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PROSPECTUS
OCTOBER 1, 1997
THE PERFORMA FUNDS
PERFORMA STRATEGIC VALUE BOND FUND
PERFORMA DISCIPLINED GROWTH FUND
PERFORMA SMALL CAP VALUE FUND
PERFORMA GLOBAL GROWTH FUND
This Prospectus explains concisely what you should know before investing in
PERFORMA STRATEGIC VALUE BOND FUND, PERFORMA DISCIPLINED GROWTH FUND, PERFORMA
SMALL CAP VALUE FUND and PERFORMA GLOBAL GROWTH FUND (each a "Fund" and
collectively the "Funds"). Please read it carefully and keep it for future
reference. The Funds are each diversified portfolios of Norwest Advantage Funds
(the "Trust"), a registered, open-end, management investment company.
Each Fund seeks to achieve its investment objective by investing all of its
investable assets in a separate portfolio of another registered, open-end,
management investment company with the same investment objective (each a
"Portfolio" and collectively the "Portfolios"). See "Organization."
Investors should read this Prospectus carefully and retain it for future
reference. You can find more detailed information in the Statement of Additional
Information, dated October 1, 1997 (the "SAI"), which maybe amended from time to
time. For information on purchasing Shares of the Funds call toll free (888)
800-6748. For a free copy of the SAI or other information, call the Funds'
distributor at (207) 879-0001. The SAI has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated into this Prospectus by
reference.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE SYSTEM OR ANY OTHER GOVERNMENT
AGENCY, AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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1. SUMMARY...................................................................... 3
2. INVESTMENT OBJECTIVES........................................................ 6
3. HOW THE FUNDS PURSUE THEIR OBJECTIVES........................................ 6
4. HOW PERFORMANCE IS SHOWN..................................................... 15
5. ORGANIZATION................................................................. 16
6. HOW THE FUNDS ARE MANAGED.................................................... 18
7. ABOUT YOUR INVESTMENT........................................................ 24
8. THE FUNDS' DISTRIBUTIONS AND
CERTAIN TAX INFORMATION...................................................... 25
APPENDIX A................................................................... A-1
Glossary of Investment Terms
APPENDIX B................................................................... B-1
Explanation of Rating Categories
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1. SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained in this Prospectus.
INVESTING IN THE FUNDS
You may purchase shares of the Funds through certain broker-dealers, banks and
other financial institutions. While no Fund is intended to provide a complete or
balanced investment program, each can serve as a component of your investment
program.
THE FUNDS
PERFORMA STRATEGIC VALUE BOND FUND seeks total return by investing primarily in
income producing securities. The Fund invests in a broad range of fixed income
instruments in order to create a strategically diversified portfolio of high
quality fixed income investments.
PERFORMA DISCIPLINED GROWTH FUND seeks capital appreciation by investing
primarily in common stocks of larger companies. The Fund invests in companies
that, in the view of the investment adviser, possess above average potential for
growth and which will report a level of corporate earnings that exceeds the
level expected by investors.
PERFORMA SMALL CAP VALUE FUND seeks capital appreciation by investing primarily
in common stocks of smaller companies. The Fund seeks higher growth rates and
greater long-term returns by investing in the stocks of smaller companies that,
in the view of the investment adviser, are undervalued and which will report a
level of corporate earnings that exceeds the level expected by investors.
PERFORMA GLOBAL GROWTH FUND seeks long-term growth of capital by investing
primarily in common stocks of established companies throughout the world,
including the United States. The Fund invests in companies located in developed,
newly industrialized and emerging markets that, in the view of the investment
adviser, have a sustainable competitive advantage and whose growth potential is
undervalued by investors.
STRUCTURE OF THE FUNDS
Each Fund seeks to achieve its investment objective by investing all of its
investable assets in a separate portfolio of a registered, open-end, management
investment company (each a "Core Trust") that has the same investment objective
and substantially similar investment policies. Accordingly, the investment
experience of each Fund will correspond directly with the investment experience
of its respective Portfolio. See "Organization." The Portfolios in which the
Funds invest are:
<TABLE>
<CAPTION>
FUND CORRESPONDING PORTFOLIO
- ------------------------------------------- -----------------------------------------
<S> <C>
Performa Strategic Value Bond Fund Strategic Value Bond Portfolio
Performa Disciplined Growth Fund Disciplined Growth Portfolio
Performa Small Cap Value Fund Small Cap Value Portfolio
Performa Global Growth Fund Schroder Global Growth Portfolio
</TABLE>
MANAGEMENT OF THE FUNDS
NORWEST INVESTMENT MANAGEMENT, INC. ("Norwest"), a subsidiary of Norwest Bank
Minnesota, N.A. ("Norwest Bank"), is the investment adviser of each Core
Portfolio other than Schroder Global Growth Portfolio and each Fund. Norwest
provides investment advice to various institutions, pension plans and other
accounts and, as of August 31, 1997, managed over $22 billion in assets. Norwest
Bank serves as transfer agent, dividend disbursing agent and custodian of the
Funds, and serves as the custodian of each Core Portfolio other than Schroder
Global Growth Portfolio. See "How the Funds are Managed."
Each Fund incurs investment advisory fees indirectly through the investment
advisory fees paid by its corresponding Core Portfolio.
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GALLIARD CAPITAL MANAGEMENT, INC. ("Galliard"), an investment advisory
subsidiary of Norwest Bank, is the investment subadviser of Strategic Value Bond
Portfolio. Galliard provides investment advisory services to bank and thrift
institutions, pension and profit sharing plans, trusts and charitable
organizations and corporate and other business entities.
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC. ("Schroder"), a wholly owned U.S.
subsidiary of Schroders Incorporated, the wholly owned U.S. holding company
subsidiary of Schroders plc., is the investment adviser of Schroder Global
Growth Portfolio. As of June 30, 1997, Schroder had over $28 billion in assets
under management.
SMITH ASSET MANAGEMENT GROUP, L.P. ("Smith Group"), a registered investment
adviser, is the investment subadviser of Disciplined Growth Portfolio and Small
Cap Value Portfolio. Smith group provides investment management services to
company retirement plans, foundations, endowments, trust companies, and high net
worth individuals.
Norwest, Schroder, Galliard and Smith (or Norwest and a particular investment
subadviser) are sometimes referred to collectively as the "Advisers."
FUND ADMINISTRATION AND DISTRIBUTION
FORUM ADMINISTRATIVE SERVICES, LLC ("FAS") serves as administrator to the Funds
and also provides administrative services to the Portfolios. Schroder Fund
Advisors Inc. ("Schroder Advisors") serves as the administrator of Schroder
Global Growth Portfolio and FAS serves as that Portfolio's subadministrator. The
manager of the Funds and distributor of their shares is Forum Financial
Services, Inc. ("Forum"). See "How the Funds are Managed - The Funds' Other
Service Providers."
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem your shares without a sales or other charge. The
minimum initial investment is $1,000, the minimum subsequent investment is $100
and you may make $100 monthly periodic investments. See "About Your Investment."
DIVIDENDS AND DISTRIBUTIONS
Dividends of net investment income are declared and paid monthly in the case of
PERFORMA STRATEGIC VALUE BOND FUND and declared and paid annually in the case of
all other Funds. Each Fund's net capital gain, if any, is distributed at least
annually. See "The Funds' Distributions and Certain Tax Information."
CERTAIN RISK FACTORS
There can be no assurance that any Fund will achieve its investment objective,
and each Fund's net asset value and total return will fluctuate based upon
changes in the value of the securities held by its corresponding Portfolio. Upon
redemption, an investment in a Fund may be worth more or less than its original
value. An investment in any Fund involves certain risks, depending on the types
of investments made and the types of investment techniques employed. All
investments made by the Portfolios entail some risk.
Each Fund is designed for the investment of that portion of an investor's funds
that can appropriately bear the special risks associated with the Fund. The
risks of investing in each Fund are more specifically described in "How the
Funds Pursue Their Objectives."
Normally, the value of PERFORMA STRATEGIC VALUE BOND FUNDS' investments will
vary inversely with changes in interest rates. While the Fund invests at least
65% of its assets in investment grade securities (securities rated in the top
four highest ratings categories by a nationally recognized statistical rating
organization ("NRSRO") such as Standard & Poor's), it may invest in lower rated
securities. See "How the Funds Pursue Their Objectives - Performa Strategic
Value Bond Fund - Risks of Non-Investment Grade Securities." In addition,
repayment of principal investment in securities entails certain risks.
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Your investment in PERFORMA DISCIPLINED GROWTH FUND, PERFORMA SMALL CAP VALUE
FUND and PERFORMA GLOBAL GROWTH FUND, each of which invests primarily in equity
securities, is subject to the general risks of investing in the stock market.
PERFORMA SMALL CAP VALUE FUND and PERFORMA GLOBAL GROWTH FUND invest in
securities of smaller companies. These investments entail certain additional
risks, including lower trading volumes and, therefore, the potential for greater
price volatility. These Funds are designed for the investment of that portion of
your funds that can appropriately bear the special risks associated with an
investment in smaller market capitalization companies. PERFORMA GLOBAL GROWTH
FUND invests in securities of foreign issuers. These investments entail certain
additional risks, including the risks of foreign political and economic
instability, adverse movements in foreign exchange rates, the imposition or
tightening of exchange controls or other limitations on repatriation of foreign
capital, and changes in foreign governmental attitudes towards private
investment, possibly leading to nationalization, increased taxation or
confiscation of foreign investors' assets.
By pooling its assets in a Core Portfolio with other institutional investors, a
Fund may be able to achieve certain efficiencies and economies of scale that it
could not achieve by investing directly in securities. Nonetheless, these
investments could have adverse effects on the Funds which investors should
consider. See "Organization - Core and Gateway Structure - Certain Risks of
Investing in Portfolios."
EXPENSES OF INVESTING IN THE FUNDS
Fund costs and expenses are one of several factors to consider when investing.
Your costs and expenses are summarized in the following three tables. The
Shareholder Transaction Expenses table summarizes your transaction costs of
buying and selling Fund shares. The Annual Fund Operating Expenses table
summarizes the expenses you will bear directly or indirectly on your investment
in a Fund and is based on estimated expenses for the Funds' initial fiscal year
of operations ending May 31, 1998. The Examples show your cumulative expenses
attributable to a hypothetical $1,000 investment over specified periods.
SHAREHOLDER TRANSACTION EXPENSES
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Sales charges on purchases and reinvested distributions None
Deferred sales charges or redemption fees None
Exchange fees None
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ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets after applicable expense reimbursements)
<TABLE>
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OTHER
EXPENSES
INVESTMENT (AFTER TOTAL FUND
ADVISORY RULE 12b-1 REIMBURSE- OPERATING
FEES FEES MENTS) EXPENSES
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<S> <C> <C> <C> <C>
Performa Strategic Value Bond Fund 0.50% None 0.35% 0.85%
Performa Disciplined Growth Fund 0.90% None 0.35% 1.25%
Performa Small Cap Value Fund 0.95% None 0.35% 1.30%
Performa Global Growth Fund 0.90% None 0.55% 1.45%
</TABLE>
This table is provided to help you understand the expenses of investing and sets
forth your share of a Fund's operating expenses. Each Fund's expenses include
the Fund's pro rata portion of all expenses of the Portfolio in which the Fund
invests. "Investment Advisory Fees" are those incurred by the Portfolio in which
the Fund invests. For Performa Global Growth Fund, "Investment Advisory Fees"
includes the administrative services fee payable to Norwest and the
administration fee and portfolio management fee payable to Schroder. "Other
Expenses" are estimated for the current fiscal year and reflect projected
expense reimbursements. Absent projected expense reimbursements, "Other
Expenses" would be 0.52%, 0.60%, 0.55% and 2.02%,
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respectively, and "Total Fund Operating Expenses" would be 1.39%, 1.87%, 1.87%
and 2.92%, respectively. Expense reimbursements are voluntary and may be reduced
or eliminated at any time. For a further description of the fees and expenses
incurred in the operation of the Funds. See "How the Funds are Managed."
EXAMPLES
Your investment of $1,000 would incur the following expenses assuming: (1) the
investment of all of the Fund's assets in its corresponding Portfolio, (2) a 5%
annual return, (3) the reinvestment of all your dividends and distributions and
(4) redemption at the end of each period. The example is based on the expenses
listed in the Annual Fund Operating Expenses table.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Performa Strategic Value Bond Fund $ 9 $ 27 $ 47 $ 105
Performa Disciplined Growth Fund $ 13 $ 40 $ 69 $ 151
Performa Small Cap Value Fund $ 13 $ 41 $ 71 $ 157
Performa Global Growth Fund $ 15 $ 46 $ 79 $ 174
</TABLE>
THE EXAMPLE DOES NOT REPRESENT PAST OR FUTURE EXPENSE LEVELS. ACTUAL EXPENSES
AND RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN. The five percent annual
return is required by government regulation and does not represent the Fund's
actual returns.
2. INVESTMENT OBJECTIVES
Each Fund pursues its investment objective as listed below in accordance with
its own separate investment policies. No Fund is intended to be a complete
investment program, and there is no assurance that any Fund will achieve its
investment objective.
PERFORMA STRATEGIC VALUE BOND FUND seeks total return by investing primarily in
income producing securities.
PERFORMA DISCIPLINED GROWTH FUND seeks capital appreciation by investing
primarily in common stocks of larger companies.
PERFORMA SMALL CAP VALUE FUND seeks capital appreciation by investing primarily
in common stocks of smaller companies.
PERFORMA GLOBAL GROWTH FUND seeks long-term growth of capital by investing
primarily in common stocks of established companies throughout the world,
including the United States.
3. HOW THE FUNDS PURSUE THEIR OBJECTIVES
STRUCTURE OF THE FUNDS
Each Fund seeks to achieve its objective by investing all of its investable
assets in the Fund's corresponding Portfolio. Each Portfolio has the same
investment objective and substantially similar investment policies as the
corresponding Fund. Accordingly, the investment experience of each Fund will
correspond directly with the investment experience of its corresponding
Portfolio. The Portfolios in which the Funds invest are:
<TABLE>
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FUND CORRESPONDING PORTFOLIO
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<S> <C>
Performa Strategic Value Bond Fund Strategic Value Bond Portfolio
Performa Disciplined Growth Fund Disciplined Growth Portfolio
Performa Small Cap Value Fund Small Cap Value Portfolio
Performa Global Growth Fund Schroder Global Growth Portfolio
</TABLE>
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By pooling their assets in a Portfolio with other institutional investors, each
of the Funds may be able to achieve certain efficiencies, economies of scale and
enhanced portfolio diversification. Nonetheless, these investments could have
adverse effects on the Funds which investors should consider. Investment
decisions are made by the Advisers of each Portfolio independently. See
"Organization - Core and Gateway Structure."
You should read the "Additional Investment Policies" section and the appendices
in conjunction with this section in order to fully understand the Funds'
investments and risks. Although this section discusses the investment policies
of the Portfolios, it applies equally to the Funds.
PERFORMA STRATEGIC VALUE BOND FUND
Strategic Value Bond Portfolio invests in a broad range of fixed income
instruments including corporate bonds, asset-backed securities, Mortgage-related
securities, U.S. Government Securities, preferred stock, convertible bonds and
foreign bonds in order to create a strategically diversified portfolio of high
quality fixed income investments.
In making investment decisions, the investment adviser focuses on relative value
as opposed to the prediction of the direction of interest rates. In general,
particular emphasis is placed on higher current income instruments such as
corporate bonds and mortgage/asset-backed securities in order to enhance
returns. The investment adviser believes that this exposure enhances performance
in varying economic and interest rate cycles while avoiding excessive risk
concentrations. The investment adviser's investment process involves rigorous
evaluation of each security. This includes identifying and valuing cash flows,
embedded options, credit quality, structure, liquidity, marketability, current
versus historical trading relationships, supply and demand for the instrument
and expected returns in varying economic/interest rate environments. This
process seeks to identify securities which represent the best relative economic
value. The results of the investment process are then evaluated against the
Portfolio's objective and the Portfolio purchases those securities which will
enhance its positioning. The Portfolio will be repositioned based on market
changes and shifts in relative value of the instruments held by the Portfolio.
The Portfolio's investments are subject to the various risks of investing in
fixed-income securities. To limit the Portfolio's "credit risk," at least 65% of
the Portfolio's assets will be invested in fixed income securities rated in one
of the three highest rating categories by at least one NRSRO, such as Moody's
Investors Service, Standard & Poor's, Fitch Investors Service, L.P. or Duff &
Phelps Credit Rating Co., or which are unrated and determined by the investment
adviser to be of comparable quality. In addition, the Portfolio will limit its
investment in securities with a less than an investment grade rating to 20% of
the Portfolio's assets. While the average quality of the Portfolio will vary
over an economic cycle, the average rating of the Portfolio's investments will
be "A" or better. A description of the rating categories of various NRSRO's is
contained in Appendix B. Investment grade instruments include those that are
rated in one of four highest long-term rating categories by an NRSRO or are
unrated and determined by the investment adviser to be of comparable quality.
The average maturity of the Portfolio will vary between five and fifteen years.
In the case of mortgage-related, asset-backed and similar securities, the
Portfolio uses the security's average life in calculating the Portfolio's
average maturity. The Portfolio's effective duration normally will vary between
three and eight years.
The Portfolio may enter into derivative transactions to receive favorable
financing or diversify portfolio risk. See "Investment Policies - Derivative
Investments" and "Appendix A - Glossary of Investment Terms - Futures, Options
and Other Derivatives."
RISKS OF INVESTING IN FIXED INCOME SECURITIES. The primary risks of investing in
any fixed income instrument are market risk (the risk of changing interest
rates) and credit risk. In addition, prepayment risk and extension risk exist
for certain types of fixed income instruments in which the Portfolio may invest.
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Market risk refers to the change in the market value of fixed income investments
held by a Portfolio, including money market instruments, when there is a change
in interest rates. There is normally an inverse relationship between the market
value of these securities and actual changes in interest rates. Thus, an
increase in interest rates generally produces a decrease in market value of
fixed income securities, while a decrease in interest rates generally produces
an increase in market value of fixed income securities. Moreover, the longer the
remaining maturity of a security, the greater is the affect of interest rate
changes on the market value of the security.
Fixed income investments are subject to CREDIT RISK which refers to the ability
of the debtor (the issuer of the instrument) and any other obligor, to pay
principal and interest on the debt as it becomes due. Changes in the ability of
an issuer to make payments of interest and principal and the market's perception
of an issuer's creditworthiness will affect the market value of the debt
securities of that issuer. Obligations of issuers of debt securities are subject
to the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors which may restrict the ability of any issuer to pay,
when due, the principal of and interest on its debt securities. The possibility
exists that, the ability of any issuer to pay, when due, the principal of and
interest on its debt securities may become impaired.
Mortgage-related and asset-backed securities are subject to PREPAYMENT RISK,
which refers to the fact that holders of these instruments may have all or any
part of their principal investment returned by the issuer as the mortgages or
other assets backing the investment are paid off. Prepayments during times of
declining interest rates tend to lower the return of a Fund. Prepayments also
may result in losses to a Fund if the securities were acquired at a premium
(that is, for an amount above the security's par value).
Certain debt instruments may also be subject to EXTENSION RISK, which refers to
the change in total return on a debt instrument resulting from extension or
abbreviation of the instrument's maturity.
