NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1997
================================================================================
CASH INVESTMENT FUND STRATEGIC INCOME FUND
READY CASH INVESTMENT FUND MODERATE BALANCED FUND
U.S. GOVERNMENT FUND GROWTH BALANCED FUND
TREASURY FUND AGGRESSIVE BALANCED-EQUITY FUND
MUNICIPAL MONEY MARKET FUND INDEX FUND
STABLE INCOME FUND INCOME EQUITY FUND
LIMITED TERM GOVERNMENT INCOME FUND VALUGROWTHSM STOCK FUND
INTERMEDIATE GOVERNMENT INCOME FUND DIVERSIFIED EQUITY FUND
DIVERSIFIED BOND FUND GROWTH EQUITY FUND
INCOME FUND LARGE COMPANY GROWTH FUND
TOTAL RETURN BOND FUND SMALL COMPANY STOCK FUND
LIMITED TERM TAX-FREE FUND SMALL COMPANY GROWTH FUND
TAX-FREE INCOME FUND DIVERSIFIED SMALL CAP FUND
COLORADO TAX-FREE FUND SMALL CAP OPPORTUNITIES FUND
MINNESOTA INTERMEDIATE TAX-FREE FUND CONTRARIAN STOCK FUND
MINNESOTA TAX-FREE FUND INTERNATIONAL FUND
<PAGE>
NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1997
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING: DISTRIBUTION:
Norwest Bank Minnesota, N.A. Forum Financial Services, Inc.
Transfer Agent Manager and Distributor
733 Marquette Avenue Two Portland Square
Minneapolis, MN 55479-0040 Portland, Maine 04101
(612) 667-8833/(800) 338-1348 (207) 879-1900
Norwest Advantage Funds is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended.
This Statement of Additional Information supplements the Prospectuses dated
October 1, 1997, as may be amended from time to time, offering the following
classes of shares of the separate portfolios of Norwest Advantage Funds: Cash
Investment Fund, Ready Cash Investment Fund (Institutional Shares, Investor
Shares and Exchange Shares), U.S. Government Fund, Treasury Fund, Municipal
Money Market Fund (Institutional Shares and Investor Shares), A Shares, B Shares
and I Shares of each of Stable Income Fund, Intermediate Government Income Fund,
Income Fund, Total Return Bond Fund, Tax-Free Income Fund, Colorado Tax-Free
Fund, Minnesota Tax-Free Fund, Income Equity Fund, ValuGrowth Stock Fund,
Diversified Equity Fund, Growth Equity Fund, Small Company Stock Fund, Small Cap
Opportunities Fund, Contrarian Stock Fund and International Fund and I Shares of
each of Limited Term Government Income Fund, Diversified Bond Fund, Limited Term
Tax-Free Fund, Minnesota Intermediate Tax-Free Fund, Strategic Income Fund,
Moderate Balanced Fund, Growth Balanced Fund, Aggressive Balanced-Equity Fund,
Index Fund, Large Company Growth Fund, Small Company Growth Fund and Diversified
Small Cap Fund.
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
A CORRESPONDING PROSPECTUS, COPIES OF WHICH MAY BE OBTAINED BY AN INVESTOR
WITHOUT CHARGE BY CONTACTING THE DISTRIBUTOR AT THE ADDRESS LISTED ABOVE.
<PAGE>
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
Introduction 1
1. Investment Policies 4
Security Ratings Information 4
Money Market Fund Matters 5
Fixed Income Investments 6
Mortgage-Backed And Asset-Backed Securities 12
Interest Rate Protection Transactions 13
Hedging And Option Income Strategies 14
Foreign Currency Transactions 22
Equity Securities and Additional Information Concerning the Equity Funds 23
Illiquid Securities and Restricted Securities 26
Borrowing And Transactions Involving Leverage 27
Repurchase Agreements 30
Temporary Defensive Position 30
2. Information Concerning Colorado and Minnesota 30
Colorado 31
Minnesota 33
3. Investment Limitations 34
Fundamental Limitations 34
Non-Fundamental Limitations 38
4. Performance and Advertising Data 41
SEC Yield Calculations 41
Total Return Calculations 42
Multiclass, Collective Trust Fund and Core-Gateway Performance 43
Other Advertisement Matters 43
5. Management 45
Trustees and Officers 45
Investment Advisory Services 51
Management and Administrative Services 57
Distribution 60
Transfer Agent 62
Custodian 62
Portfolio Accounting 62
Expenses 64
6. Portfolio Transactions 64
7. Additional Purchase and Redemption Information 68
Statement of Intention 69
Exchanges 69
Redemptions 70
Contingent Deferred Sales Charge (A Shares) 70
Contingent Deferred Sales Charge (A Shares and B Shares) 71
Conversion of B Shares and Exchange Shares 71
<PAGE>
TABLE OF CONTENTS
PAGE
8. Taxation 72
9. Additional Information About the Trust and the Shareholders of the Funds 73
Determination of Net Asset Value - Money Market Funds 73
Counsel and Auditors 73
General Information 74
Recent Mergers 74
Shareholdings 74
Financial Statements 75
Registration Statement 75
Appendix A - Description of Securities Ratings A-1
Appendix B - Miscellaneous Tables B-1
Table 1 - Investment Advisory Fees B-1
Table 2 - Management Fees B-5
Table 3 - Distribution Fees B-13
Table 4 - Sales Charges B-15
Table 5 - Accounting Fees B-18
Table 6 - Commissions B-21
Table 7 - 5% Shareholders B-23
Appendix C - Performance Data C-1 Table 1 - Money Market Fund C-1 Table
2 - Yields C-1 Table 3 - Total Returns C-4
</TABLE>
<PAGE>
INTRODUCTION
The Trust was originally organized under the name "Prime Value Funds, Inc." as a
Maryland corporation on August 29, 1986, and on July 30, 1993, was reorganized
as a Delaware business trust under the name "Norwest Funds." On October 1, 1995,
the Trust changed its name to "Norwest Advantage Funds" and on June 1, 1997,
changed its name back to "Norwest Funds." On August 4, 1997, the Trust changed
its name back to "Norwest Advantage Funds." On October 1, 1995 the Trust also
changed the name of its various classes of shares as follows: Investor A class
was renamed A class ("A Shares"); Investor B class was renamed B class ("B
Shares"); Trust class was renamed I class ("I Shares"); and Advantage class also
was renamed I Shares.
Each Fund's investment adviser is Norwest Investment Management, Inc.
("Norwest"), a subsidiary of Norwest Bank Minnesota, N.A. ("Norwest Bank").
Norwest also is the investment adviser of each Core Portfolio other than
Schroder U.S. Smaller Companies Portfolio and International Portfolio. Norwest
Bank, a subsidiary of Norwest Corporation, serves as the Trust's transfer agent,
dividend disbursing agent and custodian.
UNITED CAPITAL MANAGEMENT ("UCM") serves as investment subadviser of Total
Return Bond Fund/Total Return Bond Portfolio and Contrarian Stock Fund. UCM also
serves as an investment subadviser of Diversified Bond Fund, Strategic Income
Fund, Moderate Balanced Fund, Growth Balanced Fund and Aggressive
Balanced-Equity Fund.
GALLIARD CAPITAL MANAGEMENT, INC. ("Galliard") serves as investment subadviser
of Stable Income Fund/Stable Income Portfolio and Managed Fixed Income
Portfolio. Galliard also serves as an investment subadviser of Diversified Bond
Fund, Strategic Income Fund, Moderate Balanced Fund, Growth Balanced Fund and
Aggressive Balanced-Equity Fund.
CRESTONE CAPITAL MANAGEMENT, INC. ("Crestone") serves as investment subadviser
to Small Company Stock Fund/Small Company Stock Portfolio. Crestone also serves
as investment subadviser of Strategic Income Fund, Moderate Balanced Fund,
Growth Balanced Fund, Aggressive Balanced-Equity Fund, Diversified Equity Fund,
Growth Equity Fund and Diversified Small Cap Fund.
PEREGRINE CAPITAL MANAGEMENT, INC. ("Peregrine") serves as investment subadviser
of Small Company Growth Fund/Small Company Growth Portfolio, Positive Return
Bond Portfolio, Large Company Growth Fund/Large Company Growth Portfolio and
Small Company Value Portfolio. Peregrine also serves as an investment subadviser
of Diversified Bond Fund, Strategic Income Fund, Moderate Balanced Fund, Growth
Balanced Fund, Aggressive Balanced-Equity Fund, Diversified Equity Fund, Growth
Equity Fund and Diversified Small Cap Fund.
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC. ("Schroder") serves as investment
adviser to Schroder U.S. Smaller Companies Portfolio and International
Portfolio. Schroder also serves as an investment subadviser of Strategic Income
Fund, Moderate Balanced Fund, Growth Balanced Fund, Aggressive Balanced-Equity
Fund, Diversified Equity Fund, Growth Equity Fund, Small Cap Opportunities Fund
and International Fund.
SMITH ASSET MANAGEMENT GROUP, LP ("SMITH GROUP"). Smith Group, whose principal
business address is 500 Crescent Court, Suite 250, Dallas, Texas, is a
registered investment adviser. Smith group provides investment management
services to company retirement plans, foundations, endowments, trust companies,
and high net worth individuals. As of October 1, 1997, the Smith Group managed
over $200 million in assets. Currently, the Smith Group manages all of
Disciplined Growth Portfolio and Small Cap Value Portfolio.
FORUM FINANCIAL SERVICES, INC. ("Forum"), a registered broker-dealer, serves as
the Trust's manager and as distributor of the Trust's shares. Forum
Administrative Services, Limited Liability Company ("FAS") serves as each Fund's
administrator.
<PAGE>
Each of Ready Cash Investment Fund, Stable Income Fund, Total Return Bond Fund,
Index Fund, Income Equity Fund, Large Company Growth Fund, Small Company Stock
Fund, Small Company Growth Fund, Small Cap Opportunities Fund and International
Fund invests all of its investable assets in a separate portfolio (each a "Core
Portfolio") of a registered, open-end, management investment company that has
the same investment objective and substantially similar investment policies.
Accordingly, the investment experience of each of these Funds will correspond
directly with the investment experience of its respective Core Portfolio.
Each of Cash Investment Fund, Diversified Bond Fund, Strategic Income Fund,
Moderate Balanced Fund, Growth Balanced Fund, Diversified Equity Fund, Growth
Equity Fund, Aggressive Balanced-Equity Fund and Diversified Small Cap Fund
invests all of its investable assets in various portfolios (each a "Core
Portfolio") of a registered, open-end, management investment company portfolios
(each a "Core Trust"). Each Core Portfolio invests using a different investment
style.
The percentage of each of these Fund's (except Cash Investment Fund's) assets
invested in each Core Portfolio may be changed at any time in response to market
or other conditions. Allocations are made within specified ranges as described
in each Fund's prospectus under "Investment Objectives and Policies".
Each of U.S. Government Fund, Treasury Fund, Municipal Money Market Fund,
Limited Term Government Income Fund, Intermediate Government Income Fund, Income
Fund, Limited Term Tax-Free Fund, Tax-Free Income Fund, Colorado Tax-Free Fund,
Minnesota Tax-Free Fund, Minnesota Intermediate Tax-Free Fund, ValuGrowth Stock
Fund and Contrarian Stock Fund invests directly in portfolio securities.
The expenses of each Fund that invest in one or more Core Portfolios include the
Fund's pro rata share of the expenses of the Core Portfolios in which the Fund
invests, which are borne indirectly by the Fund's shareholders.
As used in this SAI, the following terms shall have the meanings listed:
"Advisers" or "Investment Advisers" shall mean, collectively, Norwest
and Subadvisors.
"Board" shall mean the Board of Trustees of the Trust.
"Balanced Fund" shall mean each of Strategic Income Fund, Moderate
Balanced Fund and Growth Balanced Fund.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Core Trust" shall mean Core Trust (Delaware), an open-end, management
investment company registered under the 1940 Act.
"Core Trust Board" shall mean the Board of Trustees of Core Trust.
"Crestone" shall mean Crestone Capital Management, Inc., the
investment subadvisor to Strategic Income Fund, Moderate Balanced
Fund, Growth Balanced Fund, Diversified Equity Fund, Growth Equity
Fund, Small Company Stock Fund/ Small Company Stock Portfolio.
"Custodian" shall mean Norwest acting in its capacity as custodian of
a Fund.
"Equity Fund" shall mean each of Income Equity Fund, Index Fund,
ValuGrowth Stock Fund, Diversified Equity Fund, Growth Equity Fund,
Large Company Growth Fund, Small Company Stock Fund, Small Company
Growth Fund, Contrarian Stock Fund and International Fund.
2
<PAGE>
"FAS" shall mean Forum Administrative Services, Limited Liability
Company, the Trust's administrator.
"Fitch" shall mean Fitch Investors Service, L.P.
"Forum" shall mean Forum Financial Services, Inc., a registered
broker-dealer and distributor of the Trust's shares.
"Forum Accounting" shall mean Forum Accounting Services, Limited
Liability Company, the Trust's fund accountant.
"Fund" shall mean each of the twenty-eight separate portfolios of the
Trust to which this Statement of Additional Information relates as
identified on the cover page.
"Galliard" shall mean Galliard Capital Management, Inc., the
investment subadviser to Stable Income Fund, Stable Income Portfolio,
Managed Fixed Income Portfolio, Diversified Bond Fund, Strategic
Income Fund, Moderate Balanced Fund and Growth Balanced Fund.
"Income Fund" shall mean each of Stable Income Fund, Intermediate
Government Income Fund, Diversified Bond Fund, Income Fund and Total
Return Bond Fund.
"Money Market Funds" shall mean each of Cash Investment Fund, Ready
Cash Investment Fund, U.S. Government Fund, Treasury Fund and
Municipal Money Market Fund.
"Moody's" shall mean Moody's Investors Service.
"Norwest" shall mean Norwest Investment Management, Inc., a subsidiary
of Norwest Bank Minnesota, N.A.
"Norwest Bank" shall mean Norwest Bank Minnesota, N.A., a subsidiary
of Norwest Corporation.
"NRSRO" shall mean a nationally recognized statistical rating
organization.
"Peregrine" shall mean Peregrine Capital Management, Inc., the
investment subadviser to Positive Return Bond Portfolio, Small Company
Value Portfolio, Diversified Bond Fund, Strategic Income Fund,
Moderate Balanced Fund, Growth Balanced Fund, Diversified Equity Fund,
Growth Equity Fund, Large Company Growth Fund/Large Company Growth
Portfolio, Small Company Growth Fund/Small Company Growth Portfolio.
"Portfolio" shall mean Prime Money Market Portfolio, Money Market
Portfolio, Positive Return Bond Portfolio, Stable Income Portfolio,
Managed Fixed Income Portfolio, Total Return Bond Portfolio, Index
Portfolio, Income Equity Portfolio, Large Company Growth Portfolio,
Small Company Growth Portfolio, Small Company Stock Portfolio, Small
Company Value Portfolio and International Portfolio, thirteen separate
portfolios of Core Trust.
"Schroder" shall mean Schroder Capital Management Inc., the investment
subadviser to Diversified Equity Fund, Growth Equity Fund,
International Fund, Strategic Income Fund, Moderate Balanced Fund and
Growth Balanced Fund and investment adviser to International
Portfolio.
"Schroder Advisors" shall mean Schroder Fund Advisors Inc., the
administrator to Schroder U.S. Smaller Companies Portfolio.
"Schroder Core" shall mean Schroder Capital Funds, an open-end,
management investment company registered under the 1940 Act.
3
<PAGE>
"Schroder Core Board" shall mean the Board of Trustees of Schroder
Core.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's.
"Smith" shall mean Smith Asset Management Group, L.P.
"Stock Index Futures" shall mean futures contracts that relate to
broadly-based stock indices.
"Subadvisers or "Investment Subadvisers: shall mean, collectively,
Crestone Capital Management, Inc., Galliard Capital Management, Inc.,
Schroder Capital Management, Inc. and United Capital Management.
"Tax Free Income Fund" shall mean each of Limited Term Tax-Free Fund,
Tax-Free Income Fund, Colorado Tax-Free Fund and Minnesota Tax-Free
Fund.
"Transfer Agent" shall mean Norwest Bank acting in its capacity as
transfer and dividend disbursing agent of the a Fund.
"Trust" shall mean Norwest Advantage Funds, an open-end, management
investment company registered under the 1940 Act.
"UCM" shall mean United Capital Management, Inc., the investment
subadviser to Diversified Bond Fund, Total Return Bond Fund/Total
Return Bond Portfolio, Strategic Income Fund, Moderate Balanced Fund,
Growth Balanced Fund and Contrarian Stock Fund.
"U.S. Government Securities" shall mean obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
1. INVESTMENT POLICIES
The following discussion is intended to supplement the disclosure in each
Prospectus concerning each Fund's investments, investment techniques and
strategies and the risks associated therewith (as well as those of the
Portfolio(s), which has the same investment objective and substantially similar
investment policies). Certain of the Funds are designed for investment of that
portion of an investor's funds which can appropriately bear the special risks
associated with certain types of investments (i.e., investment in smaller
capitalization companies). No Fund may make any investment or employ any
investment technique or strategy not referenced in the Prospectus which 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. References to the
investment policies and investment limitations of a Fund that invests all or a
portion of its investable assets in a Core Portfolio(s) refers to that Core
Portfolio(s) in which that Fund currently invests its assets.
SECURITY RATINGS INFORMATION
Moody's, S&P 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.
It should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, securities with the same maturity, interest
rate and rating may have
4
<PAGE>
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 (neither event requiring sale
of such security by a Fund except in certain cases with respect to the Money
Market Funds), Norwest will determine whether the Fund should continue to hold
the obligation. To the extent that the ratings given by a NRSRO may change as a
result of changes in such organizations or their rating systems, the Investment
Adviser will attempt to substitute comparable ratings. 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.
A Fund may purchase unrated securities if its Adviser determines the security to
be of comparable quality to a rated security that the Fund may purchase. Unrated
securities may not be as actively traded as rated securities. A Fund may retain
securities whose rating has been lowered below the lowest permissible rating
category (or that are unrated and determined by its Adviser to be of comparable
quality to securities whose rating has been lowered below the lowest permissible
rating category) if the Adviser determines that retaining such security is in
the best interests of the Fund.
To limit credit risks, International Portfolio may only invest in securities
that are investment grade (rated in the top four long-term investment grades by
an NRSRO or in the top two short-term investment grades by an NRSRO.)
Accordingly, the lowest permissible long-term investment grades for corporate
bonds, including convertible bonds, are Baa in the case of Moody's and BBB in
the case of S&P and Fitch; the lowest permissible long-term investment grades
for preferred stock are Baa in the case of Moody's and BBB in the case of S&P
and Fitch; and the lowest permissible short-term investment grades for
short-term debt, including commercial paper, are Prime-2 (P-2) in the case of
Moody's, A-2 in the case of S&P and F-2 in the case of Fitch. All these ratings
are generally considered to be investment grade ratings, although Moody's
indicates that securities with long-term ratings of Baa have speculative
characteristics.
MONEY MARKET FUND MATTERS
Pursuant to Rule 2a-7 adopted under the 1940 Act, each of the Money Market Funds
may invest only in "eligible securities" as defined in that Rule. Generally, an
eligible security is a security that (i) is denominated in U.S. Dollars and has
a remaining maturity of 397 days or less; (ii) is rated, or is issued by an
issuer with short-term debt outstanding that is rated, in one of the two highest
rating categories by two NRSROs or, if only one NRSRO has issued a rating, by
that NRSRO; and (iii) has been determined by the Investment Adviser to present
minimal credit risks pursuant to procedures approved by the Board. In addition,
the Money Market Funds will maintain a dollar-weighted average maturity of 90
days or less. Unrated securities may also be eligible securities if the
Investment Adviser determines that they are of comparable quality to a rated
eligible security pursuant to guidelines approved by the Board.
Under Rule 2a-7, except for Municipal Money Market Fund, a Money Market Fund may
not invest more than five percent of its total assets in the securities of any
one issuer other than with respect to U.S. Government Securities, provided that
in certain cases a Fund may invest five percent of its assets in a single issuer
for a period of up to three business days. Municipal Money Market Fund is,
however, subject to the issuer diversification rules described in paragraph (1)
under "Investment Limitations, Nonfundamental Limitations." Except for Municipal
Money Market Fund, a Money Market Fund may not invest in a security that has
received, or is deemed comparable in quality to a security that has received,
the second highest rating by the requisite number of NRSROs (a "second tier
security") if immediately after the acquisition thereof the Fund would have
invested more than (A) the greater of one percent of its total assets or one
million dollars in securities issued by that issuer which are second tier
securities, or (B) five percent of its total assets in second tier securities.
Immediately after the acquisition of any put, no more than five percent of a
Money Market Fund's total assets may be invested in securities issued by or
subject to conditional puts from the same institution and no more than ten
percent of a Money Market Fund's total assets may be invested in securities
issued by or subject to unconditional puts (including guarantees) from the same
institution. However, these restrictions only apply with respect to 75% of
Municipal Money Market Fund's total assets.
5
<PAGE>
INVESTMENT BY FEDERAL CREDIT UNIONS
U.S. Government Fund and Treasury Fund limit their investments, as described in
each of the Prospectuses for those Funds, to investments that are legally
permissible for Federally chartered credit unions under applicable provisions of
the Federal Credit Union Act (including 12 U.S.C. Section 1757(7), (8) and (15))
and the applicable rules and regulations of the National Credit Union
Administration (including 12 C.F.R. Part 703, Investment and Deposit
Activities), as such statutes and rules and regulations may be amended. Treasury
Fund limits its investments to Treasury obligations, including Treasury STRIPS
with a maturity of less than 13 months. U.S. Government Fund limits its
investments to U.S. Government Securities (including Treasury STRIPS),
repurchase agreements fully collateralized by U.S. Government Securities and
other government related zero-coupon securities, such as TIGRs and CATs. All
zero-coupon securities in which the Fund invests will have a maturity of less
than 13 months. Certain U.S. Government Securities owned by the Fund may be
mortgage or asset backed, but, except to reduce interest rate risk, no such
security will be (i) a stripped mortgage backed security ("SMBS"), (ii) a
collateralized mortgage obligation ("CMO") or real estate mortgage investment
conduit ("REMIC") that meets any of the tests outlined in 12 C.F.R. Section
703.5(g) or (iii) a residual interest in a CMO or REMIC. In order to reduce
interest rate risk the Fund may purchase a SMBS, CMO, REMIC or residual interest
in a CMO or REMIC but only in accordance with 12 C.F.R. Section 703.5(i). Each
Fund also may invest in reverse repurchase agreements in accordance with 12
C.F.R. 703.4(e).
FIXED INCOME INVESTMENTS
GENERAL INFORMATION CONCERNING FIXED INCOME SECURITIES
Yields on fixed income securities, including municipal securities, are dependent
on a variety of factors, including the general conditions of the money market
and other fixed income securities markets, the size of a particular offering,
the maturity of the obligation and the rating of the issue. Fixed income
securities with longer maturities tend to produce higher yields and are
generally subject to greater price movements than obligations with shorter
maturities. There is normally an inverse relationship between the market value
of securities sensitive to prevailing interest rates and actual changes in
interest rates. In other words, an increase in interest rates will generally
reduce the market value of portfolio investments, and a decline in interest
rates will generally increase the value of portfolio investments.
Obligations of issuers of fixed income securities (including municipal
securities) are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Reform Act of 1978. In addition, the obligations of municipal issuers
may become subject to laws enacted in the future by Congress, state
legislatures, or referenda extending the time for payment of principal and/or
interest, or imposing other constraints upon enforcement of such obligations or
upon the ability of municipalities to levy taxes. Changes in the ability of an
issuer to make payments of interest and principal and in the market's perception
of an issuer's creditworthiness will also affect the market value of the debt
securities of that issuer. The possibility exists, therefore, that, the ability
of any issuer to pay, when due, the principal of and interest on its debt
securities may become impaired.
U.S. GOVERNMENT SECURITIES
In addition to obligations of the U.S. Treasury, each of the Funds (except
Treasury Fund) may invest in U.S. Government Securities. Small Cap Opportunities
Fund may invest in U.S. Government Securities which have remaining maturities
not exceeding one year. Agencies and instrumentalities which issue or guarantee
debt securities and which have been established or sponsored by the United
States government include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, the Federal Intermediate Credit Banks, the Federal Land
Banks, the Federal National Mortgage Association, the Small Business
Administration, the Government National Mortgage Association and the Student
Loan Marketing Association. Others are supported by the right of the issuer to
borrow from the Treasury; others are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations; and still others are
supported primarily or solely by the creditworthiness of the issuer. No
assurance can
6
<PAGE>
be given that the U.S. government would provide financial support to U.S.
government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. Accordingly, although these securities have historically involved
little risk of loss of principal if held to maturity, they may involve more risk
than securities backed by the U.S. Government's full faith and credit. A Fund
will invest in the obligations of such agencies or instrumentalities only when
Norwest believes that the credit risk with respect thereto is consistent with
the Fund's investment policies.
BANK OBLIGATIONS
Small cap Opportunities Fund may invest in obligations (including certificates
of deposit and bankers' acceptances) of U.S. banks that have total assets at the
time of purchase in excess of $1 billion and are members of the Federal Deposit
Insurance Corporation. Each other Fund may, in accordance with the policies
described in its Prospectus, invest in obligations of financial institutions,
including negotiable certificates of deposit, bankers' acceptances and time
deposits of U.S. banks (including savings banks and savings associations),
foreign branches of U.S. banks, foreign banks and their non-U.S. branches
(Eurodollars), U.S. branches and agencies of foreign banks (Yankee dollars), and
wholly-owned banking-related subsidiaries of foreign banks. A Fund's investments
in the obligations of foreign banks and their branches, agencies or subsidiaries
may be obligations of the parent, of the issuing branch, agency or subsidiary,
or both. Investments in foreign bank obligations are limited to banks and
branches located in countries which the Fund's Adviser believes do not present
undue risk.
A certificate of deposit is an interest-bearing negotiable certificate issued by
a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date. Time deposits are non-negotiable
deposits with a banking institution that earn a specified interest rate over a
given period. Certificates of deposit and fixed time deposits, which are payable
at the 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. Deposits subject to early withdrawal penalties or that mature in more
than seven days are treated as illiquid securities if there is no readily
available market for the securities.
The Funds (other than Small Cap Opportunities Fund) may invest in Eurodollar
certificates of deposit, which are U.S. dollar denominated certificates of
deposit issued by offices of foreign and domestic banks located outside the
United States; Yankee certificates of deposit, which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States; Eurodollar time deposits ("ETDs"), which are U.S. dollar
denominated deposits in a foreign branch of a U.S. bank or a foreign bank; and
Canadian time deposits, which are essentially the same as ETDs, except that they
are issued by Canadian offices of major Canadian banks.
Investments that a Fund may make in instruments of foreign banks, branches or
subsidiaries 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.
SHORT TERM DEBT SECURITIES/COMMERCIAL PAPER
Small Cap Opportunities Fund may invest in commercial paper, i.e., short-term
unsecured promissory notes issued in bearer form by bank holding companies,
corporations and finance companies. The commercial paper purchased by Small Cap
Opportunities Fund for temporary defensive purposes consists of direct
obligations of domestic issuers which, at the time of investment, are rated
"P-1" by Moody's Investors Service ("Moody's") or "A-1" by Standard & Poor's
("S&P"), or securities which, if not rated, are issued by companies having an
outstanding debt issue currently rated Aa by Moody's or AAA or AA by S&P. The
rating "P-1" is the highest commercial paper
7
<PAGE>
rating assigned by Moody's and the rating "A-1" is the highest commercial paper
rating assigned by S&P. Except for the Money Market Funds and Small Cap
Opportunities Fund, each Fund may assume a temporary defensive position and may
invest without limit in commercial paper that is rated in one of the two highest
rating categories by an NRSRO or, if not rated, determined by the Investment
Adviser to be of comparable quality. Certain additional Funds may invest in
commercial paper as an investment and not as a temporary defensive position.
Except as noted below with respect to variable master demand notes, issues of
commercial paper normally have maturities of less than nine months and fixed
rates of return.
Variable amount master demand notes are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between a Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, the
Fund may demand payment of principal and accrued interest at any time. Variable
amount master demand notes must satisfy the same criteria as set forth above for
commercial paper.
GUARANTEED INVESTMENT CONTRACTS
The Fixed Income Funds may invest in guaranteed investment contracts ("GICs")
issued by insurance companies. Pursuant to such contracts, a 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 Investment Adviser has determined that
the GIC presents minimal credit risks to the Fund and is of comparable quality
to instruments in which the Fund may otherwise invest. 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. The interest rate on a GIC may be
tied to a specified market index and is guaranteed not to be less than a certain
minimum rate.
ZERO COUPON SECURITIES
Zero coupon securities are sold at original issue discount and pay no interest
to holders prior to maturity. Accordingly, these securities usually trade at a
deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Federal tax law requires that a Fund accrue a portion of the discount
at which a zero-coupon security was purchased as income each year even though
the Fund receives no interest payment in cash on the security during the year.
Interest on these securities, however, is reported as income by the Fund and
must be distributed to its shareholders. The Funds distribute all of their net
investment income, and may have to sell portfolio securities to distribute
imputed income, which may occur at a time when the Investment Adviser would not
have chosen to sell such securities and which may result in a taxable gain or
loss.
Currently U.S. Treasury securities issued without coupons include Treasury bills
and separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. These stripped components are traded
independently under the Treasury's Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program or as Coupons Under Book Entry
Safekeeping ("CUBES"). A number of banks and brokerage firms separate the
principal and interest portions of U.S. Treasury securities and sell them
separately in the form of receipts or certificates representing undivided
interests in these instruments. These instruments are generally held by a bank
in a custodial or trust account on behalf of the owners of the securities and
are known by various names,
8
<PAGE>
including Treasury Receipts ("TRs"), Treasury Investment Growth Receipts
("TIGRs") and Certificates of Accrual on Treasury Securities ("CATS"). In
addition, corporate debt securities may be zero coupon securities. For the
purpose solely of an investment policy of investing at least 65% of a Fund's
assets in U.S. Government Securities, such securities are currently not deemed
to be U.S. Government Securities but rather securities issued by the bank or
brokerage firm involved.
MUNICIPAL SECURITIES
Municipal securities are issued by the states, territories and possessions of
the United States, their political subdivisions (such as cities, counties and
towns) and various authorities (such as public housing or redevelopment
authorities), instrumentalities, public corporations and special districts (such
as water, sewer or sanitary districts) of the states, territories and
possessions of the United States or their political subdivisions. In addition,
municipal securities include securities issued by or on behalf of public
authorities to finance various privately operated facilities, such as industrial
development bonds or other private activity bonds that are backed only by the
assets and revenues of the non-governmental user (such as manufacturing
enterprises, hospitals, colleges or other entities).
Municipal securities historically have not been subject to registration with the
SEC, although there have been proposals which would require registration in the
future.
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities are intended to fulfill the short-term capital needs of the
issuer and generally have maturities not exceeding one year. They include the
following: tax anticipation notes, revenue anticipation notes, bond anticipation
notes, construction loan notes and tax-exempt commercial paper. Tax anticipation
notes are issued to finance working capital needs of municipalities, and are
payable from various anticipated future seasonal tax revenues, such as income,
sales, use and business taxes. Revenue anticipation notes are issued in
expectation of receipt of other types of revenues, such as federal revenues
available under various federal revenue sharing programs. Bond anticipation
notes are issued to provide interim financing until long-term financing can be
arranged and are typically payable from proceeds of the long-term bonds.
Construction loan notes are sold to provide construction financing. After
successful completion and acceptance, many such projects receive permanent
financing through the Federal Housing Administration under the Federal National
Mortgage Association or the Government National Mortgage Association. Tax-exempt
commercial paper is a short-term obligation with a stated maturity of 365 days
or less. It is issued by agencies of state and local governments to finance
seasonal working capital needs or as short-term financing in anticipation of
longer term financing. Municipal notes also include longer term issues that are
remarketed to investors periodically, usually at one year intervals or less.
