others. In all cases the Fund will attempt to negotiate best execution. No
Fixed Income Fund paid any brokerage commissions during the fiscal period ended
October 31, 1995.
The following table shows the aggregate brokerage commissions with respect to
each Equity Fund with respect to each Fund's investment in equity securities.
The data is for the past fiscal year.
Aggregate
Commissions Paid
----------------
Diversified Equity Fund 180,093
Growth Equity Fund 115,993
Income Equity Fund 25,321
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with securities transactions, the Advisers take into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker. The Advisers may also take into account
payments made by brokers effecting transactions for a Fund (i) to the Fund or
(ii) to other persons on behalf of the Fund for services provided to it for
which it would be obligated to pay.
In addition, the Advisers may give consideration to research services furnished
by brokers to the Advisers for their use and may cause the Fund to pay these
brokers a higher amount of commission than may be charged by other brokers.
Such research and analysis may be used by the Advisers in connection with
services to clients other than the Funds, and the Advisers' fees are not reduced
by reason of the Advisers' receipt of the research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the obligation to seek the most
favorable price and execution available and such other policies as the Board may
determine, an Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute portfolio transactions for the Funds.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized the Advisers to employ their
respective affiliates to effect securities transactions of the Funds, provided
certain other conditions are satisfied. Payment of brokerage commissions to an
affiliate of an Adviser for effecting such transactions is subject to Section
17(e) of the 1940 Act, which requires, among other things, that commissions for
transactions on securities exchanges paid by a registered investment company to
a broker which is an affiliated person of such investment company, or an
affiliated person of another person so affiliated, not exceed the usual and
customary brokers' commissions for such transactions. It is the Funds' policy
that commissions paid to Schroder Securities Limited, Norwest Investment
Management, Inc. and other affiliates of an Adviser will, in the judgment of the
Adviser responsible for making portfolio decisions and selecting brokers, be (i)
at least as favorable as commissions contemporaneously charged by the affiliate
on comparable transactions for its most favored unaffiliated customers and (ii)
at least as favorable as those which would be charged on comparable transactions
by other qualified brokers having comparable execution capability. The Board,
including a majority of the non-interested Trustees, has adopted procedures to
ensure that commissions paid to affiliates of an Adviser by the Funds satisfy
the foregoing standards.
The Fund has no understanding or arrangement to direct any specific portion of
its brokerage to Schroder Securities, and will not direct brokerage to Schroder
Securities in recognition of research services.
From time to time, the Funds may purchase securities of a broker or dealer
through which its regularly engages in securities transactions. The following
table shows these purchases, and their respective values, at October 31, 1995.
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Market Value at
October 31, 1995
Diversified Equity Fund
Charles Schwab Corporation 8,884,652
Donaldson, Lufkin & Jenrette, Inc. 1,529,150
Growth Equity Fund
Charles Schwab Corporation 9,797,364
Donaldson, Lufkin & Jenrette, Inc. 1,695,750
Stable Income Fund
Lehman Brothers, Inc. 2,028,896
TAXATION
Each Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended. Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements each
Fund must meet to qualify for such treatment, and of the application of state
and local tax laws to his or her particular situation.
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered a 60 percent long-term and 40
percent short-term capital gain or loss. Each Fund can elect to exempt its
section 1256 contracts which are part of a "mixed straddle" (as described below)
from the application of section 1256.
With respect to over-the-counter put and call options, gain or loss realized by
a Fund upon the lapse or sale of such options held by such Fund will be either
long-term or short-term capital gain or loss depending upon the Fund's holding
period with respect to such option. However, gain or loss realized upon the
lapse or closing out of such options that are written by a Fund will be treated
as short-term capital gain or loss. In general, if a Fund exercises an option,
or an option that a Fund has written is exercised, gain or loss on the option
will not be separately recognized but the premium received or paid will be
included in the calculation of gain or loss upon disposition of the property
underlying the option.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by such Fund may constitute a
"straddle" for Federal income tax purposes. A straddle of which at least one,
but not all, the positions are section 1256 contracts may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that (i) loss realized on
disposition of one position of a straddle not be recognized to the extent that a
Fund has unrealized gains with respect to the other position in such straddle;
(ii) a Fund's holding period in straddle positions be suspended while the
straddle exists (possibly resulting in any gain being treated as short-term
capital gain rather than long-term capital gain); (iii) losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-section 1256 positions be treated as 60 percent long-term and 40
percent short-term capital loss; (iv) losses recognized with respect to certain
straddle positions which would otherwise constitute short-term capital losses be
treated as long-term capital losses; and (v) the deduction of interest and
carrying charges attributable to certain straddle positions may be deferred.
Various elections are available to a Fund which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles. In general, the
straddle rules described above do not apply to any straddles held by a Fund if
all of the offsetting positions consist of section 1256 contracts.
-A-34-
<PAGE>
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110, independent
auditors, acts as auditors for the Trust.
OWNERSHIP OF FUND SHARES
Prior to the public issuance of shares of the Funds, due to its initial
investment, Forum owned all outstanding shares of each Fund and, accordingly,
may be deemed to be a controlling person of each Fund. Upon the investment in
each Fund by public shareholders, Forum ceased to be a controlling person of any
Fund. As of April 16, 1996, the Trustees and officers of the Trust in the
aggregate owned less than one percent of the outstanding shares of each Fund.
The following persons owned of record 5% or more of the outstanding shares of a
Fund, or any class thereof, as of April 16, 1996:
FUND NAME/ADDRESS SHARE BALANCE % OF FUND
DIVERSIFIED EQUITY
FUND Emseg & Co. 24,886,738.181 87.60%
733 Marquette Ave.
Minneapolis, MN 55479-0036
GROWTH EQUITY
FUND Emseg & Co. 22,303,669.626 92.64%
INCOME EQUITY
FUND Emseg & Co. 2,404,629.303 88.00%
INTERMEDIATE U.S.
GOVERNMENT FUND Emseg & Co. 3,888,311.041 94.09%
STABLE INCOME
FUND Emseg & Co. 5,773,922.807 90.67%
Norwest Advantage IRA Rollovers 321,599.323 5.05%
733 Marquette Ave.
Minneapolis, MN 55479-0036
ADDITIONAL INFORMATION ABOUT THE TRUST
Currently, the Trust is divided into thirty-one separate series representing
shares of each of the five Funds and shares of Cash Investment Fund, Ready Cash
Investment Fund, U.S. Government Fund, Treasury Fund, Municipal Money Market
Fund, Adjustable U.S. Government Reserve Fund, Government Income Fund, Income
Fund, Total Return Bond Fund, Tax-Free Income Fund, Arizona Tax-Free Fund,
Colorado Tax-Free Fund, Minnesota Tax-Free Fund, Income Stock Fund, ValuGrowth
Stock Fund, Small Company Stock Fund, Contrarian Stock Fund, Large Company
Growth Fund, Small Company Growth Fund, International Fund, Index Fund,
Conservative Balanced Fund, Moderate Balanced Fund, Growth Balanced Fund,
Managed Fixed Income Fund and Short Maturity Investment Fund. The Trust has
received an order from the SEC permitting the issuance and sale of separate
classes of shares representing interests in each of the Trust's portfolios. It
is anticipated, however, that the Trust will operate the classes of each Fund in
accordance with rules of the SEC adopted after the Trust obtained its exemptive
order.
The Board determined that currently no conflict of interest exists between or
among each Fund's A Shares, B Shares, and other classes, if any. On an ongoing
basis, the Board, pursuant to its fiduciary duties under the 1940 Act and state
law, will seek to ensure that no such conflict arises.
The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or a shareholder is
subject to the jurisdiction of courts in those states, the courts may not apply
Delaware law, and may thereby subject the Trust shareholders to liability. To
guard against this risk, the Trust Instrument of the Trust disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation and instrument entered into by
the Trust or its Trustees, and provides for indemnification out of Trust
property of any shareholder held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss beyond his
investment because of shareholder liability is limited to circumstances in which
(1) a court refuses to apply Delaware law, (2) no contractual limitation of
liability is in effect, and (3) the Trust itself is unable to meet its
obligations. In light of Delaware law, the nature of the Trust's business, and
the nature of its assets, the Board believes that the risk of personal liability
to a Trust shareholder is extremely remote.
-A-35-
<PAGE>
FINANCIAL STATEMENTS
The financial statements of each Fund for the year ended October 31, 1995 (which
include statements of assets and liabilities, statements of operations,
statements of changes in net assets, notes to financial statements, financial
highlights, schedules of investments and the independent auditors' report
thereon) are included in the Annual Report to Shareholders of the Trust
delivered along with this SAI and are incorporated herein by reference.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Funds' registration statement filed with the SEC under the Securities Act of
1933 with respect to the securities offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract of other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
-A-36-
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." 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.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
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 some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment 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.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
-A-37-
<PAGE>
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a 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 debt rated in higher rated
categories.
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
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated C typically are subordinated to senior debt which as assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
-A-38-
<PAGE>
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
-A-39-
<PAGE>
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
-A-40-
<PAGE>
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics: Leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A-1 and A-2. Issues assigned an
A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are delineated with the numbers 1, 2 and 3 to indicate
the relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated A-2 are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 rating.
-A-41-
<PAGE>
F-3. Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
-A-42-
<PAGE>
NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1996
COMPONENT EQUITY FUNDS
DIVERSIFIED EQUITY FUND
GROWTH EQUITY FUND
EQUITY FUNDS
LARGE COMPANY GROWTH FUND
SMALL COMPANY GROWTH FUND
INTERNATIONAL FUND
INTERNATIONAL PORTFOLIO
INCOME EQUITY FUND
INDEX FUND
BALANCED FUNDS
CONSERVATIVE BALANCED FUND
MODERATE BALANCED FUND
GROWTH BALANCED FUND
FIXED INCOME FUNDS
INTERMEDIATE U.S. GOVERNMENT FUND
MANAGED FIXED INCOME FUND
STABLE INCOME FUND
<PAGE>
NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1996
This Statement of Additional Information ("SAI") supplements the Prospectus
offering I Shares (the "Shares") of Diversified Equity Fund, Growth Equity Fund,
Large Company Growth Fund, Small Company Growth Fund, International Fund, Income
Equity Fund, Index Fund, Conservative Balanced Fund, Moderate Balanced Fund,
Growth Balanced Fund, Intermediate U.S. Government Fund, Managed Fixed Income
Fund and Stable Income Fund (each a "Fund" and collectively the "Funds"). Each
Fund is a diversified series of Norwest Advantage Funds, a registered open-end,
management investment company (the "Trust"). International Fund currently
invests all of its investable assets in the International Portfolio of Core
Trust (Delaware) ("International Portfolio"), a registered open-end, management
investment company. This SAI should be read only in conjunction with the Funds'
Prospectus, copies of which may be obtained without charge.
TABLE OF CONTENTS
Page
----
1. Norwest Advantage Funds. . . . . . . . . . . . . . . . . . . A-3
2. Investment Policies. . . . . . . . . . . . . . . . . . . . . A-4
3. Investment Limitations . . . . . . . . . . . . . . . . . . . A-15
4. Performance Data and Advertising . . . . . . . . . . . . . . A-18
5. Management . . . . . . . . . . . . . . . . . . . . . . . . . A-21
6. Other Information. . . . . . . . . . . . . . . . . . . . . . A-31
Appendix A - Description of Securities Ratings. . . . . . . . . . A-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY AN INVESTOR WITHOUT CHARGE BY
CONTACTING THE TRUST'S DISTRIBUTOR, FORUM FINANCIAL SERVICES, INC., TWO PORTLAND
SQUARE, PORTLAND, MAINE 04101.
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<PAGE>
1. NORWEST ADVANTAGE FUNDS
DEFINITIONS
The Trust was originally organized under the name Prime Value Funds, Inc. as a
Maryland corporation on August 29, 1986. On July 30, 1993, pursuant to a
shareholder vote, the Trust was reorganized as a Delaware business trust. On
October 1, 1995, the Trust's name was changed from "Norwest Funds." As used in
this SAI, the following terms shall have the meanings listed:
"Adviser" shall mean each Fund's investment adviser, Norwest Investment
Management, a part of Norwest. "Advisers" shall mean, collectively, the Adviser
and Schroder.
"Board" shall mean the Board of Trustees of the Trust.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Core Trust" shall mean Core Trust (Delaware), an open-end, management
investment company registered under the 1940 Act.
"Forum" shall mean Forum Financial Services, Inc., the Trust's
administrator and distributor of the Trust's shares.
"FFC" shall mean Forum Financial Corp., the Trust's fund accountant.
"Fund" shall mean each of the thirteen separate portfolios of the Trust to
which this Statement of Additional Information relates as identified on the
cover page.
"Norwest" shall mean Norwest Bank Minnesota, N.A., a subsidiary of Norwest
Corporation.
"NRSRO" shall mean a nationally recognized statistical rating organization.
"Portfolio" shall mean International Portfolio, International Portfolio II,
Small Company Portfolio and Index Portfolio, four separate portfolios of Core
Trust.
"Schroder" shall mean Schroder Capital Management Inc., the investment
subadviser to Diversified Equity Fund, Growth Equity Fund, International Fund,
Conservative Balanced Fund, Moderate Balanced Fund and Growth Balanced Fund.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Transfer Agent" shall mean Norwest acting in its capacity as transfer and
dividend disbursing agent of the Trust.
"Trust" shall mean Norwest Advantage Funds, an open-end management
investment company registered under the 1940 Act.