RISKS OF NON-INVESTMENT GRADE SECURITIES. The Portfolio may invest up to 20% of
its assets in non-investment grade securities rated "C" and above (commonly
referred to as "junk bonds"). These securities have speculative or predominantly
speculative characteristics and provide poor protection for payment of principal
and interest, but may have greater potential for capital appreciation than do
higher quality securities. Non-investment grade securities involve greater risk
of default or price changes due to changes in the issuers' creditworthiness than
do investment grade securities. The market for these securities may be thinner
and less active than that for higher quality securities, which may affect the
price at which the lower rated securities can be sold. In addition, the market
prices of lower rated securities may fluctuate more than the market prices of
higher quality securities and may decline significantly in periods of general
economic difficulty.
THE EQUITY FUNDS
Each of Disciplined Growth Portfolio, Small Cap Value Portfolio, and Global
Growth Portfolio (the "Equity Portfolios") invest primarily in common stock. The
fundamental risk of investing in common stock is the risk that the value of the
stock might decrease. Stock values fluctuate in response to the activities of an
individual company or in response to general market and/or economic conditions.
Historically, common stocks have provided greater long-term returns and have
entailed greater short-term risks than preferred stocks, fixed-income and money
market investments. Common stocks in which a Portfolio may invest may be traded
on a securities exchange or in the over-the-counter market and, particularly for
smaller and foreign companies, may not be traded every day in the volume typical
of securities traded on a major U.S. national securities exchange. As a result,
disposition by a Portfolio of a security to meet redemptions by interest holders
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.
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PERFORMA DISCIPLINED GROWTH FUND
Disciplined Growth Portfolio seeks greater long-term returns by investing
primarily in the common stock of companies that, in the view of the investment
adviser, possess above average potential for growth. The average market
capitalization of the companies in which the Portfolio invests will be greater
than $5 billion.
The Portfolio seeks to identify growth companies that will report a level of
corporate earnings that exceeds the level expected by investors. In seeking
these companies, the investment adviser uses both quantitative and fundamental
analysis. Among the factors that the investment adviser considers are changes of
earnings estimates by investment analysts, the recent trend of company earnings
reports, and an analysis of the fundamental business outlook for the company.
The investment adviser uses a variety of valuation measures to determine whether
the share price already reflects any positive fundamentals identified by the
investment adviser. The investment adviser attempts to constrain the variability
of the investment returns by employing risk control screens for price
volatility, financial quality and valuation and to the extent possible, gives
equal weighting to portfolio securities.
PERFORMA SMALL CAP VALUE FUND
Small Cap Value Portfolio seeks higher growth rates and greater long-term
returns by investing primarily in the common stock of smaller companies that, in
the view of the investment adviser, are undervalued. Under normal circumstances,
the Portfolio will invest substantially all of its assets, but not less than 65%
of its net assets, in securities of companies with a market capitalization which
reflects the market capitalization of companies included in the Russell 2000
Index.
The Portfolio invests in those smaller companies that the investment adviser
believes to be undervalued and which will report a level of corporate earnings
exceeding the level expected by investors. The determination of value is based
upon both the price to earnings ratio of the company and a comparison of the
public market value of the company to a proprietary model that values the
company in the private market. In seeking companies that will report a level of
earnings exceeding that expected by investors, the investment adviser uses both
quantitative and fundamental analysis. Among the factors that the investment
adviser considers are changes of earnings estimates by investment analysts, the
recent trend of company earnings reports, and the fundamental business outlook
for the company.
RISKS OF INVESTING IN SMALLER COMPANIES. Investment in smaller capitalization
companies carries greater risk than investment in larger capitalization
companies. Smaller capitalization companies generally experience higher growth
rates and higher failure rates than do larger capitalization companies. The
trading volume of smaller capitalization companies' securities is normally lower
than that of larger capitalization companies. Heavy trading generally has a
disproportionate effect on market price (tending to make prices rise more in
response to buying demand and fall more in response to selling pressure).
Accordingly, the net asset value of the Fund can be expected to fluctuate more
that that of other funds that invest in larger capitalization companies.
Smaller companies often have products and management personnel that have not
been tested by time or the marketplace and their financial resources may not be
as substantial as those of more established companies. Their securities (which
the Portfolio may purchase when they are offered to the public for the first
time) may have a limited trading market which can adversely affect the
Portfolio's ability to sell the securities and can result in such securities
being priced lower than otherwise might be the case. If other institutional
investors trade in the securities of a smaller company in which the Portfolio
holds an interest, the Portfolio may be forced to dispose of its holdings at
prices lower than might otherwise be obtained.
PERFORMA GLOBAL GROWTH FUND
Global Growth Portfolio invests in common stocks of established companies
located in the developed, newly industrialized and emerging markets. Under
normal market conditions, the Portfolio will invest at least 65% of the value of
its total assets in companies located in at least five countries, one of which
will be
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the United States. The Portfolio can purchase stocks without regard to a
company's market capitalization, although investments will generally be
concentrated in the larger and, to a lesser extent, medium-sized companies
relative to the particular market. The percentage of the Portfolio's assets
invested in U.S. and non-U.S. stocks will vary over time in accordance with the
outlook of the investment adviser.
Stock selection is at the heart of the investment adviser's investment process.
The investment adviser emphasizes fundamental company analysis in its approach
to selecting investments for the Portfolio. The investment adviser seeks
companies that it believes have a sustainable competitive advantage and whose
growth potential is undervalued by investors. In selecting companies for
investment, the investment adviser considers historical growth rates and future
growth prospects, management capability, competitive position in both domestic
and export markets and other factors. The investment adviser will seek to add
value through active geographic allocation. The investment adviser's allocation
decisions are based upon its assessment of the likelihood that the country will
have a favorable long-term business environment in which corporate growth will
not be impeded by adverse macroeconomic or political factors.
The Portfolio may invest in debt securities issued or guaranteed by foreign
governments (including countries, provinces and municipalities) or their
agencies and instrumentalities; debt securities issued or guaranteed by
international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development; and debt securities issued by
corporations or financial institutions.
GEOGRAPHIC CONCENTRATION. The Portfolio may invest more than 25% of its total
assets in issuers located in any one country and to the extent that it does so,
is susceptible to a range of factors that could adversely affect that country,
including the political and economic developments and foreign exchange rate
fluctuations discussed below. As a result of investing substantially in one
country, the value of the Portfolio's assets may fluctuate more widely than the
value of shares of a comparable fund with a lesser degree of geographic
concentration.
RISKS OF INTERNATIONAL INVESTING. All investments, domestic and foreign, involve
risks. Investment in the securities of foreign issuers may involve risks in
addition to those normally associated with investments in the securities of U.S.
issuers. While the Portfolio will generally invest only in securities of
companies and governments in countries that the investment adviser, in its
judgment, considers both politically and economically stable, all foreign
investments are subject to risks of foreign political and economic instability,
adverse movements in foreign exchange rates, the imposition or tightening of
exchange controls or other limitations on repatriation of foreign capital.
Foreign investments are subject to the risk of changes in foreign governmental
attitudes towards private investment that could lead to nationalization,
increased taxation or confiscation of Portfolio assets.
Moreover, (1) dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income earned by the Portfolio; (2)
commission rates payable on foreign portfolio transactions are generally higher
than in the United States; (3) accounting, auditing and financial reporting
standards differ from those in the United States, which means that less
information about foreign companies may be available than is generally available
about issuers of comparable securities in the United States.; (4) foreign
securities often trade less frequently and with lower volume than U.S.
securities and consequently may exhibit greater price volatility; and (5)
foreign securities trading practices, including those involving securities
settlement, may expose the Portfolio to increased risk in the event of a failed
trade or the insolvency of a foreign broker-dealer or registrar.
EMERGING MARKETS. Investing in emerging market countries generally presents
greater risk than does other foreign investing. In any emerging market country,
there is the increased possibility of expropriation of assets, confiscatory
taxation, nationalization of companies or industries, foreign exchange controls,
foreign investment controls on daily stock market movements, default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in those countries. In the event
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of expropriation, nationalization or other confiscation, the Portfolio could
lose its entire investment in the country involved. The economies of developing
countries are more likely to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. There may also be less monitoring and regulation of emerging markets and
the activities of brokers there. Investing may require that the Portfolio adopt
special procedures, seek local government approvals or take other actions that
may incur costs for the Portfolio.
Certain emerging market countries may restrict investment by foreign investors.
These restrictions or controls may at times limit or preclude investment in
certain securities and may increase the costs and expenses of the Portfolio.
Several emerging market countries have experienced high, and in some periods
extremely high, rates of inflation in recent years. Inflation and rapid
fluctuations in inflation rates may adversely affect these countries' economies
and securities markets. Further, inflation accounting rules in some emerging
market countries may indirectly generate losses or profits for certain emerging
market companies.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because the Portfolio will invest
heavily in non-U.S. currency-denominated securities, changes in foreign currency
exchange rates will affect the value of the Portfolio's investments. A decline
against the dollar in the value of currencies in which the Portfolio's
investments are denominated will result in a corresponding decline in the dollar
value of the Portfolio's assets. This risk is heightened in some emerging market
countries.
The Portfolio may at times have to liquidate portfolio securities in order to
acquire sufficient U.S. dollars to fund redemptions of the Funds or other
investors or to purchase the U.S. dollars in order to pay its expenses. Changes
in foreign currency exchange rates may contribute to the need to liquidate
portfolio securities.
FOREIGN EXCHANGE CONTRACTS. Because the Portfolio will invest in non-U.S. dollar
denominated securities, changes in foreign currency exchange rates will affect
the value of the Portfolio's investments. A decline against the dollar in the
value of currencies in which the Portfolio's investments are denominated will
result in a corresponding decline in the dollar value of its assets. This risk
tends to be heightened in the case of investing in certain emerging market
countries. For example, some currencies of emerging market countries have
experienced repeated devaluations relative to the U.S. dollar, and major
adjustments have periodically been made in certain of such currencies. Some
emerging market countries may also have managed currencies that do not float
freely against the dollar. Exchange rates are influenced generally by the forces
of supply and demand in the foreign currency markets and by numerous other
political and economic events occurring outside the United States, many of which
may be difficult, if not impossible, to predict. When investing in foreign
securities, the 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.
The Portfolio may enter into foreign currency forward contracts to purchase or
sell foreign currencies in anticipation of its currency requirements and to
protect against possible adverse movements in foreign exchange rates. 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 portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities and may expose the Portfolio to the risk
that the counterparty is unable to perform. Although such contracts may reduce
the risk of loss to the Portfolio due to a decline in the value of the currency
sold, they also limit any possible gain that might result should the value of
such currency rise. The Portfolio does not intend to maintain a net exposure to
such contracts where the fulfillment of obligations under such contracts would
obligate it to deliver an amount of foreign currency in excess of the value of
its portfolio securities or other assets denominated in the currency. The
Portfolio will not enter into these
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contracts for speculative purposes and will not enter into non-hedging currency
contracts. These contracts involve a risk of loss if the investment adviser
fails to predict currency values correctly. The Portfolio has no present
intention to enter into currency futures or options contracts, but may do so in
the future.
DEBT SECURITIES. The Portfolio may seek capital appreciation through investment
in convertible or non-convertible debt securities. Capital appreciation in debt
securities may arise as a result of a favorable change in relative foreign
exchange rates, in relative interest rate levels, or in the creditworthiness of
issuers. The receipt of income from these securities is incidental to the
Portfolio's objective of long-term capital appreciation. Such income can be
used, however, to offset the operating expenses of the Portfolio. The Portfolio
will not seek to benefit from anticipated short-term fluctuations in currency
exchange rates. The Portfolio may invest to a certain extent in debt securities
in order to participate in debt-to-equity conversion programs incident to
corporate reorganizations.
ADDITIONAL INVESTMENT POLICIES
Each Fund's (and each Portfolio's) investment objective and all investment
policies of the Funds (and Portfolios) that are designated as fundamental may
not be changed without approval of the holders of a majority of the outstanding
voting securities of the Fund (or Portfolio). 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 the Funds are not
fundamental and may be changed by the Board of Trustees of the Trust (the
"Board") without shareholder approval. Likewise, nonfundamental investment
policies of a Portfolio may be changed by that investment company's board of
trustees without shareholder approval. See "Appendix A" and the SAI for further
information.
BORROWING AND LENDING. As a fundamental policy, each Portfolio may borrow money
but 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 a Portfolio's assets. Certain transactions, such as reverse repurchase
agreements, that are similar to borrowings are not treated as borrowings to the
extent that the are fully collateralized. Each 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 one-third of the value of the total assets of the
Portfolio. Lending portfolio securities may result in the possible loss of
rights in the collateral should the borrower fail financially.
DIVERSIFICATION AND CONCENTRATION. Each Portfolio is diversified as that term is
defined in the Investment Company Act of 1940 (the "1940 Act"). As a fundamental
policy, with respect to 75% of its assets, no Portfolio may purchase a security
(other than a U.S. Government Security or a security of an investment company)
if, as a result: (1) more than 5% of the Portfolio's total assets would be
invested in the securities of a single issuer; or (2) the Portfolio would own
more than 10% of the outstanding voting securities of any single issuer. No
Portfolio may concentrate its assets in the securities of issuers in any one
industry. As a fundamental policy, no Portfolio may purchase a security if, as a
result, more than 25% of the value of the Portfolio's total assets would be
invested in the securities of issuers conducting their principal business
activities in the same industry. This limit does not apply to investments in
U.S. Government Securities, or repurchase agreements covering U.S. Government
Securities.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities are obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies or instrumentalities. U.S. Government Securities include obligations
backed by the full faith and credit of the U.S. Government as well as securities
supported primarily or solely by the creditworthiness of the agency or
instrumentality issuing the security, such as securities of the Federal National
Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation
("Freddie Mac") and the Student Loan Marketing Association ("Sallie Mae"). There
is no guarantee that the U.S. Government will support securities not backed by
its full faith and credit.
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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 entitling the holder to payment within seven
days and securities subject to restrictions on resale (other than those
determined to be liquid by the investment advisers). Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and a
Portfolio might also have to register securities subject to restrictions on
resale 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.
TEMPORARY DEFENSIVE POSITION. When business or financial conditions warrant,
each Portfolio may assume a temporary defensive position and invest without
limit in cash or prime quality cash equivalents, including: (1) short-term U.S.
Government Securities; (2) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of commercial banks doing business in the
United States; (3) commercial paper; (4) repurchase agreements; and (5) shares
of "money market funds" registered under the 1940 Act within the limits
specified therein. During periods when and to the extent that a Portfolio has
assumed a temporary defensive position, it may not be pursuing its investment
objective. Apart from temporary defensive purposes, a Portfolio may at any time
invest a portion of its assets in cash and cash equivalents or, in other
investment companies to the extent permitted under the 1940 Act. Except during
periods when a Portfolio assumes a temporary defensive position, each Equity
Portfolio will have at least 65% of its total assets invested in common stock
and Strategic Value Bond Portfolio will have at least 65% of its total assets
invested in bonds.
REPURCHASE AGREEMENTS. Repurchase Agreements involve the purchase of a security
by a Portfolio and a simultaneous agreement by the seller (generally a bank or
dealer) to repurchase the security from the Portfolio at a specified date or
upon demand. This technique offers a method of earning income on idle cash.
Repurchase agreements involve the risk that the seller will fail to repurchase
the security as agreed. In that case, the Portfolio will bear the risk of market
value fluctuations until the security can be sold and may encounter delays and
incur costs in liquidating the security.
COMMON AND PREFERRED STOCK AND WARRANTS. Each Equity Portfolio may invest in
common 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
preferred stockholders, if any, 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 also a shareholder and not a
creditor of the company. Equity securities owned by a Portfolio may be traded in
the over-the-counter market or on a securities exchange, but may not be traded
every day or in the volume typical of securities traded on a major U.S. national
securities exchange. As a result, disposition by an Equity Portfolio of a
security to meet withdrawals by interest holders or otherwise may require a
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.
The Equity Portfolio(s) may also 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.
MORTGAGE-RELATED SECURITIES. Strategic Value Bond Portfolio may invest in
mortgage-related securities, which represent an interest in a pool of mortgages
originated by lenders such as commercial banks, savings
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associations and mortgage bankers and brokers. Mortgage-related securities may
be issued by governmental or government-related entities or by non-governmental
entities. Interests in mortgage-related securities differ from other forms of
debt securities. Mortgage-related 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.
The market for certain mortgage-related securities may be limited. This may
increase the volatility of the price of a particular security and make it
difficult for the portfolio to sell a security.
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 Fund and may even result in
losses to a Fund 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.
Adjustable rate mortgage-related 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 Fund 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 Fund'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 Fund shares before the
interest rates on the underlying mortgages were adjusted to reflect current
market rates.
Stripped mortgage-related securities are classes of mortgage-related securities
that receive different proportions of the interest and principal distributions
from the underlying assets. 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
underlying 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, the Portfolio does not purchase IOs or POs.
ASSET-BACKED SECURITIES. Strategic Value Bond Portfolio may invest in
asset-backed securities, which represent direct or indirect participations in,
or are secured by and payable from, assets other than mortgage-related assets
such as motor vehicle installment sales contracts, leases of various types of
real and personal
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property and receivables from revolving credit card agreements. Asset-backed
securities, including adjustable rate asset-backed securities, have yield
characteristics similar to those of mortgage-related 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. Asset-backed
securities do not always have the benefit of a security interest in collateral
comparable to the security interests associated with mortgage-related
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-related securities. In
addition, the market experience in these asset-backed securities is limited and
the market may not be able to sustain liquidity through all phases of an
interest rate or economic cycle.
DERIVATIVE INVESTMENTS. Each Portfolio may from time to time use various
derivative instruments to protect its investment portfolio from movements in
securities prices and interest rates. Besides Performa Global Growth Portfolio,
the Portfolios may also use a variety of currency hedging techniques, including
forward currency contracts, to manage exchange rate risk when investing in
securities denominated in foreign currencies. See "How the Funds Pursue Their
Objectives - Performa Global Growth Fund - Foreign Exchange Contracts."
Derivative instruments include futures contracts on securities, financial
indices and foreign currencies, options on contracts and on securities,
financial indices and foreign currencies and interest rate swaps and
swap-related products. The Portfolios use derivative instruments primarily to
hedge the value of its portfolio against potential adverse movements in
securities prices, foreign currency markets or interest rates. To a limited
extent, a Portfolio may also use derivative instruments for non-hedging purposes
such as seeking to increase the Portfolio's income or otherwise seeking to
enhance return. See "Appendix A" and the SAI for a more detailed discussion of
these instruments.
The use of derivative instruments exposes a Portfolio to additional investment
risks and transaction costs. Risks inherent in the use of derivative instruments
include: (1) the risk that interest rates, securities prices and currency
markets will not move in the directions that the portfolio manager anticipates;
(2) imperfect correlation between the price of derivative instruments and
movements in the prices of the securities, interest rates or currencies being
hedged; (3) the fact that skills needed to use these strategies are different
from those needed to select portfolio securities; (4) inability to close out
certain hedged positions to avoid adverse tax consequences; (5) the possible
absence of a liquid secondary market for any particular instrument and possible
exchange-imposed price fluctuation limits, either of which may make it difficult
or impossible to close out a position when desired; (6) leverage risk, that is,
the risk that adverse price movements in an instrument can result in a loss
substantially greater than the Portfolio's initial investment in that instrument
(in some cases, the potential loss is unlimited); and (7) particularly in the
case of privately negotiated instruments, the risk that the counterparty will
fail to perform its obligations, which could leave the Portfolio worse off than
if it had not entered into the position.
Although the Portfolios believe that the use of derivative instruments will be
beneficial, a Portfolio's performance could be worse than if the Portfolio had
not used such instruments if the investment adviser's judgment proves incorrect.
