<PAGE>
As filed with the Securities and Exchange Commission on July 15, 1997
File No. 33-9645
File No. 811-4881
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 45
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 47
NORWEST FUNDS
(Formerly "Norwest Advantage Funds" and "Norwest Funds" and prior thereto
"Prime Value Funds, Inc.")
(Exact Name of Registrant as Specified in its Charter)
Two Portland Square
Portland, Maine 04101
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code: (207) 879-1900
Catherine S. Wooledge, Esq.
Forum Financial Services, Inc.
Two Portland Square, Portland, Maine 04101
(Name and Address of Agent for Service)
Copies of Communications to:
Anthony C.J. Nuland, Esq.
Seward & Kissel
1200 G Street, N.W.
Washington, D.C. 20005
It is proposed that this filing will become effective:
immediately upon filing pursuant to Rule 485, paragraph (b)
- -------
on [ ] pursuant to Rule 485, paragraph (b)
- -------
60 days after filing pursuant to Rule 485, paragraph (a)(i)
- -------
X on October 1, 1997 pursuant to Rule 485, paragraph (a)(i)
- -------
75 days after filing pursuant to Rule 485, paragraph (a)(ii)
- -------
on [ ] pursuant to Rule 485, paragraph (a)(ii)
- -------
this post-effective amendment designates a new effective date for a
- -------
previously filed post-effective amendment
- -------
Registrant has registered an indefinite number of shares of beneficial interest
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. Accordingly, no fee is payable herewith. Registrant filed
a Rule 24f-2 notice for its various portfolios with a May 31 fiscal year end on
July 26, 1996.
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
OF REGISTRANT ARE CURRENTLY STRUCTURED AS FEEDER FUNDS. THIS AMENDMENT INCLUDES
A MANUALLY EXECUTED SIGNATURE PAGE FOR THE REGISTRANTS WHOSE PORTFOLIOS ARE
MASTER FUNDS: SCHRODER CAPITAL FUNDS AND CORE TRUST (DELAWARE).
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(A))
PART A
(Prospectus offering Shares of Norwest WealthBuilder II Growth Portfolio,
Norwest WealthBuilder II Growth and Income Portfolio and Norwest
WealthBuilder II Growth Balanced Portfolio)
Form N-1A
ITEM NO. (CAPTION) LOCATION IN PROSPECTUS (CAPTION)
- --------- ----------- --------------------------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Prospectus Summary
Item 3. Condensed Financial Information Not Applicable
Item 4. General Description of
Registrant Prospectus Summary; Investment
Objectives and Policies; and Other
Information - The Trust and Its
Shares
Item 5. Management of the Fund Prospectus Summary; Management of
the Portfolios
Item 5A. Management's Discussion of
Fund Performance Performance Information
Item 6. Capital Stock and
Other Securities Cover Page; Dividends and Tax
Matters; Other Information - The
Trust and Its Shares
Item 7. Purchase of Securities
Being Offered Purchases and Redemptions of
Shares; How to Buy Shares
Item 8. Redemption or Repurchase Purchases and Redemptions of
Shares; How to Sell Shares
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(A))
PART B
(SAI offering Shares of Norwest WealthBuilder II Growth Portfolio, Norwest
WealthBuilder II Growth and Income Portfolio and Norwest WealthBuilder II
Growth Balanced Portfolio)
Form N-1A Location in Statement of
Item No (Caption) Additional Information (Caption)
- --------- ----------- --------------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information and History Prospectus
Item 13. Investment Objectives and Policies Investment Policies; Investment
Limitations
Item 14. Management of the Fund Management; Management and
Administrative Services
Item 15. Control Persons and Principal
Holders of Securities Additional Information about the
Trust; and the Shareholders of
the Fund -- Shareholding
Item 16. Investment Advisory and Other
Services Investment Advisory Services
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
Item 18. Capital Stock and Other
Securities Additional Information about the
Trust; and the Shareholders of
the Fund -- Shareholding
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered Additional Purchase, Redemption
and Exchange Information
Item 20. Tax Status Taxation
Item 21. Underwriters Portfolio Transactions
Item 22. Calculation of Performance Data Manager and Administrator
Item 23 Financial Statements Additional Information about the
Trust and the Shareholders of the
Fund-- Financial Statements
<PAGE>
Norwest WealthBuilder II Portfolios
October 1, 1997
NORWEST WEALTHBUILDER II GROWTH PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Not FDIC Insured
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . .
Highlights of the Portfolios . . . . . . . . . . . . . . . . . . . . . .
Investment Objectives. . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Structures . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Advisers. . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Management and Administration. . . . . . . . . . . . . . . . .
Portfolio Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How to Buy and Sell Shares . . . . . . . . . . . . . . . . . . . . . . .
Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Features . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . .
Certain Investment Considerations and Risk Factors . . . . . . . . . . .
How the Portfolios Can Help You Meet Your Investment Needs . . . . . . .
Information About the Portfolios . . . . . . . . . . . . . . . . . . . .
Types of Underlying Funds. . . . . . . . . . . . . . . . . . . . . . . .
Expense Information. . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . .
Investment Objectives. . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Investment Policies and Risk Considerations . . . . . . . . .
MANAGEMENT OF THE PORTFOLIOS . . . . . . . . . . . . . . . . . . . . . .
PURCHASES AND REDEMPTIONS OF SHARES. . . . . . . . . . . . . . . . . . .
General Purchase Information . . . . . . . . . . . . . . . . . . . . . .
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum Investment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsequent Purchases . . . . . . . . . . . . . . . . . . . . . . . . . .
Account Application. . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . .
HOW TO SELL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption Procedures. . . . . . . . . . . . . . . . . . . . . . . . . .
Other Redemption Matters . . . . . . . . . . . . . . . . . . . . . . . .
OTHER SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . .
Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automatic Investment Plan. . . . . . . . . . . . . . . . . . . . . . . .
Retirement Account . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automatic Withdrawal Plan. . . . . . . . . . . . . . . . . . . . . . . .
Reopening Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIVIDENDS AND TAX MATTERS. . . . . . . . . . . . . . . . . . . . . . . .
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . .
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . .
The Trust and Its Shares . . . . . . . . . . . . . . . . . . . . . . . .
UNDERSTANDING THIS PROSPECTUS: References to "you" and "your" in this
Prospectus refer to current shareholders and/or prospective investors, and
references to "we", "us", "our" refer to the Portfolios or the Trust, as the
context may indicate.
ii
<PAGE>
OCTOBER 1, 1997
Norwest WealthBuilder II Growth Portfolio, Norwest WealthBuilder II Growth and
Income Portfolio and Norwest WealthBuilder II Growth Balanced Portfolio (each, a
"Portfolio" and collectively, the "Portfolios") are separate investment
portfolios of mutual funds designed to offer you access to professionally
managed mutual funds from well-known fund groups. Each Portfolio seeks to
achieve its objective by allocating its assets among a number of affiliated and
non-affiliated funds ("Underlying Funds"). Each Portfolio is diversified across
asset classes, including key components of stock funds, for growth potential,
and bond and money market funds, for decreased volatility and increased price
stability. The Portfolios' investment adviser may select from a wide range of
Underlying Funds based upon changing markets and advantageous risk/return
characteristics of various asset classes. The main differences among the
Portfolios is the proportion a Portfolio has invested in stock funds and their
respective investment styles, which provide you with different levels of risk
exposure for your investment. In addition to its own expenses, each Portfolio
bears a pro rata portion of the expenses of the Underlying Funds. INVESTMENTS
IN THE MUTUAL FUNDS MAY RESULT IN GREATER EXPENSES THAN YOU WOULD INCUR IF YOU
WERE TO INVEST DIRECTLY INTO THE SAME MUTUAL FUNDS. The Portfolios are
diversified series of Norwest Advantage Funds (the "Trust"), an open-end
management investment company.
- - Norwest WealthBuilder II Growth Portfolio seeks long-term capital
- - appreciation with no emphasis on income.
- - Norwest WealthBuilder II Growth Portfolio seeks long-term capital
- - appreciation with a secondary emphasis on income.
- - Norwest WealthBuilder II Growth Balanced Portfolio seeks a balance of
- - capital appreciation and income by investing the portfolio's assets
- - between stock and bond investments.
This Prospectus provides you with concise information about the Portfolios and
the Trust that you should know before you invest. Please read it carefully, and
retain it for future reference. A Statement of Additional Information ("SAI")
dated October 1, 1997, as amended from time to time, containing additional
information about the Portfolios, has been filed with the Securities and
Exchange Commission (the "SEC"). The SAI is available for reference on the
SEC's Web Site (http://www.sec.gov) is incorporated into this Prospectus by
reference. You may obtain a copy of the SAI without charge by contacting the
Trust's distributor, Forum Financial Services, Inc., at Two Portland Square,
Portland, Maine 04101 or by calling [(207) 879-0001.] Investors should read
this Prospectus and retain it for future reference.
MUTUAL FUND SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FDIC,
FEDERAL RESERVE SYSTEM OR ANY OTHER GOVERNMENT AGENCY AND ALSO ARE NOT
OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR GUARANTEED BY, NORWEST BANK
MINNESOTA, N.A. OR ANY OTHER BANK OR BANK AFFILIATE.
AN INVESTMENT IN SHARES OF ANY MUTUAL FUND IS SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
PROSPECTUS SUMMARY
HIGHLIGHTS OF THE PORTFOLIOS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION CONTAINED IN THIS PROSPECTUS.
INVESTMENT OBJECTIVES
Norwest WealthBuilder II Growth Portfolio seeks long-term capital appreciation
with no emphasis on income.
Norwest WealthBuilder II Growth and Income Portfolio seeks long-term capital
appreciation with a secondary emphasis on income.
Norwest WealthBuilder II Growth Balanced Portfolio seeks a balance of capital
appreciation and income by investing the portfolio's assets between stock
and bond investments.
INVESTMENT POLICIES
Each Portfolio seeks to achieve its investment objective by investing in a
diverse mix of "Underlying Funds", which consist of affiliated and
non-affiliated, open-end, management investment companies or series thereof.
For affiliated funds, Norwest Investment Management, Inc. ("Norwest") acts as
investment adviser and, in most cases, affiliates of Norwest act as investment
subadviser. (See "Management -- Investment Advisory Services".) In addition,
each Portfolio may invest its short-term cash in repurchase agreements. You may
choose to invest in one or more of the Portfolios based on your personal
investment goals, risk tolerance and financial circumstances. (See "Investment
Objectives and Management Policies".)
PORTFOLIO STRUCTURES
Each Portfolio seeks to achieve its investment objective by investing in a
number of Underlying Funds. Each Underlying Fund invests using a different
investment objective and a different investment style.
INVESTMENT ADVISERS
Norwest Investment Management, Inc. ("Norwest"), a subsidiary of Norwest Bank
Minnesota, N.A. ("Norwest Bank"), serves as each Portfolio's investment
adviser. Norwest also serves as the investment adviser for each of the
affiliated Underlying Funds. Norwest provides investment advice to various
institutions, pension plans and other accounts and, as of June 30, 1997, with
its affiliates, managed over $42.6 billion in assets. (See "Management -
Investment Advisory Services".)
Norwest Bank serves as the Portfolios' transfer and dividend disbursing agent
and custodian. (See "Management - Shareholder Servicing and Custody" and "-
Management, Administration and Distribution Services".)
Norwest is paid an investment advisory fee directly by each Portfolio for its
services with respect to allocating and monitoring the investment of each
Portfolio's assets in Underlying Funds and direct instruments.
PORTFOLIO MANAGEMENT AND ADMINISTRATION
Forum Financial Services, Inc. ("Forum"), a registered broker-dealer and member
of the National Association of Securities Dealers, Inc. Serves as the
Portfolios' manager and distributor of the Portfolios' shares. Forum
Administrative Services, Limited Liability Company ("FAS") provides
administrative services for each Portfolio. (See "Management - Management,
Administration and Distribution Services".)
2
<PAGE>
PORTFOLIO SHARES
The Portfolios' Class C shares are sold at net asset value plus an initial sales
charge of up to 1.50%. The sales charges may be reduced or waived for certain
purchases. (See "Reduced or No Initial Sales Charge".) The Portfolios' Class C
shares are subject to a distribution fee at the annual rate of 0.75% of the
average daily net assets of the Portfolio's Class C shares.
HOW TO BUY AND SELL SHARES
You may purchased or redeem shares by mail, by bank wire, and through your
broker-dealer or other financial institution. The minimum initial investment in
Norwest WealthBuilder II is $25,000. There is a $500 minimum subsequent
investment, except for IRA and systematic investing where the minimum subsequent
investment is reduced to $150. (See "How to Buy Shares" and "How to Sell
Shares".)
EXCHANGES
You may exchange your shares for shares of other Norwest WealthBuilder II
Portfolios at the respective net asset values next determined. (See "Other
Shareholder Services - Exchanges".)
SHAREHOLDER FEATURES
Each Portfolio offers you an Automatic Investment Plan, Automatic Withdrawal
Plan and Directed Dividend Option. Your purchases of shares may be eligible for
a Reinstatement Privilege. (See "Other Shareholder Services".)
DIVIDENDS AND DISTRIBUTIONS
You will receive dividends based on the net investment income and distributions
of any net capital gain of each Portfolio once each year. We reinvest your
dividends and distributions in additional Portfolio shares unless you elect to
have them paid in cash. (See "Dividends and Tax Matters".)
CERTAIN INVESTMENT CONSIDERATIONS AND RISK FACTORS
There can be no assurance that a Portfolio will achieve its investment
objective, and each Portfolio's net asset value and total return will fluctuate
based upon changes in the value of its portfolio of investment securities. Upon
redemption, an investment in a Portfolio may be worth more or less than its
original value.
The Portfolios seek to reduce the risk of your investment by diversifying among
different assets classes and among different fund managers. Holding a
diversified portfolio of mutual funds provides a wider range of investment
management talent and investment diversification than is available in a single
mutual fund. You still have the risks of investing in the various asset
classes, such as market risks related to stocks and bonds. The Portfolios are
designed, however, to provide you with a single investment that offers diverse
asset classes, fund management, and fund categories.
Stock risk relates to the possibility that stock prices and, therefore stock
funds, will decline over time. Smaller company and international stocks, and
therefore the mutual funds that invest in these stocks, offer additional risks
beyond general stock risk. Bond risk relates to the possibility that the market
value of bonds, and therefore bond funds, will decline over time because of
changes in market interest rates or an issuer's ability to meet its repayment
obligations.
Certain investment techniques used by certain of the Underlying Funds may entail
additional risks, such as the potential use of leverage through borrowings,
securities lending and other investment techniques. (See "Investment Objectives
and Policies - Additional Investment Policies and Risk Considerations".)
3
<PAGE>
HOW THE PORTFOLIOS CAN HELP YOU MEET YOUR INVESTMENT NEEDS
If you are looking for a simple means of investing for broad diversification
among actively managed mutual funds in a single, convenient investment, the
Norwest WealthBuilder II Portfolios may be appropriate for you. Our
professional management team reviews, analyzes, selects and monitors the
portfolio of Underlying Funds for you.
ASSET ALLOCATION STRATEGY.. A primary feature of each Portfolio is
diversification among asset classes. Commonly referred to as "asset
allocation," this strategy can minimize the risks of investing in a single
security or single class of securities while potentially increasing returns.
Because the performance of asset categories does not always move in the same
direction at the same time, investing in a mix of asset classes can help improve
performance and reduce volatility.
Through asset allocation, the investment adviser selects Underlying Funds to
represent a broad spectrum of investment options for the Portfolios. The stock,
bond and money market fund allocations and the range of investments are based on
the degree to which the Underlying Funds (and any direct investments) selected
are expected in combination to be appropriate for a Portfolio's particular
investment objective. As a result of appreciation or depreciation, change in
market factors or otherwise, the percentage of a Portfolio's assets invested in
various Underlying Funds may vary from the market-neutral position set forth
above.
The Portfolios are for investors who prefer to be invested in a comprehensive
portfolio diversified across major asset classes and investment styles and who
want professional, active management of a portfolio of Underlying Funds from
well-known fund families. The Portfolios are suitable for intermediate or
long-term investing, as well as retirement savings (including IRAs and other
retirement plans). The Portfolios are designed to provide exposure to the
growth potential of the stock market with different levels of risk. The primary
difference between the Portfolios is the proportion typically invested in
domestic and foreign stock funds and various investment styles, providing you
with a choice in the level of risk exposure to stock markets.
INFORMATION ABOUT THE PORTFOLIOS
The Portfolios offer you access to continuously managed portfolios of mutual
funds with less volatility than investments in just stock funds by diversifying
among three asset categories. The Portfolios can provide you with different
levels of exposure to the growth potential of the stock market.
TYPES OF UNDERLYING FUNDS
INVESTMENT COMPANIES. The Portfolios will normally invest in open-end
management investment companies or "mutual funds" or series thereof. The
Portfolios may also invest in closed-end management investment companies and/or
unit investment trusts. Each Portfolio may hold certain securities directly.
STOCK FUNDS. Stock funds invest primarily in domestic or foreign common
stocks or securities convertible into or exchangeable for common stock. The
Underlying Funds may include stock funds holding large company stocks, small
company stocks and international stocks.
BOND FUNDS. Bond funds invest primarily in debt securities issued by a
company, municipality, government or government agency. The issuer of a bond
is required to pay the holder the amount of the loan (or par value) at a
specified maturity and to make scheduled interest payments.
MONEY MARKET FUNDS. The Portfolios may invest in Underlying Funds that are
money market funds, which means that the fund invests in U.S.-dollar
denominated short-term money market instruments that the Underlying Funds'
investment adviser has determined present minimal credit risk. Under normal
circumstances and to the extent permitted by SEC order or interpretation, the
Portfolios will invest their money market fund investments in affiliated
money market Underlying Funds. The Portfolios may also invest directly in
these instruments. The eligible instruments include: commercial paper,
certificates of deposits and time deposits issued by large banks, repurchase
agreements and U.S. Government securities.
4
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses and Annual Portfolio Operating Expenses tables
are to assist you in understanding the fees and expenses you pay in buying or
selling a Portfolio's Class C shares. The tables do not reflect the operating
expenses and investment advisory fees of the Underlying Funds.
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge on Purchases 1.50%(1)
Deferred Sales Charge or
Redemption Fees None
Exchange Fees None
ANNUAL PORTFOLIO OPERATING EXPENSES(2)
(as a percentage of average daily net assets)
Advisory Fee (fund selection and asset allocation services) 0.35%
12b-1 Fees(3) 0.75%
Other Expenses (after fee waivers and expense reimbursements)(4) 0.15%
-----
TOTAL PORTFOLIO OPERATING EXPENSES (after fee waivers
and expenses reimbursements) (5) 1.25%
(1) Reduced sales charges are available. See
(2) For a further description of the various expenses associated with investing
in the Portfolios, see "Management" and "Portfolio Expenses". The table is
based on estimated expenses for the Portfolios' first fiscal year of
operations ending May 31, 1998. To the extent a Portfolio invests all or a
portion of its assets in various Underlying Funds (each of which bears its
own expenses), these Portfolios indirectly bear their pro rata portion of
the expenses of such Underlying Funds.
(3) The Underlying Funds in which a Portfolio invests may charge a Rule 12b-1
fee; in which event, shareholders of the Portfolio indirectly bear that
expense.
(4) Other Expenses include Transfer and Shareholder Service Agent fees payable
to Norwest Bank, which currently receives remuneration from fund companies
participating in WealthBuilder II of 0.25% per annum of assets of a
Norwest WealthBuilder II Portfolio invested in an Underlying Fund.
Norwest and Norwest Bank provides investment advisory and other services
to affiliated Underlying Funds and receive compensation from them.
In light of this remuneration and compensation, Norwest Bank has agreed,
through at least May 31, 1999, to waive the Portfolios' Transfer and
Shareholder Service Agent fees, which normally total 0.25%. After that
date, the fee waiver may be terminated, modified or continued. (See
"Expenses" for information regarding the expenses for the Portfolios.)
(5) Without waivers and reimbursements, Other Expenses and Total Portfolio
Operating Expenses would be 0.40% and 1.50%, respectively. Except as
otherwise noted, expense reimbursements and fee waivers are voluntary and
may be reduced or eliminated at any time.
5
<PAGE>
EXAMPLE
The following Expense Example indicates the expenses you would pay on a $1,000
investment in a Portfolio's Class C shares assuming: (1) a 5% annual return,
and (2) reinvestment of all dividends and distributions. THIS IS ONLY AN
EXAMPLE AND DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR RETURN. ACTUAL
EXPENSES AND RETURN MAY BE GREATER OR LESS THAN INDICATED. The 5% annual return
neither predicts nor represents a Portfolio's projected returns; rather, it is
required by government regulation.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NORWEST WEALTHBUILDER II HIGH GROWTH PORTFOLIO
C shares
Assuming redemption
at the end of the period $28 $54 $83 $164
NORWEST WEALTHBUILDER II GROWTH PORTFOLIO
C shares
Assuming redemption
at the end of the period $28 $54 $83 $164
NORWEST WEALTHBUILDER II GROWTH AND
INCOME BALANCED PORTFOLIO
C shares
Assuming redemption
at the end of the period $28 $54 $83 $164
</TABLE>
The purpose of the table above is to help you understand the various costs and
expenses that you bear directly or indirectly through investing in the
Portfolios. (See "Management" and "Portfolio Expenses" for further
information.)
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
There can be no assurance that a Portfolio or an Underlying Fund will achieve
its investment objective.
INVESTMENT OBJECTIVES.
Norwest WealthBuilder II Growth Portfolio seeks capital appreciation with no
emphasis on income.
Norwest WealthBuilder II Growth and Income Portfolio seeks long-term capital
appreciation with a secondary emphasis on income.
Norwest WealthBuilder II Growth Balanced Portfolio seeks a balance of growth of
capital appreciation and income by investing the portfolio's assets between
stock and bond investments.
INVESTMENT POLICIES.
Each Portfolio invests in a combination of Underlying Funds (See "Types of
Underlying Funds" below) and, subject to the Portfolio's investment objective,
seeks to maintain different allocations between those types of funds depending
on changing markets and favorable risk/return characteristics of the various
asset classes. Allocating investments among stock, bond and money market funds
permits each Portfolio to attempt to optimize performance consistent with its
investment objective. The chart below illustrates each Portfolio's
market-neutral position with regard to its investments in stock, bond and money
market funds without adjustments based on market conditions or other factors:
NORWEST WEALTHBUILDER II FUNDS NEUTRAL POSITION INVESTMENT RANGE
- -------------------------------- -------------------- --------------------
WBII GROWTH FUNDS
Stock Funds 98.50% 97%-100%
Domestic Large Company 49.00% 20%-90%
Domestic Small Company 20.00% 5%-50%
International 29.50% 5%-55%
Money Market Funds 1.50% 0%-3%
WBII GROWTH & INCOME FUND
Stock Funds 98.50% 97%-100%
Domestic Large Company 70.00% 50%-90%
Domestic Small Company 14.25% 5%-30%
International 14.25% 5%-30%
Money Market Funds 1.50% 0%-3%
WBII GROWTH BALANCED FUND
Stock Funds 64.25% 45%-85%
Bond Funds 34.25% 15%-55%
Money Market Funds 1.50% 0%-3%
Under normal market conditions, we will invest at least 65% of each Portfolio's
total assets in the various types of funds described above. Stock funds are
funds which invest primarily in common stocks or securities convertible into or
exchangeable for common stock, including domestic stocks and stocks of foreign
issuers from developed or emerging countries. Bond funds are funds which invest
primarily in long or short-term government or corporate bonds and other fixed
income securities, including securities issued, guaranteed or insured by the
U.S. Government or its agencies or instrumentalities. Money market funds are
funds which invest in short-term money market instruments. To the extent the
Portfolios focus their investment in only a few Underlying Funds, the Portfolios
may be exposed to greater risk than if the Portfolios were to invest in a
greater number of Underlying Funds. Assets that are not invested in stock
funds, bond funds and money market funds may be invested in other types of funds
and directly in domestic and foreign securities and other instruments.
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The Investment Adviser attempts to identify and select diversified portfolios of
funds based on an analysis of many factors. In the fund selection process, the
Investment Adviser uses quantitative techniques to analyze and rank potential
Underlying Funds based on their historic total return, volatility and operating
expenses over various time periods. The second step of the process involves a
review of potential Underlying Funds' investment objectives and policies.
Potential Underlying Funds which rank the highest by these criteria will then be
subject to further qualitative and quantitative evaluation of size, management,
portfolio holdings, investment practices and policies, investment style of the
funds and their managers, and other factors prior to their purchase by the
Portfolios.
POLICIES AND RISK FACTORS. The 1940 Act currently provides that each Portfolio
may not purchase the securities of an underlying fund if, as a result, the
Portfolio, together with its affiliates, would own more than 3% of the total
outstanding securities of that underlying fund. Thus, each Portfolio's ability
to invest in shares of certain Underlying Funds could be restricted and the
Investment Adviser may have to select alternative investments.
The selection of affiliated funds is subject to the Investment Adviser's insight
and judgment and the same conditions and criteria that apply to the selection of
unaffiliated funds, except that the Portfolios will ordinarily invest all of
their assets allocated to money market funds in affiliated money market funds.
To seek to enhance each Portfolio's overall performance, the Investment Adviser
applies sophisticated quantitative techniques, valuation formulas and
optimization procedures to assess the relative attractiveness of each asset
class. After identifying the most and least attractive asset classes,
consideration is given to the expected returns and risks before deciding which
areas, if any, to overweight or underweight.
ASSET ALLOCATION STRATEGY: Each Portfolio seeks to meet its investment
objective by investing in a different mix of stock funds, bond funds and money
market funds. The Financial Analysts Journal: Brinson, Singer, Beebower:
May-June 1991, states that research shows that the greatest impact on investment
returns is due to the asset allocation decision (the mix of stocks, bonds and
cash-equivalents) rather than market timing or the selection of individual
stocks and bonds. A study of the performance of pension funds indicated that
over 90% of the performance was determined by asset mix.