"U.S. Government Securities" shall mean obligations issued or guaranteed by
the United States Government, its agencies or instrumentalities.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
-3-
<PAGE>
2. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in the
Prospectus concerning the Funds' investments, investment techniques and
strategies and the risks associated therewith. No Fund may make any investment
or employ any investment technique or strategy not referenced in the Prospectus
as relates to that Fund. For example, while the SAI describes "swap"
transactions below, only those Funds whose investment policies, as described in
the Prospectus, allow the Fund to invest in swap transactions may do so.
Reference to the investment policies and investment limitations of International
Fund also pertain to the International Portfolio, in which that Fund currently
invests all of its assets.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc., Standard & Poor's Corporation and other NRSROs
are private services that provide ratings of the credit quality of debt
obligations, including convertible securities. A description of the range of
ratings assigned to various types of bonds and other securities by several
NRSROs is included in Appendix A to this SAI. The Funds may use these ratings
to determine whether to purchase, sell or hold a security. However, ratings are
general and are not absolute standards of quality. Consequently, securities
with the same maturity, interest rate and rating may have different market
prices. If an issue of securities ceases to be rated or if its rating is
reduced after it is purchased by a Fund, the investment adviser or investment
subadviser of the Fund will determine whether the Fund should continue to hold
the obligation. Credit ratings attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings. An
issuer's current financial condition may be better or worse than a rating
indicates.
CONVERTIBLE SECURITIES
A Fund may invest in convertible securities. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to comparable nonconvertible securities. Although no
securities investment is without some risk, investment in convertible securities
generally entails less risk than in the issuer's common stock. However, the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stocks since they have fixed income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by a comparison of its yield with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
-4-
<PAGE>
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
EQUITY-LINKED SECURITIES
Equity-linked securities are securities that are convertible into or based upon
the value of, equity securities upon certain terms and conditions. The following
are three examples of equity-linked securities. A fund may invest in the
securities described below or other similar equity-linked securities.
Preferred Equity Redemption Cumulative Stock ("PERCS") technically are preferred
stock with some characteristics of common stock. PERCS are mandatorily
convertible into common stock after a period of time, usually three years,
during which the investors' capital gains are capped, usually at 30%. Commonly,
PERCS may be redeemed by the issuer at any time or if the issuer's common stock
is trading at a specified price level or better. The redemption price starts at
the beginning of the PERCS' duration period at a price that is above the cap by
the amount of the extra dividends the PERCS holder is entitled to receive
relative to the common stock over the duration of the PERCS and declines to the
cap price shortly before maturity of the PERCS. In exchange for having the cap
on capital gains and giving the issuer the option to redeem the PERCS at any
time or at the specified common stock price level, a Fund may be compensated
with a substantially higher dividend yield than that on the underlying common
stock. Funds that seek current income find PERCS attractive because a PERCS
provides a higher dividend income than that paid with respect to a company's
common stock.
Equity-Linked Securities ("ELKS") differ from ordinary debt securities, in that
the principal amount received at maturity is not fixed but is based on the price
of the issuer's common stock. ELKS are debt securities commonly issued in
fully registered form for a term of three years under an indenture trust. At
maturity, the holder of ELKS will be entitled to receive a principal amount
equal to the lesser of a cap amount, commonly in the range of 30% to 55% greater
than the current price of the issuer's common stock, or the average closing
price per share of the issuer's common stock, subject to adjustment as a result
of certain dilution events, for the 10 trading days immediately prior to
maturity. Unlike PERCS, ELKS are commonly not subject to redemption prior to
maturity. ELKS usually bear interest during the three-year term at a
substantially higher rate than the dividend yield on the underlying common
stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, the Investment Fund
may be compensated with the higher yield, contingent on how well the underlying
common stock does. Funds that seek current income find ELKS attractive because
ELKS provide a higher dividend income than that paid with respect to a company's
common stock.
Liquid Yield Option Notes ("LYONs") differ from ordinary debt securities, in
that the amount received prior to maturity is not fixed but is based on the
price of the issuer's common stock. LYONs are zero-coupon notes that sell at a
large discount from face value. For an investment in LYONs, a Fund will not
receive any interest payments until the notes mature, typically in 15 or 20
years, when the notes are redeemed at face, or par, value. The yield on LYONs,
typically, is lower-than-market rate for debt securities of the same maturity,
due in part to the fact that the LYONs are convertible into common stock of the
issuer at any time at the option of the holder of the LYON. Commonly, LYONs are
redeemable by the issuer at any time after an initial period or if the issuer's
common stock is trading at a specified price level or better, or, at the option
of the holder, upon certain fixed dates. The redemption price typically is the
purchase price of the LYONs plus accrued original issue discount to the date of
redemption, which amounts to the lower-than-market yield. A Fund will receive
only the lower-than-market yield unless the underlying common stock increases in
value at a substantial rate. LYONs are attractive to investors when it appears
that they will increase in value due to the rise in value of the underlying
common stock.
WARRANTS
Warrants are options to purchase an equity security at a specified price
(usually representing a premium over the applicable market value of the
underlying equity security at the time of the warrant's issuance) and usually
during a specified period of time. To the extent that the market value of the
security that may be purchased upon exercise of the warrant rises above the
exercise price, the value of the warrant will tend to rise. To the extent that
the exercise
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price equals or exceeds the market value of such security, the warrants will
have little or no market value. If a warrant is not exercised within the
specified time period, it will become worthless and the Fund will lose the
purchase price paid for the warrant and the right to purchase the underlying
security. The Fund may not invest more than 2% of its net assets in warrants
not traded on the American or New York Stock Exchange.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on Mortgage Assets (as defined in
the Prospectus) to make payments, mortgage-backed securities may contain
elements of credit enhancement. Credit enhancement falls into two categories:
(1) liquidity protection; and (2) protection against losses resulting after
default by an obligor on the underlying assets and collection of all amounts
recoverable directly from the obligor and through liquidation of the collateral.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets (usually the bank, savings association
or mortgage banker that transferred the underlying loans to the issuer of the
security), to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting after default and
liquidation 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 Funds will not pay any additional fees for
such credit enhancement, although the existence of credit enhancement may
increase the price of security.
Examples of credit enhancement arising out of the structure of the transaction
include (i) "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), (ii) creation
of "spread accounts" or "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 (iii) "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 enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that covered by
credit enhancement protection could adversely affect the return on an investment
in such a security.
OTHER GOVERNMENTAL RELATED MORTGAGE-BACKED SECURITIES
The Resolution Trust Corporation ("RTC"), which was organized by the U.S.
Government in connection with the savings and loan crisis, holds assets of
failed savings associations as either a conservator or receiver for such
associations, or it acquires such assets in its corporate capacity. These
assets include, among other things, single family and multi-family mortgage
loans, as well as commercial mortgage loans. In order to dispose of such assets
in an orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that RTC
holds or has acquired, as described above, and are supported by one or more of
the types of private credit enhancements used by Private Mortgage Lenders.
It is anticipated that in the future the Federal Deposit Insurance Corporation
(which also holds mortgage loans as a conservator or receiver of insolvent banks
or in its corporate capacity) or other governmental agencies or
instrumentalities may establish vehicles for the issuance of mortgage-backed
securities that are similar in structure and in types of credit enhancements to
RTC securities.
ASSET-BACKED SECURITIES
A Fund may invest in asset-backed securities, which have structural
characteristics similar to mortgage-backed securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. Asset-backed
securities are securities that represent direct or indirect participations in,
or are secured by and payable from, assets such as motor vehicle installment
sales contracts, installment loan contracts, leases of various types of real and
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personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts and special
purpose corporations.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution.
Asset-backed securities present certain risks that are not presented by
mortgage-backed debt securities or other securities in which a Fund may invest.
Primarily, these securities do not always have the benefit of a security
interest in comparable 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. Automobile receivables generally are secured by automobiles. Most issuers
of automobile receivables permit the loan servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and the
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
INTEREST-ONLY AND PRINCIPAL-ONLY SECURITIES
Some tranches of mortgage-backed securities, including CMOs, are structured so
that investors receive only principal payments generated by the underlying
collateral. Principal only ("POs") securities usually sell at a deep discount
from face value on the assumption that the purchaser will ultimately receive the
entire face value through scheduled payments and prepayments; however, the
market values of POs are extremely sensitive to prepayment rates, which, in
turn, vary with interest rate changes. If interest rates are falling and
prepayments accelerate, the value of the PO will increase. On the other hand,
if rates rise and prepayments slow, the value of the PO will drop.
Interest only ("IOs") securities result from the creation of POs; thus, CMOs
with PO tranches also have IO tranches. IO securities sell at a deep discount
to their "notional" principal amount, namely the principal balance used to
calculate the amount of interest due. They have no face or par value and, as
the notional principal amortizes and prepays, the IO cash-flow declines.
Unlike POs, IOs increase in value when interest rates rise and prepayment rates
slow; consequently they are often used to "hedge" portfolios against interest
rate risk. If prepayment rates are high, a Fund may receive less cash back than
it initially invested.
VARIABLE AND FLOATING RATE SECURITIES
The securities in which the Funds invest (including mortgage-backed securities)
may have variable or floating rates of interest. These securities pay interest
at rates that are adjusted periodically according to a specified formula,
usually with reference to some interest rate index or market interest rate (the
"underlying index"). The interest paid on these securities is a function
primarily of the underlying index upon which the interest rate adjustments are
based. Such adjustments minimize changes in the market value of the obligation
and, accordingly, enhance the ability of the Fund to maintain a stable net asset
value. Similar to fixed rate debt instruments, variable and floating rate
instruments are subject to changes in value based on changes in market interest
rates or changes in the issuer's creditworthiness. The rate of interest on
securities purchased by a Fund may be tied to Treasury or other government
securities or indices on those securities as well as any other rate of interest
or index. Certain variable rate securities (including mortgage-backed
securities) pay interest at a rate that that varies inversely to prevailing
short-term interest rates (sometimes referred to as inverse floaters). For
instance, upon reset the interest rate payable on a security may go down when
the underlying index has risen. During times when short-term interest rates are
relatively low as compared to long-term interest rates a Fund may attempt to
enhance its yield by purchasing inverse floaters. Certain
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inverse floaters may have an interest rate mechanism that multiplies the effects
of changes in the underlying index. This form of leverage may have the effect
of increasing the volatility of the security's market value while increasing the
security's, and thus the Fund's, yield.
There may not be an active secondary market for any particular floating or
variable rate instrument (particularly inverse floaters) which could make it
difficult for a Fund to dispose of the instrument if the issuer defaulted on its
repayment obligation during periods that the Fund is not entitled to exercise
any demand rights it may have. A Fund could, for this or other reasons, suffer
a loss with respect to an instrument. The Adviser monitors the liquidity of the
Fund's investment in variable and floating rate instruments, but there can be no
guarantee that an active secondary market will exist.
INTEREST RATE PROTECTION TRANSACTIONS
Certain Funds may enter into interest rate protection transactions, including
interest rate swaps, caps, collars and floors. Interest rate swap transactions
involve an agreement between two parties to exchange interest payment streams
that are based, for example, on variable and fixed rates that are calculated on
the basis of a specified amount of principal (the "notional principal amount")
for a specified period of time. Interest rate cap and floor transactions
involve an agreement between two parties in which the first party agrees to make
payments to the counterparty when a designated market interest rate goes above
(in the case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which the payments are
made when a designated market interest rate either goes above a designated
ceiling or goes below a designated floor on predetermined dates or during a
specified time period.
A Fund expects to enter into interest rate protection transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The Funds intend to use these transactions as a
hedge and not as a speculative investment.
A Fund may enter into interest rate protection transactions on an asset-based
basis, depending on whether it is hedging its assets or its liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these interest
rate protection transactions are entered into for good faith hedging purposes,
and inasmuch as segregated accounts will be established with respect to such
transactions, the Funds believe such obligations do not constitute senior
securities. The net amount of the excess, if any, of a Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash, U.S. Government Securities or other liquid
high grade debt obligations having an aggregate net asset value at least equal
to the accrued excess will be maintained in a segregated account by a custodian
that satisfies the requirements of the 1940 Act. The Funds also will establish
and maintain such segregated accounts with respect to its total obligations
under any interest rate swaps that are not entered into on a net basis and with
respect to any interest rate caps, collars and floors that are written by the
Fund.
A Fund will enter into interest rate protection transactions only with banks and
other institutions believed by the investment adviser to the Fund to present
minimal credit risks. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized and,
accordingly, they are less liquid than swaps.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve the currencies of foreign
countries. In addition, a Fund may temporarily hold funds in bank deposits in
foreign currencies during the completion of certain investment programs.
Accordingly, the value of the assets of a Fund, as measured in United States
dollars, may be affected by changes in foreign currency exchange rates and
exchange control regulations. In addition, the Fund may incur costs in
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connection with conversions between various currencies. A Fund may conduct
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or by entering
into foreign currency forward contracts ("forward contracts") to purchase or
sell foreign currencies. A forward contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days (usually less than one year) from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers and involve the risk that
the other party to the contract may fail to deliver currency when due, which
could result in losses to the Fund. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for trades. Foreign
exchange dealers realize a profit based on the difference between the price at
which they buy and sell various currencies.
A Fund may enter into forward contracts under two circumstances. First, with
respect to specific transactions, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
may be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, a Fund may enter into forward currency contracts in connection with
existing portfolio positions. For example, when an investment adviser believes
that the currency of a particular foreign country may suffer a substantial
decline against the U.S. dollar, the Fund may enter into a forward contract to
sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a short-
term hedging strategy is highly uncertain. Forward contracts involve the risk
of inaccurate predictions of currency price movements, which may cause the Fund
to incur losses on these contracts and transaction costs. The investment
advisers do not intend to enter into forward contracts on a regular or
continuous basis, and will not do so if, as a result, a Fund will have more than
25 percent of the value of its total assets committed to such contracts or the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency.