4. HOW PERFORMANCE IS SHOWN
Fund performance figures are based upon historical results and are not intended
to indicate future performance. Investment returns and net asset value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
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This section will help you understand various terms that are commonly used to
describe the Funds' performance. You may see references to these terms in the
Funds' advertisements and in general media articles. These advertisements may
include comparisons of the Funds' performance to the performance of other mutual
funds, mutual fund averages or recognized stock market indices. The Funds may
measure performance in terms of yield or total return.
Cumulative total return represents the actual rate of return on an investment
for a specified period. Cumulative total return is generally quoted for more
than one year (i.e., the life of the Fund), and does not show interim
fluctuations in the value of an investment.
Average annual total return represents the average annual percentage change of
an investment over a specified period. It is calculated by taking the cumulative
total return for the stated period and determining what constant annual return
would have produced the same cumulative return. Average annual returns for more
than one year tend to smooth out variations in the Fund's return and are not the
same as actual annual results.
Yield shows the rate of income a Fund earns on its investments as a percentage
of the Fund's share price. It is calculated by dividing the Fund's net
investment income for a 30-day period by the average number of shares entitled
to receive dividends and dividing the result by the Fund's net asset value per
share at the end of the 30-day period. Yield does not include changes in NAV.
Generally, yields are calculated according to standardized SEC formulas and may
not equal the income on an investor's account. Yield is usually quoted on an
annualized basis. An annualized yield represents the amount you would earn if
you remained in a Fund for a year and the Fund continued to have the same yield
for the entire year.
5. ORGANIZATION
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 the Funds) and may
divide portfolios or series into classes of shares; the costs of doing so will
be borne by the Trust. As of the date of this Prospectus, each Fund offers one
class of shares. The Trust currently offers thirty-nine separate series.
VOTING AND OTHER RIGHTS
Each share has one vote, with fractional shares voting proportionally. Shares of
the Trust will vote together without regard to series or classes of shares on
all matters except: (1) when required by the 1940 Act or when the Trustees have
determined that the matter affects the interests of one or more series or
classes materially differently, shares will be voted by individual series or
class; and (2) when the Trustees have determined that the matter affects only
the interest of one or more series or classes, only shareholders of that series
or class shall be entitled to vote thereon. Shares are freely transferable, are
entitled to dividends as declared by the Trustees. If a Fund were liquidated,
its shareholder would receive the net assets of the Fund.
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 shareholder. 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.
Each Portfolio normally will not hold meetings of investors except as required
by the 1940 Act. Each investor in a Portfolio will be entitled to vote in
proportion to its relative beneficial interest in the Portfolio.
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When required by the 1940 Act and other applicable law, a Fund will solicit
proxies from its shareholders and will vote its interest in a Portfolio in
proportion to the votes cast by its shareholders. If there are other investors
in a Portfolio, there can be no assurance that any issue that receives a
majority of the votes cast by Fund shareholders will receive a majority of votes
cast by all investors in the Portfolio; indeed, if other investors hold a
majority interest in the Portfolio, they could hold have voting control of the
Portfolio.
From time to time, certain shareholders may own a large percentage of the Shares
of a Fund and, accordingly, may be able to greatly affect (if not determine) the
outcome of a shareholder vote. Due to its initial investment in each Fund, prior
to the public offering of each Fund, Forum may be deemed to control each Fund.
CORE AND GATEWAY STRUCTURE
Each Fund seeks to achieve its investment objective by investing all of its
investable assets in its corresponding Portfolio, that has the same investment
objective and substantially identical investment policies as the Fund.
Accordingly, each Portfolio directly acquires portfolio securities and a Fund
acquires an indirect interest in those securities. Each Portfolio (other than
Schroder Global Growth Portfolio) is a separate series of Core Trust (Delaware)
("Core Trust"), a business trust organized under the laws of the State of
Delaware in 1994. Schroder Global Growth Portfolio is a separate series of
Schroder Capital Funds ("Schroder Core"), a business trust organized under the
laws of the State of Delaware in 1995. Core Trust and Schroder Core are
registered under the 1940 Act as open-end, management, investment companies. The
assets of each Portfolio belong only to, and the liabilities of each Portfolio
are borne solely by, that Portfolio and no other portfolio of Core Trust or
Schroder Core, as applicable.
THE PORTFOLIOS. A Fund's investment in a Portfolio is in the form of a
non-transferable beneficial interest. All investors in a Portfolio will invest
on the same terms and conditions and will pay a proportionate share of the
Portfolio's expenses.
The Portfolios do not sell their shares directly to members of the general
public. Another investor in a Portfolio, such as an investment company, that
might sell its shares to members of the general public would not be required to
sell its shares at the same public offering price as any Fund, and could have
different advisory and other fees and expenses than a Fund. Therefore, Fund
shareholders may have different returns than shareholders in another investment
company that invests in a Portfolio. Information regarding any such funds is
available from Core Trust by calling Forum at (207) 879-1900.
CERTAIN RISKS OF INVESTING IN PORTFOLIOS. A Fund's investment in a Portfolio may
be affected by the actions of other large investors in that Portfolio. For
example, if Disciplined Growth Portfolio had a large investor other than
Performa Disciplined Growth Fund that redeemed its interest, Disciplined Growth
Portfolio's remaining investors (including Disciplined Growth Fund) might, as a
result, experience higher pro rata operating expenses, thereby producing lower
returns. As there may be other investors in a Portfolio, there can be no
assurance that any issue that receives a majority of the votes cast by a Fund's
shareholders will receive a majority of votes cast by all investors in a
Portfolio; indeed, other investors holding a majority interest in a Portfolio
could have voting control of the Portfolio.
Each Fund may withdraw its entire investment from a Portfolio at any time, if
the Board determines that it is in the best interests of the Fund and its
shareholders to do so. A Fund might withdraw its investment from a Portfolio,
for example, if there were other investors in the Portfolio with power to, and
who did by a vote of all investors (including the Fund), change the investment
objective or policies of the Portfolio in a manner not acceptable to the Board.
A withdrawal could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) by the Portfolio. That distribution could result
in a less diversified portfolio of investments for the Fund and could affect
adversely the liquidity of the Fund's portfolio. If the Fund decided to convert
those securities to cash, it would incur brokerage fees or other transaction
costs. If the Fund withdrew its investment from a Portfolio, the Board would
consider what action might be taken,
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including the management of the Fund's assets directly by Norwest or the
investment of the Fund's assets in another pooled investment entity. The
inability of the Fund to find a suitable replacement investment, in the event
the Board decided not to permit Norwest to manage the Fund's assets directly,
could have a significant impact on shareholders of the Fund.
6. HOW THE FUNDS ARE MANAGED
TRUSTEES
The Board of Trustees oversees the business affairs of the Funds and is
responsible for major decisions relating to each Fund's investment objective and
policies. The Board formulates the general policies of the Funds and meets
periodically to review the results of the Funds, monitor investment activities
and practices and discuss other matters affecting the Funds and the Trust. The
Board consists of eight persons. A board of trustees for each Core Trust (each a
"Core Board") performs similar functions with respect to the Portfolios of that
investment company. The Board also monitors the activities of each Portfolio and
its service providers.
INVESTMENT ADVISORY SERVICES
Norwest Investment Management, Inc. Subject to the general supervision of the
Core Board, Norwest makes investment decisions for the Portfolios (except for
Global Growth Portfolio) and continuously reviews, supervises and administers
each Portfolio's investment program or oversees the investment decisions of the
subadvisers, as applicable. Norwest, which is 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. As of that date, Norwest Corporation and its affiliates
managed assets with a value of approximately $52.9 billion.
As part of its regular banking operations, Norwest Bank Minnesota, N.A. and
other banking affiliates of Norwest may make loans to 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's banking affiliates. A
lending relationship will not be a factor in Norwest's selection of portfolio
securities.
To assist Norwest, the Portfolios and Norwest have retained the services of
three subadvisers. The subadvisers make investment decisions for, and
continuously review, supervise and administer, that portion of a Portfolio's
assets that Norwest believes should be managed by the subadviser. Norwest
supervises the performance of the subadvisers.
GALLIARD CAPITAL MANAGEMENT, INC. Galliard, which is located at 800 LaSalle
Avenue Suite 2060, Minneapolis, Minnesota, is a registered investment adviser
that specializes in fixed income management. The firm manages assets on the
premise that outstanding performance is achieved through fundamental security
analysis and strategic portfolio diversification. As of August 31, 1997,
Galliard had over $3.1 billion in assets under management. Galliard is the
subadviser of Strategic Value Bond Portfolio.
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC. Schroder, whose principal
business address is 787 7th Avenue, 34th Floor, New York, New York 10019, is a
registered investment adviser. Subject to the general supervision of the Core
Board for Global Growth Portfolio, Schroder makes investment decisions for the
Portfolio and continuously reviews, supervises and administers the Portfolio's
investment program. Schroder is a wholly owned U.S. subsidiary of Schroders
Incorporated (doing business in New York State as Schroders Holdings), the
wholly owned U.S. holding company subsidiary of Schroders plc. Schroders plc is
the holding company parent of a large world-wide group of banks and financial
services companies
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<PAGE>
(referred to as the "Schroder Group") with associated companies and branch and
representative offices in eighteen countries. The Schroder Group specializes in
providing investment management services. As of June 30, 1997, Schroder Group
had over $175 billion in assets under management.
SMITH ASSET MANAGEMENT GROUP, LP. Smith Group, whose principal business address
is 500 Crescent Court, Suite 250, Dallas, Texas, is a registered investment
adviser. Smith group provides investment management services to company
retirement plans, foundations, endowments, trust companies, and high net worth
individuals. As of August 31, 1997, the Smith Group managed over $230 million in
assets. Smith Group is the subadviser of Disciplined Growth Portfolio and Small
Cap Value Portfolio.
PORTFOLIO MANAGERS
The following persons are primarily responsible for the management of the
Portfolios' assets and have served as the portfolio managers since the inception
of the Portfolios.
PERFORMA STRATEGIC VALUE BOND FUND (Strategic Value Bond Portfolio). Richard
Merriam. Senior Portfolio Manager/Principal of Galliard since 1995. Mr. Merriam
directs the management of fixed income portfolios and oversees the trading and
research functions at Galliard. Prior to joining Galliard, Mr. Merriam was Chief
Investment Officer of Insight Investment Management. Before that, he served as a
Senior Vice President at Washington Square Capital, where he oversaw management
of nearly $5.0 billion in assets. Mr. Merriam has over 13 years investment
management experience. He obtained a BA from the University of Michigan and a
MBA from the University of Minnesota.
PERFORMA DISCIPLINED GROWTH FUND (Disciplined Growth Portfolio) and PERFORMA
SMALL CAP VALUE FUND (Small Cap Value Portfolio). Stephen S. Smith, CFA. Mr.
Smith is the Chief Investment Officer for Smith Group and is a principal in the
firm. He has held this position since November, 1995. Prior thereto, Mr. Smith
served as senior portfolio manger with NationsBank where he managed
approximately $1 billion of client assets. At NationsBank, Mr. Smith held a
variety of management positions including manager of the institutional asset
management group, manager of the disciplined equity style used in a mutual fund
and collective investment fund and member of the Investment Policy Committee. At
NationsBank he also served as sub-adviser for an identified segment in the
disciplined equity style for an unaffiliated mutual fund. His educational
background includes a B.S. in Industrial Engineering and an M.B.A., both
received from the University of Alabama. He was awarded the Chartered Financial
Analyst (CFA) designation in 1981.
PERFORMA GLOBAL GROWTH FUND (Schroder Global Growth Portfolio). The investment
management team of Michael Perelstein and Paul Morris (with the assistance of a
Schroder investment committee). Mr. Perelstein has been a Senior Vice President
of Schroder since January 2, 1997. Prior thereto, he was a Managing Director at
MacKay Shields. Mr. Perelstein has more than twelve years of international and
global investment experience. Mr. Morris has been a Senior Vice President of
SCMI and a Director of Schroder Capital Management Inc. since January 1997.
Prior thereto he was Principal and Senior Portfolio Manager at Weiss Peck &
Greer, L.L.C.; Managing Director (Equity Division) UBS Asset Management and
Equity Portfolio Manager at Chase Investors Management Corp.
BACKGROUND OF SMITH GROUP PERFORMANCE
The following table sets forth composite performance data relating to the
historical performance of separate accounts and mutual fund portfolios primarily
managed by Stephen Smith, the portfolio manager of Disciplined Growth Portfolio
and Small Cap Value Portfolio, since the dates indicated, that have investment
objectives, policies, strategies and risks substantially similar to those of the
Portfolios. The data are provided to illustrate the past performance of Mr.
Smith in managing substantially similar accounts as measured against specified
market indices and does not represent the performance of the Portfolios.
Investors should not consider this performance data as an indication of future
performance of the Portfolios, the Smith Group or Mr. Smith.
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Mr. Smith's composite performance data were calculated on a total return basis
and include all dividends and interest, accrued income and realized and
unrealized gain and loss. All composites are calculated net of estimated expense
ratios based on projected asset levels for each Portfolio's first year of
operation (i.e., 1.87% for both Disciplined Growth Portfolio and Small Cap Value
Portfolio) excluding expense reimbursements, and without provision for federal
or state income taxes. Estimated expenses are expected to be 1.25% and 1.30% for
Disciplined Growth and Small Cap Value Portfolios, respectively, as a result of
expense reimbursements; had estimated expense ratios that included expense
reimbursements been used, the composites' performance would have been higher.
Mr. Smith's composites include all actual, fee-paying, discretionary
institutional private accounts and mutual fund portfolios managed by Mr. Smith
that have substantially the same investment objectives and policies. Securities
transactions are accounted for on the trade date and accrual accounting is used.
Cash and equivalents are included in performance returns. The monthly returns of
Mr. Smith's composites combine the individual accounts' returns (calculated on a
time-weighted rate of return) by asset-weighing each individual account's asset
value as of the beginning of the month. Quarterly and yearly returns are
calculated by geometrically linking the monthly and quarterly returns,
respectively.
The institutional private accounts that are included in Mr. Smith's composites
are not subject to certain investment limitations, diversification requirements,
specific tax restrictions and investment limitations imposed on the Portfolios
by the 1940 Act or the Internal Revenue Code. Consequently, the performance
results for Mr. Smith's composites could have been adversely affected if the
institutional private accounts included in the composite had been regulated as
investment companies.
The investment results of Mr. Smith's composites presented below are unaudited
and do not represent the past performance of nor predict the future returns that
might be experienced by the Portfolios or an individual investor investing in
the Performa Disciplined Growth Fund or the Performa Small Cap Value Fund.
Investors should also be aware that the use of a methodology different from that
used below to calculate performance could result in different performance data.
<TABLE>
<CAPTION>
MR. SMITH'S COMPOSITE FOR THE
DISCIPLINED GROWTH STYLE(2) S&P 500 INDEX(3)
-------------------------------------- -----------------
<S> <C> <C>
1995 36.89% 37.54%
1996 30.15% 22.99%
1997 to Date(1) 33.37% 22.87%
1 Year(1) 51.41% 40.62%
2 Years(1) 34.30% 29.20%
Since Inception
1/1/95(1) 38.34% 28.11%
<CAPTION>
MR. SMITH'S COMPOSITE FOR THE
SMALL CAP VALUE STYLE RUSSELL 2000(4)
-------------------------------------- -----------------
<S> <C> <C>
Since Inception
11/1/96(1) 34.14% 24.33%
Year to Date(1) 21.64% 16.77%
</TABLE>
(1) Average annual return through August 31, 1997. Return for less than one year
is not annualized.
(2) The composite returns shown in this chart consists of total returns for the
period January 1995 through August 1997 of accounts for which Stephen S.
Smith, now Chief Investment Officer of the Smith Group, served as the
primary manager as described above, including the period January 1, 1995 -
October 31, 1995, during which Mr. Smith was senior portfolio manager for
another firm. The composite does not include the performance of other
accounts not managed similarly to the Portfolio. Since November 1, 1995 at
Smith Group, Mr. Smith has employed the same investment style in
discretionary private accounts as he employed in the accounts described
above. No other person played a significant part in
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<PAGE>
achieving the prior performance of these accounts during Mr. Smith's tenure.
The data for January 1, 1995 - October 31, 1995 are not, and should not be,
construed as the performance data of Smith Group, which began business on
November 1, 1995.
(3) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any, but
does not reflect fees, brokerage commissions, or other expenses of
investing.
(4) The Russell 2000 Index is an unmanaged index consisting of the securities of
the 2,000 issuers having the smallest capitalization in the Russell 3000
Index, representing approximately 10% of the Russell 3000 total market
capitalization. The average market capitalization of companies included in
the Index is approximately $500 million. The Index reflects the reinvestment
of income dividends and capital gain distributions, if any, but does not
reflect fees, brokerage commissions, or other expenses of investing.
ADVISORY FEES
Norwest (Schroder in the case of Global Growth Portfolio) is paid an advisory
fee at the following annual rates of the Portfolios' average daily net assets.
<TABLE>
<CAPTION>
FUND ADVISORY FEE
- ---------------------------------------------------------------------------- ---------------
<S> <C>
Strategic Value Bond Portfolio (Performa Strategic Value Bond Fund) 0.50%
Disciplined Growth Portfolio (Performa Disciplined Growth Fund) 0.90%
Small Cap Value Portfolio (Performa Small Cap Value Fund) 0.95%
Schroder Global Growth Portfolio (Performa Global Growth Fund) 0.50%
</TABLE>
Norwest (and not the Portfolios) pays Smith and Galliard a fee for their
investment subadvisory services. This compensation does not increase the amount
paid by the Portfolio to Norwest.
Each Fund may withdraw its investments from its corresponding Portfolio at any
time if the Board determines that it is in the best interests of the Fund to do
so. See "Organization - Core and Gateway Structure." Accordingly, each Fund has
retained Norwest as its investment adviser and the corresponding Portfolio's
subadviser as a subadviser. Similarly, in the event that Performa Global Growth
Fund withdraws its investment from its corresponding Portfolio, the Fund has
retained Schroder as a subadviser. Under these "dormant" investment advisory
arrangements, no Fund pays any advisory fees as long as the Fund remains
completely invested in its corresponding Portfolio or any other investment
company. In the event that a Fund were to withdraw its assets from its
corresponding Portfolio (other than Schroder Global Growth Portfolio), Norwest
would receive an advisory fee from the Fund at the same rate as the fee paid by
the Portfolio. In the event that Performa Global Growth Fund were to withdraw
its assets from Global Growth Portfolio, Norwest would receive an advisory fee
from the Fund at an annual rate of 0.90% of the Fund's average daily net assets.
Pursuant to the Funds' dormant subadvisory agreements, Norwest (and not the
Funds) would pay Schroder, Smith or Galliard, as applicable, a fee for its
subadvisory services.
THE FUNDS' EXPENSES
Each Fund is responsible for all expenses related to its operations. Theses
expenses include legal and accounting expenses; trustees' fees and expenses;
insurance premiums; fees and expenses of the Fund's service providers; brokerage
fees and expenses; expenses of registering and qualifying shares for sale with
the SEC and with various state securities commissions; expenses of obtaining
quotations on portfolio securities; the expenses of maintaining the Fund'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 a Fund are charged to the Fund; other
expenses are allocated proportionately among all the series of the Trust in
relation to the net assets of each series. Similar policies pertain to the
Portfolios.
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<PAGE>
PORTFOLIO TRADING AND TRANSACTIONS
The Advisers place orders for the purchase and sale of assets they manage with
brokers and dealers selected by and in the discretion of the respective Adviser.
Each Adviser seeks "best execution" for all portfolio transactions, but a
Portfolio may pay higher than the lowest available commission rates when the
Adviser believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction.