MUNICIPAL BONDS. Municipal bonds meet longer term capital needs of a municipal
issuer and generally have maturities of more than one year when issued. General
obligation bonds are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. General obligation bonds are secured by the issuer's pledge of its full
faith and credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to rate or amount. Revenue bonds in recent years have come to
include an increasingly wide variety of types of municipal obligations. As with
other kinds of municipal obligations, the issuers of revenue bonds may consist
of virtually any form of state or local governmental entity. Generally, revenue
bonds are secured by the revenues or net revenues derived from a particular
facility, class of facilities, or, in some cases, from the proceeds of a special
excise or other specific revenue source, but not from general tax revenues.
Revenue bonds are issued to finance a wide variety of capital projects including
electric, gas, water and sewer systems; highways, bridges, and tunnels; port and
airport facilities; colleges and universities; and hospitals. Many of these
bonds are additionally secured by a debt service reserve fund which can be used
to make a limited number of principal and interest payments should the pledged
revenues be insufficient. Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also be employed in revenue
bond issues. Revenue bonds issued by housing authorities may be secured in a
number of ways, including partially or fully insured mortgages, rent subsidized
and/or collateralized mortgages, and/or the net revenues from housing or other
public projects. Some authorities provide further security in the form of a
state's ability (without obligation) to make up deficiencies in the
9
<PAGE>
debt service reserve fund. In recent years, revenue bonds have been issued in
large volumes for projects that are privately owned and operated, as discussed
below.
Municipal bonds are considered private activity bonds if they are issued to
raise money for privately owned or operated facilities used for such purposes as
production or manufacturing, housing, health care and other nonprofit or
charitable purposes. These bonds are also used to finance public facilities such
as airports, mass transit systems and ports. The payment of the principal and
interest on such bonds is dependent solely on the ability of the facility's
owner or user to meet its financial obligations and the pledge, if any, of real
and personal property as security for such payment.
While at one time the pertinent provisions of the Code permitted private
activity bonds to bear tax-exempt interest in connection with virtually any type
of commercial or industrial project (subject to various restrictions as to
authorized costs, size limitations, state per capita volume restrictions, and
other matters), the types of qualifying projects under the Code have become
increasingly limited, particularly since the enactment of the Tax Reform Act of
1986. Under current provisions of the Code, tax-exempt financing remains
available, under prescribed conditions, for certain privately owned and operated
facilities of organizations described in Section 501(c)(3) of the Code,
multi-family rental housing facilities, airports, docks and wharves, mass
commuting facilities and solid waste disposal projects, among others, and for
the tax-exempt refinancing of various kinds of other private commercial projects
originally financed with tax-exempt bonds. In future years, the types of
projects qualifying under the Code for tax-exempt financing could become
increasingly limited.
OTHER MUNICIPAL OBLIGATIONS. Other municipal obligations, incurred for a variety
of financing purposes, include municipal leases, which may take the form of a
lease or an installment purchase or conditional sale contract. Municipal leases
are entered into by state and local governments and authorities to acquire a
wide variety of equipment and facilities such as fire and sanitation vehicles,
telecommunications equipment and other capital assets. Municipal leases
frequently have special risks not normally associated with general obligation or
revenue bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually to the
government issuer) have evolved as a means for governmental issuers to acquire
property and equipment without being required to meet the constitutional and
statutory requirements for the issuance of debt. The debt-issuance limitations
of many state constitutions and statutes are deemed to be inapplicable because
of the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
ALTERNATIVE MINIMUM TAX. Municipal securities are also categorized according to
(i) whether the interest is or is not includable in the calculation of
alternative minimum taxes imposed on individuals and corporations, (ii) whether
the costs of acquiring or carrying the bonds are or are not deductible in part
by banks and other financial institutions, and (iii) other criteria relevant for
Federal income tax purposes. Due to the increasing complexity of the Code and
related requirements governing the issuance of tax-exempt bonds, industry
practice has uniformly required as a condition to the issuance of such bonds,
but particularly for revenue bonds, an opinion of nationally recognized bond
counsel as to the tax-exempt status of interest on the bonds.
PUTS AND STANDBY COMMITMENTS ON MUNICIPAL SECURITIES. The Funds may acquire
"puts" with respect to municipal securities. A put gives the Fund the right to
sell the municipal security at a specified price at any time on or before a
specified date. The Funds may sell, transfer or assign a put only in conjunction
with its sale, transfer or assignment of the underlying security or securities.
The amount payable to a Fund upon its exercise of a "put" is normally: (1) the
Fund's acquisition cost of the municipal securities (excluding any accrued
interest which the Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (2) all interest accrued on the
securities since the last interest payment date during that period.
Puts may be acquired by the Funds to facilitate the liquidity of its portfolio
assets. Puts may also be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. The
Funds expect that they will generally acquire puts only where the puts are
available without the payment of any
10
<PAGE>
direct or indirect consideration. However, if necessary or advisable, the Funds
may pay for a put either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the puts (thus reducing the
yield to maturity otherwise available for the same securities). The Funds intend
to enter into puts only with dealers, banks and broker-dealers which, in the
Fund's Investment Adviser's opinion, present minimal credit risks.
Puts may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets.
The Funds may purchase municipal securities together with the right to resell
them to the seller or a third party at an agreed-upon price or yield within
specified periods prior to their maturity dates. Such a right to resell is
commonly known as a "stand-by commitment," and the aggregate price which the
Fund pays for securities with a stand-by commitment may be higher than the price
which otherwise would be paid. The primary purpose of this practice is to permit
a Fund to be as fully invested as practicable in municipal securities while
preserving the necessary flexibility and liquidity to meet unanticipated
redemptions. In this regard, a Fund acquires stand-by commitments solely to
facilitate portfolio liquidity and does not exercise its rights thereunder for
trading purposes. Stand-by commitments involve certain expenses and risks,
including the inability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, non-marketability of the
commitment, and differences between the maturity of the underlying security and
the maturity of the commitment. The Funds' policy is to enter into stand-by
commitment transactions only with municipal securities dealers which are
determined to present minimal credit risks.
The acquisition of a stand-by commitment does not affect the valuation or
maturity of the underlying municipal securities which continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund are valued at zero in determining net asset value. When a Fund pays
directly or indirectly for a stand-by commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Stand-by commitments do not affect the average weighted maturity of the Fund's
portfolio of securities.
VARIABLE AND FLOATING RATE SECURITIES
The securities in which the Funds invest (including municipal securities or
mortgage- and asset-backed securities, as applicable) may have variable or
floating rates of interest and, under certain limited circumstances, may have
varying principal amounts. These securities pay interest at rates that are
adjusted periodically accordingly to a specified formula, usually with reference
to one or more interest rate indices or market interest rates (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-related
securities or mortgage-backed securities) pay interest at a rate 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 reset 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. Money Market Funds
may not invest in inverse floaters and certain other variable and floating rates
securities that do not imply with Rule 2a-7.
There may not be an active secondary market for any particular floating or
variable rate instruments (particularly inverse floaters and similar
instruments) 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.
Each Fund's
11
<PAGE>
investment adviser monitors the liquidity of the Funds' investment in variable
and floating rate instruments, but there can be no guarantee that an active
secondary market will exist.
Many variable rate instruments include the right of the holder to demand
prepayment of the principal amount of the obligation prior to its stated
maturity and the right of the issuer to prepay the principal amount prior to
maturity. The payment of principal and interest by issuers of certain securities
purchased by the Funds may be guaranteed by letters of credit or other credit
facilities offered by banks or other financial institutions. Such guarantees
will be considered in determining whether a municipal security meets the Funds'
investment quality requirements.
Variable rate obligations purchased by the Funds may include participation
interests in variable rate obligations purchased by the Funds from banks,
insurance companies or other financial institutions that are backed by
irrevocable letters of credit or guarantees of banks. The Funds can exercise the
right, on not more than thirty days' notice, to sell such an instrument back to
the bank from which it purchased the instrument and draw on the letter of credit
for all or any part of the principal amount of a Fund's participation interest
in the instrument, plus accrued interest, but will do so only (1) as required to
provide liquidity to a Fund, (2) to maintain a high quality investment
portfolio, or (3) upon a default under the terms of the demand instrument. Banks
and other financial institutions retain portions of the interest paid on such
variable rate obligations as their fees for servicing such instruments and the
issuance of related letters of credit, guarantees and repurchase commitments.
The Funds will not purchase participation interests in variable rate obligations
unless it is advised by counsel or receives a ruling of the Internal Revenue
Service that interest earned by the Funds from the obligations in which it holds
participation interests is exempt from Federal income tax. The Internal Revenue
Service has announced that it ordinarily will not issue advance rulings on
certain of the Federal income tax consequences applicable to securities, or
participation interests therein, subject to a put. Each Fund's investment
adviser monitors the pricing, quality and liquidity of variable rate demand
obligations and participation interests therein held by the Fund on the basis of
published financial information, rating agency reports and other research
services to which the Investment Adviser may subscribe.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, a Fund might be entitled to
less than the initial principal amount of the security upon the security's
maturity. The Funds intend to purchase such securities only when the Fund's
investment adviser believes the interest income from the instrument justifies
any principal risks associated with the instrument. A Fund may attempt to limit
any potential loss of principal by purchasing similar instruments that are
intended to provide an offsetting increase in principal. There can be no
assurance that a Fund will be able to limit principal fluctuations and,
accordingly, a Fund may incur losses on those securities even if held to
maturity without issuer default.
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.
12
<PAGE>
Examples of credit enhancement arising out of the structure of the transaction
include: (1) "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); (2) 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 (3) "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.
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.
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 securities ("POs") 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 securities ("IOs") 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.
13
<PAGE>
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.
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, are less liquid than swaps.
HEDGING AND OPTION INCOME STRATEGIES
SMALL CAP OPPORTUNITIES FUND
COVERED CALLS AND HEDGING
As described in the Prospectus, the Schroder U.S. Smaller Companies Portfolio
may write covered calls on up to 100% of its total assets or employ one or more
types of instruments to hedge ("Hedging Instruments"). When hedging to attempt
to protect against declines in the market value of the Portfolio's securities,
to permit the Portfolio
14
<PAGE>
to retain unrealized gains in the value of portfolio securities which have
appreciated, or to facilitate selling securities for investment reasons, the
Portfolio would: (1) sell Stock Index Futures; (2) purchase puts on such futures
or securities; or (3) write covered calls on securities or on Stock Index
Futures. When hedging to establish a position in the equities markets as a
temporary substitute for purchasing particular equity securities (which the
Portfolio will normally purchase and then terminate the hedging position), the
Portfolio would: (1) purchase Stock Index Futures, or (2) purchase calls on such
Futures or on securities. The Portfolio's strategy of hedging with Stock Index
Futures and options on such Futures will be incidental to the Portfolio's
activities in the underlying cash market.
Writing Covered Call Options. The Portfolio may write (I.E., sell) call options
("calls") if: (1) the calls are listed on a domestic securities or commodities
exchange and (2) the calls are "covered" (I.E., the Portfolio owns the
securities subject to the call or other securities acceptable for applicable
escrow arrangements) while the call is outstanding. A call written on a Stock
Index Future must be covered by deliverable securities or segregated liquid
assets. If a call written by the Portfolio is exercised, the Portfolio forgoes
any profit from any increase in the market price above the call price of the
underlying investment on which the call was written.
When the Portfolio writes a call on a security, it receives a premium and agrees
to sell the underlying securities to a purchaser of a corresponding call on the
same security during the call period (usually not more than 9 months) at a fixed
exercise price (which may differ from the market price of the underlying
security), regardless of market price changes during the call period. The risk
of loss will have been retained by the Portfolio if the price of the underlying
security should decline during the call period, which may be offset to some
extent by the premium.
To terminate its obligation on a call it has written, the Portfolio may be
purchase a corresponding call in a "closing purchase transaction." A profit or
loss will be realized, depending upon whether the net of the amount of option
transaction costs and the premium previously received on the call written was
more or less than the price of the call subsequently purchased. A profit may
also be realized if the call lapses unexercised, because the Portfolio retains
the underlying security and the premium received. Any such profits are
considered short-term capital gains for Federal income tax purposes, and when
distributed by the Portfolio are taxable as ordinary income. If the Portfolio
could not effect a closing purchase transaction due to the lack of a market, it
would have to hold the callable securities until the call lapsed or was
exercised.
The Portfolio may also write calls on Stock Index Futures without owning a
futures contract or a deliverable bond, provided that at the time the call is
written, the Portfolio covers the call by segregating in escrow an equivalent
dollar amount of liquid assets. The Portfolio will segregate additional liquid
assets if the value of the escrowed assets drops below 100% of the current value
of the Stock Index Future. In no circumstances would an exercise notice require
the Portfolio to deliver a futures contract; it would simply put the Portfolio
in a short futures position, which is permitted by the Portfolio's hedging
policies.
PURCHASING CALLS AND PUTS. The Portfolio may purchase put options ("puts") which
relate to: (1) securities held by it; (2) Stock Index Futures (whether or not it
holds such Stock Index Futures in its portfolio); or (3) broadly-based stock
indices. The Portfolio may not sell puts other than those it previously
purchased, nor purchase puts on securities it does not hold. The Portfolio may
purchase calls: (1) as to securities, broadly-based stock indices or Stock Index
Futures or (2) to effect a "closing purchase transaction" to terminate its
obligation on a call it has previously written. A call or put may be purchased
only if, after such purchase, the value of all put and call options held by the
Portfolio would not exceed 5% of the Portfolio's total assets.
When the Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and, except as to calls on stock indices, has
the right to buy the underlying investment from a seller of a corresponding call
on the same investment during the call period at a fixed exercise price. The
Portfolio benefits only if the call is sold at a profit or if, during the call
period, the market price of the underlying investment is above the sum of the
call price plus the transaction costs and the premium paid for the call and the
call is exercised. If the call is not exercised or sold (whether or not at a
profit), it will become worthless at its expiration date and the Portfolio will
lose its premium payments and the right to purchase the underlying investment.
When the Portfolio purchases a call on a stock index, it pays a premium, but
settlement is in cash rather than by delivery of an underlying investment.
15
<PAGE>
When the Portfolio purchases a put, it pays a premium and, except as to puts on
stock indices, has the right to sell the underlying investment to a seller of a
corresponding put on the same investment during the put period at a fixed
exercise price. Buying a put on a security or Stock Index Future the Portfolio
owns enables the Portfolio to attempt to protect itself during the put period
against a decline in the value of the underlying investment below the exercise
price by selling the underlying investment at the exercise price to a seller of
a corresponding put. If the market price of the underlying investment is equal
to or above the exercise price and, as a result, the put is not exercised or
resold, the put will become worthless at its expiration date and the Portfolio
will lose its premium payment and the right to sell the underlying investment;
the put may, however, be sold prior to expiration (whether or not at a profit).
Purchasing a put on either a stock index or on a Stock Index Future not held by
the Portfolio permits the Portfolio either to resell the put or to buy the
underlying investment and sell it at the exercise price. The resale price of the
put will vary inversely with the price of the underlying investment. If the
market price of the underlying investment is above the exercise price and, as a
result, the put is not exercised, the put will become worthless on its
expiration date. In the event of a decline in price of the underlying
investment, the Portfolio could exercise or sell the put at a profit to attempt
to offset some or all of its loss on its portfolio securities. When the
Portfolio purchases a put on a stock index, or on a Stock Index Future not held
by it, the put protects the Portfolio to the extent that the index moves in a
similar pattern to the securities held. In the case of a put on a stock index or
Stock Index Future, settlement is in cash rather than by the Portfolio's
delivery of the underlying investment.
STOCK INDEX FUTURES. The Portfolio may buy and sell futures contracts only if
they are Stock Index Futures. A stock index is "broadly-based" if it includes
stocks that are not limited to issuers in any particular industry or group of
industries. Stock Index Futures obligate the seller to deliver (and the
purchaser to take) cash to settle the futures transaction, or to enter into an
offsetting contract. No physical delivery of the underlying stocks in the index
is made.
No price is paid or received upon the purchase or sale of a Stock Index Future.
Upon entering into a futures transaction, the Portfolio will be required to
deposit an initial margin payment in cash or U.S. Treasury bills with a futures
commission merchant (the "futures broker"). The initial margin will be deposited
with the Portfolio's custodian in an account registered in the futures broker's
name; however the futures broker can gain access to that account only under
specified conditions. As the future is marked to market to reflect changes in
its market value, subsequent margin payments, called variation margin, will be
paid to or by the futures broker on a daily basis. Prior to expiration of the
future, if the Portfolio elects to close out its position by taking an opposite
position, a final determination of variation margin is made, additional cash is
required to be paid by or released to the Portfolio, and any loss or gain is
realized for tax purposes. Although Stock Index Futures by their terms call for
settlement by the delivery of cash, in most cases the obligation is fulfilled
without such delivery, by entering into an offsetting transaction. All futures
transactions are effected through a clearinghouse associated with the exchange
on which the contracts are traded.
Puts and calls on broadly-based stock indices or Stock Index Futures are similar
to puts and calls on securities or futures contracts except that all settlements
are in cash and gain or loss depends on changes in the index in question (and
thus on price movements in the stock market generally) rather than on price
movements in individual securities or futures contracts. When the Portfolio buys
a call on a stock index or Stock Index Future, it pays a premium. During the
call period, upon exercise of a call by the Portfolio, a seller of a
corresponding call on the same index will pay the Portfolio an amount of cash to
settle the call if the closing level of the stock index or Stock Index Future
upon which the call is based is greater than the exercise price of the call;
that cash payment is equal to the difference between the closing price of the
index and the exercise price of the call times a specified multiple (the
"multiplier") which determines the total dollar value for each point of
difference. When the Portfolio buys a put on a stock index or Stock Index
Future, it pays a premium and has the right during the put period to require a
seller of a corresponding put, upon the Portfolio's exercise of its put, to
deliver to the Portfolio an amount of cash to settle the put if the closing
level of the stock index or Stock Index Future upon which the put is based is
less than the exercise price of the put; that cash payment is determined by the
multiplier, in the same manner as described above as to calls.
16
<PAGE>
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE. The Portfolio's
custodian, or a securities depository acting for the custodian, will act as the
Portfolio's escrow agent, through the facilities of the Options Clearing
Corporation ("OCC"), as to the securities on which the Portfolio has written
options, or as to other acceptable escrow securities, so that no margin will be
required for such transactions. OCC will release the securities on the
expiration of the option or upon the Portfolio's entering into a closing
transaction. An option position may be closed out only on a market which
provides secondary trading for options of the same series, and there is no
assurance that a liquid secondary market will exist for any particular option.
The Portfolio's option activities may affect its portfolio turnover rate and
brokerage commissions. The exercise of calls written by the Portfolio may cause
the Portfolio to sell related portfolio securities, thus increasing its turnover
rate in a manner beyond the Portfolio's control. The exercise by the Portfolio
of puts on securities or Stock Index Futures may cause the sale of related
investments, also increasing portfolio turnover. Although such exercise is
within the Portfolio's control, holding a put might cause the Portfolio to sell
the underlying investment for reasons which would not exist in the absence of
the put. The Portfolio will pay a brokerage commission each time it buys or
sells a call, a put or an underlying investment in connection with the exercise
of a put or call. Such commissions may be higher than those which would apply to
direct purchases or sales of the underlying investments. Premiums paid for
options are small in relation to the market value of such investments, and,
consequently, put and call options offer large amounts of leverage. The leverage
offered by trading in options could result in the Portfolio's net asset value
being more sensitive to changes in the value of the underlying investments.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS AND COVERED CALLS. The Portfolio must
operate within certain restrictions as to its long and short positions in Stock
Index Futures and options thereon under a rule (the "CFTC Rule") adopted by the
CFTC under the Commodity Exchange Act (the "CEA"), which excludes the Portfolio
from registration with the CFTC as a "commodity pool operator" (as defined in
the CEA) if it complies with the CFTC Rule. Under these restrictions the
Portfolio will not, as to any positions, whether short, long or a combination
thereof, enter into Stock Index Futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets, with certain exclusions as defined in the CFTC Rule. Under the
restrictions, the Portfolio also must, as to its short positions, use Stock
Index Futures and options thereon solely for bona-fide hedging purposes within
the meaning and intent of the applicable provisions under the CEA.
Transactions in options by the Portfolio are subject to limitations established
by each of the exchanges governing the maximum number of options that may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
exchanges or brokers. Thus, the number of options which the Portfolio may write
or hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Stock Index Futures. An exchange may order the
liquidation of positions found to be in violation of those limits and may impose
certain other sanctions. Due to requirements under the 1940 Act, when the
Portfolio purchases a Stock Index Future, the Portfolio will maintain, in a
segregated account or accounts with its custodian bank, cash or liquid assets in
an amount equal to the market value of the securities underlying such Stock
Index Future, less the margin deposit applicable to it.
LIMITS ON USE OF HEDGING INSTRUMENTS. The Portfolio intends to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). One of the tests for such qualification for taxable years
beginning on or before August 5, 1997 is that less than 30% of its gross income
in that year must be derived from gains realized on the sale of securities held
for less than three months. Due to this limitation, the Portfolio will limit the
extent to which it engages in the following activities, but will not be
precluded from them: (1) selling investments, including Stock Index Futures,
held for less than three months, whether or not they were purchased on the
exercise of a call held by the Portfolio; (2) purchasing calls or puts which
expire in less than three months; (3) effecting closing transactions with
respect to calls or puts purchased less than three months previously; (4)
exercising puts held for less than three months; and (5) writing calls on
investments held for less than three months.
17
<PAGE>
POSSIBLE RISK FACTORS IN HEDGING. In addition to the risks discussed above,
there is a risk in using short hedging by selling Stock Index Futures or
purchasing puts on stock indices that the prices of the applicable index (thus
the prices of the Hedging Instruments) will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of the Portfolio's equity
securities. The ordinary spreads between prices in the cash and futures markets
are subject to distortions due to differences in the natures of those markets.
First, all participants in the futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures markets depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures markets could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the futures markets may
cause temporary price distortions.
The risk of imperfect correlation increases as the composition of the
Portfolio's portfolio diverges from the securities included in the applicable
index. To compensate for the imperfect correlation of movements in the price of
the equity securities being hedged and movements in the price of the Hedging
Instruments, the Portfolio may use Hedging Instruments in a greater dollar
amount than the dollar amount of equity securities being hedged if the
historical volatility of the prices of such equity securities being hedged is
more than the historical volatility of the applicable index. It is also possible
that where the Portfolio has used Hedging Instruments in a short hedge, the
market may advance and the value of equity securities held in the Portfolio's
portfolio may decline. If this occurred, the Portfolio would lose money on the
Hedging Instruments and also experience a decline in value in its equity
securities. However, while this could occur for a very brief period or to a very
small degree, the value of a diversified portfolio of equity securities will
tend to move over time in the same direction as the indices upon which the
Hedging Instruments are based.
If the Portfolio uses Hedging Instruments to establish a position in the
equities markets as a temporary substitute for the purchase of individual equity
securities (long hedging) by buying Stock Index Futures and/or calls on such
Futures, on securities or on stock indices, it is possible that the market may
decline; if the Portfolio then concludes not to invest in equity securities at
that time because of concerns as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the Hedging Instruments that is
not offset by a reduction in the price of the equity securities purchased.
Additionally, each other Fund (other than the Money Market Funds), may (i)
purchase or sell (write) put and call options on securities to enhance the
Fund's performance and (ii) seek to hedge against a decline in the value of
securities owned by it or an increase in the price of securities which it plans
to purchase through the writing and purchase of exchange-traded and
over-the-counter options on individual securities or securities or financial
indices and through the purchase and sale of financial futures contracts and
related options. Certain Funds currently do no not intend to enter into any such
transactions. Whether or not used for hedging purposes, these investments
techniques involve risks that are different in certain respects from the
investment risks associated with the other investments of a Fund. Principal
among such risks are: (1) the possible failure of such instruments as hedging
techniques in cases where the price movements of the securities underlying the
options or futures do not follow the price movements of the portfolio securities
subject to the hedge; (2) potentially unlimited loss associated with futures
transactions and the possible lack of a liquid secondary market for closing out
a futures position; and (3) possible losses resulting from the inability of the
Portfolio's investment adviser to correctly predict the direction of stock
prices, interest rates and other economic factors. To the extent a Fund invests
in foreign securities, it may also invest in options on foreign currencies,
foreign currency futures contracts and options on those 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 or the CFTC.
No assurance can be given, however, that any hedging or option income strategy
will succeed in achieving its intended result.
18
<PAGE>
Except as otherwise noted in the Prospectus or herein, 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 it 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 securities (or other assets as may be permitted by the SEC) with a value
sufficient at all times to cover its potential obligations. When required by
applicable regulatory guidelines, the Funds will set aside cash, U.S. Government
Securities or other liquid securities (or other assets as may be permitted by
the SEC) 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 sell put and call
options covering specified individual securities, securities or financial
indices 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 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
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.
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 the 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 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 or
currency, the relationship of the exercise price to the market price, the
historical price volatility of the underlying assets, the option period, supply
and demand and interest rates.
Certain Funds may purchase call options on debt securities that the Fund's
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.
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.
19
<PAGE>
Certain Funds may purchase and write put and call options on fixed income or
equity 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 or equity 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 "Hedging and Option Income
Strategies -- Options Strategies" and "Foreign Currency 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, a 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 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.
20
<PAGE>
(5) When a Fund enters into an over-the-counter contract with a
counterparty, the Fund will assume the risk that the counterparty will fail to
perform its obligations, in which case the Fund could be worse off than if the
contract had not been entered into.
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 its
Investment 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 (typically 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
21
<PAGE>
positions. In that event, it may not be possible for a Fund to close a position,
and in the event of adverse price movements, it 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 Investment 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 currencies due to price distortions in the
futures market or otherwise. There may be several reasons unrelated to the value
of the underlying 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 Norwest'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 a Fund will not enter into any
futures contract or option on a futures contract if, as a result, the aggregate
initial margin and premiums required to establish such positions would exceed 5%
of the Fund's net assets.
22
<PAGE>
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 pending the completion of certain investment programs.
Accordingly, the value of the assets of a Fund, as measured in U.S. 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 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 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 investment 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 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 investment securities or other assets denominated in that
currency.
At or before the settlement of a forward 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, it will realize 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.
23
<PAGE>
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 assets in a segregated account with
its custodian in the prescribed amount.
EQUITY SECURITIES AND ADDITIONAL INFORMATION CONCERNING THE EQUITY FUNDS
CONTRARIAN STOCK FUND
Contrarian Stock Fund invests primarily in common stocks which may be out of
favor with the investment community when purchased but for which Norwest
believes there is significant potential for price appreciation. The basic
premise to Norwest's "contrarian" investment approach is that security prices
change more than fundamental investment values. Norwest monitors a universe of
depressed issues as a starting point in making investment decisions for the
Fund. It then projects the earnings of these depressed companies in normal and
peak years and estimates how the market might value these earnings. Analysis of
possible investments is intensive and fundamental, with emphasis on the quality
of a firm's assets and its ability to earn good returns on those assets.
COMMON STOCK AND PREFERRED STOCK
Common stockholders are the owners of the company issuing the stock and,
accordingly, vote on various corporate governance matters such as mergers. They
are not creditors of the company, but rather, upon liquidation of the company
are entitled to their pro rata share of the company's assets after creditors
(including fixed income security holders) and, if applicable, preferred
stockholders are paid. Preferred stock is a class of stock having a preference
over common stock as to dividends and, in general, as to the recovery of
investment. A preferred stockholder is a shareholder in the company and not a
creditor of the company as is a holder of the company's fixed income securities.
Dividends paid to common and preferred stockholders are distributions of the
earnings of the company and not interest payments, which are expenses of the
company. Equity securities owned by a Fund may be traded in the over-the-counter
market or on a regional securities exchange and may not be traded every day or
in the volume typical of securities trading on a national securities exchange.
As a result, disposition by a Fund of a portfolio security to meet redemptions
by shareholders or otherwise may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over a lengthy period of time. The market
value of all securities, including equity securities, is based upon the market's
perception of value and not necessarily the book value of an issuer or other
objective measure of a company's worth.
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.
24
<PAGE>
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
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.
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 either at any time or when 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
25
<PAGE>
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
A warrant is an option 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. The price of warrants does not necessarily
move parallel to the prices of the underlying securities. Warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer. Unlike convertible securities and preferred stocks,
warrants do not pay a fixed dividend. Investments in warrants involve certain
risks, including the possible lack of a liquid market for the resale of the
warrants, potential price fluctuations as a result of speculation or other
factors and failure of the price of the underlying security to reach a level at
which the warrant can be prudently exercised. 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. Small Cap Opportunities Fund may not invest in warrants
if as a result more than 5% of its net assets would be so invested, or if more
than 2% of its net assets would be so invested in warrants that are not listed
on the New York or American Stock Exchanges.
HIGH YIELD/JUNK BONDS
Each of Minnesota Intermediate Tax-Free Fund, Minnesota Tax-Free Fund and Small
Cap Opportunities Fund may invest in bonds rated below "Baa" by Moody's or "BBB"
by S&P (commonly known as "high yield/high risk securities" or "junk bonds").
Securities rated less than "Baa" by Moody's or "BBB" by S&P are classified as
non-investment grade securities and are considered speculative by those rating
agencies. Junk bonds may be issued as a consequence of corporate restructurings,
such as leveraged buyouts, mergers, acquisitions, debt recapitalizations, or
similar events or by smaller or highly leveraged companies. Although the growth
of the high yield/high risk securities market in the 1980's had paralleled a
long economic expansion, many issuers subsequently have been affected by adverse
economic and market conditions. It should be recognized that an economic
downturn or increase in interest rates is likely to have a negative effect on:
(1) the high yield bond market; (2) the value of high yield/high risk
securities; and (3) the ability of the securities' issuers to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. In addition, the market for high
yield/high risk securities, which is concentrated in relatively few market
makers, may not be as liquid as the market for investment grade securities.
Under adverse market or economic conditions, the market for high yield/high risk
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the Fund could find it
more difficult to sell these securities or may be able to sell the securities
only at prices lower than if such securities were widely traded. Prices realized
upon the sale of such lower rated or unrated securities, under these
circumstances, may be less than the prices used in calculating the Fund's net
asset value.
In periods of reduced market liquidity, prices of high yield/high risk
securities may become more volatile and may experience sudden and substantial
price declines. Also, there may be significant disparities in the prices quoted
for high yield/high risk securities by various dealers. Under such conditions,
the Fund may have to use subjective rather than objective criteria to value its
high yield/high risk securities investments accurately and rely more heavily on
the judgment of the Fund's investment adviser.
26
<PAGE>
Prices for high yield/high risk securities also may be affected by legislative
and regulatory developments. For example, Congress has considered legislation to
restrict or eliminate the corporate tax deduction for interest payments or to
regulate corporate restructurings such as takeovers, mergers or leveraged
buyouts. These laws could adversely affect the Fund's net asset value and
investment practices, the market for high yield/high risk securities, the
financial condition of issuers of these securities and the value of outstanding
high yield/high risk securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund's
Investment Adviser may have to replace the security with a lower yielding
security, resulting in a decreased return for investors. If a Fund experiences
unexpected net redemptions, the Fund's Investment Adviser may be forced to sell
the Fund's higher rated securities, resulting in a decline in the overall credit
quality of the Fund's portfolio and increasing the exposure of the Portfolio to
the risks of high yield/high risk securities.
ILLIQUID AND RESTRICTED SECURITIES
Each Fund may invest up to 15 percent (ten percent in the case of the Money
Market Funds) of its net assets in securities that at the time of purchase are
illiquid. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act ("restricted securities"), 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 which
are otherwise not readily marketable and includes, among other things, purchased
over-the-counter (OTC) options and repurchase agreements not entitling the
holder to repayment within seven days. The Board and, in the case of the
Portfolios, the Core Trust Board, has the ultimate responsibility for
determining whether specific securities are liquid or illiquid and 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 applicable board.
The Investment Advisers take 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 Advisers monitor the liquidity of the securities held by each
Fund and report periodically on such decisions to the Board or Core Trust Board,
as applicable.
In connection with a Fund's original purchase of restricted securities, it may
negotiate rights with the issuer to have such securities registered for sale at
a later time. Further, the expenses of registration of restricted securities
that are illiquid may also be negotiated by the Fund with the issuer at the time
such securities are purchased by a Fund. When registration is required, however,
a considerable period may elapse between a decision to sell the securities and
the time the Fund would be permitted to sell such securities. A similar delay
might be experienced in attempting to sell such securities pursuant to an
exemption from registration. Thus, a Fund may not be able to obtain as favorable
a price as that prevailing at the time of the decision to sell.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a Fund might also have to register restricted
securities in order to dispose of them, resulting in expense and delay. A Fund
might not be able to dispose of restricted or other securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions. There can be no assurance that a liquid market will exist for any
security at any particular time.