At or before the settlement of a forward currency contract, a Fund may either
make delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the Fund
chooses to make delivery of the foreign currency, it may be required to obtain
the currency through the conversion of assets of the Fund into the currency.
The Fund may close out a forward contract obligating it to purchase a foreign
currency by selling an offsetting contract. If the Fund engages in an
offsetting transaction, the Fund will incur a gain or a loss to the extent that
there has been a change in forward contract prices. Additionally, although
forward contracts may tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential
gain which might result should the value of such currency increase.
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market. The interbank market in foreign currencies is a global,
around-the-clock market.
When required by applicable regulatory guidelines, a Fund will set aside cash,
U.S. Government Securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
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HEDGING AND OPTION INCOME STRATEGIES
Certain Funds may engage in certain options strategies in order to enhance the
Fund's income and may engage in certain options and futures strategies to
attempt to hedge the Fund's portfolio. The instruments in which the Funds may
invest include (i) options on fixed income securities, fixed income securities
indexes and foreign currencies, (ii) index, interest rate and foreign currency
futures contracts ("futures contracts"), and (iii) options on futures contracts.
Use of these instruments is subject to regulation by the SEC, the several
options and futures exchanges upon which options and futures are traded, and the
CFTC.
The various strategies referred to herein and in the Prospectus are intended to
illustrate the type of strategies that are available to, and may be used by, an
investment adviser in managing a Fund's portfolio. No assurance can be given,
however, that any strategies will succeed.
The Funds will not use leverage in their option income and hedging strategies.
In the case of transactions entered into as a hedge, a Fund will hold
securities, currencies or other options or futures positions whose values are
expected to offset ("cover") its obligations thereunder. A Fund will not enter
into a hedging strategy that exposes the Fund to an obligation to another party
unless it owns either (1) an offsetting ("covered") position or (2) cash, U.S.
Government Securities or other liquid, high-grade debt securities with a value
sufficient at all times to cover its potential obligations. When required by
applicable regulatory guidelines, the Fund will set aside cash, U.S. Government
Securities or other liquid, high-grade debt securities in a segregated account
with its custodian in the prescribed amount. Any assets used for cover or held
in a segregated account cannot be sold or closed out while the hedging or option
income strategy is outstanding, unless they are replaced with similar assets.
As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS STRATEGIES
A Fund may purchase put and call options written by others and write (sell) put
and call options covering specified securities, stock index-related amounts or
currencies. A put option (sometimes called a "standby commitment") gives the
buyer of the option, upon payment of a premium, the right to deliver a specified
amount of a security or currency to the writer of the option on or before a
fixed date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of a
security or currency on or before a fixed date, at a predetermined price. The
predetermined prices may be higher or lower than the market value of the
underlying currency or security. A Fund may buy or sell both exchange-traded
and over-the-counter ("OTC") options. A Fund will purchase or write an option
only if that option is traded on a recognized U.S. options exchange or if an
investment adviser believes that a liquid secondary market for the option
exists. When a Fund purchases an OTC option, it relies on the dealer from which
it has purchased the OTC option to make or take delivery of the securities or
currency underlying the option. Failure by the dealer to do so would result in
the loss of the premium paid by the Fund as well as the loss of the expected
benefit of the transaction. OTC options and the securities underlying these
options currently are treated as illiquid securities by the Funds.
Upon selling an option, a Fund receives a premium from the purchaser of the
option. Upon purchasing an option the Fund pays a premium to the seller of the
option. The amount of premium received or paid by the Fund is based upon
certain factors, including the market price of the underlying securities index,
the relationship of the exercise price to the market price, the historical price
volatility of the underlying securities index, the option period, supply and
demand and interest rates.
A Fund may purchase call options on debt securities that an investment adviser
intends to include in the Fund's portfolio in order to fix the cost of a future
purchase. Call options may also be purchased as a means of participating in an
anticipated price increase of a security on a more limited risk basis than would
be possible if the security itself were purchased. In the event of a decline in
the price of the underlying security, use of this strategy would serve to limit
the potential loss to the Fund to the option premium paid; conversely, if the
market price of the underlying security increases above the exercise price and
the Fund either sells or exercises the option, any profit eventually realized
will be reduced by the premium paid. A Fund may similarly purchase put options
in order to hedge against
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a decline in market value of securities held in its portfolio. The put enables
the Fund to sell the underlying security at the predetermined exercise price;
thus the potential for loss to the Fund is limited to the option premium paid.
If the market price of the underlying security is lower than the exercise price
of the put, any profit the Fund realizes on the sale of the security would be
reduced by the premium paid for the put option less any amount for which the put
may be sold.
An investment adviser may write call options when it believes that the market
value of the underlying security will not rise to a value greater than the
exercise price plus the premium received. Call options may also be written to
provide limited protection against a decrease in the market price of a security,
in an amount equal to the call premium received less any transaction costs.
A Fund may purchase and write put and call options on fixed income security
indexes in much the same manner as the options discussed above, except that
index options may serve as a hedge against overall fluctuations in the fixed
income securities markets (or market sectors) or as a means of participating in
an anticipated price increase in those markets. The effectiveness of hedging
techniques using index options will depend on the extent to which price
movements in the index selected correlate with price movements of the securities
which are being hedged. Index options are settled exclusively in cash.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
A Fund may take positions in options on foreign currencies in order to hedge
against the risk of foreign exchange fluctuation on foreign securities the Fund
holds in its portfolio or which it intends to purchase. Options on foreign
currencies are affected by the factors discussed in "Options Strategies" above
and "Foreign Currency Forward Transactions" which influence foreign exchange
sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring
in the interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, the Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
A Fund may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Fund
wished to terminate its potential obligation to sell securities or currencies
under a call option it had written, a call option of the same type would be
purchased by the Fund. Closing transactions essentially permit the Fund to
realize profits or limit losses on its options positions prior to the exercise
or expiration of the option. In addition:
(1) The successful use of options depends upon the investment adviser's
ability to forecast the direction of price fluctuations in the underlying
securities or currency markets, or in the case of an index option,
fluctuations in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine months. Options
that expire unexercised have no value. Unless an option purchased by a
Fund is exercised or unless a closing transaction is effected with respect
to that position, a loss will be realized in the amount of the premium
paid.
(3) A position in an exchange-listed option may be closed out only on an
exchange which provides a market for identical options. Most exchange-
listed options relate to equity securities. Exchange markets for options
on foreign currencies are relatively new and the ability to establish and
close out positions on
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the exchanges is subject to the maintenance of a liquid secondary market.
Closing transactions may be effected with respect to options traded in the
over-the-counter markets (currently the primary markets for options on
foreign currencies) only by negotiating directly with the other party to
the option contract or in a secondary market for the option if such market
exists. There is no assurance that a liquid secondary market will exist
for any particular option at any specific time. If it is not possible to
effect a closing transaction, a Fund would have to exercise the option
which it purchased in order to realize any profit. The inability to effect
a closing transaction on an option written by a Fund may result in material
losses to the Fund.
(4) A Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
FUTURES STRATEGIES. A futures contract is a bilateral agreement wherein one
party agrees to accept, and the other party agrees to make, delivery of cash, an
underlying debt security or the currency as called for in the contract at a
specified future date and at a specified price. For futures contracts with
respect to an index, delivery is of an amount of cash equal to a specified
dollar amount times the difference between the index value at the time of the
contract and the close of trading of the contract.
A Fund may sell interest rate futures contracts in order to continue to receive
the income from a fixed income security, while endeavoring to avoid part of or
all of a decline in the market value of that security which would accompany an
increase in interest rates.
A Fund may purchase index futures contracts for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transactions costs, or to
seek higher investment returns when a futures contract is priced more
attractively than securities in the index.
A Fund may purchase call options on a futures contract as a means of obtaining
temporary exposure to market appreciation at limited risk. This strategy is
analogous to the purchase of a call option on an individual security, in that it
can be used as a temporary substitute for a position in the security itself.
A Fund may sell foreign currency futures contracts to hedge against possible
variations in the exchange rate of the foreign currency in relation to the U.S.
dollar. In addition, a Fund may sell foreign currency futures contracts when
the Adviser anticipates a general weakening of foreign currency exchange rates
that could adversely affect the market values of the Fund's foreign securities
holdings. A Fund may purchase a foreign currency futures contract to hedge
against an anticipated foreign exchange rate increase pending completion of
anticipated transactions. Such a purchase would serve as a temporary measure to
protect the Fund against such increase. A Fund may also purchase call or put
options on foreign currency futures contracts to obtain a fixed foreign exchange
rate at limited risk. A Fund may write call options on foreign currency
futures contracts as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING. No
price is paid upon entering into futures contracts, rather, a Fund is required
to deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash or U.S. Government Securities generally equal to 5% or
less of the contract value. This amount is known as initial margin. Subsequent
payments, called variation margin, to and from the broker, would be made on a
daily basis as the value of the futures position varies. When writing a call on
a futures contract, variation margin must be deposited in accordance with
applicable exchange rules. The initial margin in futures transactions is in the
nature of a performance bond or good-faith deposit on the contract that is
returned to the Fund upon termination of the contract, assuming all contractual
obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit
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has been reached in a particular contract, no trades may be made that day at a
price beyond that limit. Prices could move to the daily limit for several
consecutive trading days with little or no trading and thereby prevent prompt
liquidation of positions. In such event, it may not be possible for a Fund to
close a position, and in the event of adverse price movements, the Fund would
have to make daily cash payments of variation margin. In addition:
(1) Successful use by a Fund of futures contracts and related options will
depend upon the Adviser's ability to predict movements in the direction of
the overall securities and currency markets, which requires different
skills and techniques than predicting changes in the prices of individual
securities. Moreover, futures contracts relate not to the current level of
the underlying instrument but to the anticipated levels at some point in
the future; thus, for example, trading of stock index futures may not
reflect the trading of the securities which are used to formulate an index
or even actual fluctuations in the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged securities or currencies due to price
distortions in the futures market or otherwise. There may be several
reasons unrelated to the value of the underlying securities or currencies
which causes this situation to occur. As a result, a correct forecast of
general market trends may still not result in successful hedging through
the use of futures contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not
be possible to close a position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash
payments of variation margin.
(4) Like other options, options on futures contracts have a limited life.
A Fund will not trade options on futures contracts on any exchange or board
of trade unless and until, in the Adviser's opinion, the market for such
options has developed sufficiently that the risks in connection with
options on futures transactions are not greater than the risks in
connection with futures transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that is
at risk. Sellers of options on futures contracts, however, must post an
initial margin and are subject to additional margin calls which could be
substantial in the event of adverse price movements.
(6) A Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
(7) Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the buying and selling of futures
generally. In addition, there are risks associated with foreign currency
futures contracts and their use as a hedging device similar to those
associated with options on foreign currencies described above. In
addition, settlement of foreign currency futures contracts must occur
within the country issuing that currency. Thus, a Fund must accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign restrictions or regulations regarding the maintenance of foreign
banking arrangements by U.S. residents, and the Fund may be required to pay
any fees, taxes or charges associated with such delivery which are assessed
in the issuing country.
COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
A Fund may invest in certain financial futures contracts and options contracts
in accordance with the policies described in the Prospectus and above. A Fund
will only invest in futures contracts, options on futures contracts and other
options contracts that are subject to the jurisdiction of the CFTC after filing
a notice of eligibility and otherwise complying with the requirements of Section
4.5 of the rules of the CFTC. Under that section the Fund would be permitted to
purchase such futures or options contracts only for bona fide hedging purposes
within the meaning of the rules of the CFTC; provided, however that in addition,
with respect to positions in commodity futures and option contracts not for bona
fide hedging purposes the Fund represents that the aggregate initial margin and
premiums required to establish these positions (subject to certain exclusions)
will not exceed 5% of the liquidation
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value of the Fund's assets after taking into account unrealized profits and
losses on any such contract the Fund has entered into.
GUARANTEED INVESTMENT CONTRACTS
A Fund may invest in guaranteed investment contracts ("GICs") issued by
insurance companies. Pursuant to such contracts, the Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the deposit fund on a monthly basis guaranteed
interest at a rate based on an index. The GICs provide that this guaranteed
interest will not be less than a certain minimum rate. The insurance company
may assess periodic charges against a GIC for expense and service costs
allocable to it, and these charges will be deducted from the value of the
deposit fund. A Fund will purchase a GIC only when the Adviser has determined
that the GIC presents minimal credit risks to the Fund and is of comparable
quality to instruments that are rated high quality by an NRSRO having the
characteristics described above. Because a Fund may not receive the principal
amount of a GIC from the insurance company on seven days' notice or less, a GIC
may be considered an illiquid investment. The term of a GIC will be one year or
less. In determining the average weighted portfolio maturity of a Fund, a GIC
will be deemed to have a maturity equal to the period of time remaining until
the next readjustment of the guaranteed interest rate.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
Generally, a reverse repurchase agreement enables a Fund to recover for the term
of the reverse repurchase agreement all or most of the cash invested in the
portfolio securities sold and to keep the interest income associated with those
portfolio securities. Such transactions are only advantageous if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. In addition, interest costs on the money received
in a reverse repurchase agreement may exceed the return received on the
investments made by a Fund with those monies. The use of reverse repurchase
agreement proceeds to make investments may be considered to be a speculative
technique.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Funds may purchase securities on a when-issued or delayed delivery basis.
In those cases, the purchase price and the interest rate payable on the
securities are fixed on the transaction date and delivery and payment may take
place a month or more after the date of the transaction. At the time a Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction as a purchase and thereafter reflect
the value each day of such securities in determining its net asset value.