Commission rates for brokerage transactions are fixed on many foreign securities
exchanges, and this may cause higher brokerage expenses to accrue to a Portfolio
that invests in foreign securities than would be the case for comparable
transactions effected on U.S. securities exchanges.
Subject to the Portfolios' policy of obtaining the best price consistent with
quality of execution of transactions, each Adviser may employ broker-dealer
affiliates of the Adviser (collectively "Affiliated Brokers") to effect
brokerage transactions. The payment of commissions to Affiliated Brokers is
subject to procedures to provide that the commissions will not exceed the usual
and customary broker's commissions charged by unaffiliated brokers. No specific
portion of a Portfolio's brokerage will be directed to Affiliated Brokers and in
no event will a broker affiliated with the Adviser directing the transaction
receive brokerage transactions in recognition of research services provided to
the Adviser. The Advisers may effect transactions through brokers who sell Fund
shares.
The frequency of portfolio transactions (the portfolio turnover rate) will vary
from year to year depending on many factors. From time to time a Portfolio may
engage in active short-term trading to take advantage of price movements
affecting individual issues, groups of issues or markets. The Advisers
anticipate that the annual portfolio turnover rate of each Portfolio will be
less than 100% in their first year of operations. An annual portfolio turnover
rate of 100% would occur if all of the securities in a Portfolio were replaced
once in a period of one year. Higher portfolio turnover rates may result in
increased brokerage costs and an increase in short term capital gains or losses
to the Portfolio.
THE FUNDS' OTHER SERVICE PROVIDERS
MANAGEMENT, ADMINISTRATION AND DISTRIBUTION SERVICES. As manager, Forum
supervised 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, provides persons satisfactory to the Board to serve as officers of
the Trust and oversees the performance of administrative and professional
services rendered to the Funds by others.
FAS is responsible for performing certain administrative services necessary for
the Trust's operations with respect to each Fund including preparing and
printing updates of the Trust's registration statement and prospectuses,
preparing proxy and information statements and monitoring the sale of shares and
ensuring that such shares are properly and duly registered with the SEC and
applicable state securities administrators.
As of October 1, 1997, Forum and FAS provided management and administrative
services to registered investment companies and collective investment funds with
assets of approximately $25.5 billion. For their services to the Funds, FAS and
Forum each receives a fee at an annual rate of 0.025% of the Fund's average
daily net assets.
FAS also serves as administrator of each Portfolio, except Schroder Global
Growth Portfolio, for which it serves as subadministrator. FAS provides services
to the Portfolios (other than Schroder Global Growth Portfolio) that are similar
to those provided to the Funds by Forum and FAS. Schroder Advisors serves as
administrator and Forum serves as subadministrator of Schroder Global Growth
Portfolio. Schroder Advisors and Forum provide certain management and
administrative services necessary for the Portfolio's operations, other than the
administrative services provided to the Portfolio by Schroder.
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<PAGE>
For its services with respect to each Core Portfolio (other than Schroder Global
Growth Portfolio) FAS receives a fee at an annual rate of 0.05% of the
Portfolio's average daily net assets. For their services to Schroder Global
Growth Portfolio, Schroder Advisors receives a fee at an annual rate of 0.15%
and Forum receives a fee at an annual rate of 0.075% of the Portfolio's average
daily net assets.
Pursuant to a separate agreement, Norwest receives a fee with respect to
Performa Global Growth Fund at an annual rate of 0.25% of the Fund's average
daily net assets. Under this agreement, Norwest is responsible for compiling
data and preparing communications between the Fund and its shareholders,
maintaining requisite information flows between the Fund and Schroder,
monitoring and reporting to the Board on the performance of the Portfolio and
reimbursing the Fund for certain excess expenses. Fees are payable under this
agreement based on the Fund's assets invested in the Portfolio.
Forum Accounting Services, LLC provides portfolio accounting services to each
Fund and to each Portfolio. Forum is the manager of the Funds and distributor of
their shares. Forum is a registered broker-dealer and member of the National
Association of Securities Dealers, Inc. Forum also serves as the placement agent
of the Portfolios. These companies are members of the Forum Financial Group of
companies, Two Portland Square, Portland, Maine 04101, which together provide a
full range of services to the investment company and financial services
industry. As of October 1, 1997, they were controlled by John Y. Keffer,
President and Chairman of the Trust.
TRANSFER AGENT AND CUSTODIAN. Norwest Bank serves as transfer agent and dividend
disbursing agent for the Funds (in this capacity, the "Transfer Agent"). The
Transfer Agent maintains an account for each shareholder of the Funds, performs
other transfer agency functions and acts as dividend disbursing agent for the
Funds. The Transfer Agent is permitted to subcontract any or all of its
functions with to qualified agents. 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 to the Transfer Agent.
For its services, the Transfer Agent receives a fee with respect to each Fund at
an annual rate of 0.25% of each Fund's average daily net assets.
Norwest Bank also serves as each Fund's and each Portfolio's (other than Global
Growth Portfolio's) custodian and may appoint subcustodians for the foreign
securities and other assets held in foreign countries. For its custodial
service, Norwest Bank receives 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 directly payable by a Fund to the extent the Fund is invested in a Portfolio.
The Chase Manhattan Bank serves as custodian of Schroder Global Growth Portfolio
and is paid a fee for its services.
BANKING LAW MATTERS
Federal banking rules generally permit a bank or bank affiliate to act as
investment adviser, transfer agent, or custodian to a fund and to purchase
shares of the investment company as agent for and upon the order of a customer
and, in connection therewith, to retain a sales charge or similar payment.
Norwest and any bank or other bank affiliate also may perform Processing
Organization or similar services for the Funds and their shareholders. If a bank
or bank affiliate were prohibited in the future from so acting, changes in the
operation of the Funds could occur and a shareholder serviced by the bank or
bank affiliate may no longer be able to avail itself of those services. It is
not expected that shareholders would suffer any adverse financial consequences
as a result of any of these occurrences.
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<PAGE>
7. ABOUT YOUR INVESTMENT
GENERAL INFORMATION
Shares are continuously sold and redeemed at a price equal to their net asset
value next-determined after acceptance of an order, or receipt of a redemption
request, on every weekday except customary national holidays (New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas) and Good Friday ("Fund Business Day").
GENERAL PURCHASE INFORMATION
Accounts may be opened - and shares purchased and redeemed - only through
certain broker-dealers, banks and other financial institutions ("Processing
Organizations"). For information regarding opening an account to purchase shares
of the Funds, please call toll free: (888) 800-6748.
When you purchase shares through a Processing Organization, you are subject to
the Processing Organization's procedures, and you should read this Prospectus
along with all materials and other information provided by the Processing
Organization. Processing Organizations are responsible for promptly transmitting
purchase, redemption and other requests to the Funds and may charge you a fee
for these services. Typically, there is a three-day settlement period for
purchases and redemptions through broker-dealers.
When you purchase and redeem through a Processing Organization the Trust
confirms your transactions directly with the Processing Organization. The
Processing Organization, in turn, provides you with confirmations and periodic
statements. If a Processing Organization fails to carry out its obligations to
you, the Trust is not responsible. The Funds may suspend the sale of shares at
any time and may refuse any order to purchase shares.
Generally, a minimum investment of $1,000 is required to open an account, the
minimum subsequent investment is $100 and you may make $100 monthly periodic
investments. A Processing Organization may set different minimums. Refer to your
Processing Organization for instructions pertaining to the purchase of shares.
GENERAL REDEMPTION INFORMATION
Generally, shares may be redeemed at their net asset value next determined on
any Fund Business Day. The Funds impose no minimum period of investment and no
restriction on the frequency of redemptions, however Processing Organizations
may impose such minimums and restrictions. Refer to your Processing Organization
for instructions pertaining to the redemption of shares. For information
regarding redemption of shares of the Funds, please call toll free: (888)
800-6748.
HOW THE FUNDS VALUE THEIR SHARES
Each Fund calculates the net asset value of its shares on each Fund Business Day
by dividing the total value of its assets, less liabilities, by the number of
its shares outstanding. Shares are valued as of the close of regular trading on
the New York Stock Exchange. The Funds only determine net asset value on Fund
Business Days.
Securities of a Portfolio for which market quotations are readily available are
valued at market value. Short-term investments that will mature in 60 days or
less are valued at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by applicable Core Board.
Trading on international securities exchanges and over-the-counter markets is
normally completed well before the close of business on each Fund Business Day.
In addition, trading in foreign securities generally or in a particular country
or countries may not take place on all Fund Business Days. Trading does take
place in various foreign markets, however, on days on which a Fund's net asset
value is not calculated. Calculation of the net asset value per share of a Fund
may not occur contemporaneously with the determination of the
24
<PAGE>
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 Fund's determination of net asset value will not be
reflected in the Fund's calculation of net asset value unless Norwest or
Schroder, as applicable, 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
U.S. dollars at the mean of the bid and asked prices of such currencies against
the U.S. dollar last quoted by a major bank prior to the time of conversion.
8. THE FUNDS' DISTRIBUTIONS AND CERTAIN TAX INFORMATION
HOW THE FUNDS MAKE DISTRIBUTIONS TO SHAREHOLDERS
Dividends of net investment income are declared and paid monthly in the case of
Performa Strategic Value Bond Fund and declared and paid annually in the case of
all other Funds. Distributions of net capital gain, if any, realized by a Fund
are distributed annually. You may have dividends and distributions reinvested in
shares of the same Fund (the "Reinvestment Option"), receive dividends and
distributions in cash (the "Cash Option") or have dividends and distributions
reinvested in shares of another Fund or Investor Shares of Ready Cash Investment
Fund (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 Fund are
automatically invested in additional shares of that Fund. 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 you
selected one of the other two options. Under the Cash Option, all dividends and
distributions are paid to you in cash. Under the Directed Dividend Option, if
you have shares of a Fund in a single account that total $10,000 or more, you
may elect to have all dividends and distributions reinvested in shares of
another fund, provided that those shares are eligible for sale in the your state
of residence. For further information concerning the Directed Dividend Option,
you should contact the Transfer Agent or your Processing Organization.
TAX INFORMATION
Each Fund intends to qualify for each fiscal year to be taxed as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, (the
"Code"). As such, each Fund will not be liable for federal income and excise
taxes on the net investment income and net capital gain distributed to its
shareholders. Because each Fund intends to distribute all of its net investment
income and net capital gain each year, each Fund should thereby avoid all
federal income and excise taxes.
Dividends paid by a Fund out of its net investment income (including net
short-term capital gain) are taxable to you as ordinary income. Two different
tax rates apply to net capital gain - that is, the excess of gains from capital
assets held for more than one year over net losses from capital assets held for
not more than one year. One rate (generally 28%) applies to net gain from
capital assets held for more than one year but not more than 18 months
("mid-term gain"), and a second rate (generally 20%) applies to the balance of
net capital gain ("adjusted net capital gain"). Distributions of mid-term gain
and adjusted net capital gain will be taxable to shareholders as such,
regardless of how long a shareholder has held shares in the Fund. If you hold
shares for six months or less and during that period receive 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 Fund
paying the
25
<PAGE>
dividend or distribution by the amount of the dividend or distribution.
Dividends or distributions made to you shortly after the purchase of Shares,
although in effect a return of capital to you, will be taxable to you as
described above.
It is expected that a portion of the dividends of each Fund, except Performa
Strategic Value Bond Fund, 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 Fund's fiscal year.
No Portfolio is required to pay federal income taxes on its net investment
income and capital gain, as each Portfolio is treated as a partnership for
federal income tax purposes. All interest, dividends and gains and losses of a
Portfolio are deemed to have been "passed through" to the Funds investing in the
Portfolio in proportion to the Funds' holdings of the Portfolio, regardless of
whether such interest, dividends or gains have been distributed by the Portfolio
or losses have been realized by the Portfolio.
Investment income received by a Fund from sources within foreign countries may
be subject to foreign income or other taxes. Performa Global Growth Fund 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 its Portfolio. As a
shareholder of that Fund, you will be notified of your share of those foreign
taxes and will be required to treat the amount of such foreign taxes as
additional income. In that event, you may be entitled to claim a credit or
deduction for those taxes.
Each Fund is required by federal law to withhold 31% of reportable payments paid
to you (which may include dividends, capital gain distributions and redemptions)
if you fail to provide the Fund with a correct taxpayer identification number or
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 Fund will be mailed
to you shortly after the close of each calendar year.
You should consult your tax advisor with respect to your specific tax situation
as well as with respect to state and local taxes.
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 FUNDS' OFFICIAL SALES LITERATURE IN CONNECTION
WITH THE OFFERING OF THE FUNDS' 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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<PAGE>
APPENDIX A
GLOSSARY OF INVESTMENT TERMS
This glossary describes some of the types of securities and other obligations in
which a Fund (or Portfolio) may invest. Although the descriptions refer to
Portfolios only, the descriptions apply also to investments by the Funds. The
Funds (and Portfolios) are not limited to the securities and obligations listed
below, and may invest in the securities and other obligations described below
and in other types of securities and obligations to the extent permitted by its
investment objectives and policies. Refer to the SAI for a more detailed
discussion of the Funds' investment policies and these and other securities and
obligations in which the Funds (and Portfolios) may invest.
EQUITY AND RELATED SECURITIES
COMMON STOCK represents a share of ownership in a company, and usually carries
voting rights and may earn dividends. Common stockholders 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 holders of
debt securities) and, if applicable, preferred stockholders, are paid. Unlike
preferred stock, dividends on common stock are not fixed but are declared at the
discretion of the issuer.
CONVERTIBLE SECURITIES are preferred stocks or bonds that are convertible into
common stock at a specified price or conversion ratio within a specific amount
of time.
DEPOSITARY RECEIPTS are receipts for shares of a foreign-based company that
entitle the holder to dividends and capital gain on the underlying security.
Receipts include those issued by domestic banks (American Depositary Receipts
("ADRs")), foreign financial institutions (Global or European Depositary
Receipts) and broker-dealers (depositary shares). 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 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.
PREFERRED STOCK is a class of stock that generally pays dividends at a specified
rate and has preference over common stock in the payment of dividends and
liquidation. A preferred stockholder generally is a shareholder in the company
and not a creditor of the company. Preferred stock generally does not carry
voting rights.
WARRANTS are securities, typically issued with preferred stocks or bonds, that
give the holder the right to buy a proportionate amount of common stock at a
specified price, usually at a price that is higher than the market price at the
time of issuance of the warrant. The right may last for a specified period or
indefinitely. The specified price for warrants usually represents a premium over
the applicable market value of the underlying equity security at the time of the
warrant's issuance.
DEBT AND RELATED INVESTMENTS
BILLS, NOTES, BONDS AND DEBENTURES are debt securities issued by a corporation
or other business entity, municipality, government or government agency. Bills
usually have the shortest maturities and bonds the longest maturities. The
issuer is required to pay the holder the face or principal amount of the loan at
a specified maturity and, except for zero coupon securities, to make scheduled
interest payments during the term of the securities.
COMMERCIAL PAPER is a short-term debt obligation with a maturity ranging from 1
to 270 days issued by banks, corporations and other borrowers.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") are debt obligations that are
collateralized by mortgages or mortgage pass-through securities ("Mortgage
Assets"). 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,
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certain classes (often referred to as tranches) of CMOs may have priority over
other classes with respect to the receipt of payments. CMOs may have complicated
structures and generally involve more risks than less complex mortgage-related
securities.
DEMAND NOTES are unsecured obligations redeemable upon a specified number of
days' notice (typically not more than 30 days). These obligations include master
demand notes that permit investment of fluctuating amounts at varying rates of
interest pursuant to direct arrangement with the issuer of the instrument. The
issuers of these obligations often have 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 them. Although a
purchaser of a demand note would generally not be able to resell a master demand
note to a third party, the purchaser is entitled to demand payment from the
issuer at any time in accordance with the note's notice provisions.
FIXED-INCOME SECURITIES are securities that pay a specified rate of return. The
term generally includes securities of all maturities (for instance, bills, notes
and bonds), securities on which interest or dividend payments are made before
maturity and zero coupon securities, and securities of various issuers (for
instance, corporate instruments, municipal securities and U.S. Government
Securities) that pay a specified rate of interest for a specified period of
time. The term also can include preferred stock, which pays fixed-dividends.
Coupon, discount and dividend rates usually are fixed for the term of a
security, but can provide for an increase or decrease in rate during the term of
the security.
GUARANTEED INVESTMENT CONTRACTS are arrangements with an insurance companies
under which the purchaser of the contract contributes cash to the insurance
company's general account and the insurance company credits the contribution
with interest on a monthly basis. The interest rate may be fixed or tied to a
specified market index, and the principal and interest are guaranteed by the
insurance company.
HIGH-YIELD/HIGH-RISK SECURITIES are securities that are rated below investment
grade by an NRSRO (i.e., "BB" or lower by S&P's and "Ba" or lower by Moody's).
Other terms commonly used to describe these securities include "lower rated
bonds," "non-investment grade bonds" and "junk bonds." These securities have
speculative or predominantly speculative characteristics.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES are shares in a pool of mortgages
or other debt. These securities are generally pass-through securities, which
means that principal and interest payments on the underlying securities (less
servicing fees) are passed through to securityholders on a pro rata basis. These
securities involve prepayment risk, which is the risk that during periods of
declining interest rates, the underlying mortgages or other debt may be
refinanced or paid off prior to their maturities, leaving the holder unable to
reinvest the prepaid amount at an interest rate comparable to the rate on the
prepaid securities.
PARTICIPATION INTERESTS are 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 the participation interests back to
the bank or other institution.
REVERSE REPURCHASE AGREEMENTS involve the sale of a security by a Portfolio to
another party (generally a bank or dealer) in return for cash and an agreement
by the Portfolio to buy the security back at a specified price and time. This
technique is similar to borrowing.
SECURITY LOANS occur when the holder of a security lends it and receives a fee
from the borrower or is able to retain interest from investing cash collateral
deposited by the borrower. The lender may pay fees to arrange securities loans.
Security loans involve the risk that the borrower will fail to return the
borrowed security. In that case, the lender bears the risk of market value
fluctuations until the security is returned or collateral can be liquidated and
the proceeds (which may not cover the effects of fluctuations and the lenders
costs) used to replace the unreturned securities.
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VARIABLE AND FLOATING RATE SECURITIES are securities that have variable or
floating rates of interest that are adjusted periodically according to a
specified formula, usually with reference to some interest rate index or market
interest rate. In certain limited circumstances, adjustments in a security
interest rate may affect the amount of principal paid at maturity. The
adjustable rate tends to decrease the security's price sensitivity to changes in
interest rates.
ZERO COUPON SECURITIES are debt securities that are issued at a discount from
face value and do not pay interest prior to maturity. The discount approximates
the total amount of interest the security will accrue from the date of issuance
to maturity. The market value of these securities generally fluctuates more in
response to changes in interest rates than securities of comparable quality and
maturity that pay interest during their term. Holders of a zero-coupon security
with a term of more than a year must treat a portion of the discount of the
security as income on the purchase price paid for the security. As the Funds
distribute all of their net investment income, a Portfolio may have to sell
portfolio securities to distribute the income resulting from this treatment,
which may result in a taxable gain or loss and occur at a time when the
investment adviser would not otherwise have chosen to sell the securities.