A institutional market has developed for certain securities that are not
registered under the 1933 Act, including repurchase agreements, commercial
paper, foreign securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on the issuer's ability to honor a demand for repayment
of the unregistered security. A security's contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative of
the liquidity of the security. If such securities are eligible for purchase by
institutional buyers in accordance with Rule 144A under the 1933 Act under
guidelines adopted by the Board or the Core Trust Board, the Investment Advisers
may determine that such securities are not illiquid securities. These guidelines
take into account trading activity in the securities and the
27
<PAGE>
availability of reliable pricing information, among other factors. If there is a
lack of trading interest in a particular Rule 144A security, a Fund's holdings
of that security may be illiquid.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend its portfolio securities subject to the restrictions stated
in its Prospectus. Under applicable regulatory requirements (which are subject
to change), the loan collateral must, on each business day, at least equal the
market value of the loaned securities and must consist of cash, bank letters of
credit, U.S. Government securities, or other cash equivalents in which the Fund
is permitted to invest. To be acceptable as collateral, letters of credit must
obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank must be satisfactory to the
Fund. In a portfolio securities lending transaction, the Fund receives from the
borrower an amount equal to the interest paid or the dividends declared on the
loaned securities during the term of the loan as well as the interest on the
collateral securities, less any finders' or administrative fees the Fund pays in
arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower as long as it realizes at least a
minimum amount of interest required by the lending guidelines established by the
Trust's Board of Trustees. The Fund will not lend its portfolio securities to
any officer, director, employee or affiliate of the Fund or an Adviser. The
terms of the Portfolio's loans must meet certain tests under the Internal
Revenue Code and permit the Portfolio to reacquire loaned securities on five
business days' notice or in time to vote on any important matter.
BORROWING AND TRANSACTIONS INVOLVING LEVERAGE
Each Fund may borrow money for temporary or emergency purposes, including the
meeting of redemption requests, in amounts up to 33 1/3 percent of the Fund's
total assets. Borrowing involves special risk considerations. Interest costs on
borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds (or on the assets
that were retained rather than sold to meet the needs for which funds were
borrowed). Under adverse market conditions, a Fund might have to sell portfolio
securities to meet interest or principal payments at a time when investment
considerations would not favor such sales. Except as otherwise noted, no Fund
may purchase securities for investment while any borrowing equaling five percent
or more of the Fund's total assets is outstanding or borrow for purposes other
than meeting redemptions in an amount exceeding five percent of the value of the
Fund's total assets. A Fund's use of borrowed proceeds to make investments would
subject the Fund to the risks of leveraging. Reverse repurchase agreements,
short sales not against the box, dollar roll transactions and other similar
investments that involve a form of leverage have characteristics similar to
borrowings but are not considered borrowings if the Fund maintains a segregated
account.
OTHER TECHNIQUES INVOLVING LEVERAGE
Utilization of leveraging involves special risks and may involve speculative
investment techniques. Certain Funds may borrow for other than temporary or
emergency purposes, lend their securities, enter reverse repurchase agreements,
and purchase securities on a when issued or forward commitment basis. In
addition, certain Funds may engage in dollar roll transactions. Each of these
transactions involve the use of "leverage" when cash made available to the Fund
through the investment technique is used to make additional portfolio
investments. The Funds use these investment techniques only when Norwest
believes that the leveraging and the returns available to the Fund from
investing the cash will provide shareholders a potentially higher return.
Leverage exists when a Fund achieves the right to a return on a capital base
that exceeds the investment the Fund has invested. Leverage creates the risk of
magnified capital losses which occur when losses affect an asset base, enlarged
by borrowings or the creation of liabilities, that exceeds the equity base of
the Fund. Leverage may involve the creation of a liability that requires the
Fund to pay interest (for instance, reverse repurchase agreements) or the
creation of a liability that does not entail any interest costs (for instance,
forward commitment transactions).
The risks of leverage include a higher volatility of the net asset value of the
Fund's shares and the relatively greater effect on the net asset value of the
shares caused by favorable or adverse market movements or changes in the cost of
cash obtained by leveraging and the yield obtained from investing the cash. So
long as a Fund is able to realize a
28
<PAGE>
net return on its investment portfolio that is higher than interest expense
incurred, if any, leverage will result in higher current net investment income
being realized by the Fund than if the Fund were not leveraged. On the other
hand, interest rates change from time to time as does their relationship to each
other depending upon such factors as supply and demand, monetary and tax
policies and investor expectations. Changes in such factors could cause the
relationship between the cost of leveraging and the yield to change so that
rates involved in the leveraging arrangement may substantially increase relative
to the yield on the obligations in which the proceeds of the leveraging have
been invested. To the extent that the interest expense involved in leveraging
approaches the net return on the Fund's investment portfolio, the benefit of
leveraging will be reduced, and, if the interest expense on borrowings were to
exceed the net return to shareholders, the Fund's use of leverage would result
in a lower rate of return than if the Fund were not leveraged. Similarly, the
effect of leverage in a declining market could be a greater decrease in net
asset value per share than if the Fund were not leveraged. In an extreme case,
if the Fund's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Fund to liquidate certain
of its investments at an inappropriate time. The use of leverage may be
considered speculative.
SEGREGATED ACCOUNT
In order to limit the risks involved in various transactions involving leverage,
the Trust's custodian will set aside and maintain in a segregated account cash
and other liquid securities in accordance with SEC guidelines. The account
value, which is marked to market daily, will be at least equal to the Fund's
commitments under these transactions. The Fund's commitments may include: (1)
the Fund's obligations to repurchase securities under a reverse repurchase
agreement, settle when-issued and forward commitment transactions and make
payments under a cap or floor (see "Swap Agreements"); and (2) the greater of
the market value of securities sold short or the value of the securities at the
time of the short sale (reduced by any margin deposit). 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 calculated on a daily basis and an amount at
least equal to the accrued excess will be maintained in the segregated account.
If the Fund enters into an interest rate swap on other than a net basis, the
Fund will maintain the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap in their segregated account.
MARGIN AND SHORT SALES
Certain Funds may enter into short sales as described in the prospectus of that
Fund. The Funds may make short sales of securities against the box. A short sale
is "against the box" to the extent that while the short position is open, the
Fund must own an equal amount of the securities sold short, or by virtue of
ownership of securities have the right, without payment of further
consideration, to obtain an equal amount of the securities sold short. Short
sales against-the-box may in certain cases be made to defer, for Federal income
tax purposes, recognition of gain or loss on the sale of securities "in the box"
until the short position is closed out. Under recently enacted legislation, if a
Portfolio has unrealized gain with respect to a long position and enters into a
short sale against-the-box, the Portfolio generally will be deemed to have sold
the long position for tax purposes and thus will recognize gain. Prohibitions on
entering short sales other than against the box does not restrict a Fund's
ability to use short-term credits necessary for the clearance of portfolio
transactions and to make margin deposits in connection with permitted
transactions in options and futures contracts.
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. Counterparties
to a Money Market Fund's reverse repurchase agreements must be a primary dealer
that reports to the Federal Reserve Bank of New York ("primary dealers") or one
of the largest 100 commercial banks in the United States.
29
<PAGE>
Generally, a reverse repurchase agreement enables the 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 TRANSACTIONS
Certain Funds may purchase or sell portfolio securities on a when-issued or
delayed delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased by a Fund with payment and delivery to take place in
the future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time it enters into the transaction. 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. When a Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of the security, although delivery and
payment occur at a later date. 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.
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. The value of the fixed income securities to be delivered in the
future will fluctuate as interest rates and the credit of the underlying issuer
vary. 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. A Fund generally has the
ability to close out a purchase obligation on or before the settlement date,
rather than purchase the security. 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, realize a gain or loss due to
market fluctuation.
To the extent a Fund engages in when-issued or delayed delivery transactions, it
will do so for the purpose of acquiring securities consistent with the Fund's
investment objectives and policies and not for the purpose of investment
leverage or to speculate in interest rate changes. A Fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Fund reserves
the right to dispose of the right to acquire these securities before the
settlement date if deemed advisable.
The use of when-issued transactions and forward commitments enables the Fund to
hedge against anticipated changes in interest rates and prices. If an Investment
Adviser were to forecast incorrectly the direction of interest rate movements,
however, a Fund might be required to complete when-issued or forward
transactions at prices inferior to the current market values. When-issued
securities and forward commitments may be sold prior to the settlement date, but
a Fund enters into when-issued and forward commitments only with the intention
of actually receiving or delivering the securities, as the case may be. In some
instances, the third-party seller of when-issued or forward commitment
securities may determine prior to the settlement date that it will be unable to
meet its existing transaction commitments without borrowing securities. If
advantageous from a yield perspective, a Fund may, in that event, agree to
resell its purchase commitment to the third-party seller at the current market
price on the date of sale and concurrently enter into another purchase
commitment for such securities at a later date. As an inducement for a Fund to
"roll over" its purchase commitment, the Fund may receive a negotiated fee.
When-issued securities may include bonds purchased on a "when, as and if issued"
basis under which the issuance of the securities depends upon the occurrence of
a subsequent event. Any significant commitment of a Fund's assets to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of the Fund's net asset value. For purposes of the Funds' investment
policies, the purchase of securities with a settlement date occurring on a
Public Securities Association approved settlement date is considered a normal
delivery and not a when-issued or forward commitment purchase.
30
<PAGE>
REPURCHASE AGREEMENTS
The Funds may invest in securities subject to repurchase agreements with U.S.
banks or broker-dealers. Small Cap Opportunities Fund may invest only in
repurchase agreements maturing in seven days or less. In a typical repurchase
agreement, the seller of a security commits itself at the time of the sale to
repurchase that security from the buyer at a mutually agreed-upon time and
price. The repurchase price exceeds the sale price, reflecting an agreed-upon
interest rate effective for the period the buyer owns the security subject to
repurchase. The agreed-upon rate is unrelated to the interest rate on that
security. The Adviser will monitor the value of the underlying security at the
time the transaction is entered into and at all times during the term of the
repurchase agreement to ensure that the value of the security always equals or
exceeds the repurchase price (including accrued interest). In the event of
default by the seller under the repurchase agreement, the Portfolio may have
difficulties in exercising its rights to the underlying securities and may incur
costs and experience time delays in connection with the disposition of such
securities. To evaluate potential risks, the Adviser reviews the
credit-worthiness of those banks and dealers with which the Portfolio enters
into repurchase agreements.
Counterparties to a Money Market Fund's repurchase agreements must be a primary
dealer that reports to the Federal Reserve Bank of New York ("primary dealers")
or one of the largest 100 commercial banks in the United States.
Securities subject to repurchase agreements will be held by the Fund's custodian
or another qualified custodian or in the Federal Reserve book-entry system.
Repurchase agreements are considered to be loans by a Fund for certain purposes
under the 1940 Act.
TEMPORARY DEFENSIVE POSITION
When a Fund other than a Money Market Fund, in accordance with the policies
described in its Prospectus, assumes a temporary defensive position, it may
invest in: (1) short-term U.S. Government Securities; (2) 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, except in the case of International Fund total assets in excess of
one billion dollars and that are insured by the Federal Deposit Insurance
Corporation; (3) 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 investment
adviser to be of comparable quality; (4) repurchase agreements covering any of
the securities in which the Fund may invest directly; and (5) money market
mutual funds.
II. INFORMATION CONCERNING COLORADO AND MINNESOTA
Following is a brief summary of some of the factors that may affect the
financial condition of the State of Colorado and the State of Minnesota and
their respective political subdivisions. It is not a complete or comprehensive
description of these factors or an analysis of financial conditions and may not
be indicative of the financial condition of issuers of obligations held by
Colorado Tax Free Fund, Minnesota Intermediate Tax-Free Fund and Minnesota
Tax-Free Fund or any particular projects financed with the proceeds of such
obligations. Many factors not included in the summary, such as the national
economy, social and environmental policies and conditions, and the national and
international markets for products produced in each state could have an adverse
impact on the financial condition of a State and its political subdivisions,
including the issuers of obligations held by a Fund. It is not possible to
predict whether and to what extent those factors may affect the financial
condition of a State and its political subdivisions, including the issuers of
obligations held by a Fund.
The following summary is based on publicly available information that has not
been independently verified by the Trust or its legal counsel.
31
<PAGE>
COLORADO
THE COLORADO STATE ECONOMY
Among the most significant sectors of the State's economy are services, trade,
manufacture of durable and non-durable goods and tourism. Between late 1984 and
mid-1987, the State's economy was adversely affected by numerous factors,
including the contraction of the energy sector, layoffs by advanced technology
firms and an excess supply of both residential and nonresidential buildings
causing employment in the construction sector to decline. As a result of these
conditions, certain areas of the State experienced particularly high
unemployment. Furthermore, in 1986, for the first time in 32 years, job
generation in the State was negative and, in 1986, for the first time in 21
years, the State experienced negative migration, with more people leaving the
State than moving in.
From 1987 through 1996, there has been moderate but steady improvement in the
Colorado economy: per-capita income increased approximately 54.9% (4.5% in 1996)
and retail trade sales increased approximately 81.9% (6.9% in 1996). The State's
estimated growth rate is above the national growth rate and the State's
unemployment rate is still below the national unemployment rate (in 1996 the
State's unemployment rate was 4.2% and the United State's unemployment rate was
5.4%).
The State of Colorado's political subdivisions include approximately 1,600 units
of local government in Colorado, including counties, statutory cities and towns,
home-rule cities and counties, school districts and a variety of water,
irrigation, and other special districts and special improvement districts, all
with various constitutional and statutory authority to levy taxes and incur
indebtedness.
STATE REVENUES
The State operates on a fiscal year beginning July 1 and ending June 30. Fiscal
year 1996 refers to the fiscal year ended June 30, 1996.
The State derives all of its General Fund revenues from taxes. The two most
important sources of these revenues are sales and use taxes and personal income
taxes, which accounted for approximately 31.5% and 53.2%, respectively, of total
General Fund revenues during fiscal year 1995 and approximately 31.0% and 54.3%,
respectively, of total General Fund revenues during fiscal year 1996. The ending
General Fund balance for fiscal year 1995 was $488.5 million and for fiscal year
1996 was approximately $368.5 million.
The Colorado Constitution contains strict limitations on the ability of the
State to create debt except under certain very limited circumstances. However,
the constitutional provision has been interpreted not to limit the ability of
the State to issue certain obligations which do not constitute debt, including
short-term obligations which do not extend beyond the fiscal year in which they
are incurred and lease purchase obligations which are subject to annual
appropriation. The State is authorized pursuant to State statutes to issue
short-term notices to alleviate temporary cash flow shortfalls. The most recent
issue of such notes, issued on July 1, 1997, was given the highest rating
available for short-term obligations by S&P (SP-1+) and Fitch Investors Service,
L.P. (F-1+) (A rating on such notes was not requested from, and consequently no
rating was given by, Moody's). Because of the short-term nature of such notes,
their ratings should not be considered necessarily indicative of the State's
general financial condition.
TAX AND SPENDING LIMITATION AMENDMENT
On November 3, 1992, the Colorado voters approved a State constitutional
amendment (the "Amendment") that restricts the ability of the State and local
governments to increase taxes, revenues, debt and spending. The Amendment
provides that its provisions supersede conflicting State constitutional, State
statutory, charter or other State or local provisions.
32
<PAGE>
The provisions of the Amendment apply to "districts," which are defined in the
Amendment as the State or any local government, with certain exclusions. Under
the terms of the Amendment, districts must have prior voter approval to impose
any new tax, tax rate increase, mill levy increase, valuation for assessment
ratio increase and extension of an expiring tax. Such prior voter approval is
also required, except in certain limited circumstances, for the creation of "any
multiple-fiscal year direct or indirect district debt or other financial
obligation." The Amendment prescribes the timing and procedures for any
elections required by the Amendment.
Because the Amendment's voter approval requirements apply to any "multiple
fiscal year" debt or financial obligation, short-term obligations which do not
extend beyond the fiscal year in which they are incurred are exempt from the
voter approval requirements of the Amendment. In addition, the Colorado Court of
Appeals has determined that lease purchase obligations subject to annual
appropriation are not subject to the voter approval requirements of the
Amendment. The Amendment's voter approval requirements and other limitations
(discussed in the following paragraph) do not apply to "enterprises," which are
defined in the Amendment as follows: "a government-owned business authorized to
issue its own revenue bonds and receiving under 10% of annual revenue in grants
from all Colorado state and local governments combined."
Among other provisions, the Amendment requires the establishment of emergency
reserves, limits increases in district revenues and limits increases in district
fiscal year spending. As a general matter, annual State fiscal year spending may
change not more than inflation plus the percentage change in State population in
the prior calendar year. Annual local district fiscal year spending may change
no more than inflation in the prior calendar year plus annual local growth, as
defined in and subject to the adjustments provided in the Amendment. The
Amendment provides that annual district property tax revenues may change no more
than inflation in the prior calendar year plus annual local growth, as defined
in and subject to the adjustments provided in the Amendment. District revenues
in excess of the limits prescribed by the Amendment are required, absent voter
approval, to be refunded by any reasonable method, including temporary tax
credits or rate reductions. The State anticipates that revenues in excess of the
limits applicable for the 1996 fiscal year will be refunded to certain taxpayers
in the State in accordance with the Amendment. In addition, the Amendment
prohibits new or increased real property transfer taxes, new State real property
taxes and new local district income taxes. The Amendment also provides that a
local district may reduce or end its subsidy to any program (other than public
education through grade 12 or as required by federal law) delegated to it by the
State General Assembly for administration.
This description is not intended to constitute a complete description of all of
the provisions of the Amendment. Furthermore, many provisions of the Amendment
and their application are unclear. Several statutes have been enacted since the
passage of the Amendment attempting to clarify the application of the Amendment
with respect to certain governmental entities and activities and numerous court
decisions have been rendered interpreting certain of the Amendment's provisions.
However, many provisions of the Amendment may require further legislative or
judicial clarification. The future impact of the Amendment on the financial
operations and obligations of the State and local governments in the State
cannot be determined at this time. Attempts to apply the provisions of the
Amendment to obligations issued prior to the approval of the Amendment may be
challenged as violation of protections afforded by the federal constitution
against impairment of contracts.
MINNESOTA
The following information has been derived from the 1997 edition of HISTORICAL
ECONOMIC STATISTICS and the ECONOMIC REPORT TO THE GOVERNOR for 1993 and 1994,
both prepared by the Economic Resource Group, and COMPARE MINNESOTA: AN ECONOMIC
AND STATISTICAL FACT BOOK 1996/1997 by the Minnesota Department of Trade and
Economic Development. In a number of instances, the information in these sources
is current through 1994.
THE STRUCTURE OF THE MINNESOTA STATE'S ECONOMY
Diversity and a significant natural resource base are two important
characteristics of the State's economy.
33
<PAGE>
When viewed in 1994 on an aggregate level, the structure of the State's economy
parallels the structure of the United States economy as a whole. State
employment in 10 major sectors was distributed in approximately the same
proportions as national employment. In all sectors, the share of total State
employment was within 2.5 percentage points of national employment share.
Some unique characteristics of the State's economy are apparent in employment
concentrations in many major industries. The State's high technology industries
accounted for more than 7% of all employment in the State of 1994, and the
State's concentration of high technology employment is 50% higher than the
United States average. This emphasis is partly explained by the location in the
State of Honeywell, IBM, 3M Company, Unisys and Seagate Technology.
The importance of the State's resource base for overall employment is apparent
in the employment mix in non-durable goods industries. The State's concentration
of employment in 1994 was 50% higher than the United States average in the food
and kindred products industry and almost 50% higher in the forest and forestry
products industry. Both of these rely heavily on renewable resources in the
State. Over half of the State's acreage is devoted to agricultural purposes, and
nearly one-third to forestry.
The printing and publishing industry and medical products manufacturing industry
are also relatively more important in the State than in the United States. From
1985 to 1994, employment in the State's printing and publishing industry grew
28.2%, compared to the United States growth rate of 7.8% over the same period.
Printing and publishing companies provided 2.9% of all of the State's private
industry jobs in 1994. In the medical products manufacturing industry, the
State's concentration of employment in 1994 was the second highest in the nation
and twice the United States average.
Mining is currently a less significant factor in the State economy than it once
was. Mining employment, primarily in the iron ore or taconite industry, dropped
from 17.3 thousand in 1979 to 7.4 thousand in 1994. It is not expected that
mining employment will return to 1979 levels. However, Minnesota retains
significant quantities of taconite as well as copper, nickel, cobalt, and peat
which may be utilized in the future.
EMPLOYMENT GROWTH IN THE STATE
In the period 1985 to 1994, employment in non-farm industries increased 24.1%,
compared to an increase of 16.9% in the United States. Manufacturing has been a
strong sector, with Minnesota employment outperforming its United States
counterpart in the period from 1985 to 1994 with an increase of 10.5% compared
to a decrease of 4.9% in the United States in the same period. Over 40% of the
total increase in Minnesota non-farm employment between the years 1985-1994
resulted from a 45.5% increase in employees in the services industry during this
period. Mining was the only industry where employment decreased between
1985-1994 in both Minnesota and the United States, dropping by 9.4% in Minnesota
and 34.8% in the United States.
PERFORMANCE OF THE STATE'S ECONOMY
Since 1980, State per capita personal income has been within three percentage
points of national per capita personal income. The State's per capita income,
which is computed by dividing personal income by total resident population, has
generally remained above the national average in spite of the early 1980's
recessions and some difficult years in agriculture. In 1994, Minnesota per
capita personal income was 102.6% of its U.S. counterpart.
In the level of personal income per capita, Minnesota ranked second among twelve
north central states in both 1992 and 1994. During the period 1985 to 1994,
Minnesota ranked second among such states in annual average growth of personal
income and fifth during the period 1993 to 1994. Minnesota ranked twentieth
nationally and third among the twelve north central states with a per capita
disposable income of $18,792 in 1994. During 1990-1992, wage and salary
disbursements which constitute some 60% of total personal income grew 12.3% in
Minnesota as compared to 8.3% for the United States. Personal income in
Minnesota grew more rapidly than seven other north central states' averages
during 1993-1994, and faster than the United States average. From 1985 to 1994,
Minnesota non-agricultural employment grew 24.1% while such employment in the
United States grew 16.9%.
34
<PAGE>
During the 1990-1993 period, Minnesota non-agricultural employment increased
5.1%, while regional employment increased 1.3%.
The annual employment rate in Minnesota was below that of the United States and
of the twelve north central states for every year during the ten-year period of
1985 to 1994. In 1994, the State's unemployment rate was 3.9% compared to the
United States average of 6.1% and the twelve north central state's average of
5.1%.
POPULATION TRENDS IN THE STATE
Minnesota resident population grew from 4,074,000 in 1980 to 4,565,000 in 1994,
for a growth rate of 12.1%. The United States growth rate between 1980 and 1994
was 15.1% and the overall growth rate for the twelve north central states was
4.4%. Minnesota population is currently forecast to grow 12.3% between 1994 and
2010.
III. INVESTMENT LIMITATIONS
For purposes of all fundamental and nonfundamental investment policies of the
Fund: (1) the term 1940 Act includes the rules thereunder, SEC interpretations
and any exemptive order upon which the Fund may rely and (2) the term Code
includes the rules thereunder, IRS interpretations and any private letter ruling
or similar authority upon which the Fund may rely.
The Fund has adopted the investment policies listed in this section which are
nonfundamental policies unless otherwise noted. Except for its investment
objective, which is fundamental, the Fund has not adopted any fundamental
policies except as required by the 1940 Act.
Except as required by the 1940 Act or the Code, 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.
A fundamental policy cannot be changed without the affirmative vote of the
lesser of: (1) more than 50% of the outstanding shares of the Fund or (2) 67% of
the shares of the Fund present or represented at a shareholders meeting at which
the holders of more than 50% of the outstanding shares of the Fund are present
or represented.
FUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are fundamental
policies of the Fund. Reference to any Fund that invests in one or more Core
Portfolios includes reference to the Core Portfolio(s) in which that Fund
invests, which has the same fundamental policies as the Fund.
(1) DIVERSIFICATION
EACH FUND (other than Colorado Tax-Free Fund, Minnesota Intermediate
Tax-Free Fund and Minnesota Tax-Free Fund) may not, with respect to
75% of its assets, purchase a security (other than a U.S. Government
Security or a security of an investment company) if, as a result: (1)
more than 5% of the Fund's total assets would be invested in the
securities of a single issuer or (2) the Fund would own more than 10%
of the outstanding voting securities of any single issuer
(2) CONCENTRATION
(a) CASH INVESTMENT FUND and READY CASH INVESTMENT FUND may not
purchase a security if, as a result, more than 25% of the Fund's total
assets would be invested in securities of issuers conducting their
principal business activities in the same industry; provided: (1)
there is no limit on investments in U.S. Government Securities, in
repurchase agreements covering U.S. Government Securities or in
foreign government securities; (2) municipal securities are not
treated as involving a single industry; (3) there is no limit on
investment in issuers domiciled in a single
35
<PAGE>
country; (4) financial service companies are classified according to
the end users of their services (for example, automobile finance, bank
finance and diversified finance); and (5) utility companies are
classified according to their services (for example, gas, gas
transmission, electric and gas, electric and telephone); and provided
the Fund will invest more than 25% of the value of the Fund's total
assets in obligations of domestic and foreign financial institutions
and their holding companies. Notwithstanding anything to the contrary,
to the extent permitted by the 1940 Act, the Fund may invest in one or
more investment companies; provided that, except to the extent the
Fund invests in other investment companies pursuant to Section
12(d)(1)(A) of the 1940 Act, the Fund treats the assets of the
investment companies in which it invests as its own for purposes of
this policy.
(b) TREASURY FUND, U.S. GOVERNMENT FUND and MUNICIPAL MONEY MARKET
FUND may not purchase a security if, as a result, more than 25% of the
Fund's total assets would be invested in securities of issuers
conducting their principal business activities in the same industry;
provided: (1) there is no limit on investments in U.S. Government
Securities, in repurchase agreements covering U.S. Government
Securities, in foreign government securities, or in obligations of
domestic commercial banks (including U.S. branches of foreign banks
subject to regulations under U.S. laws applicable to domestic banks
and, to the extent that its parent is unconditionally liable for the
obligation, foreign branches of U.S. banks); (2) municipal securities
are not treated as involving a single industry; (3) there is no limit
on investment in issuers domiciled in a single country; (4) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance and
diversified finance); and (5) utility companies are classified
according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone). Notwithstanding anything to
the contrary, to the extent permitted by the 1940 Act, the Fund may
invest in one or more investment companies; provided that, except to
the extent the Fund invests in other investment companies pursuant to
Section 12(d)(1)(A) of the 1940 Act, the Fund treats the assets of the
investment companies in which it invests as its own for purposes of
this policy.
(c) INCOME FUND, LIMITED TERM TAX-FREE FUND, TAX-FREE INCOME FUND,
COLORADO TAX-FREE FUND, MINNESOTA INTERMEDIATE TAX-FREE FUND,
MINNESOTA TAX-FREE FUND and VALUGROWTH STOCK FUND may not purchase a
security if, as a result, more than 25% of the Fund's total assets
would be invested in securities of issuers conducting their principal
business activities in the same industry; provided: (1) there is no
limit on investments in repurchase agreements covering U.S. Government
Securities; (2) municipal securities are not treated as involving a
single industry; (3) financial service companies are classified
according to the end users of their services (for example, automobile
finance, bank finance and diversified finance); and (4) utility
companies are classified according to their services (for example,
gas, gas transmission, electric and gas, electric and telephone).
Notwithstanding anything to the contrary, to the extent permitted by
the 1940 Act, the Fund may invest in one or more investment companies;
provided that, except to the extent the Fund invests in other
investment companies pursuant to Section 12(d)(1)(A) of the 1940 Act,
the Fund treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
(d) TOTAL RETURN BOND FUND may not purchase a security if, as a
result, more than 25% of the Fund's total assets would be invested in
securities of issuers conducting their principal business activities
in the same industry; provided: (1) there is no limit on investments
in U.S. Government Securities, or in repurchase agreements covering
U.S. Government Securities; (2) mortgage-related or housing-related
securities (including mortgage-related or housing-related U.S.
Government Securities) and municipal securities are not treated as
involving a single industry; (3) financial service companies are
classified according to the end users of their services (for example,
automobile finance, bank finance and diversified finance); and (4)
utility companies are classified according to their services (for
example, gas, gas transmission, electric and gas, electric and
telephone). Notwithstanding anything to the contrary, to the extent
permitted by the 1940
36
<PAGE>
Act, the Fund may invest in one or more investment companies; provided
that, except to the extent the Fund invests in other investment
companies pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund
treats the assets of the investment companies in which it invests as
its own for purposes of this policy.
(e) SMALL COMPANY STOCK FUND and CONTRARIAN STOCK FUND may not
purchase a security if, as a result, more than 25% of the Fund's total
assets would be invested in securities of issuers conducting their
principal business activities in the same industry; provided: (1)
there is no limit on investments in U.S. Government Securities, or in
repurchase agreements covering U.S. Government Securities, municipal
securities are not treated as involving a single industry; (2)
financial service companies are classified according to the end users
of their services (for example, automobile finance, bank finance and
diversified finance); and (3) utility companies are classified
according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone). Notwithstanding anything to
the contrary, to the extent permitted by the 1940 Act, the Fund may
invest in one or more investment companies; provided that, except to
the extent the Fund invests in other investment companies pursuant to
Section 12(d)(1)(A) of the 1940 Act, the Fund treats the assets of the
investment companies in which it invests as its own for purposes of
this policy.
(f) DIVERSIFIED SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND may
not purchase a security if, as a result, more than 25% of the Fund's
total assets would be invested in 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. Notwithstanding anything to the contrary, to the extent
permitted by the 1940 Act, the Fund may invest in one or more
investment companies; provided that, except to the extent the Fund
invests in other investment companies pursuant to Section 12(d)(1)(A)
of the 1940 Act, the Fund treats the assets of the investment
companies in which it invests as its own for purposes of this policy.
(g) STABLE INCOME FUND, LIMITED TERM GOVERNMENT INCOME FUND,
INTERMEDIATE GOVERNMENT INCOME FUND, DIVERSIFIED BOND FUND, STRATEGIC
INCOME FUND, MODERATE BALANCED FUND, GROWTH BALANCED FUND, AGGRESSIVE
BALANCED FUND, INCOME EQUITY FUND, INDEX FUND, DIVERSIFIED EQUITY
FUND, GROWTH EQUITY FUND, LARGE COMPANY GROWTH FUND, and SMALL COMPANY
GROWTH FUND may not purchase a security if, as a result, more than 25%
of the Fund's total assets would be invested in 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); and that utility
companies are classified according to their services (for example,
gas, gas transmission, electric and gas, electric and telephone.
Notwithstanding anything to the contrary, to the extent permitted by
the 1940 Act, the Fund may invest in one or more investment companies;
provided that, except to the extent the Fund invests in other
investment companies pursuant to Section 12(d)(1)(A) of the 1940 Act,
the Fund treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
(h) INTERNATIONAL FUND may not purchase a security if, as a result,
more than 25% of the Fund's total assets would be invested in
securities of issuers conducting their principal business activities
in the same industry; provided: (1) there is no limit on investments
in U.S. Government Securities, or in repurchase agreements covering
U.S. Government Securities; (2) there is no limit on investment in
issuers domiciled in a single country; (3) financial service companies
are classified according to the end users of their services (for
example, automobile finance, bank finance and diversified finance);
and (4) utility companies are classified according to their services
(for example, gas, gas transmission, electric and gas, electric and
telephone). Notwithstanding anything to the contrary, to
37
<PAGE>
the extent permitted by the 1940 Act, the Fund may invest in one or
more investment companies; provided that, except to the extent the
Fund invests in other investment companies pursuant to Section
12(d)(1)(A) of the 1940 Act, the Fund treats the assets of the
investment companies in which it invests as its own for purposes of
this policy.
(3) BORROWING
(a) Each MONEY MARKET FUND, INCOME FUND, TOTAL RETURN BOND FUND, each
TAX-FREE INCOME FUND, VALUGROWTH STOCK FUND, SMALL COMPANY STOCK FUND,
CONTRARIAN STOCK FUND, DIVERSIFIED SMALL CAP FUND and SMALL CAP
OPPORTUNITIES FUND may borrow money from banks or by entering into
reverse repurchase agreements, but the Fund will limit borrowings to
amounts not in excess of 33 1/3% of the value of the Fund's total
assets (computed immediately after the borrowing).