A Fund will make commitments for such when-issued transactions only when it has
the intention of actually acquiring the securities. To facilitate such
acquisitions, the Fund will maintain with its custodian a separate account with
portfolio securities in an amount at least equal to such commitments. On
delivery dates for such transactions, the Fund will meet its obligations from
maturities, sales of the securities held in the separate account or from other
available sources of cash. If a Fund chooses to dispose of the right to acquire
a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation.
DOMESTIC AND FOREIGN BANK OBLIGATIONS
A Fund may invest in fixed-time deposits, which are payable at their stated
maturity date and bear a fixed rate of interest, generally may be withdrawn on
demand by the Fund but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation
and could reduce the Fund's
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yield. Although fixed-time deposits do not in all cases have a secondary
market, there are no contractual restrictions on the Fund's right to transfer a
beneficial interest in the deposits to third parties.
Investments that a Fund may make in securities of foreign branches of domestic
banks and domestic and foreign branches of foreign banks may involve certain
risks, including future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on such
securities, the possible seizure or nationalization of foreign deposits,
differences from domestic banks in applicable accounting, auditing and financial
reporting standards, and the possible establishment of exchange controls or
other foreign governmental laws or restrictions applicable to the payment of
certificates of deposit or time deposits which might affect adversely the
payment of principal and interest on such securities held by the Fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements maturing in more than seven days.
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to the investment adviser of each
Fund, pursuant to guidelines approved by the Board. The investment adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer. The investment
adviser monitors the liquidity of the securities in each Fund's portfolio and
reports periodically on such decisions to the Board.
TEMPORARY DEFENSIVE POSITION
When a Fund assumes a temporary defensive position, it may invest in (i) short-
term U.S. Government Securities, (ii) certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of commercial banks doing
business in the United States that have, at the time of investment, total assets
in excess of one billion dollars and that are insured by the Federal Deposit
Insurance Corporation, (iii) commercial paper of prime quality rated Prime-2 or
higher by Moody's or A-2 or higher by S&P or, if not rated, determined by the
Adviser to be of comparable quality, (iv) repurchase agreements covering any of
the securities in which the Fund may invest directly and (v) money market mutual
funds.
The Funds may invest in the securities of other investment companies within the
limits prescribed by the 1940 Act. Under normal circumstances, each Fund
intends to invest less than 5% of the value of its net assets in the securities
of other investment companies. In addition to the Fund's expenses (including
the various fees), as a shareholder in another investment company, a Fund would
bear its pro rata portion of the other investment company's expenses (including
fees).
3. INVESTMENT LIMITATIONS
Except as required by the 1940 Act, if any percentage restriction on investment
or utilization of assets is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values of a
Fund's assets or purchases and redemptions of shares will not be considered a
violation of the limitation.
FUNDAMENTAL LIMITATIONS
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<PAGE>
Each Fund has adopted the following investment limitations which are fundamental
policies of the Fund and cannot be changed without the affirmative vote of a
majority of the Fund's outstanding voting securities (as defined in the
Prospectus).
(1) Diversification: With respect to 75 percent of its assets, the Fund
may not purchase a security other than a U.S. Government Security if, as a
result, more than five percent of the Fund's total assets would be invested
in the securities of a single issuer or the Fund would own more than ten
percent of the outstanding voting securities of any single issuer;
provided, however, that each Fund may invest all or a portion of its assets
in another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
(2) Concentration: The Fund may not purchase securities if, immediately
after the purchase, more than 25 percent of the value of the Fund's total
assets would be invested in the securities of issuers conducting their
principal business activities in the same industry; provided, however, that
there is no limit on investments in U.S. Government Securities, repurchase
agreements covering U.S. Government Securities, foreign government
securities, mortgage related or housing-related securities, municipal
securities, and issuers domiciled in a single country; that financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance and diversified
finance); that utility companies are classified according to their services
(for example, gas, gas transmission, electric and gas, electric and
telephone); that will each invest more than 25 percent of the value of the
Fund's total assets in obligations of domestic and foreign financial
institutions and their holding companies; and that each Fund may invest all
of a portion of its assets in another diversified, open-end management
investment company with substantially the same investment objective,
policies and restrictions as the Fund.
(3) Borrowing: Each Fund may borrow money for temporary or emergency
purposes, including the meeting of redemption requests; but not in excess
of 33 1/3 percent of the value of the Fund's total assets (as computed
immediately after the borrowing).
(4) Issuance of Senior Securities: The Fund may not issue senior
securities except to the extent permitted by the 1940 Act.
(5) Underwriting Activities: The Fund may not underwrite securities of
other issuers, except to the extent that the Fund may be considered to be
acting as an underwriter in connection with the disposition of portfolio
securities.
(6) Making Loans: The Fund may not make loans, except the Funds may enter
into repurchase agreements, purchase debt securities that are otherwise
permitted investments and lend portfolio securities.
(7) Purchases and Sales of Real Estate: The Fund may not purchase or sell
real estate, any interest therein or real estate limited partnership
interests, except that the Fund may invest in debt obligations secured by
real estate or interests therein or securities issued by companies that
invest in real estate or interests therein.
(8) Purchases and Sales of Commodities: The Fund may not purchase or sell
physical commodities or contracts, options or options on contracts to
purchase or sell physical commodities, provided that currencies and
currency-related contracts and contracts on indices are not deemed to be
physical commodities.
NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are not
fundamental policies of the Fund and may be changed by the Board.
(1) Borrowing: Borrowing for other than temporary or emergency purposes
or meeting redemption requests is limited to five percent of the value of
each Funds total assets except in the case of Intermediate U.S. Government
Fund, and Managed Fixed Income Fund. Where a Fund establishes a segregated
account
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<PAGE>
to limit the amount of leveraging of the Fund with respect to certain
investment techniques, the Fund does not treat those techniques as
involving borrowings fro purposes of this limitation.
(2) Illiquid Securities: No Fund may acquire securities or invest in
repurchase agreements with respect to any securities if, as a result, more
than (i) fifteen percent of the Fund's net assets (taken at current value)
would be invested in repurchase agreements not entitling the holder to
payment of principal within seven days and in securities which are not
readily marketable, including securities that are not readily marketable by
virtue of restrictions on the sale of such securities to the public without
registration under the Securities Act of 1933 ("Restricted Securities") or
(ii) ten percent of the Fund's total assets would be invested in Restricted
Securities.
(3) Other Investment Companies: The Fund may not invest in securities of
another investment company, except to the extent permitted by the 1940 Act.
(4) Margin and Short Sales: Except for Intermediate U.S. Government Fund,
a Fund may not purchase securities on margin or make short sales of
securities (except short sales against the box) except for the use of
short-term credit necessary for the clearance of purchases and sales of
portfolio securities. A Fund may make margin deposits in connection with
permitted transactions in options and futures contracts. A Fund may not
enter short sales if, as a result, more that 25% of the value of the Fund's
total assets would be so invested, or such a position would represent more
than 2% of the outstanding voting securities of any single issuer or class
of an issuer.
(5) Unseasoned Issuers: The Fund may not invest in securities (other than
fully-collateralized debt obligations) issued by companies that have
conducted continuous operations for less than three years, including the
operations of predecessors, unless guaranteed as to principal and interest
by an issuer in whose securities the Fund could invest, if, as a result,
more than five percent of the value of the Fund's total assets would be so
invested; provided, that the Fund may invest all of a portion of its assets
in another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
(6) Pledging: The Fund may not pledge, mortgage, hypothecate or encumber
any of its assets except to secure permitted borrowings.
(7) Investments by Officers and Trustees: The Fund may not invest in or
hold securities of any issuer if, to the Trust's knowledge, officers and
trustees of the Trust or an investment adviser to the Fund, individually
owning beneficially more than one-half of one percent of the securities of
the issuer, in the aggregate own more than five percent of the issuer's
securities.
(8) Oil, Gas and Mineral Investments: The Fund may not invest in
interests in oil and gas or interests in other mineral exploration or
development programs, including oil, gas and other mineral leases and the
Fund may not invest in real estate limited partnerships.
(9) Securities With Voting Rights: No Fixed Income Fund may purchase
securities having voting rights, except securities of other investment
companies.
(10) Warrants: Each Fund may not purchase warrants if, as a result, more
that 5% of the value of the Fund's total assets would be so invested.
(11) Options: Each Fund may not purchase an option if, as a result, more
that 5% of the value of the Fund's total assets would be so invested.
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<PAGE>
4. PERFORMANCE DATA AND ADVERTISING
Quotations of performance may from time to time be used in advertisements, sales
literature, shareholder reports or other communications to shareholders or
prospective investors. All performance information supplied by the Funds is
historical and is not intended to indicate future returns. Each Fund's yield and
total return fluctuate in response to market conditions and other factors. The
value of a Fund's shares when redeemed may be more or less than their original
cost.
In performance advertising the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Inc., Lipper Analytical Services, Inc., or other companies which track the
investment performance of investment companies ("Fund Tracking Companies").
Each Fund may also compare any of its performance information with the
performance of recognized stock, bond and other indexes, including but not
limited to Standard & Poor's 500 Composite Stock Index, Russell 2000 Index,
Morgan Stanley - Europe, Australian and Far East Index, Lehman Brothers
Intermediate Government Index, Lehman Brothers Intermediate Government/Corporate
Index, Salomon Brothers Bond Index, Shearson Lehman Bond Index, the Dow Jones
Industrial Average, U.S. Treasury bonds, bills or notes and changes in the
Consumer Price Index as published by the U.S. Department of Commerce. The Funds
may refer to general market performances over past time periods such as those
published by Ibbotson Associates (for instance, its "Stocks, Bonds, Bills and
Inflation Yearbook"). In addition, the Funds may refer in such materials to
mutual fund performance rankings and other data published by Fund Tracking
Companies. Performance advertising may also refer to discussions of the Funds
and comparative mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial magazines.
SEC YIELD CALCULATIONS
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that each Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return on
the Fund's shares. Also, Norwest and others may charge the various retirement
plans or other shareholders that invest in a Fund fees in connection with an
investment in a Fund, which will have the effect of reducing the Fund's net
yield to those shareholders. The yields of a Fund are not fixed or guaranteed,
and an investment in a Fund is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of a Fund with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to
compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
FIXED INCOME AND EQUITY FUNDS. Standardized yields for the Funds used in
advertising are computed by dividing a Fund's interest income (in accordance
with specific standardized rules) for a given 30 days or one month period, net
of expenses, by the average number of shares entitled to receive distributions
during the period, dividing this figure by the Fund's net asset value per share
at the end of the period and annualizing the result (assuming compounding of
income in accordance with specific standardized rules) in order to arrive at an
annual percentage rate. In general, interest income is reduced with respect to
municipal securities purchased at a premium over their par value by subtracting
a portion of the premium from income on a daily basis. In general, interest
income is increased with respect to municipal securities purchased at original
issue at a discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining each Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
For the 30-day period ended October 31, 1995 the annualized yield of I Shares of
each of the Fixed Income Funds was as follows.
Yield
-----
Intermediate U.S. Government Fund 6.80%
Managed Fixed Income Fund 5.62%
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Stable Income Fund 5.60%
TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in a Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)to the nth power = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period.
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Period total return
is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return.
The other definitions are the same as in average annual total return
above.
The average annual total return of each class of each Fund for the periods shown
ended October 31, 1995 was as follows. Where a Fund or class lacks sufficient
performance history for a period , return since inception has been substituted
for return for the period, as indicated by an asterisk. The actual dates of the
commencement of operations for each Fund and class thereof is listed in the
Fund's financial statements.
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One Year Five Years Ten Years
-------- ---------- ---------
Diversified Equity Fund
I Shares 22.55% 17.49% 15.14%*
Growth Equity Fund
I Shares 19.67% 19.97% 15.57%*
Large Company Growth Fund
I Shares 26.52% 19.68% 14.84%
Small Company Growth Fund
I Shares 35.35% 31.26% 20.79%
International Fund
A Shares 11.58%* - -
B Shares 8.24%* - -
I Shares 2.55% 8.28% 7.10%*
Income Equity Fund
I Shares 25.99% 16.23% 15.05%
Index Fund
I Shares 25.02% 16.68% 11.84%*
Conservative Balanced Fund
I Shares 12.04% 9.35% 8.90%*
Moderate Balanced Fund
I Shares 14.46% 11.03% 10.28%*
Growth Balanced Fund
I Shares 17.51% 13.48% 11.39%*
Intermediate U.S.Government Fund
I Shares 11.31% 7.21% 7.33%
Managed Fixed Income Fund
I Shares 10.59% 7.28% 8.00%
Stable Income Fund
I Shares 7.39% 7.39%* -
OTHER ADVERTISEMENT MATTERS
The Funds may advertise other forms of performance. For example, the Funds may
quote unaveraged or cumulative total returns reflecting the change in the value
of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a series of
redemptions over any time period. Total returns may be quoted with or without
taking into consideration a Fund's front-end sales charge or contingent deferred
sales charge; excluding sales charges from a total return calculation produces a
higher return figure.
The Funds may also include various information in their advertisements.
Information included in a Fund's advertisements may include, but is not limited
to (i) portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer or by maturity, (ii) statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
by an investor to meet specific financial goals, such as funding retirement,
paying for children's education and financially supporting aging parents, (iv)
information (including charts and illustrations) showing the effects of
compounding interest (compounding is the process of earning interest on
principal plus interest that was earned earlier; interest can be compounded at
different intervals, such as annually, quartile or daily), (v) information
relating to inflation and its effects on the dollar; for example, after ten
years the purchasing power of $25,000 would shrink to $16,621, $14,968, $13,465
and $12,100, respectively, if the annual rates of inflation were 4%, 5%, 6% and
7%, respectively, (vi) information regarding the effects of automatic investment
and systematic withdrawal plans, including the principle of dollar cost
averaging, (vii) descriptions of the Funds' portfolio managers and the portfolio
management staff of the Advisers or summaries of the views of the portfolio
managers with respect to the financial markets, (viii) the results of a
hypothetical investment in a Fund over a given number of years, including the
amount that the investment would be at the end of the period, (ix) the effects
of earning Federally and, if applicable, state tax-exempt income from a Fund or
investing in a tax-deferred account, such as an individual retirement account or
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Section 401(k) pension plan and (x) the net asset value, net assets or number of
shareholders of a Fund as of one or more dates.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the
$90 interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of any Fund's performance.