OTHER INVESTMENT TERMS AND TECHNIQUES
DOLLAR ROLL TRANSACTIONS occur when a Portfolio sells fixed income securities,
typically mortgage-related securities, and makes a commitment to purchase
similar, but not identical, securities at a later date from the party to whom
the original securities were sold. 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 Portfolio but it 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 price for
the future purchase, as well as by the interest earned on the cash proceeds of
the initial sale. Like other forward commitments, dollar roll transactions
involve the risk that the market value of the securities to be purchased by the
Portfolio may decline below the price at which the Portfolio sold the original
securities. Also, if the buyer of the original securities under a dollar roll
transaction becomes insolvent, the Portfolio's use of the proceeds of the
transaction may be restricted pending a determination by the other buyer, or its
trustee or receiver, whether to enforce the Portfolio's obligation to repurchase
the securities, which may have increased a market value on the price at which
the original securities were sold.
MARKET CAPITALIZATION refers to the value of an issuer's outstanding stock and
is calculated by multiplying the total number of common shares outstanding by
the market price per share of the stock.
RULE 144A SECURITIES are securities that are not registered for sale to the
general public and may be resold only to certain types of institutional
investors. Because of the restrictions on their resale, these securities may be
difficult to resell at the same price as comparable non-restricted securities.
SHORT SALES AGAINST-THE-BOX occur when a Portfolio contemporaneously owns or has
the right to obtain at no added cost securities identical to securities which
the Portfolio has borrowed and sold, otherwise referred to as "sold short." For
federal income tax purposes, short sales against-the-box may in certain cases be
made to defer recognition of gain or loss on the sale of securities until the
short position is closed out. Under recently enacted legislation, if a Portfolio
has unrealized gain on securities it owns and sells identical securities short
against-the-box, the Portfolio generally will be deemed to have sold the long
position for tax purposes and thus will recognize gain.
WHEN-ISSUED, DELAYED DELIVERY and FORWARD TRANSACTIONS generally involve the
purchase of a security under an agreement to make payment and accept delivery at
some time in the future, (i.e., beyond the normal period of securities
settlement). A Portfolio does not earn interest on such securities until
settlement but bears the risk of market value fluctuations between the purchase
and settlement dates. New issues of stocks and bonds, private placements and
U.S. Government Securities may be sold in this manner.
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CERTIFICATES OF PARTICIPATION are certificates representing an interest in a
pool of securities. Holders are entitled to a proportionate interest in the
underlying securities.
FUTURES, OPTIONS AND OTHER DERIVATIVES
FORWARD CONTRACTS are contracts to purchase or sell a specified amount of
property for an agreed upon price at a specified time. Forward contracts
generally are not exchange traded and are typically negotiated on an individual
basis. The Portfolios may enter into forward currency contracts to hedge against
declines in the value of securities denominated in, or whose value is tied to, a
currency other than the U.S. dollar or to reduce the impact of currency
appreciation on future purchases of such securities. Portfolios may also enter
into forward contracts to purchase or sell securities indicies or other
financial indices.
FUTURES CONTRACTS are contracts that obligate the buyer to receive and the
seller to deliver a commodity at a specified price on a specified date. The
Portfolio may buy and sell futures contracts on foreign currencies, securities
indicies and financial indices, including interest rates or an index of U.S.
government, foreign government, equity or fixed-income securities. The
Portfolios may also buy options on futures contracts. An option on a futures
contract gives the buyer the right, but not the obligation, to buy or sell a
futures contract at a specified price on or before a specified date. Futures
contracts and options on futures contracts are standardized and traded on
exchanges.
INDEXED/STRUCTURED SECURITIES are typically short- to intermediate-term debt
securities whose value at maturity or interest rate is linked to currencies,
interest rates, securities, indices, commodity prices or other financial
indicies. These securities may be positively or negatively indexed (i.e., their
value may increase or decrease based on a movement in the price of the linked
component). Indexed/structured securities may have return characteristics
similar to direct investments in the linked component and may be more volatile
than a direct investment in the linked component. These investments may be
difficult to resell and a purchaser bears both the market risk of an investment
in the linked component and the credit risk of the issuer.
INVERSE FLOATERS, a type of indexed/structured security, are variable or
floating rate securities that pay interest at a rate that varies inversely with
movements in prevailing short-term interest rates. Upon reset of the interest
rate payable on an inverse floater, its interest rate may decrease if the linked
interest rate increases. When short-term interest rates are relatively low
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,
potential yield. These investments may be difficult to resell and a purchaser
bears both the market risk of the investment and the credit risk of the issuer.
OPTIONS are the right, but not the obligation, to buy or sell a specified amount
of securities or other assets on or before a fixed date at a predetermined
price. Options may have standardized terms and be traded as exchanges or may be
tailor-made and difficult to resell. The Portfolio may purchase and write put
and call options on securities, securities indices and foreign currencies. A
purchaser of a non-standardized option is subject both to market risk and the
credit risk of the issuer.
SWAP AGREEMENTS include interest rate and mortgage (or other asset) swap
agreements. 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. 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
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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 substantial impact on a Portfolio's performance. Swap agreements
expose a Portfolio to movements in the relative value of the obligations being
swapped, to the credit risk of the counterparties and to the Portfolio's ability
to terminate its swap agreements or reduce its exposure to them through
offsetting transactions.
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APPENDIX B
EXPLANATION OF RATING CATEGORIES
The following is a description of credit ratings issued by two of the major
credit ratings agencies. Credit ratings evaluate only the safety of principal
and interest payments, not the market value risk of lower quality securities.
Credit rating agencies may fail to change credit ratings to reflect subsequent
events on a timely basis. Although the investment advisers consider security
ratings when making investment decisions, each adviser also performs its own
investment analysis and does not rely solely on the ratings assigned by credit
agencies.
BOND RATINGS
STANDARD & POOR'S RATINGS SERVICES
<TABLE>
<S> <C>
INVESTMENT GRADE RATINGS
"AAA" Highest rating; extremely strong capacity to pay principal and interest.
"AA" High quality; very strong capacity to pay principal and interest.
"A" Strong capacity to pay principal and interest; somewhat more susceptible
to the adverse effects of changing circumstances and economic conditions.
"BBB" Adequate capacity to pay principal and interest; normally exhibit
adequate protection parameters, but adverse economic conditions or
changing circumstances more likely to lead to a weakened capacity to pay
principal and interest than for higher rated bonds.
NON-INVESTMENT GRADE RATINGS
"BB," "B" Predominantly speculative with respect to the issuer's capacity to meet
required interest and principal payments.
"CCC," "CC" Progressively higher degrees of speculation.
"C" Highest degree of speculation. Quality and protective characteristics
outweighed by large uncertainties or major risk exposure to adverse
conditions.
"D" In default.
MOODY'S INVESTORS SERVICE, INC.
INVESTMENT GRADE RATINGS
"Aaa" Highest quality, smallest degree of investment risk.
"Aa" High quality; together with Aaa bonds, they compose the high-grade bond
group.
"A" Upper-medium grade obligations; many favorable investment attributes.
"Baa" Medium-grade obligations; neither highly protected nor poorly secured.
Interest and principal appear adequate for the present but certain
protective elements may be lacking or may be unreliable over any great
length of time.
NON-INVESTMENT GRADE RATINGS
"Ba" More uncertain, with speculative elements. Protection of interest and
principal payments not well safeguarded during good and bad times.
"B" Lack characteristics of desirable investment; potentially low assurance
of timely interest and principal payments or maintenance of other
contract terms over time.
"Caa" Poor standing, may be in default; elements of danger with respect to
principal or interest payments.
"Ca" Speculative in a high degree; could be in default or have other marked
shortcomings.
"C" Lowest-rated; extremely poor prospects of ever attaining investment
standing.
</TABLE>
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PERFORMA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1997
PERFORMA DISCIPLINED GROWTH FUND
PERFORMA SMALL CAP VALUE FUND
PERFORMA STRATEGIC VALUE BOND FUND
PERFORMA GLOBAL GROWTH FUND
<PAGE>
PERFORMA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1997
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING: DISTRIBUTION:
Norwest Bank Minnesota, N.A. Forum Financial Services, Inc.
Transfer Agent Manager and Distributor
733 Marquette Avenue Two Portland Square
Minneapolis, MN 55479-0040 Portland, Maine 04101
(612) 667-8833/(800) 338-1348 (207) 879-1900
The Performa Funds are separate series of Norwest Advantage Funds, an open-end,
management investment company registered 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 shares of
Performa Disciplined Growth Fund, Performa Small Cap Value Fund, Performa
Strategic Value Bond Fund and Performa Global Growth Fund.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
A THE CURRENT 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
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
Illiquid Securities and Restricted Securities
Loans of Portfolio Securities Borrowing And Transactions
Involving Leverage
Repurchase Agreements
Temporary Defensive Position
2. Investment Limitations
Fundamental Limitations
Non-Fundamental Limitations
3. Performance and Advertising Data
SEC Yield Calculations
Total Return Calculations
Other Advertisement Matters
4. Management
Trustees and Officers
Investment Advisory Services
Management and Administrative Services
Distribution
Transfer Agent
Custodian
Portfolio Accounting
Expenses
5. Portfolio Transactions
6. Additional Purchase and Redemption Information
General
Exchanges
Redemptions
7. Taxation
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TABLE OF CONTENTS
Page
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8. Additional Information About the Trust and the Shareholders
of the Funds
Determination of Net Asset Value
Counsel and Auditors
General Information
Financial Statements
Registration Statement
Appendix A - Description of Securities Ratings A-1
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<PAGE>
INTRODUCTION
The Trust was originally organized under the name "Prime Value Funds, Inc." as a
Maryland corporation on August 29, 1986, and on July 30, 1993, was reorganized
as a Delaware business trust under the name "Norwest Funds." On October 1,
1997, the Trust changed its name to "Norwest Advantage Funds."
Each Fund's investment adviser is Norwest Investment Management, Inc.
("Norwest"), a subsidiary of Norwest Bank Minnesota, N.A. ("Norwest Bank").
Norwest also is the investment adviser of each Core Portfolio (other than
Schroder Global Growth Portfolio). Norwest Bank, a subsidiary of Norwest
Corporation, serves as the Trust's transfer agent, dividend disbursing agent and
custodian.
Smith Asset Management Group, LP ("Smith") serves as investment subadviser of
Performa Disciplined Growth Fund/ Disciplined Growth Portfolio and Performa
Small Cap Value Fund/ Small Cap Value Portfolio.
Galliard Capital Management, Inc. ("Galliard") serves as investment subadviser
of Performa Strategic Value Bond Fund/Strategic Value Bond Portfolio.
Schroder Capital Management International Inc. ("Schroder") serves as investment
adviser to Schroder Global Growth Portfolio. Schroder also serves as an
investment subadviser of Performa Global Growth Fund.
Forum Financial Services, Inc. ("Forum"), a registered broker-dealer, serves as
the Trust's manager and as distributor of the Trust's shares. Forum
Administrative Services, Limited Liability Company ("FAS") serves as each Fund's
administrator.
As used in this SAI, the following terms shall have the meanings listed:
"Advisers" or "Investment Advisers" shall mean, collectively, Norwest,
Schroder and the Subadvisers.
"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.
"Core Trust" shall mean Core Trust (Delaware), an open-end, management
investment company registered under the 1940 Act.
"Core Trust Board" shall mean the Board of Trustees of Core Trust.
"Custodian" shall mean Norwest acting in its capacity as custodian of a
Fund.
"Bond" includes fixed income investments issued with a final maturity of 3
years or more, or that on their face are described as "bonds."
"FAS" shall mean Forum Administrative Services, Limited Liability Company,
the Trust's administrator.
"Fitch" shall mean Fitch Investors Service, L.P.
"Forum" shall mean Forum Financial Services, Inc., a registered
broker-dealer and distributor of the Trust's shares.
"Forum Accounting" shall mean Forum Accounting Services, Limited Liability
Company, the Trust's fund accountant.
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"Fund" shall mean each of the four separate portfolios of the Trust to
which this Statement of Additional Information relates as identified on the
cover page.
"Galliard" shall mean Galliard Capital Management, Inc., the investment
subadviser to Performa Strategic Value Bond Fund/Strategic Value Bond
Portfolio.
"Moody's" shall mean Moody's Investors Service.
"Norwest" shall mean Norwest Investment Management, Inc., a subsidiary of
Norwest Bank Minnesota, N.A.
"Norwest Bank" shall mean Norwest Bank Minnesota, N.A., a subsidiary of
Norwest Corporation.
"NRSRO" shall mean a nationally recognized statistical rating organization.
"Performa Funds" shall mean the Funds set forth on the cover page of this
Statement of Additional Information.
"Portfolio" shall mean, Disciplined Growth Portfolio, Small Cap Value
Portfolio, Strategic Value Bond Portfolio and Schroder Global Growth
Portfolio, each a separate portfolio of Core Trust.
"Schroder" shall mean Schroder Capital Management Inc., the investment
adviser to Schroder Global Growth Portfolio.
"Schroder Core" shall mean Schroder Capital Funds, open-end, management
investment company registered under the 1940 Act.
"Schroder Core Board" shall mean the Board of Trustees of Schroder Capital
Funds.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's.
"Smith" shall mean Smith Asset Management Group, L.P.
"Stock Index Futures" shall mean futures contracts that relate to
broadly-based stock indices.
"Subadvisers or "Investment Subadvisers: shall mean, collectively, Galliard
Capital Management, Inc., Smith Asset Management Group, LP and Schroder
Capital Management Inc., as applicable.
"Transfer Agent" shall mean Norwest Bank acting in its capacity as transfer
and dividend disbursing agent of a Fund.
"Trust" shall mean Norwest Advantage Funds, an open-end, management
investment company registered under the 1940 Act.
"U.S. Government Securities" shall mean obligations issued or guaranteed by
the 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.
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1. INVESTMENT POLICIES
The following discussion is intended to supplement the discussion in the
Prospectus concerning each Portfolio's investments, investment techniques and
strategies and the risks associated therewith (as well as those of each Fund, to
the extent that the Fund is invested in a Portfolio). Certain of the Funds are
designed for investment of that portion of an investor's funds which can
appropriately bear the special risks associated with certain types of
investments (i.e., investment in smaller capitalization companies). No Fund or
Portfolio may make any investment or employ any investment technique or strategy
not referenced in the Prospectus which relates to that Fund or Portfolio. For
example, while the SAI describes "swap" transactions below, only those Funds or
Portfolios whose investment policies, as described in the Prospectus, allow the
Fund or Portfolio to invest in swap transactions may do so. The discussion
below refers to the investment policies of the Portfolios. Because the
investment policies of each Fund are substantially similar to the investment
policies of the Portfolio in which the Fund invests, the discussion below is
equally applicable to the Fund.
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, the Portfolio's Adviser 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.
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
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<PAGE>
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 Fund may invest in U.S.
Government Securities. Agencies, instrumentalities and government sponsored
enterprises that 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. Some 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 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 its Adviser 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 the Prospectus,
invest in obligations of financial institutions, including negotiable
certificates of deposit, bankers' acceptances and time deposits of U.S. banks
(including savings banks and savings associations), foreign branches of U.S.
banks, foreign banks and their non-U.S. branches (Eurodollars), U.S. branches
and agencies of foreign banks (Yankee dollars), and wholly-owned banking-related
subsidiaries of foreign banks. A 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 funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date. Time deposits are non-negotiable
deposits with a banking institution that earn a specified interest rate over a
given period. Certificates of deposit and fixed time deposits, which are
payable at the stated maturity date and bear a fixed rate of interest, generally
may be withdrawn on demand by a 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 a 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
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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 Adviser to be of
comparable quality. Certain 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
Strategic Value Bond Portfolio may invest in guaranteed investment contracts
("GICs") issued by insurance companies. Pursuant to such contracts, the
Portfolio makes cash contributions to a deposit fund of the insurance company's
general account. The insurance company then credits to the deposit fund on a
monthly basis guaranteed interest at a rate based on an index. The GICs provide
that this guaranteed interest will not be less than a certain minimum rate. The
insurance company may assess periodic charges against a GIC for expense and
service costs allocable to it, and these charges will be deducted from the value
of the deposit fund. The Portfolio will purchase a GIC only when the 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, the 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 the 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 a Portfolio to 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
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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.
MUNICIPAL SECURITIES
Municipal securities are issued by the States, territories and possessions of
the United States, their political subdivisions (such as cities, counties and
towns) and various authorities (such as public housing or redevelopment
authorities), instrumentalities, public corporations and special districts (such
as water, sewer or sanitary districts) of the States, territories and
possessions of the United States or their political subdivisions. In addition,
municipal securities include securities issued by or on behalf of public
authorities to finance various privately operated facilities, such as industrial
development bonds or other private activity bonds that are backed only by the
assets and revenues of the non-governmental user (such as manufacturing
enterprises, hospitals, colleges or other entities).
Municipal securities historically have not been subject to registration with the
SEC, although there have been proposals which would require registration in the
future.
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities are intended to fulfill the short-term capital needs of the
issuer and generally have maturities not exceeding one year. They include the
following: tax anticipation notes, revenue anticipation notes, bond
anticipation notes, construction loan notes and tax-exempt commercial paper. Tax
anticipation notes are issued to finance working capital needs of
municipalities, and are payable from various anticipated future seasonal tax
revenues, such as income, sales, use and business taxes. Revenue anticipation
notes are issued in expectation of receipt of other types of revenues, such as
federal revenues available under various federal revenue sharing programs. Bond
anticipation notes are issued to provide interim financing until long-term
financing can be arranged and are typically payable from proceeds of the
long-term bonds. Construction loan notes are sold to provide construction
financing. After successful completion and acceptance, many such projects
receive permanent financing through the Federal Housing Administration under the
Federal National Mortgage Association or the Government National Mortgage
Association. Tax-exempt commercial paper is a short-term obligation with a
stated maturity of 365 days or less. It is issued by agencies of state and
local governments to finance seasonal working capital needs or as short-term
financing in anticipation of longer term financing. Municipal notes also
include longer term issues that are remarketed to investors periodically,
usually at one year intervals or less.
MUNICIPAL BONDS. Municipal bonds meet longer term capital needs of a municipal
issuer and generally have maturities of more than one year when issued. General
obligation bonds are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. General obligation bonds are secured by the issuer's pledge of its
full faith and credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount. Revenue bonds in recent years have
come to include an increasingly wide variety of types of municipal obligations.
As with other kinds of municipal obligations, the issuers of revenue bonds may
consist of virtually any form of state or local governmental entity. Generally,
revenue bonds are secured by the revenues or net revenues derived from a
particular facility, class of facilities, or, in some cases, from the proceeds
of a special excise or other specific revenue source, but not from general tax
revenues. Revenue bonds are issued to finance a wide variety of capital
projects including electric, gas, water and sewer systems; highways, bridges,
and
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tunnels; port and airport facilities; colleges and universities; and
hospitals. Many of these bonds are additionally secured by a debt service
reserve fund which can be used to make a limited number of principal and
interest payments should the pledged revenues be insufficient. Various forms of
credit enhancement, such as a bank letter of credit or municipal bond insurance,
may also be employed in revenue bond issues. Revenue bonds issued by housing
authorities may be secured in a number of ways, including partially or fully
insured mortgages, rent subsidized and/or collateralized mortgages, and/or the
net revenues from housing or other public projects. Some authorities provide
further security in the form of a state's ability (without obligation) to make
up deficiencies in the debt service reserve fund. In recent years, revenue
bonds have been issued in large volumes for projects that are privately owned
and operated, as discussed below.
Municipal bonds are considered private activity bonds if they are issued to
raise money for privately owned or operated facilities used for such purposes as
production or manufacturing, housing, health care and other nonprofit or
charitable purposes. These bonds are also used to finance public facilities
such as airports, mass transit systems and ports. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
owner or user to meet its financial obligations and the pledge, if any, of real
and personal property as security for such payment.