(b) STABLE INCOME FUND, [LIMITED TERM GOVERNMENT INCOME FUND],
INTERMEDIATE GOVERNMENT INCOME FUND, DIVERSIFIED BOND FUND, STRATEGIC
INCOME FUND, MODERATE BALANCED FUND, GROWTH BALANCED FUND, AGGRESSIVE
BALANCED-EQUITY FUND, INDEX FUND, INCOME EQUITY FUND, DIVERSIFIED
EQUITY FUND, GROWTH EQUITY FUND, LARGE COMPANY GROWTH FUND, SMALL
COMPANY GROWTH FUND and INTERNATIONAL FUND may borrow money for
temporary or emergency purposes, including the meeting of redemption
requests, but not in excess of 33 1/3% of the value of the Fund's
total assets (as computed immediately after the borrowing).
(4) ISSUANCE OF SENIOR SECURITIES
NO FUND may issue senior securities except to the extent permitted by
the 1940 Act.
(5) UNDERWRITING ACTIVITIES
NO FUND may 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
NO FUND may make loans, except a Fund may enter into repurchase
agreements, purchase debt securities that are otherwise permitted
investments and lend portfolio securities.
(7) PURCHASES AND SALES OF REAL ESTATE
EACH FUND (other than [DIVERSIFIED SMALL CAP FUND], and SMALL CAP
OPPORTUNITIES FUND) may not purchase or sell real estate or 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.
DIVERSIFIED SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND may not
purchase or sell real estate or any interest therein, except that it
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
EACH FIXED INCOME FUND, EQUITY FUND (other than DIVERSIFIED SMALL CAP
FUND and SMALL CAP OPPORTUNITIES FUND) and BALANCED FUND may not
purchase or sell physical commodities or contracts, options or options
on contracts to purchase or sell physical commodities; provided that
currency and currency-related contracts and contracts on indices will
not be deemed to be physical commodities.
38
<PAGE>
DIVERSIFIED SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND may not
purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, but it may purchase, sell or
enter into financial options and futures and forward currency
contracts and other financial contracts or derivative instruments.
NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are not
fundamental policies of the Fund. Reference to a Fund includes reference to its
corresponding Portfolio, if applicable, which has the same fundamental policies
as the Fund. The policies of a Fund may be changed by the Board, or in the case
of its corresponding Portfolio, the Core Trust Board.
(1) DIVERSIFICATION
(a) To the extent required to qualify as a regulated investment
company, and with respect to 50% of its assets, MUNICIPAL MONEY MARKET
FUND may not purchase a security other than a U.S. Government
Security, if as a result, more than 5% of the Fund' s total assets
would be invested in the section as a single issuer or the Fund would
own more than 10% of the outstanding rated securities of any single
issuer.
(b) With respect to each of COLORADO TAX-FREE FUND, MINNESOTA
INTERMEDIATE TAX-FREE FUND and MINNESOTA TAX-FREE FUND, the Fund is
"non-diversified" as that term is defined in the 1940 Act.
(c) With respect to each of COLORADO TAX-FREE FUND, MINNESOTA
INTERMEDIATE TAX-FREE FUND and MINNESOTA TAX-FREE FUND, to the extent
required to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended, the Fund may not purchase a
security (other than a U.S. Government security or a security of an
investment company) if, as a result: (1) with respect to 50% of its
assets, more than 5% of the Fund's total assets would be invested in
the securities of any single issuer; (2) with respect to 50% of its
assets, the Fund would own more than 10% of the outstanding securities
of any single issuer; or (3) more than 25% of the Fund's total assets
would be invested in the securities of any single issuer.
(2) BORROWING
EACH FUND'S (other than INTERMEDIATE GOVERNMENT INCOME FUND'S and
DIVERSIFIED BOND FUND'S) borrowings for other than temporary or
emergency purposes or meeting redemption requests may not exceed an
amount equal to 5% of the value of the Fund's net assets. When STABLE
INCOME FUND, LIMITED TERM GOVERNMENT INCOME FUND, INTERMEDIATE
GOVERNMENT INCOME FUND, DIVERSIFIED BOND FUND, STRATEGIC INCOME FUND,
MODERATE BALANCED FUND, GROWTH BALANCED FUND, AGGRESSIVE
BALANCED-EQUITY FUND, INCOME EQUITY FUND, INDEX FUND, DIVERSIFIED
EQUITY FUND, GROWTH EQUITY FUND, LARGE COMPANY GROWTH FUND, SMALL
COMPANY GROWTH FUND and INTERNATIONAL FUND establish a segregated
account to limit the amount of leveraging with respect to certain
investment techniques, they do not treat those techniques as involving
borrowings for purposes of this or other borrowing limitations.
(3) ILLIQUID SECURITIES
(a) EACH MONEY MARKET FUND may not acquire securities or invest in
repurchase agreements with respect to any securities if, as a result,
more than 10% 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 1933 Act, as amended
("Restricted Securities").
39
<PAGE>
(b) EACH FIXED INCOME FUND, EQUITY FUND and BALANCED FUND may not
acquire securities or invest in repurchase agreements with respect to
any securities if, as result, more than 15% 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 txe 1933
Act, as amended ("Restricted Securities").
(4) OTHER INVESTMENT COMPANIES
EACH FUND may not invest in securities of another investment company,
except to the extent permitted by the 1940 Act.
(5) MARGIN AND SHORT SALES
EACH FUND (other than LIMITED TERM GOVERNMENT INCOME FUND and
INTERMEDIATE GOVERNMENT INCOME 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. EACH FUND
may make margin deposits in connection with permitted transactions in
options, futures contracts and options on futures contracts. NO FUND
(other than [DIVERSIFIED SMALL CAP FUND] and SMALL CAP OPPORTUNITIES
Fund) may 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.
(6) UNSEASONED ISSUERS
NO FUND (other than DIVERSIFIED SMALL CAP FUND and SMALL CAP
OPPORTUNITIES FUND) may 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 5% of the value of the Fund's total assets
would be so invested; provided, 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.
(7) PLEDGING
NO FUND may pledge, mortgage, hypothecate or encumber any of its
assets except to secure permitted borrowings or to secure other
permitted transactions.
(9) SECURITIES WITH VOTING RIGHTS
NO MONEY MARKET FUND or FIXED INCOME FUND may purchase securities
having voting rights except securities of other investment companies;
provided that the Funds may hold securities with voting rights
obtained through a conversion or other corporate transaction of the
issuer of the securities, whether or not the Fund was permitted to
exercise any rights with respect to the conversion or other
transaction.
(10) LENDING OF PORTFOLIO SECURITIES
NO FUND (other than [DIVERSIFIED SMALL CAP FUND] and SMALL CAP
OPPORTUNITIES FUND) may lend portfolio securities if the total value
of all loaned securities would exceed 33 1/3% of the Fund's total
assets.
[DIVERSIFIED SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND may not
lend portfolio securities if the total value of all loaned securities
would exceed 25% of its total assets.
40
<PAGE>
(11) REAL ESTATE LIMITED PARTNERSHIPS
NO FUND may invest in real estate limited partnerships.
(12) OPTIONS AND FUTURES CONTRACTS
(a) NO MONEY MARKET FUND may invest in options, futures contracts or
options on futures contracts.
(b) NO FIXED INCOME FUND, EQUITY FUND (other than [DIVERSIFIED SMALL
CAP FUND] and SMALL CAP OPPORTUNITIES FUND) or BALANCED FUND may
purchase an option if, as a result, more that 5% of the value of the
Fund's total assets would be so invested.
(13) WARRANTS
NO FUND may invest in warrants if: (1) more than 5% of the value of
the Fund's net assets would will be invested in warrants (valued at
the lower of cost or market) or (2) more than 2% of the value of the
Fund's net assets would be invested in warrants which are not listed
on the New York Stock Exchange or the American Stock Exchange;
provided, that warrants acquired by a Fund attached to securities are
deemed to have no value.
(14) TREASURY FUND INVESTMENT LIMITATIONS
TREASURY FUND may not enter into repurchase agreements or purchase any
security other than those that are issued or guaranteed by the U.S.
Treasury, including separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury.
(15) PURCHASES AND SALES OF COMMODITIES
NO MONEY MARKET FUND may 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 be deemed to be physical
commodities.
(16) VALUGROWTH STOCK FUND INVESTMENT LIMITATIONS
VALUGROWTH STOCK FUND may not enter into commitments under when-issued
and forward commitment obligations in an amount greater than 15% of
the value of the Fund's total assets.
IV. PERFORMANCE AND ADVERTISING DATA
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. There can be no assurance that the Money Market Funds will be able to
maintain a stable net asset value of $1.00. For purposes of advertising
performance, and in accordance with SEC interpretations, Small Cap Opportunities
Fund may refer to the performance of the Core Portfolio in which it invests
(Schroder U.S. Smaller Companies Portfolio). That Portfolio in turn has adopted
the performance of Schroder U.S. Smaller Companies Fund, a series of Schroder
Capital Funds (Delaware), which has an identical investment objective to the
Fund and the Portfolio. Like the Fund, the Schroder U.S. Smaller Companies Fund
also invests all of its investable assets in the Portfolio.
For a listing of certain performance data as of May 31, 1997 (see Appendix C --
Performance Data).
41
<PAGE>
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"). The
Funds may also compare any of their performance information with the performance
of recognized stock, bond and other indexes, including but not limited to the
Municipal Bond Buyers Indices, the Salomon Brothers Bond Index, Shearson Lehman
Bond Index, the Standard & Poor's 500 Composite Stock Price Index, Russell 2000
Index, Morgan Stanley - Europe, Australian and Far East Index, Lehman Brothers
Intermediate Government Index, Lehman Brothers Intermediate Government/Corporate
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 also
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. Norwest, Processing Organizations and others may charge their
customers, 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.
MONEY MARKET FUNDS
Yield quotations for the Money Market Funds will include an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a specific seven-calendar-day period and are calculated by dividing the
net change during the seven-day period in the value of an account having a
balance of one share at the beginning of the period by the value of the account
at the beginning of the period, and multiplying the quotient by 365/7. For this
purpose, the net change in account value reflects the value of additional shares
purchased with dividends declared on the original share and dividends declared
on both the original share and any such additional shares, but would not reflect
any realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any effective
annualized yield quotation used by a Money Market Fund is calculated by
compounding the current yield quotation for such period by adding 1 to the
product, raising the sum to a power equal to 365/7, and subtracting 1 from the
result. The standardized tax equivalent yield is the rate an investor would have
to earn from a fully taxable investment in order to equal a Fund's yield after
taxes. Tax equivalent yields are calculated by dividing the Fund's yield by one
minus the stated Federal or combined Federal and state tax rate. If a portion of
a Fund's yield is tax-exempt, only that portion is adjusted in the calculation.
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
42
<PAGE>
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.
The standardized tax equivalent yield is the rate an investor would have to earn
from a fully taxable investment in order to equal a Fund's yield after taxes.
Tax equivalent yields are calculated by dividing the Fund's yield by one minus
the stated Federal or combined Federal and state tax rate. If a portion of a
Fund's yield is tax-exempt, only that portion is adjusted in the calculation.
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, any change in the Fund's net asset value per
share over the period and maximum sales charge, if any, applicable to purchases
of the Fund's shares. Average annual total returns are calculated, through the
use of a formula prescribed by the SEC, 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. The
average annual total return is computed separately for each class of shares of a
Fund. 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)n = 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
43
<PAGE>
MULTICLASS, COLLECTIVE INVESTMENT AND COMMON TRUST FUND AND MASTER-FEEDER
PERFORMANCE
MULTICLASS PERFORMANCE
When a Fund has more than one class of shares, performance calculations for the
classes of shares that are created after the initial class may be stated so as
to include the performance of the initial class or classes of the Fund.
Generally, performance of the initial class is not restated to reflect the
expenses or expense ratio of the subsequent class. For instance, if A Shares of
a Fund are created after I Shares have been in existence, the inception of
performance for the A Shares will be deemed to be the inception date of the I
Shares and the performance of the I Shares (based on the I Shares actual
expenses) from the inception of I Shares to the inception of A Shares will be
deemed to be the performance of A Shares for that period. For standardized total
return calculations, the current maximum initial sales load on A Shares would be
used in determining the total return of A Shares as if assessed at the inception
of I Shares. Generally, the performance of B Shares will be calculated only from
the inception date of B Shares, regardless of the existence of prior share
classes in the same Fund.
COLLECTIVE INVESTMENT FUND PERFORMANCE
Prior to November 11, 1994, Norwest Bank Minnesota, N.A. managed several
collective investment funds with investment objectives and investment policies
that were in all material respects equivalent to certain of the Funds.
Therefore, the performance for those applicable Funds includes the performance
of their predecessor collective investment funds for periods before those funds
became mutual funds on November 11, 1994. The collective investment fund
performance was adjusted by netting those Funds' 1994 estimate of their expense
ratios for the first year of operations as a mutual fund, including any
applicable sales load. The collective investment funds were not registered under
the 1940 Act nor subject to certain limitations, diversification requirements,
and other restrictions imposed by the 1940 Act and the Internal Revenue Code,
which, if applicable, may have adversely affected the performance result. Prior
performance is not indicative of a Fund's future performance. The performance of
International Fund reflects the historical performance of Schroder International
Equity Fund (managed by Schroder Capital Management International Inc.) in which
the collective investment fund invested. Performance of International Fund has
been adjusted to reflect fees and expenses of the Schroder International Equity
Fund.
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 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 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. Any performance information may be presented numerically
or in a table, graph or similar illustration.
The Funds may also include various information in their advertisements
including, but not limited to: (1) 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; (2) 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; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of
44
<PAGE>
earning interest on principal plus interest that was earned earlier; interest
can be compounded at different intervals, such as annually, quartile or daily);
(4) 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; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) descriptions of the Funds' portfolio
managers and the portfolio management staff of the Investment Advisers or
summaries of the views of the portfolio managers with respect to the financial
markets; (7) 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; (8) 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 (9) 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 principal 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 insure 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:
<TABLE>
<S> <C> <C> <C> <C>
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
</TABLE>
With respect to the Funds that invest in municipal securities and distribute
Federally tax-exempt (and in certain cases state tax exempt) dividends, the
Funds may advertise the benefits of and other effects of investing in municipal
securities. For instance, the Funds' advertisements may note that municipal
bonds have historically offered higher after tax yields than comparable taxable
alternatives for those persons in the higher tax brackets, that municipal bond
yields may tend to outpace inflation and that changes in tax law have eliminated
many of the tax advantages of other investments. The combined Federal and state
income tax rates for a particular state may also be described and advertisements
may indicate equivalent taxable and tax-free yields at various approximate
combined marginal Federal and state tax bracket rates. All yields so advertised
are for illustration only are not necessarily representative of a Fund's yield.
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 for more than 60 years been
committed to quality products and outstanding service to
45
<PAGE>
assist its customers in meeting their financial goals and setting forth the
reasons that Norwest believes that it has been successful as a national
financial service firm.
CORE-GATEWAY PERFORMANCE
When a Fund such as International Fund (a "Gateway fund") invests all of its
investable assets in another investment company such as International Portfolio
(a "Core fund"), special performance calculation rules apply. For instance, if a
Gateway fund invests in a Core fund that has a performance history prior to the
investment by the Gateway fund, the Gateway fund will assume the performance
history of the Core fund. That history will not be restated to reflect the
internal expense ratio of the Gateway fund. However, a Core fund's performance
will be restated to reflect any sales charges that are applicable to the Gateway
fund's shares.
V. MANAGEMENT
Those officers, as well as certain other officers and Trustees of the Trust, may
be directors, officers or employees of (and persons providing services to the
Trust may include) Forum, its affiliates or certain non-banking affiliates of
Norwest.
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 and age as of May 31, 1997 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, Chairman and President,* Age 54.
President and Owner, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, Limited Liability
Company (a mutual fund administrator), Forum Financial Corp. (a
registered transfer agent), and other companies within the Forum
Financial Group of companies. Mr. Keffer is a Director, Trustee and/or
officer of various registered investment companies for which Forum
Financial Services, Inc. or its affiliates serves as manager,
administrator or distributor. His address is Two Portland Square,
Portland, Maine 04101.
ROBERT C. BROWN, Trustee,* Age 65.
Director, Federal Farm Credit Banks Funding Corporation and Farm
Credit System Financial Assistance Corporation since February 1993.
Prior thereto, he was Manager of 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, Age 70.
Principal of The Burkhardt Law Firm. His address is 777 South Steele
Street, Denver, Colorado 80209.
JAMES C. HARRIS, Trustee, Age 76.
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.
46
<PAGE>
RICHARD M. LEACH, Trustee, Age 63.
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 of
Digital Techniques, Inc. (an interactive video design and
manufacturing company). His address is P.O. Box 1888, New London, New
Hampshire 03257.
JOHN S. MCCUNE, Trustee, Age 46.
President, Norwest Investment Services, Inc. His address is 608 2nd
Avenue South, Minneapolis, Minnesota 55479.
TIMOTHY J. PENNY, Trustee, Age 45.
Senior Counselor to the public relations firm of Himle-Horner since
January 1995 and Senior Fellow at the Humphrey Institute, Minneapolis,
Minnesota (a public policy organization) since January 1995. 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, Age 56.
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
ROBERT B. CAMPBELL, Treasurer, Age 35.
Director of Fund Accounting, Forum Financial Services, Inc., with
which he has been associated since April 1997. Prior thereto, from
February 1994 - April 1996 Mr. Campbell was Vice President-Business
Unit Head, Domestic Fund Services at State Street Fund Services, Inc.
Prior thereto, from September 1992 - January 1994 Mr. Campbell was
Assistant Vice President-Fund Manager at State Street Bank & Trust
Company, and prior thereto First Line Manager. His address is Two
Portland Square, Portland, Maine 04101.
DAVID I. GOLDSTEIN, Vice President and Secretary, Age 35.
Managing Director and Counsel, Forum Financial Services, Inc., with
which he has been associated since 1991. 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.
SARA M. CLARK, Vice President and Assistant Treasurer, Age 33.
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.
47
<PAGE>
THOMAS G. SHEEHAN, Vice President and Assistant Secretary, Age 42.
Managing Director and 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.
CATHERINE S. WOOLEDGE, Assistant Secretary, Age 55.
Counsel, Forum Financial Services, Inc., with which she has been
associated since 1996. Prior thereto, Ms. Wooledge was an associate at
the law firm of Morrison & Foerster since September 1994, prior
thereto Ms. Wooledge was an associate corporate counsel at Franklin
Resources, Inc. since September 1993, and prior thereto associate at
the law firm of Drinker Biddle & Reath, Washington, D.C. Ms. Wooledge
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.
DON L. EVANS, Assistant Secretary, Age 49.
Assistant Counsel, Forum Financial Services, Inc., with which he has
been associated since 1995. Prior thereto, Mr. Evans was associated
with the law firm of Bisk & Lutz and prior thereto was associated with
the law firm of Weiner & Strother. Mr. Evans 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.
RENEE A. WALKER, Assistant Secretary, Age 27.
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 from 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.
COMPENSATION OF TRUSTEES AND OFFICERS OF THE TRUST
Each Trustee of the Trust is paid a retainer fee in the total amount of $5,000,
payable quarterly, 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. In addition, each Trustee is paid $3,000 for
each regular 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 or
compensation or reimbursement for his associated expenses. In addition, no
officer of the Trust is compensated by the Trust.
Mr. Burkhardt, Chairman of the Trust's and Norwest Select Funds' audit
committees, receives additional compensation of $6,000 from the Trust and
Norwest Select Funds allocated pro rata between the Trust and Norwest Select
Funds based upon relative net assets, for his services as Chairman. Each Trustee
was elected by shareholders on April 30, 1997.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Select Funds, combined. Norwest Select Funds
have a December 31 fiscal year end. Information is presented for the twelve
month period ended May 31, 1997, which was the fiscal year end of all of the
Trust's portfolios.
48
<PAGE>
<TABLE>
TOTAL COMPENSATION FROM
TOTAL COMPENSATION THE TRUST AND NORWEST
FROM THE TRUST SELECT FUNDS
<S> <C> <C>
Mr. Brown $30,942 $31,000
Mr. Burkhardt $36,932 $37,000
Mr. Harris $30,942 $31,000
Mr. Leach $30,942 $31,000
Mr. Penny $30,942 $31,000
Mr. Willeke $30,942 $31,000
Mr. McCune $30,942 $31,000
</TABLE>
Neither the Trust nor Norwest Select Funds has adopted any form of retirement
plan covering Trustees or officers. For the twelve month period ended May 31,
1997 total expenses of the Trustees (other than Mr. Keffer) was $22,804 and
total expenses of the trustees of Norwest Select Funds was $46.
As of October 1, 1997, the Trustees and officers of the Trust in the aggregate
owned less than 1% of the outstanding shares of the Funds.
TRUSTEES AND OFFICERS OF CORE TRUST
The Trustees and officers of Core Trust and their principal occupations during
the past five years and ages 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. Messrs. Keffer, Goldstein, Butt, Sheehan, and Misses. Clark and
Walker, officers of Core Trust, all currently serve as officers of the Trust.
Accordingly, for background information pertaining to these officers, (see
"Management -- Trustees and Officers -- Trustees and Officers of the Trust.")
JOHN Y. KEFFER,* Chairman and President.
COSTAS AZARIADIS, Trustee, Age 53.
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, Age 54.
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, Age 53.
Partner at the law firm of Reid & Priest. Prior thereto he was a
partner at the law firm of Winthrop Stimson Putnam & Roberts since
1989. His address is 40 Wall Street, New York, New York 10005.
49
<PAGE>
RICHARD C. BUTT, Treasurer
CPA, Managing Director, Operations, Forum Financial Corp. since
1996. Prior thereto, Mr. Butt was a consultant in the financial
services division of KPMG Peat Marwick LLP ("KPMG"). Prior to his
employment at KPMG, Mr. Butt was President of 440 Financial
Distributors, Inc., the distribution subsidiary of 440 Financial
Group, and Senior Vice President of the parent company. Prior
thereto, he was a Vice President at Fidelity Services Company.
Mr. Butt is responsible for fund accounting and transfer agency
at Forum. His address is Two Portland Square, Portland, Maine
04101.
SARA M. CLARK, Vice President, Assistant Secretary and Assistant Treasurer.
DAVID I. GOLDSTEIN, Secretary.
THOMAS G. SHEEHAN, Assistant Secretary.
RENEE A. WALKER, Assistant Secretary
TRUSTEES AND OFFICERS OF SCHRODER CORE
The following information relates to the principal occupations of each Trustee
and executive officer of the Schroder Core during the past five years and shows
the nature of any affiliation with Schroder. Messrs. Keffer, Goldstein and
Sheehan and Ms. Wooledge, officers of Schroder Core, all currently serve as
officers of the Trust. Accordingly, for background information pertaining to
these officers. (See "Trustees and Officers of the Trust.")
PETER E. GUERNSEY, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
JOHN I. HOWELL, Greenwich, Connecticut - Trustee of the Trust - Private
Consultant since February 1987; Honorary Director, American International Group,
Inc.; Director, American International Life Assurance Company of New York.
CLARENCE F. MICHALIS, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman (Honorary)
and Trustee of the Trust retired since March, 1988; prior thereto, consultant to
SCMI since February 1, 1984.
MARK J. SMITH (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a Vice President of the
Trust - Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON (b)(c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust Secretary of SCM since July 1995; Secretary of
Schroder Advisors since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a Vice President of
the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd.
since 1989.
50
<PAGE>
CATHERINE S. WOOLEDGE, Assistant Treasurer and Assistant Secretary of the Trust.
BARBARA GOTTLIEB(c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
ROBERT JACKOWITZ(b)(c), 787 Seventh Avenue, New York, New York - Treasurer of
the Trust - Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI since June 1995; and
Assistant Treasurer of Schroders Incorporated since January 1993.
JOHN Y. KEFFER, Vice President of the Trust.
JANE P. LUCAS(c), 787 Seventh Avenue, New York, New York - Vice President of the
Trust - Director and Senior Vice President SCMI; Director of SCM since September
1995; Assistant Director Schroder Investment Management Ltd.
since June 1991.
GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
CATHERINE A. MAZZA, 787 Seventh Avenue, New York, New York - Vice President of
the Trust - President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
THOMAS G. SHEEHAN, Assistant Treasurer and Assistant Secretary of the Trust.
FARIBA TALEBI, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
JOHN A. TROIANO(b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
ALEXANDRA POE, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust - Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; prior thereto
an investment management attorney with Gordon Altman Butowsky Weitzen Shalov &
Wein since July 1994; prior thereto counsel and Vice President of Citibank, N.A.
since 1989.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) Schroder Advisors is a wholly owned subsidiary of SCMI, which is a
wholly owned subsidiary of Schroders Incorporated, which in turn
is an indirect, wholly owned U.S. subsidiary of Schroders plc.
(c) Schroder Capital Management, Inc. ("SCM") is a wholly owned
subsidiary of Schroder Wertheim Holdings Incorporated which is a
wholly owned subsidiary of Schroders, Incorporated, which in turn
is an indirect wholly owned U.S. subsidiary of Schroders plc.
51
<PAGE>
INVESTMENT ADVISORY SERVICES
GENERAL
Table 1 in Appendix B 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. That table also shows similar information with respect
to Schroder for its services to International Portfolio. The data is for the
past three fiscal years or a shorter period if the Fund has been in operation
for a shorter period.
The advisory fee for each Fund is based on the average daily net assets of the
Fund at the annual rate disclosed in the Fund's prospectus. If the Fund invests
in one or more core portfolios, the advisory fee paid by the Fund will be with
respect to advisory services rendered at the portfolio level.
All investment advisory fees are accrued daily and paid monthly. Each investment
adviser, in its sole discretion, may waive or continue to waive all or any
portion of its investment advisory fees.
In addition to receiving its advisory fee from the Funds, each investment
adviser or its affiliates may act and be compensated as investment manager for
its clients with respect to assets which are invested in a Fund. In some
instances Norwest or its affiliates 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 a Fund an amount equal to all or a portion of the fees
received by Norwest or any of its affiliates from a Fund with respect to the
client's assets invested in the Fund.
NORWEST INVESTMENT MANAGEMENT
Norwest furnishes at its expense all services, facilities and personnel
necessary in connection with managing each Fund's investments and effecting
portfolio transactions for each Fund. For further information about the
investment subadvisory services for certain Funds and the advisory services for
International Portfolio of Core Trust. (See "Management -- Investment Advisory
Services -- Schroder Capital Management International, Inc.," "--Sub-Advisers,"
Crestone Capital Management, Inc.," "Galliard Capital Management, Inc.,"
"Peregrine Capital Management, Inc.," and "United Capital Management, Inc.")
Under its various Investment Advisory Agreements, Norwest may delegate its
responsibilities to any investment subadviser approved by the Board and, as
applicable, shareholders, with respect to all or a portion of the assets of the
Fund. The Investment 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, and in either case, by a
majority of the Trustees who are not interested persons of any party to the
Investment Advisory Agreement, at a meeting called for the purpose of voting on
the Investment Advisory Agreement.
Each Investment Advisory Agreement is terminable without penalty with respect to
the Fund on 60 days' written notice: (1) by the Board or by a vote of a majority
of the outstanding voting securities of the Fund to the Adviser or (2) by the
Adviser on 60 days' written notice to the Trust. Each Investment Advisory
Agreement shall terminate upon assignment. The Investment Advisory Agreements
also provide that, with respect to the Funds, neither Norwest nor its personnel
shall be liable for any mistake of judgment or in any event whatsoever, except
for lack of good faith, provided that nothing in the Investment Advisory
Agreements shall be deemed to protect, or purport to protect, the Adviser
against liability by reason of willful misfeasance, bad faith or gross
negligence in the performance of Norwest's duties or by reason of reckless
disregard of its obligations and duties under the Investment Advisory
Agreements. The Investment Advisory Agreements provide that Norwest may render
services to others.
Norwest acts as investment adviser to Cash Investment Fund, Ready Cash
Investment Fund, U.S. Government Fund, Treasury Fund, Municipal Money Market
Fund, Stable Income Fund, Limited Term Government Income Fund, Intermediate
Government Income Fund, Diversified Bond Fund, Income Fund, Total Return Bond
Fund, Limited Term Tax-Free Fund, Tax-Free Income Fund, Colorado Tax-Free Fund,
Minnesota Intermediate Tax-Free Fund, Minnesota Tax-Free Fund, Strategic Income
Fund, Moderate Balanced Fund, Growth Balanced Fund, Aggressive
52
<PAGE>
Balanced-Equity Fund, Index Fund, Income Equity Fund, ValuGrowthSM Stock Fund,
Diversified Equity Fund, Growth Equity Fund, Large Company Growth Fund, Small
Company Stock Fund, Small Company Growth Fund, Small Cap Opportunities Fund,
Diversified Small Cap Fund, Contrarian Stock Fund and International Fund. The
investment advisory agreements between Core Trust on behalf of the portfolios
are identical to the Investment Advisory Agreements between the Trust and
Norwest, except for the fees payable thereunder and certain immaterial matters.
Norwest Investment Management, Inc. is a part of Norwest Corporation which as of
June 30, 1997, was a $83.6 billion financial services company providing banking,
insurance, investments, mortgage and consumer finance through 3,844 stores in
all 50 states, Canada, the Caribbean, Central America and elsewhere
internationally.
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC.-- SCHRODER U.S. SMALLER COMPANIES
PORTFOLIO/INTERNATIONAL PORTFOLIO
Small Cap Opportunities Fund invests all of its assets in Schroder U.S. Smaller
Companies Portfolio, International Fund invests all of its assets in
International Portfolio and each Blended Fund invests a portion of its assets in
International Portfolio. Pursuant to a separate Advisory Agreement between
Schroder Core and Schroder, Schroder acts as investment adviser to Schroder U.S.
Smaller Companies Portfolio and is required to furnish at its expense all
services, facilities and personnel necessary in connection with managing
Schroder U.S. Smaller Companies Portfolio's investments and effecting portfolio
transactions for Schroder U.S. Smaller Companies Portfolio. Pursuant to a
separate Advisory Agreement between Core Trust and Schroder, Schroder acts as
investment adviser to International Portfolio and is required to furnish at its
expense all services, facilities and personnel necessary in connection with
managing International Portfolio's investments and effecting portfolio
transactions for International Portfolio. The Advisory Agreements between
Schroder U.S. Smaller Companies Portfolio, International Portfolio and Schroder
will continue in effect only if such continuance is specifically approved at
least annually: (1) by the applicable Trust Board or by vote of a majority of
the outstanding voting interests of the Portfolio, and, in either case (2) by a
majority of the applicable Trust's trustees who are not parties to the Advisory
Agreement or interested persons of any such party (other than as trustees of the
applicable Trust), at a meeting called for the purpose of voting on the Advisory
Agreement; provided further, however, that if the Advisory Agreement or the
continuation of the Agreement is not approved as to a Portfolio, the Adviser may
continue to render to that Portfolio the services described herein in the manner
and to the extent permitted by the Act and the rules and regulations thereunder.
On behalf of each Fund that invests all or a portion of its assets in Schroder
U.S. Smaller Companies Portfolio or International Portfolio, Norwest and the
Trust have entered into an Investment Subadvisory Agreement with Schroder. An
Investment Subadvisory Agreement would become operative and Schroder would
directly manage a Fund's assets if the Board determined it was no longer in the
best interest of the Fund to invest in smaller companies or international
securities by investing in another registered investment company. In that event,
pursuant to the Investment Subadvisory Agreement Schroder would makes investment
decisions directly for a Fund and continuously review, supervise and administer
the Fund's investment program with respect to that portion, if any, of the
Fund's portfolio that Norwest has so delegated. Schroder would be required to
furnish at its own expense all services, facilities and personnel necessary in
connection with managing of the Funds' investments and effecting portfolio
transactions for the Funds (to the extent of Norwest's delegation).