The Funds may advertise information regarding the effects of automatic
investment and systematic withdrawal plans, including the principle of dollar
cost averaging. In a dollar cost averaging program, an investor invests a fixed
dollar amount in a Fund at period intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not ensure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
Systematic Share Shares
Period Investment Price Purchased
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
Total Invested $600 Average Price $15.17 Total Shares 41.81
In connection with its advertisements each Fund may provide "shareholders
letters" which serve to provide shareholders or investors an introduction into
the Fund's, the Trust's or any of the Trust's service provider's policies or
business practices. For instance, advertisements may provide for a message from
Norwest or its parent corporation that Norwest has more than 60 years been
committed to quality products and outstanding service in order to assist its
customers in meeting their financial goals and the reasons Norwest believes that
it has been successful as a national financial service firm.
5. MANAGEMENT
TRUSTEES AND OFFICERS
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of the Trust is indicated by an asterisk.
John Y. Keffer and David R. Keffer are brothers.
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John Y. Keffer, Chairman and President.*
President and Director, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Financial Corp. (a registered transfer agent), Forum
Advisors, Inc. (a registered investment adviser). Mr. Keffer is a
Director, Trustee and officer of various registered investment companies
for which Forum Financial Services, Inc. serves as manager, administrator
and/or distributor. His address is 61 Broadway, New York, New York 10006.
Robert C. Brown, Trustee.*
Director, Federal Farm Credit Banks Funding Corporation and Farm Credit
System Financial Assistance Corp. Prior thereto, he was Manager of the
Capital Markets Group, Norwest Corporation (a multi-bank holding company
and parent of Norwest) until 1991. His address is 1431 Landings Place,
Sarasota, Florida 34231.
Donald H. Burkhardt, Trustee.
Principal, The Burkhardt Law Firm. His address is 777 South Steele Street,
Denver, Colorado 80209.
James C. Harris, Trustee.
President and sole Director of James C. Harris & Co., Inc. (a financial
consulting firm). Mr. Harris is also a liquidating Trustee and former
Director of First Midwest Corporation, a small business investment company.
His address is 6950 France Avenue South, Minneapolis, Minnesota 55435.
Richard M. Leach, Trustee.
Chief Executive Officer, Tee Box Company (a golf equipment manufacturer),
since January 1994 and President of Richard M. Leach Associates (a
financial consulting firm) since 1992. Prior thereto, Mr. Leach was Senior
Adviser of Taylor Investments (a registered investment adviser), a Director
of Mountainview Broadcasting (a radio station) and Managing Director,
Digital Techniques, Inc. (an interactive video design and manufacturing
company). His address is P.O. Box 1888, New London, New Hampshire 03257.
Timothy J. Penny, Trustee
Senior Counselor to the public relations firm Himle-Horner since 1994.
Prior thereto Mr. Penny was the Representative to the United States
Congress from Minnesota's First Congressional District. His address is 500
North State Street, Waseca, Minnesota 56095.
Donald C. Willeke, Trustee
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
Michael D. Martins, Vice President and Treasurer
Fund Accounting Manager, Forum Financial Corp., with which he has been
associated since 1995. Prior thereto, Mr. Martins was at the audit firm of
Deloitte & Touche LLP. Mr. Martins is also an officer of various
registered investment companies for which Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
David I. Goldstein, Vice President and Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1991. Prior thereto, Mr. Goldstein was associated with the law firm
of Kirkpatrick & Lockhart. Mr. Goldstein is also an officer of
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various registered investment companies for which Forum Financial Services,
Inc. serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
David R. Keffer, Vice President, Assistant Secretary and Assistant Treasurer.
Chief Financial Officer, Forum Financial Services, Inc. Mr. Keffer is also
an officer of various registered investment companies for which Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is 61 Broadway, New York, New York 10006.
Sara M. Clark, Vice President and Assistant Treasurer.
Managing Director, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, from 1991 to 1994 Ms. Clark was
Controller of Wright Express Corporation (a national credit card company)
and for six years prior thereto was employed at Deloitte & Touche LLP as an
accountant. Ms. Clark is also an officer of various registered investment
companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
Thomas G. Sheehan, Vice President and Assistant Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since 1993. Prior thereto, Mr. Sheehan was Special Counsel to the Division
of Investment Management of the SEC. Mr. Sheehan is also an officer of
various registered investment companies for which Forum Financial Services,
Inc. serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
Renee A. Walker, Assistant Secretary.
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, Ms. Walker was an administrator at
Longwood Partners (the manager of a hedge fund partnership) for a year.
After graduating for college, from 1991 to 1993 Ms. Walker was a sales
representative assistant at PaineWebber Incorporated (a broker-dealer).
Her address is Two Portland Square, Portland, Maine 04101.
Christopher J. Kelley, Assistant Secretary.
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since 1994. Prior thereto and subsequent to attending law
school, Mr. Kelley was employed at Putnam Investments in legal and
compliance capacities. His address is Two Portland Square, Portland, Maine
04101.
COMPENSATION OF TRUSTEES AND OFFICERS
Effective June 1, 1995 each Trustee of the Trust is paid a quarterly retained
fee for the Trustee's service to the Trust and to Norwest Select Funds, a
separate registered open-end management investment company for which each
Trustee serves as trustee. of $4,000. In addition, each Trustee is paid $3,000
for each Board meeting attended (whether in person or by electronic
communication) and is paid $1,000 for each Committee meeting attended on a date
when a Board meeting is not held. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. Mr. Keffer
received no compensation for his services as Trustee for the past year and no
officer of the Trust is compensated by the Trust. In addition, Mr. Keffer
currently is not compensated or reimbursed for his expenses in serving as
Trustee. Prior to June 1, 1995 Trustee of the Trust was paid $1,000 for each
Board meeting attended (whether in person or by electronic communication) plus
$100 per active portfolio of the Trust and was paid $1,000 for each Committee
meeting attended on a date when a Board meeting is not held.
Mr. Burkhart, Chairman of the Trust's and Norwest Select Funds' audit
committees, receives additional compensation of $5,000 from the Trust and $1,000
form Norwest Select Funds for his services as Chairman. Mr.
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Penny was appointed a Trustee in January 1996 and, accordingly, was not paid any
compensation during the Trust's last fiscal year.
As of October 1, 1995, the Trustees and officers of the Trust in the aggregate
owned less than 1% of the outstanding shares of the Fund.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Select Funds, combined. Information is
presented for the year ended October 31, 1995, the Funds' fiscal year end. Other
funds of the Trust have a May 31 fiscal year end.
Total Compensation From
Total Compensation the Trust and Norwest
from the Trust Select Funds
------------- ------------
Mr. Brown $23,565 $26,177
Mr. Burkhart $29,909 $33,023
Mr. Harris $22,567 $25,177
Mr. Leach $22,566 $25,177
Mr. Willeke $14,000 $14,000
Neither the Trust or Norwest Select Funds has adopted any from of retirement
plan covering Trustees or officers.
TRUSTEES AND OFFICERS OF CORE TRUST
The Trustees and officers of Core Trust and their principal occupations during
the past five years are set forth below. Each Trustee who is an "interested
person" (as defined by the 1940 Act) of Core Trust is indicated by an asterisk.
Mr. John Y. Keffer, Mr. David R. Keffer and Messrs. Goldstein, Martins and
Sheehan, officers of Core Trust, all currently serve as officers of the Trust.
Accordingly, for background information pertaining to these officers, see
"Trustees and Officers of the Trust" above.
John Y. Keffer*, Chairman and President.
Costas Azariadis, Trustee.
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee.
Managing Director, Forum Financial Services, Inc. since September 1991.
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is Two Portland Square, Portland, Maine
04101.
J. Michael Parish, Trustee.
Partner at the law firm of Winthrop Stimson Putnam & Roberts since 1989.
Prior thereto, he was a partner at LeBoeuf, Lamb, Leiby & MacRae, a law
firm of which he was a member from 1974 to 1989. His address is 40 Wall
Street, New York, New York 10005.
Michael D. Martins, Treasurer
David R. Keffer, Vice President, Assistant Secretary and Assistant Treasurer.
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David I. Goldstein, Secretary.
Thomas G. Sheehan, Assistant Secretary.
Max Berueffy, Assistant Secretary.
Counsel, Forum Financial Services, Inc., with which he has been associated
since May 1994. For seven years prior to that, Mr. Berueffy held various
positions on the staff of the U.S. Securities and Exchange Commission. His
last position was Senior Special Counsel in the Division of Investment
Management. Mr. Berueffy is also an officer of various registered invest-
ment companies for which Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine 04101.
INVESTMENT ADVISORY SERVICES
NORWEST INVESTMENT MANAGEMENT
Norwest Investment Management, a part of Norwest Bank Minnesota, N.A., is
required to furnish at its expense all services, facilities and personnel
necessary in connection with managing each Fund's investments and effecting
portfolio transactions for each Fund. With respect to the Adviser's services
for International Fund, see "International Fund" below. Under its advisory
agreements, Norwest may delegate its responsibilities to any investment
subadviser approved by the Board with respect to all or a portion of the assets
of a Fund.
The Advisory Agreement between each Fund and Norwest will continue in effect
only if such continuance is specifically approved at least annually by the Board
or by vote of the shareholders of the Fund, and in either case by a majority of
the Trustees who are not parties to the Advisory Agreement or interested persons
of any such party, at a meeting called for the purpose of voting on the Advisory
Agreement.
The Advisory Agreement with respect to a Fund is terminable without penalty by
the Fund with respect to that Fund on 60 days written notice when authorized
either by vote of the Fund's shareholders or by a vote of a majority of the
Board, or by the Adviser on not more than 60 days nor less than 30 days written
notice, and will automatically terminate in the event of its assignment. The
Advisory Agreements also provide that, with respect to each Fund, neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any act or omission in the performance of its or their duties to
the Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of the Adviser's or their duties or by reason of reckless disregard
of its or their obligations and duties under the Advisory Agreement. The
Advisory Agreements provide that the Adviser may render service to others.
In addition to receiving its advisory fee from the Funds, Norwest may also act
and be compensated as investment manager for its clients with respect to assets
which are invested in a Fund. In some instances Norwest may elect to credit
against any investment management, custodial or other fee received from, or
rebate to, a client who is also a shareholder in the Fund an amount equal to all
or a portion of the fees received by Norwest or any affiliate of Norwest from a
Fund with respect to the client's assets invested in the Fund.
The advisory fees are accrued daily and paid monthly. Norwest, in its sole
discretion, may waive all or any portion of its advisory fee with respect to
each Fund. Norwest has agreed to reimburse the Trust for certain of each Fund's
operating expenses (exclusive of interest, taxes and brokerage fees,
organization expenses and, if applicable, distribution expenses, all to the
extent permitted by applicable state law or regulation) which in any year exceed
the limits prescribed by any state in which the Fund's shares are qualified for
sale. The Trust may elect not to qualify its shares for sale in every state.
For the purpose of this obligation to reimburse expenses, a Fund's annual
expenses are estimated and accrued daily, and any appropriate estimated payments
will be made by Norwest monthly. Subject to these obligations, the Trust pays
for all of its expenses.
Subject to the obligations of Norwest to reimburse the Trust for its excess
expenses as described above, the Trust has, under the Investment Advisory
Agreements, confirmed its obligation to pay all its other expenses, including:
(i) interest charges, taxes, brokerage fees and commissions; (ii) certain
insurance premiums; (iii) fees, interest charges
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and expenses of the Trust's custodian, transfer agent and dividend disbursing
agent; (iv) fees of pricing, interest, dividend, credit and other reporting
services; (v) costs of membership in trade associations; (vi) telecommunications
expenses; (vii) auditing, legal and compliance expenses; (viii) costs of the
Trust's formation and maintaining its existence; (ix) costs of preparing and
printing the Trust's prospectuses, statements of additional information, account
application forms and shareholder reports and delivering them to existing and
prospective shareholders; (x) costs of maintaining books of original entry for
portfolio and fund accounting and other required books and accounts and of
calculating the net asset value of shares of the Trust; (xi) costs of
reproduction, stationery and supplies; (xii) compensation of the Trust's
trustees, officers and employees who are not employees of the Adviser, Forum
Financial Services, Inc. or affiliated persons of the Adviser or Forum Financial
Services, Inc. and costs of other personnel performing services for the Trust;
(xiii) costs of corporate meetings; (xiv) registration fees and related expenses
for registration with the SEC and the securities regulatory authorities of other
countries in which the Trust's shares are sold; (xv) state securities law
registration fees and related expenses; (xvi) fees and out-of-pocket expenses
payable to Forum Financial Services, Inc. under any distribution, management or
similar agreement; (xvii) and all other fees and expenses paid by the Trust
pursuant to any distribution or shareholder service plan adopted pursuant to
Rule 12b-1 under the Act.
The following table shows the dollar amount of fees payable under the Investment
Advisory Agreements between Norwest and the Trust with respect to each Fund, the
amount of fee that was waived by Norwest, if any, and the actual fee received by
Norwest. The data is for the past fiscal year.