While at one time the pertinent provisions of the Code permitted private
activity bonds to bear tax-exempt interest in connection with virtually any type
of commercial or industrial project (subject to various restrictions as to
authorized costs, size limitations, state per capita volume restrictions, and
other matters), the types of qualifying projects under the Code have become
increasingly limited, particularly since the enactment of the Tax Reform Act of
1986. Under current provisions of the Code, tax-exempt financing remains
available, under prescribed conditions, for certain privately owned and operated
facilities of organizations described in Section 501(c)(3) of the Code,
multi-family rental housing facilities, airports, docks and wharves, mass
commuting facilities and solid waste disposal projects, among others, and for
the tax-exempt refinancing of various kinds of other private commercial projects
originally financed with tax-exempt bonds. In future years, the types of
projects qualifying under the Code for tax-exempt financing could become
increasingly limited.
OTHER MUNICIPAL OBLIGATIONS. Other municipal obligations, incurred for a
variety of financing purposes, include municipal leases, which may take the form
of a lease or an installment purchase or conditional sale contract. Municipal
leases are entered into by state and local governments and authorities to
acquire a wide variety of equipment and facilities such as fire and sanitation
vehicles, telecommunications equipment and other capital assets. Municipal
leases frequently have special risks not normally associated with general
obligation or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the government issuer) have evolved as a means for governmental
issuers to acquire property and equipment without being required to meet the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations of many state constitutions and statutes are deemed to
be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis.
ALTERNATIVE MINIMUM TAX. Municipal securities are also categorized according
to: (1) whether the interest is or is not includable in the calculation of
alternative minimum taxes imposed on individuals and corporations; (2) whether
the costs of acquiring or carrying the bonds are or are not deductible in part
by banks and other financial institutions; and (3) 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: (1) the Portfolio's acquisition cost of the municipal securities
(excluding any accrued
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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 (2) 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
the opinion of the Adviser of the Portfolio, 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 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.
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. 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.
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Each Portfolio's 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: (1) as required to provide liquidity to a Portfolio; (2) to
maintain a high quality investment portfolio; or (3) upon a default under the
terms of the demand instrument. Banks and other financial institutions retain
portions of the interest paid on such variable rate obligations as their fees
for servicing such instruments and the issuance of related letters of credit,
guarantees and repurchase commitments.
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 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 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: (1) "senior-subordinated securities" (multiple class securities with
one or more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class); (2) creation
of "spread accounts" or "reserve funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets are held in
reserve against future losses); and (3) "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceeds
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that covered by
credit enhancement protection could adversely affect the return on an investment
in such a security.
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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.
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 Fund 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
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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 may enter into interest rate protection transactions to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The 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 assets 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 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
Each Portfolio may: (1) purchase or sell (write) put and call options on
securities to enhance the Portfolio's performance and (2) 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: (1) the possible failure of
such instruments as hedging techniques in cases where the price movements of the
securities underlying the options or futures do not follow the price movements
of the portfolio securities subject to the hedge; (2) potentially unlimited loss
associated with futures transactions and the possible lack of a liquid secondary
market for closing out a futures position; and (3) possible losses resulting
from the inability of the Portfolio's Investment Adviser to correctly predict
the direction of stock prices, interest rates and other economic factors. To
the extent a 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 that any hedging or option income strategy will
succeed in achieving its intended result.
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Except as otherwise noted in the Prospectus or herein, the Portfolios will not
use leverage in their 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: (1) an offsetting ("covered") position or (2) cash, U.S.
Government Securities or other liquid securities (or other assets as may be
permitted by the SEC) with a value sufficient at all times to cover its
potential obligations. When required by applicable regulatory guidelines, the
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 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 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 the adviser
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 of a Portfolio 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.
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Certain Portfolios may purchase and write put and call options on fixed income
or equity security indices 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
Fund holds in its portfolio or which it intends to purchase. Options on foreign
currencies are affected by the factors discussed in "Hedging and Option Income
Strategies -- Options Strategies" and "Foreign Currency Transactions" which
influence foreign exchange sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring
in the interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, a 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
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.
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(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 fund management purposes, to facilitate trading, to reduce transactions
costs, or to seek higher investment returns when a futures contract is priced
more attractively than securities in the index.
A 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.
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.
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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 the Adviser's opinion, the market for such options
has developed sufficiently that the risks in connection with options on futures
transactions are not greater than the risks in connection with futures
transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls which could be substantial in
the event of adverse price movements.
(6) A 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. Pursuant to 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.
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FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve the currencies of foreign
countries. In addition, a Portfolio may temporarily hold funds in bank deposits
in foreign currencies pending the completion of certain investment programs.
Accordingly, the value of the assets of a 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 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
Fund to incur losses on these contracts and transaction costs. The Advisers do
not intend to enter into forward contracts on a regular or continuous basis and
will not do so if, as a result, a 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 Fund
engages in an offsetting transaction, it will realize a gain or a loss to the
extent that there has been a change in forward contract prices. Additionally,
although forward contracts may tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain which might result should the value of such currency
increase.
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
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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
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
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
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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 a 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 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 investing
Portfolio may be compensated with the higher yield, contingent on how well the
underlying common stock does. Portfolio s 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.
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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: (1) the high yield bond market; (2) the value of
high yield/high risk securities; and (3) the ability of the securities' issuers
to service their principal and interest payment obligations, to meet their
projected business goals or to obtain additional financing. In addition, the
market for high yield/high risk securities, which is concentrated in relatively
few market makers, may not be as liquid as the market for investment grade
securities. Under adverse market or economic conditions, the market for high
yield/high risk securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, a
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 under supervision of the Board of Trustees, 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, the Adviser may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Portfolio experiences unexpected net
redemptions, the Adviser may be forced to sell the Portfolio's higher rated
securities, resulting in a decline in the overall credit quality of the
Portfolio's portfolio and increasing the exposure of the Portfolio to the risks
of high yield/high risk securities.
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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 a 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 and, in the case of the Portfolios, the Core Trust Board and Schroder
Core 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 applicable board. The
Investment Advisers take into account a number of factors in reaching liquidity
decisions, including but not limited to: (1) the frequency of trades and
quotations for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential buyers; (3) the willingness
of dealers to undertake to make a market in the security; and (4) the nature of
the marketplace trades, including the time needed to dispose of the security,
the method of soliciting offers and the mechanics of the transfer. The
investment advisers monitor the liquidity of the securities held by each
Portfolio and report periodically on such decisions to the Board, Core Trust
Board or Schroder Core Board, as applicable.
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 a 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, a 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.
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, Core Trust Board and Schroder Core
Board, the investment advisers may determine that such securities are not
illiquid securities. These guidelines take into account trading activity in the
securities and the 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
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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 Core Trust or Schroder
Core Board. No Portfolio will lend its portfolio securities to any officer,
director, employee or affiliate of the Portfolio or the Portfolio's Adviser.
The terms of the Portfolio's loans must meet certain tests under the Internal
Revenue Code and permit the Portfolio to reacquire loaned securities on five
business days' notice or in time to vote on any important matter.
BORROWING AND TRANSACTIONS INVOLVING LEVERAGE
Each 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 funds
(or on the assets that were retained rather than sold to meet the needs for
which funds were borrowed). Under adverse market conditions, a 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 Funds may borrow for other than temporary or
emergency purposes, lend their securities, enter reverse repurchase agreements,
and purchase securities on a when issued or forward commitment basis. In
addition, certain 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. A Portfolio uses these investment techniques only when the
Portfolio's Adviser believes that the leveraging and the returns available to
the Portfolio from investing the cash will provide shareholders a potentially
higher return.
Leverage exists when a Portfolio achieves the right to a return on a capital
base that exceeds the amount 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
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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 Core Trust or Schroder Core custodian will setup and maintain in a
segregated account for each Portfolio 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.
When a Portfolio invests in a derivative instrument, it may be required to
segregate cash and other assets with its custodian. Segregating assets could
diminish the Portfolio's return due to the opportunity losses of foregoing other
potential investments with the segregated assets.
MARGIN AND SHORT SALES
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 in certain cases be made to defer, for Federal income
tax purposes, recognition of gain or loss on the sale of securities "in the box"
until the short position is closed out. Under recently enacted legislation, if
a Portfolio has unrealized gain with respect to a long position and enters into
a short sale against-the-box, the Portfolio generally will be deemed to have
sold the long position for tax purposes and thus will recognize gain.
Prohibitions on entering short sales other than against the box does not
restrict a 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 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.
Generally, a reverse repurchase agreement enables a 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
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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 and delayed delivery transactions 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 advised by the investment adviser might be
required to complete when-issued or delayed delivery transactions at prices
inferior to the current market values. When-issued securities and delayed
delivery transactions may be sold prior to the settlement date, but a Portfolio
enters into when-issued and delayed delivery transaction 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 delayed delivery 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 Fund 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 delayed delivery purchase.
REPURCHASE AGREEMENTS
The Portfolio s 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. Each Adviser will,
with respect to the Funds it advises, 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, a 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.
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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 the Prospectus,
assumes a temporary defensive position, it may invest without limit in: (1)
short-term U.S. Government Securities; (2) certificates of deposit, bankers'
acceptances and interest-bearing savings deposits of commercial banks doing
business in the United States that have, at the time of investment, total assets
in excess of one billion dollars and that are insured by the Federal Deposit
Insurance Corporation; (3) commercial paper of prime quality rated Prime-2 or
higher by Moody's or A-2 or higher by S&P or, if not rated, determined by the
investment adviser to be of comparable quality; (4) repurchase agreements
covering any of the securities in which the Portfolio may invest directly; and
(5) money market mutual funds.
2. INVESTMENT LIMITATIONS
For purposes of all fundamental and nonfundamental investment policies of each
Fund: (1) the term 1940 Act includes the rules thereunder, SEC interpretations
and any exemptive order upon which the Fund may rely; and (2) the term Code
includes the rules thereunder, IRS interpretations and any private letter ruling
or similar authority upon which the Fund may rely.
Each Fund has adopted the investment policies listed in this section which are
nonfundamental policies unless otherwise noted. Except for its investment
objective, which is fundamental, the Fund has not adopted any fundamental
policies except as required by the 1940 Act or other applicable law.
Except as required by the 1940 Act or the Code, if any percentage restriction on
investment or utilization of assets is adhered to at the time an investment is
made, a later change in percentage resulting from a change in the market values
of a Fund's assets or purchases and redemptions of shares will not be considered
a violation of the limitation.
A fundamental policy cannot be changed without the affirmative vote of the
lesser of: (1) more than 50% of the outstanding shares of the Fund or (2)
67% of the shares of the Fund present or represented at a shareholders
meeting at which the holders of more than 50% of the outstanding shares of
the Fund are present or represented.
FUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are fundamental
policies of the Fund. Each Portfolio has the same fundamental investment
policies as the Fund that invests in the Portfolio.
1. DIVERSIFICATION
No Fund 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: (1) more than 5% of the Fund's total assets
would be invested in the securities of a single issuer; or (2) the
Fund would own more than 10% of the outstanding voting securities of
any single issuer.
2. INDUSTRY CONCENTRATION
No Fund may purchase a security if, as a result, more than 25% of the
Fund's total assets would be invested in securities of issuers
conducting their principal business activities in the same industry.
For purposes of this limitation, there is no limit on: (1)
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 (2) investment in
issuers domiciled in a single jurisdiction.
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Notwithstanding anything to the contrary, to the extent permitted by
the 1940 Act, each Fund may invest in one or more investment
companies; provided that, except to the extent the Fund invests in
other investment companies pursuant to Section 12(d)(1)(A) of the 1940
Act, the Fund treats the assets of the investment companies in which
it invests as its own for purposes of this policy.
For purposes of this policy: (1) "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; (2) financial service companies are classified according to
the end users of their services (for example, automobile finance, bank
finance and diversified finance); and (3) utility companies are
classified according to their services (for example, gas, gas
transmission, electric and gas, electric and telephone).
3. BORROWING
No Fund may borrow money if, as a result, outstanding borrowings would
exceed an amount equal to 33 1/3% of the Fund's total assets.
4. REAL ESTATE
No Fund may purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent the Fund from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business).
5. LENDING
No Fund 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 Fund may lend a security if, as a result, the amount of loaned
securities would exceed an amount equal to 33 1/3% of the Fund's total
assets.
6. COMMODITIES
No Fund may purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities).
7. UNDERWRITING
No Fund 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 Fund's assets, the Fund may be
deemed to be an underwriter.
8. SENIOR SECURITIES
No Fund may issue senior securities except to the extent permitted by
the 1940 Act.
NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following investment limitations which are not
fundamental policies of the Fund. A nonfundamental policy will not be used to
defeat a fundamental limitation of a Portfolio. Reference to a Fund includes
reference to its corresponding Portfolio, if applicable, which has the same
fundamental policies as the
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Fund. The policies of a Fund may be changed by the Board, or in the case of its
corresponding Portfolio, the Core Trust or Schroder Core Board, if applicable.
1. BORROWING
For purposes of the limitation on borrowing, the following are not
treated as borrowings to the extent they are fully collateralized:
(1) the delayed delivery of purchased securities (such as the
purchase of when-issued securities); (2) reverse repurchase
agreements; (3) dollar-roll transactions; and (5) the lending of
securities ("leverage transactions"). (See Fundamental Limitation
No. 3 "Borrowing" above.
2. LIQUIDITY
No Fund may invest more than 15% of its net assets in illiquid assets
such as: (1) securities that cannot be disposed of within seven days
at their then-current value; (2) repurchase agreements not entitling
the holder to payment of principal within seven days; and (3)
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 Fund may treat
certain restricted securities as liquid pursuant to guidelines adopted
by the Board.
3. EXERCISING CONTROL OF ISSUERS
No Fund may make investments for the purpose of exercising control of
an issuer. Investments by a Fund 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. OTHER INVESTMENT COMPANIES
No Fund may invest in securities of another investment company, except
to the extent permitted by the 1940 Act.
5. SHORT SALES AND PURCHASING ON MARGIN
No Fund 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.
No Fund may purchase securities on margin, except that a Fund may use
short-term credit for the clearance of the Fund's transactions, and
provided that initial and variation margin payments in connection with
futures contracts and options on futures contracts shall not
constitute purchasing securities on margin.
6. OPTIONS, WARRANTS AND FUTURES CONTRACTS
No Fund may invest in futures or options contracts regulated by the
CFTC for: (1) bona fide hedging purposes within the meaning of the
rules of the CFTC and (2) for other purposes if, as a result, no more
than 5% of the Fund's net assets would be invested in initial margin
and premiums (excluding amounts "in-the-money") required to establish
the contracts.
No Fund: (1) will hedge more than [50%] of its total assets by
selling futures contracts, buying put options, and writing call
options (so called "short positions"); (2) will buy futures contracts
or write put options whose underlying value exceeds [25%] of the
Fund's total assets; and (3) will buy call options with a value
exceeding [5%] of the Fund's total assets.
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3. PERFORMANCE AND ADVERTISING DATA
Quotations of performance may from time to time be used in advertisements, sales
literature, shareholder reports or other communications to shareholders or
prospective investors. All performance information supplied by the Funds is
historical and is not intended to indicate future returns. Each Fund's yield
and total return fluctuate in response to market conditions and other factors.
The value of a Fund's shares when redeemed may be more or less than their
original cost.
In performance advertising, the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Inc., Lipper Analytical Services, Inc., or other companies which track the
investment performance of investment companies ("Fund Tracking Companies"). The
Funds may also compare any of their performance information with the performance
of recognized stock, bond and other indices, including but not limited to the
Municipal Bond Buyers Indices, the Salomon Brothers Bond Index, Shearson Lehman
Bond Index, the Standard & Poor's 500 Composite Stock Price Index, Russell 2000
Index, Morgan Stanley - Europe, Australian and Far East Index, Lehman Brothers
Intermediate Government Index, Lehman Brothers Intermediate Government/Corporate
Index, the Dow Jones Industrial Average, U.S. Treasury bonds, bills or notes and
changes in the Consumer Price Index as published by the U.S. Department of
Commerce. The Funds may refer to general market performances over past time
periods such as those published by Ibbotson Associates (for instance, its
"Stocks, Bonds, Bills and Inflation Yearbook"). In addition, the Funds may also
refer in such materials to mutual fund performance rankings and other data
published by Fund Tracking Companies. Performance advertising may also refer to
discussions of the Funds' and comparative mutual fund data and ratings reported
in independent periodicals, such as newspapers and financial magazines.
SEC YIELD CALCULATIONS
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that each Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return on
the Fund's shares. Norwest, Processing Organizations and others may charge
their customers, various retirement plans or other shareholders that invest in a
Fund fees in connection with an investment in a Fund, which will have the effect
of reducing the Fund's net yield to those shareholders. The yields of a Fund
are not fixed or guaranteed, and an investment in a Fund is not insured or
guaranteed. Accordingly, yield information may not necessarily be used to
compare shares of a Fund with investment alternatives which, like money market
instruments or bank accounts, may provide a fixed rate of interest. Also, it
may not be appropriate to compare a Fund's yield information directly to similar
information regarding investment alternatives which are insured or guaranteed.
FIXED INCOME AND EQUITY FUNDS
Standardized yields for the Funds used in advertising are computed by dividing a
Fund's dividends and interest earned (in accordance with specific standardized
rules) for a given 30 days or one month period, net of expenses, by the average
number of shares entitled to receive distributions during the period, dividing
this figure by the Fund's net asset value per share at the end of the period and
annualizing the result (assuming compounding of income in accordance with
specific standardized rules) in order to arrive at an annual percentage rate.
In general, interest income is reduced with respect to municipal securities
purchased at a premium over their par value by subtracting a portion of the
premium from income on a daily basis. In general, interest income is increased
with respect to municipal securities purchased at original issue at a discount
by adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from these calculations.
Income calculated for the purpose of determining each Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
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TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Fund's return, including the effect of reinvesting dividends
and capital gain distributions, any change in the Fund's net asset value per
share over the period and maximum sales charge, if any, applicable to purchases
of the Fund's shares. Average annual total returns are calculated, through the
use of a formula prescribed by the SEC, by determining the growth or decline in
value of a hypothetical historical investment in a Fund over a stated period,
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady
annual rate that would equal 100% growth on a compounded basis in ten years. The
average annual total return is computed separately for each class of shares of a
Fund. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
(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 Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Period total return
is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return
The other definitions are the same as in average annual total return
above
CORE-GATEWAY PERFORMANCE
When a Fund such as Performa Disciplined Growth Fund (a "Gateway fund") invests
all of its investable assets in another investment company such as Disciplined
Growth Portfolio (a "Core fund"), special performance calculation rules apply.
For instance, if a Gateway fund invests in a Core fund that has a performance
history prior to the investment by the Gateway fund, the Gateway fund will
assume the performance history of the Core fund. That history will not be
restated to reflect the internal expense ratio of the Gateway fund. However, a
Core fund's performance will be restated to reflect any sales charges that are
applicable to the Gateway fund's shares.
OTHER ADVERTISEMENT MATTERS
The Funds may advertise other forms of performance. For example, the Funds may
quote unaveraged or cumulative total returns reflecting the change in the value
of an investment over a stated period. Average annual and
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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. Any performance information may be
presented numerically or in a table, graph or similar illustration.