The Investment Subadvisory Agreements will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Board or by
vote of a majority of the outstanding voting securities of the applicable Fund,
and, in either case, (2) by a majority of the applicable Trust's trustees who
are not parties to the Investment Subadvisory Agreements or interested persons
of any such party (other than as trustees of the applicable Trust), at a meeting
called for the purpose of voting on the Investment Subadvisory Agreements;
provided further, however, that if the Investment Subadvisory Agreements or the
continuation of the Agreements is not approved as to a Fund, the Subadviser may
continue to render to that Fund the services described herein in the manner and
to the extent permitted by the Act and the rules and regulations thereunder.
Each Investment Subadvisory Agreement is terminable without penalty with respect
to the Fund on 60 days' written notice when authorized either by majority vote
of the Fund's shareholders or by the Board, or by Schroder on 60 days written
notice to the Trust, and will automatically terminate in the event of its
assignment. The Investment Subadvisory Agreements also provide that, with
respect to the Funds, neither Schroder nor its personnel shall be liable for any
mistake of judgment or in any event whatsoever, except for lack of good faith,
provided that nothing shall be deemed to protect the Adviser against liability
by reason of willful misfeasance, bad faith or gross
53
<PAGE>
negligence in the performance of Schroder's duties or by reason of reckless
disregard of its obligations and duties under the Investment Subadvisory
Agreements. The Investment Subadvisory Agreements provide that Schroder may
render services to others.
No payments are made under the Funds' Investment Subadvisory Agreements with
Schroder because no assets are allocated to Schroder to manage directly.
The Advisory Agreements between Schroder and Core Trust and Schroder and
Schroder Core on behalf of International Portfolio and Schroder U.S. Smaller
Companies Portfolio, respectively are identical to the Investment Advisory
Agreements between the Trust and Norwest, except for the fees payable thereunder
and certain immaterial matters.
SUB-ADVISERS
The Adviser pays a fee to each of the subadvisers. These fees do not increase
the fees paid by shareholders of the Funds. The amount of the fees paid by
Norwest to each Subadviser may vary from time to time as a result of periodic
negotiations with the Subadviser regarding such matters as the nature and extent
of the services (other than investment selection and order placement activities)
provided by the Subadviser to the Fund, the increased cost and complexity of
providing services to the Fund, the investment record of the Subadviser in
managing the Fund and the nature and magnitude of the expenses incurred by the
Subadviser in managing the Fund's assets and by the Adviser in overseeing and
administering management of the Fund. However, the contractual fee payable to
each Fund by Norwest for investment advisory services will not vary as a result
of those negotiations.
Norwest performs internal due diligence on each Subadviser and monitors each
Subadviser's performance using its proprietary investment adviser selection and
monitoring process. Norwest will be responsible for communicating performance
targets and evaluations to Subadvisers, supervising each Subadviser's compliance
with the Fund's fundamental investment objectives and policies, authorizing
Subadvisers to engage in certain investment techniques for the Fund, and
recommending to the Board of Trustees whether sub-advisory agreements should be
renewed, modified or terminated. Norwest also may from time to time recommend
that the Board of Trustees replace one or more Subadvisers or appoint additional
Subadvisers, depending on the Adviser's assessment of what combination of
Subadvisers it believes will optimize each Fund's chances of achieving its
investment objectives.
CRESTONE CAPITAL MANAGEMENT, INC.
To assist Norwest in carrying out its obligations under the Investment Advisory
Agreement with the Small Company Stock Fund (the "Fund"), Norwest has entered
into an Investment Subadvisory Agreement with Crestone, located at 7720 East
Belleview Avenue, Suite 220, Englewood, Colorado 80111. Crestone is registered
with the SEC as an investment adviser and is a non-wholly owned subsidiary of
Norwest. Pursuant to the Sub-Investment Advisory Agreement, Crestone makes
investment decisions for the Fund and continuously reviews, supervises and
administers the Fund's investment program with respect to that portion, if any,
of the Fund's portfolio that Norwest believes should be invested using Crestone
as a subadviser. Currently, Crestone manages the entire portfolio of the Fund
and has done so since the Fund's inception. Norwest supervises the performance
of Crestone including its adherence to the Portfolio's investment objectives and
policies and pays Crestone a fee for its investment management services. For its
services under the Sub-Investment Advisory Agreement, Norwest pays Crestone a
fee based on the Fund's average daily net assets at an annual rate of 0.40% on
the first $30 million; 0.30% on the next $30 million; 0.20% on the next $40
million and 0.15% on all sums in excess of $100 million. For the Fund's fiscal
years ended May 31, 1996, 1995 and 1994, Norwest paid Crestone subadvisory fees
of $180,748, $137,862 and $8,792, respectively.
Under its Investment Subadvisory Agreement, Crestone makes investment decisions
for the Fund and continuously reviews, supervises and administers the Fund's
investment program with respect to that portion, if any, of the Fund's portfolio
for which Norwest has delegated management responsibility. Crestone is required
to furnish at its own expense all services, facilities and personnel necessary
in connection with managing of the Fund's investments and effecting portfolio
transactions for the Fund (to the extent of Norwest's delegation). The
Investment Subadvisory Agreement will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Board or by
vote of a majority of the outstanding voting securities of the Fund, and, in
either case, (2) by a majority of the Trust's trustees who are not parties to
the Investment Subadvisory Agreement or interested persons of any such party
(other than as trustees of the Trust), at a meeting called for the purpose of
voting on the Investment Subadvisory Agreements; provided further, however, that
if the Investment Subadvisory Agreement or the continuation of the Agreement is
not approved, the Subadviser may continue to render to the Fund the services
described in the Investment Subadvisory Agreement in the manner and to the
extent permitted by the Act and the rules and regulations thereunder.
54
<PAGE>
The Investment Subadvisory Agreement is terminable without penalty with respect
to the Fund on 60 days' written notice when authorized either by majority vote
of the Fund's shareholders or by the Board, or by Crestone on 60 days written
notice to the Trust, and will automatically terminate in the event of its
assignment. The Investment Subadvisory Agreement also provides that, with
respect to the Fund, neither Crestone nor its personnel shall be liable for any
mistake of judgment or in any event whatsoever, except for lack of good faith,
provided that nothing shall be deemed to protect Crestone against liability by
reason of willful misfeasance, bad faith or gross negligence in the performance
of Crestone's duties or by reason of reckless disregard of its obligations and
duties under the Investment Subadvisory Agreement. The Investment Subadvisory
Agreements provides that Crestone may render services to others.
GALLIARD
To assist Norwest in carrying out its obligations under the Investment Advisory
Agreement with Stable Income Fund, Diversified Bond Fund, Strategic Income Fund,
Moderate Balanced Fund and Growth Balanced Fund (the "Funds"), Norwest has
entered into an Investment Subadvisory Agreement with Galliard, located at 800
LaSalle Avenue, Suite 2060, Minneapolis, Minnesota 55479. Galliard is registered
with the SEC as an investment adviser and is an investment advisory subsidiary
of Norwest Bank. Pursuant to the Sub-Investment Advisory Agreement, Galliard
makes investment decisions for each of the Funds and continuously reviews,
supervises and administers each Fund's investment program with respect to that
portion, if any, of the Fund's portfolio that Norwest believes should be
invested using Galliard as a subadviser. Currently, Galliard manages the entire
portfolio of each Fund and has done so since the Fund's inception. Norwest
supervises the performance of Galliard including its adherence to the
Portfolio's investment objectives and policies and pays Galliard a fee for its
investment management services.
Under its Investment Subadvisory Agreement, Galliard makes investment decisions
for each Fund and continuously reviews, supervises and administers each Fund's
investment program with respect to that portion, if any, of the Fund's portfolio
for which Norwest has delegated management responsibility. Galliard 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 Investment Subadvisory Agreement will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Board or by
vote of a majority of the outstanding voting securities of the Funds, and, in
either case, (2) by a majority of the Trust's trustees who are not parties to
the Investment Subadvisory Agreement or interested persons of any such party
(other than as trustees of the Trust), at a meeting called for the purpose of
voting on the Investment Subadvisory Agreements; provided further, however, that
if the Investment Subadvisory Agreement or the continuation of the Agreement is
not approved, the Subadviser may continue to render to each Fund the services
described in the Investment Subadvisory Agreement in the manner and to the
extent permitted by the Act and the rules and regulations thereunder.
The Investment Subadvisory Agreement is terminable without penalty with respect
to a Fund on 60 days' written notice when authorized either by majority vote of
the Fund's shareholders or by the Board, or by Galliard on 60 days written
notice to the Trust, and will automatically terminate in the event of its
assignment. The Investment Subadvisory Agreement also provides that, with
respect to each Fund, neither Galliard nor its personnel shall be liable for any
mistake of judgment or in any event whatsoever, except for lack of good faith,
provided that nothing shall be deemed to protect Galliard against liability by
reason of willful misfeasance, bad faith or gross negligence in the performance
of Galliard's duties or by reason of reckless disregard of its obligations and
duties under the
55
<PAGE>
Investment Subadvisory Agreement. The Investment Subadvisory Agreements provides
that Galliard may render services to others.
PEREGRINE CAPITAL MANAGEMENT, INC.
To assist Norwest in carrying out its obligations under the Investment Advisory
Agreement with Diversified Bond Fund, Strategic Income Fund, Moderate Balanced
Fund, Growth Balanced Fund, Diversified Equity Fund, Growth Equity Fund, Large
Company Growth Fund and Small Company Growth Fund (the "Funds"), Norwest has
entered into an Investment Subadvisory Agreement with Peregrine, located at 800
LaSalle Avenue, Suite 1850, Minneapolis, Minnesota 55479. Peregrine is
registered with the SEC as an investment adviser and is an investment advisory
subsidiary of Norwest Bank. Pursuant to the Sub-Investment Advisory Agreement,
Peregrine makes investment decisions for each of the Funds and continuously
reviews, supervises and administers each Fund's investment program with respect
to that portion, if any, of the Fund's portfolio that Norwest believes should be
invested using Peregrine as a subadviser. Currently, Peregrine manages the
entire portfolio of each Fund and has done so since the Fund's inception.
Norwest supervises the performance of Peregrine including its adherence to the
Portfolio's investment objectives and policies and pays Peregrine a fee for its
investment management services.
Under its Investment Subadvisory Agreement, Peregrine makes investment decisions
for each Fund and continuously reviews, supervises and administers each Fund's
investment program with respect to that portion, if any, of the Fund's portfolio
for which Norwest has delegated management responsibility. Peregrine 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 Investment Subadvisory Agreement will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Board or by
vote of a majority of the outstanding voting securities of the Funds, and, in
either case, (2) by a majority of the Trust's trustees who are not parties to
the Investment Subadvisory Agreement or interested persons of any such party
(other than as trustees of the Trust), at a meeting called for the purpose of
voting on the Investment Subadvisory Agreements; provided further, however, that
if the Investment Subadvisory Agreement or the continuation of the Agreement is
not approved, the Subadviser may continue to render to each Fund the services
described in the Investment Subadvisory Agreement in the manner and to the
extent permitted by the Act and the rules and regulations thereunder.
The Investment Subadvisory Agreement is terminable without penalty with respect
to a Fund on 60 days' written notice when authorized either by majority vote of
the Fund's shareholders or by the Board, or by Peregrine on 60 days written
notice to the Trust, and will automatically terminate in the event of its
assignment. The Investment Subadvisory Agreement also provides that, with
respect to each Fund, neither Peregrine nor its personnel shall be liable for
any mistake of judgment or in any event whatsoever, except for lack of good
faith, provided that nothing shall be deemed to protect Peregrine against
liability by reason of willful misfeasance, bad faith or gross negligence in the
performance of Peregrine's duties or by reason of reckless disregard of its
obligations and duties under the Investment Subadvisory Agreement. The
Investment Subadvisory Agreements provides that Peregrine may render services to
others.
UNITED CAPITAL MANAGEMENT
To assist Norwest in carrying out its obligations under the Investment Advisory
Agreement with Diversified Bond Fund, Total Return Bond Fund, Strategic Income
Fund, Moderate Balanced Fund, Growth Balanced Fund and Contrarian Stock Fund
(the "Funds"), Norwest has entered into an Investment Subadvisory Agreement with
UCM, located at 1700 Lincoln Street, Suite 3301, Denver, Colorado 80274. UCM is
registered with the SEC as an investment adviser and is a division of Norwest
Bank Colorado, N.A.. Pursuant to the Sub-Investment Advisory Agreement, UCM
makes investment decisions for each of the Funds and continuously reviews,
supervises and administers each Fund's investment program with respect to that
portion, if any, of the Fund's portfolio that Norwest believes should be
invested using UCM as a subadviser. Currently, UCM manages the entire portfolio
of each Fund and has done so since the Fund's inception. Norwest supervises the
performance of UCM including its
56
<PAGE>
adherence to the Portfolio's investment objectives and policies and pays UCM a
fee for its investment management services.
Under its Investment Subadvisory Agreement, UCM makes investment decisions for
each Fund and continuously reviews, supervises and administers each Fund's
investment program with respect to that portion, if any, of the Fund's portfolio
for which Norwest has delegated management responsibility. UCM 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 Investment Subadvisory Agreement will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Board or by
vote of a majority of the outstanding voting securities of the Funds, and, in
either case, (2) by a majority of the Trust's trustees who are not parties to
the Investment Subadvisory Agreement or interested persons of any such party
(other than as trustees of the Trust), at a meeting called for the purpose of
voting on the Investment Subadvisory Agreements; provided further, however, that
if the Investment Subadvisory Agreement or the continuation of the Agreement is
not approved, the Subadviser may continue to render to each Fund the services
described in the Investment Subadvisory Agreement in the manner and to the
extent permitted by the Act and the rules and regulations thereunder.
The Investment Subadvisory Agreement is terminable without penalty with respect
to a Fund on 60 days' written notice when authorized either by majority vote of
the Fund's shareholders or by the Board, or by UCM on 60 days written notice to
the Trust, and will automatically terminate in the event of its assignment. The
Investment Subadvisory Agreement also provides that, with respect to each Fund,
neither UCM nor its personnel shall be liable for any mistake of judgment or in
any event whatsoever, except for lack of good faith, provided that nothing shall
be deemed to protect UCM against liability by reason of willful misfeasance, bad
faith or gross negligence in the performance of UCM's duties or by reason of
reckless disregard of its obligations and duties under the Investment
Subadvisory Agreement. The Investment Subadvisory Agreements provides that UCM
may render services to others.
Smith Asset Management Group, L.P.
To assist Norwest in carrying out its obligations under the Investment Advisory
Agreement with Disciplined Growth Portfolio and Small Cap Value Portfolio,
Norwest has entered into an Investment Subadvisory Agreement with Smith, located
at 500 Crescent Court, Suite 250, Dallas, Texas. Smith is registered with the
SEC as an investment adviser and is an investment advisory subsidiary of Norwest
Bank. Pursuant to the Sub-Investment Advisory Agreement, Smith makes investment
decisions for each of the Portfolios and continuously reviews, supervises and
administers each Portfolio's investment program with respect to that portion, if
any, of the Fund's portfolio that Norwest believes should be invested using
Smith as a subadviser. Currently, Smith manages the entire portfolio of each
Portfolio and has done so since the Portfolio's inception. Norwest supervises
the performance of Smith including its adherence to the Portfolio's investment
objectives and policies and pays Smith a fee for its investment management
services. As of October 1, 1997, for its services under the Investment
Subadvisory Agreement, Norwest pays Smith a fee based on Disciplined Growth
Portfolio's and Small Cap Value Portfolio's average daily net assets at an
annual rate of 0.35% and 0.45%, respectively.
Under its Investment Subadvisory Agreement, Smith makes investment decisions for
each Portfolio and continuously reviews, supervises and administers each
Portfolio's investment program with respect to that portion, if any, of the
Portfolio's portfolio for which Norwest has delegated management responsibility.
Galliard is required to furnish at its own expense all services, facilities and
personnel necessary in connection with managing of each Portfolio's investments
and effecting portfolio transactions for each Portfolio (to the extent of
Norwest's delegation).
The Investment Subadvisory Agreement will continue in effect with respect to a
Portfolio only if such continuance is specifically approved at least annually:
(1) by the Core Trust Board or by vote of a majority of the outstanding voting
securities of the Portfolios, and, in either case; (2) by a majority of the Core
Trust's trustees who are not parties to the Investment Subadvisory Agreement or
interested persons of any such party (other than as trustees of
57
<PAGE>
the Core Trust), at a meeting called for the purpose of voting on the Investment
Subadvisory Agreements; provided further, however, that if the Investment
Subadvisory Agreement or the continuation of the Agreement is not approved, the
Subadviser may continue to render to each Portfolio the services described in
the Investment Subadvisory Agreement in the manner and to the extent permitted
by the Act and the rules and regulations thereunder.
The Investment Subadvisory Agreement is terminable without penalty with respect
to a Portfolio on 60 days' written notice when authorized either by majority
vote of the Portfolio's shareholders or by the Core Trust Board, or by Smith on
60 days written notice to the Core Trust, and will automatically terminate in
the event of its assignment. The Investment Subadvisory Agreement also provides
that, with respect to each Portfolio, neither Smith nor its personnel shall be
liable for any mistake of judgment or in any event whatsoever, except for lack
of good faith, provided that nothing shall be deemed to protect Smith against
liability by reason of willful misfeasance, bad faith or gross negligence in the
performance of Smith's duties or by reason of reckless disregard of its
obligations and duties under the Investment Subadvisory Agreement. The
Investment Subadvisory Agreements provides that Smith may render services to
others.
Smith also currently serves as Investment Subadviser to the Funds pursuant to an
investment advisory agreement between Smith and Norwest. The investment
subadvisory agreement with respect to the Funds is identical to the Investment
Subadvisory Agreement, except for the fees payable thereunder (no fee is payable
under the investment subadvisory agreement with respect to a Fund to the extent
that the Fund is invested in an investment company) and certain immaterial
matters.
MANAGEMENT AND ADMINISTRATIVE SERVICES
MANAGER AND ADMINISTRATOR
Forum manages all aspects of the Trust's operations with respect to each Fund
except those which are the responsibility of FAS, Norwest, any other investment
adviser or investment subadviser to a Fund, or Norwest in its capacity as
administrator pursuant to an investment administration or similar agreement.
With respect to each Fund, Forum has entered into a Management Agreement that
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 interested persons of any party to the
Management Agreement.
On behalf of the Trust and with respect to each Fund, Forum: (1) oversees: (a)
the preparation and maintenance by the Advisers and the Trust's administrator,
custodian, transfer agent, dividend disbursing agent and fund accountant (or if
appropriate, prepares and maintains) in such form, for such periods and in such
locations as may be required by applicable law, of all documents and records
relating to the operation of the Trust required to be prepared or maintained by
the Trust or its agents pursuant to applicable law; (b) the reconciliation of
account information and balances among the Advisers and the Trust's custodian,
transfer agent, dividend disbursing agent and fund accountant; (c) the
transmission of purchase and redemption orders for Shares; (d) the notification
of the Advisers of available funds for investment; and (e) the performance of
fund accounting, including the calculation of the net asset value per Share; (2)
oversees the Trust's receipt of the services of persons competent to perform
such supervisory, administrative and clerical functions as are necessary to
provide effective operation of the Trust; (3) oversees the performance of
administrative and professional services rendered to the Trust by others,
including its administrator, custodian, transfer agent, dividend disbursing
agent and fund accountant, as well as accounting, auditing, legal and other
services performed for the Trust; (4) provides the Trust with adequate general
office space and facilities and provides, at the Trust's request and expense,
persons suitable to the Board to serve as officers of the Trust; (5) oversees
the preparation and the printing of the periodic updating of the Trust's
registration statement, Prospectuses and SAIs, the Trust's tax returns, and
reports to its shareholders, the SEC and state and other securities
administrators; (6) oversees the preparation of proxy and information statements
and any other communications to shareholders; (7) with the cooperation of the
Trust's counsel, Investment Advisers and other relevant parties, oversees the
preparation and dissemination of materials for meetings of the Board; (8)
oversees the preparation, filing and maintenance of the Trust's governing
documents, including the Trust Instrument, Bylaws and minutes of meetings of
Trustees, Board committees and shareholders; (9) oversees registration and sale
of Fund shares, to ensure that
58
<PAGE>
such shares are properly and duly registered with the SEC and applicable state
and other securities commissions; (10) oversees the calculation of performance
data for dissemination to information services covering the investment company
industry, sales literature of the Trust and other appropriate purposes; (11)
oversees the determination of the amount of and supervises the declaration of
dividends and other distributions to shareholders as necessary to, among other
things, maintain the qualification of each Fund as a regulated investment
company under the Internal Revenue Code of 1986, as amended, and oversees the
preparation and distribution to appropriate parties of notices announcing the
declaration of dividends and other distributions to shareholders; (12) reviews
and negotiates on behalf of the Trust normal course of business contracts and
agreements; (13) maintains and reviews periodically the Trust's fidelity bond
and errors and omission insurance coverage; and (14) advises the Trust and the
Board on matters concerning the Trust and its affairs.
The Management Agreement terminates automatically if 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 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 administration or management of the Trust, 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 their obligations and
duties under the Management Agreement.
FAS manages all aspects of the Trust's operations with respect to each Fund
except those which are the responsibility of Forum, Norwest, or any other
investment adviser or investment subadviser to a Fund, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Fund, Forum has entered into a Administrative
Agreement that 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 interested persons of any party
to the Management Agreement.
On behalf of the Trust and with respect to each Fund, FAS: (1) provides the
Trust with, or arranges for the provision of, the services of persons competent
to perform such supervisory, administrative and clerical functions as are
necessary to provide effective operation of the Trust; (2) assists in the
preparation and the printing and the periodic updating of the Trust's
registration statement, Prospectuses and SAIs, the Trust's tax returns, and
reports to its shareholders, the SEC and state and other securities
administrators; (3) assists in the preparation of proxy and information
statements and any other communications to shareholders; (4) assists the
Advisers in monitoring Fund holdings for compliance with Prospectus and SAI
investment restrictions and assist in preparation of periodic compliance
reports; (5) with the cooperation of the Trust's counsel, the Investment
Advisers, the officers of the Trust and other relevant parties, is responsible
for the preparation and dissemination of materials for meetings of the Board;
(6) is responsible for preparing, filing and maintaining the Trust's governing
documents, including the Trust Instrument, Bylaws and minutes of meetings of
Trustees, Board committees and shareholders; (7) is responsible for maintaining
the Trust's existence and good standing under state law; (8) monitors sales of
shares and ensures that such shares are properly and duly registered with the
SEC and applicable state and other securities commissions; (9) is responsible
for the calculation of performance data for dissemination to information
services covering the investment company industry, sales literature of the Trust
and other appropriate purposes; and (10) is responsible for the determination of
the amount of and supervises the declaration of dividends and other
distributions to shareholders as necessary to, among other things, maintain the
qualification of each Fund as a regulated investment company under the Code, as
amended, and prepares and distributes to appropriate parties notices announcing
the declaration of dividends and other distributions to shareholders.
The Administrative Agreement terminates automatically if 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 Administrative Agreement also provides that neither FAS nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the administration or management of the Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of FAS's
or their duties or by reason of reckless disregard of their obligations and
duties under the Administrative Agreement.
59
<PAGE>
Pursuant to their agreements with the Trust, Forum and FAS may subcontract any
or all of their duties to one or more qualified subadministrators who agree to
comply with the terms of Forum's Management Agreement or FAS's Administration
Agreement, respectively. Forum and FAS may compensate those agents for their
services; however, no such compensation may increase the aggregate amount of
payments by the Trust to Forum or FAS pursuant to their Management and
Administration Agreements with the Trust.
Table 2 in Appendix B shows the dollar amount of fees payable to Forum for its
management services with respect to each Fund (or class thereof for those
periods when multiple classes were outstanding), the amount of fee that was
waived by Forum, if any, and the actual fee received by Forum. The data is for
the past three fiscal years or shorter period if the Fund has been in operation
for a shorter period.
PORTFOLIOS OF CORE TRUST
Forum manages all aspects of Core Trust's operations with respect to the
portfolios except those which are the responsibility of Norwest or Schroder.
With respect to each Portfolio, Forum has entered into a management agreement
(the "Core Trust Management Agreement") that will continue in effect only if
such continuance is specifically approved at least annually by the Core Trust
Board or by the shareholders and, in either case, by a majority of the Trustees
who are not interested persons of any party to the Core Trust Management
Agreement. Under the Core Trust Management Agreement, Forum performs similar
services for each Portfolio as it and FAS perform for the Blended Funds under
the Management and Administration Agreements, to the extent the services are
applicable to the Portfolios and their structure. Forum and FAS waive their fees
payable by each of the Blended Funds under the Management and Administration
Agreements to the extent those Funds incur indirectly management fees charged by
Forum to a Blended Portfolio.
NORWEST ADMINISTRATIVE SERVICES
Under an Administrative Servicing Agreement between the Trust and Norwest with
respect to Small Cap Opportunities Fund and International Fund, Norwest performs
ministerial, administrative and oversight functions for the Funds and undertakes
to reimburse certain excess expenses of the Funds. Among other things, Norwest
gathers performance and other data from Schroder as the adviser of Schroder U.S.
Smaller Companies Portfolio and International Portfolio and from other sources,
formats the data and prepares reports to the Funds' shareholders and the
Trustees. Norwest also ensures that Schroder is aware of pending net purchases
or redemptions of each Fund's shares and other matters that may affect
Schroder's performance of its duties. Lastly, Norwest has agreed to reimburse
each 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 Funds' shares
are qualified for sale. No fees will be paid to Norwest under the Administrative
Servicing Agreement unless the each of the Fund's assets are invested solely in
Schroder U.S. Smaller Companies Portfolio or International Portfolio (in the
case of Small Cap Opportunities Fund and International Fund, respectively) 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 Administrative Service 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.
Table 2 in Appendix B shows the dollar amount of fees payable under the
Servicing Agreement, the amount of the fee that was waived, if any, and the
amount received by Norwest for the past three fiscal years of the Fund.
60
<PAGE>
SCHRODER ADMINISTRATIVE SERVICES
Schroder Core has entered into an Administrative Services Agreement with
Schroder Advisors, 787 Seventh Avenue, New York, New York 10019, pursuant to
which Schroder Advisors provides management and administrative services
necessary for the operation of Schroder U.S. Smaller Companies Portfolio,
including coordination of the services performed by the Portfolio's investment
adviser, transfer agent, custodian, independent accountants, legal counsel and
others. Schroder Advisors is a wholly-owned subsidiary of Schroder, and is a
registered broker-dealer organized to act as administrator and distributor of
mutual funds.
For these services, Schroder Advisors will receive a fee from Schroder Core at
the annual rate of 0.10% of the average daily net assets of the Portfolio. The
Administrative Services Agreement is terminable with respect to the Portfolio
without penalty, at any time, by vote of a majority of the trustees of Schroder
Core who are not "interested persons" of Schroder Core and who have no direct or
indirect financial interest in the operation of the Administrative Services
Agreement, upon not more than 60 days' written notice to Schroder Advisors or by
vote of the holders of a majority of the shares of the Portfolio, or, upon 60
days' notice, by Schroder Advisors. The Administrative Services Agreement will
terminate automatically in the event of its assignment.
On behalf of the Portfolio, Schroder Core has entered into a Sub-Administration
Agreement with Forum. Pursuant to the Sub-Administration Agreement, Forum
assists Schroder Advisors with certain of its responsibilities under the
Administrative Services Agreement, including shareholder reporting and
regulatory compliance.
The Sub-Administration Agreement is terminable with respect to the Portfolio
without penalty, at any time, by the board of trustees of Schroder Core upon 60
days' written notice to Forum or by Forum upon 60 days' written notice to the
Portfolio.
DISTRIBUTION
Forum also acts as distributor of the shares of the Fund. Forum acts as the
agent of the Trust in connection with the offering of shares of the Funds on a
"best efforts" basis pursuant to a Distribution Services Agreement.
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 ("12b-1 Trustees").
61
<PAGE>
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: (1) 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 12b-1 Trustees, on 60 days' written notice to Forum or (2) by Forum on 60
days' written notice to the Trust.
Under the Distribution Services Agreement related to the Funds that offer A
Shares, 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 that offers B Shares, and with respect to
Exchange Shares of Ready Cash Investment 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 and Exchange 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 the 12b-1 trustees. 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 Plan is "semi-enhanced" in that under the circumstances described below,
payments to Forum under the Plan continue while there are uncovered distribution
charges even though the Plan has been terminated. Uncovered distribution charges
include all sales commissions previously due, plus interest, less amounts
previously received by Forum (or other distributor) pursuant to the Plan and
contingent deferred sales charges previously paid to Forum. The Plan provides
that in the event of a Complete Termination (as defined below) of the Plan with
respect to a Fund, payments by a Fund in consideration of sales of B Shares that
occurred prior to termination of the Plan will cease. A Complete Termination in
respect of any Fund means: (1) the 12b-1 Trustees acting in good faith have
determined that termination is in the best interest of the Trust and the
shareholders of the Fund; (2) the Trust does not alter the terms of the CDSC
applicable to the B Shares of the Fund outstanding at the time of the
termination; (3) the Trust does not pay any portion of the asset based sales
charge or service fees to an entity other than the distributor or its assignee
(unless the distributor at the time of the termination was in material breach
under the Distribution Agreement in respect of the Fund); and (4) the Fund does
not adopt 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.
In the event of a termination of the Plan that does not satisfy clauses (2), (3)
and (4) of the definition of a Complete Termination above, Ready Cash Investment
Fund, ValuGrowth Stock Fund, Small Company Stock Fund, Contrarian Stock Fund,
Income Fund, Tax-Free Income Fund, Total Return Bond Fund and Minnesota Tax-Free
Fund would continue to pay distribution services fees for no more than four
years. In contrast, payments by Stable Income Fund, Intermediate Government
Income Fund, Growth Equity Fund and Diversified Equity Fund would continue until
such time as there exist no outstanding uncovered distribution charges
attributable to the Fund and, therefore, could continue for periods of time
beyond four years after the date of termination.
62
<PAGE>
In addition, pursuant to the Plan, each of Stable Income Fund, Income Equity
Fund, Intermediate Government Income Fund, Diversified Equity Fund and Growth
Equity Fund may, subject to approval by the Trustees, assume and pay: (i) any
uncovered distribution charges of the distributor of a fund whose assets are
being acquired by the Fund and (ii) any other amounts expended for distribution
on behalf of such fund that are not reimbursed or paid by the fund upon the
merger or combination with or acquisition of substantially all of the assets of
that fund.
Table 3 in Appendix B shows the dollar amount of fees payable to Forum for its
distribution services with respect to each Fund (or class thereof), the amount
of fee that was waived by Forum, if any, and the actual fee received by Forum.
All maintenance fees were waived by Forum during the fiscal years ended May 31,
1994, 1995 and 1996. With respect to each Fund, Forum has paid brokers that sold
B Shares in amounts greater than the distribution fees received by Forum with
respect to that Fund. The data is for the past three fiscal years or shorter
period if the Fund has been in operation for a shorter period.
Table 4 in Appendix B shows the dollar amount of sales charges payable to Forum
with respect to sales of A Shares (or of the respective Funds prior to the
offering of multiple classes of shares) and the amount of sales charge retained
by Forum and not reallowed to other persons. The data is for the past three
fiscal years or shorter period if the Fund has been in operation for a shorter
period.
TRANSFER AGENT
Norwest Bank, Sixth Street and Marquette, Minneapolis, Minnesota 55479 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.
The responsibilities of the Transfer Agent include: (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 a fee computed daily and paid
monthly from the Trust, with respect to each Fund, at an annual rate of 0.25% of
the Fund's average daily net assets attributable to each class of the Fund
(0.20% plus expenses in the case of Cash Investment Fund and 0.10% plus expenses
in the case of Municipal Money Market Fund - Institutional Shares).
CUSTODIAN
Pursuant to a Custodian Agreement, Norwest Bank, Sixth Street and Marquette,
Minneapolis, Minnesota 55479 serves as each Fund's and each Core Portfolio's
(other than Schroder U.S. Smaller Companies Portfolio's) custodian (in this
capacity the "Custodian"). The Chase Manhattan Bank, N.A., acts as custodian for
Schroder U.S. Smaller Companies Portfolio, but plays no role in making decisions
as to the purchase or sale of portfolio securities. The Custodian's
responsibilities include safeguarding and controlling the Trust's cash and
securities, determining income and collecting interest on Fund investments. The
fee is computed and paid monthly, based on the average daily net assets of the
Fund, the number of portfolio transactions of the Fund and the number of
securities in the Fund's portfolio.