Fee Fee Fee
Payable Waived Retained
------- ------ --------
Diversified Equity Fund 3,737, 147 0 3,737,147
Growth Equity Fund 3,961,897 0 3,961,897
Large Company Growth Fund 362,480 0 362,480
Small Company Growth Fund 1,984,348 0 1,984,348
International Fund - - -
Income Equity Fund 187,584 0 187,584
Index Fund 212,875 0 212,875
Conservative Balanced Fund 547,353 0 547,353
Moderate Balanced Fund 1,722,174 0 1,722,174
Growth Balanced Fund 1,849,672 0 1,849,672
Intermediate U.S. Government Fund 160,764 0 160,764
Managed Fixed Income Fund 607,061 0 607,061
Stable Income Fund 114,429 0 114,429
SUBADVISORY ARRANGEMENTS
With respect to each of International Fund, Diversified Equity Fund, Growth
Equity Fund, Conservative Balanced Fund, Moderate Balanced Fund and Growth
Balanced Fund (the Funds that may invest in international securities), Norwest
and the Trust have entered into Subadvisory Agreements with Schroder.
Schroder makes investment decisions for each of the Funds listed above and
continuously reviews, supervises and administers each Fund's investment program
with respect to that portion, if any, of the respective Fund's portfolio that
Norwest has so delegated. Schroder is required to furnish at its own expense
all services, facilities and personnel necessary in connection with managing of
each Fund's investments and effecting portfolio transactions for each Fund (to
the extent of Norwest's delegation).
The Subadvisory Agreements among those Funds, Norwest and the Subadviser will
continue in effect only if such continuance is specifically approved at least
annually by the Board or by vote of the shareholders of the Fund, and in either
case by a majority of the Trustees who are not parties to the Subadvisory
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the Subadvisory Agreement.
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The Subadvisory Agreement with respect to a Fund is terminable without penalty
by the Fund with respect to that Fund on 60 days written notice when authorized
either by vote of the Fund's shareholders or by a vote of a majority of the
Board, or by the Subadviser on not more than 60 days nor less than 30 days
written notice, and will automatically terminate in the event of its assignment.
The Subadvisory Agreements also provide that, with respect to each Fund, neither
the Subadviser nor its personnel shall be liable for any error of judgment or
mistake of law or for any act or omission in the performance of its or their
duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of the Subadviser's or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Subadvisory Agreement. The Subadvisory Agreements provide that the Subadviser
may render services to others.
The Subadvisory fees are accrued daily and paid monthly. Each Subadviser, in
its sole discretion, may waive all or any portion of its subadvisory fee with
respect to each Fund.
INTERNATIONAL FUND
The Advisory Agreement and Subadvisory Agreement with respect to International
Fund are identical to the Advisory Agreement and Subadvisory Agreement of each
other Fund for which Schroder acts as investment subadviser, except for the fees
payable thereunder and as follows. No payments will be made under International
Fund's Advisory Agreement or Subadvisory Agreement so long as all of the Fund's
investments consist solely of the International Portfolio or any other
registered investment company.
Schroder acts as investment adviser to the International Portfolio and is
required to furnish at its expense all services, facilities and personnel
necessary in connection with managing the International Portfolio's investments
and effecting portfolio transactions for the International Portfolio. The
Advisory Agreement between the International Portfolio and Schroder will
continue in effect only if such continuance is specifically approved at least
annually by the Board of Trustees of Core Trust or by vote of the holders of
beneficial interest of the International Portfolio, and in either case by a
majority of the Trustees of Core Trust who are not parties to the Advisory
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on the Advisory Agreement.
The Advisory Agreement with respect to the International Portfolio is terminable
without penalty by the International Portfolio on 60 days written notice when
authorized either by vote of the International Portfolio's shareholders or by a
vote of a majority of the Board of Trustees of Core Trust, or by Schroder on not
more than 60 days nor less than 30 days written notice, and will automatically
terminate in the event of its assignment. The Advisory Agreement also provides
that, with respect to the International Portfolio, neither Schroder nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the performance of its or their duties to the International
Portfolio, except for willful misfeasance, bad faith or gross negligence in the
performance of Schroder's or their duties or by reason of reckless disregard of
its or their obligations and duties under the Advisory Agreement. The Advisory
Agreement provides that Schroder may render service to others.
The advisory fees are accrued daily and paid monthly. Schroder, in its sole
discretion, may waive all or any portion of its advisory fee with respect to
International Portfolio. For the Fund's fiscal period ended October 31, 1995,
the Adviser did not pay Schroder any investment advisory fee pursuant to its
Advisory Agreement with respect to the Fund.
ADMINISTRATION AND DISTRIBUTION
Forum supervises the overall management of the Trust (which includes, among
other responsibilities, negotiation of contracts and fees with, and monitoring
of performance and billing of, the Trust's transfer agent and custodian and
arranging for maintenance of books and records of the Trust) and provides the
Trust with general office facilities pursuant to a Management Agreement.
The Management Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by the shareholders and,
in either case, by a majority of the Trustees who are not parties to the
Management Agreement or interested persons of any such party.
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The Management Agreement terminates automatically if it is assigned and may be
terminated without penalty with respect to any Fund by vote of that Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Management Agreement also provides that, with respect to
each Fund, neither Forum nor its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the performance of its
or their duties to the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of Forum's or their duties or by reason of
reckless disregard of its or their obligations and duties under the Management
Agreement.
The following table shows the dollar amount of fees payable under the Management
Agreement between Forum and the Trust with respect to each Fund, the amount of
fee that was waived by Forum, if any, and the actual fee received by Forum. The
data is for the past fiscal year.
Fee Fee Fee
Payable Waived Retained
------- ------ --------
Diversified Equity Fund 574,946 287,473 287,473
Growth Equity Fund 440,211 286,137 154,074
Large Company Growth Fund 55,766 55,766 0
Small Company Growth Fund 220,483 177,287 43,196
International Fund 205,150 41,566 163,584
Income Equity Fund 37,517 37,517 0
Index Fund 141,917 141,917 0
Conservative Balanced Fund 121,634 121,634 0
Moderate Balanced Fund 324,938 212,921 112,017
Growth Balanced Fund 318,909 209,411 109,498
Intermediate U.S. Government Fund 48,716 48,716 0
Managed Fixed Income Fund 173,446 147,461 25,985
Stable Income Fund 38,143 38,143 0
The Manager is also the Trust's Distributor and acts as the agent of the Trust
in connection with the offering of I Shares of each Fund on a "best efforts"
basis pursuant to a Distribution Agreement. Under a servicing agreement between
the Trust and Norwest with respect to International Fund, Norwest performs
ministerial, administrative and oversight functions for the Fund and undertakes
to reimburse certain excess expenses of the Fund. Among other things, Norwest
gathers performance and other data from the adviser of the International
Portfolio and from other sources, formats the data and prepares reports to the
Fund's shareholders and the Trustees. Norwest also ensures that the adviser to
the International Portfolio is aware of pending net purchases or redemptions of
Fund shares and other matters that may affect the adviser's performance of its
duties. Lastly, Norwest has agreed to reimburse the Fund for any amounts by
which its operating expenses (exclusive of interest, taxes and brokerage fees,
organization expenses and, if applicable, distribution expenses, all to the
extent permitted by applicable state law or regulation) exceed the limits
prescribed by any state in which the Fund's shares are qualified for sale. No
fees will be paid to Norwest under the Servicing Agreement unless the Fund's
assets are invested solely in the International Portfolio or in a portfolio of
another registered investment company. This agreement will continue in effect
only if such continuance is specifically approved at least annually by the Board
or by the shareholders and, in either case, by a majority of the Trustees who
are not parties to the Management Agreement or interested persons of any such
party.
The agreement provides that neither Norwest nor its personnel shall be liable
for any error of judgment or mistake of law or for any act or omission in the
performance of its or their duties to the Fund, except for willful misfeasance,
bad faith or gross negligence in the performance of Forum's or their duties or
by reason of reckless disregard of its or their obligations and duties under the
agreement.
A SHARES AND B SHARES
Under the Distribution Services Agreement related to International Fund and
certain other Funds, Forum receives, and may reallow to certain financial
institutions, the initial sales charges assessed on purchases of A Shares of
that Fund. With respect to B Shares of International Fund and certain other
Funds, the Funds have adopted a distribution
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plan pursuant to Rule 12b-1 under the 1940 Act (the "Plan") which authorizes the
payment to Forum under the Distribution Services Agreement of a distribution
services fee, which may not exceed an annual rate of 0.75%, and a maintenance
fee in an amount equal to 0.25%, of the average daily net assets of the Fund
attributable to the B Shares.
The Plan provides that all written agreements relating to the Plan must be in a
form satisfactory to the Board. In addition, the Plan requires the Trust and
Forum to prepare, at least quarterly, written reports setting forth all amounts
expended for distribution purposes by the Funds and Forum pursuant to the Plan
and identifying the distribution activities for which those expenditures were
made.
The Plan provides that, with respect to each class of each Fund to which it
applies, it will remain in effect for one year from the date of its adoption and
thereafter may continue in effect for successive annual periods provided it is
approved by the shareholders of the respective class or by the Board, including
a majority of trustees who are not interested persons of the Trust and who have
no direct or indirect interest in the operation of the Plan, the Distribution
Services Agreement or any agreement related to the Plan. The Plan further
provides that it may not be amended to increase materially the costs which may
be borne by the Trust for distribution pursuant to the Plan without shareholder
approval and that other material amendments to the Plan must be approved by the
trustees in the manner described in the preceding sentence. The Plan may be
terminated at any time by a vote of the Board or by the shareholders of the
respective classes.
The following table shows the dollar amount of sales charges payable to Forum
with respect to sales of A Shares of International Fund and the amount of sales
charge retained by Forum and not reallowed to other persons. The data is for
the fiscal period ended October 31, 1995.
Sales Retained
Charges Amount
------- ------
A Shares Sales Charges 4,974 498
TRANSFER AGENT
Norwest acts as Transfer Agent of the Trust pursuant to a Transfer Agency
Agreement. The Transfer Agency Agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by a vote
of the shareholders of the Trust and in either case by a majority of the
Trustees who are not parties to the Transfer Agency Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
Transfer Agency Agreement.
Among the responsibilities of the Transfer Agent as agent for the Trust are:
(1) answering customer inquiries regarding account status and history, the
manner in which purchases and redemptions of shares of the Fund may be effected
and certain other matters pertaining to the Fund; (2) assisting shareholders in
initiating and changing account designations and addresses; (3) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, (4) assisting in processing purchase and redemption
transactions and receiving wired funds; (5) transmitting and receiving funds in
connection with customer orders to purchase or redeem shares; (6) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (7) furnishing periodic statements and confirmations of
purchases and redemptions; (8) transmitting proxy statements, annual reports,
prospectuses and other communications from the Trust to its shareholders; (9)
receiving, tabulating and transmitting to the Trust proxies executed by
shareholders with respect to meetings of shareholders of the Trust; and (10)
providing such other related services as the Trust or a shareholder may request.
For its services, the Transfer Agent receives from the Trust, with respect to
each Fund a fee computed and paid monthly at the annual rate of 0.25% of the
Fund's average daily net assets (or, in those Funds with more than one class,
the Fund's average daily net assets attributable to the class).
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CUSTODIAN
Pursuant to a Custodian Agreement, Norwest acts as the custodian of the Trust's
assets. The custodian's responsibilities include safeguarding and controlling
the Trust's cash and securities, determining income and collecting interest on
Fund investments. For these services, the custodian receives no fee. The
custodian receives a separate fee for performing certain functions in connection
with loans of portfolio securities.
Pursuant to rules adopted under the 1940 Act, each Fund may maintain its foreign
securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Fund; the reputation of the institution in its national market;
the political and economic stability of the country in which the institution is
located; and further risks of potential nationalization or expropriation of Fund
assets. The custodian employs qualified foreign subcustodians to provide
custody of the Funds' foreign assets in accordance with applicable regulations.
The Chase Manhattan Bank, N.A., through its Global Securities Services Division
located in London, England, acts as custodian of International Fund's assets,
but plays no role in making decisions as to the purchase or sale of portfolio
securities for the Fund.
A Fund will not pay custodian fees to the extent the Fund invests in shares of
another registered investment company. Where the Fund's investments consists
solely of such shares, such as International Fund's investment in shares of the
International Portfolio, the Fund will pay no custodian fees directly
The Chase Manhattan Bank, N.A. serves as custodian to International Portfolio
and International Portfolio II of Core Trust and is compensated by Core Trust
with respect to those Portfolios. Norwest serves as custodian of Small Company
Portfolio and Index Portfolio of Core Trust and receives no compensation for its
services to those Portfolios.
PORTFOLIO ACCOUNTING
Forum Financial Corp., an affiliate of Forum, performs portfolio accounting
services for each Fund pursuant to a Fund Accounting Agreement with the Trust.
The Fund Accounting Agreement will continue in effect only if such continuance
is specifically approved at least annually by the Board or by a vote of the
shareholders of the Trust and in either case by a majority of the Trustees who
are not parties to the Fund Accounting Agreement or interested persons of any
such party, at a meeting called for the purpose of voting on the Fund Accounting
Agreement.
Under its agreement, FFC prepares maintains books and records of each Fund on
behalf of the Trust that are required to be maintained under the 1940 Act,
calculates the net asset value per share of each Fund (and class thereof) and
dividends and capital gain distributions and prepares periodic reports to
shareholders and the SEC. For its services, FFC receives from the Trust with
respect to each Fund a fee of $36,000 per year plus, for each class of the Fund
above one, $6,000 per year. In addition, FFC is paid an additional $12,000 per
year with respect to tax-free money market Funds, global and international Funds
and Funds with more than 25% of their total assets invested in asset backed
securities, that have more than 100 security positions or that have a monthly
portfolio turnover rate of 10% or greater.