PORTFOLIO ALLOCATION STRATEGY. The Investment Adviser seeks to enhance the
overall risk/return performance of the Portfolios by utilizing both a Tactical
Asset Allocation Model and a Tactical Equity Allocation Model. Both models are
proprietary to Norwest. The Tactical Asset Allocation Model is a disciplined
stock/bond allocation model which is employed in balanced portfolios to improve
the return and risk performance of the portfolio by shifting assets toward the
"cheaper" asset when a compelling mispricing in valuation exists. The
allocation model measures the deviation from normal historical spreads between
the expected return of stocks versus bonds, which provides a probability of
outperformance. If the stock/bond spread becomes "abnormal", assets are shifted
to the more attractive asset until the markets correct relative to each other.
If the stock/bond spread remains within the "normal" range, the asset mix
remains at the targeted base mix. Portfolios are rebalanced to the appropriate
targeted mix when a 5% deviation from target is reached. The Tactical Equity
Allocation Model is a dynamic, multi-style asset allocation discipline which
emphasizes portfolio return. The active management discipline aims to identify
fundamental market conditions under which certain equity classes and styles can
sustain superior performance relative to other equity classes and styles. By
combining both fundamentals and momentum, the Tactical Equity Allocation Model
tends to minimize the number of portfolio shifts, while capitalizing on
significant periods of relative outperformance between competing equity classes
and styles, including domestic vs. international, large cap vs. small cap, and
value vs. growth.
The Portfolios are diversified investment companies, and many of the Underlying
Funds also are diversified funds. The level of diversification the Portfolios
obtain from being invested in a number of Underlying Funds reduces the risk
associated with an investment in a single Underlying Fund. This risk is further
reduced because each Underlying Fund's investments are also spread over a range
of issuers and industries.
The Portfolios will not invest 25% or more of their assets in Underlying Funds
that concentrate their investments in any one industry. The Portfolios may
indirectly invest 25% or more of their assets in one industry, however, if the
Underlying Funds invest their assets in the same industries. Because the scope
of investment alternatives within an
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industry is limited, the value of the shares of an Underlying Fund that is
concentrated may be subject to greater market fluctuation than an investment in
a fund which invests in a broader range of securities. In addition, the
Underlying Funds may use certain investment strategies, such as trading in
options and futures, which may also involve increased risks to the Portfolios.
Under certain circumstances, an Underlying Fund may determine to make payment of
redemption by a Portfolio wholly or in part by an in-kind distribution of
securities from its portfolio in lieu of cash. In such cases, the Portfolio may
hold the securities distributed by an Underlying Fund until the investment
adviser determines that it is appropriate to dispose of such securities.
Investment decisions for the Underlying Funds are made independently of the
Portfolios and their investment adviser. One Underlying Fund, therefore, may be
purchasing shares of an issuer whose shares are being sold by another Underlying
Fund. The result would be an indirect cost to a Portfolio without accomplishing
any investment purpose. The Portfolios may purchase shares of no-load funds
that are available without a transaction fee and load funds that are available
to the Portfolios without a sales charge.
STOCK FUNDS. Stock funds invest primarily in domestic or foreign common stocks
or securities convertible into or exchangeable for common stock. The Underlying
Funds may include stock funds holding large company stocks, small company stocks
and international stocks.
Large company stock funds are those that normally select their investments from
a universe of U.S. companies with large and mid-size market capitalization.
These companies' market capitalization currently ranges from about $1.5 billion
to over $100 billion. Many of these companies' stocks are included in the
Standard & Poor's 500(R) Index, a widely recognized, unmanaged index of common
stock prices. The Underlying Funds that invest in these stocks, and therefore
the Portfolios, are exposed to stock-market risk. Stock prices may decline over
short or even long periods. While past performance is no guarantee of future
results, a diverse portfolio of large company stock funds, each with a diverse
portfolio of stocks representing various industries, would tend to reduce stock
market risk.
Small company stock funds are funds that select investments from a universe of
companies with a market capitalization below that of the large and mid-size
company universe. The market capitalization of these companies currently ranges
from approximately $1.5 billion down to about $100 million or less. Small
company stocks have historically been characterized by greater total returns,
greater volatility of price and returns, and lower dividend yields than large
company stocks. The greater price volatility of small company stocks may be the
result lower market liquidity or less publicly available information than large
company stocks. There may also be fewer investors who monitor the activities of
small companies than investors who monitor the activities of large companies.
While past performance is no guarantee of future results, a diverse portfolio of
small company stock funds, each with a diverse portfolio of stocks representing
various industries, would tend to reduce market risk.
International stock funds generally invest substantially in the stocks or
securities of foreign issuers. The Portfolios' investment in international
stock funds involves risks similar to those of investing in a portfolio of
foreign stocks. Foreign stocks are issued by publicly traded companies from
countries around the world, excluding the United States. The Underlying Funds'
investments will often be denominated in foreign currency, with the value of
these investments affected by changes in currency exchange rates versus the U.S.
dollar in addition to normal market fluctuations. The rate of exchange between
the U.S. dollar and foreign currencies is determined by the forces of supply and
demand in foreign exchange markets, by changes in interest rates, as well as by
political and economic factors. Other risks and considerations of international
investing include: differences in accounting, auditing and financial reporting
standards; generally higher transaction costs on foreign portfolio transactions;
small trading volumes and generally lower liquidity of foreign stock markets,
which may result in greater price volatility; foreign withholding taxes payable
on portfolio holdings, which may reduce dividend income payable to shareholders;
the possibility of expropriation, nationalization or confiscatory taxation;
adverse changes in investment or exchange control regulations; political
instability, which could affect U.S. investment in foreign countries; and
potential restrictions on the flow of international capital. These
international investment risks are present when investing in both developed and
developing emerging markets. Some of the Underlying Funds may attempt to hedge
against currency fluctuations by entering into currency futures, options or
forward contracts. The risks of such investments are discussed below.
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As a portion of their foreign stock fund allocations and subject to its
investment objective, a Portfolio may invest up to 5% of its net assets in
Underlying Funds that invest primarily in developing or emerging market
countries. These countries tend to have economic structures that are less
diverse and mature and political systems that are less stable than developed
market countries. A developing or emerging market country generally is
considered to be in the initial stages of industrialization. The risks of
investing in developing or emerging markets are similar to but greater than the
risks of investing in developed international markets.
As a part of their stock fund allocations, the Portfolios may also invest in
Underlying Funds that invest primarily in stock of issuers located throughout
the world, including the United States. As these funds may invest in both
developed and emerging market countries, they share the risks associated with
investments in both markets, as discussed above. In addition, because these
funds may also invest in the United States, they expose a Portfolio to the risks
associated with investing in stock of U.S. issuers.
BOND FUNDS: Bond funds seek current income and invest primarily in short- or
longer-term U.S. government obligations, investment-grade corporate-debt
obligations, and highly rated asset-backed securities. The U.S. government debt
securities in which the Underlying Funds may invest are issued or guaranteed by
the U.S. Government, its agencies, instrumentalities and government-sponsored
enterprises, and include bills, notes, bonds, discount notes and stripped
government securities. Not all obligations issued or guaranteed by U.S.
Government agencies, instrumentalities and government-sponsored enterprises are
backed by the full faith and credit of the United States. If it were not
obligated to do so, there can be no assurance that the U.S. Government would
provide financial support for obligations issued by its agencies,
instrumentalities and government-sponsored enterprises.
The Underlying Funds may also invest in bonds having floating- or fixed-interest
rates. The Portfolios will only select Underlying Funds that invest primarily
in U.S. government and/or investment-grade corporate-debt obligations.
Asset-backed securities, including mortgage-related securities, may also be
included in the Underlying Funds' portfolios. Asset-backed securities are
secured by company receivables, home equity loans, truck and auto loans, leases
and credit card receivables. The collateral backing asset-backed securities
cannot be foreclosed upon. Mortgage-backed securities are securities
collateralized by pools of mortgage loans and are assembled by various
governmental agencies and government-sponsored enterprises, such as GNMA, FNMA
and FHLMC. When interest rates decline, there is an increased likelihood that
the mortgages underlying a mortgage-backed security will be pre-paid, resulting
in the loss of any unamortized premium paid for the securities and the
probability of having to reinvest the proceeds at lower rates. The bond
category also includes repurchase agreements collateralized by eligible
investments. The Portfolios will not select Underlying Funds that invest
primarily in non-investment grade asset-backed obligations.
The market value of the Underlying Funds' debt investments changes in response
to interest-rate fluctuations and other factors. During periods of falling
interest rates, the values of outstanding debt securities generally rise;
conversely, during periods of rising interest rates, the values of such
securities generally decline. While securities with longer maturities tend to
produce higher yields, the prices of longer maturity securities are also subject
to greater market fluctuations as a result of changes in interest rates.
Changes in the rating of any debt security by an NSRSO and in the ability of an
issuer to make payments of interest and repayments of principal also affect the
value of these investments. Except under default conditions, changes in the
value of portfolio securities do not affect cash income derived from these
securities but do affect the Underlying Funds' net asset values.
A portion of a Portfolio's assets may be invested in "balanced funds," which are
funds that normally seek to invest substantial portions of their assets in both
stocks and bonds or preferred stock. Generally, a balanced fund must invest at
least 25% of its assets in fixed income senior securities. A Portfolio's
investment in a balanced fund exposes the Portfolio to the risks, described
above, of an investment in both a stock fund and a bond fund, because balanced
funds invest in both of these instruments. The stock portion of a balanced fund
has the risks associated with a stock fund; the bond portion has the risks
associated with a bond fund. Each Portfolio may invest more than 5% of its
assets in balanced funds.
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MONEY MARKET FUNDS. The Portfolios may invest in Underlying Funds that are
money market funds, which means that the fund invests in U.S.-dollar denominated
short-term money market instruments that the Underlying Funds' investment
adviser has determined present minimal credit risk. Under normal circumstances
and to the extent permitted by SEC order or interpretation, the Portfolios will
invest their money market fund investments in affiliated money market Underlying
Funds. The Portfolios may also invest directly in these instruments. The
eligible instruments include:
1. Bank certificates of deposit, time deposits or bankers' acceptances of
domestic banks (including their foreign branches), U.S. branches of foreign
banks and foreign branches of foreign banks, having capital, surplus and
undivided profits in excess of $100 million.
2. Commercial paper rated in one of the two highest rating categories by an
NRSRO, or commercial paper or notes of issuers with an unsecured debt issue
outstanding currently rated in one of the two highest rating categories by
any NRSRO where the obligation is on the same or a higher level of priority
and collateralized to the same extent as the rated issue.
3. Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
4. Repurchase agreements involving obligations that are suitable for
investment under the categories set forth above.
CLOSED-END FUNDS. A closed-end fund is a fund with a fixed number of shares.
While an open-end investment company must redeem at net asset value its shares
when tendered for redemption by a shareholder, a closed-end investment company
is not so required. Instead, shares of closed-end investment companies trade on
exchanges and over the counter like conventional stocks.
Shares of a closed-end investment company may, and typically do, trade at a
discount. In addition, there may be no readily available market for closed-end
investment company shares, in which case the shares are generally considered
illiquid and subject to a Fund's restriction on holding illiquid securities.
Consistent with each Portfolio's investment objective and policies and under the
general supervision of the Trust's Board of Trustees, the investment adviser has
the authority to select for a Portfolio what it believes is the optimal
combination of Underlying Funds at any time deemed appropriate, including in
response to market and other conditions. In addition, the Investment Adviser
may, at any time, invest a Portfolio's assets in an Underlying Fund that is
different from or in addition to those presently used.
BORROWING. As a fundamental policy, each Portfolio may borrow money from banks
or by entering into reverse repurchase agreements and will limit borrowings to
amounts not in excess of 33 1/3% of the value of the Portfolio's total assets.
Borrowing for other than temporary or emergency purposes or meeting redemption
requests is not expected to exceed 5% of the value of any Portfolio's assets.
Irrespective of the Portfolio's policy on borrowings, each Portfolio may enter
into reverse repurchase agreements as described above (transactions in which a
Portfolio sells a security and simultaneously commits to repurchase that
security from the buyer at an agreed upon price on an agreed upon future date).
LENDING. A Portfolio may lend its investment securities to brokers, dealers and
financial institutions for the purpose of realizing additional income. The
total market value of securities loaned will not at any time exceed 25% of the
value of the total assets of the Portfolio. The risk in lending portfolio
securities, as with other extensions of credit, is the possible loss of rights
in the collateral should the borrower fail financially. In determining whether
to lend securities, the Portfolio's investment adviser will consider all
relevant facts and circumstances, including the creditworthiness of the
borrower.
ILLIQUID SECURITIES. No Portfolio may invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the Portfolio has valued the securities and include, among other
things, repurchase agreements not
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entitling the holder to payment within seven days and restricted securities
(other than those determined to be liquid pursuant to guidelines established by
the Board or Core Board). Limitations on resale may have an adverse effect on
the marketability of portfolio securities, and a Portfolio might also have to
register restricted securities in order to dispose of them, resulting in expense
and/or delay. A Portfolio might not be able to dispose of restricted or other
securities promptly or at reasonable prices and, thereby, might experience
difficulty satisfying redemptions. There can be no assurance that a liquid
market will exist for any security at any particular time.
An institutional market has developed for certain securities that are not
registered under the Securities Act of 1933 (the "1933 Act"), including
repurchase agreements and foreign securities. 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, the
investment adviser may determine that such securities are not illiquid
securities under guidelines adopted by the Board. These guidelines take into
account trading activity in the securities and the availability of reliable
pricing information, among other factors. If there is a lack of trading
interest in a particular Rule 144A security, a Portfolio's holdings of that
security may be illiquid.
REPURCHASE AGREEMENTS AND LENDING OF PORTFOLIO SECURITIES. Each Portfolio may
enter into repurchase agreements and may lend securities from its portfolio to
brokers, dealers and other financial institutions. These investments may entail
certain risks not associated with direct investments in securities. For
instance, in the event that bankruptcy or similar proceedings were commenced
against a counterparty in these transactions or a counterparty defaulted on its
obligations, a Portfolio may have difficulty in exercising its rights to the
underlying securities, may incur costs and experience time delays in disposing
of them and may suffer a loss.
Repurchase agreements are transactions in which a fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed-upon
price and future date, normally one to seven days later. The resale price
reflects a market rate of interest that is not related to the coupon rate or
maturity of the purchased security. When a Portfolio lends a security, it
receives payment from the borrower or interest from investing cash collateral.
The Trust maintains possession of the purchased securities and the collateral in
lending transactions, the total market value of which on a continuous basis is
at least equal to the repurchase price or value of securities loaned, plus
accrued interest. The Portfolios may pay fees to arrange securities loans and
each Portfolio will limit securities lending to not more than 33 1/3% of the
value of its total assets.
Each Portfolio may invest a certain portion of its cash reserves in repurchase
agreements or an affiliated money market Underlying Fund. A reserve position
provides flexibility in meeting redemptions, expenses and the timing of new
investments and serves as a short-term defense during periods of unusual
volatility.
PORTFOLIO TURNOVER. The Portfolios anticipate that their annual portfolio
turnover rate will not exceed 100%, however, there is no limit on the
Portfolios' or the Underlying Funds' portfolio turnover rates.
ADDITIONAL INVESTMENT POLICIES AND RISK CONSIDERATIONS
Each Portfolio's investment objective and fundamental investment policies may
not be changed without approval of the holders of a majority of the Portfolio's
outstanding voting securities. A majority of outstanding voting securities
means the lesser of 67% of the shares present or represented at a shareholders'
meeting at which the holders of more than 50% of the outstanding shares are
present or represented, or more than 50% of the outstanding shares. Except as
otherwise indicated, investment policies of each Portfolio are not fundamental
and may be changed by the Board of Trustees of the Trust (the "Board") without
shareholder approval
A further description of the Portfolios' investment policies, including
additional fundamental policies, is contained in the SAI.
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Each Portfolio's investment portfolio of funds reduces the risk associated with
investing in a single Underlying Fund with a single manager. Holding a
diversified portfolio of funds can provide access to a wider range of management
talent, companies, industries, countries and markets than would be available
through any one underlying fund.
The Portfolios seek to reduce overall risk by diversifying investments among
major asset categories. You are still exposed, however, to the risks associated
with investing in each particular asset class, including stock and bond risk.
Stock risk is the possibility that stock prices, and therefore stock funds, will
decline over short or even extended periods. Small-company, international and
emerging market stocks, and therefore the Underlying Funds that invest in these
instruments, pose additional risks. Bond risk is the potential for decline in
the market value of bonds and bond funds due to interest rate changes or the
ability of an issuer to meet its obligations.
The investment adviser monitors the creditworthiness of counterparties to the
Portfolios' transactions and intends to enter into a transaction only when it
believes that the counterparty presents minimal credit risks and the benefits
from the transaction justify the attendant risks. As used herein, the term U.S.
government obligations means obligations issued or guaranteed as to principal
and/or interest by the U.S. Government, its agencies, instrumentalities and
government-sponsored enterprises. All investment policies relate to each
Portfolio and, unless otherwise noted, not to a portion of a Portfolio that
invests in a particular investment style.
As part of its regular banking operations, Norwest Bank may make loans to public
companies. Thus, it may be possible, from time to time, for a Portfolio to hold
or acquire the securities of issuers which are also lending clients of Norwest
Bank. A lending relationship is not a factor in the selection of portfolio
securities for a Portfolio.
MANAGEMENT OF THE PORTFOLIOS
GENERAL OVERSIGHT OF THE PORTFOLIOS. The Board of Trustees and officers meet
regularly to review the Portfolios' general policies, investments, performance,
expenses and other business affairs. The Board consists of eight persons.
INVESTMENT ADVISORY SERVICES. Subject to the general supervision of the Board,
Norwest makes investment decisions for the Portfolios and continuously reviews
and determines the allocation of the assets of the Portfolios among the various
Underlying Funds in which the Portfolios invest. Norwest, located at Norwest
Center, Sixth Street and Marquette, Minneapolis, Minnesota 55479, is an indirect
subsidiary of Norwest Corporation, a multi-bank holding company that was
incorporated under the laws of Delaware in 1929. As of June 30, 1997, Norwest
Corporation had assets of $83.6 billion, which made it the 11th largest bank
holding company in the United States.
ADVISORY FEES. For its services, Norwest is entitled to receive investment
advisory and allocation fees from Norwest WealthBuilder II Growth Portfolio,
Norwest WealthBuilder II Growth and Income Portfolio and Norwest WealthBuilder
II Growth Balanced Portfolio at the annual rate 0.35% of each Portfolio's
respective average daily net assets.
PORTFOLIO MANAGERS. Many persons on the advisory staff of Norwest contribute to
the investment services provided to the Portfolios. The following persons,
however, are primarily responsible for day-to-day management and allocation
services and have been since the inception of each Portfolio. For periods prior
to June 1, 1997, all persons associated with Norwest served in their current
positions with Norwest Bank. In addition to their responsibilities as listed
below, each portfolio manager associated with Norwest may perform portfolio
management and other duties for Norwest Bank.
NORWEST WEALTHBUILDER II GROWTH PORTFOLIO,
NORWEST WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO AND
NORWEST WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
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The investment management team of Amala Thakkar, CFA, Institutional Product
Manager and Galen Blomster, Vice President, is primarily responsible for the
day-to-day management of each Portfolio's portfolio of investments and has so
managed the each Portfolio's investments since its inception. Ms. Thakkar and
Mr. Blomster have been employed by Norwest since 1994 and 1977, respectively.
MANAGEMENT, ADMINISTRATION, AND DISTRIBUTION. As manager, Forum supervises the
overall management of the Trust (including the Trust's receipt of services for
which the Trust is obligated to pay) other than investment advisory services.
In this capacity Forum provides the Trust with general office facilities and
persons satisfactory to the Board to serve as officers of the Trust and oversees
the performance of administrative and professional services rendered to the
Portfolios by others, including the Portfolios' custodian, transfer agent,
accountants, auditors and legal counsel. FAS is responsible for performing
certain administrative services necessary for the Trust's operations with
respect to each Portfolio including, but not limited to: (i) preparing and
printing updates of the Trust's registration statement and prospectuses and
preparing the Trust's tax returns and reports to its shareholders, the SEC and
state securities administrators; (ii) preparing proxy and information statements
and any other communications to shareholders; (iii) monitoring the sale of
shares and ensuring that such shares are properly and duly registered with the
SEC and applicable state securities administrators; and (iv) determining the
amount of and supervising the declaration of dividends and distributions to
shareholders.
As of June 30, 1997, Forum and FAS provided management and administrative
services to registered investment companies and collective investment funds with
assets of approximately $25.5 billion. Forum is a member of the National
Association of Securities Dealers, Inc. For their services with respect to each
Portfolio, Forum and FAS each receives a fee at an annual rate of 0.05% of the
Portfolio's average daily net assets.
Pursuant to a separate agreement, Forum Accounting Services, Limited Liability
Company ("Forum Accounting") provides portfolio accounting services to each
Portfolio. Forum, FAS, and Forum Accounting are members of the Forum Financial
Group of companies that together provide a full range of services to the
investment company and financial services industry. As of June 1, 1997, Forum,
FAS and Forum Accounting were controlled by John Y. Keffer, President and
Chairman of the Trust.
Distribution Plan
Forum acts as distributor of the Portfolio's shares. The Trust may compensate
Forum under a distribution plan, adopted pursuant to Rule 12b-1 under the 1940
Act (the "Distribution Plan") by the Trust on behalf of the Portfolio's shares.
Forum, in turn, may use these payments to compensate others for services
provided, or to reimburse others for expenses incurred, in connection with the
distribution of shares. The Distribution Plan authorizes monthly payments at an
annual rate of up to 0.75% of the Portfolio's average daily net assets. No
payments will be made under the Distribution Plan until the Board so authorizes.
Payments under the Distribution Plan may be for various types of costs,
including: (i) advertising expenses; (ii) costs of printing prospectuses and
other materials to be given or sent to prospective investors; (iii) expenses of
sales employees or agents of Forum, including salary, commissions, travel and
related expenses in connection with the distribution of shares; (iv) payments to
broker-dealers who advise shareholders regarding the purchase, sale, or
retention of shares; and (v) payments to banks, trust companies, broker-dealers
(other than Forum) or other financial organizations (collectively, "Service
Organizations"). Payments to a particular Service Organization under the
Distribution Plan will be calculated by reference to the average daily net
assets of shares owned beneficially by investors who have a brokerage or other
service relationship with the Service Organization. The Portfolio will not be
liable for distribution expenditures made by Forum in any given year in excess
of the maximum amount payable under the Distribution Plan in that year. Costs
or expenses in excess of the annual limit may not be carried forward to future
years. Salary expenses of sales personnel who are responsible for marketing
various shares of portfolios of the Trust may be allocated to those portfolios,
including the shares of the Portfolio, that have adopted a plan similar to that
of the Portfolio on the basis of average daily net assets. Travel expenses may
be allocated to, or divided among, the particular portfolios of the Trust for
which they are incurred.
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Forum receives no fees for its services as the distributor of the shares. From
its own resources, Forum may pay fees to broker-dealers or other persons for
distribution or other services related to the Portfolios.
TRANSFER AND SHAREHOLDER SERVICES AGENT. Norwest Bank serves as transfer and
shareholder services agent for the Portfolios. The transfer agent maintains an
account for each Portfolio shareholder (unless such accounts are maintained by
sub-transfer agents or other processing agents), performs other transfer agency
functions and acts as dividend disbursing agent for the Trust. The transfer
agent is permitted to subcontract any or all of its functions with respect to
all or any portion of the Fund's shareholders to one or more qualified
sub-transfer agents or processing agents, which may be affiliates of the
transfer agent. Sub-transfer agents and processing agents may be "Processing
Organizations" as described under "How to Buy Shares Purchase Procedures". The
transfer agent is permitted to compensate those agents for their services;
however, that compensation may not increase the aggregate amount of payments by
the Trust with respect to the Portfolios to the transfer agent. For its
services, the transfer agent is entitled to receive a fee with respect to each
Portfolio at an annual rate of 0.25% of its average daily net assets.
Norwest Bank also serves as each Portfolio's custodian and may appoint
subcustodians for any securities and other assets held in depositories. For its
custodial service, Norwest Bank is entitled to receive a fee with respect to
each Portfolio at an annual rate of: 0.02% of the first $100 million of the
Portfolio's average daily net assets, 0.015% of the next $200 million of the
Portfolio's average daily net assets and 0.01% of the Portfolio's remaining
average daily net assets. No fee is payable by a Portfolio to the extent the
Portfolio is invested in one or more Underlying Funds.
EXPENSES. Subject to the obligation of Norwest and Norwest Bank to waive fees
and/or reimburse the Trust for certain expenses of the Portfolios, each
Portfolio is responsible for all expenses related to its operations. Each
Portfolio bears all costs of its operations other than expenses specifically
assumed by the Investment Adviser. The costs borne by the Portfolio include a
pro rata portion of the following: legal and accounting expenses; Trustees'
fees and expenses; insurance premiums, custodian and transfer agent fees and
expenses; brokerage fees and expenses; expenses of registering and qualifying
the Portfolio's shares for sale with the SEC and with various state securities
commissions; expenses of obtaining quotations on portfolio securities and
pricing of the Portfolio's shares; a portion of the expenses of maintaining the
Portfolio's legal existence and of shareholders' meetings; and expenses of
preparation and distribution to existing shareholders of reports, proxies and
prospectuses. Trust expenses directly attributed to the Portfolio are charged
to the Portfolio; other expenses are allocated proportionately among all the
series of the Trust in relation to the net assets of each series. The
Investment Adviser has undertaken voluntarily to waive a portion of its fees and
or assume certain expenses of the Portfolio in order to limit total Portfolio
expenses excluding taxes, interest, brokerage commissions and other Portfolio
transaction expenses and extraordinary expenses to 1.25% of the Portfolio's
average daily net assets. If expense reimbursements are required, they are made
on a monthly basis.