The Funds may also include various information in their advertisements
including, but not limited to: (1) portfolio holdings and portfolio allocation
as of certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quartile or
daily); (4) information relating to inflation and its effects on the dollar; for
example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) descriptions of the Funds' portfolio
managers and the portfolio management staff of the Investment Advisers or
summaries of the views of the portfolio managers with respect to the financial
markets; (7) the results of a hypothetical investment in a Fund over a given
number of years, including the amount that the investment would be at the end of
the period; (8) the effects of earning Federally and, if applicable, state
tax-exempt income from a Fund or investing in a tax-deferred account, such as an
individual retirement account or Section 401(k) pension plan; and (9) the net
asset value, net assets or number of shareholders of a Fund as of one or more
dates.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the
$90 interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of any Fund's performance.
The Funds may advertise information regarding the effects of automatic
investment and systematic withdrawal plans, including the principal of dollar
cost averaging. In a dollar cost averaging program, an investor invests a fixed
dollar amount in a Fund at period intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
29
<PAGE>
Systematic Share Shares
Period Investment Price Purchased
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
Total Invested $600 Average Price $15.17 Total Shares 41.81
In connection with its advertisements each Fund may provide "shareholders
letters" which serve to provide shareholders or investors an introduction into
the Fund's, the Trust's or any of the Trust's service provider's policies or
business practices. For instance, advertisements may provide for a message from
Norwest or its parent corporation that Norwest has 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 services firm.
4. MANAGEMENT
The 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 August 31, 1997 are set forth below. Each
Trustee who is an "interested person" (as defined by the 1940 Act) of the Trust
is indicated by an asterisk.
John Y. Keffer, Chairman and President,* Age 54.
President and Owner, Forum Financial Services, Inc. (a registered
broker-dealer), Forum Administrative Services, Limited Liability Company (a
mutual fund administrator), Forum Financial Corp. (a registered transfer
agent), and other companies within the Forum Financial Group of companies.
Mr. Keffer is a Director, Trustee and/or officer of various registered
investment companies for which Forum Financial Services, Inc. or its
affiliates serves as manager, administrator or distributor. His address is
Two Portland Square, Portland, Maine 04101.
Robert C. Brown, Trustee,* Age 65.
Director, Federal Farm Credit Banks Funding Corporation and Farm Credit
System Financial Assistance Corporation since February 1993. Prior
thereto, he was Manager of Capital Markets Group, Norwest Corporation (a
multi-bank holding company and parent of Norwest), until 1991. His address
is 1431 Landings Place, Sarasota, Florida 34231.
Donald H. Burkhardt, Trustee, Age 70.
Principal of The Burkhardt Law Firm. His address is 777 South Steele
Street, Denver, Colorado 80209.
30
<PAGE>
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. [(A BROKER-DEALER SUBSIDIARY
OF NORWEST BANK)] 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 Fund Accounting, Forum Financial Services, Inc., with which he
has been associated since April 1997. Prior thereto, from February 1994 -
April 1996 Mr. Campbell was Vice President-Business Unit Head, Domestic
Fund Services at State Street Fund Services, Inc. (a manager of investment
company). Prior thereto, from September 1992 - January 1994 Mr. Campbell
was Assistant Vice President-Fund Manager at State Street Bank & Trust
Company, (a financial services provider) and prior thereto First Line
Manager. His address is Two Portland Square, Portland, Maine 04101.
David I. Goldstein, Vice President and Secretary, Age 35.
Managing Director and Counsel, Forum Financial Services, Inc., with which
he has been associated since 1991. Mr. Goldstein is also an officer of
various registered investment companies for which Forum Financial Services,
Inc. serves as manager, administrator and/or distributor. His address is
Two Portland Square, Portland, Maine 04101.
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<PAGE>
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 55.
Counsel, Forum Financial Services, Inc., with which she has been associated
since 1996. Prior thereto, Ms. Wooledge was an associate at the law firm
of Morrison & Forester since September 1994, prior thereto Ms. Wooledge was
an associate corporate counsel at Franklin Resources, Inc. since September
1993, and prior thereto associate at the law firm of Drinker Biddle &
Reath, Washington, D.C. Ms. Wooledge is also an officer of various
registered investment companies for which Forum Financial Services, Inc.
serves as manager, administrator and/or distributor. Her address is Two
Portland Square, Portland, Maine 04101.
Don L. Evans, Assistant Secretary, Age 49.
Assistant Counsel, Forum Financial Services, Inc., with which he has been
associated since 1995. Prior thereto, Mr. Evans was associated with the
law firm of Bisk & Lutz and prior thereto was associated with the law firm
of Weiner & Strother. Mr. Evans is also an officer of various registered
investment companies for which Forum Financial Services, Inc. serves as
manager, administrator and/or distributor. His address is Two Portland
Square, Portland, Maine.
Renee A. Walker, Assistant Secretary, Age 27.
Fund Administrator, Forum Financial Services, Inc., with which she has been
associated since 1994. Prior thereto, Ms. Walker was an administrator at
Longwood Partners (the manager of a hedge fund partnership) for a year.
After graduating from college, from 1991 to 1993 Ms. Walker was a sales
representative assistant at PaineWebber Incorporated (a broker-dealer).
Her address is Two Portland Square, Portland, Maine 04101.
COMPENSATION OF TRUSTEES AND OFFICERS OF THE TRUST
Each Trustee of the Trust is paid a retainer fee in the total amount of $5,000,
payable quarterly, for the Trustee's service to the Trust and to Norwest Select
Funds, a separate registered open-end management investment company for which
each Trustee serves as trustee. In addition, each Trustee is paid $3,000 for
each regular Board meeting attended (whether in person or by electronic
communication) and is paid $1,000 for each Committee meeting attended on a date
when a Board meeting is not held. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. Mr. Keffer
received no compensation for his services as Trustee for the past year or
compensation or reimbursement for his associated expenses. In addition, no
officer of the Trust is compensated by the Trust.
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<PAGE>
Mr. Burkhardt, Chairman of the Trust's and Norwest Select Funds' audit
committees, receives additional compensation of $6,000 from the Trust and
Norwest Select Funds allocated pro rata between the Trust and Norwest Select
Funds based upon relative net assets, for his services as Chairman. Each
Trustee was elected by shareholders on April 30, 1997.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Select Funds, combined. Norwest Select Funds
have a December 31 fiscal year end. Information is presented for the twelve
month period ended May 31, 1997, which was the fiscal year end of all of the
Trust's portfolios.
Total Compensation From
Total Compensation the Trust and Norwest
from the Trust Select Funds
-------------- ------------
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 Funds 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 Funds was $[27].
As of September 30, 1997, the Trustees and officers of the Trust in the
aggregate owned less than 1% of the outstanding shares of the Funds.
TRUSTEES AND OFFICERS OF CORE TRUST
The Trustees and officers of Core Trust and their principal occupations during
the past five years and ages are set forth below. Each Trustee who is an
"interested person" (as defined by the 1940 Act) of Core Trust is indicated by
an asterisk. Messrs. Keffer, Goldstein, Sheehan, and Misses. Clark and Walker,
officers of Core Trust, all currently serve as officers of the Trust.
Accordingly, for background information pertaining to these officers, (see
"Management - Trustees and Officers - Trustees and Officers of the Trust.")
John Y. Keffer,* Chairman and President.
Costas Azariadis, Trustee, Age 53.
Professor of Economics, University of California, Los Angeles, since July
1992. Prior thereto, Dr. Azariadis was Professor of Economics at the
University of Pennsylvania. His address is Department of Economics,
University of California, Los Angeles, 405 Hilgard Avenue, Los Angeles,
California 90024.
James C. Cheng, Trustee, Age 54.
President of Technology Marketing Associates (a marketing consulting
company) since September 1991. Prior thereto, Mr. Cheng was President and
Chief Executive Officer of Network Dynamics, Incorporated (a software
development company). His address is 27 Temple Street, Belmont,
Massachusetts 02178.
J. Michael Parish, Trustee, Age 53.
Partner at the law firm of Reid & Priest. Prior thereto he was a partner
at the law firm of Winthrop Stimson Putnam & Roberts. His address is 40
Wall Street, New York, New York 10005.
33
<PAGE>
Richard C. Butt, Treasurer
CPA, Managing Director, Operations, Forum Financial Corp. since 1996.
Prior thereto, Mr. Butt was a consultant in the financial services
division of KPMG Peat Marwick LLP ("KPMG"). Prior to his employment at
KPMG, Mr. Butt was President of 440 Financial Distributors, Inc., the
distribution subsidiary of 440 Financial Group, and Senior Vice President
of the parent company. Prior thereto, he was a Vice President at
Fidelity Services Company. Mr. Butt is responsible for fund accounting and
transfer agency at Forum. His address is Two Portland Square, Portland,
Maine 04101.
Sara M. Clark, Vice President, Assistant Secretary and Assistant Treasurer.
David I. Goldstein, Secretary.
Thomas G. Sheehan, Assistant Secretary.
Renee A. Walker, Assistant Secretary
The Trustees and officers of Schroder Core and their principal occupations
during the past five years and ages are set forth below. Each Trustee who is an
"interested person" (as defined by the 1940 Act) of Core Trust is indicated by
an asterisk. Messrs. _________________, and Misses. ______________, officers of
Schroder Core, all currently serve as officers of the Trust. Accordingly, for
background information pertaining to these officers, (see "Management - Trustees
and Officers - Trustees and Officers of the Trust.")
PETER E. GUERNSEY, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
JOHN I. HOWELL, Greenwich, Connecticut - Trustee of the Trust - Private
Consultant since February 1987; Honorary Director, American International
Group, Inc.; Director, American International Life Assurance Company of New
York.
CLARENCE F. MICHALIS, 44 East 64th Street, New York, New York - Trustee of
the Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman
(Honorary) and Trustee of the Trust - retired since March, 1988; prior
thereto, consultant to Schroder since February 1, 1984.
MARK J. SMITH(b), 33 Gutter Lane, London, England - President and Trustee
of the Trust - First Vice President of Schroder since April 1990; Director
and Vice President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a Vice-President
of the Trust - Director of Schroder and Schroder Capital Management
International Ltd. since 1994; First Vice President of Schroder since July,
1992; prior thereto, employed by various affiliates of Schroders plc in
various positions in the investment research and portfolio management areas
since 1986.
MARGARET H. DOUGLAS-HAMILTON(b)(c), 787 Seventh Avenue, New York, New York
- Vice President of the Trust - Secretary of SCM since July 1995; Secretary
of Schroder Advisers since April 1990; First Vice President and General
Counsel of Schroders Incorporated(b) since May 1987; prior thereto, partner
of Sullivan & Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a Vice
President of the Trust; Deputy Chairman of Schroder since October 1995;
Director and Executive Vice President of Schroder Capital Management
International Ltd. since 1989.
34
<PAGE>
CATHERINE S. WOOLEDGE, 2 Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. Prior thereto, associate at Morrison & Foerster from
September 1994 through October 1996; associate corporate counsel at
Franklin Resources, Inc. September 1993 through September 1994; and prior
thereto, associate at Drinker Biddle & Reath, Washington, D.C.
BARBARA GOTTLIEB(c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995
prior thereto held various positions with SWIS affiliates.
ROBERT JACKOWITZ(b) (c), 787 Seventh Avenue, New York, New York - Treasurer
of the Trust - Vice President of SCM since September 1995; Treasurer of SCM
and Schroder Advisers since July 1995; Vice President of Schroder since
June 1995; and Assistant Treasurer of Schroders Incorporated since January
1993.
JOHN Y. KEFFER, 2 Portland Square, Portland, Maine - Vice President of the
Trust. President of Forum Financial Services, Inc., the Fund's
sub-administrator, and Forum Financial Corp., the Fund's transfer and
dividend disbursing agent and fund accountant.
JANE P. LUCAS, (c) 787 Seventh Avenue, New York, New York - Vice President
of the Trust - Director and Senior Vice President Schroder; Director of SCM
since September 1995; Assistant Director Schroder Investment Management
Ltd. since June 1991.
GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Associate, Schroder.
CATHERINE A. MAZZA, 787 Seventh Avenue, New York, New York - Vice President
of the Trust - President of Schroder Advisors since 1997; First Vice
President of Schroder and SCM since 1996; prior thereto, held various
marketing positions at Alliance Capital, an investment adviser, since July
1985.
THOMAS G. SHEEHAN, 2 Portland Square, Portland, Maine - Assistant Treasurer
and Assistant Secretary of the Trust - Counsel, Forum Financial Services,
Inc. since 1993; prior thereto, Special Counsel, U.S. Securities and
Exchange Commission, Division of Investment Management, Washington, D.C.
FARIBA TALEBI, 787 Seventh Avenue, New York, New York - Vice President of
the Trust - First Vice President of Schroder since April 1993, employed in
various positions in the investment research and portfolio management areas
since 1987.
JOHN A. TROIANO(b), 787 Seventh Avenue, New York, New York - Vice President
of the Trust - Managing Director and Senior Vice President of Schroder
since October 1995; Director of Schroder Advisors since October 1992;
Director of Schroder since 1991; prior thereto, employed by various
affiliates of Schroder in various positions in the investment research and
portfolio management areas since 1981.
IRA L. UNSCHULD, 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Vice President of Schroder since April, 1993 and an Associate
from July, 1990 to April, 1993; prior to July, 1990, employed by various
financial institutions as a securities or financial analyst.
ALEXANDRA POE, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust - Vice President of Schroder since August 1996; Fund
Counsel and Senior Vice President of Schroder Advisors since August 1996;
prior thereto an investment management attorney with Gordon Altman Butowsky
Weitzen Shalov & Wein since July 1994; prior thereto counsel and Vice
President of Citibank, N.A. since 1989.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust.
35
<PAGE>
INVESTMENT ADVISORY SERVICES
GENERAL
The advisory fee for each Fund is based on the average daily net assets of the
Fund at the annual rate disclosed in the Fund's prospectus. To the extent that
a Fund invests in one or more core portfolios, the advisory fee paid by the Fund
will be with respect to the core portfolio for advisory services rendered at the
portfolio level.
All investment advisory fees are accrued daily and paid monthly. Each
investment adviser, in its sole discretion, may waive or continue to waive all
or any portion of its investment advisory fees.
In addition to receiving its advisory fee from the Funds, each investment
adviser or its affiliates may act and be compensated as investment manager for
its clients with respect to assets which are invested in a Fund. In some
instances an investment adviser or its affiliates may elect to credit against
any investment management, custodial or other fee received from, or rebate to, a
client who is also a shareholder in a Fund an amount equal to all or a portion
of the fees received by the investment adviser or any of its affiliates from a
Fund with respect to the client's assets invested in the Fund.
NORWEST INVESTMENT MANAGEMENT
Norwest furnishes at its expense all services, facilities and personnel
necessary in connection with managing each Portfolio's investments and effecting
portfolio transactions for each Portfolio (except Schroder Global Growth
Portfolio). Under an Investment Advisory Agreement between Norwest and Core
Trust on behalf of the Portfolios (other than Schroder Global Growth Portfolio),
Norwest may delegate its responsibilities to any investment subadviser approved
by the Board and, as applicable, interestholders, with respect to all or a
portion of the assets of the Portfolio. The Investment Advisory Agreement will
continue in effect only if such continuance is specifically approved at least
annually by the Core Trust 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: (1) by the Board or by a vote of a
majority of the outstanding voting securities of the Fund to the Adviser or (2)
by the Adviser on 60 days' written notice to the Core Trust. Each Investment
Advisory Agreement shall terminate upon assignment. The Investment Advisory
Agreements also provide that, with respect to the Portfolios (other than
Schroder Global Growth Portfolio), 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 also currently acts as investment adviser to each Performa Fund. The
investment advisory agreements between Norwest and the Trust on behalf of the
Funds are identical to the Investment Advisory Agreements between Core Trust and
Norwest on behalf of the Portfolios (other than Schroder Global Growth
Portfolio), except for the fees payable thereunder (no fee is payable to the
extent that a Fund is invested in an investment company) and certain immaterial
matters.
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL, INC.
Pursuant to a separate Advisory Agreement between Schroder Core and Schroder,
Schroder acts as investment adviser to Schroder Global Growth Portfolio and is
required to furnish at its expenses all services, facilities and personnel
necessary in connection with managing the Portfolio's investments and effecting
portfolio transactions for the Portfolio. The Advisory Agreement between
Schroder Core and Schroder will continue in effect only if such continuance is
specifically approved at least annually: (1) by the Schroder Core Board or by
vote of a majority of
36
<PAGE>
the outstanding voting interests of the Portfolio, and , in either case, (2) by
a majority of Schroder Core's trustees who are not parties to the Advisory
Agreement or interested persons of any such party (other than as trustees of the
Schroder Core), at a meeting called for the purpose of voting on the Advisory
Agreement; provided further, however, that if the Advisory Agreement or the
continuation of the Agreement is not approved as to the Portfolio, the adviser
may continue to render to the Portfolio the services described herein in the
manner and to the extent permitted by the 1940 Act and the rules and regulations
thereunder.
On behalf of Performa Global Growth Fund, Norwest and the Trust have entered
into an Investment Subadvisory Agreement with Schroder. The Investment
Subadvisory Agreement would become operative and Schroder would directly manage
the Fund's assets if the Board determined it was no longer in the best interest
of the Fund to invest in another registered investment company. In that event,
pursuant to the Investment Subadvisory Agreement, Schroder would make investment
decisions directly for the Fund and continuously review, supervise and
administer the Fund's investment program with respect to that portion, if any,
of the Fund's portfolio that Norwest had so delegated. Schroder would be
required to furnish at its own expense all services, facilities and personnel
necessary in connection with managing of the Fund's investments and effecting
portfolio transactions for the Funds (to the extent of Norwest's delegation).
The Investment Subadvisory Agreement will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Board or by
vote of a majority of the outstanding voting securities of the Fund, and, in
either case, (2) by a majority of the Trust's trustees who are not parties to
the Investment Subadvisory Agreement or interested persons of any such party
(other than as trustees of the Trust), at a meeting called for the purpose of
voting on the Investment Subadvisory Agreements. If the Investment Subadvisory
Agreement is not approved as to the Fund, the Subadviser may continue to render
to the Fund the services described herein in the manner and to the extent
permitted by the 1940 Act and the rules and regulations thereunder.
The Investment Subadvisory Agreement is terminable without penalty with respect
to the Fund on 60 days' written notice when authorized either by majority vote
of the Fund's shareholders or by the Board, or by Schroder on 60 days' written
notice to the Trust, and will automatically terminate in the event of its
assignment. The Investment Subadvisory Agreement also provides that, with
respect to the Fund, neither Schroder nor its personnel shall be liable for any
mistake of judgment or in any event whatsoever, except for lack of good faith,
provided that nothing shall be deemed to protect Schroder against liability by
reason of willful misfeasance, bad faith or gross negligence in the performance
of Schroder's duties or by reason of reckless disregard of its obligations and
duties under the Investment Subadvisory Agreement. The Investment Subadvisory
Agreement provides that Schroder may render services to others.
No payments currently are made under the Fund's Investment Subadvisory Agreement
with Schroder because the Fund currently invests all its investable assets in
the Portfolio.
SUB-ADVISERS
Norwest pays a fee to each of the Subadvisers. These fees do not increase the
fees paid by shareholders of the Funds. The amount of the fees paid by Norwest
to each Subadviser may vary from time to time as a result of periodic
negotiations with the Subadviser regarding such matters as the nature and extent
of the services (other than investment selection and order placement activities)
provided by the Subadviser to the Portfolio, the increased cost and complexity
of providing services to the Portfolio, the investment record of the Subadviser
in managing the Portfolio and the nature and magnitude of the expenses incurred
by the Subadviser in managing the Portfolio's assets and by the Adviser in
overseeing and administering management of the Portfolio. However, the
contractual fee payable to each Portfolio by Norwest for investment advisory
services will not vary as a result of those negotiations.