FFC is required to use its best judgment and efforts in rendering fund
accounting services and is not be liable to the Trust for any action or inaction
in the absence of bad faith, willful misconduct or gross negligence. FFC is not
responsible or liable for any failure or delay in performance of its fund
accounting obligations arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control and the Trust has agreed to
indemnify and hold harmless FFC, its employees, agents, officers and directors
against and from any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character arising out of or in any way related to FFC's actions
taken or failures to act with respect to a Fund or based, if applicable, upon
information, instructions or requests with respect to a Fund given or made to
FFC by an officer of the Trust duly authorized. This indemnification does not
apply to FFC's actions taken or failures to act in cases of FFC's own bad faith,
willful misconduct or gross negligence.
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The following table shows the dollar amount of fees payable to FFC for its
portfolio accounting services with respect to each Fund, the amount of fee that
was waived by FFC, if any, and the actual fee received by FFC. The data is for
the past fiscal year.
Fee Fee Fee
Payable Waived Retained
------- ------ --------
Diversified Equity Fund 34,700 0 34,700
Growth Equity Fund 34,700 0 34,700
Large Company Growth Fund 34,700 0 34,700
Small Company Growth Fund 36,700 0 36,700
International Fund 51,766 0 51,766
Income Equity Fund 34,700 0 34,700
Index Fund 46,266 0 46,266
Conservative Balanced Fund 54,266 0 54,266
Moderate Balanced Fund 52,266 0 52,266
Growth Balanced Fund 50,833 0 50,833
Intermediate U.S. Government Fund 52,700 0 52,700
Managed Fixed Income Fund 46,700 0 46,700
Stable Income Fund 51,700 0 51,700
FFC performs similar services for each Portfolio and, in addition, acts as each
Portfolio's transfer agent.
6. OTHER INFORMATION
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
PURCHASES
Shares of each Fund are sold on a continuous basis.
Fund shares are normally issued for cash only. In the Adviser's discretion,
however, the Fund may accept portfolio securities that meet the investment
objective and policies of the Fund as payment for Fund shares. The Fund will
only accept securities that (i) are not restricted as to transfer either by law
or liquidity of market and (ii) have a value which is readily ascertainable (and
not established only by valuation procedures).
Set forth below is an example of the method of computing the offering price of
the Funds' A Shares. All other shares of the Trust are offered at their next
determined net asset value. The example assumes a purchase of A Shares of a
hypothetical fund ("Fund Q") in an amount such that the purchase would be
subject to the fund's maximum sales charge (in this case, 4.5%) at a price based
on a hypothetical net asset value per share of A Shares of the fund. Offering
price is determined as follows: Net asset value per share times the sum of one
(1) plus the sales charge expressed as a percentage (for example 4.5% would
equal 0.045).
Net Asset Offering
Value Per Share Price
--------------- -----
Fund Q 11.48 12.00
STATEMENT OF INTENTION
As more fully described in the Prospectus, investors may obtain reduced sales
charges with respect to the purchase of A Shares of the Funds by means of a
written Statement of Intention, which expresses the investor's intention to
invest not less than $100,000 within a period of 13 months in A Shares of a
Fund. The Statement of Intention is not
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<PAGE>
a binding obligation upon the investor to purchase the full amount indicated. A
Shares purchased with the first 5% of such amount will be held subject to a
registered pledge (while remaining registered in the name of the investor) to
secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such pledged shares
will be involuntarily redeemed to pay the additional sales charge, if necessary.
When the full amount indicated has been purchased, the shares will be released
from pledge.
EXCHANGES AND TELEPHONE TRANSACTIONS
By making an exchange, the investor authorizes the Trust's transfer agent to act
on telephonic instructions from any person representing himself or herself to be
the investor and believed by the Trust's transfer agent to be genuine. The
records of the Trust's transfer agent of such instructions are binding. The
exchange procedures may be modified or terminated at any time upon appropriate
notice to shareholders. For Federal income tax purposes, exchanges are treated
as sales on which a purchaser will realize a capital gain or loss depending on
whether the value of the shares redeemed is more or less than his basis in such
shares at the time of such transaction.
The exchange privilege permits I Shares shareholders to exchange their shares
for I Shares of any other Fund. For Federal income tax purposes, an exchange
transaction is treated as a sale and subsequent purchase on which a purchaser
may realize a capital gain or loss depending on whether the value of the shares
redeemed is more or less than his basis in such shares at the time of the
transaction.
Shareholders of A Shares may purchase, with the proceeds from a redemption of
all or part of their shares, A Shares of the other funds of the Trust that offer
A Shares or Investor class shares ("Investor Shares") of Ready Cash Investment
Fund or Municipal Money Market Fund, two money market portfolios of the Trust.
Shareholders of B Shares may purchase, with the proceeds from a redemption of
all or part of their shares, B Shares of the other funds of the Trust that offer
B Shares or Exchange class shares ("Exchange Shares") of Ready Cash Investment
Fund.
Shareholders of Investor Shares of Ready Cash Investment Fund and Municipal
Money Market Fund may purchase, with the proceeds from a redemption of all or
part of their shares, Investor Shares of the other Fund or A Shares of the funds
of the Trust that offer A Shares. Shareholders of Exchange Shares of Ready Cash
Investment Fund may purchase, with the proceeds from a redemption of all or part
of their shares, B Shares of the funds of the Trust that offer B Shares.
Shareholders of A Shares or Investor Shares making an exchange will be subject
to the applicable sales charge of any A Shares acquired in the exchange;
provided, that the sales charge charged with respect to the acquired shares will
be assessed at a rate that is equal to the excess (if any) of the rate of the
sales charge that would be applicable to the acquired shares in the absence of
an exchange over the rate of the sales charge previously paid on the exchanged
shares. For purposes of the preceding sentence, A Shares acquired through the
reinvestment of dividends or distributions are deemed to have been acquired with
a sales charge rate equal to that paid on the shares on which the dividend or
distribution was paid.
In addition, A Shares and Investor Shares acquired by a previous exchange
transaction involving shares on which a sales charge has directly or indirectly
been paid (e.g., shares purchased with a sales charge or issued in connection
with an exchange transaction involving shares that had been purchased with a
sales charge), as well as additional shares acquired through reinvestment of
dividends or distributions on such shares will be treated as if they had been
acquired subject to that sales charge.
B Shares may be exchanged without the payment of any contingent deferred sales
charge; however, B Shares or Exchange Shares acquired as a result of such
exchange and subsequently redeemed will nonetheless be subject to the contingent
deferred sales charge applicable to the original B Shares as if those shares
were being redeemed at that time. Exchange Shares may be exchanged without the
payment of any contingent deferred sales charge; however, B Shares acquired as a
result of such exchange and subsequently redeemed will nonetheless be subject to
the contingent deferred sales charge applicable to the Exchange Shares as if
those shares were being redeemed at that time.
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<PAGE>
REDEMPTIONS
In addition to the situations described in the Prospectus with respect to the
redemptions of shares, the Trust may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to a Fund's shares as provided in the Prospectus from time to time.
Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partially in portfolio securities if the Board determines that
payment in cash would be detrimental to the best interests of the Fund. If
payment for shares redeemed is made wholly or partially in portfolio securities,
brokerage costs may be incurred by the shareholder in converting securities to
cash. The Trust and Core Trust have each filed a formal election with the SEC
pursuant to which the Funds and the International Portfolio will only effect a
redemption in portfolio securities if the particular shareholder is redeeming
more than $250,000 or one percent of a Fund's or the International Portfolio's
total net assets, whichever is less, during any 90-day period.
CONTINGENT DEFERRED SALES CHARGE (A SHARES)
Certain A Shares of the Funds on which no initial sales charge was assessed,
that are redeemed within specified periods after the purchase date will be
subject to a contingent deferred sales charge upon redemption.
RIGHT OF ACCUMULATION. Contingent deferred sales charges may be charged on
redemptions of A Shares purchased pursuant to the Cumulative Quantity Discount
(Right of Accumulation). The contingent deferred sales charge will apply to A
Shares purchased if the value of those shares on the date of purchase plus the
net asset value of any Investor Shares held by the shareholder (as of the close
of business on the previous Fund Business Day) of all A Shares held by the
shareholder exceed $1,000,000. For example, if a shareholder has made prior
purchases of A Shares which now have a value of $900,000, the purchase of
$150,000 of A Shares will not be subject to an initial sales charge but will be
subject to the contingent deferred sales charge. The $900,000 of A Shares is
not subject to the contingent deferred sales charge.
STATEMENT OF INTENTION. Contingent deferred sales charges may be charged on
redemptions of A Shares purchased pursuant to a Statement of Intention ("SOI").
The contingent deferred sales charge will not apply to SOIs of under $1,000,000
and will not be applied to SOIs for a greater amount if the shareholder never
purchases $1,000,000 or more of A Shares under the SOI. If a shareholder
purchases $1,000,000 or more under an SOI, the contingent deferred sales charge
will apply with respect to the entire amount purchased. The holding period for
each A Share, however, shall be determined from the date the share was
purchased. If the shareholder redeems A Shares during the period that the SOI
is in effect, a contingent deferred sales charge will be charged at the time the
shareholder has purchased $1,000,000 or more worth of A Shares pursuant to the
SOI and will be assessed at the rate applicable in the case of a single purchase
of the minimum amount specified in the SOI. If the shareholder purchases less
than the amount specified under the SOI, an additional contingent deferred sales
charge may be assessed in respect of A Shares previously redeemed based on the
amount actually purchased pursuant to the SOI.
A Shares purchased by a shareholder within 60 days following the redemption by
the shareholder of A Shares in the same Fund with a value at least equal to the
A Shares being purchased will not be subject to a contingent deferred sales
charge; provided, however, that this exemption is not applicable to more than
two purchases within a 12-month period.
CONTINGENT DEFERRED SALES CHARGE (A SHARES AND B SHARES)
With respect to A Shares and B Shares of the Funds, certain redemptions are not
subject to any contingent deferred sales charge. No contingent deferred sales
charge is imposed on (i) redemptions of shares acquired through the reinvestment
of dividends and distributions, (ii) involuntary redemptions by a Fund of
shareholder accounts with low account balances, (iii) redemptions of shares
following the death or disability of a shareholder if the Fund is notified
within one year of the shareholder's death or disability, (iv) redemptions to
effect a distribution (other than a lump sum distribution) from an IRA, Keogh
plan or Section 403(b) custodial account or from a qualified retirement plan.
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For these purposes, the term disability shall have the meaning ascribed thereto
in Section 72(m)(7) of the Code. Under that provision, a person is considered
disabled if the person is unable to engage in any substantial activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or to be of long-continued and indefinite duration.
Appropriate documentation satisfactory to the Fund is required to substantiate
any shareholder death or disability.
CONVERSION OF B SHARES
The conversion of Exchange Shares to Investor Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the distribution services fee with respect to the Exchange Shares
does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Code, and (ii) the conversion of Exchange
Shares to Investor Shares does not constitute a taxable event under Federal
income tax law. The conversion of Exchange Shares to Investor Shares may be
suspended if such an opinion is no longer available at the time the conversion
is to occur. In that event, no further conversions of Exchange Shares would
occur, and shares might continue to be subject to a distribution services fee
for an indefinite period, which may extend beyond the specified number of years
for conversion of the original B Shares.
DETERMINATION OF NET ASSET VALUE
Securities owned by a Fund for which market quotations are readily available are
valued at current market value. The Funds value their securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the
security is valued at the mean of the last bid and asked prices. All other
securities for which over-the-counter market quotations are readily available
generally are valued at the mean of the current bid and asked prices. When
market quotations are not readily available, securities are valued at fair value
as determined in good faith by the Board. Debt securities may be valued on the
basis of valuations furnished by pricing services which utilize electronic data
processing techniques to determine valuations for normal institutional-size
trading units of debt securities, without regard to sale or bid prices, when
such valuations are believed to more accurately reflect the fair market value of
such securities. All assets and liabilities of a Fund denominated in foreign
currencies are 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.
Under procedures adopted by the Board, a net asset value for a Fund later
determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at a net asset value determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original net asset value and the recalculated net
asset value divided by the recalculated net asset value is 0.005 (1/2 of 1%) or
less or shareholder transactions are otherwise insubstantially affected, further
action is not required.
PORTFOLIO TRANSACTIONS
The following discussion concerning portfolio transactions relates to the Funds
and, with respect to International Fund, the International Portfolio.
Investment decisions for the Funds will be made independently from those for any
other client account or investment company that is or may in the future become
managed by the Adviser or its affiliates. Investment decisions are the product
of many factors including basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as is possible,
averaged as to price and allocated between such clients in a manner which, in
the respective Adviser's opinion, is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients. In addition, when purchases or sales of the
same security for the Fund and other
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client accounts managed by the Advisers occur contemporaneously, the purchase or
sale orders may be aggregated in order to obtain any price advantages available
to large denomination purchases or sales.
Purchases and sales of fixed income portfolio securities are generally effected
as principal transactions. These securities are normally purchased directly
from the issuer or from an underwriter or market maker for the securities.
There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as
market makers include the spread between the bid and ask prices. In the case of
securities traded in the foreign and domestic over-the-counter markets, there is
generally no stated commission, but the price usually includes an undisclosed
commission or markup. In underwritten offerings, the price includes a disclosed
fixed commission or discount.