The Portfolio's pro rata share of the expenses of the Underlying Funds in which
a Portfolio invests (borne indirectly by the Portfolio's shareholders); Trust
expenses allocable to a Portfolio, and expenses not specifically attributable to
the Portfolios, which are allocated among the Portfolios and all other series of
the Trust in proportion to their average net assets. Each Portfolio service
provider may elect to waive all or a portion of its fees, which are accrued
daily and paid monthly. Any such waivers have the effect of increasing a
Portfolio's performance for the period during which the waiver is in effect.
Except as described above, fee waivers are voluntary and may be reduced or
eliminated at any time.
Each service provider to the Trust or its agents and affiliates also may act in
various capacities for, and receive compensation from, their customers who are
Portfolio shareholders. Under agreements with those customers, these entities
may elect to credit against the fees payable to them by their customers or to
rebate to customers all or a portion of any fee received from the Trust with
respect to assets of those customers invested in a Portfolio.
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PURCHASES AND REDEMPTIONS OF SHARES
Shares are continuously sold and redeemed at a price equal to their net asset
value next-determined after acceptance of an order on every weekday except
customary national holidays and Good Friday ("Portfolio Business Day").
GENERAL PURCHASE INFORMATION
Investments in the Portfolios may be made either through certain financial
institutions or by an investor directly. An investor who invests in a Portfolio
directly is the shareholder of record. All transactions in the Portfolios'
shares are effected through the transfer agent, which accepts orders for
redemptions and subsequent purchases only from shareholders of record and new
investors. Shareholders of record receive from the Trust periodic statements
listing all account activity during the statement period. You must pay for your
shares in U.S. dollars by check or money order (drawn on a U.S. bank), by bank
or federal funds wire transfer, or by electronic bank transfer; cash cannot be
accepted.
When you sign your application for a new Portfolio account, you are certifying
that your Social Security or other taxpayer ID number is correct and that you
are not subject to backup withholding. If you violate certain federal income
tax provisions, the Internal Revenue Service can require the Trust to withhold
31% of your distributions and redemptions.
Each Portfolio offers one class of shares -- Class C shares. Shares are sold
to investors with an initial sales charge of 1.5%.
Purchase orders received by the transfer agent prior to the close of regular
trading on the New York Stock Exchange ("NYSE") on any Portfolio Business Day
are priced at the net asset value determined that day (the "trade date").
Orders received by financial institutions prior to the close of regular
trading on the NYSE on a Portfolio Business Day, also are priced at the net
asset value determined that day, provided the order is received by the Trust
prior to 4:00 p.m. (Eastern time). For shares purchased through financial
institutions that transmits its orders to the Portfolio, payment for
Portfolio shares is due on the third business day after the trade date. In
all other cases, payment must be made with the purchase order.
Forum may pay a broker-dealers' reallowance to selected broker-dealers
purchasing shares as principal or agent, which may include banks, bank
affiliates and Processing Organizations. Normally, Forum reallows discounts
to selected broker-dealers. Forum reallows the entire sales charge to
selected broker-dealers for all sales with respect to which orders are placed
with Forum. The broker-dealers' reallowance may be changed from time to time.
Forum may make additional payments (out of its own resources) to selected
broker-dealers of up to 1.00% of the value of Portfolio shares purchased at
net asset value.
In addition, from time to time and at its own expense, Forum may provide
compensation, including financial assistance, to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns or other dealer-sponsored special events.
Compensation may include: (i) the provision of travel arrangements and lodging,
(ii) tickets for entertainment events and (iii) merchandise.
No sales charge is assessed on purchases: (i) by any bank, trust company or
other institution acting on behalf of its fiduciary customer accounts or any
other account maintained by its trust department (including a pension, profit
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Internal Revenue Code of 1986, as amended); (ii) by
trustees and officers of the Trust; directors, officers and full-time employees
of Forum, of Norwest Corporation or of any of their affiliates; the spouse,
direct ancestor or direct descendant (collectively, "relatives") of any such
person; any trust or individual retirement account or self-employed retirement
plan for the benefit of any such person or relative; or the estate of any such
person or relative; and (iii) by any registered investment adviser with whom
Forum has entered into a share purchase agreement and which is acting on behalf
of its fiduciary customer accounts. Shares sold without a sales charge may not
be resold except to the Portfolios, and share purchases must be made for
investment purposes.
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REINSTATEMENT PRIVILEGE. If you have redeemed a Portfolio's Class C shares, you
may, within 60 days following the redemption, purchase C shares, without payment
of an additional a front-end sales charge, in Norwest WealthBuilder II
Portfolios in an amount up to the amount of your redemption. If you want to
exercise this "Reinstatement Privilege", please contact the Trust for further
information.
REDUCED INITIAL SALES CHARGES. To qualify for a reduced sales charge, you or
your Processing Organization must notify the transfer agent at the time of
purchase of your intention to qualify, and you must provide the transfer agent
with sufficient information to verify that your purchase qualifies, for the
reduced sales charges, which are as follows:
SALES CHARGE AS A % OF DOLLAR
AMOUNT OF PURCHASE AMOUNT SUBJECT TO CHARGE
----------------------------- -----------------------------
$25,000 up to $250,000 1.5%
$250,000 up to $500,000 1.25%
$500,000 up to $1,000,000 1.00%
$1,000,000 and up 0.75%
Reduced sales charges may be modified or terminated at any time and are subject
to confirmation of your holdings. Further information about reduced sales
charges is contained in the SAI.
SELF-DIRECTED 401 PROGRAMS. Purchases of Portfolio shares through self-directed
401(k) programs and other qualified retirement plans offered by Norwest Bank,
Forum or their affiliates in accumulated amounts of less than $100,000 are
subject to a reduced sales charge applicable to a single purchase of $100,000.
HOW TO BUY SHARES
MINIMUM INVESTMENT
There is a $25,000 minimum initial investment in the Norwest WealthBuilder II
Portfolios. There is a $500 minimum for subsequent purchases of Portfolio
shares, except for IRA and systematic investing where the subsequent investment
minimum is reduced to $150. The investment adviser may in its discretion waive
the investment minimums.
PURCHASE PROCEDURES
INITIAL PURCHASES. THERE ARE THREE WAYS TO PURCHASE SHARES INITIALLY.
1. BY MAIL. Investors may send a check or money order (cash cannot be
accepted) along with a completed account application to the Trust at the
address listed under "Account Application". Checks or money orders are
accepted at full value subject to collection. If a check or money order does
not clear, the purchase order is canceled, and the investor is liable for any
losses or fees incurred by the Trust, the transfer agent or Forum.
For individual or Uniform Gift to Minors Act accounts, your check or money
order used to purchase shares of a Portfolio must be made payable to Norwest
WealthBuilder II Portfolios ["Portfolio Name"] or to one or more owners of
that account and endorsed to "Norwest WealthBuilder II Portfolios
["Portfolio Name"]. No other method of payment by check is accepted. For
corporation, partnership, trust, 401(k) plan or other non-individual type
accounts, your check to purchase Portfolio shares must be made payable on its
face to "Norwest WealthBuilder II Portfolios ["Portfolio Name"]. No other
method of payment by check is accepted.
2. BY BANK WIRE. You may make an initial investment in a Portfolio using
the wire system for transmittal of money among banks. You should first
telephone the transfer agent at [(612) 667-8833] or [(800) 338-1348] to
obtain an account number. You then should instruct your bank to wire the
money immediately to:
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NORWEST BANK MINNESOTA, N.A.
ABA 091 000 019
FOR CREDIT TO: "Norwest WealthBuilder II Portfolios
0844-131
RE: [NAME OF PORTFOLIO]
ACCOUNT NO.:
ACCOUNT NAME:
You then should promptly complete and mail the account application form. Your
bank may impose a charge on you for transmitting the money by bank wire. The
Trust does not charge investors for the receipt of wire transfers. Payment by
bank wire is treated as a federal funds payment when received.
3. THROUGH FINANCIAL INSTITUTIONS. You may purchase and redeem shares through
certain broker-dealers, banks and other financial institutions ("Processing
Organizations"). The transfer agent, Forum and their affiliates may be
Processing Organizations. Processing Organizations may receive as a
broker-dealer's reallowance a portion of the sales charge paid by their
customers who purchase Class C shares, may receive payments from Forum with
respect to sales of Class C shares, and may receive payments as a processing
agent from the transfer agent. In addition, financial institutions, including
Processing Organizations, may charge you a fee for their services; they are
responsible for promptly transmitting purchase, redemption and other requests to
the Portfolios.
If you purchase shares through a Processing Organization, you are subject to
the procedures of that Processing Organization, which may include charges,
limitations, investment minimums, cutoff times and restrictions in addition
to, or different from, those applicable to shareholders who invest in a
Portfolio directly. You should acquaint yourself with the Processing
Organization's procedures and should read this Prospectus in conjunction with
any materials and information that they have provided to you. If you
purchase Portfolio shares through a Processing Organization, you may or may
not be the shareholder of record and, subject to their and the Portfolios'
procedures, you may have Portfolio shares transferred into the name of that
Processing Organization. There is typically a three-day settlement period for
purchases and redemptions through broker-dealers. Certain Processing
Organizations also may enter purchase orders with payment to follow.
Certain shareholder services may not be available to you if you have
purchased shares through a Processing Organization. You should contact your
Processing Organization for further information. The Trust may confirm
purchases and redemptions of a Processing Organization's customers directly
to the Processing Organization, which in turn would provide you with
confirmations and periodic statements. The Trust is not responsible for the
failure of any Processing Organization to carry out its obligations to you or
other customers.
SUBSEQUENT PURCHASES
Subsequent purchases may be made by mailing a check, by sending a bank wire,
or through your Processing Organization as indicated above. All payments
should clearly indicate your name and account number.
ACCOUNT APPLICATION
You may obtain an account application to open an account by writing the Trust at
the following address:
NORWEST WEALTHBUILDER II PORTFOLIOS
[NAME OF PORTFOLIO]
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT
733 MARQUETTE AVENUE
MINNEAPOLIS, MN 55479-0040
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To participate in shareholder services not referenced on your account
application or to change information on your account (such as addresses), please
contact the Trust. The Trust reserves the right in the future to modify, limit
or terminate any shareholder privilege upon appropriate notice to shareholders
and to charge a fee for certain shareholder services, although no such fees are
currently contemplated. You may terminate any privilege and participation in
any program at any time by writing the Trust.
GENERAL INFORMATION
Portfolio shares are continuously sold on every Business Day, which excludes
customary national business holidays and Good Friday. The purchase price for
Portfolio shares equals their net asset value next-determined after acceptance
of an order plus any applicable sales charge imposed at the time of purchase.
Portfolio shares become entitled to receive dividends and distributions on the
next Portfolio Business Day after a purchase order is accepted. The Trust
reserve the right to reject any purchase order for shares. Share certificates
are issued only to shareholders of record upon their written request, and no
certificates are issued for fractional shares.
Investments in a Portfolio may be made either through certain financial
institutions or by an investor directly. An investor who invests in a
Portfolio directly is the shareholder of record. All transactions in
Portfolio shares are effected through the transfer agent, which accepts
orders for redemptions and for subsequent purchases only from shareholders of
record. Shareholders of record will receive from the Trust periodic
statements listing all account activity during the statement period.
HOW TO SELL SHARES
GENERAL INFORMATION
You may sell your Portfolio shares (redeem) at their net asset value on any
Portfolio Business Day. There is no minimum period of investment and no
restriction on the frequency of redemptions.
Your Portfolio shares are redeemed as of the next determination of the
Portfolio's net asset value following acceptance by the transfer agent of
your redemption order in proper form (and any supporting documentation that
the transfer agent may require). You are not entitled to receive dividends
declared on your redeemed shares after the day the redemption becomes
effective.
Normally, your redemption proceeds are paid immediately, but in no event later
than seven days following acceptance of a redemption order. Proceeds of
redemption requests (and exchanges), however, will not be paid unless any check
used to purchase your shares being redeemed has been cleared by your bank, which
may take up to 15 days. This delay may be avoided by paying for shares through
wire transfers. Unless otherwise indicated, redemption proceeds normally are
paid by check mailed to your record address. Your right of redemption may not
be suspended nor the payment date postponed for more than seven days after the
tender of the shares to a Portfolio, except when the New York Stock Exchange is
closed (or when trading thereon is restricted) for any reason other than its
customary weekend or holiday closings, for any period during which an emergency
exists as a result of which disposal by the Portfolio of its portfolio
securities or determination by the Portfolio of the value of its net assets is
not reasonably practicable and for such other periods as the SEC may permit.
REDEMPTION PROCEDURES
If you have invested through a Processing Organization, you may redeem your
shares through the Processing Organization as described above. If you have
invested directly in a Portfolio, you may redeem your shares as described
below. If you wish to redeem shares by telephone or receive redemption
proceeds by bank wire, you must elect these options by properly completing
the appropriate sections of your account application form. These privileges
may not be available until several weeks after your application is received.
Shares for which certificates have been issued may not be redeemed by
telephone.
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1. BY MAIL. You may redeem shares by sending a written request to the
transfer agent accompanied by any share certificate that may have been issued
to the shareholder to evidence the shares being redeemed. All written
requests for redemption must be signed by the shareholder with signature
guaranteed, and all certificates submitted for redemption must be endorsed by
the shareholder with signature guaranteed. See "How to Sell Shares - Other
Redemption Matters."
2. BY TELEPHONE. A shareholder who has elected telephone redemption
privileges may make a telephone redemption request by calling the transfer
agent at (800) 338-1348 or (612) 667-8833 and providing the shareholder's
account number, the exact name in which his shares are registered and the
shareholder's social security or taxpayer identification number. In response
to the telephone redemption instruction, the Trust will mail a check to the
shareholder's record address or, if the shareholder has elected wire
redemption privileges, wire the proceeds. See "How to Sell Shares - Other
Redemption Matters."
3. BY BANK WIRE. For redemptions of more than $5,000, a shareholder who has
elected wire redemption privileges may request a Portfolio to transmit the
redemption proceeds by federal funds wire to a bank account designated in
writing by the shareholder. To request bank wire redemptions by telephone,
the shareholder also must have elected the telephone redemption privilege.
Redemption proceeds are transmitted by wire on the day after a redemption
request in proper form is received by the transfer agent.
OTHER REDEMPTION MATTERS
To protect shareholders and the Portfolios against fraud, signatures on
certain requests must have a signature guarantee. Requests must be made in
writing and include a signature guarantee for any of the following
transactions: (i) endorsement on a share certificate; (ii) instruction to
change a shareholder's record name; (iii) modification of a designated bank
account for wire redemptions; (iv) instruction regarding an Automatic
Investment Plan or Automatic Withdrawal Plan, (v) dividend and distribution
election; (vi) telephone redemption; (vii) exchange option election or any
other option election in connection with the shareholder's account; (viii)
written instruction to redeem Shares whose value exceeds $50,000; (ix)
redemption in an account in which the account address has changed within the
last 30 days; (x) redemption when the proceeds are deposited in a Norwest
Advantage Funds account under a different account registration; and (xi) the
remitting of redemption proceeds to any address, person or account for which
there are not established standing instructions on the account.
Signature guarantees may be provided by any bank, broker-dealer, national
securities exchange, credit union, savings association or other eligible
institution that is authorized to guarantee signatures and is acceptable to
the transfer agent. Whenever a signature guarantee is required, the signature
of each person required to sign for the account must be guaranteed.
Shareholders who want telephone redemption or exchange privileges must elect
those privileges. The Trust and transfer agent will employ reasonable
procedures in order to verify that telephone requests are genuine, including
recording telephone instructions and causing written confirmations of the
resulting transactions to be sent to shareholders. If the Trust and transfer
agent did not employ such procedures, they could be liable for losses due to
unauthorized or fraudulent telephone instructions. Shareholders should
verify the accuracy of telephone instructions immediately upon receipt of
confirmation statements. During times of drastic economic or market changes,
telephone redemption and exchange privileges may be difficult to implement.
In the event that a shareholder is unable to reach the transfer agent by
telephone, requests may be mailed or hand-delivered to the transfer agent.
Due to the cost to the Trust of maintaining smaller accounts, the Trust
reserves the right to redeem, upon not less than 60 days' written notice, all
shares in any Portfolio account whose aggregate net asset value is less than
$1,000 immediately following any redemption.
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OTHER SHAREHOLDER SERVICES
EXCHANGES
You may exchange your shares for Class C shares of the other Norwest
WealthBuilder II Portfolios. For information, please contact the transfer agent
The Portfolios do not charge for exchanges, and there is currently no limit on
the number of exchanges a shareholder may make. The Trust reserves the right,
however, to limit excessive exchanges by any shareholder or to impose a fee on
per exchange over a minimum amount. Exchanges are subject to the fees charged
by, and the limitations (including minimum investment restrictions) of, the
Portfolio into which you are exchanging.
Exchanges may only be made between identically registered accounts or by opening
a new account. A new account application is required to open a new account
through an exchange if the new account will not have an identical registration
and the same shareholder privileges as the account from which your exchange is
being made. Your may only exchange into a Portfolio if that Portfolio's shares
may legally be sold in your state of residence.
Under federal tax law, the Portfolios treat an exchange as a redemption and a
purchase. Accordingly, a shareholder may 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 the shares at the time of the exchange. Exchange
procedures may be amended materially or terminated by the Trust at any time upon
60 days' notice to shareholders. See "Additional Purchase and Redemption
Information" in the SAI.
SALES CHARGES. The exchange of C shares may result in additional sales
charges. If an exchange of C shares is made into a Portfolio that imposes an
initial sales charge, you are required to pay an amount equal to any excess
of that Portfolio's initial sales charge attributable to the number of shares
being acquired in the exchange over any initial sales charge paid by the
shareholder for the C shares being exchanged. For example, if you paid a 1%
initial sales charge in connection with a purchase of shares and then
exchanged those shares into shares of another Portfolio subject to the 1.5%
sales charge, you would pay the differential sales charge on the exchange. C
shares acquired through the reinvestment of dividends or distributions are
deemed to have been acquired with a sales charge rate equal to that
applicable to the shares on which the dividends or distributions were paid.
1. EXCHANGES BY MAIL. Exchanges may be made by sending a written request to
the transfer agent accompanied by any share certificates for the shares to be
exchanged. All written requests for exchanges must be signed by the
shareholder, and all certificates submitted for exchange must be endorsed by
the shareholder with signature guaranteed. See "How to Sell Shares -- Other
Redemption Matters."
2. EXCHANGES BY TELEPHONE. A shareholder who has elected telephone exchange
privileges may make a telephone exchange request by calling the transfer
agent at (800) 338-1348 or (612) 667-8833 and providing the shareholder's
account number, the exact name in which the shareholder's shares are
registered and the shareholder's social security or taxpayer identification
number. (See "How to Sell Shares - Other Redemption Matters.")
AUTOMATIC INVESTMENT PLAN
Under the Portfolios' Automatic Investment Plan, shareholders may authorize
monthly amounts of $150 or more to be withdrawn automatically from your
designated bank account (other than passbook savings) and sent to the
transfer agent for investment in Shares of a Portfolio. If you wish to use
this plan, you must complete an application which may be obtained by writing
or calling the transfer agent. The Trust may modify or terminate the
automatic investment plan with respect to any shareholder in the event that
the Trust is unable to settle any transaction with the shareholder's bank.
If the Automatic Investment Plan is terminated before your account totals
$25,000, the Trust reserves the right to close the account in accordance with
the procedures described under "How to Sell Shares - Other Redemption
Matters."
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RETIREMENT ACCOUNTS
The Portfolios may be a suitable investment vehicle for part or all of the
assets you hold in individual retirement accounts ("IRAs"). An IRA account
application may be obtained by contacting the Trust at (800) 338-1348 or
(612) 667-8833. Generally, all contributions and investment earnings in an
IRA generally are tax-deferred until you withdrawn them. You generally may
make tax-deductible IRA contributions of up to a maximum of $2,000 annually.
However, your deduction is reduced if you or, in the case of a married
individual filing jointly, either you or the your spouse is an active
participant in an employer-sponsored retirement plan and has adjusted gross
income above certain levels.
Your employer may also contribute to your IRA as part of a Savings Incentive
Match Plan for Employees, or "SIMPLE plan," established after December 31,
1996. Under a SIMPLE plan, you may contribute up to $6,000 annually to the
employee's IRA, and the employer must generally match such contributions up
to 3% of the employee's annual salary. Alternatively, the employer may elect
to contribute to the employee's IRA 2% of the lesser of the employee's earned
income or $150,000.
The foregoing discussion regarding IRAs is based on regulations in effect as
of June 1, 1997 and summarizes only some of the important federal tax
considerations generally affecting IRA contributions made by individuals or
their employers. It is not intended as a substitute for tax planning. You
should consult your tax advisors with respect to their specific tax
situations as well as with respect to state and local taxes.
AUTOMATIC WITHDRAWAL PLAN
A shareholder whose shares in a single account total $25,000 or more may
establish a withdrawal plan to provide for the preauthorized payment from
your account of $250 or more on a monthly, quarterly, semi-annual or annual
basis. Under the withdrawal plan, sufficient shares in your account are
redeemed to provide the amount of the periodic payment and any taxable gain
or loss is recognized by your upon redemption of the shares. If you wish to
utilize the withdrawal plan, you may do so by completing an application which
may be obtained by writing or calling the transfer agent. The Trust may
suspend your withdrawal privileges without notice if your account contains
insufficient funds to effect a withdrawal or if your account balance averages
less than $25,000 over a period of twelve (12) months.
REOPENING ACCOUNTS
A shareholder may reopen an account, without filing a new account application
form, at any time within one year after the shareholder's account is closed,
provided that the information on the account application form on file with the
Trust is still applicable.
DIVIDENDS AND TAX MATTERS
DIVIDENDS
Dividends and distributions of each Portfolio's net investment income are
declared and paid annually. Distributions of any net capital gain realized by a
Portfolio are distributed annually.
You may choose to have dividends and distributions of a Portfolio reinvested
in shares of that Portfolio (the "Reinvestment Option") or to receive
dividends and distributions in cash (the "Cash Option") or to direct
dividends and distributions to be reinvested in shares of another series of
the Trust (the "Directed Dividend Option"). All dividends and distributions
are treated in the same manner for federal income tax purposes whether
received in cash or reinvested in shares of a fund.
Under the Reinvestment Option, all dividends and distributions of a Portfolio
are automatically invested in additional shares of that Portfolio. All
dividends and distributions are reinvested at a Fund's net asset value as of the
payment date of the dividend or distribution. You are assigned this option
unless one of the other two options is selected. Under the
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Cash Option, all dividends and distributions are paid to the shareholder in
cash. Under the Directed Dividend Option, shareholders of a Portfolio whose
shares in a single account of that Portfolio total $25,000 or more may elect to
have all dividends and distributions reinvested in shares of another series of
the Trust, provided that those shares are eligible for sale in the shareholder's
state of residence. For further information concerning the Directed Dividend
Option, shareholders should contact the transfer agent.
TAX MATTERS
Each Portfolio intends to qualify for each fiscal year to be taxed as a
"regulated investment company" under the Internal Revenue Code of 1986 (the
"Code"). As such, each Portfolio will not be liable for federal income and
excise taxes on the net investment income and capital gain distributed to its
shareholders. Because each Portfolio intends to distribute all of its net
investment income and net capital gain each year, each Portfolio should thereby
avoid all federal income and excise taxes.
Dividends paid by a Portfolio out of its net investment income (including net
short-term capital gain) are taxable to shareholders of the Portfolio as
ordinary income. Distributions of net long-term capital gain by a Portfolio
are taxable to shareholders of the Portfolio as long-term capital gain,
regardless of the length of time the shareholder may have held shares in the
Portfolio at the time of distribution. If a shareholder holds shares for six
months or less and during that period receives a long-term capital gain
distribution, any loss realized on the sale of the shares during that
six-month period will be a long-term capital loss to the extent of the
distribution. Dividends and distributions reduce the net asset value of the
Portfolio paying the dividend or distribution by the amount of the dividend
or distribution. Furthermore, a dividend or distribution made shortly after
the purchase of shares by a shareholder, although in effect a return of
capital to that particular shareholder, will be taxable to the shareholder as
described above.
It is expected that a portion of each Portfolio's dividends from net
investment income will be eligible for the dividends received deduction for
corporations. The amount of such dividends eligible for the dividends
received deduction is limited to the amount of dividends from domestic
corporations received during a Portfolio's fiscal year. To the extent a
Portfolio or one of its Underlying Funds invests in the securities of
domestic issuers, dividends received by corporate shareholders of the
Portfolio may qualify for the dividends received deduction for corporations.
Each Portfolio is required by federal law to withhold 31% of reportable payments
(which may include dividends, capital gain distributions and redemptions) paid
to a shareholder who fails to provide the Portfolio with a correct taxpayer
identification number or to make required certifications, or who is subject to
backup withholding.
Reports containing appropriate information with respect to the federal income
tax status of dividends and distributions paid during the year by each Portfolio
will be mailed to shareholders shortly after the close of each calendar year.
Investment income received by a Portfolio from sources within foreign countries
may be subject to foreign income or other taxes. Any such applicable Portfolio
intends to elect, if eligible to do so, to permit its shareholders to take a
credit (or a deduction) for foreign income and other taxes paid by the
corresponding Underlying Fund. Shareholders of that Portfolio will be notified
of their share of those foreign taxes and will be required to treat the amount
of such foreign taxes as additional income. In that event, the shareholder may
be entitled to claim a credit or deduction for those taxes.
OTHER INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of each Portfolio is determined as
of 4:00 p.m., Eastern time, on each Portfolio Business Day by dividing the value
of the Portfolio's net assets (i.e., the value of its securities and other
assets less its liabilities) by the number of shares outstanding at the time the
determination is made. Securities owned by a Portfolio for which market
quotations are readily available are valued at current market value or, in their
absence, at fair value as determined by the Board or pursuant to procedures
approved by the Board.