63
<PAGE>
Pursuant to rules adopted under the 1940 Act, a 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 upon 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
possible 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.
No Fund will pay custodian fees to the extent the Fund invests in shares of
another registered investment company. Each Fund so invested incurs, however,
its proportionate share of the custodial fees of the Core Portfolio(s) in which
it invests.
PORTFOLIO ACCOUNTING
Forum Accounting, 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 the Fund Accounting Agreement, Forum Accounting prepares and 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, Forum
Accounting receives from the Trust with respect to each Fund a fee of $3,000 per
month plus for each additional class of the Fund above one $1,000 per month. In
addition, Forum Accounting is paid additional surcharges for each of the
following: (1) Funds with asset levels exceeding $100 million - $500/month,
Funds with asset levels exceeding $250 million - $1000/month, Funds with asset
levels exceeding $500 million - $1,500/month, Funds with asset levels exceeding
$1,000 million - $2,000/month; (2) Funds requiring international custody -
$1,000/month; (3) Funds with more than 30 international positions -
$1,000/month; (4) Tax free money market Funds - $1,000/month; (5) Funds with
more than 25% of net assets invested in asset backed securities - $1,000/month,
Funds with more than 50% of net assets invested in asset backed securities -
$2,000/month; (6) Funds with more than 100 security positions - $1,000/month;
and (7) Funds with a monthly portfolio turnover rate of 10% or greater -
$1,000/month.
Forum Accounting receives from the Trust with respect to each Gateway Fund a
standard gateway fee of $1,000 per month plus for each additional class of the
Fund above one - $1,000 per month. Forum Accounting also receives a fee of
$2,000 per month for each Gateway Fund operating pursuant to Section 12(d)(1)(E)
of the 1940 Act that invests in more than one security. In addition to the
standard gateway fees, Forum Accounting is entitled to receive from the Trust
with respect to each Gateway Fund operating pursuant to Section 12(d)(1)(H) of
the 1940 Act additional surcharges as described above if the Fund invests in
securities other than investment companies (calculated as if the securities were
the Fund's only assets)
Surcharges are determined based upon the total assets, security positions or
other factors as of the end of the prior month and on the portfolio turnover
rate for the prior month. The rates set forth above shall remain fixed through
December 31, 1997. On January 1, 1998, and on each successive January 1, the
rates may be adjusted automatically by Forum without action of the Trust to
reflect changes in the Consumer Price Index for the preceding calendar year, as
published by the U.S. Department of Labor, Bureau of Labor Statistics. Forum
shall notify the Trust each year of the new rates, if applicable
Forum Accounting 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.
Forum Accounting 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
64
<PAGE>
Trust has agreed to indemnify and hold harmless Forum Accounting, 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 Forum Accounting'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 Forum Accounting by an officer of the
Trust duly authorized. This indemnification does not apply to Forum Accounting's
actions taken or failures to act in cases of Forum Accounting's own bad faith,
willful misconduct or gross negligence.
Forum Accounting performs similar services for the Portfolios and, in addition,
acts as the Portfolios' transfer agent.
Table 5 in Appendix B shows the dollar amount of fees payable to Forum
Accounting for its accounting services with respect to each Fund, the amount of
fee that was waived by Forum Accounting, if any, and the actual fee received by
Forum Accounting. The data is for the past three fiscal years or shorter period
if the Fund has been in operation for a shorter period.
EXPENSES
Subject to the obligations of Norwest to reimburse the Trust for its excess
expenses as described above, the Trust has, under its Investment Advisory
Agreements, confirmed its obligation to pay all its other expenses, including:
(1) interest charges, taxes, brokerage fees and commissions; (2) certain
insurance premiums; (3) fees, interest charges and expenses of the Trust's
custodian, transfer agent and dividend disbursing agent; (4) telecommunications
expenses; (5) auditing, legal and compliance expenses; (6) costs of the Trust's
formation and maintaining its existence; (7) 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; (8) 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; (9) costs of reproduction, stationery and
supplies; (10) compensation of the Trust's trustees, officers and employees and
costs of other personnel performing services for the Trust who are not officers
of Norwest, Forum or affiliated persons of Norwest or Forum; (11) costs of
corporate meetings; (12) 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; (13) state securities law registration fees
and related expenses; (14) fees and out-of-pocket expenses payable to Forum
Financial Services, Inc. under any distribution, management or similar
agreement; (15) 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.
VI. PORTFOLIO TRANSACTIONS
The following discussion of portfolio transactions, while referring to the
Funds, relates equally to the Portfolios.
Purchases and sales of portfolio securities for the Money Market Funds and Fixed
Income Funds usually are principal transactions. Debt instruments 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. The Equity Funds and the Balanced Funds generally will effect
purchases and sales of equity securities through brokers who charge commissions
except in the over-the-counter markets. Purchases of debt and equity securities
from underwriters of the securities include a disclosed fixed 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 asked price. In
the case of debt securities and equity 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. 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 each Fund 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, commissions are negotiated, whereas on foreign
stock exchanges commissions are generally fixed. Where transactions are executed
in the over-the-counter market, each Fund will seek to deal with the primary
market
65
<PAGE>
makers; but when necessary in order to obtain best execution, they will utilize
the services of others. In all cases the Funds will attempt to negotiate best
execution.
The Money Market Funds and Fixed Income Funds may effect purchases and sales
through brokers who charge commissions, although the Trust does not anticipate
that the Money Market Funds will do so. Table 6 in Appendix B shows the
aggregate brokerage commissions with respect to each Fund. The data presented is
for the past three fiscal years or a shorter period if the Fund has been in
operation for a shorter period, except as otherwise noted. Any material change
in the last two years in the amount of brokerage commissions paid by a fund was
due to an increase or decrease in the Fund's assets.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, each of the Board, Core Trust Board and Schroder Core Board has
authorized the Investment Advisers to employ their respective affiliates to
effect securities transactions of the Funds or the Portfolios, provided certain
other conditions are satisfied. Payment of brokerage commissions to an affiliate
of an Investment 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 Fund's policy
that commissions paid to Schroder Securities Limited, Norwest Investment
Services, Inc. ("NISI") and other affiliates of an Investment Adviser will, in
the judgment of the Investment Adviser responsible for making portfolio
decisions and selecting brokers, be: (1) at least as favorable as commissions
contemporaneously charged by the affiliate on comparable transactions for its
most favored unaffiliated customers and (2) 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
disinterested Trustees, has adopted procedures to ensure that commissions paid
to affiliates of an Adviser by the Funds satisfy the foregoing standards. The
Core Trust and Schroder Core Boards have adopted similar policies with respect
to the Portfolios.
No Fund has an understanding or arrangement to direct any specific portion of
its brokerage to an affiliate of an Investment Adviser, and will not direct
brokerage to an affiliate of an Investment Adviser in recognition of research
services.
From time to time, a Fund may purchase securities of a broker or dealer through
which it regularly engages in securities transactions.
During the last three fiscal years certain Funds paid brokerage commissions to
NISI, a wholly-owned broker-dealer subsidiary of the parent of Norwest, Norwest
Corporation. The following table indicates the Funds that paid commissions to
NISI, the aggregate amounts of commissions paid, the percentage of aggregate
brokerage commissions paid to NISI and the percentage of the aggregate dollar
amount of transactions involving payment of commissions that were effected
through NISI.
<TABLE>
PERCENTAGE OF
COMMISSION
AGGREGATE PERCENTAGE TRANSACTIONS
COMMISSIONS OF COMMISSIONS EXECUTED
PAID TO NISI PAID TO NISI THROUGH NISI
<S> <C> <C> <C>
VALUGROWTH STOCK FUND
Year Ended May 31, 1996 $10,494 2.41% 1.73%
Year Ended May 31, 1995 $12,213 1.78% 2.28%
Year Ended May 31, 1994 $25,713 4.65% 6.00%
</TABLE>
The practice of placing orders with NISI is consistent with each Fund's
objective of obtaining best execution and is not dependent on the fact that NISI
is an affiliate of Norwest.
66
<PAGE>
The Funds and the Portfolios may not always pay the lowest commission or spread
available. Rather, in determining the amount of commissions, including certain
dealer spreads, paid in connection with securities transactions, an Investment
Adviser takes into account factors such 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
Investment Advisers may also take into account payments made by brokers
effecting transactions for a Fund or Portfolio: (1) to the Fund or Portfolio or
(2) to other persons on behalf of the Fund or Portfolio for services provided to
the Fund or Portfolio for which it would be obligated to pay.
In addition, the Investment Advisers may give consideration to research services
furnished by brokers to the Advisers for their use and may cause the Funds and
Portfolios to pay these brokers a higher amount of commission than may be
charged by other brokers. Such research and analysis is of the types described
in Section 28(e)(3) of the Securities Exchange Act of 1934, as amended, and is
designed to augment the Investment Adviser's own internal research and
investment strategy capabilities. Such research and analysis may be used by the
Investment Advisers in connection with services to clients other than the Funds
and Portfolios, and not all such services may be used by the Investment Adviser
in connection with the Funds. An Investment Adviser's fees are not reduced by
reason of the Investment Adviser's 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 Boards
may determine, an Adviser may consider sales of shares of the Fund as a factor
in the selection of broker-dealers to execute portfolio transactions for the
Fund.
Investment decisions for the Funds (and for the Portfolios) will be made
independently from those for any other account or investment company that is or
may in the future become managed by the Investment Advisers or their 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
investment 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 a portfolio security for one client could have an adverse
effect on another client that has a position in that security. In addition, when
purchases or sales of the same security for a Fund and other client accounts
managed by the investment 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.
During their last fiscal year, certain Funds acquired securities issued by their
"regular brokers and dealers" or the parents of those brokers and dealers.
Regular brokers and dealers means the 10 brokers or dealers that: (1) received
the greatest amount of brokerage commissions during the Fund's last fiscal year;
(2) engaged in the largest amount of principal transactions for portfolio
transactions of the Fund during the Fund's last fiscal year; or (3) sold the
largest amount of the Fund's shares during the Fund's last fiscal year.
Following is a list of the regular brokers and dealers of the Funds whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of May 31, 1997.
<TABLE>
REGULAR BROKER VALUE OF
OR DEALER SECURITIES HELD
<S> <C> <C>
CASH INVESTMENT FUND Bear, Stearns & Company $75,000,000
CS First Boston $15,000,000
Merrill Lynch & Co. $47,497,784
Morgan Stanley $345,781,386
67
<PAGE>
READY CASH INVESTMENT FUND Bear, Stearns & Company $50,000,000
CS First Boston $10,000,000
Merrill Lynch & Co. $37,499,817
Morgan Stanley $55,000,000
U.S. GOVERNMENT FUND Bank of America Securities 345,781,386
TREASURY FUND None 0
MUNICIPAL MONEY MARKET FUND None 0
STABLE INCOME FUND Lehman Brothers Holdings 1,043,889
INTERMEDIATE GOVERNMENT FUND None 0
DIVERSIFIED BOND FUND Lehman Brothers Holdings 1,092,216
Paine Webber Group, Inc. 991,450
Dean Witter 977,500
Charles Schwab Corporation 562,630
INCOME FUND None 0
TOTAL RETURN BOND FUND Salomon Brothers Inc. 1,205,617
LIMITED TERM TAX-FREE FUND None 0
TAX-FREE INCOME FUND None 0
COLORADO TAX FREE FUND None 0
MINNESOTA TAX FREE FUND` None 0
STRATEGIC INCOME FUND Charles Schwab Corporation 187,544
Dean Witter 293,598
Paine Webber Group, Inc. 495,725
Salomon Brothers Inc. 497,433
Bear Stearns Company 500,232
Charles Schwab Corporation 487,425
Donaldson, Lufkin & Jenrette, Inc. 111,562
MODERATE BALANCED FUND Charles Schwab Corporation 562,630
Dean Witter 636,131
Lehman Brothers Inc. 819,162
Paine Webber Group, Inc. 1,090,595
Salomon Brothers Inc. 895,522
Charles Schwab Corporation 1,940,000
Donaldson, Lufkin & Jenrette, Inc. 427,126
GROWTH BALANCED FUND Charles Schwab Corporation 562,629
Dean Witter 636,130
Lehman Brothers, Inc. 819,162
Paine Webber Group, Inc. 991,450
Salomon Brothers Inc. 497,432
Charles Schwab Corp. 3,533,225
Donaldson, Lufkin & Jenrette, Inc. 784,125
68
<PAGE>
INCOME EQUITY FUND None 0
INDEX FUND Merrill Lynch & Co., Inc. 498,575
Morgan Stanley Group, Inc. 336,600
Salomon Brothers, Inc. 192,626
VALUGROWTH STOCK FUND None 0
DIVERSIFIED EQUITY FUND Charles Schwab Corporation 9,971,600
Donaldson, Lufkin & Jenrette, Inc. 2,218,502
GROWTH EQUITY FUND Charles Schwab Corporation 11,300,500
Donaldson, Lufkin & Jenrette, Inc. 2,524,500
LARGE COMPANY GROWTH FUND Charles Schwab Corporation 11,300,500
Donaldson, Lufkin & Jenrette, Inc. 2,524,500
SMALL COMPANY STOCK FUND None 0
SMALL COMPANY GROWTH FUND None 0
CONTRARIAN STOCK FUND None 0
INTERNATIONAL FUND None 0
</TABLE>
PORTFOLIO TURNOVER. A high rate of portfolio turnover involves corresponding
greater expenses than a lower rate, which expenses must be borne by a fund and
its shareholders. High portfolio turnover also may result in the realization of
substantial net short-term capital gains. In order to qualify as a regulated
investment company for Federal tax purposes for taxable years beginning on or
before August 5, 1997, less than 30% of the gross income of the Fund in that
year must be derived from the sale of securities held by the Fund for less than
three months. See "Taxation" below. Portfolio turnover rates are set forth under
"Financial Highlight's" in the Funds Prospectuses. The change in portfolio
turnover rate for Income Fund and Intermediate Government Income Fund from 1995
to 1996 was due in part to the change in portfolio managers. Other significant
changes in portfolio turnover rates was due to changing market conditions and
the effect of those conditions on the Funds' investment policies.
VII. ADDITIONAL PURCHASE, REDEMPTION AND
EXCHANGE INFORMATION GENERAL
Shares of all Funds are sold on a continuous basis by the distributor.
The per share net asset values of each class of shares of a Fund are expected to
be substantially the same. Under certain circumstances, however, the per share
net asset value of each class may vary. Due to the higher expenses of B Shares,
the net asset value of B Shares will generally be lower than the net asset value
of the other classes. The per share net asset value of each class of a Fund
eventually will tend to converge immediately after the payment of dividends,
which will differ by approximately the amount of the expense accrual
differential among the classes.
MONEY MARKET FUNDS
As described in the Prospectuses, under certain circumstances a Money Market
Fund may close early and advance time by which the Fund must receive a purchase
or redemption order and payments. In that case, if an investor placed an order
after the cut-off time the order would be processed on the follow-up business
day and the investor's access to the fund would be temporarily limited.
69
<PAGE>
CLASS A SHARES
OFFERING PRICE. Set forth below is an example of the method of computing the
offering price of the A Shares of the Funds that offer A Shares. Other shares of
the Trust are offered at their next determined net asset value. The example
assumes a purchase of A Shares of the Fixed Income and Equity Funds' in an
amount such that the purchase would be subject to each Fund's maximum sales
charges set forth in the Prospectus at a price based on the net asset value per
share of A Shares of each Fund at May 31, 1997. The maximum sales charge as of
October 1, 1997 are 5.5% for each Equity Fund and 4.0% for each Fixed Income
Fund, except Stable Income Fund, for which it was 1.50%. 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 5.5% would equal 0.055).
NET ASSET OFFERING
VALUE PER SHARE PRICE
STABLE INCOME FUND $10.24 $10.39
INTERMEDIATE GOVERNMENT INCOME FUND $10.84 $11.27
INCOME FUND $ 9.27 $ 9.64
TOTAL RETURN BOND FUND $ 9.40 $ 9.78
TAX-FREE INCOME FUND $10.05 $10.45
COLORADO TAX-FREE FUND $10.22 $10.63
MINNESOTA TAX-FREE FUND $10.57 $10.99
INCOME EQUITY FUND $33.16 $34.98
VALUGROWTH STOCK FUND $25.06 $26.44
DIVERSIFIED EQUITY FUND $36.51 $38.52
GROWTH EQUITY FUND $32.49 $34.28
SMALL COMPANY STOCK FUND $13.95 $14.72
SMALL CAP OPPORTUNITIES FUND $19.83 $20.92
INTERNATIONAL FUND $21.66 $22.85
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 $50,000 or more 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.
EXCHANGES
By making an exchange by telephone, the investor authorizes the Trust's transfer
agent to act on telephonic instructions believed by the Trust's transfer agent
to be genuine instructions from any person representing himself or herself to be
the investor. 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 the
shareholder's 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 that offer A Shares or
Investor Shares of Ready Cash Investment Fund or Municipal Money Market Fund.
Shareholders of B Shares may purchase, with the proceeds from a redemption of
all or part of their
70
<PAGE>
shares, B Shares of the other Funds that offer B Shares or Exchange Shares of
Ready Cash Investment Fund. Shareholders of I Shares may purchase, with the
proceeds from a redemption of all or part of their shares, I Shares of the other
Funds or Institutional Shares of Ready Cash Investment Fund or Municipal Money
Market Fund or shares of U.S. Government Fund and Treasury 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
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 that offer B Shares.
Shareholders of Institutional Shares of Ready Cash Investment Fund and Municipal
Money Market Fund and others who are eligible to purchase I Shares may purchase,
with the proceeds from a redemption of all or part of their shares,
Institutional Shares of these Funds, or I Shares of the other Funds of the
Trust.
Shareholders of Institutional Shares of Municipal Money Market Fund who are not
eligible to purchase I Shares may purchase, with the proceeds from a redemption
of all or part of their shares, shares of Cash Investment Fund, U.S. Government
Fund and Treasury Fund. Similarly, shareholders of Cash Investment Fund, U.S.
Government Fund and Treasury Fund who are not eligible to purchase I Shares may
purchase, with the proceeds from a redemption of all or part of their shares,
shares of the other two Funds or Institutional Shares of Municipal Money Market
Fund.
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.
Exchange Shares may only be acquired in exchange for B Shares of a Fund. B
Shares ("original B Shares") may be exchanged for Exchange Shares without the
payment of any contingent deferred sales charge; however, B Shares or Exchange
Shares acquired as a result of an 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 original B 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
71
<PAGE>
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 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)
A Shares of the Funds on which no initial sales charge was assessed pursuant to
the Right of Accumulation or Statement of Intention, 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 A Shares purchased without
an initial sales charge pursuant to the Cumulative Quantity Discount (Right of
Accumulation) that are redeemed within the first two years after purchase. No
initial 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 all A Shares held by
the shareholder (as of the close of business on the previous Fund Business Day)
exceed $1,000,000. In that case the contingent deferred sales charge will apply
to redemptions of shares within the first two years after purchase. 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 without an initial sales charge pursuant to a Statement of Intention
("SOI") that are redeemed within the first two years after purchase. If a
shareholder purchases $1,000,000 or more within a 13 month period under an SOI,
no initial sales charge will apply with respect to the entire amount purchased.
However, the contingent deferred sales charge will apply with respect to the
entire amount purchased amount if the shareholder never purchases $1,000,000 or
more of A Shares under the 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. 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.
REINSTATEMENT PRIVILEGE
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: (1) redemptions of shares acquired through the
reinvestment of dividends and distributions; (2) involuntary redemptions by a
Fund of shareholder accounts with low account balances; (3) 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; and (4)
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
72
<PAGE>
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 AND EXCHANGE SHARES
The conversion of Exchange Shares to Investor Shares and B Shares to A Shares is
subject to the continuing availability of an opinion of counsel to the effect
that: (1) the assessment of the distribution services fee with respect to the
Exchange Shares and B Shares does not result in the Funds dividends or
distributions constituting "preferential dividends" under the Code and (2) the
conversion of Exchange Shares and B Shares does not constitute a taxable event
under Federal income tax law. The conversion of Exchange Shares to Investor
Shares and B Shares to A 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 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.
VIII. TAXATION
Each Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Code. 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.
Since each Money Market Fund and Fixed Income Fund expects to derive
substantially all of its gross income (exclusive of capital gains) from sources
other than dividends, it is expected that none of such Funds' dividends or
distributions will qualify for the dividends-received deduction for
corporations.
Certain listed options, regulated futures contracts and forward currency
contracts are considered "section 1256 contracts" for Federal income tax
purposes. Section 1256 contracts held by a Fund or Core Portfolio 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 or Core Portfolio on section 1256
contracts generally will be considered 60% long-term and 40% short-term capital
gain or loss. Each Fund or Core Portfolio 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 or Core Portfolio upon the lapse or sale of such options held by such
Fund or Core Portfolio will be either long-term or short-term capital gain or
loss depending upon the Fund's (or Core Portfolio'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 or Core Portfolio will be treated as
short-term capital gain or loss. In general, if a Fund or Core Portfolio
exercises an option, or an option that a Fund or Core Portfolio 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 or Core Portfolio 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 (or Core Portfolio's) gains and
losses with respect to straddle positions by requiring, among other things,
that: (1) 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; (2) a Fund's (or Core Portfolio's) holding
period in straddle
73
<PAGE>
positions be suspended while the straddle exists (possibly resulting in gain
being treated as short-term capital gain rather than long-term capital gain);
(3) 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%
long-term and 40% short-term capital loss; (4) losses recognized with respect to
certain straddle positions which would otherwise constitute short-term capital
losses be treated as long-term capital losses; and (5) the deduction of interest
and carrying charges attributable to certain straddle positions may be deferred.
Various elections are available to a Fund or Core Portfolio 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 or Core Portfolio all of the offsetting positions of which
consist of section 1256 contracts.
For federal income tax purposes, gains and losses attributable to fluctuations
in exchange rates which occur between the time a Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities are treated as ordinary income or ordinary loss. Similarly, gains or
losses from the disposition of foreign currencies, from the disposition of debt
securities denominated in a foreign currency, or from the disposition of a
forward contract denominated in a foreign currency which are attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the asset and the date of disposition also are treated as
ordinary gain or loss.
A Fund's (or Core Portfolio's) investments in zero coupon securities will be
subject to special provisions of the Code which may cause the Fund to recognize
income without receiving cash necessary to pay dividends or make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
federal income and excise taxes. In order to satisfy those distribution
requirements the Fund or Core Portfolio may be forced to sell other portfolio
securities.
If International Fund is eligible to do so, the Fund intends to file an election
with the Internal Revenue Service to pass through to its shareholders its share
of the foreign taxes paid by the Fund. Pursuant to this election, a shareholder
will be required to: (1) include in gross income rata share of foreign taxes
paid by the Fund; (2) treat his pro rata share of such foreign taxes as having
been paid by him; and (3) either deduct such pro rata share of foreign taxes in
computing his taxable income or treat such foreign taxes as a credit against
federal income taxes. No deduction for foreign taxes may be claimed by an
individual shareholder who does not itemize deductions. In addition, certain
shareholders may be subject to rules which limit or reduce their ability to
fully deduct, or claim a credit for, their pro rata share of the foreign taxes
paid by the Fund. Under recently enacted legislation, a shareholder's foreign
tax credit with respect to a dividend received from the Fund will be disallowed
unless the shareholder holds shares in the Fund at least 16 days during the
30-day period beginning 15 days before the date on which the shareholder becomes
entitled to receive the dividend.
IX. ADDITIONAL INFORMATION ABOUT THE TRUST AND THE SHAREHOLDERS OF THE FUNDS
DETERMINATION OF NET ASSET VALUE - MONEY MARKET FUNDS
Pursuant to the rules of the SEC, the Board has established procedures to
stabilize each Money Market Funds' net asset value at $1.00 per share. These
procedures include a review of the extent of any deviation of net asset value
per share as a result of fluctuating interest rates, based on available market
rates, from the Fund's $1.00 amortized cost price per share. Should that
deviation exceed 1/2 of 1%, the Board will consider whether any action should be
initiated to eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include redemption of shares in kind, selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations. Each Fund will maintain a dollar-weighted average portfolio maturity
of 90 days or less, will not purchase any instrument with a remaining maturity
greater than 397 days or subject to a repurchase agreement having a duration of
greater than 397 days, will limit portfolio investments, including repurchase
agreements, to those U.S. dollar-denominated instruments that the Board has
determined present minimal credit risks and will comply with certain reporting
and recordkeeping procedures. The Trust has also established procedures to
ensure that portfolio securities meet the Funds' high quality criteria.
74
<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, NY 10004.
KPMG Peat Marwick LLP, 99 High Street, Boston, MA 02110, independent auditors,
served as the independent auditors for the Trust for the fiscal years ended May
31, 1994 and thereafter. For the prior fiscal periods another audit firm acted
as independent auditors of the Trust's predecessor corporation.
GENERAL INFORMATION
The Trust is divided into thirty nine separate series representing shares of the
Funds. The Trust received an order from the SEC permitting the issuance and sale
of separate classes of shares representing interests in each of the Trust's
existing funds; however, the Trust currently issues and operates the various
Funds, separate classes of shares under the provisions of 1940 Act.
The Board has determined that currently no conflict of interest exists between
or among each Fund's A Shares, B Shares and I Shares, among Ready Cash
Investment Fund's Institutional, Investor and Exchange Shares and between
Municipal Money Market Fund's Institutional and Investor Shares. 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. 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.
In order to adopt the name Norwest Funds, the Trust agreed in each Investment
Advisory Agreement with Norwest that if Norwest ceases to act as investment
adviser to the Trust or any Fund whose name includes the word "Norwest," or if
Norwest requests in writing, the Trust shall take prompt action to change the
name of the Trust and any such Fund to a name that does not include the word
"Norwest." Norwest may from time to time make available without charge to the
Trust for the Trust's use any marks or symbols owned by Norwest, including marks
or symbols containing the word "Norwest" or any variation thereof, as Norwest
deems appropriate. Upon Norwest's request in writing, the Trust shall cease to
use any such mark or symbol at any time. The Trust has acknowledged that any
rights in or to the word "Norwest" and any such marks or symbols which exist or
may exist, and under any and all circumstances, shall continue to be, the sole
property of Norwest. Norwest may permit other parties, including other
investment companies, to use the word "Norwest" in their names without the
consent of the Trust. The Trust shall not use the word "Norwest" in conducting
any business other than that of an investment company registered under the Act
without the permission of Norwest.
75
<PAGE>
RECENT MERGERS
As of May 17, 1996, three portfolios of the Trust, Adjustable U.S. Government
Reserve Fund, Government Income Fund and Income Stock Fund (the "Acquired
Funds") were reorganized into Stable Income Fund, Intermediate Government Income
Fund and Income Equity Fund (the "Acquiring Funds"), respectively through the
acquisition of all the assets and liabilities of the Acquired Funds by the
corresponding Acquiring Funds. Each Acquiring Fund commenced operations prior to
that date and was the entity that continued its existence after the
transactions. Performance information for the Acquiring Funds only reflects the
Acquiring Funds, performance and all fees listed in this Statement of Additional
Information reflect the fees paid by the Acquiring Funds.
SHAREHOLDINGS
Table 7 to Appendix A lists the persons who owned of record 5% or more of the
outstanding shares of a class of shares of a Fund as of September 2, 1997.
FINANCIAL STATEMENTS
The financial statements of each Fund for the semi-annual period ended November
30, 1996 (which include statements of assets and liabilities, statements of
operations, statements of changes in net assets, notes to financial statements,
financial highlights and portfolios of investments) are included in the
Semi-Annual Report to Shareholders of the Trust delivered along with this SAI
and are incorporated herein by reference. The financial statements of each Fund
for the year ended May 31, 1996 (which include statements of assets and
liabilities, statements of operations, statements of changes in net assets,
notes to financial statements, financial highlights, portfolios 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
Trust's registration statement filed with the SEC under the 1933 Act 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 or other documents are not necessarily complete, and, in each instance,
are qualified by, reference is made to the copy of such contract or other
documents filed as exhibits to the registration statement.
76
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE ("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-1
<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. 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-2
<PAGE>
FITCH INVESTORS SERVICE, L.P. ("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 rated 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.
A-3
<PAGE>
PREFERRED STOCK
MOODY'S INVESTORS SERVICE
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.
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
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.
A-4
<PAGE>
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.
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.
SHORT TERM MUNICIPAL LOANS
MOODY'S INVESTORS SERVICE. Moody's highest rating for short-term municipal loans
is "MIG-1/VMIG-1". A rating of "MIG-1/VMIG-1" denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broadbased access to the market for refinancing. Loans bearing
the "MIG-2/VMIG-2" designation are of high quality. Margins of protection are
ample although not so large as in the "MIG-1/VMIG-1" group. A rating of
"MIG-3/VMIG-3" denotes favorable quality. All security elements are accounted
for but there is lacking the undeniable strength of the preceding grades.
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established. A rating of "MIG- 4/VMIG-4"
denotes adequate quality. Protection commonly regarded as required of an
investment security is present and although not distinctly or predominantly
speculative, there is specific risk.
STANDARD & POOR'S. S&P's highest rating for short-term municipal loans is
"SP-1". S&P states that short-term municipal securities bearing the "SP-1"
designation have very strong or strong capacity to pay principal and interest.
Those issues rated "SP-1" which are determined to possess overwhelming safety
characteristics will be given a plus (+) designation. Issues rated "SP-2" have
satisfactory capacity to pay principal and interest.
Issues rated "SP-3" have speculative capacity to pay principal and interest.
FITCH INVESTORS SERVICE, L.P. 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.
Short-term issues rated "F-1+" are regarded as having the strongest degree of
assurance for timely payment. Issues assigned a rating of "F-1" reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
Issues assigned a rating of "F-2" 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".
OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
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.
A-5
<PAGE>
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
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, L.P.
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+".
A-6
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
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. That table also shows the dollar amount of fees payable under the
investment advisory agreement between Schroder and Core Trust with respect to
International Portfolio, the amount of fee that was waived by Schroder, if any,
and the actual fee received by Schroder. The data is for the past three fiscal
years or shorter period if the Fund/Portfolio has been in operation for a
shorter period.