Purchases and sales of equity securities on exchanges are generally effected
through brokers who charge commissions. Allocations of transactions to brokers
and dealers and the frequency of transactions are determined by the Advisers in
their best judgment and in a manner deemed to be in the best interest of
shareholders of the Funds (holders of beneficial interest in the case of the
International Portfolio) rather than by any formula. The primary consideration
is prompt execution of orders in an effective manner and at the most favorable
price available to the Fund. In transactions on stock exchanges in the United
States, these commissions are negotiated, whereas on foreign stock exchanges
these commissions are generally fixed. Where transactions are executed in the
over-the-counter market, the Fund will seek to deal with the primary market
makers; but when necessary in order to obtain best execution, it will utilize
the services of others. In all cases the Fund will attempt to negotiate best
execution. No Fixed Income Fund paid any brokerage commissions during the
fiscal period ended October 31, 1995.
The following table shows the aggregate brokerage commissions with respect to
each Equity Fund and Balanced wwwFund with respect to each Fund's investment in
equity securities. The data is for the past fiscal year.
Aggregate
Commissions Paid
----------------
Diversified Equity Fund 180,093
Growth Equity Fund 115,993
Large Company Growth Fund 60,264
Small Company Growth Fund 600,341
International Fund -
Income Equity Fund 25,321
Index Fund 107,332
Conservative Balanced Fund 9,298
Moderate Balanced Fund 57,931
Growth Balanced Fund 66,361
Managed Fixed Income Fund 1,750
A Fund may not always pay the lowest commission or spread available. Rather, in
determining the amount of commission, including certain dealer spreads, paid in
connection with securities transactions, the Advisers take into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker. The Advisers may also take into account
payments made by brokers effecting transactions for a Fund (i) to the Fund or
(ii) to other persons on behalf of the Fund for services provided to it for
which it would be obligated to pay.
In addition, the Advisers may give consideration to research services furnished
by brokers to the Advisers for their use and may cause the Fund to pay these
brokers a higher amount of commission than may be charged by other brokers.
Such research and analysis may be used by the Advisers in connection with
services to clients other than the Funds, and the Advisers' fees are not reduced
by reason of the Advisers' receipt of the research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the obligation to seek the most
favorable price and execution available and such other policies as the Board may
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determine, an Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute portfolio transactions for the Funds.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized the Advisers to employ their
respective affiliates to effect securities transactions of the Funds, provided
certain other conditions are satisfied. Payment of brokerage commissions to an
affiliate of an Adviser for effecting such transactions is subject to Section
17(e) of the 1940 Act, which requires, among other things, that commissions for
transactions on securities exchanges paid by a registered investment company to
a broker which is an affiliated person of such investment company, or an
affiliated person of another person so affiliated, not exceed the usual and
customary brokers' commissions for such transactions. It is the Funds' policy
that commissions paid to Schroder Securities Limited, Norwest Investment
Management, Inc. and other affiliates of an Adviser will, in the judgment of the
Adviser responsible for making portfolio decisions and selecting brokers, be (i)
at least as favorable as commissions contemporaneously charged by the affiliate
on comparable transactions for its most favored unaffiliated customers and (ii)
at least as favorable as those which would be charged on comparable transactions
by other qualified brokers having comparable execution capability. The Board,
including a majority of the non-interested Trustees, has adopted procedures to
ensure that commissions paid to affiliates of an Adviser by the Funds satisfy
the foregoing standards.
The Fund has no understanding or arrangement to direct any specific portion of
its brokerage to Schroder Securities, and will not direct brokerage to Schroder
Securities in recognition of research services.
From time to time, the Funds may purchase securities of a broker or dealer
through which its regularly engages in securities transactions. The following
table shows these purchases, and their respective values, at October 31, 1995.
Market Value at
October 31, 1995
Diversified Equity Fund
Charles Schwab Corporation 8,884,652
Donaldson, Lufkin & Jenrette, Inc. 1,529,150
Growth Equity Fund
Charles Schwab Corporation 9,797,364
Donaldson, Lufkin & Jenrette, Inc. 1,695,750
Large Company Growth Fund
Charles Schwab Corporation 3,097,275
Donaldson, Lufkin & Jenrette, Inc. 544,425
Index Fund
Merrill Lynch & Co., Inc. 377,400
Morgan Stanley Group, Inc. 269,700
Salomon Brothers, Inc. 133,663
Conservative Balanced Fund
Charles Schwab Corporation 436,912
Donaldson, Lufkin & Jenrette, Inc. 77,350
Lehman Brothers, Inc. 913,003
Paine Webber Group, Inc. 1,004,850
Salomon Brothers, Inc. 1,497,017
Merrill Lynch & Co., Inc. 501,983
Bear Stearns Company 500,627
Salomon Brothers, Inc. 492,067
Moderate Balanced Fund
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Charles Schwab Corporation 1,882,613
Donaldson, Lufkin & Jenrette, Inc. 324,275
Lehman Brothers, Inc. 2,383,953
Paine Webber Group, Inc. 2,009,700
Salomon Brothers, Inc. 2,795,395
Growth Balanced Fund
Charles Schwab Corporation 3,211,651
Donaldson, Lufkin & Jenrette, Inc. 556,325
Paine Webber Group, Inc. 1,607,760
Salomon Brothers, Inc. 1,999,477
Managed Fixed Income Fund
Dean Witter 2,600,000
Lehman Brothers, Inc. 2,788,578
Paine Webber Group, Inc. 2,713,095
Salomon Brothers, Inc. 2,612,844
Stable Income Fund
Lehman Brothers, Inc. 2,028,896
TAXATION
Each Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended. Such qualification does not, of course, involve governmental
supervision of management or investment practices or policies. Investors should
consult their own counsel for a complete understanding of the requirements each
Fund must meet to qualify for such treatment, and of the application of state
and local tax laws to his or her particular situation.
Certain listed options and regulated futures contracts are considered "section
1256 contracts" for Federal income tax purposes. Section 1256 contracts held by
a Fund at the end of each taxable year will be "marked to market" and treated
for Federal income tax purposes as though sold for fair market value on the last
business day of such taxable year. Gain or loss realized by a Fund on section
1256 contracts generally will be considered a 60 percent long-term and 40
percent short-term capital gain or loss. Each Fund can elect to exempt its
section 1256 contracts which are part of a "mixed straddle" (as described below)
from the application of section 1256.
With respect to over-the-counter put and call options, gain or loss realized by
a Fund upon the lapse or sale of such options held by such Fund will be either
long-term or short-term capital gain or loss depending upon the Fund's holding
period with respect to such option. However, gain or loss realized upon the
lapse or closing out of such options that are written by a Fund will be treated
as short-term capital gain or loss. In general, if a Fund exercises an option,
or an option that a Fund has written is exercised, gain or loss on the option
will not be separately recognized but the premium received or paid will be
included in the calculation of gain or loss upon disposition of the property
underlying the option.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by such Fund may constitute a
"straddle" for Federal income tax purposes. A straddle of which at least one,
but not all, the positions are section 1256 contracts may constitute a "mixed
straddle". In general, straddles are subject to certain rules that may affect
the character and timing of a Fund's gains and losses with respect to straddle
positions by requiring, among other things, that (i) loss realized on
disposition of one position of a straddle not be recognized to the extent that a
Fund has unrealized gains with respect to the other position in such straddle;
(ii) a Fund's holding period in straddle positions be suspended while the
straddle exists (possibly resulting in any gain being treated as short-term
capital gain rather than long-term capital gain); (iii) losses recognized with
respect to certain straddle positions which are part of a mixed straddle and
which are non-section 1256 positions be treated as 60 percent long-term and 40
percent short-term capital loss; (iv) losses recognized with respect to certain
straddle positions which would otherwise constitute short-term capital losses be
treated as long-term capital losses; and (v)
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the deduction of interest and carrying charges attributable to certain straddle
positions may be deferred. Various elections are available to a Fund which may
mitigate the effects of the straddle rules, particularly with respect to mixed
straddles. In general, the straddle rules described above do not apply to any
straddles held by a Fund if all of the offsetting positions consist of section
1256 contracts.
Each International Fund shareholder should include in the shareholder's report
of gross income in his Federal income tax return both cash dividends received by
the shareholder from the Fund and also the amount which the Fund advises the
shareholder is the shareholder's pro rata portion of foreign income taxes paid
with respect to, or withheld from, dividends and interest paid to the
International Portfolio from its foreign investments. Each shareholder then
would be entitled, subject to certain limitations, to take a foreign tax credit
against the shareholders' Federal income tax liability for the amount of such
foreign taxes or else to deduct such foreign taxes as an itemized deduction from
gross income.
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, New York 10004.
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110, independent
auditors, acts as auditors for the Trust.
OWNERSHIP OF FUND SHARES
Prior to the public issuance of shares of the Funds, due to its initial
investment, Forum owned all outstanding shares of each Fund and, accordingly,
may be deemed to be a controlling person of each Fund. Upon the investment in
each Fund by public shareholders, Forum ceased to be a controlling person of any
Fund. As of April 16, 1996, the Trustees and officers of the Trust in the
aggregate owned less than one percent of the outstanding shares of each Fund.
The following persons owned of record 5% or more of the outstanding shares of a
Fund or any class thereof, as of April 16, 1996:
<TABLE>
<CAPTION>
FUND NAME/ADDRESS SHARE BALANCE % OF CLASS % OF FUND
<S> <C> <C> <C> <C>
DIVERSIFIED EQUITY
FUND Emseg & Co. 24,886,738.181 87.60% 87.60%
733 Marquette Ave.
Minneapolis, MN 55479-0036
GROWTH EQUITY
FUND Emseg & Co. 22,303,669.626 92.64% 92.64%
SMALL COMPANY
GROWTH FUND Emseg & Co. 10,955,106.984 98.99% 98.99%
LARGE COMPANY
GROWTH FUND Emseg & Co. 2,908,044.274 96.27% 96.27%
INTERNATIONAL
FUND Emseg & Co. 6,140,308.873 88.03% 86.89%
INCOME EQUITY
FUND Emseg & Co. 2,404,629.303 88.00% 88.00%
INDEX FUND Emseg & Co. 7,715,040.010 99.12% 99.12%
Norwest Bank Texas 250,947.838 9.18% 9.18%
1500 Broadway
Lubbock, TX 79408
CONSERVATIVE
BALANCED FUND Emseg & Co. 7,556,384.859 91.59% 91.59%
MODERATE
BALANCED FUND Emseg & Co. 18,036,670.275 90.67% 90.67%
GROWTH
BALANCED FUND Emseg & Co. 17,826,012.049 92.20% 92.20%
Alpine & Co. 2,443,119.718 8.60% 8.60%
1740 Broadway
Denver, CO 80274-8676
DIVERSIFIED BOND
FUND Emseg & Co. 5,695,093.057 88.68% 88.68%
INTERMEDIATE U.S.
GOVERNMENT FUND Emseg & Co. 3,888,311.041 94.09% 94.09%
STABLE INCOME
FUND Emseg & Co. 5,773,922.807 90.67% 90.67%
Norwest Advantage IRA Rollovers 321,599.323 5.05% 5.05%
733 Marquette Ave.
Minneapolis, MN 55479-0036
</TABLE>
ADDITIONAL INFORMATION ABOUT THE TRUST
Currently, the Trust is divided into thirty-one separate series representing
shares of each of the thirteen Funds and shares of Cash Investment Fund, Ready
Cash Investment Fund, U.S. Government Fund, Treasury Fund, Municipal Money
Market Fund, Adjustable U.S. Government Reserve Fund, Government Income Fund,
Income Fund, Total Return Bond Fund, Tax-Free Income Fund, Arizona Tax-Free
Fund, Colorado Tax-Free Fund, Minnesota Tax-Free Fund, Income Stock Fund,
ValuGrowth Stock Fund, Small Company Stock Fund, Contrarian Stock Fund and Short
Maturity Investment Fund. The Trust has received an order from the SEC
permitting the issuance and sale of separate classes of shares representing
interests in each of the Trust's portfolios. It is anticipated, however, that
the Trust will operate the classes of each Fund in accordance with rules of the
SEC adopted after the Trust obtained its exemptive order.
The Board determined that currently no conflict of interest exists between or
among each Fund's I Shares and its other classes, if any. On an ongoing basis,
the Board, pursuant to its fiduciary duties under the 1940 Act and state law,
will seek to ensure that no such conflict arises.
The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or a shareholder is
subject to the jurisdiction of courts in those states,
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<PAGE>
the courts may not apply Delaware law, and may thereby subject the Trust
shareholders to liability. To guard against this risk, the Trust Instrument of
the Trust disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation and instrument entered into by the Trust or its Trustees, and
provides for indemnification out of Trust property of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which (1) a court refuses
to apply Delaware law, (2) no contractual limitation of liability is in effect,
and (3) the Trust itself is unable to meet its obligations. In light of
Delaware law, the nature of the Trust's business, and the nature of its assets,
the Board believes that the risk of personal liability to a Trust shareholder is
extremely remote.
FINANCIAL STATEMENTS
The financial statements of each Fund for the year ended October 31, 1995 (which
include statements of assets and liabilities, statements of operations,
statements of changes in net assets, notes to financial statements, financial
highlights, schedules of investments and the independent auditors' report
thereon) are included in the Annual Report to Shareholders of the Trust
delivered along with this SAI and are incorporated herein by reference.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Funds' registration statement filed with the SEC under the Securities Act of
1933 with respect to the securities offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract of other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
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APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." 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.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
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 some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment 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.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
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STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a 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 debt rated in higher rated
categories.
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
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated C typically are subordinated to senior debt which as assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. Bonds rated D are in payment default or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
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FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rate F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
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An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
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<PAGE>
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics: Leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A-1 and A-2. Issues assigned an
A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are delineated with the numbers 1, 2 and 3 to indicate
the relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated A-2 are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1 rating.
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F-3. Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-S. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Issues assigned this rating are in actual or imminent payment default.
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