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In accordance with the 1940 Act, the Underlying Funds are valued at their
respective net asset values as determined by those funds. The underlying money
market funds value their portfolio securities in accordance with Rule 2a-7
promulgated under the 1940 Act. The other Underlying Funds value their portfolio
securities based on market quotes if they are readily available. The Investment
Adviser assigns fair values to the Portfolios' other investments in good faith
under guidelines adopted by the Board of Trustees. The Board of Trustees reviews
these values regularly.
Trading in securities on European, Far Eastern and other international
securities exchanges and over-the-counter markets is normally completed well
before the close of business on each Portfolio Business Day. In addition,
trading in foreign securities generally or in a particular country or
countries may not take place on all Portfolio Business Days. Trading does
take place in various foreign markets, however, on days on which a
Portfolio's net asset value is not calculated. Calculation of the net asset
value per share of a Portfolio may not occur contemporaneously with the
determination of the prices of the foreign securities used in the
calculation. Events affecting the values of foreign securities that occur
after the time their prices are determined and before the Portfolio's
determination of net asset value will not be reflected in the Portfolio's
calculation of net asset value unless Norwest determines that the particular
event would materially affect net asset value, in which case an adjustment
will be made.
All assets and liabilities denominated in foreign currencies are converted
into United States dollars at the mean of the bid and asked prices of such
currencies against the United States dollar last quoted by a major bank prior
to the time of conversion.
PERFORMANCE INFORMATION
A Portfolio's performance may be quoted in terms of yield or total return.
ALL PERFORMANCE INFORMATION IS BASED ON HISTORICAL RESULTS AND IS NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. A Portfolio's yield is a way of
showing the rate of income the Portfolio earns on its investments as a
percentage of the Portfolio's share price. To calculate standardized yield,
a Portfolio takes the income it earned from its investments for a 30-day
period (net of expenses), divides it by the average number of shares entitled
to receive dividends, and expresses the result as an annualized percentage
rate based on the Portfolio's share price at the end of the 30-day period. A
Portfolio's total return shows its overall change in value, including changes
in share price and assuming all the Portfolio's dividends and distributions
are reinvested. A cumulative total return reflects a Portfolio's performance
over a stated period of time. An average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative total return if the Portfolio's performance had been constant over
the entire period. Because average annual returns tend to smooth out
variations in the Portfolios' returns, shareholders should recognize that
they are not the same as actual year-by-year results. Published yield
quotations are, and total return figures may be, based on amounts invested in
a Portfolio net of sales charges that may be paid by an investor. A
computation of yield or total return that does not take into account sales
charges paid by an investor will be higher than a similar computation that
takes into account payment of sales charges.
The Portfolios' advertisements may reference ratings and rankings among
similar mutual funds by independent evaluators such as Morningstar, Inc.,
Lipper Analytical Services, Inc. and IBC/Donoghue, Inc. In addition, the
performance of a Portfolio may be compared to securities indices. These
indices may be comprised of a composite of various recognized securities
indices to reflect the investment policies of a fund that invests its assets
using different investment styles. Indices are not used in the management of
a Portfolio but rather are standards by which an Adviser and shareholders may
compare the performance of a Portfolio to an unmanaged composite of
securities with similar, but not identical, characteristics as the Portfolio.
This material is not to be considered representative or indicative of future
performance. All performance information for a Portfolio is calculated on a
class basis.
THE TRUST AND ITS SHARES
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The Trust has an unlimited number of authorized shares of beneficial interest.
The Board may, without shareholder approval, divide the authorized shares into
an unlimited number of separate portfolios or series (such as a Portfolio) and
may divide portfolios or series into classes of shares (such as A shares); the
costs of doing so is borne by the Trust or Portfolio in accordance with the
Trust Instrument. Currently the authorized shares of the Trust are divided into
thirty-five separate series.
SHAREHOLDER VOTING AND OTHER RIGHTS. Each share of each series or class
thereof of the Trust has equal dividend, distribution, liquidation and voting
rights, and fractional shares have those rights proportionately, except that
expenses related to the distribution of the shares of a class (and certain
other expenses such as transfer agency and administration expenses) may be
borne solely by those shares and each fund or class votes separately with
respect to the provisions of any Rule 12b-1 plan which pertains to the fund
or class and other matters for which separate fund or class voting is
appropriate under applicable law. Generally, shares are voted in the
aggregate without reference to a particular fund or class, except if the
matter affects only one fund or class or voting by series or class is
required by law, in which case shares will be voted separately by series or
class, as appropriate. Delaware law does not require the Trust to hold
annual meetings of shareholders, and it is anticipated that shareholder
meetings will be held only when specifically required by federal or state
law. Shareholders (and Trustees) have available certain procedures for the
removal of Trustees. There are no conversion or preemptive rights in
connection with shares of the Trust. All shares when issued in accordance
with the terms of the offering will be fully paid and nonassessable. shares
are redeemable at net asset value, at the option of the shareholders. A
shareholder in a series is entitled to the shareholder's pro rata share of
all dividends and distributions arising from that series' assets and, upon
redeeming shares, will receive the portion of the series' net assets
represented by the redeemed shares.
From time to time certain shareholders may own a large percentage of the
shares of a Portfolio and, accordingly, may be able to greatly affect (if not
determine) the outcome of a shareholder vote.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT
OF ADDITIONAL INFORMATION AND THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF THE PORTFOLIOS' SHARES, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE
MADE.
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NORWEST WEALTHBUILDER II PORTFOLIOS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1997
NORWEST WEALTHBUILDER II GROWTH PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
<PAGE>
NORWEST ADVANTAGE PORTFOLIOS
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 Prospectus dated
October 1, 1997, as may be amended from time to time, offering class C Shares
of the separate portfolios of Norwest Advantage Portfolios: Norwest
WealthBuilder II Growth Portfolio, Norwest WealthBuilder II Growth and Income
Portfolio and Norwest WealthBuilder II Growth Balanced Portfolio.
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 OF CONTENTS
Page
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Introduction
1. Investment Policies
Security Ratings Information
Money Market Portfolio Matters
Fixed Income Investments
Mortgage-Backed And Asset-Backed Securities
Interest Rate Protection Transactions
Hedging And Option Income Strategies
Foreign Currency Transactions
Equity Securities and Additional Information
Concerning the Equity Portfolios
Illiquid Securities and Restricted Securities
Borrowing And Transactions Involving Leverage
Repurchase Agreements
Temporary Defensive Position
2. Information Concerning Colorado and Minnesota
Colorado
Minnesota
3. Investment Limitations
Fundamental Limitations
Non-Fundamental Limitations
4. Performance and Advertising Data
SEC Yield Calculations
Total Return Calculations
Other Advertisement Matters
5. Management
Trustees and Officers
Investment Advisory Services
Management and Administrative Services
Distribution
Transfer Agent
Custodian
Portfolio Accounting
Expenses
6. Portfolio Transactions
7. Additional Purchase and Redemption Information
Statement of Intention
Exchanges
Redemptions
Contingent Deferred Sales Charge (A Shares)
Contingent Deferred Sales Charge (A Shares and B Shares)
Conversion of B Shares
8. Taxation
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TABLE OF CONTENTS
Page
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9. Additional Information About the Trust and the Shareholders
of the Portfolios
Determination of Net Asset Value
Counsel and Auditors
General Information
Recent Mergers
Shareholdings
Financial Statements
Registration Statement
Appendix A - Investments, Strategies and Risk Considerations C-1
Appendix B - Description of Securities Ratings C-15
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INTRODUCTION
The Trust was originally organized under the name "Prime Value Portfolios, 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 Portfolios." On
October 1, 1995, the Trust changed its name to "Norwest Advantage Portfolios"
and on June 1, 1997, changed its name back to "Norwest Portfolios." 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. [Class C Shares ___].
Each Portfolio's investment adviser is Norwest Investment Management, Inc.
("Norwest"), a subsidiary of Norwest Bank Minnesota, N.A. ("Norwest Bank").
Norwest Bank, a subsidiary of Norwest Corporation, serves as the Trust's
transfer agent, dividend disbursing agent and custodian.
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
Portfolio's administrator.
As used in this SAI, the following terms shall have the meanings listed:
"Adviser" or "Investment Adviser" shall mean Norwest.
"Board" shall mean the Board of Trustees of the Trust.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Custodian" shall mean Norwest acting in its capacity as custodian of a
Portfolio.
"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 Portfolio accountant.
"Portfolio" shall mean each of the three separate portfolios of the Trust
to which this Statement of Additional Information relates as identified on
the cover page.
"Moody's" shall mean Moody's Investors Service, Inc.
"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.
"SEC" shall mean the U.S. Securities and Exchange Commission.
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"S&P" shall mean Standard & Poor's Rating Group.
"Stock Index Futures" shall mean futures contracts that relate to broadly-
based stock indices.
"Transfer Agent" shall mean Norwest Bank acting in its capacity as transfer
and dividend disbursing agent of the a Portfolio.
"Trust" shall mean Norwest Advantage Portfolios, an open-end, management
investment company registered under the 1940 Act.
"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 Portfolio's investments, investment techniques and
strategies and the risks associated therewith. Certain of the Portfolios are
designed for investment of that portion of an investor's Portfolios which can
appropriately bear the special risks associated with certain types of
investments (i.e., investment in smaller capitalization companies). No
Portfolio may make any investment or employ any investment technique or strategy
not referenced in the Prospectus which relates to that Portfolio. For example,
while the SAI describes "swap" transactions below, only those Portfolios whose
investment policies, as described in the Prospectus, allow the Portfolio to
invest in swap transactions may do so.
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
Portfolios 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 different market prices. If an issue
of securities ceases to be rated or if its rating is reduced after it is
purchased by a Portfolio (neither event requiring sale of such security by a
Portfolio), Norwest will determine whether the Portfolio 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 Portfolio may purchase unrated securities if its Adviser determines the
security to be of comparable quality to a rated security that the Portfolio may
purchase. Unrated securities may not be as actively traded as rated securities.
A Portfolio 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 Portfolio.
To limit credit risks, certain Portfolios 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.)
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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.
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 Portfolios may
invest in U.S. Government Securities. 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 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 Portfolio 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 Portfolio's investment policies.
BANK OBLIGATIONS
Each Portfolio 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-
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related subsidiaries of foreign banks. A Portfolio'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 Portfolio's Adviser believes do not present undue
risk.
A certificate of deposit is an interest-bearing negotiable certificate issued by
a bank against Portfolios 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 Portfolio 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 Portfolio's yield.
Although fixed-time deposits do not in all cases have a secondary market, there
are no contractual restrictions on the Portfolio'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 Portfolios 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 Portfolio 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 Portfolio.
SHORT TERM DEBT SECURITIES/COMMERCIAL PAPER
Each Portfolio 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 Portfolios 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 Portfolio and the issuer, they
are not normally traded. Although there is no secondary market in the notes,
the Portfolio 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 Portfolios may invest in guaranteed investment contracts ("GICs") issued by
insurance companies. Pursuant to such contracts, a Portfolio makes cash
contributions to a deposit Portfolio of the insurance company's general account.
The insurance company then credits to the deposit Portfolio 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.
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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 Portfolio. A Portfolio will purchase a GIC only when the
Investment Adviser has determined that the GIC presents minimal credit risks to
the Portfolio and is of comparable quality to instruments in which the Portfolio
may otherwise invest. Because a Portfolio 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 Portfolio, 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 Portfolio accrue a portion of the
discount at which a zero-coupon security was purchased as income each year even
though the Portfolio receives no interest payment in cash on the security during
the year. Interest on these securities, however, is reported as income by the
Portfolio and must be distributed to its shareholders. The Portfolios
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, 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 Portfolio'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, that are backed only by the assets and revenues of the
non-governmental user (such as hospitals and airports).
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
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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 Portfolio 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 the 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 Portfolio 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 debt service reserve Portfolio. In recent years, revenue
bonds have been issued in large volumes for projects that are privately owned
and operated, as discussed below.
Private activity bonds are considered municipal bonds if the interest paid
thereon is exempt from Federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing, and 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 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 a organization described in Section 501(c)(3) of the Code, rental
multi-family 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 are expected to
become increasingly limited.
Because of terminology formerly used in the Internal Revenue Code, virtually any
form of private activity bond may still be referred to as an "industrial
development bond," but more and more frequently revenue bonds have become
classified according to the particular type of facility being financed, such as
hospital revenue bonds, nursing
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home revenue bonds, multifamily housing revenues bonds, single family housing
revenue bonds, industrial development revenue bonds, solid waste resource
recovery revenue bonds, and so on.
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 Portfolios may
acquire "puts" with respect to municipal securities. A put gives the Portfolio
the right to sell the municipal security at a specified price at any time on or
before a specified date. The Portfolios 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 Portfolio upon its exercise of a "put"
is normally (i) the Portfolio's acquisition cost of the municipal securities
(excluding any accrued interest which the Portfolio paid on their acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Portfolio owned the securities, plus (ii) all
interest accrued on the securities since the last interest payment date during
that period.
Puts may be acquired by the Portfolios to facilitate the liquidity of its
portfolio assets. Puts may also be used to facilitate the reinvestment of a
Portfolio's assets at a rate of return more favorable than that of the
underlying security. The Portfolios expect that they will generally acquire puts
only where the puts are available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Portfolios 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 Portfolios intend to
enter into puts only with dealers, banks and broker-dealers which, in Norwest'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 Portfolio's assets.
The Portfolios 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
Portfolio 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 Portfolio 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 Portfolio 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
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differences between the maturity of the underlying security and the maturity of
the commitment. The Portfolios' 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
Portfolio are valued at zero in determining net asset value. When a Portfolio
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
Portfolio's portfolio of securities.
VARIABLE AND FLOATING RATE SECURITIES
The securities in which the Portfolios 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio's, yield.
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 Portfolio to dispose of the
instrument if the issuer defaulted on its repayment obligation during periods
that the Portfolio is not entitled to exercise any demand rights it may have. A
Portfolio could, for this or other reasons, suffer a loss with respect to an
instrument. Each Portfolio's investment adviser monitors the liquidity of the
Portfolios' 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 Portfolios 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 Portfolios' investment quality requirements.
Variable rate obligations purchased by the Portfolios may include participation
interests in variable rate obligations purchased by the Portfolios from banks,
insurance companies or other financial institutions that are backed by
irrevocable letters of credit or guarantees of banks. The Portfolios 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
Portfolio's participation interest in the instrument, plus accrued interest, but
will do so only (i) as required to provide liquidity to a Portfolio, (ii) to
maintain a high quality investment portfolio, or (iii) 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.
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The Portfolios 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 Portfolios 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
Portfolio's investment adviser monitors the pricing, quality and liquidity of
variable rate demand obligations and participation interests therein held by the
Portfolio 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 Portfolio might be entitled
to less than the initial principal amount of the security upon the security's
maturity. The Portfolios intend to purchase such securities only when the
Portfolio's investment adviser believes the interest income from the instrument
justifies any principal risks associated with the instrument. A Portfolio 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 Portfolio will be able to limit principal
fluctuations and, accordingly, a Portfolio 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 Portfolios will not pay any additional fees
for such credit enhancement, although the existence of credit enhancement may
increase the price of security.
Examples of credit enhancement arising out of the structure of the transaction
include (i) "senior-subordinated securities" (multiple class securities with one
or more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), (ii) creation
of "spread accounts" or "reserve Portfolios" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets are
held in reserve against future losses) and (iii) "over-collateralization" (where
the scheduled payments on, or the principal amount of, the underlying assets
exceeds that required to make payment of the securities and pay any servicing or
other fees). The degree of credit enhancement provided for each issue generally
is based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that covered by
credit enhancement protection could adversely affect the return on an investment
in such a security.
ASSET-BACKED SECURITIES
A Portfolio may invest in asset-backed securities, which have structural
characteristics similar to mortgage-backed securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. Asset-backed
securities are securities that represent direct or indirect participations in,
or are secured by and payable from, assets such as motor vehicle installment
sales contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts and special
purpose corporations.
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Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution.
Asset-backed securities present certain risks that are not presented by
mortgage-backed debt securities or other securities in which a Portfolio 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.
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 Portfolio may receive less cash back
than it initially invested.
INTEREST RATE PROTECTION TRANSACTIONS
Certain Portfolios 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 Portfolio 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
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purchasing at a later date. The Portfolios intend to use these transactions as
a hedge and not as a speculative investment.
A Portfolio 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 Portfolio 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 Portfolios believe such obligations do not
constitute senior securities. The net amount of the excess, if any, of a
Portfolio'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 Portfolios 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 Portfolio.
A Portfolio will enter into interest rate protection transactions only with
banks and other institutions believed by the Investment Adviser to the Portfolio
to present minimal credit risks. If there is a default by the other party to
such a transaction, the Portfolio 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
Covered Calls and Hedging
Certain Portfolios may write covered calls on up to 100% of their 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 to retain unrealized gains in
the value of portfolio securities which have appreciated, or to facilitate
selling securities for investment reasons, the Portfolio would: (i) sell Stock
Index Futures; (ii) purchase puts on such futures or securities; or (iii) 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: (i)
purchase Stock Index Futures, or (ii) 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. A Portfolio may write (i.e., sell) call options
("calls") if: (i) the calls are listed on a domestic securities or commodities
exchange, and (ii) 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 a 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.
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To terminate its obligation on a call it has written, the Portfolio may 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.
A 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. A Portfolio may purchase put options ("puts") which
relate to: (i) securities held by it, (ii) Stock Index Futures (whether or not
it holds such Stock Index Futures in its portfolio), or (iii) broadly-based
stock indices. A Portfolio may not sell puts other than those it previously
purchased, nor purchase puts on securities it does not hold. A Portfolio may
purchase calls: (a) as to securities, broadly-based stock indices or Stock
Index Futures, or (b) 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 a 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 a 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.
When a 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 a 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
a 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 a 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. A 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
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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, a 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 a 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 a 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 a 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 a 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.
Additional Information About Hedging Instruments and their Use. A 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.
A Portfolio's option activities may affect its portfolio turnover rate and
brokerage commissions. The exercise of calls written by a 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 a 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. A 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 a 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. A 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")
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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
a 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, a 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 a 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 a 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 a
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. Each 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 is that less
than 30% of its gross income must be derived from gains realized on the sale of
securities held for less than three months. Due to this limitation, each
Portfolio will limit the extent to which it engages in the following activities,
but will not be precluded from them: (i) 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; (ii) purchasing calls
or puts which expire in less than three months; (iii) effecting closing
transactions with respect to calls or puts purchased less than three months
previously; (iv) exercising puts held for less than three months; and (v)
writing calls on investments held for less than three months.
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 a 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 a 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, a
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 a 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.
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If a 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 Portfolio may (i) purchase or sell (write) put and call
options on securities to enhance the Portfolio'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 Portfolios
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 Portfolio. Principal among such risks are: (a) 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; (b)
potentially unlimited loss associated with futures transactions and the possible
lack of a liquid secondary market for closing out a futures position; and (c)
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 Portfolio 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.
Except as otherwise noted in the Prospectus or herein, a Portfolio will not use
leverage in its option income and hedging strategies. In the case of
transactions entered into as a hedge, a Portfolio will hold securities,
currencies or other options or futures positions whose values are expected to
offset ("cover") its obligations thereunder. A Portfolio will not enter into a
hedging strategy that exposes it to an obligation to another party unless it
owns either (i) an offsetting ("covered") position or (ii) 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 Portfolios
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 Portfolio's assets could impede portfolio management or
the Portfolio's ability to meet redemption requests or other current
obligations.
OPTIONS STRATEGIES
A Portfolio 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 Portfolio may buy or sell both exchange-traded and over-the-counter ("OTC")
options. A Portfolio 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 Portfolio
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
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do so would result in the loss of the premium paid by the Portfolio 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 Portfolios.
Upon selling an option, a Portfolio receives a premium from the purchaser of the
option. Upon purchasing an option the Portfolio pays a premium to the seller of
the option. The amount of premium received or paid by the Portfolio 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 Portfolios may purchase call options on debt securities that Norwest
intends to include in the Portfolio'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 Portfolio to the option premium paid;
conversely, if the market price of the underlying security increases above the
exercise price and the Portfolio either sells or exercises the option, any
profit eventually realized will be reduced by the premium paid. A Portfolio 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 Portfolio to
sell the underlying security at the predetermined exercise price; thus the
potential for loss to the Portfolio 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 Portfolio 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.
Certain Portfolios 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 Portfolio may take positions in options on foreign currencies in order to
hedge against the risk of foreign exchange fluctuation on foreign securities the
Portfolio 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 Portfolio 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
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A Portfolio may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Portfolio
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 Portfolio. Closing transactions essentially permit the
Portfolio 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 Portfolio
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 Portfolio 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 Portfolio may result in material losses to
the Portfolio.
(4) A Portfolio's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs.
(5) When a Portfolio enters into an over-the-counter contract with a
counterparty, the Portfolio will assume the risk that the counterparty will fail
to perform its obligations, in which case the Portfolio 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 Portfolio 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 Portfolio may purchase index futures contracts for several reasons: to
simulate full investment in the underlying index while retaining a cash balance
for Portfolio 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 Portfolio 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.
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A Portfolio 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 Portfolio 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
Portfolio's foreign securities holdings. A Portfolio 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 Portfolio against such increase. A
Portfolio may also purchase call or put options on foreign currency futures
contracts to obtain a fixed foreign exchange rate at limited risk. A Portfolio
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 Portfolio 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 Portfolio upon termination of
the contract, assuming all contractual obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In that event, it may not be possible for a Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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.
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(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 Portfolio'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
Portfolio 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 Portfolio
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 Portfolio may invest in certain financial futures contracts and options
contracts in accordance with the policies described in the Prospectus and above.
A Portfolio 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
Portfolio 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 Portfolio's net assets.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve the currencies of foreign
countries. In addition, a Portfolio may temporarily hold Portfolios in bank
deposits in foreign currencies pending the completion of certain investment
programs. Accordingly, the value of the assets of a Portfolio, as measured in
U.S. dollars, may be affected by changes in foreign currency exchange rates and
exchange control regulations. In addition, the Portfolio may incur costs in
connection with conversions between various currencies. A Portfolio 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 Portfolio. 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 Portfolio may enter into forward contracts under two circumstances. First,
with respect to specific transactions, when the Portfolio 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
Portfolio 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 Portfolio 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 Portfolio may enter into a forward contract to
sell, for a fixed amount of dollars, the amount
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of foreign currency approximating the value of some or all of the Portfolio'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
Portfolio 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 Portfolio will have more
than 25 percent of the value of its total assets committed to such contracts or
the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the Portfolio's investment securities or
other assets denominated in that currency.
At or before the settlement of a forward contract, a Portfolio 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
Portfolio chooses to make delivery of the foreign currency, it may be required
to obtain the currency through the conversion of assets of the Portfolio into
the currency. The Portfolio may close out a forward contract obligating it to
purchase a foreign currency by selling an offsetting contract. If the Portfolio
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.
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 Portfolio 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 EQUITY PORTFOLIOS
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 Portfolio 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 Portfolio of a portfolio
security to meet redemptions by shareholders or otherwise may require the
Portfolio 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
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A Portfolio may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Although no securities investment is without some risk, investment
in convertible securities generally entails less risk than in the issuer's
common stock. However, the extent to which such risk is reduced depends in
large measure upon the degree to which the convertible security sells above its
value as a fixed income security. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stocks since they have
fixed income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by a comparison of its yield with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion value decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by the Portfolio is called for redemption, the
Portfolio 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 Portfolio may
be compensated with a substantially higher dividend yield than that on the
underlying common stock. Portfolios 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
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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
Portfolio may be compensated with the higher yield, contingent on how well the
underlying common stock does. Portfolios 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 Portfolio will not
receive any interest payments until the notes mature, typically in 15 or 20
years, when the notes are redeemed at face, or par, value. The yield on LYONs,
typically, is lower-than-market rate for debt securities of the same maturity,
due in part to the fact that the LYONs are convertible into common stock of the
issuer at any time at the option of the holder of the LYON. Commonly, LYONs are
redeemable by the issuer at any time after an initial period or if the issuer's
common stock is trading at a specified price level or better, or, at the option
of the holder, upon certain fixed dates. The redemption price typically is the
purchase price of the LYONs plus accrued original issue discount to the date of
redemption, which amounts to the lower-than-market yield. A Portfolio 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
Portfolio will lose the purchase price paid for the warrant and the right to
purchase the underlying security.
HIGH YIELD/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 (i) the high yield bond market, (ii) the value of high
yield/high risk securities and (iii) 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
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Portfolio 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 Portfolio'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 Portfolio 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 Portfolio's investment adviser.
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 Portfolio'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, Schroder may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Portfolio experiences unexpected net
redemptions, Schroder may be forced to sell the Portfolio's higher rated
securities, resulting in a decline in the overall credit quality of the
Portfolio's investment portfolio and increasing the exposure of the Portfolio to
the risks of high yield/high risk securities.
ILLIQUID AND RESTRICTED SECURITIES
Each Portfolio may invest up to 15 percent 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 Portfolio
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 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
Portfolio, pursuant to guidelines approved by the board. The Investment Adviser
takes into account a number of factors in reaching liquidity decisions,
including but not limited to: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer. The Investment
Adviser monitors the liquidity of the securities held by each Portfolio and
report periodically on such decisions to the Board.
In connection with a Portfolio'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 Portfolio with the issuer at the
time such securities are purchased by the Portfolio. When registration is
required, however, a considerable period may elapse between a decision to sell
the securities and the time the Portfolio 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, the Portfolio 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 Portfolio might also have to register restricted
securities in order to dispose of them, resulting in expense and delay. A
Portfolio 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.
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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, the Investment Adviser may determine
that such securities are not illiquid securities. These guidelines take into
account trading activity in the securities and the availability of reliable
pricing information, among other factors. If there is a lack of trading
interest in a particular Rule 144A security, a Portfolio's holdings of that
security may be illiquid.