<TABLE>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
CASH INVESTMENT FUND
<S> <C> <C> <C>
Year Ended May 31, 1997 2,805,919 0 2,805,919
Year Ended May 31, 1996 2,383,128 0 2,383,128
Year Ended May 31, 1995 2,067,323 0 2,067,323
READY CASH INVESTMENT FUND
Year Ended May 31, 1997 6,267,045 50,148 6,216,897
Year Ended May 31, 1996 4,128,532 44,547 4,083,985
Year Ended May 31, 1995 2,153,906 71,093 2,082,813
U.S. GOVERNMENT FUND
Year Ended May 31, 1997 2,538,240 0 2,538,240
Year Ended May 31, 1996 2,205,102 0 2,205,102
Year Ended May 31, 1995 1,687,958 0 1,687,958
TREASURY FUND
Year Ended May 31, 1997 1,548,275 0 1,548,275
Year Ended May 31, 1996 1,308,984 0 1,308,984
Year Ended May 31, 1995 1,152,801 0 1,152,801
MUNICIPAL MONEY MARKET FUND
Year Ended May 31, 1997 2,394,475 369,405 2,025,070
Year Ended May 31, 1996 1,907,103 303,321 1,603,782
Year Ended May 31, 1995 987,273 175,377 811,896
STABLE INCOME FUND
Year Ended May 31, 1997 334,768 0 334,768
Year Ended May 31, 1996 106,127 0 106,127
Year End October 31, 1995 114,429 0 114,429
B-1
<PAGE>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
INTERMEDIATE GOVERNMENT INCOME FUND
Year Ended May 31, 1997 1,355,907 0 1,355,907
Year Ended May 31, 1996 142,125 0 142,125
Year End October 31, 1995 160,764 0 160,764
DIVERSIFIED BOND FUND
Year Ended May 31, 1997 598,019 0 598,019
Year Ended May 31, 1996 344,777 0 344,777
Year End October 31, 1995 607,061 0 607,061
INCOME FUND
Year Ended May 31, 1997 1,385,988 277,198 1,108,790
Year Ended May 31, 1996 981,244 196,249 784,995
Year Ended May 31, 1995 560,463 149,529 410,934
TOTAL RETURN BOND FUND
Year Ended May 31, 1997 651,181 357,998 293,183
Year Ended May 31, 1996 584,872 352,590 232,282
Year Ended May 31, 1995 305,162 244,711 60,451
LIMITED TERM TAX-FREE FUND
Year Ended May 31, 1997 88,741 63,145 25,596
Year Ended May 31, 1996 N/A N/A N/A
TAX-FREE INCOME FUND
Year Ended May 31, 1997 1,537,966 1,236,539 301,427
Year Ended May 31, 1996 1,187,026 1,032,179 154,847
Year Ended May 31, 1995 671,570 306,789 364,781
COLORADO TAX-FREE FUND
Year Ended May 31, 1997 299,582 238,690 60,892
Year Ended May 31, 1996 286,768 286,768 0
Year Ended May 31, 1995 257,147 257,147 0
MINNESOTA TAX-FREE FUND
Year Ended May 31, 1997 212,616 190,702 21,914
Year Ended May 31, 1996 154,733 154,733 0
Year Ended May 31, 1995 67,504 67,504 0
B-2
<PAGE>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
STRATEGIC INCOME FUND
Year Ended May 31, 1997 589,365 0 589,365
Year Ended May 31, 1996 376,529 0 376,529
Year Ended October 31, 1995 547,353 0 547,353
MODERATE BALANCED FUND
Year Ended May 31, 1997 2,185,490 0 2,185,490
Year Ended May 31, 1996 1,208,825 0 1,208,825
Year End October 31, 1995 1,722,174 0 1,722,174
GROWTH BALANCED FUND
Year Ended May 31, 1997 2,688,223 0 2,688,223
Year Ended May 31, 1996 1,424,260 0 1,424,260
Year End October 31, 1995 1,849,672 0 1,849,672
INCOME EQUITY FUND
Year Ended May 31, 1997 1,906,693 0 1,906,693
Year Ended May 31, 1996 227,790 0 227,790
Year End October 31, 1995 187,584 0 187,584
INDEX FUND
Year Ended May 31, 1997 563,081 212,327 350,754
Year Ended May 31, 1996 193,373 143,795 49,578
Year End October 31, 1995 212,875 0 212,875
VALUGROWTH STOCK FUND
Year Ended May 31, 1997 1,475,664 18,446 1,457,218
Year Ended May 31, 1996 1,335,281 16,691 1,318,590
Year Ended May 31, 1995 1,132,507 4,813 1,127,694
DIVERSIFIED EQUITY FUND
Year Ended May 31, 1997 6,874,776 0 6,874,776
Year Ended May 31, 1996 3,038,858 0 3,038,858
Year End October 31, 1995 3,737,147 0 3,737,147
B-3
<PAGE>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
GROWTH EQUITY FUND
Year Ended May 31, 1997 7,205,405 0 7,205,405
Year Ended May 31, 1996 3,342,391 0 3,342,390
Year End October 31, 1995 3,961,897 0 3,961,897
LARGE COMPANY GROWTH FUND
Year Ended May 31, 1997 651,110 0 651,110
Year Ended May 31, 1996 274,152 0 274,152
Year End October 31, 1995 362,480 0 362,480
SMALL COMPANY STOCK FUND
Year Ended May 31, 1997 1,481,914 419,413 1,062,501
Year Ended May 31, 1996 909,200 327,218 581,982
Year Ended May 31, 1995 322,908 322,908 0
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1997 3,513,581 0 3,513,581
Year Ended May 31, 1996 1,653,578 0 1,653,578
Year End October 31, 1995 1,984,348 0 1,984,348
DIVERSIFIED SMALL CAP FUND
Year Ended May 31, 1997 N/A N/A N/A
SMALL CAP OPPORTUNITIES FUND
Year Ended May 31, 1997 N/A N/A N/A
CONTRARIAN STOCK FUND
Year Ended May 31, 1997 161,601 61,290 100,311
Year Ended May 31, 1996 349,877 70,170 279,707
Year Ended May 31, 1995 258,669 128,979 129,690
INTERNATIONAL FUND*
Year Ended May 31, 1997 812,485 0 812,485
Year Ended May 31, 1996 316,701 0 316,701
Year End October 31, 1995 367,007 0 367,007
</TABLE>
* Represents investment advisory fees paid to Schroder Capital Management Inc.
by International Portfolio of Core Trust.
B-4
<PAGE>
TABLE 2 - MANAGEMENT FEES
The following table shows the dollar amount of fees payable to: (1) Forum for
its management services with respect to each Fund (or class thereof for those
periods when multiple classes were outstanding); (2) Norwest for its
administrative services with respect to International Fund; and (3) Forum with
respect to its administrative securities with respect to International
Portfolio. Also shown are the amount of fees that were waived by Forum and
Norwest, if any, and the actual fees received by Forum and Norwest. The data is
for the past three fiscal years or shorter period if the Fund has been in
operation for a shorter period.
(I) MANAGEMENT FEES TO FORUM
<TABLE>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
<S> <C> <C> <C>
CASH INVESTMENT FUND
Year Ended May 31, 1997 1,252,466 127,192 1,125,274
Year Ended May 31, 1996 1,076,303 160,959 915,344
Year Ended May 31, 1995 944,718 263,073 681,645
U.S. GOVERNMENT FUND
Year Ended May 31, 1997 1,140,934 12,114 1,128,820
Year Ended May 31, 1996 1,002,126 40,949 961,177
Year Ended May 31, 1995 786,649 135,127 651,522
TREASURY FUND
Year Ended May 31, 1997 728,447 595,668 132,779
Year Ended May 31, 1996 627,992 448,841 179,151
Year Ended May 31, 1995 558,734 467,978 90,756
READY CASH INVESTMENT FUND
Investor Shares
Year Ended May 31, 1997 1,070,654 14,082 1,056,572
Year Ended May 31, 1996 760,979 60,072 700,907
Year Ended May 31, 1995 391,466 147,704 243,762
Institutional Shares
Year Ended May 31, 1997 2,595,399 2,413,208 182,191
Year Ended May 31, 1996 1,569,081 1,569,081 0
Year Ended May 31, 1995 739,794 589,996 149,797
Exchange Shares
Year Ended May 31, 1997 850 850 0
Year Ended May 31, 1996 273 273 0
Year Ended May 31, 1995 417 331 86
B-5
<PAGE>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
MUNICIPAL MONEY MARKET FUND
Investor Shares
Year Ended May 31, 1997 121,330 78,834 42,496
Year Ended May 31, 1996 115,294 65,869 49,425
Year Ended May 31, 1995 82,763 75,983 6,780
Institutional Shares
Year Ended May 31, 1997 1,275,270 1,017,363 257,907
Year Ended May 31, 1996 990,763 814,669 176,094
Year Ended May 31, 1995 481,393 393,600 87,793
STABLE INCOME FUND
A Shares
Year Ended May 31, 1997 12,730 12,730 0
Year Ended May 31, 1996 623 623 0
B Shares
Year Ended May 31, 1997 799 799 0
Year Ended May 31, 1996 33 33 0
I Shares
Year Ended May 31, 1997 98,060 98,060 0
Year Ended May 31, 1996 34,720 34,720 0
Year End October 31, 1995 38,143 38,143 0
INTERMEDIATE GOVERNMENT INCOME FUND
A Shares
Year Ended May 31, 1997 14,471 14,471 0
Year Ended May 31, 1996 666 666 0
B Shares
Year Ended May 31, 1997 9,953 9,953 0
Year Ended May 31, 1996 412 412 0
I Shares
Year Ended May 31, 1997 386,457 151,928 234,529
Year Ended May 31, 1996 41,991 41,991 0
Year End October 31, 1995 48,716 48,716 0
DIVERSIFIED BOND FUND
I Shares
Year Ended May 31, 1997 170,862 110,901 59,961
Year Ended May 31, 1996 98,508 69,269 29,239
Year Ended October 31, 1995 173,446 147,461 25,985
B-6
<PAGE>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
INCOME FUND
A Shares
Year Ended May 31, 1997 10,585 10,585 0
Year Ended May 31, 1996 11,894 11,894 0
Year Ended May 31, 1995 12,210 11,607 603
B Shares
Year Ended May 31, 1997 6,826 6,826 0
Year Ended May 31, 1996 6,732 6,732 0
Year Ended May 31, 1995 5,559 3,553 2,006
I Shares
Year Ended May 31, 1997 536,985 436,300 100,685
Year Ended May 31, 1996 373,872 353,908 19,964
Year Ended May 31, 1995 206,416 124,725 81,691
TOTAL RETURN BOND FUND
A Shares
Year Ended May 31, 1997 5,187 5,187 0
Year Ended May 31, 1996 2,416 2,416 0
Year Ended May 31, 1995 674 674 0
B Shares
Year Ended May 31, 1997 4508 4508 0
Year Ended May 31, 1996 3,264 3,264 0
Year Ended May 31, 1995 923 923 0
I Shares
Year Ended May 31, 1997 250,777 24,127 226,650
Year Ended May 31, 1996 228,269 12,744 215,525
Year Ended May 31, 1995 120,468 17,639 102,829
LIMITED TERM TAX-FREE FUND
I Shares
Year Ended May 31, 1997 17,748 17,748 0
Year Ended May 31, 1996 N/A N/A N/A
B-7
<PAGE>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
TAX-FREE INCOME FUND
A Shares
Year Ended May 31, 1997 58,862 42,638 16,224
Year Ended May 31, 1996 67,046 27,085 39,961
Year Ended May 31, 1995 64,084 64,084 0
B Shares
Year Ended May 31, 1997 13,295 13,295 0
Year Ended May 31, 1996 9,866 9,866 0
Year Ended May 31, 1995 6,348 5,591 757
I Shares
Year Ended May 31, 1997 543,029 288,245 254,784
Year Ended May 31, 1996 397,898 304,725 93,173
Year Ended May 31, 1995 198,196 139,199 58,997
COLORADO TAX-FREE FUND
A Shares
Year Ended May 31, 1997 54,902 49,840 5,062
Year Ended May 31, 1996 53,988 48,022 5,966
Year Ended May 31, 1995 56,039 40,684 15,355
B Shares
Year Ended May 31, 1997 13,532 13,115 417
Year Ended May 31, 1996 11,566 11,566 0
Year Ended May 31, 1995 9,429 7,791 1,638
I Shares
Year Ended May 31, 1997 51,399 44,432 6,967
Year Ended May 31, 1996 49,153 41,507 7,646
Year Ended May 31, 1995 37,392 31,974 5,418
MINNESOTA TAX-FREE FUND
A Shares
Year Ended May 31, 1997 51,795 33,434 18,361
Year Ended May 31, 1996 43,885 26,289 17,596
Year Ended May 31, 1995 19,236 19,236 0
B Shares
Year Ended May 31, 1997 20,364 14,581 5,783
Year Ended May 31, 1996 13,910 10,499 3,411
Year Ended May 31, 1995 5,974 5,974 0
I Shares
Year Ended May 31, 1997 12,888 10,362 2,526
Year Ended May 31, 1996 4,098 2,630 1,468
Year Ended May 31, 1995 1,781 1,622 159
STRATEGIC INCOME FUND
Year Ended May 31, 1997 130,970 115,223 15,747
Year Ended May 31, 1996 83,673 69,584 14,089
Year Ended October 31, 1995 121,634 121,634 0
B-8
<PAGE>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
MODERATE BALANCED FUND
Year Ended May 31, 1997 412,357 278,998 133,359
Year Ended May 31, 1996 228,080 126,077 102,003
Year Ended October 31, 1995 324,938 212,921 112,017
GROWTH BALANCED FUND
Year Ended May 31, 1997 463,486 303,389 160,097
Year Ended May 31, 1996 245,562 136,905 108,657
Year Ended October 31, 1995 318,909 209,411 109,498
INCOME EQUITY FUND
A Shares
Year Ended May 31, 1997 37,101 30,944 6,157
Year Ended May 31, 1996 1,196 1,196 0
B Shares
Year Ended May 31, 1997 23,583 23,583 0
Year Ended May 31, 1996 670 670 0
I Shares
Year Ended May 31, 1997 320,654 168,477 152,177
Year Ended May 31, 1996 43,691 43,691 0
Year Ended October 31, 1995 37,517 37,517 0
INDEX FUND
Year Ended May 31, 1997 375,387 213,759 161,628
Year Ended May 31, 1996 128,916 93,961 34,955
Year Ended October 31, 1995 141,917 141,917 0
VALUGROWTH STOCK FUND
A Shares
Year Ended May 31, 1997 33,232 29,323 3,909
Year Ended May 31, 1996 27,427 27,427 0
Year Ended May 31, 1995 24,465 24,465 0
B Shares
Year Ended May 31, 1997 11,318 11,318 0
Year Ended May 31, 1996 8,763 8,763 0
Year Ended May 31, 1995 5,593 4,617 976
I Shares
Year Ended May 31, 1997 324,366 194,534 129,832
Year Ended May 31, 1996 297,630 147,086 150,544
Year Ended May 31, 1995 253,243 148,800 104,443
B-9
<PAGE>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
DIVERSIFIED EQUITY FUND
A Shares
Year Ended May 31, 1997 14,322 14,322 0
Year Ended May 31, 1996 99 99 0
B Shares
Year Ended May 31, 1997 15,913 15,913 0
Year Ended May 31, 1996 96 96 0
I Shares
Year Ended May 31, 1997 1,027,423 723,040 304,383
Year Ended May 31, 1996 467,322 238,224 229,098
Year Ended October 31, 1995 574,946 287,473 287,473
GROWTH EQUITY FUND
A Shares
Year Ended May 31, 1997 10,336 10,336 0
Year Ended May 31, 1996 100 100 0
B Shares
Year Ended May 31, 1997 4,347 4,347 0
Year Ended May 31, 1996 25 25 0
I Shares
Year Ended May 31, 1997 785,917 545,815 240,102
Year Ended May 31, 1996 371,252 187,661 183,591
Year Ended October 31, 1995 440,211 286,1371 154,107
LARGE COMPANY GROWTH FUND
Year Ended May 31, 1997 100,171 87,896 12,275
Year Ended May 31, 1996 42,177 40,150 2,027
Year Ended October 31, 1995 55,766 55,766 0
SMALL COMPANY STOCK FUND
A Shares
Year Ended May 31, 1997 11,966 10,318 1,648
Year Ended May 31, 1996 5,800 5,800 0
Year Ended May 31, 1995 1,655 1,515 140
B Shares
Year Ended May 31, 1997 8,329 8,329 0
Year Ended May 31, 1996 4,426 4,426 0
Year Ended May 31, 1995 1,051 1,051 0
I Shares
Year Ended May 31, 1997 276,089 90,214 185,875
Year Ended May 31, 1996 171,614 15,664 155,950
Year Ended May 31, 1995 61,876 14,997 46,878
B-10
<PAGE>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1997 390,398 185,644 204,754
Year Ended May 31, 1996 183,731 76,278 107,453
Year Ended October 31, 1995 220,483 177,287 43,196
SMALL CAP OPPORTUNITIES FUND
A Shares
Year Ended May 31, 1997 122 122 0
B Shares
Year Ended May 31, 1997 44 44 0
I Shares
Year Ended May 31, 1997 26,560 26,560 0
CONTRARIAN STOCK FUND
A Shares
Year Ended May 31, 1997 995 995 0
Year Ended May 31, 1996 1,439 1,439 0
Year Ended May 31, 1995 646 646 0
B Shares
Year Ended May 31, 1997 668 668 0
Year Ended May 31, 1996 1,194 1,194 0
Year Ended May 31, 1995 328 328 0
I Shares
Year Ended May 31, 1997 38,738 35,577 3,160
Year Ended May 31, 1996 84,836 37,213 47,623
Year Ended May 31, 1995 63,693 543 63,150
INTERNATIONAL FUND
A Shares
Year Ended May 31, 1997 1,494 1,494 0
Year Ended May 31, 1996 345 345 0
B Shares
Year Ended May 31, 1997 1,247 1,247 0
Year Ended May 31, 1996 395 395 0
I Shares
Year Ended May 31, 1997 177,707 4,264 173,443
Year Ended May 31, 1996 69,616 0 69,616
Year Ended October 31, 1995 205,140 41,566 163,574
B-11
<PAGE>
(II) ADMINISTRATIVE FEES TO NORWEST
INTERNATIONAL FUND
Year Ended May 31, 1997 451,118 0 451,118
Year Ended May 31, 1996 175,887 0 175,887
Year Ended October 31, 1995 205,150 0 205,150
(III) ADMINISTRATIVE FEES TO FORUM
INTERNATIONAL PORTFOLIO
Year Ended May 31, 1997 270,828 0 270,828
Year Ended May 31, 1996 105,567 11,873 93,694
Year Ended October 31, 1995 122,669 70,043 52,626
</TABLE>
B-12
<PAGE>
TABLE 3 - DISTRIBUTION FEES
The following table shows the dollar amount of fees payable to Forum for its
distribution services with respect to each Fund (or class thereof), the amount
of fee that was waived by Forum, if any, and the actual fee received by Forum.
All maintenance fees were waived by Forum during the fiscal years ended May 31,
1995 and 1996. The data is for the past three fiscal years or shorter period if
the Fund has been in operation for a shorter period. Only Exchange Shares and B
Shares incur distribution fees.
<TABLE>
DISTRIBUTION DISTRIBUTION DISTRIBUTION
FEE FEE FEE
PAYABLE WAIVED RETAINED
<S> <C> <C> <C>
READY CASH INVESTMENT FUND
Exchange Shares
Year Ended May 31, 1997 4,249 1,062 3,187
Year Ended May 31, 1996 1,023 1,023 0
Year Ended May 31, 1995 2,050 2,050 0
STABLE INCOME FUND
B Shares
Year Ended May 31, 1997 7,992 1,998 5,994
Year Ended May 31, 1996 245 245 0
INTERMEDIATE GOVERNMENT INCOME FUND
B Shares
Year Ended May 31, 1997 99,968 24,882 75,086
Year Ended May 31, 1996 2,646 2,646 0
INCOME FUND
B Shares
Year Ended May 31, 1997 34,127 8,532 25,595
Year Ended May 31, 1996 25,247 6,666 18,581
Year Ended May 31, 1995 27,796 6,949 20,847
TOTAL RETURN BOND FUND
B Shares
Year Ended May 31, 1997 22,540 5,635 16,905
Year Ended May 31, 1996 12,239 3,619 8,620
Year Ended May 31, 1995 4,612 1,153 3,459
TAX-FREE INCOME FUND
B Shares
Year Ended May 31, 1997 66,476 16,619 49,857
Year Ended May 31, 1996 36,997 2,390 34,607
Year Ended May 31, 1995 31,738 7,934 23,803
COLORADO TAX-FREE FUND
B Shares
Year Ended May 31, 1997 67,660 16,915 50,745
Year Ended May 31, 1996 43,374 207 43,167
Year Ended May 31, 1995 47,144 11,786 35,358
B-13
<PAGE>
DISTRIBUTION DISTRIBUTION DISTRIBUTION
FEE FEE FEE
PAYABLE WAIVED RETAINED
MINNESOTA TAX-FREE FUND
B Shares
Year Ended May 31, 1997 101,817 25,454 76,363
Year Ended May 31, 1996 52,163 0 52,163
Year Ended May 31, 1995 30,386 8,880 21,506
INCOME EQUITY FUND
B Shares
Year Ended May 31, 1997 235,827 58,957 176,872
Year Ended May 31, 1996 5,031 0 5,031
VALUGROWTH STOCK FUND
B Shares
Year Ended May 31, 1997 56,592 14,148 42,444
Year Ended May 31, 1996 32,860 5,269 27,591
Year Ended May 31, 1995 27,965 6,991 20,974
DIVERSIFIED EQUITY FUND
B Shares
Year Ended May 31, 1997 159,132 39,783 119,349
Year Ended May 31, 1996 719 719 0
GROWTH EQUITY FUND
B Shares
Year Ended May 31, 1997 43,471 10,868 32,603
Year Ended May 31, 1996 187 187 0
SMALL COMPANY STOCK FUND
B Shares
Year Ended May 31, 1997 41,641 10,410 31,231
Year Ended May 31, 1996 16,598 4,077 12,521
Year Ended May 31, 1995 5,256 2,038 3,218
SMALL CAP OPPORTUNITIES FUND
B Shares
Year Ended May 31, 1997 431 108 323
CONTRARIAN STOCK FUND
B Shares
Year Ended May 31, 1997 3,340 835 2,505
Year Ended May 31, 1996 4,479 4,479 0
Year Ended May 31, 1995 1,642 411 1,232
INTERNATIONAL FUND
B Shares
Year Ended May 31, 1997 12,465 3,116 9,349
Year Ended May 31, 1996 2,959 2,930 29
</TABLE>
B-14
<PAGE>
TABLE 4 - SALES CHARGES
The following table shows: (1) the dollar amount of sales charges payable to
Forum with respect to sales of A Shares (or of the respective Funds prior to the
offering of multiple classes of shares); (2) the amount of sales charge retained
by Forum and not reallowed to other persons; and (3) the amount of contingent
deferred sales charge ("CDSL") paid to Forum. The data is for the past three
fiscal years or shorter period if the Fund has been in operation for a shorter
period.
<TABLE>
SALES RETAINED CDSL
CHARGES AMOUNT PAID
<S> <C> <C> <C>
STABLE INCOME FUND
A Shares
Year Ended May 31, 1997 3,200 320 --
Year Ended May 31, 1996 423 52 --
B Shares
Year Ended May 31, 1997 -- -- 6,526
Year Ended May 31, 1996 -- -- 75
INTERMEDIATE GOVERNMENT INCOME FUND
A Shares
Year Ended May 31, 1997 13,182 1,187 --
Year Ended May 31, 1996 1,482 129 --
B Shares
Year Ended May 31, 1997 -- -- 31,694
Year Ended May 31, 1996 -- -- 964
INCOME FUND
A Shares
Year Ended May 31, 1997 11,979 1,121 --
Year Ended May 31, 1996 1,567,755 4,428 --
B Shares
Year Ended May 31, 1997 -- -- 11,887
Year Ended May 31, 1996 -- -- 8,272
TOTAL RETURN BOND FUND
A Shares
Year Ended May 31, 1997 3,908 363 --
Year Ended May 31, 1996 1,194,198 3,074 --
B Shares
Year Ended May 31, 1997 -- -- 7,505
Year Ended May 31, 1996 -- -- 2,853
TAX-FREE INCOME FUND
A Shares
Year Ended May 31, 1997 74,101 6,646 --
Year Ended May 31, 1996 5,429,389 12,264 --
B Shares
Year Ended May 31, 1997 -- -- 15,724
Year Ended May 31, 1996 -- -- 6,576
B-15
<PAGE>
SALES RETAINED CDSL
CHARGES AMOUNT PAID
COLORADO TAX-FREE FUND
A Shares
Year Ended May 31, 1997 38,085 3,321 --
Year Ended May 31, 1996 2,889,945 7,135 --
B Shares
Year Ended May 31, 1997 -- -- 11,889
Year Ended May 31, 1996 -- -- 12,557
MINNESOTA TAX-FREE FUND
A Shares
Year Ended May 31, 1997 53,290 4,744 --
Year Ended May 31, 1996 4,598,204 12,506 --
B Shares
Year Ended May 31, 1997 -- -- 13,097
Year Ended May 31, 1996 -- -- 8,412
INCOME EQUITY FUND
A Shares
Year Ended May 31, 1997 320,385 1,121 --
Year Ended May 31, 1996 10,996 1,088 --
B Shares
Year Ended May 31, 1997 -- -- 38,812
Year Ended May 31, 1996 -- -- 570
VALUGROWTH STOCK FUND
A Shares
Year Ended May 31, 1997 38,540 3,759 --
Year Ended May 31, 1996 1,162,647 4,628 --
B Shares
Year Ended May 31, 1997 -- -- 10,770
Year Ended May 31, 1996 -- -- 12,911
DIVERSIFIED EQUITY FUND
A Shares
Year Ended May 31, 1997 485,324 8,286 --
Year Ended May 31, 1996 50,658 15 --
B Shares
Year Ended May 31, 1997 -- -- 23,510
Year Ended May 31, 1996 -- -- 0
GROWTH EQUITY FUND
A Shares
Year Ended May 31, 1997 175,495 5,347 --
Year Ended May 31, 1996 26,825 7 --
B Shares
Year Ended May 31, 1997 -- -- 6,972
Year Ended May 31, 1996 -- -- 0
B-16
<PAGE>
SALES RETAINED CDSL
CHARGES AMOUNT PAID
SMALL COMPANY STOCK FUND
A Shares
Year Ended May 31, 1997 23,419 2,335 --
Year Ended May 31, 1996 1,309,565 5,153 2,972
B Shares
Year Ended May 31, 1997 -- -- 6,411
Year Ended May 31, 1996 -- -- --
SMALL CAP OPPORTUNITIES FUND
A Shares
Year Ended May 31, 1997 11,604 1,178 --
B Shares
Year Ended May 31, 1997 -- -- --
CONTRARIAN STOCK FUND
A Shares
Year Ended May 31, 1997 40 1 --
Year Ended May 31, 1996 103,499 425 --
B Shares
Year Ended May 31, 1997 -- -- 4,630
Year Ended May 31, 1996 -- -- 1,432
INTERNATIONAL FUND
A Shares
Year Ended May 31, 1997 8,728 874 --
Year Ended May 31, 1996 269 30 --
B Shares
Year Ended May 31, 1997 -- -- 2,086
Year Ended May 31, 1996 -- -- 213
</TABLE>
B-17
<PAGE>
TABLE 5 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to Forum Accounting
for its accounting services with respect to each Fund, the amount of fee that
was waived by Forum Accounting, if any, and the actual fee received by Forum
Accounting. The table also shows similar information with respect to
International Portfolio. The data is for the past three fiscal years or shorter
period if the Fund has been in operation for a shorter period.
<TABLE>
FEE FEE FEE
PAYABLE WAIVED RETAINED
<S> <C> <C> <C>
CASH INVESTMENT FUND
Year Ended May 31, 1997 65,000 0 65,000
Year Ended May 31, 1996 49,000 0 49,000
Year Ended May 31, 1995 36,000 0 36,000
U.S. GOVERNMENT FUND
Year Ended May 31, 1997 60,000 0 60,000
Year Ended May 31, 1996 46,000 0 46,000
Year Ended May 31, 1995 36,000 0 36,000
TREASURY FUND
Year Ended May 31, 1997 54,500 0 54,500
Year Ended May 31, 1996 43,500 0 43,500
Year Ended May 31, 1995 36,000 0 36,000
READY CASH INVESTMENT FUND
Year Ended May 31, 1997 86,000 0 86,000
Year Ended May 31, 1996 63,000 0 63,000
Year Ended May 31, 1995 48,000 0 48,000
MUNICIPAL MONEY MARKET FUND
Year Ended May 31, 1997 90,000 0 90,000
Year Ended May 31, 1996 72,500 0 72,500
Year Ended May 31, 1995 60,000 0 60,000
STABLE INCOME FUND
Year Ended May 31, 1997 92,500 26,041 66,459
Year Ended May 31, 1996 37,452 7,136 30,316
Year Ended October 31, 1995 51,700 0 51,700
INTERMEDIATE GOVERNMENT INCOME FUND
Year Ended May 31, 1997 85,500 24,146 61,354
Year Ended May 31, 1996 29,452 5,322 24,130
Year Ended October 31, 1995 52,700 0 52,700
DIVERSIFIED BOND FUND
Year Ended May 31, 1997 54,000 15,223 38,777
Year Ended May 31, 1996 29,500 5,561 23,939
Year Ended October 31, 1995 36,700 0 36,700
INCOME FUND
Year Ended May 31, 1997 93,000 0 93,000
Year Ended May 31, 1996 79,500 0 79,500
Year Ended May 31, 1995 64,000 0 64,000
B-18
<PAGE>
FEE FEE FEE
PAYABLE WAIVED RETAINED
TOTAL RETURN BOND FUND
Year Ended May 31, 1997 66,000 0 66,000
Year Ended May 31, 1996 57,500 0 57,500
Year Ended May 31, 1995 50,000 0 50,000
LIMITED TERM TAX-FREE FUND
Year Ended May 31, 1997 24,000 0 24,000
Year Ended May 31, 1996 N/A N/A N/A
TAX-FREE INCOME FUND
Year Ended May 31, 1997 91,000 0 91,000
Year Ended May 31, 1996 66,000 0 66,000
Year Ended May 31, 1995 62,000 0 62,000
COLORADO TAX-FREE FUND
Year Ended May 31, 1997 66,000 0 66,000
Year Ended May 31, 1996 60,000 0 60,000
Year Ended May 31, 1995 55,000 0 55,000
MINNESOTA TAX-FREE FUND
Year Ended May 31, 1997 64,000 0 64,000
Year Ended May 31, 1996 56,000 0 56,000
Year Ended May 31, 1995 55,300 0 55,300
STRATEGIC INCOME FUND
Year Ended May 31, 1997 60,000 17,019 42,981
Year Ended May 31, 1996 32,500 6,054 26,446
Year Ended October 31, 1995 54,266 0 54,266
MODERATE BALANCED FUND
Year Ended May 31, 1997 62,000 17,546 44,454
Year Ended May 31, 1996 36,000 7,104 28,896
Year Ended October 31, 1995 52,266 0 52,266
GROWTH BALANCED FUND
Year Ended May 31, 1997 61,000 17,237 43,763
Year Ended May 31, 1996 34,000 6,591 27,409
Year Ended October 31, 1995 50,833 0 50,833
INCOME EQUITY FUND
Year Ended May 31, 1997 71,500 20,160 51,340
Year Ended May 31, 1996 22,935 4,293 18,642
Year Ended October 31, 1995 34,700 0 34,700
VALUGROWTH STOCK FUND
Year Ended May 31, 1997 66,000 0 66,000
Year Ended May 31, 1996 57,500 0 57,500
Year Ended May 31, 1995 48,500 0 48,500
B-19
<PAGE>
FEE FEE FEE
PAYABLE WAIVED RETAINED
INDEX FUND
Year Ended May 31, 1997 60,000 8,393 51,607
Year Ended May 31, 1996 30,500 5,659 24,841
Year Ended October 31, 1995 46,266 0 46,266
DIVERSIFIED EQUITY FUND
Year Ended May 31, 1997 81,500 22,995 58,505
Year Ended May 31, 1996 30,306 6,216 24,090
Year Ended October 31, 1995 34,700 0 34,700
GROWTH EQUITY FUND
Year Ended May 31, 1997 79,000 22,311 56,689
Year Ended May 31, 1996 30,306 6,216 24,090
Year Ended October 31, 1995 34,700 0 34,700
LARGE COMPANY GROWTH FUND
Year Ended May 31, 1997 38,000 10,750 27,250
Year Ended May 31, 1996 21,000 3,755 17,245
Year Ended October 31, 1995 34,700 0 34,700
SMALL COMPANY STOCK FUND
Year Ended May 31, 1997 76,000 0 76,000
Year Ended May 31, 1996 60,500 0 60,500
Year Ended May 31, 1995 51,000 0 51,000
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1997 55,000 5,536 49,464
Year Ended May 31, 1996 30,000 5,759 24,241
Year Ended October 31, 1995 36,700 0 36,700
SMALL CAP OPPORTUNITIES FUND
Year Ended May 31, 1997 26,057 26,057 0
CONTRARIAN STOCK FUND
Year Ended May 31, 1997 60,000 0 60,000
Year Ended May 31, 1996 52,000 0 52,000
Year Ended May 31, 1995 50,000 0 50,000
INTERNATIONAL FUND
Year Ended May 31, 1997 36,000 10,148 25,852
Year Ended May 31, 1996 23,000 3,952 19,048
Year Ended October 31, 1995 51,766 39,766 12,000
INTERNATIONAL PORTFOLIO
Year Ended May 31, 1997 90,000 0 90,000
Year Ended May 31, 1996 50,500 8,500 42,000
Year Ended October 31, 1995 77,967 8,567 69,400
</TABLE>
B-20
<PAGE>
TABLE 6 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
each Fund that incurred brokerage costs. The data is for the past three fiscal
years or shorter period if the Fund has been in operation for a shorter period.