LOANS OF PORTFOLIO SECURITIES
Each Portfolio may lend its portfolio securities subject to the restrictions
stated in the 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 Portfolio is permitted to invest. To be acceptable as collateral,
letters of credit must obligate a bank to pay amounts demanded by the Portfolio
if the demand meets the terms of the letter. Such terms and the issuing bank
must be satisfactory to the Portfolio. In a portfolio securities lending
transaction, the Portfolio 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 Portfolio pays in arranging the loan. The
Portfolio 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 Portfolio will not lend its portfolio securities to any officer, director,
employee or affiliate of the Portfolio or the Adviser. The terms of a
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 Portfolio may borrow money for temporary or emergency purposes, including
the meeting of redemption requests, in amounts up to 33 1/3 percent of the
Portfolio'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
Portfolios (or on the assets that were retained rather than sold to meet the
needs for which Portfolios were borrowed). Under adverse market conditions, a
Portfolio 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 Portfolio may purchase securities for investment
while any borrowing equaling five percent or more of the Portfolio's total
assets is outstanding or borrow for purposes other than meeting redemptions in
an amount exceeding five percent of the value of the Portfolio's total assets.
A Portfolio's use of borrowed proceeds to make investments would subject the
Portfolio 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 Portfolio maintains a
segregated account.
OTHER TECHNIQUES INVOLVING LEVERAGE
Utilization of leveraging involves special risks and may involve speculative
investment techniques. Certain Portfolios 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 Portfolios may engage in dollar roll transactions. Each of
these transactions involve the use of "leverage" when cash made available to the
Portfolio through the investment technique is used to make additional portfolio
investments. The Portfolios use these investment techniques only when Norwest
believes that the leveraging and the returns available to the Portfolio from
investing the cash will provide shareholders a potentially higher return.
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Leverage exists when a Portfolio achieves the right to a return on a capital
base that exceeds the investment the Portfolio 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 Portfolio. Leverage may involve the creation of a liability
that requires the Portfolio 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
Portfolio'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 Portfolio is able to realize a 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 Portfolio
than if the Portfolio 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 Portfolio'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 Portfolio's use of leverage would result in a lower
rate of return than if the Portfolio 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 Portfolio were not leveraged. In an extreme case, if the
Portfolio's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Portfolio 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 and maintain in a segregated account cash, U.S.
Government Securities (or other assets as may be permitted by the SEC) in
accordance with SEC guidelines. The account's value, which is marked to market
daily, will be at least equal to the Portfolio's commitments under these
transactions. The Portfolio's commitments include the Portfolio's obligations
to repurchase securities under a reverse repurchase agreement and settle
when-issued and forward commitment transactions.
MARGIN AND SHORT SALES
Certain Portfolios may enter into short sales as described in the prospectus of
that Portfolio. The Portfolios 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 Portfolio 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 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. Prohibitions on entering short sales
other than against the box does not restrict a Portfolio'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 Portfolio 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.
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Generally, a reverse repurchase agreement enables the Portfolio 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 Portfolio 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 Portfolio 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 Portfolios 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 Portfolio 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 Portfolio 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 Portfolio 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
Portfolio will maintain with its custodian a separate account with portfolio
securities in an amount at least equal to such commitments.
At the time a Portfolio makes the commitment to purchase securities on a
when-issued or delayed delivery basis, the Portfolio 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 Portfolio
will meet its obligations from maturities, sales of the securities held in the
separate account or from other available sources of cash. A Portfolio generally
has the ability to close out a purchase obligation on or before the settlement
date, rather than purchase the security. If a Portfolio 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 Portfolio engages in when-issued or delayed delivery
transactions, it will do so for the purpose of acquiring securities consistent
with the Portfolio's investment objectives and policies and not for the purpose
of investment leverage or to speculate in interest rate changes. A Portfolio
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
Portfolio 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
Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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
Portfolio to "roll over" its purchase commitment, the Portfolio 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
Portfolio's assets to the purchase of securities on a "when, as and if issued"
basis may increase the volatility of the Portfolio's net asset value. For
purposes of the Portfolios' 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.
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REPURCHASE AGREEMENTS
The Portfolios may invest in securities subject to repurchase agreements with
U.S. banks or broker-dealers. 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.
Securities subject to repurchase agreements will be held by the Portfolio's
custodian or another qualified custodian or in the Federal Reserve book-entry
system. Repurchase agreements are considered to be loans by a Portfolio for
certain purposes under the 1940 Act.
TEMPORARY DEFENSIVE POSITION
When a Portfolio, in accordance with the policies described in its Prospectus,
assumes a temporary defensive position, it may invest in (i) short-term U.S.
Government Securities, (ii) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of commercial banks doing business in the
United States that have, at the time of investment, total assets in excess of
one billion dollars and that are insured by the Federal Deposit Insurance
Corporation, (iii) commercial paper of prime quality rated Prime-2 or higher by
Moody's or A-2 or higher by S&P or, if not rated, determined by the investment
adviser to be of comparable quality, (iv) repurchase agreements covering any of
the securities in which the Portfolio may invest directly and (v) money market
mutual Portfolios.
3. INVESTMENT LIMITATIONS
For purposes of all Fundamental and nonfundamental investment policies of the
Portfolio, (i) the term 1940 Act includes the rules thereunder, SEC
interpretations and any exemptive order upon which the Portfolio may rely and
(ii) the term Code includes the rules thereunder, IRS interpretations and any
private letter ruling or similar authority upon which the Portfolio may rely.
The Portfolio 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 Portfolio 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 Portfolio'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 (i) more than 50% of the outstanding shares of the Portfolio or (ii)
67% of the shares of the Portfolio present or represented at a shareholders
meeting at which the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented.
FUNDAMENTAL LIMITATIONS
Each Portfolio has adopted the following investment limitations which are
fundamental policies of the Portfolio.
(1) DIVERSIFICATION
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No Portfolio may, 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: (i) more than 5% of the
Portfolio's total assets would be invested in the securities of a
single issuer, or (ii) the Portfolio would own more than 10% of the
outstanding voting securities of any single issuer.
2. INDUSTRY CONCENTRATION
No Portfolio may purchase a security if, as a result, more than 25% of
the Portfolio's total assets would be invested in securities of
issuers conducting their principal business activities in the same
industry. For purposes of this limitation, there is no limit on: (i)
investments in U.S. Government securities, in repurchase agreements
covering U.S. Government Securities, in securities issued by the
states, territories or possessions of the United States ("municipal
securities") or in foreign government securities or (ii) investment in
issuers domiciled in a single jurisdiction. Notwithstanding anything
to the contrary, to the extent permitted by the 1940 Act, each
Portfolio may invest in one or more investment companies; provided
that, except to the extent the Portfolio invests in other investment
companies pursuant to Section 12(d)(1)(A) of the 1940 Act, the
Portfolio treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
For purposes of this policy (i) "mortgage related securities," as that
term is defined in the 1934 Act, are treated as securities of an
issuer in the industry of the primary type of asset backing the
security, (ii) financial service companies are classified according to
the end users of their services (for example, automobile finance, bank
finance and diversified finance) and (iii) utility companies are
classified according to their services (for example, gas, gas
transmission, electric and gas, electric and telephone).
3. BORROWING
No Portfolio may borrow money if, as a result, outstanding borrowings
would exceed an amount equal to 33 1/3% of the Portfolio's total
assets.
4. REAL ESTATE
No Portfolio may purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Portfolio from investing in securities or other
instruments backed by real estate or securities of companies engaged
in the real estate business).
5. LENDING
No Portfolio may make loans to other parties. For purposes of this
limitation, entering into repurchase agreements, lending securities
and acquiring any debt security are not deemed to be the making of
loans.
No Portfolio may lend a security if, as a result, the amount of loaned
securities would exceed an amount equal to 33 1/3% of the Portfolio's
total assets.
6. COMMODITIES
No Portfolio may purchase or sell physical commodities unless acquired
as a result of ownership of securities or other instruments (but this
shall not prevent the Portfolio from purchasing or selling options and
futures contracts or from investing in securities or other instruments
backed by physical commodities).
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7. UNDERWRITING
No Portfolio may underwrite (as that term is defined in the 1933 Act)
securities issued by other persons except, to the extent that in
connection with the disposition of the Portfolio's assets, the
Portfolio may be deemed to be an underwriter.
8. SENIOR SECURITIES
No Portfolio may issue senior securities except to the extent
permitted by the 1940 Act.
NONFUNDAMENTAL LIMITATIONS
Each Portfolio has adopted the following investment limitations which are not
fundamental policies of the Portfolio. These policies may be changed by the
Board.
(1) BORROWING
For purposes of the limitation on borrowing, the following are not
treated as borrowings to the extent they are fully collateralized: (i)
the delayed delivery of purchased securities (such as the purchase of
when-issued securities), (ii) reverse repurchase agreements, (iii)
dollar-roll transactions and (iv) the lending of securities ("leverage
transactions").
2. LIQUIDITY
No Portfolio may invest more than 15% of its net assets in illiquid
assets such as: (i) securities that cannot be disposed of within seven
days at their then-current value, (ii) repurchase agreements not
entitling the holder to payment of principal within seven days and
(iii) securities subject to restrictions on the sale of the securities
to the public without registration under the 1933 Act ("restricted
securities") that are not readily marketable. Each Portfolio may
treat certain restricted securities as liquid pursuant to guidelines
adopted by the Board of Trustees.
3. EXERCISING CONTROL OF ISSUERS
No Portfolio may make investments for the purpose of exercising
control of an issuer. Investments by a Portfolio in entities created
under the laws of foreign countries solely to facilitate investment in
securities in that country will not be deemed the making of
investments for the purpose of exercising control.
4. SHORT SALES AND PURCHASING ON MARGIN
[Under normal circumstances,] No Portfolio may sell securities short,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short (short sales "against the
box"), and provided that transactions in futures contracts and options
are not deemed to constitute selling securities short.
[{Under certain circumstances a Portfolio may sell securities short.
Under these circumstances,} a Portfolio may not enter into short sales
if, as a result, more that {25%} of the Portfolio's total assets would
be so invested or the Portfolio's short positions (other than those
positions "against the box") would represent more than {2%} of the
outstanding voting securities of any single issuer or of any class of
securities of any single issuer.]
No Portfolio may purchase securities on margin, except that a
Portfolio may use short-term credit for the clearance of the
Portfolio's transactions, and provided that initial and variation
margin
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payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
5. OPTIONS, WARRANTS AND FUTURES CONTRACTS
No Portfolio may invest in futures or options contracts regulated by
the CFTC for (i) bona fide hedging purposes within the meaning of the
rules of the CFTC and (ii) for other purposes if, as a result, no more
than 5% of the Portfolio's net assets would be invested in initial
margin and premiums (excluding amounts "in-the-money") required to
establish the contracts.
No Portfolio (i) will hedge more than [50%] of its total assets by
selling futures contracts, buying put options, and writing call
options (so called "short positions"), (ii) will buy futures contracts
or write put options whose underlying value exceeds [25%] of the
Portfolio's total assets, and (iii) will buy call options with a value
exceeding [5%] of the Portfolio's total assets.
4. 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 Portfolios
is historical and is not intended to indicate future returns. Each Portfolio's
yield and total return fluctuate in response to market conditions and other
factors. The value of a Portfolio's shares when redeemed may be more or less
than their original cost.
In performance advertising, the Portfolios 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 ("Portfolio Tracking Companies").
The Portfolios 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 Portfolios 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 Portfolios may also refer in such materials to
mutual Portfolio performance rankings and other data published by Portfolio
Tracking Companies. Performance advertising may also refer to discussions of
the Portfolios' and comparative mutual Portfolio 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
Portfolio's performance, investors should be aware that each Portfolio's yield
fluctuates from day to day and that the Portfolio's yield for any given period
is not an indication or representation by the Portfolio of future yields or
rates of return on the Portfolio's shares. Norwest, Processing Organizations
and others may charge their customers, various retirement plans or other
shareholders that invest in a Portfolio fees in connection with an investment in
a Portfolio, which will have the effect of reducing the Portfolio's net yield to
those shareholders. The yields of a Portfolio are not fixed or guaranteed, and
an investment in a Portfolio is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of a Portfolio 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 Portfolio's yield information directly to similar information
regarding investment alternatives which are insured or guaranteed.
FIXED INCOME AND EQUITY PORTFOLIOS
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Standardized yields for the Portfolios used in advertising are computed by
dividing a Portfolio'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 Portfolio's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income in accordance
with specific standardized rules) in order to arrive at an annual percentage
rate. In general, interest income is reduced with respect to municipal
securities purchased at a premium over their par value by subtracting a portion
of the premium from income on a daily basis. In general, interest income is
increased with respect to municipal securities purchased at original issue at a
discount by adding a portion of the discount to daily income. Capital gains and
losses generally are excluded from these calculations.
Income calculated for the purpose of determining each Portfolio'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 Portfolio may differ from the rate
of distribution the Portfolio paid over the same period or the rate of income
reported in the Portfolio's financial statements.
TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Portfolio's return, including the effect of reinvesting
dividends and capital gain distributions, any change in the Portfolio's net
asset value per share over the period and maximum sales charge, if any,
applicable to purchases of the Portfolio'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 Portfolio 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 Portfolio. 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 Portfolios.
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:
n
P(1+T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: 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 Portfolio 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:
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PT = (ERV/P-1)
Where:
PT = period total return
The other definitions are the same as in average annual total return
above
OTHER ADVERTISEMENT MATTERS
The Portfolios may advertise other forms of performance. For example, the
Portfolios 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 Portfolio'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 Portfolios may also include various information in their advertisements
including, but not limited to (i) portfolio holdings and portfolio allocation as
of certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity, (ii) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual Portfolios that may be employed by an investor to meet specific financial
goals, such as Portfolioing retirement, paying for children's education and
financially supporting aging parents, (iv) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quartile or
daily), (v) information relating to inflation and its effects on the dollar; for
example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively, (vi) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging, (vii) descriptions of the Portfolios'
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, (viii) the results of a hypothetical investment in a
Portfolio over a given number of years, including the amount that the investment
would be at the end of the period, (ix) the effects of earning Federally and, if
applicable, state tax-exempt income from a Portfolio or investing in a
tax-deferred account, such as an individual retirement account or Section 401(k)
pension plan and (x) the net asset value, net assets or number of shareholders
of a Portfolio 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 Portfolio's performance.
The Portfolios 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 Portfolio 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 Portfolio the following will be the relationship
between average cost per share ($14.35 in the example given) and average price
per share:
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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
With respect to the Portfolios that invest in municipal securities and
distribute Federally tax-exempt (and in certain cases state tax exempt)
dividends, the Portfolios may advertise the benefits of and other effects of
investing in municipal securities. For instance, the Portfolios' 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 Portfolio's yield.
In connection with its advertisements each Portfolio may provide "shareholders
letters" which serve to provide shareholders or investors an introduction into
the Portfolio'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 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.
5. 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 Portfolio 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.
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Robert C. Brown, Trustee,* Age 65.
Director, Federal Farm Credit Banks Portfolioing 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.
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 Campbell, Treasurer, Age 35.
Director of Portfolio 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 Portfolio Services at State Street Portfolio Services, Inc.
Prior thereto, from September 1992 - January 1994 Mr. Campbell was
Assistant Vice President-Portfolio 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.
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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.
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 54.
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 48.
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.
Portfolio 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 Portfolio 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
Portfolios, 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
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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 Portfolios' audit
committees, receives additional compensation of $6,000 from the Trust and
Norwest Select Portfolios allocated pro rata between the Trust and Norwest
Select Portfolios 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 Portfolios, combined. Norwest Select
Portfolios have a December 31 fiscal year end. Information is presented for the
twelve month period ended May 31, 1996, which was the fiscal year end of all of
the Trust's portfolios.
Total Compensation From
Total Compensation the Trust and Norwest
from the Trust Select Portfolios
------------------ -----------------------
Mr. Brown $28,974 $29,000
Mr. Burkhardt $36,223 $36,250
Mr. Harris $27,975 $28,000
Mr. Leach $32,970 $33,000
Mr. Penny $15,985 $16,000
Mr. Willeke $29,973 $30,000
Mr. McCune $0 $0
Neither the Trust nor Norwest Select Portfolios has adopted any form of
retirement plan covering Trustees or officers. For the twelve month period
ended May 31, 1996 total expenses of the Trustees (other than Mr. Keffer) was
$30,408 and total expenses of the trustees of Norwest Select Portfolios was $27.
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 Portfolios.
INVESTMENT ADVISORY SERVICES
GENERAL
The advisory fee for each Portfolio is based on the average daily net assets of
the Portfolio at the annual rate disclosed in the Portfolio's prospectus.
All investment advisory fees are accrued daily and paid monthly. Norwest, the
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 Portfolios, the 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 Portfolio. 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 Portfolio an amount equal to all or a portion of the
fees received by Norwest or any of its affiliates from a Portfolio with respect
to the client's assets invested in the Portfolio.
NORWEST INVESTMENT MANAGEMENT
Norwest furnishes at its expense all services, facilities and personnel
necessary in connection with managing each Portfolio's investments and effecting
portfolio transactions for each Portfolio. The Investment Advisory Agreement
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between each Portfolio 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 Portfolio on 60 days' written notice (i) by the Board or by a vote of a
majority of the outstanding voting securities of the Portfolio to the Adviser or
(ii) 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 Portfolios, 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 the Portfolios.
MANAGEMENT AND ADMINISTRATIVE SERVICES
MANAGER AND ADMINISTRATOR
Forum manages all aspects of the Trust's operations with respect to each
Portfolio except those which are the responsibility of FAS, Norwest, any other
investment adviser or investment subadviser to a Portfolio, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Portfolio, 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 Portfolio, Forum (i) oversees
(A) the preparation and maintenance by the Advisers and the Trust's
administrator, custodian, transfer agent, dividend disbursing agent and
Portfolio 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
Portfolio accountant; (C) the transmission of purchase and redemption orders for
Shares; (D) the notification of the Advisers of available Portfolios for
investment; and (E) the performance of Portfolio accounting, including the
calculation of the net asset value per Share; (ii) 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; (iii) oversees the performance of administrative and professional
services rendered to the Trust by others, including its administrator,
custodian, transfer agent, dividend disbursing agent and Portfolio accountant,
as well as accounting, auditing, legal and other services performed for the
Trust; (iv) 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; (v) 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; (vi) oversees the preparation of
proxy and information statements and any other communications to shareholders;
(vii) 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; (viii) 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; (ix)
oversees registration and sale of Portfolio shares, to ensure that such shares
are properly and duly registered with the SEC and applicable state and other
securities commissions; (x) 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; (xi) oversees the
determination of the amount of and supervises the declaration of dividends and
other distributions to
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shareholders as necessary to, among other things, maintain the qualification of
each Portfolio 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; (xii) reviews and negotiates on behalf of the
Trust normal course of business contracts and agreements; (xiii) maintains and
reviews periodically the Trust's fidelity bond and errors and omission insurance
coverage; and (xiv) 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 Portfolio by vote of that
Portfolio'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 Portfolio
except those which are the responsibility of Forum, Norwest, or any other
investment adviser or investment subadviser to a Portfolio, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Portfolio, 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 Portfolio, FAS (i) 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; (ii) 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; (iii) assists in the preparation of proxy and information
statements and any other communications to shareholders; (iv) assists the
Advisers in monitoring Portfolio holdings for compliance with Prospectus and SAI
investment restrictions and assist in preparation of periodic compliance
reports; (v) 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;
(vi) 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; (vii) is responsible for
maintaining the Trust's existence and good standing under state law; (viii)
monitors sales of shares and ensures that such shares are properly and duly
registered with the SEC and applicable state and other securities commissions;
(ix) 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 (x) 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 Portfolio 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 Portfolio by vote of that
Portfolio'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.
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.
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[The Administration Agreement became effective on June 1, 1997.]
DISTRIBUTION
Forum also acts as distributor of the shares of the Portfolio. Forum acts as
the agent of the Trust in connection with the offering of shares of the
Portfolios 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 Portfolio'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 Portfolio, 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
Portfolio 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 Portfolio 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").
The Distribution Services Agreement terminates automatically if assigned. With
respect to each Portfolio, the Distribution Services Agreement may be terminated
at any time without the payment of any penalty (i) by the Board or by a vote of
the Portfolio's shareholders or, with respect to each class of a Portfolio 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 (ii) by
Forum on 60 days' written notice to the Trust.
[Under the Distribution Services Agreement related to the Portfolios 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 Portfolios. With
respect to B Shares of each Portfolio that offers B Shares, and with respect to
Exchange Shares of Ready Cash Investment Portfolio, the Portfolios 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 Portfolio 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 Portfolios 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 Portfolio 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.
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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 Portfolio, payments by a Portfolio in consideration of
sales of B Shares that occurred prior to termination of the Plan will cease. A
Complete Termination in respect of any Portfolio means: (i) 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 Portfolio; (ii) the Trust does not alter
the terms of the CDSC applicable to the B Shares of the Portfolio outstanding at
the time of the termination; (iii) 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 Portfolio);
and (iv) the Portfolio does not adopt a distribution plan relating to a class of
shares of the Portfolio 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 (ii),
(iii) and (iv) of the definition of a Complete Termination above, [_______
Portfolio would continue to pay distribution services fees for no more than
____ years. In contrast, payments by ________ Portfolio would continue until
such time as there exist no outstanding uncovered distribution charges
attributable to the Portfolio and, therefore, could continue for periods
of time beyond ____years after the date of termination.
[In addition, pursuant to the Plan, each of _____________ Portfolio and ______
Portfolio may, subject to approval by the Trustees, assume and pay (i) any
uncovered distribution charges of the distributor of a Portfolio whose assets
are being acquired by the Portfolio and (ii) any other amounts expended for
distribution on behalf of such Portfolio that are not reimbursed or paid by the
Portfolio upon the merger or combination with or acquisition of substantially
all of the assets of that Portfolio.]
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: (i) answering customer
inquiries regarding account status and history, the manner in which purchases
and redemptions of shares of the Portfolio may be effected and certain other
matters pertaining to the Portfolio; (ii) assisting shareholders in initiating
and changing account designations and addresses; (iii) providing necessary
personnel and facilities to establish and maintain shareholder accounts and
records, (iv) assisting in processing purchase and redemption transactions and
receiving wired Portfolios; (v) transmitting and receiving Portfolios in
connection with customer orders to purchase or redeem shares; (vi) verifying
shareholder signatures in connection with changes in the registration of
shareholder accounts; (vii) furnishing periodic statements and confirmations of
purchases and redemptions; (viii) transmitting proxy statements, annual reports,
prospectuses and other communications from the Trust to its shareholders; (ix)
receiving, tabulating and transmitting to the Trust proxies executed by
shareholders with respect to meetings of shareholders of the Trust; and (x)
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 Portfolio, at an annual rate of
0.25% of the Portfolio's average daily net assets attributable to each class of
the Portfolio.
CUSTODIAN
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Pursuant to a Custodian Agreement, Norwest Bank, Sixth Street and Marquette,
Minneapolis, Minnesota 55479 serves as each Portfolio's custodian (in this
capacity the "Custodian"). The Custodian's responsibilities include
safeguarding and controlling the Trust's cash and securities, determining income
and collecting interest on Portfolio investments. The fee is computed and paid
monthly, based on the average daily net assets of the Portfolio, the number of
portfolio transactions of the Portfolio and the number of securities in the
Portfolio's portfolio.
Pursuant to rules adopted under the 1940 Act, a Portfolio 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
Portfolio; 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
Portfolio assets. The Custodian employs qualified foreign subcustodians to
provide custody of the Portfolios foreign assets in accordance with applicable
regulations.
PORTFOLIO ACCOUNTING
Forum Accounting, an affiliate of Forum, performs portfolio accounting services
for each Portfolio pursuant to a Portfolio Accounting Agreement with the Trust.
The Portfolio 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 Portfolio Accounting Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
Portfolio Accounting Agreement.
[Under the Portfolio Accounting Agreement, Forum Accounting prepares and
maintains books and records of each Portfolio on behalf of the Trust that are
required to be maintained under the 1940 Act, calculates the net asset value per
share of each Portfolio (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
Portfolio a fee of $[3,000] per month plus for each additional class of the
Portfolio above one $[1,000] per month. In addition, Forum Accounting is paid
additional surcharges for each of the following: (i) Portfolios with asset
levels exceeding $100 million - $500/month, Portfolios with asset levels
exceeding $250 million - $1000/month, Portfolios with asset levels exceeding
$500 million - $1,500/month, Portfolios with asset levels exceeding $1,000
million - $2,000/month (ii) Portfolios requiring international custody -
$1,000/month, (iii) Portfolios with more than 30 international positions -
$1,000/month (iv) Portfolios with more than 25% of net assets invested in asset
backed securities - $1,000/month, (vi) Portfolios with more than 50% of net
assets invested in asset backed securities - $2,000/month, (vi) Portfolios with
more than 100 security positions - $1,000/month and (vii) Portfolios with a
monthly portfolio turnover rate of 10% or greater - $1,000/month.]
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
Portfolio 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 Portfolio accounting obligations arising out of or caused,
directly or indirectly, by circumstances beyond its reasonable control and the
Trust has agreed to indemnify and hold harmless 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 Portfolio or based, if applicable, upon information, instructions or
requests with respect to a Portfolio given or made to Forum Accounting by an
officer of
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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.
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:
(i) interest charges, taxes, brokerage fees and commissions; (ii) certain
insurance premiums; (iii) fees, interest charges and expenses of the Trust's
custodian, transfer agent and dividend disbursing agent; (iv) telecommunications
expenses; (v) auditing, legal and compliance expenses; (vi) costs of the Trust's
formation and maintaining its existence; (vii) costs of preparing and printing
the Trust's prospectuses, statements of additional information, account
application forms and shareholder reports and delivering them to existing and
prospective shareholders; (viii) costs of maintaining books of original entry
for portfolio and Portfolio accounting and other required books and accounts and
of calculating the net asset value of shares of the Trust; (ix) costs of
reproduction, stationery and supplies; (x) compensation of the Trust's trustees,
officers and employees and costs of other personnel performing services for the
Trust who are not officers of Norwest, Forum or affiliated persons of Norwest or
Forum; (xi) costs of corporate meetings; (xii) registration fees and related
expenses for registration with the SEC and the securities regulatory authorities
of other countries in which the Trust's shares are sold; (xiii) state securities
law registration fees and related expenses; (xiv) fees and out-of-pocket
expenses payable to Forum Financial Services, Inc. under any distribution,
management or similar agreement; (xv) and all other fees and expenses paid by
the Trust pursuant to any distribution or shareholder service plan adopted
pursuant to Rule 12b-1 under the Act.
6. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Portfolios 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 Portfolios
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 Adviser in its best judgment and in a
manner deemed to be in the best interest of shareholders of each Portfolio
rather than by any formula. The primary consideration is prompt execution of
orders in an effective manner and at the most favorable price available to the
Portfolio. 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
Portfolio will seek to deal with the primary market makers; but when necessary
in order to obtain best execution, they will utilize the services of others. In
all cases the Portfolios will attempt to negotiate best execution.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized the Investment Adviser to employ its
affiliates to effect securities transactions of 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
Portfolio's policy that commissions paid to [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 (i) at least as favorable as commissions contemporaneously charged
by the affiliate on comparable transactions for its most favored unaffiliated
customers and (ii) at least as favorable as those which would be charged on
comparable transactions by other qualified brokers having comparable execution
capability. The Board, including a majority of
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the disinterested Trustees, has adopted procedures to ensure that commissions
paid to affiliates of an Adviser by the Portfolios satisfy the foregoing
standards.
No Portfolio 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 Portfolio may purchase securities of a broker or dealer
through which it regularly engages in securities transactions.
The practice of placing orders with NISI is consistent with each Portfolio's
objective of obtaining best execution and is not dependent on the fact that NISI
is an affiliate of Norwest.
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 Portfolio (i) to the Portfolio or (ii) to other persons on
behalf of the Portfolio for services provided to the 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 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 Portfolios, and not all
such services may be used by the Investment Adviser in connection with the
Portfolios. 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 Portfolio as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Portfolio.
Investment decisions 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 Adviser or its affiliates. Investment decisions are
the product of many factors, including basic suitability for the particular
client involved. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the security. In some instances,
one client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as is possible, averaged as to price and allocated between such clients in a
manner which, in the respective 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
Portfolio 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.
PORTFOLIO TURNOVER. A high rate of portfolio turnover involves corresponding
greater expenses than a lower rate, which expenses must be borne by a Portfolio
and its shareholders. High portfolio turnover also may result in the
realization of substantial net short-term capital gains. In order to continue
for Federal tax purposes, less than 30% of the annual gross income of the
Portfolio must be desired from the sale of securities held by the Portfolio for
less
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than three months. See "Taxation" below. Portfolio turnover rates are set
forth under "Financial Highlight's" in the Portfolios Prospectus.
7. ADDITIONAL PURCHASE, REDEMPTION AND EXCHANGE INFORMATION
GENERAL
Shares of all Portfolios are sold on a continuous basis by the distributor.
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 Shares making an exchange will be subject to the applicable
sales charge of any 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, 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, 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.
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
Portfolio 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 Portfolio'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 Portfolio. The
Portfolios have chosen not to make an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of its net assets at the beginning
of such period. Redemption requests in excess of applicable limits may be paid,
in whole or in part, in investment securities or in cash, as the Trust's Board
of Trustees may deem advisable; however, payment will be made wholly in cash
unless the Board of Trustees believes that economic or market conditions exist
that would make such a practice detrimental to the best interests of the
Portfolio. If redemption proceeds are paid in investment securities, such
securities will be valued as set forth in the Prospectus under "_______________"
and a redeeming shareholder would normally incur brokerage expenses if he or she
were to convert the securities to cash.
8. TAXATION
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Each Portfolio 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 Portfolio must meet to qualify for such
treatment, and of the application of state and local tax laws to his or her
particular situation.
Since certain Portfolios expect to derive substantially all of their gross
income (exclusive of capital gains) from sources other than dividends, it is
expected that none of such Portfolios 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 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 Portfolio on section 1256 contracts generally will be
considered 60% long-term and 40% short-term capital gain or loss. Each
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 Portfolio upon the lapse or sale of such options held by such Portfolio will
be either long-term or short-term capital gain or loss depending upon the
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
Portfolio will be treated as short-term capital gain or loss. In general, if a
Portfolio exercises an option, or an option that a 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
Portfolio in conjunction with any other position held by such 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 Portfolio's gains and losses with respect
to straddle positions by requiring, among other things, that: (i) loss realized
on disposition of one position of a straddle not be recognized to the extent
that a Portfolio has unrealized gains with respect to the other position in such
straddle; (ii) a Portfolio's holding period in straddle positions be suspended
while the straddle exists (possibly resulting in gain being treated as
short-term capital gain rather than long-term capital gain); (iii) losses
recognized with respect to certain straddle positions which are part of a mixed
straddle and which are non-section 1256 positions be treated as 60% long-term
and 40% short-term capital loss; (iv) losses recognized with respect to certain
straddle positions which would otherwise constitute short-term capital losses be
treated as long-term capital losses; and (v) the deduction of interest and
carrying charges attributable to certain straddle positions may be deferred.
Various elections are available to a 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
Portfolio all of the offsetting positions of which consist of section 1256
contracts.
A Portfolio's investments in zero coupon securities will be subject to special
provisions of the Code which may cause the Portfolio 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
Portfolio may be forced to sell other portfolio securities.
9. ADDITIONAL INFORMATION ABOUT THE TRUST AND THE SHAREHOLDERS
OF THE PORTFOLIOS
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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.
_______________________, independent auditors, serve as the independent auditors
for the Trust.
GENERAL INFORMATION
The Trust is divided into twenty eight separate series representing shares of
the Portfolios. 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 Portfolios; however, the Trust currently issues and
operates the various Portfolios, 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 Portfolio's A Shares, B Shares and I Shares, among Ready Cash
Investment Portfolio's Institutional, Investor and Exchange Shares and between
Municipal Money Market Portfolio'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 (i) a court refuses
to apply Delaware law, (ii) no contractual limitation of liability is in effect,
and (iii) 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 Portfolios, the Trust agreed in each
Investment Advisory Agreement with Norwest that if Norwest ceases to act as
investment adviser to the Trust or any Portfolio 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 Portfolio 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.
SHAREHOLDINGS
[25% Shareholders]
FINANCIAL STATEMENTS
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The fiscal year end of the Portfolios is May 31. Financial statements for each
Portfolio's semi-annual period and fiscal year will be distributed to
shareholders of record. The Board in the future may change the fiscal year end
of the Portfolio.
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.
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APPENDIX A - INVESTMENTS, STRATEGIES AND RISK CONSIDERATIONS
Each of the Portfolios may invest in certain Underlying Portfolios which may
have investment objectives or investment policies which allow the Underlying
Portfolio to invest in one or more of the following types of investments:
COMMON STOCKS, WARRANTS AND PREFERRED STOCK
COMMON STOCKS AND WARRANTS - 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, generally, 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 Portfolio may be
traded on a securities exchange or in the over-the-counter market and may not be
traded every day or in the volume typical of securities traded on a major
national securities exchange. As a result, disposition by a Portfolio of a
portfolio security to meet redemptions by shareholders or otherwise may require
the Portfolio 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 an extended 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. A Portfolio may invest in warrants, which are options to
purchase an equity security at a specified price (usually representing a premium
over the applicable market value of the underlying equity security at the time
of the warrant's issuance) and usually during a specified period of time.
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 (in which case the warrant may expire without being
exercised, resulting in the loss of the Portfolio's entire investment therein).
CONVERTIBLE SECURITIES
Convertible securities, which include convertible debt, convertible preferred
stock and other securities exchangeable under certain circumstances for shares
of common stock, are fixed income securities or preferred stock which generally
may be converted at a stated price within a specific amount of time into a
specified number of shares of common stock. 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
stream of income with generally higher yields than those of common stocks of the
same or similar issuers. These securities are usually senior to common stock in
a company's capital structure, but usually are subordinated to non-convertible
debt securities. In general, the value of a convertible security is the higher
of its investment value (its value as a fixed income security) and its
conversion value (the value of the underlying shares of common stock if the
security is converted). As a fixed income security, the value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise. The value of a convertible security is, however, also
influenced by the value of the underlying common stock.
A Portfolio may invest in equity-linked securities, including Preferred Equity
Redemption Cumulative Stock ("PERCS"), Equity-Linked Securities ("ELKS"), and
Liquid Yield Option Notes ("LYONS"). Equity-Linked Securities are securities
that are convertible into or based upon the value of, equity securities upon
certain terms and
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conditions. The amount received by an investor at maturity of these securities
is not fixed but is based on the price of the underlying common stock, which may
rise or fall. In addition, it is not possible to predict how equity-linked
securities will trade in the secondary market or whether the market for them
will be liquid or illiquid.
ADRS AND EDRS
A Portfolio may invest in sponsored and unsponsored American Depository Receipts
("ADRs"), which are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs,
in registered form, are designed for use in U.S. securities markets.
Unsponsored ADRs may be created without the participation of the foreign issuer.
Holders of these ADRs generally bear all the costs of the ADR facility, whereas
foreign issuers typically bear certain costs in a sponsored ADR. The bank or
trust company depository of an unsponsored ADR may be under no obligation to
distribute shareholder communications received from the foreign issuer or to
pass through voting rights. A may also invest in European Depository Receipts
("EDRs"), receipts issued by a European financial institution evidencing an
arrangement similar to that of ADRs, and in other similar instruments
representing securities of foreign companies. EDRs, in bearer form, are
designed for use in European securities markets.
U.S. GOVERNMENT SECURITIES
The term U.S. Government Securities means obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies or
instrumentalities. The U.S. Government Securities in which a Portfolio may
invest include U.S. Treasury Securities and obligations issued or guaranteed by
U.S. Government agencies and instrumentalities and backed by the full faith and
credit of the U.S. Government, such as those guaranteed by the Small Business
Administration or issued by the Government National Mortgage Association. In
addition, the U.S. Government Securities in which the Portfolios may invest
include securities supported primarily or solely by the creditworthiness of the
issuer, such as securities of the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and the Tennessee Valley Authority.
There is no guarantee that the U.S. Government will support securities not
backed by its full faith and credit. 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.
ZERO-COUPON SECURITIES
A Portfolio may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. These 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"). The Portfolios may invest in other types of
related zero-coupon securities. For instance, 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, including Treasury Receipts ("TRs"),
Treasury Investment Growth Receipts ("TIGRs") and Certificates of Accrual on
Treasury Securities ("CATS"). Zero-coupon securities also may be issued by
corporations and municipalities.
Zero-coupon securities are sold at original issue discount and pay no interest
to holders prior to maturity, but a Portfolio holding a zero-coupon security
must include a portion of the original issue discount of the security as income.
Because of this, zero-coupon securities may be subject to greater fluctuation of
market value than the other securities in which the Portfolios may invest. The
Portfolios 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 an investment adviser would not have chosen to sell such securities and
which may result in a taxable gain or loss.
CORPORATE DEBT SECURITIES AND COMMERCIAL PAPER
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CORPORATE DEBT SECURITIES/COMMERCIAL PAPER - The corporate debt securities in
which a Portfolio may invest include corporate bonds and notes and short-term
investments such as commercial paper and variable rate demand notes. Commercial
paper (short-term promissory notes) is issued by companies to finance their or
their affiliate's current obligations and is frequently unsecured. Variable and
floating rate demand notes are unsecured obligations redeemable upon not more
than 30 days' notice. These obligations include master demand notes that permit
investment of fluctuating amounts at varying rates of interest pursuant to a
direct arrangement with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
These obligations generally are not traded, nor generally is there an
established secondary market for these obligations. To the extent a demand note
does not have a 7 day or shorter demand feature and there is no readily
available market for the obligation, it is treated as an illiquid security.
FINANCIAL INSTITUTION OBLIGATIONS
A Portfolio may 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.
Certificates of deposit represent an institution's obligation to repay
Portfolios deposited with it that earn a specified interest rate over a given
period. Bank notes are a debt obligation of a bank. Bankers' acceptances are
negotiable obligations of a bank to pay a draft which has been drawn by a
customer and are usually backed by goods in international trade. 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 but may be subject to early
withdrawal penalties which could reduce a Portfolio's performance. Deposits
subject to early withdrawal penalties or that mature in more than 7 days are
treated as illiquid securities if there is no readily available market for the
securities. A Portfolio'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
Advisers believe do not present undue risk.
PARTICIPATION INTERESTS
A Portfolio may purchase participation interests in loans or securities in which
the Portfolio may invest directly that are owned by banks or other financial
institutions. A participation interest gives the Portfolio an undivided
interest in a loan or security in the proportion that the Portfolio's interest
bears to the total principal amount of the security. Participation interests,
which may have fixed, floating or variable rates, may carry a demand feature
backed by a letter of credit or guarantee of the bank or institution permitting
the holder to tender them back to the bank or other institution. For certain
participation interests the Portfolio will have the right to demand payment, on
not more than 7 days notice, for all or a part of the Portfolio's participation
interest. A Portfolio will only purchase participation interests from banks or
other financial institutions that Norwest deems to be creditworthy. A Portfolio
will not invest more than 10 percent of its total assets in participation
interests in which the Portfolio does not have demand rights.
ILLIQUID SECURITIES AND RESTRICTED SECURITIES
ILLIQUID SECURITIES/RESTRICTED SECURITIES. A Portfolio may invest up to 15
percent 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 Securities Act of 1933 ("restricted securities"),
securities which are otherwise not readily marketable, such as over-the-counter
options, and repurchase agreements not entitling the holder to payment of
principal in 7 days. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a Portfolio might also have to
register restricted securities in order to dispose of them, resulting in expense
and delay. A Portfolio might not be able to dispose of
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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. An
institutional market has developed for certain securities that are not
registered under the Securities Act of 1933, 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 Securities Act of 1933 or other exemptions, the Advisers may determine that
such securities are not illiquid securities, under guidelines or other
exemptions adopted by the. These guidelines take into account trading activity
in the securities and the availability of reliable pricing information, among
other factors. If there is a lack of trading interest in a particular Rule 144A
security, a Portfolio's holdings of that security may be illiquid.
BORROWING
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 Portfolios (or on the assets that were
retained rather than sold to meet the needs for which Portfolios were borrowed).
Under adverse market conditions, a Portfolio might have to sell portfolio
securities to meet interest or principal payments at a time when investment
considerations would not favor such sales. No Portfolio, other than
Intermediate Government Income Portfolio, Diversified Bond Portfolio and, with
respect to their assets invested in Managed Fixed Income Portfolio, the Balanced
Portfolios, may purchase securities for investment while any borrowing equal to
5 percent or more of the Portfolio's total assets is outstanding or borrow for
purposes other than meeting redemptions in an amount exceeding 5 percent of the
value of the Portfolio's total assets. A Portfolio's use of borrowed proceeds
to make investments would subject the Portfolio 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
Portfolio maintains a segregated account; the use of these techniques in
connection with a segregated account may result in a Portfolio's assets being
100 percent leveraged. See "Appendix A - Techniques Involving Leverage."
PURCHASING SECURITIES ON MARGIN
When the Portfolio purchases securities on margin, it only pays part of the
purchase price and borrows the remainder. As a borrowing, a Portfolio's
purchase of securities on margin is subject to the limitations and risks
described in Borrowing above. In addition, if the value of the securities
purchased on margin decreases such that the Portfolio's borrowing with respect
to the security exceeds the maximum permissible borrowing amount, the Portfolio
will be required to make margin payments (additional payments to the broker to
maintain the level of borrowing at permissible levels). A Portfolio's
obligation to satisfy margin calls may require the Portfolio to sell securities
at an inappropriate time.
TECHNIQUES INVOLVING LEVERAGE
Utilization of leveraging involves special risks and may involve speculative
investment techniques. The Portfolios 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 Portfolios may engage in dollar roll transactions and
Intermediate Government Income Portfolio may purchase securities on margin and
sell securities short (other than against the box). Each of these transactions
involve the use of "leverage" when cash made available to the Portfolio through
the investment technique is used to make additional portfolio investments. In
addition, the use of swap and related agreements may involve leverage. The
Portfolios use these investment techniques only when Norwest to a Portfolio
believes that the leveraging and the returns available to the Portfolio from
investing the cash will provide shareholders a potentially higher return.
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Leverage exists when a Portfolio achieves the right to a return on a capital
base that exceeds the Portfolio's investment. 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 Portfolio.
The risks of leverage include a higher volatility of the net asset value of the
Portfolio'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 Portfolio is able to realize a 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 Portfolio
than if the Portfolio 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 Portfolio'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 Portfolio's use of leverage would result in a lower
rate of return than if the Portfolio 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 Portfolio were not leveraged. In an extreme case, if the
Portfolio's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Portfolio 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 securities in accordance with SEC
guidelines. The account's value, which is marked to market daily, will be at
least equal to the Portfolio's commitments under these transactions. The
Portfolio's commitments may include: (i) the Portfolio'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
"Appendix A - Swap Agreements"); and (ii) 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 Portfolio'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
Portfolio enters into an interest rate swap on other than a net basis, the
Portfolio will maintain the full amount accrued on a daily basis of the
Portfolio's obligations with respect to the swap in their segregated account.
The use of a segregated account in connection with leveraged transactions may
result in a Portfolio's portfolio being 100 percent leveraged.
REPURCHASE AGREEMENTS, SECURITIES LENDING, REVERSE REPURCHASE AGREEMENTS,
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DOLLAR ROLL TRANSACTIONS.
A Portfolio's use of repurchase agreements, securities lending, reverse
repurchase agreements and forward commitments (including "dollar roll"
transactions) entails certain risks not associated with direct investments in
securities. For instance, in the event that bankruptcy or similar proceedings
were commenced against a counterparty while these transactions remained open or
a counterparty defaulted on its obligations, the Portfolio might suffer a loss.
Failure by the other party to deliver a security purchased by the Portfolio may
result in a missed opportunity to make an alternative investment. The Advisers
monitor the creditworthiness of counterparties to these transactions and intend
to enter into these transactions only when they believe the counterparties
present minimal credit risks and the income to be earned from the transaction
justifies the attendant risks. Counterparty insolvency risk with respect to
repurchase agreements is reduced by favorable insolvency laws that allow the
Portfolio, among other things, to liquidate the collateral held in the event of
the bankruptcy of the counterparty. Those laws do not apply to securities
lending and, accordingly, securities lending involves more risk than does the
use of repurchase agreements. As a result of entering forward commitments and
reverse repurchase agreements, as well as lending its securities, a Portfolio
may be exposed to greater potential fluctuations in the value of its assets and
net asset value per share. See "Appendix A - Techniques Involving Leverage."
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REPURCHASE AGREEMENTS. A Portfolio may enter into repurchase agreements,
transactions in which a Portfolio purchases a security and simultaneously
commits to resell that security to the seller at an agreed-upon price on an
agreed-upon future date, normally 1 to 7 days later. The resale price of a
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the purchased security. The Trust's custodian
maintains possession of the collateral underlying a repurchase agreement, which
has a market value, determined daily, at least equal to the repurchase price,
and which consists of the types of securities in which the Portfolio may invest
directly. Certain Portfolios may enter into repurchase agreements with foreign
entities.
SECURITIES LENDING. A Portfolio may lend securities from its portfolios to
brokers, dealers and other financial institutions. Securities loans must be
continuously secured by cash or U.S. Government Securities with a market value,
determined daily, at least equal to the value of the Portfolio's securities
loaned, including accrued interest. A Portfolio receives interest in respect of
securities loans from the borrower or from investing cash collateral. A
Portfolio may pay fees to arrange the loans. No Portfolio will lend portfolio
securities in excess of 33 1/3 percent of the value of the Portfolio's total
assets.
REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into reverse repurchase
agreements, transactions in which the Portfolio 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.
Because certain of the incidents of ownership of the security are retained by
the Portfolio, reverse repurchase agreements may be viewed as a form of
borrowing by the Portfolio from the buyer, collateralized by the security sold
by the Portfolio. A Portfolio will use the proceeds of reverse repurchase
agreements to Portfolio redemptions or to make investments. In most cases these
investments either mature or have a demand feature to resell to the issuer on a
date not later than the expiration of the agreement. Interest costs on the money
received in a reverse repurchase agreement may exceed the return received on the
investments made by the Portfolio with those monies. Any significant commitment
of a Portfolio's assets to the reverse repurchase agreements will tend to
increase the volatility of the Portfolio's net asset value per share.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. A Portfolio may purchase fixed
income securities on a "when-issued" or "forward commitment" basis. When these
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within 3 months after the transaction. During the period between a commitment
and settlement, no payment is made for the securities purchased and no interest
on the security accrues to the purchaser. At the time a Portfolio makes a
commitment to purchase securities in this manner, the Portfolio immediately
assumes the risk of ownership, including price fluctuation. Failure by the
other party to deliver a security purchased by a Portfolio may result in a loss
or a missed opportunity to make an alternative investment. The use of
when-issued transactions and forward commitments enables a Portfolio to hedge
against anticipated changes in interest rates and prices. If Norwest or
Schroder were to forecast incorrectly the direction of interest rate movements,
however, a Portfolio might be required to complete these transactions when the
value of the security is lower than the price paid by the Portfolio. Except for
dollar-roll transactions, a Portfolio will not purchase securities on a
when-issued or forward commitment basis if, as a result, more than 15 percent
(35 percent in the case of Total Return Bond Portfolio) of the value of the
Portfolio's total assets would be committed to such transactions.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Portfolios purchase securities on a when-issued and
forward commitment basis only with the intention of actually receiving the
securities. When-issued securities may include bonds purchased on a "when, and
if issued" basis under which the issuance of the securities depends upon the
occurrence of a subsequent event. Commitment of a Portfolio's assets to the
purchase of securities on a when-issued or forward commitment basis will tend to
increase the volatility of the Portfolios net asset value per share.
DOLLAR ROLL TRANSACTIONS. A Portfolio may enter into "dollar roll" transactions
wherein the Portfolio sells fixed income securities, typically mortgage-backed
securities, and makes a commitment to purchase similar, but not
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identical, securities at a later date from the same party. Like a forward
commitment, during the roll period no payment is made for the securities
purchased and no interest or principal payments on the security accrue to the
purchaser, but the Portfolio assumes the risk of ownership. A Portfolio is
compensated for entering into dollar roll transactions by the difference between
the current sales price and the forward price for the future purchase, as well
as by the interest earned on the cash proceeds of the initial sale. Like other
when-issued securities or firm commitment agreements, dollar roll transactions
involve the risk that the market value of the securities sold by the Portfolio
may decline below the price at which a Portfolio is committed to purchase
similar securities. In the event the buyer of securities under a dollar roll
transaction becomes insolvent, the Portfolios use of the proceeds of the
transaction may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Portfolios obligation to repurchase
the securities. The Portfolios will engage in roll transactions for the purpose
of acquiring securities for its portfolio and not for investment leverage. Each
Portfolio will limit its obligations on dollar roll transactions to 35 percent
of the Portfolio's net assets.
SWAP AGREEMENTS
To manage its exposure to different types of investments, a Portfolio may enter
into interest rate, currency and mortgage (or other asset) swap agreements and
may purchase and sell interest rate "caps," "floors" and "collars." In a
typical interest rate swap agreement, one party agrees to make regular payments
equal to a floating interest rate on a specified amount (the "notional principal
amount") in return for payments equal to a fixed interest rate on the same
amount for a specified period. If a swap agreement provides for payment in
different currencies, the parties may also agree to exchange the notional
principal amount. Mortgage swap agreements are similar to interest rate swap
agreements, except that the notional principal amount is tied to a reference
pool of mortgages. In a cap or floor, one party agrees, usually in return for a
fee, to make payments under particular circumstances. For example, the
purchaser of an interest rate cap has the right to receive payments to the
extent a specified interest rate exceeds an agreed upon level; the purchaser of
an interest rate floor has the right to receive payments to the extent a
specified interest rate falls below an agreed upon level. A collar entitles the
purchaser to receive payments to the extent a specified interest rate falls
outside an agreed upon range.
Swap agreements may involve leverage and may be highly volatile; depending on
how they are used, they may have a considerable impact on the Portfolios
performance. See "Appendix A - Techniques Involving Leverage." Swap agreements
involve risks depending upon the counterparties' creditworthiness and ability to
perform as well as the Portfolio's ability to terminate its swap agreements or
reduce its exposure through offsetting transactions. Norwest monitors the
creditworthiness of counterparties to these transactions and intends to enter
into these transactions only when they believe the counterparties present
minimal credit risks and the income expected to be earned from the transaction
justifies the attendant risks.
MUNICIPAL SECURITIES
The municipal securities in which the Portfolios may invest include municipal
bonds, notes and leases. Municipal securities may be zero-coupon securities.
Yields on municipal securities are dependent on a variety of factors, including
the general conditions of the municipal security markets and the fixed income
markets in general, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The achievement of a Portfolio's
investment objective is dependent in part on the continuing ability of the
issuers of municipal securities in which the Portfolio invests to meet their
obligations for the payment of principal and interest when due.
Municipal bonds can be classified as either "general obligation" or "revenue"
bonds. General obligation bonds are secured by a municipality's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are usually payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other tax, but not from general tax revenues. Municipal
bonds include industrial development bonds. Municipal bonds may also be "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer is unable to meet its obligations under the bonds
from current revenues, it may draw on a reserve Portfolio that is backed by the
moral commitment (but not the legal obligation) of the state or municipality
that created the issuer.