<TABLE>
AGGREGATE
COMMISSIONS PAID
<S> <C>
DIVERSIFIED BOND FUND
Year Ended May 31, 1997 N/A
Year Ended May 31, 1996 5,261
Year Ended October 31, 1995 1,750
STRATEGIC INCOME FUND
Year Ended May 31, 1997 14,867
Year Ended May 31, 1996 8,406
Year Ended October 31, 1995 9,298
MODERATE BALANCED FUND
Year Ended May 31, 1997 50,414
Year Ended May 31, 1996 54,332
Year Ended October 31, 1995 57,931
GROWTH BALANCED FUND
Year Ended May 31, 1997 83,720
Year Ended May 31, 1996 69,732
Year Ended October 31, 1995 66,361
INCOME EQUITY FUND
Year Ended May 31, 1997 301,308
Year Ended May 31, 1996 52,904
Year Ended October 31, 1995 25,321
INDEX FUND
Year Ended May 31, 1997 157,319
Year Ended May 31, 1996 121,170
Year Ended October 31, 1995 107,321
VALUGROWTH STOCK FUND
Year Ended May 31, 1997 502,785
Year Ended May 31, 1996 436,274
Year Ended May 31, 1995 485,176
Year Ended May 31, 1994 553,049
DIVERSIFIED EQUITY FUND
Year Ended May 31, 1997 226,652
Year Ended May 31, 1996 175,648
Year Ended October 31, 1995 180,093
B-21
<PAGE>
AGGREGATE
COMMISSIONS PAID
GROWTH EQUITY FUND
Year Ended May 31, 1997 130,483
Year Ended May 31, 1996 127,666
Year Ended October 31, 1995 115,993
LARGE COMPANY GROWTH FUND
Year Ended May 31, 1997 59,924
Year Ended May 31, 1996 42,229
Year Ended October 31, 1995 60,264
SMALL COMPANY STOCK FUND
Year Ended May 31, 1997 458,447
Year Ended May 31, 1996 208,021
Year Ended May 31, 1995 67,471
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1997 1,365,750
Year Ended May 31, 1996 785,875
Year Ended October 31, 1995 600,341
SMALL CAP OPPORTUNITIES FUND
Year Ended May 31, 1997 N/A
CONTRARIAN STOCK FUND
Year Ended May 31, 1997 74,313
Year Ended May 31, 1996 52,162
Year Ended May 31, 1995 43,397
INTERNATIONAL FUND*
Year Ended May 31, 1997 N/A
Year Ended May 31, 1996 188,849
Year Ended October 31, 1995 348,358
* Reflects commission paid by International Portfolio; International Fund paid
no commissions directly during either year.
</TABLE>
B-21
<PAGE>
TABLE 7 - 5% SHAREHOLDERS
The following table lists the persons who owned of record 5% or more of the
outstanding shares of a class of shares of a Fund as of August 31, 1997, as well
as their percentage holding of all shares of the Fund. All percentages are
rounded off to the nearest one percent. Certain persons own shares of the Funds
of record only, including [Alpine & Co., BHC Securities, Inc., EMSEG & Co.,
First Stock Co., Norwest Bank Minnesota, N.A. and Stout & Co.]
<TABLE>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
<S> <C> <C> <C> <C>
CASH INVESTMENT FUND Gas Marketing, Inc. 2,389,160 59.99% 59.99%
PO Box 594
630 W 23rd St. Suite 7
Yankton SD 57078
Norwest Investment Services 942,670,406.360 23.66% 23.66%
c/o Greg Wraalstad
608 2nd Ave S, 8th Fl, MS 0162 Minneapolis MN
55479-0162
Norwest Bank Minnesota NA 283,517,274.650 7.12% 7.12%
VP 4600301
Attn: Cash Sweep Processing-Judy
Jeska
Minneapolis MN 55479-0050
Norwest Bank Minnesota NA 642,113,439.640 16.12% 16.12%
VP 4500022
Attn: Cash Sweep Processing-Judy
Jeska
733 Marquette Ave, 4th Fl.
Minneapolis MN 55479-0050
Norwest Bank Minnesota NA 384,772,245.000 9.66% 9.66%
VP 4500030
Attn: Cash Sweep Processing -
Judy Jeska
733 Marquette Ave., 4th Fl.
Minneapolis MN 55479-0050
READY CASH INVESTMENT FUND
Investor Shares Norwest Investment Services 602,513,033.400 99.22% 99.05%
c/o Greg Warrlstad
608 2nd Avenue South
8th Floor, MS 0162
Minneapolis MN 55479-0162
Institutional Shares Norwest Advantage IRA Rollovers 347,346.710 100.00% 0.06%
Omnibus Account
733 Marquette Ave. S
Minneapolis MN 55479
B-22
<PAGE>
Exchange Shares Stephen P. Arkulary 65,561.130 9.42% 0.01%
and Helen M. Doane
JT TEN 711266
595 W. Wabasha Street
Duluth MN 55803
Dennis M. Dougherty 470,796.170 67.66% 0.08%
RD. 1, Box 1444
East Stroudsburg PA 18301
BHC Securities Inc. 45,885.610 6.59% 0.01%
One Commerce Square
2005 Market Street
Philadelphia PA 19103-3212
U.S. GOVERNMENT FUND Alpine & Co 143,913,278.630 6.50% 6.50%
Non-Discretionary
1740 Broadway MS 8751
Denver, CO 80274
Norwest Bank Minnesota NA AMS 572,577,302.090 25.85% 25.85%
Collective Trust Funds
Clearing Account
Attn: Cash Sweep Processing -
Judy Jeska
733 Marquette Avenue 4th Floor
Minneapolis, MN 55479-0050
Norwest Investment Services 337,724,309.420 15.24% 15.24%
c/o Greg Wraalstad
608 2nd Avenue South
8th Floor - MS 0162
Minneapolis MN 55479-0162
TREASURY FUND Norwest Investment Services 266,416,807.670 24.68% 24.68%
c/o Greg Wraalstad
608 2nd Avenue South
8th Floor -- MS 0162
Minneapolis MN 55479-0162
Norwest Bank Minnesota NA AMS 567,055,207.700 52.52% 52.52%
Collective Trust Funds
Clearing Account
Attn: Cash Sweep Processing -
Judy Jeska
733 Marquette Avenue 4th Floor
Minneapolis, MN 55479-0050
B-23
<PAGE>
Norwest Bank Colorado Springs 76,443,473.150 7.08% 7.08%
Attn: Jan Peto
P.O. Box 400
Colorado Springs, CO 80901
MUNICIPAL MONEY MARKET FUND
Investor Shares Norwest Investment Services 47,457,009.540 97.22% 6.22%
c/o Greg Wraalstad
608 2nd Ave S.
8th Floor MS - 0162
Minneapolis MN 55479-0162
Institutional Shares Norwest Bank Minnesota NA AMS 170,300,262.470 23.86% 22.33%
Collective Trust Funds
Clearing Account
Attn: Cash Sweep Processing -
Judy Jeska
733 Marquette Ave., 4th Floor
Minneapolis MN 55479-0050
Norwest Bank Minnesota NA
VP4620002 290,683,010.630 40.73% 38.12%
Attn: Cash Sweep Processing
733 Marquette Avenue 4th Floor
Minneapolis, MN 55479-0050
Alpine & Co.
Non Discretionary 44,351,987.450 6.21% 5.82%
1740 Broadway MS 0076
Denver CO 80274
STABLE INCOME FUND
A Shares Hichory Tech Corporation 98,014.916 10.51% 0.79%
Attn: Craig Thill
PO Box 3248
Mankato MN 56002
Ramsey Foundation 136,738.146 14.66% 1.11%
Attn: Him Kleist 6th Fl., 310146
8100 34th Ave. S
PO Box 1309
Minneapolis MN 55440-1309
Aspen Medical Group, PA
Attn: Cheryl Feller 926011 90,810.627 9.73% 0.73%
1021 Bandana Blvd. E
Suite 200
St. Paul MN 55108
B-24
<PAGE>
Analysts International Corp. 216,969.473 23.26% 1.75%
Attn: Gerald McGrath 700284
7615 Metro Blvd.
Minneapolis MN 55439
B Shares Fred P. Mattson 7,979.991 6.18% 0.06%
and Berry J. Matton
P.O. Box 248
Elmwood, WI 54740-0248
Norwest Investment Services, Inc. 10,386.414 8.04% 0.08%
FBO 800059291
Northstar Building East - 8th Fl.
618 Second Avenue - South
Minneapolis MN 55479-0162
Charles Anjad-Ali
1305 Dayton Avenue 9,545.939 7.39% 0.08%
St. Paul MN 55104
UTE Plumbing Heating, Inc.
Retirement Account 16,496.593 12.77% 0.13%
Employee Pension Plan Trust
UA DTD 07-01-86
2315 Bott Ave.
Colorado Springs CO 80904-3727
Norwest Investment Svcs., Inc.
FBO 302900271
Northstar Building E - 8th Floor 10,137.871 7.85% 0.08%
608 Second Avenue S
Minneapolis MN 55479-0162
Norwest Investment Svcs., Inc.
FBO 102953761
Northstar Building E - 8th Floor 13,659.617 10.57% 0.11%
608 Second Ave. S
Minneapolis MN 55479-0162
I Shares EMSEG & Co. 9,446,876 83.54% 76.37%
c/o Norwest Bank MN
733 Marquette Ave., MS 0036
Minneapolis MN 55479-0036
Norwest Advantage IRA RO 692,279.612 6.12% 5.60%
1500 Broadway
Lubbock TX 79408
B-25
<PAGE>
INTERMEDIATE GOVERNMENT INCOME
FUND
A Shares Ibrahim M. Almadani 101,920.942 8.63% 5.19%
and Salwa A. Aboulghaffar
c/o Bernie Harkel
10010 Regency Circle
Omaha NE 68114
INCOME FUND
A Shares Norwest Wealthbuilder 50,173.443 8.84% 0.17%
Reinvest Account
733 Marquette Ave.
Minneapolis MN 55479-0040
I Shares Norwest Income Bond CTF 14,414,374.536 51.80% 50.09%
14380000
PO Box 1450 NW 8477
Minneapolis MN 55480-8477
Dentru & Co. 5,766,397.937 20.72% 20.04%
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver CO 80274
FINABA 2,327,763.313 8.37% 8.08%
Non-Discretionary Cash Acct.
Attn: Jon Rutter
PO Box 10523
Lubbock TX 79408
TOTAL RETURN BOND FUND
A Shares Norwest Wealthbuilder 210,795.954 59.09% 1.49%
Reinvest Account
733 Marquette Avenue
Minneapolis, MN 55479-0050
I Shares Kiwils & Co. 830,986.693 6.12% 5.86%
Discretionary Reinvest
1700 Broadway MS 0076
Denver CO 80274
Dentru & Co 3,226,054.237 23.76% 22.74%
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver CO 80274
Seret & Co. 6,957,002.422 51.24% 49.04%
Discretionary Reinvest
1740 Broadway MS 8751
Denver, CO 80274
B-26
<PAGE>
LIMITED TERM TAX-FREE FUND
I Shares Victoria & Co. Special 682,704.508 16.45% 16.45%
Common Trust Fund
Trust Operations
One O'Connor Plaza
Victoria TX 77901
Norwest Limited Term 2,901,067.860 69.89% 69.89%
Tax-Exempt Bond Fund
PO Box 1450 NW 8477
Minneapolis MN 55480-8477
TAX-FREE INCOME FUND
A Shares Norwest Wealthbuilder 157,598.599 5.45% 0.52%
Reinvest Account
733 Marquette Ave.
Minneapolis MN 55479-0040
B Shares Martha M. George 42,396.662 5.39% 0.14%
3130 Ward Road
Bismarck ND 58501
I Shares Dentru & Co 6,772,836.133 25.49% 22.39%
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver CO 80274
FINABA 1,574,547.942 5.93% 5.21%
Non-Discretionary Cash Acct.
PO Box 10523
Lubbock, TX 79408
Norwest Tax Exempt Bond Fund 14,186,350.784 53.39% 46.90%
14931100
P.O. Box 1450 NW 8477
Minneapolis, MN 55480-8477
COLORADO TAX-FREE FUND
A Shares Walter Stonehocker and Roswitha 548,481.947 18.90% 9.02%
Stonehocker
TEN COM 639254
15600 Holly
Brighton, CO 80601
I Shares Dentru & Co 2,407,875.122 96.26% 39.59%
Non Discretionary Cash
1740 Broadway Mail 8676
Denver CO 80274
B-27
<PAGE>
MINNESOTA TAX-FREE FUND
I Shares Norwest Bank Minnesota, NA 174,616.136 13.78% 3.45%
Agnt Madri Inc. Agency
U/A/DT 5/14/96
733 Marquette Avenue MS-0036
Minneapolis, MN 55479-0036
INCOME EQUITY FUND
I Shares EMSEG & Co. 8,977,318.760 64.24% 64.24%
c/o Norwest Bank MN
733 Marquette Ave. MS 0036
Minneapolis MN 55479-0036
Dentru & Co. 2,229,198.533 15.95% 15.95%
c/o Norwest Bank Co NA
Denver CO 80274-8676
Norwest Bank Texas NA 1,251,536.113 8.95% 8.95%
1500 Broadway
Lubbock TX 79408
VALUGROWTH STOCK FUND
I Shares Dentru & Co. 3,108,986.881 41.97% 36.40%
c/o Norwest Bank Co NA
Denver CO 80274-8676
FINABA 1,028,804.846 13.89% 12.05%
Non-Discretionary Cash Acct.
Attn: Jon Rutter
PO Box 10523
Lubbock, TX 79408
DIVERSIFIED EQUITY FUND
A Shares Norwest Investment Services, Inc. 44,458.710 5.51% 2.28%
FBO 302660761
Northstar Building E - 8th Fl.
608 Second Ave. S.
Minneapolis MN 55479-0162
GROWTH EQUITY FUND
A Shares Norwest Wealthbuilder 183,744.799 38.36% 23.78%
Reinvest Account
733 Marquette Avenue
Minneapolis MN 55479-0040
SMALL COMPANY STOCK FUND
A Shares Norwest Wealthbuilder 125,850.376 21.17% 0.97%
Reinvest Account
733 Marquette Avenue
Minneapolis, MN 55479-0040
B-28
<PAGE>
B Shares Norwest Investment Services, Inc. 30,123.636 7.65% 0.23%
FBO 7311400141
Northstar Building E - 8th Fl.
608 Second Ave. S
Minneapolis MN 55479-0162
I Shares Dentru & Co 2,309,493.178 19.35% 17.87%
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver CO 80274
Norwest Bank Minnesota 779,625.000 6.53% 6.03%
Cust Norwest Foundation - NIM
A/C 12928201
PO Box 1450 NW 0477
Minneapolis MN 55480-8477
SMALL CAP OPPORTUNITIES FUND
A Shares Norwest Investment 2,619.172 5.94% 0.04%
Services, Inc.
FBO 702167001
Northstar Building East - 8th Fl.
608 Second Avenue South
Minneapolis MN 55479-0162
Norwest Investment 6,920.371 15.69% 0.12%
Services, Inc.
FBO 103482111
Northstar Building East - 8th Fl.
608 Second Avenue South
Minneapolis MN 55479-0162
Norwest Investment 2,762.148 6.26% 0.05%
Services, Inc.
FBO 102180141
Northstar Building E - 8th Fl.
608 Second Ave. S
Minneapolis MN 55479-0162
B Shares Norwest Investment 1,728.180 7.97% 0.03%
Services, Inc.
FBO 731123361
Northstar Building East - 8th Fl.
608 Second Avenue South
Minneapolis MN 55479-0162
B-29
<PAGE>
Norwest Investment 2,418.821 11.15% 0.04%
Services, Inc.
FBO 701942871
Northstar Building East - 8th Fl.
608 Second Avenue South
Minneapolis MN 55479-0162
Charles W. Gaillard 2,294.725 10.58% 0.04%
2580 Cedar Ridge Rd.
Wayzata MN 55391
1,129.688 5.21% 0.02%
Harold B. Metzger
and Carol E. Metzger Jtten
5326 Norwood St.
Duluth MN 55804
SMALL COMPANY GROWTH FUND
I Shares EMSEG & Co. 14,103,302.706 90.01% 90.01%
c/o Norwest Bank MN
733 Marquette Ave., MS 0036
Minneapolis MN 55479-0036
Vanguard Fiduciary Trust Co. 1,438,387.501 9.18% 9.18%
PO Box 2600
Valley Forge PA 19482
LARGE COMPANY GROWTH FUND
I Shares EMSEG & Co. 3,096,084.493 73.98% 73.98%
c/o Norwest Bank MN
733 Marquette Ave., MS 0036
Minneapolis MN 55479-0036
Victoria & Co. 220,768.250 5.28% 5.28%
NorwestBank TX South Central
PO Box 6000
San Antonio TX 78286-9646
CONTRARIAN STOCK FUND
I Shares Norwest Bank Minnesota 40,241.000 5.36% 5.36%
Agnt: Merle D. & Dyanne R.
Kerr Agency A/C 07183400 PO Box 1450 NW
8477 Minneapolis MN 55480-8477
Dentru & Co 345,757.574 46.07% 46.07%
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver CO 80274
B-30
<PAGE>
Kiwils & Co. 159,053.929 21.19% 21.19%
Discretionary Reinvest
1740 Broadway MS 8751
Denver CO 80274
Seret & Co. 63,119.198 8.41% 8.41%
Discretionary Reinvest
1740 Broadway MS 8751
Denver, CO 80274
INTERNATIONAL FUND
A Shares Norwest Wealthbuilder 40,577.877 34.47% 20.14%
Reinvest Account
733 Marquette Avenue
Minneapolis, MN 55479-0040
Norwest Investment 6,328.014 5.37% 3.14%
Services, Inc.
FBO 732267711
Northstar Building E - 8th Fl.
608 Second Ave. S
Minneapolis MN 55479-0162
B Shares David A. Struvk 4,764.293 5.69% 2.36%
1941 Crestview Circle
Ewcelsior MN 55331
Norwest Investment 7,722.102 9.22% 3.83%
Services, Inc.
FBO 015097851
Northstar Building E - 8th Fl.
608 Second Ave. S
Minneapolis MN 55479-0162
INDEX FUND
I Shares EMSEG & Co. 11,399,385.666 92.19% 92.19%
c/o Norwest Bank MN
733 Marquette Ave. MS 0036
Minneapolis MN 55479-0036
DIVERSIFIED BOND FUND
EMSEG & Co. 5,169,536.113 82.81% 82.81%
c/o Norwest Bank MN
733 Marquette Ave. MS 0036
Minneapolis MN 55479-0036
Kiwils & Co. 342,107.622 5.48% 5.48%
c/o Norwest Bank CO NA
1740 Broadway MS 8676
Denver CO 80274-8676
B-31
<PAGE>
STRATEGIC INCOME FUND
I Shares EMSEG & Co. 6,322,210.779 89.18% 89.18%
c/o Norwest Bank MN
733 Marquette Ave. MS 0036
Minneapolis MN 55479-0036
Seret & Co. 383,346.369 5.41% 5.41%
c/o Norwest Bank CO
1740 Broadway MS 8676
Denver, CO 80274-8676
MODERATE BALANCED FUND
I Shares EMSEG & Co. 16,309,251.531 88.43% 88.43%
c/o Norwest Bank MN
733 Marquette Ave. MS 0036
Minneapolis MN 55479-0036
GROWTH BALANCED FUND
I Shares EMSEG & Co. 17,655,722.442 87.10% 87.10%
c/o Norwest Bank MN
733 Marquette Ave. MS 0036
Minneapolis MN 55479-0036
Seret & Co. 1,174,525.257 5.79% 5.79%
c/o Norwest Bank CO
1740 Broadway MS 8676
Denver, CO 80274-8676
</TABLE>
B-32
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - MONEY MARKET FUND YIELDS
As of May 31, 1997, the seven day yield, seven day effective yield and, for
Municipal Money Market Fund, the seven day tax equivalent yield, of each class
of the Money Market Funds was as follows. For the tax-equivalent yield
quotations, the assumed federal income tax rate is 39.6%.
<TABLE>
EFFECTIVE TAX-EQUIVALENT TAX-EQUIVALENT
YIELD YIELD YIELD EFFECTIVE YIELD
<S> <C> <C> <C> <C>
CASH INVESTMENT FUND 5.26% 5.40% N/A N/A
READY CASH INVESTMENT FUND
Investor Shares 4.92% 5.04% N/A N/A
Institutional Shares 5.26% 5.40% N/A N/A
Exchange Shares 4.17% 4.26% N/A N/A
U.S. GOVERNMENT FUND 5.00% 5.13% N/A N/A
TREASURY FUND 4.85% 4.96% N/A N/A
MUNICIPAL MONEY MARKET FUND
Investor Shares 3.34% 3.40% N/A N/A
Institutional Shares 3.54% 3.61% N/A N/A
</TABLE>
TABLE 2 - YIELDS
For the 30-day period ended May 31, 1997 the annualized yield and, where
applicable, the tax equivalent yield of each class of the Fixed Income Funds,
Balanced Funds and Equity Funds was as follows. For the tax-equivalent yield
quotations, the assumed Federal income tax rate is 39.6%. In addition, for the
tax-equivalent yields of the Colorado and Minnesota Tax-Free Funds, the assumed
Colorado and Minnesota income tax rates are 5% and 8.5%, respectively. Limited
Term Tax-Free Fund had not commenced operations as of November 30, 1996.
<TABLE>
TAX EQUIVALENT
<S> <C> <C>
YIELD YIELD
STABLE INCOME FUND
A Shares 5.84% N/A
B Shares 5.18% N/A
I Shares 5.93% N/A
INTERMEDIATE GOVERNMENT INCOME FUND
A Shares 5.81% N/A
B Shares 5.29% N/A
I Shares 6.03% N/A
DIVERSIFIED BOND FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares 6.03% N/A
C-1
<PAGE>
TAX EQUIVALENT
YIELD YIELD
INCOME FUND
A Shares 6.09% N/A
B Shares 5.59% N/A
I Shares 6.34% N/A
TOTAL RETURN BOND FUND
A Shares 5.70% N/A
B Shares 5.15% N/A
I Shares 5.92% N/A
LIMITED TERM TAX-FREE FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares 4.65% 7.69%
TAX-FREE INCOME FUND
A Shares 5.18% 8.57%
B Shares 4.63% 7.66%
I Shares 5.38% 8.90%
COLORADO TAX-FREE FUND
A Shares 5.22% 9.09%
B Shares 4.66% 8.12%
I Shares 5.42% 9.45%
MINNESOTA TAX-FREE FUND
A Shares 4.93% 8.91%
B Shares 4.36% 7.90%
I Shares 5.12% 9.26%
STRATEGIC INCOME FUND
I Shares N/A N/A
MODERATE BALANCED FUND
I Shares N/A N/A
GROWTH BALANCED FUND
I Shares N/A N/A
DIVERSIFIED EQUITY FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
GROWTH EQUITY FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
INDEX FUND
I Shares 2.44% N/A
C-2
<PAGE>
TAX EQUIVALENT
YIELD YIELD
VALUGROWTH STOCK FUND
A Shares 1.03% N/A
B Shares 0.40% N/A
I Shares 1.08% N/A
INCOME EQUITY FUND
A Shares 2.38% N/A
B Shares 1.76% N/A
I Shares 2.50% N/A
LARGE COMPANY GROWTH FUND
I Shares 0.08% N/A
SMALL COMPANY STOCK FUND
A Shares 0.56% N/A
B Shares 1.26% N/A
I Shares 0.59% N/A
SMALL COMPANY GROWTH FUND
I Shares 0.80% N/A
SMALL CAP OPPORTUNITIES FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
CONTRARIAN STOCK FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares 0.39% N/A
INTERNATIONAL FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
</TABLE>
C-3
<PAGE>
TABLE 3 - TOTAL RETURNS
The average annual total return of each class of each Fixed Income and Equity
Fund for the periods ended May 31, 1997 was as follows. The actual dates of the
commencement of each Fund's operations, or the commencement of the offering of
each class' shares, is listed in the Fund's financial statements. The
performance of the Funds marked with an asterisk (*) includes the performance of
a collective investment fund or a common trust fund prior to its conversion into
the Fund. (See "Performance and Advertising Data -- Multiclass, Collective
Investment Fund, Common Trust Fund and Core-Gateway Performance.") Prior to
1989, the collective investment funds and common trust fund were valued on the
calendar quarter; therefore the following chart does not reflect a Since
Inception figure as of the fiscal year end for those funds adopting collective
investment or common trust fund performance. Calendar quarter performance is
available from the adviser.
<TABLE>
CALENDAR
ONE MONTH THREE YEAR TO ONE YEAR THREE FIVE TEN YEARS SINCE
MONTHS DATE YEARS YEARS INCEPTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH INVESTMENT FUND 0.44% 1.31% 2.58% 5.21% 5.22% 4.43% N/A 5.84%
READY CASH INVESTMENT FUND
Investor Shares 0.42% 1.22% 2.00% 4.87% 4.89% 4.09% N/A 5.45%
Institutional Shares 0.44% 1.31% 2.14% 5.23% 5.24% 4.33% N/A 5.58%
Exchange Shares 0.35% 1.03% 1.69% 4.09% N/A N/A N/A 4.07%
U.S. GOVERNMENT FUND 0.43% 1.26% 2.07% 5.04% 5.04% 4.25% N/A 5.57%
TREASURY FUND 0.41% 1.22% 1.99% 4.87% 4.85% 4.07% N/A 4.36%
MUNICIPAL MONEY MARKET FUND
Investor Shares 0.29% 0.80% 1.28% 3.08% 3.17% 2.76% N/A 3.73%
Institutional Shares 0.31% 0.85% 1.36% 3.28% 3.38% 2.91% N/A 3.82%
STABLE INCOME FUND
A Shares 0.53% 1.56% 2.31% 6.24% N/A N/A N/A 6.42%
B Shares 0.46% 1.37% 2.07% 5.43% N/A N/A N/A 5.32%
I Shares 0.53% 1.56% 2.31% 6.24% N/A N/A N/A 6.41%
INTERMEDIATE GOVERNMENT
INCOME FUND*
A Shares 0.78% 1.04% 1.40% 6.36% 6.04% 5.12% 6.94% N/A
B Shares 0.71% 0.75% 1.04% 5.51% N/A N/A N/A 9.02%
I Shares 0.78% 0.94% 1.40% 6.36% 6.03% 5.12% 6.93% N/A
DIVERSIFIED BOND FUND*
A Shares N/A N/A N/A N/A N/A N/A N/A N/A
B Shares N/A N/A N/A N/A N/A N/A N/A N/A
I Shares 0.79% 0.91% 1.07% 6.23% 5.80% 5.14% 7.08% N/A
INCOME FUND
A Shares 0.78% 0.89% 1.02% 6.79% 5.93% 5.45% N/A 7.67%
B Shares 0.72% 0.70% 0.70% 6.03% 5.15% N/A N/A 2.90%
I Shares 0.89% 0.89% 1.12% 6.90% 5.96% 5.45% N/A 7.67%
TOTAL RETURN BOND FUND
A Shares 0.86% 1.16% 2.03% 6.84% 6.52% N/A N/A 5.10%
B Shares 0.80% 1.08% 1.83% 6.27% 5.80% N/A N/A 4.39%
I Shares 0.76% 1.16% 2.03% 6.95% 6.57% N/A N/A 5.14%
LIMITED TERM TAX-FREE FUND
A Shares N/A N/A N/A N/A N/A N/A N/A N/A
B Shares N/A N/A N/A N/A N/A N/A N/A N/A
I Shares 0.78% 0.73% 1.75% N/A N/A N/A N/A 6.99%
TAX-FREE INCOME FUND
A Shares 1.47% 1.05% 2.14% 8.43% 7.37% 6.32% N/A 6.63%
B Shares 1.40% 0.86% 1.82% 7.63% 6.57% N/A N/A 4.88%
I Shares 1.57% 1.15% 2.24% 8.54% 7.41% 6.34% N/A 10.68%
COLORADO TAX-FREE FUND
A Shares 1.54% 1.10% 2.37% 9.00% 7.26% N/A N/A 5.92%
B Shares 1.47% 0.92% 2.05% 8.19% 6.46% N/A N/A 5.08%
I Shares 1.54% 1.10% 2.37% 9.00% 7.26% N/A N/A 5.92%
C-4
<PAGE>
CALENDAR
ONE MONTH THREE YEAR TO ONE YEAR THREE FIVE TEN YEARS SINCE
MONTHS DATE YEARS YEARS INCEPTION
MINNESOTA TAX-FREE FUND
A Shares 1.39% 1.09% 1.85% 7.98% 6.81% 6.32% N/A 6.75%
B Shares 1.42% 0.90% 1.53% 7.18% 6.01% N/A N/A 4.54%
I Shares 1.39% 1.09% 1.85% 7.98% 6.78% 6.32% N/A 6.73%
STRATEGIC INCOME FUND*
I Shares 2.27% 2.55% 4.06% 9.58% 9.52% 7.95% N/A N/A
MODERATE BALANCED FUND*
I Shares 3.15% 3.40% 5.83% 12.04% 11.98% 9.64% N/A 10.68%
GROWTH BALANCED FUND*
I Shares 4.91% 5.00% 8.50% 15.81% 15.83% 12.17% N/A 12.56%
INCOME EQUITY FUND*
A Shares 4.64% 4.61% 11.36% 22.40% 24.98% 16.95% N/A 16.49%
B Shares 4.58% 4.40% 10.99% 21.48% N/A N/A N/A 22.10%
I Shares 4.64% 4.61% 11.36% 22.41% 25.01% 16.95% N/A 17.49%
INDEX FUND*
A Shares N/A N/A N/A N/A N/A N/A N/A N/A
B Shares N/A N/A N/A N/A N/A N/A N/A N/A
I Shares 6.07% 7.78% 15.47% 29.02% 25.14% 17.66% 14.08% 14.33%
VALUGROWTH STOCK FUND
A Shares 5.56% 5.92% 11.87% 23.32% 18.44% 13.06% N/A 13.65%
B Shares 5.46% 5.68% 11.49% 22.33% 17.53% N/A N/A 14.05%
I Shares 5.57% 5.93% 11.83% 23.30% 18.42% 13.01% N/A 13.63%
DIVERSIFIED EQUITY FUND*
A Shares 6.82% 6.79% 11.93% 20.75% 21.77% 16.18% N/A 16.73%
B Shares 6.73% 6.57% 11.59% 19.86% N/A N/A N/A 22.71%
I Shares 6.79% 6.76% 11.93% 20.76% 21.76% 16.18% N/A 16.73%
GROWTH EQUITY FUND*
A Shares 9.03% 6.95% 9.14% 14.11% 18.04% 15.69% N/A 16.24%
B Shares 8.98% 6.75% 8.80% 13.28% N/A N/A N/A 15.55%
I Shares 9.06% 6.95% 9.14% 14.11% 18.04% 15.69% N/A 16.24%
LARGE COMPANY GROWTH FUND*
A Shares N/A N/A N/A N/A N/A N/A N/A N/A
B Shares N/A N/A N/A N/A N/A N/A N/A N/A
I Shares 7.55% 7.73% 13.73% 21.93% 22.69% 14.42% 13.10% N/A
SMALL COMPANY STOCK FUND
A Shares 20.57% 7.06% 3.49% 6.34% 17.45% N/A N/A 14.88%
B Shares 20.41% 6.82% 3.18% 5.46% 16.55% N/A N/A 13.99%
I Shares 20.49% 7.02% 3.50% 6.30% 17.44% N/A N/A 14.73%
SMALL COMPANY GROWTH FUND*
I Shares 10.45% 4.47% 3.70% 5.65% 21.96% 20.18% 16.82% N/A
SMALL CAP OPPORTUNITIES FUND
A Shares 11.78% 8.01% 10.23% 11.37% 27.54% N/A N/A 25.02%
B Shares 11.71% 7.81% 9.91% N/A N/A N/A N/A 25.35%
I Shares 11.77% 8.00% 10.22% 11.42% 27.56% N/A N/A 25.03%
CONTRARIAN STOCK FUND
A Shares N/A N/A N/A N/A N/a N/A N/A N/A
B Shares N/A N/A N/A N/A N/A N/A N/A N/A
I Shares 9.98% 10.15% 16.52% 13.02% 12.48% N/A N/A 10.13%
INTERNATIONAL FUND*
A Shares 6.13% 7.55% 8.42% 10.33% N/A N/A N/A 14.81%
B Shares 6.00% 7.32% 8.19% 9.44% N/A N/A N/A 13.97%
I Shares 6.07% 7.55% 8.52% 10.27% N/A N/A N/A 10.44%
</TABLE>
C-5