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The Portfolio may invest in tax-exempt industrial development bonds, which in
most cases are revenue bonds and generally do not have the pledge of the credit
of the municipality. The payment of the principal and interest on these bonds
is dependent solely on the ability of an initial or subsequent user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. The Portfolio will acquire private activity securities only if the
interest payments on the security are exempt from federal income taxation (other
than the Alternative Minimum Tax (AMT)).
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities, are intended to fulfill short-term capital needs and
generally have original maturities not exceeding one year. They include tax
anticipation notes, revenue anticipation notes (which generally are issued in
anticipation of various seasonal revenues), bond anticipation notes,
construction loan notes and tax-exempt commercial paper. Tax-exempt commercial
paper generally is issued with maturities of 270 days or less at fixed rates of
interest.
MUNICIPAL LEASES. Municipal Leases, which may take the form of a lease or an
installment purchase or conditional sale contract, are issued 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. Lease and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting 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. Generally, the Portfolio will invest
in municipal lease obligations through certificates of participation.
PARTICIPATION INTERESTS. The Portfolios may purchase participation interests in
municipal securities that are owned by banks or other financial institutions.
Participation interests usually carry a demand feature backed by a letter of
credit or guarantee of the bank or institution permitting the holder to tender
them back to the bank or other institution. Prior to purchasing any
participation interest, the Portfolios will obtain appropriate assurances that
the interest earned by the Portfolios from the obligations in which it holds
participation interests is exempt from federal and, in the case of state
tax-free Portfolios, applicable state income tax.
STAND-BY COMMITMENTS. The Portfolios 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 a Portfolio 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 Portfolio 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 Portfolio 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 Portfolio's policy
is to enter into stand-by commitment transactions only with municipal securities
dealers which, in the view of Norwest, present minimal credit risks.
PUTS ON MUNICIPAL SECURITIES. The Portfolios may acquire "puts" on municipal
securities they purchase. A put gives the Portfolio the right to sell the
municipal security at a specified price at any time on or before a specified
date. The Portfolio will acquire puts only to enhance liquidity, shorten the
maturity of the related municipal security or permit the Portfolio to invest its
Portfolios at more favorable rates. Generally, the Portfolio will buy a
municipal security that is accompanied by a put only if the put is available at
no extra cost. In some cases, however, the Portfolio may pay an extra amount to
acquire a put, either in connection with the purchase of the related municipal
security or separately from the purchase of the security. Puts involve the same
risks discussed above with respect to stand-by commitments.
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SHORT SALES
Certain Portfolios are authorized to make short sales of securities it owns or
has the right to acquire at no added cost through conversion or exchange of
other securities it owns (referred to as short sales "against the box") and to
make short sales of securities which it does not own or have the right to
acquire. A short sale that is not made "against the box" is a transaction in
which a Portfolio sells a security it does not own in anticipation of a decline
in the market price for the security. When the Portfolio makes a short sale,
the proceeds it receives are retained by the broker until the Portfolio replaces
the borrowed security. In order to deliver the security to the buyer, the
Portfolio must arrange through a broker to borrow the security and, in so doing,
the Portfolio becomes obligated to replace the security borrowed at its market
price at the time of replacement, whatever that price may be. Short sales that
are not made "against the box" create opportunities to increase the Portfolio's
return but, at the same time, involve special risk considerations and may be
considered a speculative technique. Since the Portfolio in effect profits from
a decline in the price of the securities sold short without the need to invest
the full purchase price of the securities on the date of the short sale, the
Portfolio's net asset value per share, will tend to increase more when the
securities it has sold short decrease in value, and to decrease more when the
securities it has sold short increase in value, than would otherwise be the case
if it had not engaged in such short sales. Short sales theoretically involve
unlimited loss potential, as the market price of securities sold short may
continuously increase, although a Portfolio may mitigate such losses by
replacing the securities sold short before the market price has increased
significantly. Under adverse market conditions a Portfolio might have
difficulty purchasing securities to meet its short sale delivery obligations and
might have to sell portfolio securities to raise the capital necessary to meet
its short sale obligations at a time when fundamental investment considerations
would not favor those sales. See "Appendix A - Techniques Involving Leverage."
If the Portfolio makes a short sale "against the box," the Portfolio would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. The Portfolio's decision to make a short sale "against the box" may
be a technique to hedge against market risks when Norwest believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Portfolio or a security convertible into or exchangeable for such
security. In such case, any future losses in the Portfolio's long position
would be reduced by an offsetting future gain in the short position. The
Portfolio's ability to enter into short sales transactions is limited by certain
tax requirements. See "Dividends - Distributions and Taxes" in the SAIs.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent an interest in a pool of mortgages
originated by lenders such as commercial banks, savings associations and
mortgage bankers and brokers. Mortgage-backed securities may be issued by
governmental or government-related entities or by non-governmental entities such
as special purpose trusts created by banks, savings associations, private
mortgage insurance companies or mortgage bankers.
Interests in mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or on specified call dates. In
contrast, mortgage-backed securities provide monthly payments which consist of
interest and, in most cases, principal. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of the
securities or a mortgage loan servicer. Additional payments to holders of these
securities are caused by prepayments resulting from the sale or foreclosure of
the underlying property or refinancing of the underlying loans.
UNDERLYING MORTGAGES. Pools of mortgages consist of whole mortgage loans or
participations in mortgage loans. The majority of these loans are made to
purchasers of 1-4 family homes, but may be made to purchasers of mobile homes or
other real estate interests. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Portfolio may
purchase pools of variable rate mortgages, growing equity mortgages, graduated
payment mortgages and other types of mortgages. Mortgage servicers impose
qualification standards for local lending institutions
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which originate mortgages for the pools as well as credit standards and
underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
LIQUIDITY AND MARKETABILITY. The market for mortgage-backed securities has
expanded considerably in recent years. The size of the primary issuance market
and active participation in the secondary market by securities dealers and many
types of investors make government and government-related pass-through pools
highly liquid. The recently introduced private conventional pools of mortgages
(pooled by commercial banks, savings and loan institutions and others, with no
relationship with government and government-related entities) have also achieved
broad market acceptance and consequently an active secondary market has emerged,
however, the market for conventional pools is smaller and less liquid than the
market for government and government-related mortgage pools.
AVERAGE LIFE AND PREPAYMENTS. The average life of a pass-through pool varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's terms may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. Prepayments with respect to securities
during times of declining interest rates will tend to lower the return of a
Portfolio and may even result in losses to a Portfolio if the securities were
acquired at a premium. The occurrence of mortgage prepayments is affected by
various factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of
fixed-rate 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with
other maturities or different characteristics will have varying assumptions for
average life. The assumed average life of pools of mortgages having terms of
less than 30 years is less than 12 years, but typically not less than 5 years.
YIELD CALCULATIONS. Yields on pass-through securities are typically quoted by
investment dealers based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgages. Conversely, in periods of rising rates, the rate of
prepayment tends to decrease, thereby lengthening the actual average life of the
pool. Actual prepayment experience may cause the yield to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the yield of a
Portfolio.
GOVERNMENT AND GOVERNMENT-RELATED GUARANTORS. The principal government
guarantor of mortgage-backed securities is the Government National Mortgage
Association ("GNMA"), a wholly owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages.
The Federal National Mortgage Association ("FNMA") is a government-sponsored
corporation owned entirely by private stockholders that is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller-servicers. The Federal Home
Loan Mortgage Corporation ("FHLMC") is a corporate instrumentality of the United
States Government that was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("PCs") which represent interests in mortgages from
FHLMCs national portfolio. FNMA and FHLMC each guarantee the payment of
principal and interest on the securities they issue. These securities, however,
are not backed by the full faith and credit of the United States Government.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. Mortgage-backed securities offered
by private issuers include pass-through securities comprised of pools of
conventional mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and which are
collateralized by mortgage
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loans; and collateralized mortgage obligations. Mortgage-backed securities
issued by non-governmental issuers may offer a higher rate of interest than
securities issued by government issuers because of the absence of direct or
indirect government guarantees of payment. Many non-governmental issuers or
servicers of mortgage-backed securities, however, guarantee timely payment of
interest and principal on such securities. Timely payment of interest and
principal may also be supported by various forms of insurance, including
individual loan, title, pool and hazard policies. There can be no assurance
that the private issuers or insurers will be able to meet their obligations
under the relevant guarantees and insurance policies.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage-backed
securities ("ARMs") are securities that have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or market
interest rate. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because of the
resetting of interest rates, adjustable rate securities are less likely than
non-adjustable rate securities of comparable quality and maturity to increase
significantly in value when market interest rates fall. Also, most adjustable
rate securities (or the underlying mortgages) are subject to caps or floors.
"Caps" limit the maximum amount by which the interest rate paid by the borrower
may change at each reset date or over the life of the loan and, accordingly,
fluctuation in interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
securities.
ARMs may have less risk of a decline in value during periods of rapidly rising
rates, but they may also have less potential for capital appreciation than other
debt securities of comparable maturities due to the periodic adjustment of the
interest rate on the underlying mortgages and due to the likelihood of increased
prepayments of mortgages as interest rates decline. Furthermore, during periods
of declining interest rates, income to a Portfolio will decrease as the coupon
rate resets to reflect the decline in interest rates. During periods of rising
interest rates, changes in the coupon rates of the mortgages underlying a
Portfolio's ARMs may lag behind changes in market interest rates. This may
result in a slightly lower net value until the interest rate resets to market
rates. Thus, investors could suffer some principal loss if they sold Portfolio
shares before the interest rates on the underlying mortgages were adjusted to
reflect current market rates.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are debt obligations that are collateralized by mortgages or mortgage
pass-through securities issued by GNMA, FHLMC or FNMA or by pools of
conventional mortgages ("Mortgage Assets"). CMOs may be privately issued or
U.S. Government Securities. Payments of principal and interest on the Mortgage
Assets are passed through to the holders of the CMOs on the same schedule as
they are received, although, certain classes (often referred to as tranches) of
CMOs have priority over other classes with respect to the receipt of payments.
Multi-class mortgage pass-through securities are interests in trusts that hold
Mortgage Assets and that have multiple classes similar to those of CMOs.
Unless the context indicates otherwise, references to CMOs include multi-class
mortgage pass-through securities. Payments of principal of and interest on the
underlying Mortgage Assets (and in the case of CMOs, any reinvestment income
thereon) provide Portfolios to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities. Parallel pay
CMOs are structured to provide payments of principal on each payment date to
more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or final distribution date but may be retired earlier. Planned amortization
class mortgage-based securities ("PAC Bonds") are a form of parallel pay CMO.
PAC Bonds are designed to provide relatively predictable payments of principal
provided that, among other things, the actual prepayment experience on the
underlying mortgage loans falls within a contemplated range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the contemplated range, or if deviations from other assumptions
occur, principal payments on a PAC Bond may be greater or smaller than
predicted. The magnitude of the contemplated range varies from one PAC Bond to
another; a narrower range increases the risk that prepayments will be greater or
smaller than contemplated. CMOs may have complicated structures and generally
involve more risks than simpler forms of mortgage-backed securities.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a "Z-tranche"). Holders of accrual bonds receive no cash
payments for an extended period of time. During the time that earlier tranches
are
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outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increases the face amount of the security at a
compounded rate, but is not paid to the bond holder. After all previous
tranches are retired, accrual bond holders start receiving cash payments that
include both principal and continuing interest. The market value of accrual
bonds can fluctuate widely and their average life depends on the other aspects
of the CMO offering. Interest on accrual bonds is taxable when accrued even
though the holders receive no accrual payment. The Portfolios 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 an investment adviser
would not have chosen to sell such securities and which may result in a taxable
gain or loss.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities are
classes of mortgage-backed securities that receive different proportions of the
interest and principal distributions from the underlying Mortgage Assets. They
may be may be privately issued or U.S. Government Securities. In the most
extreme case, one class will be entitled to receive all or a portion of the
interest but none of the principal from the Mortgage Assets (the interest-only
or "IO" class) and one class will be entitled to receive all or a portion of the
principal, but none of the interest (the "PO" class). Currently, no Portfolio
may purchase IOs or POs.
ASSET-BACKED SECURITIES
Asset-backed securities represent direct or indirect participations in, or
are secured by and payable from, assets other than mortgage-backed 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. No Portfolio may
invest more than 10 percent of its net assets in asset-backed securities that
are backed by a particular type of credit, for instance, credit card
receivables. Asset-backed securities, including adjustable rate asset-backed
securities, have yield characteristics similar to those of mortgage-backed
securities and, accordingly, are subject to many of the same risks. Assets
are securitized through the use of trusts and special purpose corporations
that issue securities that 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 do not always have the benefit of a security interest in
collateral comparable to the security interests associated with
mortgage-backed securities. As a result, the risk that recovery on
repossessed collateral might be unavailable or inadequate to support payments
on asset-backed securities is greater for asset-backed securities than for
mortgage-backed securities. In addition, 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 an interest rate
or economic cycle has not been tested.
FOREIGN EXCHANGE CONTRACTS AND FOREIGN CURRENCY FORWARD CONTRACTS. Changes in
foreign currency exchange rates will affect the U.S. dollar values of securities
denominated in currencies other than the U.S. dollar. The rate of exchange
between the U.S. dollar and other currencies fluctuates in response to forces of
supply and demand in the foreign exchange markets. These forces are affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. When
investing in foreign securities a Portfolio usually effects currency exchange
transactions on a spot (I.E., cash) basis at the spot rate prevailing in the
foreign exchange market. The Portfolio incurs foreign exchange expenses in
converting assets from one currency to another.
A Portfolio may enter into foreign currency forward contracts or currency
futures or options contracts for the purchase or sale of foreign currency to
"lock in" the U.S. dollar price of the securities denominated in a foreign
currency or the U.S. dollar value of interest and dividends to be paid on such
securities, or to hedge against the possibility that the currency of a foreign
country in which a Portfolio has investments may suffer a decline against the
U.S. dollar. Like foreign exchange contracts and foreign currency forward
contracts, these instruments are often referred to as derivatives, which may be
defined as financial instruments whose performance is derived, at least in part,
from the performance of another asset (such as a security, currency or an index
of securities. The Portfolios have no present intention to enter into currency
futures or options contracts but may do so in the future. A forward currency
contract is an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. This method of
attempting to hedge the value of a Portfolio's portfolio securities against a
decline in the value of a
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currency does not eliminate fluctuations in the underlying prices of the
securities. Although the strategy of engaging in foreign currency transactions
could reduce the risk of loss due to a decline in the value of the hedged
currency, it could also limit the potential gain from an increase in the value
of the currency. No Portfolio intends to maintain a net exposure to such
contracts where the fulfillment of the Portfolio's obligations under such
contracts would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of the Portfolio's portfolio securities or other assets
denominated in that currency. A Portfolio will not enter into these contracts
for speculative purposes and will not enter into non-hedging currency contracts.
These contracts involve a risk of loss if Norwest fails to predict currency
values correctly.
FUTURES CONTRACTS AND OPTIONS
A Portfolio may seek to enhance its return through the writing (selling) and
purchasing of exchange-traded and over-the-counter options on fixed income
securities or indices. A Portfolio may also to attempt 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 use of those options and the
purchase and sale of interest rate futures contracts and options on those
futures contracts. These instruments are often referred to as "derivatives,"
which may be defined as financial instruments whose performance is derived, at
least in part, from the performance of another asset (such as a security,
currency or an index of securities. A Portfolio may only write options that are
covered. An option is covered if, so long as the Portfolio is obligated under
the option, it owns an offsetting position in the underlying security or futures
contract or maintains cash, U.S. Government Securities or other liquid debt
securities in a segregated account with a value at all times sufficient to cover
the Portfolio's obligation under the option. Certain futures strategies
employed by a Balanced Portfolio in making temporary allocations may not be
deemed to be for bona fide hedging purposes, as defined by the Commodity Futures
Trading Commission. A Portfolio may enter into these futures contracts only if
the aggregate of initial margin deposits for open futures contract positions
does not exceed 5 percent of the Portfolio's total assets.
RISK CONSIDERATIONS. The Portfolio's use of options and futures contracts
subjects the Portfolio to certain investment risks and transaction costs to
which it might not otherwise be subject. These risks include: (i) dependence
on Norwest's ability to predict movements in the prices of individual securities
and fluctuations in the general securities markets; (ii) imperfect correlations
between movements in the prices of options or futures contracts and movements in
the price of the securities hedged or used for cover which may cause a given
hedge not to achieve its objective; (iii) the fact that the skills and
techniques needed to trade these instruments are different from those needed to
select the other securities in which the Portfolio invests; (iv) lack of
assurance that a liquid secondary market will exist for any particular
instrument at any particular time, which, among other things, may hinder a
Portfolio's ability to limit exposures by closing its positions; (v) the
possible need to defer closing out of certain options, futures contracts and
related options to avoid adverse tax consequences; and (vi) the potential for
unlimited loss when investing in futures contracts or writing options for which
an offsetting position is not held.
Other risks include the inability of the Portfolio, as the writer of covered
call options, to benefit from any appreciation of the underlying securities
above the exercise price and the possible loss of the entire premium paid for
options purchased by the Portfolio. In addition, the futures exchanges may
limit the amount of fluctuation permitted in certain futures contract prices
during a single trading day. A Portfolio may be forced, therefore, to liquidate
or close out a futures contract position at a disadvantageous price. There can
be no assurance that a liquid market will exist at a time when a Portfolio seeks
to close out a futures position or that a counterparty in an over-the-counter
option transaction will be able to perform its obligations. There are a limited
number of options on interest rate futures contracts and exchange traded options
contracts on fixed income securities. Accordingly, hedging transactions
involving these instruments may entail "cross-hedging." As an example, a
Portfolio may wish to hedge existing holdings of mortgage-backed securities, but
no listed options may exist on those securities. In that event, Norwest may
attempt to hedge the Portfolio's securities by the use of options with respect
to similar fixed income securities. The Portfolio may use various futures
contracts that are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
in those contracts will develop or continue to exist.
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LIMITATIONS. Except for the futures contracts strategies of a Portfolio used
for making temporary allocations among bonds and stocks, the Portfolios have no
current intention of investing in futures contracts and options thereon for
purposes other than hedging. Certain Underlying Portfolios may purchase a call
or put only if, after such purchase, the value of all put and call options held
by the Underlying Portfolio would not exceed 5% of its total assets. No
Portfolio may sell a put option if the exercise value of all put options written
by the Portfolio would exceed 50 percent of the Portfolio's total assets or sell
a call option if the exercise value of all call options written by the Portfolio
would exceed the value of the Portfolio's assets. In addition, the current
market value of all open futures positions held by a Portfolio will not exceed
50 percent of its total assets.
OPTIONS ON SECURITIES. A call option is a contract pursuant to which the
purchaser of the call option, in return for a premium paid, has the right to buy
the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. A put option gives its purchaser, in return for a premium, the right to
sell the underlying security at a specified price during the term of the option.
The writer of the put, who receives the premium, has the obligation to buy the
underlying security, upon exercise at the exercise price during the option
period. The amount of premium received or paid is based upon certain factors,
including the market price of the underlying security or index, the relationship
of the exercise price to the market price, the historical price volatility of
the underlying security or index, the option period, supply and demand and
interest rates.
OPTIONS ON STOCK INDICES. A stock index assigns relative values to the stock
included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional stock options except that exercises of stock
index options are effected with cash payments and do not involve delivery of
securities. Thus, upon exercise of stock index options, the purchaser will
realize and the writer will pay an amount based on the differences between the
exercise price and the closing price of the stock index.
INDEX FUTURES CONTRACTS. Bond and stock index futures contracts are bilateral
agreements pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the bond or stock index value at the close of trading of the contract and the
price at which the futures contract is originally struck. No physical delivery
of the securities comprising the index is made. Generally, these futures
contracts are closed out prior to the expiration date of the contract. In
addition to the Portfolios listed at the beginning of this section, "Futures
Contracts and Options," a Portfolio using the Index Portfolio investment style
may invest in index futures contracts to a limited extent.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to stock
options except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
C-14
<PAGE>
APPENDIX B - DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
C-15
<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.
C-16
<PAGE>
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally 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.
C-17
<PAGE>
PREFERRED STOCK
MOODY'S INVESTORS SERVICE, INC.
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
C-18
<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 Portfolio 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, INC. 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 RATING GROUP. 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, INC. Fitch's short-term ratings apply to debt
obligations that are payable on demand or have original maturities of generally
up to three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.
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.
C-19
<PAGE>
OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics: Leading market positions in well-established
industries; high rates of return on Portfolios employed; conservative
capitalization structure with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial charges and
high internal cash generation; well-established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A-1 and A-2. Issues assigned an
A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are delineated with the numbers 1, 2 and 3 to indicate
the relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated A-2 are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION AND THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF THE PORTFOLIOS' SHARES, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
C-20
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
Not Applicable to this filing.
FINANCIAL HIGHLIGHTS.
Not Applicable to this filing.
(B) EXHIBITS.
NOTE: * INDICATES THAT THE EXHIBIT IS INCORPORATED HEREIN BY REFERENCE. ALL
REFERENCES TO A POST-EFFECTIVE AMENDMENT ("PEA") OR PRE-EFFECTIVE AMENDMENT
("PREEA") ARE TO PEAS AND PREEAS TO REGISTRANT'S REGISTRATION STATEMENT ON FORM
N-1A, FILE NO. 33-9645.
(1)* Trust Instrument of Registrant as now in effect (filed as Exhibit 1 to
PEA No. 35).
(2)* By-Laws of Registrant as now in effect (filed as Exhibit 2 to PEA No.
35).
(3) Not Applicable.
(4)* Specimen Certificate for shares of beneficial interest of each class of
each portfolio of Registrant. Except for the names of the classes of
shares and CUSIP numbers. the certificate of each class of each portfolio
of Registrant is substantially the same as the specimen certificate, and
therefore, is omitted pursuant to Rule 483(d)(2) under the 1933 Act
(filed as Exhibit 4 to PEA No. 35).
(5) (a)* Form of Investment Advisory Agreement between Registrant and
Norwest Investment Mangement, Inc. relating to Cash Investment
Fund, Ready Cash Investment Fund, U.S. Government Fund, Treasury
Fund, Municipal Money Market Fund, Stable Income Fund, Short
Maturity Government Bond 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, Conservative Balanced Fund, Moderate Balanced
Fund, Growth Balanced Fund, Aggressive Balanced Fund, Index Fund,
Income Equity Fund, ValuGrowth-SM- Stock Fund, Diversified Equity
Fund, Growth Equity Fund, Large Company Growth Fund, Small
Company Stock Fund, Small Company Growth Fund, Diversified Small
Cap Fund, Small Cap Opportunities Fund, Contrarian Stock Fund,
International Fund, Norwest WealthBuilder II Growth Portfolio,
<PAGE>
Norwest WealthBuilder II Growth and Income Portfolio, Norwest
WealthBuilder II Growth Balanced Portfolio, Performa Smith
Disciplined Growth Fund, Performa Smith Small Cap Value Fund,
Performa Large Cap Value Fund, Performa Galliard Strategic Value
Bond Fund and Performa Schroder Global Growth Fund. Except for
the names of each series of the Registrant, the Investment
Advisory Agreement of each series of Registrant is substantially
the same as the Investment Advisory Agreement, and therefore, is
omitted pursuant to Rule 483(d)(2) under the 1933 Act (filed as
Exhibit 5(a) to PEA No. 43).
(b)* Investment Sub-Advisory Agreement between Registrant and Crestone
Capital Management, Inc. relating to Small Company Stock Fund
(filed as Exhibit 5(b) to PEA No. 35).
(c)* Investment Sub-Advisory Agreement between Registrant and Schroder
Capital Management International Inc. relating to the Diversified
Equity Fund, Growth Equity Fund, International Fund, Conservative
Balanced Fund, Moderate Balanced Fund and Growth Balanced Fund
(filed as Exhibit 5(c) to PEA No. 35).
(d)* Advisory Agreement between Registrant and Norwest Bank Minnesota,
N.A., relating to Cash Investment Fund, Treasury Fund, U.S.
Government Fund, Ready Cash Investment Fund, Municipal Money
Market Fund, Minnesota Tax-Free Fund, Colorado Tax-Free Fund,
Government Income Fund, Income Fund, Tax-Free Income Fund,
Adjustable U.S. Government Reserve Fund, ValuGrowth Stock Fund,
and Income Stock Fund (filed as Exhibit 5(d) to PEA No. 35).
(e)* Form of Investment Sub-Advisory Agreement between Registrant and
Galliard Capital Management International Inc. relating to the
Stable Income Fund (filed as Exhibit 5(e) to PEA No. 43).
(f)* Form of Investment Sub-Advisory Agreement between Registrant and
Peregrine Capital Management International Inc. relating to the
Small Company Growth Fund and Large Company Growth Fund (filed as
Exhibit 5(f) to PEA No. 43).
(g)* Form of Investment Sub-Advisory Agreement between Registrant and
United Capital Management relating to Total Return Bond Fund and
Contrarian Stock Fund (filed as Exhibit 5(g) to PEA No. 43).
(6)* Distribution Agreement between Registrant and Forum Financial Services,
Inc. relating to each portfolio of Registrant (filed as Exhibit 6 to PEA
No. 35).
(7) Not Applicable.
(8) (a)* Custodian Agreement between Registrant and Norwest Bank
Minnesota, N.A. dated August 1, 1993 as amended November 11, 1994
(filed as Exhibit 8(a) to PEA No. 35).
<PAGE>
(b)* Transfer Agency Agreement to be between Registrant and Norwest
Bank Minnesota, N.A. (filed as Exhibit 8(b) to PEA No. 35).
(9) (a)* Management Agreement between Registrant and Forum Financial
Services, Inc. relating to each portfolio of Registrant (filed
as Exhibit 9(a) to PEA No. 35).
(b)* Fund Accounting Agreement between Registrant and Forum Financial
Corp. (filed as Exhibit 9(b) to PEA No. 35).
(c)* Administration Services Agreement between Registrant and Norwest
Bank Minnesota, N.A. relating to International Fund (filed as
Exhibit 9(c) to PEA No. 35).
(10) (a)* Opinion of Seward & Kissel (filed on December 31, 1986 as
Exhibit 10(a) of PreEA 2).
(b)* Opinion of Seward & Kissel (filed as Exhibit 10(b) to PEA No.
35).
(11) (a) Not applicable.
(11) (b) Not applicable.
(12) Not Applicable.
(13)* Investment representation letter of John Y. Keffer as initial purchaser
of shares of stock of Registrant (filed on December 31, 1986 as Exhibit
13 of PreEA 2).
(14)* Individual Retirement Account materials (filed on April 22, 1994 as
Exhibit 14 to PEA 24).
(15)* Rule 12b-1 Plan adopted by Registrant with respect to the Income Fund,
Tax-Free Income Fund, Minnesota Tax-Free Fund, ValuGrowth Stock Fund,
Adjustable U.S. Government Reserve Fund, Colorado Tax-Free Fund, Income
Stock Fund, Arizona Tax-Free Fund, Contrarian Stock Fund, Small Company
Stock Fund, Government Income Fund, Total Return Bond Fund, Stable Income
Fund, Income Equity Fund, Diversified Equity Fund, Intermediate U.S.
Government Fund, Growth Equity Fund and Exchange Shares of Ready Cash
Investment Fund (filed as Exhibit 15 to PEA No. 35).
(16) Schedule for Computation of each Performance Quotation provided in the
Registration Statement in response to Item 22 (filed on June 2, 1997 as
Exhibit 16 to PEA 42.)
(17) Not Applicable.
(18)* Multiclass (Rule 18f-3) Plan adopted by Registrant (filed as Exhibit 18
to PEA No. 35).
<PAGE>
Other Exhibits
(A)* Power of Attorney of James C. Harris, Trustee of Registrant (filed as
Other Exhibit A to PEA No. 35).
(B)* Power of Attorney of Richard M. Leach, Trustee of Registrant (filed as
Other Exhibit B to PEA No. 35).
(C)* Power of Attorney of Robert C. Brown, Trustee of Registrant (filed as
Other Exhibit C to PEA No. 35).
(D)* Power of Attorney of Donald H. Burkhardt, Trustee of Registrant (filed as
Other Exhibit D to PEA No. 35).
(E)* Power of Attorney of John Y. Keffer, Trustee of Registrant (filed as
Other Exhibit E to PEA No. 35).
(F)* Power of Attorney of Donald C. Willeke, Trustee of Registrant (filed as
Other Exhibit F to PEA No. 35).
(G)* Power of Attorney of Timothy J. Penny, Trustee of Registrant (filed as
Other Exhibit G to PEA No. 35).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF MAY 1, 1997.
Number of
Title of Class of Unit of Beneficial Interest Record Holders
- --------------------------------------------- --------------
Cash Investment Fund 49
U.S. Government Fund 34
Treasury Fund 25
Municipal Money Market Fund
Investor Shares 20
Institutional Shares 13
Ready Cash Investment Fund
Investor Shares 160
Institutional Shares 14
Exchange Class 14
Income Fund
A Shares 248
<PAGE>
B Shares 245
I Shares 846
Total Return Bond Fund
A Shares 73
B Shares 205
I Shares 275
Colorado Tax-Free Fund
A Shares 413
B Shares 181
I Shares 6
Minnesota Tax-Free Fund
A Shares 443
B Shares 362
I Shares 103
Tax-Free Income Fund
A Shares 592
B Shares 231
I Shares 285
ValuGrowth Stock Fund
A Shares 1,178
B Shares 637
I Shares 1,087
Small Cap Opportunities Fund
A Shares 41
B Shares 23
I Shares 17
Contrarian Stock Fund
A Shares 5
B Shares 4
I Shares 88
Small Company Stock Fund
A Shares 569
B Shares 634
I Shares 1,832
Diversified Equity Fund
A Shares 1,148
B Shares 2,320
I Shares 14
Growth Equity Fund
A Shares 609
B Shares 915
I Shares 12
Large Company Growth Fund
I Shares 13
Small Company Growth Fund
<PAGE>
I Shares 11
International Fund
A Shares 171
B Shares 197
I Shares 18
Income Equity Fund
A Shares 1,996
B Shares 2,616
I Shares 20
Index Fund
I Shares 13
Conservative Balanced Fund
I Shares 11
Moderate Balanced Fund
I Shares 13
Growth Balanced Fund
I Shares 13
Intermediate Government Income Fund
A Shares 475
B Shares 476
I Shares 18
Diversified Bond Fund
I Shares 14
Stable Income Fund
A Shares 71
B Shares 51
I Shares 15
ITEM 27. INDEMNIFICATION.
The general effect of Section 10.02 of Registrant's Trust Instrument is to
indemnify existing or former trustees and officers of the Trust to the fullest
extent permitted by law against liability and expenses. There is no
indemnification if, among other things, any such person is adjudicated liable to
Registrant or its shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. This description is modified in its entirety by the provisions of
Section 10.02 of Registrant's Trust Instrument contained in this Registration
Statement as Exhibit 1 and incorporated herein by reference.
Registrant's Investment Advisory Agreements, Investment Subadvisory Agreements,
Management and Distribution Agreements and Distribution Services Agreements
provide that Registrant's investment advisers and principal underwriter are
protected against liability to the extent permitted by Section 17(i) of the
Investment Company Act of 1940. Similar provisions are contained in the
Management Agreement and Transfer Agency and Fund Accounting
<PAGE>
Agreement. Registrant's principal underwriter is also provided with
indemnification against various liabilities and expenses under the Management
and Distribution Agreements and Distribution Services Agreements between
Registrant and the principal underwriter; provided, however, that in no event
shall the indemnification provision be construed as to protect the principal
underwriter against any liability to Registrant or its security holders to
which the principal underwriter would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under those agreements. Registrant's transfer agent and fund accountant and
certain related individuals are also provided with indemnification against
various liabilities and expenses under the Transfer Agency and Fund
Accounting Agreements between Registrant and the transfer agent and fund
accountant; provided, however, that in no event shall the transfer agent,
fund accountant or such persons be indemnified against any liability or
expense that is the direct result of willful misfeasance, bad faith or gross
negligence by the transfer agent or such persons.
The preceding paragraph is modified in its entirety by the provisions of the
Investment Advisory Agreements, Investment SubAdvisory Agreements, Management
and Distribution Agreements, Distribution Services Agreements, Management
Agreements, Transfer Agency Agreement and Fund Accounting Agreement of
Registrant filed as Exhibits 5, 6, and 9 to Registrant's Registration Statement
and incorporated herein by reference.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
NORWEST INVESTMENT MANAGEMENT, INC.
The description of Norwest Investment Management, Inc., under the caption
"Management--Advisor" or Management of the Funds-Norwest Investment
Management" in each Prospectus and under the caption "Management-Adviser" or
"Management--Investment Advisory Services--Norwest Investment Management" in
each Statement of Additional Information constituting Parts A and B,
respectively, of this Registration Statement are incorporated by reference
herein.
<PAGE>
The following are the directors and principal executive officers of NIM,
including their business connections which are of a substantial nature. The
address of Norwest Corporation, the parent of Norwest Bank Minnesota, N.A.
("Norwest Bank"), which is the parent of NIM, is Norwest Center, Sixth Street
and Marquette Avenue, Minneapolis, MN 55479. Unless otherwise indicated below,
the principal business address of any company with which the directors and
principal executive officers are connected is also Sixth Street and Marquette
Avenue, Minneapolis, MN 55479.
James R. Campbell, Director, President and Chief Executive Officer, has
held this position for the last two years. Mr. Campbell is also Executive
Vice President of Norwest Corporation, Director and Chairman of Norwest
Investment Advisors, Inc., and a Director of Flore Properties, Inc.,
Centennial Investment Corporation and Peregrine Capital Management, Inc.,
which is located at LaSalle Plaza, 800 LaSalle Avenue, Suite 1850,
Minneapolis, Minnesota 55402-2056. Mr. Campbell is also a Director of a
number of non-profit organizations located in Minneapolis, Minnesota.
Within the last two years Mr. Campbell was a Director of Norwest Insurance,
Inc. and Norwest Equipment Finance, Inc.
Michael A. Graf, Controller and Cashier, also serves as Senior Vice
President and Controller of Norwest Corporation.
P. Jay Kiedrowski, Executive Vice President, has served in various
capacities as an employee of Norwest Bank Minnesota, N.A. and/or its
affiliates since August 1987. Mr. Kiedrowski is also a Director and
Chairman of the Board of Norwest Investment Management, Inc. and President
of Norwest Investment Management, a part of Norwest.
Scott A. Kisting, Director and Executive Vice President, is also a Director
of Norwest Insurance, Inc., IntraWest Insurance Company and Fidelity
National Life Insurance Company.
William H. Queenan, Director, is also Executive Vice President of Norwest
Corporation.
John T. Thornton, Director, is also Executive Vice President and Chief
Financial Officer of Norwest Corporation. Mr. Thornton is also a Director
of Northern Prairie Indemnity, Limited, Grand Cayman, Cayman Islands,
British West Indies, a Director of Norwest Capital Markets, Inc. Mr.
Thornton is also a Director of Norwest Growth Fund, Inc., Norwest Venture
Capital Management, Inc. and Norwest Equity Capital, Inc., and Director,
President and Treasurer of Norwest Investors, Inc., and Director, President
and CEO of Norwest Limited, Inc., all located at 2800 Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, MN 54402. Mr. Thornton is also
Director and President of Superior Guaranty Insurance Company and Norwest
Holding Company, and a Director of Bettendorf Asset Management, Inc. Mr.
Thornton is also a Director of Eau Claire Asset Management, Inc., Green Bay
Asset Management, Inc., Iowa Asset Management, Inc., LaCrosse Asset
Management, Inc., South Bend Asset Management, Inc., South Dakota
<PAGE>
Asset Management, Inc., Waupun Asset Management, Inc., all located at
100 West Commons Blvd., Suite 303, New Castle, DE 19720.
Richard C. Westergaard, Executive Vice President, has served in various
capacities as an employee of Norwest Bank Minnesota, N.A. and/or its
affiliates during the last two years. Mr.Westergaard is also a Director of
Norwest Business Credit, Inc., Norwest Credit, Inc., First Interstate
Equipment Finance, Inc. and R.D. Leasing, Inc. and a Director of Norwest
Equipment Finance, Inc. and Commonwealth Leasing Corporation, located at
Investors Building, 733 Marquette, Suite 300, Minneapolis, MN 55479-2048.
Charles D. White, Senior Vice President, has served in various capacities
as an employee of Norwest Bank Minnesota, N.A. and/or its affiliates during
the last two years. Mr. White is also Treasurer and Chief Financial
Officer of Norwest Limited, Inc. Mr. White is also a Director of
Bettendorf Asset Management, Inc., Eau Claire Asset Management, Inc., Green
Bay Asset Management, Inc., IntraWest Asset Management, Inc., Iowa Asset
Management, Inc., LaCrosse Asset Management, Inc., South Bend Asset
Management, Inc., South Dakota Asset Management, Inc., and Waupun Asset
Management, Inc., located at 100 West Commons Boulevard, Suite 303, New
Castle, DE 19720.
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC.
The description of Schroder Capital Management International Inc. ("Schroder")
under the caption "Management of the Funds - Investment Advisory Services -
Schroder Capital Management International Inc." in the Prospectus and
"Management-Investment Advisory Services" in the Statement of Additional
Information relating to International Fund, Diversified Equity Fund, Growth
Equity Fund, Conservative Balanced Fund, Moderate Balanced Fund and Growth
Balanced Fund, constituting certain of Parts A and B, respectively, of the
Registration Statement, are incorporated by reference herein.
The following are the directors and principal officers of Schroder, including
their business connections of a substantial nature. The address of each company
listed, unless otherwise noted, is 33 Gutter Lane, London EC2V 8AS, United
Kingdom. Schroder Capital Management International Limited ("Schroder Ltd.") is
a United Kingdom affiliate of Schroder which provides investment management
services international clients located principally in the United States.
David M. Salisbury. Chief Executive Officer, Director and Chairman of SCMI;
Joint Chief Executive and Director of Schroder Ltd.
Richard R. Foulkes. Deputy Chairman/Executive Vice President of SCMI.
John A. Troiano. Managing Director and Senior Vice President of SCMI. Mr.
Troiano is also a Director of Schroder Ltd.
<PAGE>
David Gibson. Senior Vice President and Director of SCMI. Director of
Schroder Capital Management.
John S. Ager. Senior Vice President and Director of SCMI.
Sharon L. Haugh. Senior Vice President and Director of SCMI, Director and
Chairman of Schroder Advisors Inc.
Gavin D.L. Ralston. Senior Vice President and Managing Director of SCMI.
Mark J. Smith. Senior Vice President and Director of SCMI.
Robert G. Davy. Senior Vice President. Mr. Davy is also a Director of
Schroder Ltd. and an officer of open end investment companies for which
SCMI and/or its affiliates provide investment services.
Jane P. Lucas. Senior Vice President and Director of SCMI; Director of
Schroder Advisors Inc.; Director of Schroder Capital Management.
C. John Govett. Director of SCMI; Group Managing Director of Schroder Ltd.
And Director of Schroders plc.
Phillipa J. Gould. Senior Vice President and Director of SCMI.
Louise Croset. First Vice President and Director of SCMI.
Abdallah Nauphal, Group Vice President and Director of SCMI.
CRESTONE CAPITAL MANAGEMENT, INC.
The description of Crestone Capital Management, Inc. ("Crestone") under the
caption "Management - SubAdviser" in the Prospectus and "Management- Adviser -
SubAdviser - Small Company Stock Fund" in the Statement of Additional
Information relating to the Small Company Stock Fund, constituting certain of
Parts A and B, respectively, of the Registration Statement, are incorporated by
reference herein.
The following are the directors and principal executive officers of Crestone,
including their business connections which are of a substantial nature. The
address of Crestone is 7720 East Belleview Avenue, Suite 220, Englewood Colorado
80111 and, unless otherwise indicated below, that address is the principal
business address of any company with which the directors and principal executive
officers are connected.
Kirk McCown, President and Director.
Mark Steven Sunderhuse, Senior Vice President and Director.
<PAGE>
P. Jay Kiedrowski, Director. Mr. Kiedrowski is also President and Chairman
of the Board of Norwest and an Executive Vice President of Norwest Bank.
His address is Sixth and Marquette Avenue, Minneapolis, Minnesota 55479.
Steven P. Gianoli, Director. Mr. Gianoli is a Vice President of Norwest
and Norwest Bank. His address is Sixth and Marquette Avenue, Minneapolis,
Minnesota 55479.
Susan Koonsman, Director. Ms. Koonsman is President of Norwest Investments
& Trust. Her address is 1740 Broadway, Denver, Colorado 80274.
PEREGRINE CAPITAL MANAGEMENT, INC.
The description of Peregrine Capital Management, Inc. ("Peregrine") under the
caption "Management - SubAdviser" in the Prospectus and "Management- Adviser -
SubAdviser - Diversified Bond Fund, Conservative Balanced Fund, Moderate
Balanced Fund, Growth Balanced Fund, Diversified Equity Fund, Growth Equity
Fund, Large Company Growth Fund and Small Company Growth Fund in the Statement
of Additional Information relating to Diversified Bond Fund, Conservative
Balanced Fund, Moderate Balanced Fund, Growth Balanced Fund, Diversified Equity
Fund, Growth Equity Fund, Large Company Growth Fund and Small Company Growth
Fund, constituting certain of Parts A and B, respectively, of the Registration
Statement, are incorporated by reference herein.
The following are the directors and principal executive officers of Peregrine,
including their business connections which are of a substantial nature. The
address of Peregrine is LaSalle Plaza, 800 LaSalle Avenue, Suite 1850,
Minneapolis, Minnesota 55402 and, unless otherwise indicated below, that address
is the principal business address of any company with which the directors and
principal executive officers are connected.
James R. Campbell, Director. Mr. Campbell is President, Chief Executive
Odfficer and a Director of Norwest Bank. His address is Sixth and
Marquette Avenue, Minneapolis, Minnesota 55479-0116
Patricia D. Burns, Senior Vice President.
Tasso H. Coin, Senior Vice President.
John S. Dale, Senior Vice President.
Julie M. Gerend, Senior Vice President. Prior to September, 1995, Ms.
Gerend was Manager, Account Executive at Fidelity Institutional Retirement
Services, Co.
William D. Diese, Senior Vice President.
<PAGE>
Daniel J. Hagen, Vice President. Prior to May, 1996, Mr. Hagen was
Managing Director of Piper Jaffray, Inc.
Ronald G. Hoffman, Senior Vice President and Secretary.
Frank T. Matthews, Vice President.
Jeannine McCormick, Senior Vice President.
Barbara K. McFadden, Senior Vice President.
Robert B. Mersky, Chairman, President and Chief Executive Officer.
Gary E. Nussbaum, Senior Vice President.
James P. Ross, Vice President. Prior to November, 1996, Mr. Ross was Vice
President of Norwest Bank.
Jonathan L. Scharlau, Assistant Vice President.
Jay H. Strohmaier, Senior Vice President. Prior to September, 1996, Mr.
Strohmaier was Senior Vice President/Managed Accounts for Voyageur Asset
Management.
Paul E. von Kuster, Senior Vice President.
Janelle M. Walter, Assistant Vice President.
Paul R. Wurm, Senior Vice President.
J. Daniel Vandermark, Vice President. His address is Sixth and Marquette
Avenue, Minneapolis, Minnesota 55479-1013
GALLIARD CAPITAL MANAGEMENT, INC.
The description of Galliard Capital Management, Inc. ("Galliard") under the
caption "Management - SubAdviser" in the Prospectus and "Management- Adviser -
SubAdviser - Stable Income Fund, Diversified Bond Fund, Conservative Balanced
Fund, Moderate Balanced Fund and Growth Balanced Fund" in the Statement of
Additional Information relating to the Stable Income Fund, Diversified Bond
Fund, Conservative Balanced Fund, Moderate Balanced Fund and Growth Balanced
Fund", constituting certain of Parts A and B, respectively, of the Registration
Statement, are incorporated by reference herein.
The following are the directors and principal executive officers of Galliard,
including their business connections which are of a substantial nature. The
address of Galliard is LaSalle Plaza, Suite 2060, 800 LaSalle Avenue,
Minneapolis, Minnesota 55479 and, unless otherwise indicated
<PAGE>
below, that address is the principal business address of any company with
which the directors and principal executive officers are connected.
Peter Jay Kiedrowski, Chairman. Mr. Kiedrowski is President and Chief
Executive Officer of NIM; Chairman of Crestone and Executive Vice President
of Norwest Bank.
Richard Merriam, Principal. Mr. Merriam is Chief Investment Officer of
Insight Investment Management.
John Caswell, Principal. Mr. Caswell is Chief Investment Officer of
Norwest Bank, N.A.
Karl Tourville, Principal. Mr. Tourville is Vice President/Head of Fixed
Income of Norwest Bank.
Laura Gideon, Senior Vice President of Marketing. Ms. Gideon is Vice
President of Marketing for American Express.
Leela Scattum, Vice President of Operations. Ms. Scattum is a Fund
Accountant for Norwest Bank.
UNITED CAPITAL MANAGEMENT
The description of United Capital Management ("UCM") under the caption
"Management - SubAdviser" in the Prospectus and "Management- Adviser -
SubAdviser - Diversified Bond Fund, Total return Bond Fund, Conservative
Balanced Fund, Moderate Balanced Fund, Growth Balanced Fund and Contrarian Stock
Fund" in the Statement of Additional Information relating to the, Diversified
Bond Fund, Total Return Bond Fund, Conservative Balanced Fund, Moderate Balanced
Fund, Growth Balanced Fund and Contrarian Stock Fund" constituting certain of
Parts A and B, respectively, of the Registration Statement, are incorporated by
reference herein.
The following are the directors and principal executive officers of UCM,
including their business connections which are of a substantial nature. The
address of UCM is 1700 Lincoln Street, Suite 3301, Denver, Colorado 80274 and,
unless otherwise indicated below, that address is the principal business address
of any company with which the directors and principal executive officers are
connected.
W. Lon Schreur, President. Mr. Schreur is Senior Vice President of Norwest
Bank Colorado, N.A..
John T. Groton, Vice President. Mr. Groton is Vice President of Norwest
Bank Colorado, N.A.
David B. Kinney, Vice President. Mr. Kinney is Vice President of Norwest
Bank Colorado, N.A.
<PAGE>
James C. Peery, Senior Vice President. Mr. Peery is Vice President of
Norwest Bank Colorado, N.A.
Leona F. Bennett, Vice President. Ms. Bennett is Vice President of Norwest
Bank Colorado, N.A.
Denise B. Johnson, Vice President. Mr. Johnson is Vice President of
Norwest Bank Colorado, N.A.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Forum Financial Services, Inc., Registrant's underwriter, serves as
underwriter to Core Trust (Delaware), The CRM Funds, The Cutler Trust,
Forum Funds, The Highland Family of Funds, Monarch Funds, Norwest Funds,
Norwest Select Funds, Sound Shore Fund, Inc. and Trans Adviser Funds, Inc.
(b) John Y. Keffer, President and Secretary of Forum Financial Services, Inc.,
is the Chairman and President of Registrant. David R. Keffer, Vice President
and Treasurer of Forum Financial Services, Inc., is the Vice President,
Assistant Treasurer and Assistant Secretary of Registrant. Their business
address is Two Portland Square, Portland, Maine.
(c) Not Applicable.
ITEM 30. LOCATION OF BOOKS AND RECORDS.
The majority of accounts, books and other documents required to be maintained by
31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained at the offices of Forum Financial Services, Inc. at Two Portland
Square, Portland, Maine 04101, at Forum Financial Corp., Two Portland Square,
Portland, Maine 04101 and Forum Administrative Services, Limited Liability
Company, Two Portland Square, Portland, Maine 04101. The records required to be
maintained under Rule 31a-1(b)(1) with respect to journals of receipts and
deliveries of securities and receipts and disbursements of cash are maintained
at the offices of Registrant's custodian. The records required to be maintained
under Rule 31a-1(b)(5), (6) and (9) are maintained at the offices of
Registrant's investment advisers as indicated in the various prospectuses
constituting Part A of this Registration Statement.
Additional records are maintained at the offices of Norwest Bank Minnesota,
N.A., 733 Marquette Avenue, Minneapolis, MN 55479-0040, Registrant's investment
adviser, custodian and transfer agent.
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
<PAGE>
(i) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six
months from the latter of the effective date of Registrant's Securities
Act of 1933 Registration Statement relating to the prospectuses offering
those shares or the commencement of public shares of the respective
shares; and,
(ii) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to
shareholders relating to the portfolio or class thereof to which the
prospectus relates upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Portland, and State of Maine on the 11th day of
July, 1997.
NORWEST FUNDS
/s/ John Y. Keffer
-------------------------------
John Y. Keffer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement amendment has been signed below by the following persons on the 11th
day of July, 1997.
Signatures Title
---------- -----
(a) Principal Executive Officer
/s/ John Y. Keffer Chairman and President
-------------------------------
John Y. Keffer
(b) Principal Financial and Accounting Officer
/s/ Robert B. Campbell Treasurer
-------------------------------
Robert B. Campbell
(c) A Majority of the Trustees
Robert C. Brown Trustee
Donald H. Burkhardt Trustee
James C. Harris Trustee
Richard M. Leach Trustee
Donald C. Willeke Trustee
Timothy J. Penny Trustee
John S. McCune Trustee
By: /s/ John Y. Keffer
-------------------------------
John Y. Keffer
Attorney in Fact
<PAGE>
SIGNATURES
On behalf of Core Trust (Delaware), being duly authorized, I have duly caused
this amendment to the Registration Statement of Norwest Funds to be signed in
the City of Portland, State of Maine on the 11th day of July, 1997.
CORE TRUST (DELAWARE)
By: /s/ John Y. Keffer
------------------------
John Y. Keffer
President
This amendment to the Registration Statement of Norwest Funds has been signed
below by the following persons in the capacities indicated on the 11th day of
July, 1997.
Signatures Title
---------- -----
(a) Principal Executive Officer
/s/ John Y. Keffer Chairman and President
-------------------------------
John Y. Keffer
(b) Principal Financial and Accounting Officer
/s/ Richard C. Butt Treasurer, Principal Financial
------------------------------- and Accounting Officer
Richard C. Butt
(c) A Majority of the Trustees
/s/ John Y. Keffer Chairman
-------------------------------
John Y. Keffer
J. Michael Parish Trustee
James C. Cheng Trustee
Costas Azariadis Trustee
By: /s/ John Y. Keffer
-------------------------------
John Y. Keffer
Attorney in Fact
<PAGE>
SIGNATURES
On behalf of Schroder Capital Funds, being duly authorized, I have duly caused
this amendment to the Registration Statement of Norwest Funds to be signed in
the City of New York, State of New York on the 2nd day of July, 1997.
SCHRODER CAPITAL FUNDS
By: /s/ Catherine A. Mazza
------------------------
Catherine A. Mazza
This amendment to the Registration Statement of Norwest Funds has been signed
below by the following persons in the capacities indicated on the 2nd day of
July, 1997.
Signatures Title
---------- -----
(a) Principal Executive Officer
MARK J. SMITH
By: /s/ Thomas G. Sheehan President
------------------------------- and Trustee
Thomas G. Sheehan, Attorney-in-Fact
(b) Principal Financial and
Accounting Officer
ROBERT JACKOWITZ Treasurer
By: /s/ Thomas G. Sheehan
-------------------------------
Thomas G. Sheehan, Attorney-in-Fact
(c) Majority of the Trustees
PETER E. GUERNSEY Trustee
JOHN I. HOWELL Trustee
HERMANN C. SCHWAB Trustee
By: /s/ Thomas G. Sheehan
-------------------------------
Thomas G. Sheehan
Attorney-in-Fact