Norwest performs internal due diligence on each Subadviser and monitors each
Subadviser's performance using its proprietary investment adviser selection and
monitoring process. Norwest will be responsible for communicating performance
targets and evaluations to Subadvisers, supervising each Subadviser's compliance
with the Portfolio's fundamental investment objectives and policies, authorizing
Subadvisers to engage in certain investment techniques for the Portfolio, and
recommending to the Board of Trustees whether sub-advisory agreements should be
renewed,
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modified or terminated. Norwest also may from time to time recommend that the
Core Trust Board replace one or more Subadvisers or appoint additional
Subadvisers, depending on the Norwest's assessment of what combination of
Subadvisers it believes will optimize each Portfolio's chances of achieving its
investment objectives.
GALLIARD
To assist Norwest in carrying out its obligations under the Investment Advisory
Agreement with Performa Strategic Value Bond Fund, Norwest has entered into an
Investment Subadvisory Agreement with Galliard, located at 800 LaSalle Avenue,
Suite 2060, Minneapolis, Minnesota 55479. Galliard is registered with the SEC
as an investment adviser and is an investment advisory subsidiary of Norwest
Bank. Pursuant to the Investment Subadvisory Agreement, Galliard makes
investment decisions for the Portfolio and continuously reviews, supervises and
administers the Portfolio's investment program with respect to that portion, if
any, of the Fund's portfolio that Norwest believes should be invested using
Galliard as a subadviser. Currently, Galliard manages the entire portfolio of
the Portfolio and has done so since the Fund's inception. Galliard is required
to furnish at its own expense all services, facilities and personnel necessary
in connection with managing of the Portfolio's investments and effecting
portfolio transactions for each Fund (to the extent of Norwest's delegation).
Norwest supervises the performance of Galliard including its adherence to the
Portfolio's investment objectives and policies and pays Galliard a fee for its
investment management services. As of June 1, 1997, for its services under the
Sub-Investment Advisory Agreement, Norwest pays Galliard a fee based on each
Fund's average daily net assets at an annual rate of _____%
The Investment Subadvisory Agreement will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Core Board
or by vote of a majority of the outstanding voting securities of the Portfolio,
and, in either case; (2) by a majority of the Core Trust's trustees who are not
parties to the Investment Subadvisory Agreement or interested persons of any
such party (other than as trustees of the Core Trust), at a meeting called for
the purpose of voting on the Investment Subadvisory Agreements; provided
further, however, that if the Investment Subadvisory Agreement or the
continuation of the Agreement is not approved, the Subadviser may continue to
render to the Portfolio the services described in the Investment Subadvisory
Agreement in the manner and to the extent permitted by the 1940 Act and the
rules and regulations thereunder.
The Investment Subadvisory Agreement is terminable without penalty with respect
to the Portfolio on 60 days' written notice when authorized either by majority
vote of the Fund's shareholders or by the Core Board, or by Galliard on 60 days
written notice to Core Trust, and will automatically terminate in the event of
its assignment. The Investment Subadvisory Agreement also provides that, with
respect to each Portfolio, neither Galliard nor its personnel shall be liable
for any mistake of judgment or in any event whatsoever, except for lack of good
faith, provided that nothing shall be deemed to protect Galliard against
liability by reason of willful misfeasance, bad faith or gross negligence in the
performance of Galliard's duties or by reason of reckless disregard of its
obligations and duties under the Investment Subadvisory Agreement. The
Investment Subadvisory Agreements provides that Galliard may render services to
others.
Galliard also currently serves as investment subadviser to Performa Strategic
Value Bond Fund pursuant to an investment subadvisory agreement between Galliard
and Norwest. The investment subadvisory agreement with respect to the Fund is
identical to the Investment Subadvisory Agreement, except for the fees payable
thereunder (no fee is payable under the investment subadvisory agreement to the
extent that the Fund is invested in an investment company) and certain
immaterial matters.
SMITH ASSET MANAGEMENT GROUP, L.P.
To assist Norwest in carrying out its obligations under the Investment Advisory
Agreement with Performa Disciplined Growth Fund and Performa Small Cap Value
Fund, Norwest has entered into an Investment Subadvisory Agreement with Smith,
located at 500 Crescent Court, Suite 250, Dallas, Texas. Smith is registered
with the SEC as an investment adviser and is an investment advisory subsidiary
of Norwest Bank. Pursuant to the Sub-Investment Advisory Agreement, Smith makes
investment decisions for each of the Portfolios and continuously reviews,
supervises and administers each Portfolios' investment program with respect to
that portion, if any, of the
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Fund's portfolio that Norwest believes should be invested using Smith as a
subadviser. Currently, Smith manages the entire investment portfolio of each
Portfolio and has done so since the Portfolios' inception. Norwest supervises
the performance of Smith including its adherence to the Portfolio's investment
objectives and policies and pays Smith a fee for its investment management
services. As of June 1, 1997, for its services under the Investment Subadvisory
Agreement, Norwest pays Smith a fee based on Disciplined Growth Portfolio's and
Small Cap Value Portfolio's average daily net assets at an annual rate of 0.35%
and 0.45%, respectively.
Under its Investment Subadvisory Agreement, Smith makes investment decisions for
each Portfolio and continuously reviews, supervises and administers each
Portfolios' investment program with respect to that portion, if any, of the
Portfolio's portfolio for which Norwest has delegated management responsibility.
Smith is required to furnish at its own expense all services, facilities and
personnel necessary in connection with managing of each Portfolio's investments
and effecting portfolio transactions for each Portfolio (to the extent of
Norwest's delegation).
The Investment Subadvisory Agreement will continue in effect with respect to a
Portfolio only if such continuance is specifically approved at least annually:
(1) by the Core Trust Board or by vote of a majority of the outstanding voting
securities of the Portfolios, and, in either case; (2) by a majority of the Core
Trust's trustees who are not parties to the Investment Subadvisory Agreement or
interested persons of any such party (other than as trustees of the Core Trust),
at a meeting called for the purpose of voting on the Investment Subadvisory
Agreements; provided further, however, that if the Investment Subadvisory
Agreement or the continuation of the Agreement is not approved, the Subadviser
may continue to render to each Portfolio the services described in the
Investment Subadvisory Agreement in the manner and to the extent permitted by
the Act and the rules and regulations thereunder.
The Investment Subadvisory Agreement is terminable without penalty with respect
to a Portfolio on 60 days' written notice when authorized either by majority
vote of the Portfolio's shareholders or by the Core Trust Board, or by Smith on
60 days written notice to the Core Trust, and will automatically terminate in
the event of its assignment. The Investment Subadvisory Agreement also provides
that, with respect to each Portfolio, neither Smith nor its personnel shall be
liable for any mistake of judgment or in any event whatsoever, except for lack
of good faith, provided that nothing shall be deemed to protect Smith against
liability by reason of willful misfeasance, bad faith or gross negligence in the
performance of Smith's duties or by reason of reckless disregard of its
obligations and duties under the Investment Subadvisory Agreement. The
Investment Subadvisory Agreements provides that Smith may render services to
others. Smith also currently serves as Investment Subadviser to the Funds
pursuant to an investment advisory agreement between Smith and Norwest. The
investment subadvisory agreement with respect to the Funds is identical to the
Investment Subadvisory Agreement, except for the fees payable thereunder (no fee
is payable under the investment subadvisory agreement with respect to a Fund to
the extent that the Fund is invested in an investment company) and certain
immaterial matters.
MANAGEMENT AND ADMINISTRATIVE SERVICES
MANAGER AND ADMINISTRATOR
Forum manages all aspects of the Trust's operations with respect to each Fund
except those which are the responsibility of Forum, Norwest, any other
Investment Adviser or Investment Subadviser to a Fund, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Fund, Forum has entered into a Management
Agreement that will continue in effect only if such continuance is specifically
approved at least annually by the Board or by the shareholders and, in either
case, by a majority of the Trustees who are not interested persons of any party
to the Management Agreement.
On behalf of the Trust and with respect to each Fund, Forum: (1) oversees (a)
the preparation and maintenance by the Advisers and the Trust's administrator,
custodian, transfer agent, dividend disbursing agent and fund accountant (or if
appropriate, prepares and maintains) in such form, for such periods and in such
locations as may be required by applicable law, of all documents and records
relating to the operation of the Trust required to be prepared or maintained by
the Trust or its agents pursuant to applicable law; (b) the reconciliation of
account information and
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balances among the Advisers and the Trust's custodian, transfer agent, dividend
disbursing agent and fund accountant; (c) the transmission of purchase and
redemption orders for Shares; (d) the notification of the Advisers of available
funds for investment; and (e) the performance of fund accounting, including the
calculation of the net asset value per Share; (2) oversees the Trust's receipt
of the services of persons competent to perform such supervisory, administrative
and clerical functions as are necessary to provide effective operation of the
Trust; (3) oversees the performance of administrative and professional services
rendered to the Trust by others, including its administrator, custodian,
transfer agent, dividend disbursing agent and fund accountant, as well as
accounting, auditing, legal and other services performed for the Trust; (4)
provides the Trust with adequate general office space and facilities and
provides, at the Trust's request and expense, persons suitable to the Board to
serve as officers of the Trust; (5) oversees the preparation and the printing of
the periodic updating of the Trust's registration statement, Prospectuses and
SAIs, the Trust's tax returns, and reports to its shareholders, the SEC and
state and other securities administrators; (6) oversees the preparation of proxy
and information statements and any other communications to shareholders; (7)
with the cooperation of the Trust's counsel, Investment Advisers and other
relevant parties, oversees the preparation and dissemination of materials for
meetings of the Board; (8) oversees the preparation, filing and maintenance of
the Trust's governing documents, including the Trust Instrument, Bylaws and
minutes of meetings of Trustees, Board committees and shareholders; (9) oversees
registration and sale of Fund shares, to ensure that such shares are properly
and duly registered with the SEC and applicable state and other securities
commissions; (10) oversees the calculation of performance data for dissemination
to information services covering the investment company industry, sales
literature of the Trust and other appropriate purposes; (11) oversees the
determination of the amount of and supervises the declaration of dividends and
other distributions to shareholders as necessary to, among other things,
maintain the qualification of each Fund as a regulated investment company under
the Internal Revenue Code of 1986, as amended, and oversees the preparation and
distribution to appropriate parties of notices announcing the declaration of
dividends and other distributions to shareholders; (12) reviews and negotiates
on behalf of the Trust normal course of business contracts and agreements; (13)
maintains and reviews periodically the Trust's fidelity bond and errors and
omission insurance coverage; and (14) advises the Trust and the Board on matters
concerning the Trust and its affairs.
The Management Agreement terminates automatically if assigned and may be
terminated without penalty with respect to any Fund by vote of that Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Management Agreement also provides that neither Forum nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the administration or management of the Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of Forum's
or their duties or by reason of reckless disregard of their obligations and
duties under the Management Agreement.
FAS manages all aspects of the Trust's operations with respect to each Fund
except those which are the responsibility of Forum, Norwest, or any other
Investment Adviser or Investment Subadviser to a Fund, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Fund, FAS has entered into an Administrative
Agreement that will continue in effect only if such continuance is specifically
approved at least annually by the Board or by the shareholders and, in either
case, by a majority of the Trustees who are not interested persons of any party
to the Management Agreement.
On behalf of the Trust and with respect to each Fund, FAS: (1) provides the
Trust with, or arranges for the provision of, the services of persons competent
to perform such supervisory, administrative and clerical functions as are
necessary to provide effective operation of the Trust; (2) assists in the
preparation and the printing and the periodic updating of the Trust's
registration statement, Prospectuses and SAIs, the Trust's tax returns, and
reports to its shareholders, the SEC and state and other securities
administrators; (3) assists in the preparation of proxy and information
statements and any other communications to shareholders; (4) assists the
Advisers in monitoring Fund holdings for compliance with Prospectus and SAI
investment restrictions and assists in preparation of periodic compliance
reports; (5) with the cooperation of the Trust's counsel, the Investment
Advisers, the officers of the Trust and other relevant parties, is responsible
for the preparation and dissemination of materials for meetings of the Board;
(6) is responsible for preparing, filing and maintaining the Trust's governing
documents, including the Trust Instrument, Bylaws and minutes of meetings of
Trustees, Board committees and shareholders; (7) is responsible for maintaining
the Trust's existence and good standing under state law; (8) monitors sales of
shares and ensures that such shares are properly and duly registered with the
SEC and applicable state and other securities commissions; (9)
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is responsible for the calculation of performance data for dissemination to
information services covering the investment company industry, sales literature
of the Trust and other appropriate purposes; and (10) is responsible for the
determination of the amount of and supervises the declaration of dividends and
other distributions to shareholders as necessary to, among other things,
maintain the qualification of each Fund as a regulated investment company under
the Code, as amended, and prepares and distributes to appropriate parties
notices announcing the declaration of dividends and other distributions to
shareholders.
The Administrative Agreement terminates automatically if assigned and may be
terminated without penalty with respect to any Fund by vote of that Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Administrative Agreement also provides that neither FAS nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the administration or management of the Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of FAS's
or their duties or by reason of reckless disregard of their obligations and
duties under the Administrative Agreement.
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, as applicable. 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.
PORTFOLIOS OF CORE TRUST
Forum manages all aspects of Core Trust's operations with respect to the
Portfolios except those which are the responsibility of Norwest or Schroder.
With respect to each Portfolio, Forum has entered into a management agreement
(the "Core Trust Management Agreement") that will continue in effect only if
such continuance is specifically approved at least annually by the Core Trust
Board or by the interestholders and, in either case, by a majority of the
trustees who are not interested persons of any party to the Core Trust
Management Agreement. Under the Core Trust Management Agreement, Forum performs
similar services for each Portfolio as it and FAS perform under the Management
and Administration Agreements, to the extent the services are applicable to the
Portfolios and their structure.
NORWEST ADMINISTRATIVE SERVICES
Under an Administrative Servicing Agreement between the Trust and Norwest with
respect to certain funds of the Trust, Norwest performs ministerial,
administrative and oversight functions for the Funds and undertakes to reimburse
certain excess expenses of the Funds. Among other things, Norwest gathers
performance and other data from Schroder as the adviser of certain Portfolios
and from other sources, formats the data and prepares reports to the Funds'
shareholders and the Trustees. Norwest also ensures that Schroder is aware of
pending net purchases or redemptions of each Fund's shares and other matters
that may affect Schroder's performance of its duties. Lastly, Norwest has
agreed to reimburse each Fund for any amounts by which its operating expenses
(exclusive of interest, taxes and brokerage fees, organization expenses and, if
applicable, distribution expenses, all to the extent permitted by applicable
state law or regulation) exceed the limits prescribed by any state in which the
Funds' shares are qualified for sale. [No fees will be paid to Norwest under the
Administrative Servicing Agreement unless the assets of each Fund that is
subject to the agreement are invested in a portfolio of another registered
investment company.] The Administrative Servicing Agreement will continue in
effect only if such continuance is specifically approved at least annually by
the Board or by the shareholders and, in either case, by a majority of the
Trustees who are not parties to the Management Agreement or interested persons
of any such party.
The Administrative Servicing Agreement provides that neither Norwest nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the performance of its or their duties to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of
Forum's or their duties or by reason of reckless disregard of its or their
obligations and duties under the agreement.
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DISTRIBUTION
Forum also acts as distributor of the shares of the Fund. Forum acts as the
agent of the Trust in connection with the offering of shares of the Funds on a
"best efforts" basis pursuant to a Distribution Services Agreement.
Under the Distribution Services Agreement, the Trust has agreed to indemnify,
defend and hold Forum, and any person who controls Forum within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which Forum or any such controlling person may incur,
under the 1933 Act, or under common law or otherwise, arising out of or based
upon any alleged untrue statement of a material fact contained in the Trust's
Registration Statement or a Fund's Prospectus or Statement of Additional
Information in effect from time to time under the 1933 Act or arising out of or
based upon any alleged omission to state a material fact required to be stated
in any one thereof or necessary to make the statements in any one thereof not
misleading. Forum is not, however, protected against any liability to the Trust
or its shareholders to which Forum would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of Forum's reckless disregard of its obligations and duties
under the Distribution Services Agreement.
With respect to each Fund, the Distribution Services Agreement will continue in
effect only if such continuance is specifically approved at least annually by
the Board or by the shareholders and, in either case, by a majority of the
Trustees who are not parties to the Distribution Services Agreement or
interested persons of any such party.
The Distribution Services Agreement terminates automatically if assigned. With
respect to each Fund, the Distribution Services Agreement may be terminated at
any time without the payment of any penalty by the Board or by a vote of the
Fund's shareholders on 60 days' written notice to Forum; or by FAS on 60 days'
written notice to the Trust.
TRANSFER AGENT
Norwest Bank, Sixth Street and Marquette, Minneapolis, Minnesota 55479 acts as
Transfer Agent of the Trust pursuant to a Transfer Agency Agreement. The
Transfer Agency Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by a vote of the
shareholders of the Trust and in either case by a majority of the Trustees who
are not parties to the Transfer Agency Agreement or interested persons of any
such party, at a meeting called for the purpose of voting on the Transfer Agency
Agreement.
The responsibilities of the Transfer Agent include: (1) answering customer
inquiries regarding account status and history, the manner in which purchases
and redemptions of shares of the Fund may be effected and certain other matters
pertaining to the Fund; (2) assisting shareholders in initiating and changing
account designations and addresses; (3) providing necessary personnel and
facilities to establish and maintain shareholder accounts and records; (4)
assisting in processing purchase and redemption transactions and receiving wired
funds; (5) transmitting and receiving funds in connection with customer orders
to purchase or redeem shares; (6) verifying shareholder signatures in connection
with changes in the registration of shareholder accounts; (7) furnishing
periodic statements and confirmations of purchases and redemptions; (8)
transmitting proxy statements, annual reports, prospectuses and other
communications from the Trust to its shareholders; (9) receiving, tabulating and
transmitting to the Trust proxies executed by shareholders with respect to
meetings of shareholders of the Trust; and (10) providing such other related
services as the Trust or a shareholder may request.
For its services, the Transfer Agent receives a fee computed daily and paid
monthly from the Trust, with respect to each Fund, at an annual rate of 0.25% of
the Fund's average daily net assets attributable to each class of the Fund.
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CUSTODIAN
Pursuant to a Custodian Agreement, Norwest Bank, Sixth Street and Marquette,
Minneapolis, Minnesota 55479 serves as each Fund's and 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 Fund investments. The fee is
computed and paid monthly, based on the average daily net assets of the Fund,
the number of portfolio transactions of the Fund and the number of securities in
the Fund's portfolio.
Pursuant to rules adopted under the 1940 Act, a Fund may maintain its foreign
securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board upon consideration of a number of factors, including (but not
limited to) the reliability and financial stability of the institution; the
ability of the institution to perform capably custodial services for the Fund;
the reputation of the institution in its national market; the political and
economic stability of the country in which the institution is located; and
possible risks of potential nationalization or expropriation of Fund assets.
The Custodian employs qualified foreign subcustodians to provide custody of the
Funds foreign assets in accordance with applicable regulations.
No Fund will pay custodian fees to the extent the Fund invests in shares of
another registered investment company. Each Fund so invested incurs, however,
its proportionate share of the custodial fees of the Portfolio in which it
invests.
PORTFOLIO ACCOUNTING
Forum Accounting, an affiliate of Forum, performs portfolio accounting services
for each Fund pursuant to a Fund Accounting Agreement with the Trust. The Fund
Accounting Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by a vote of the
shareholders of the Trust and in either case by a majority of the Trustees who
are not parties to the Fund Accounting Agreement or interested persons of any
such party, at a meeting called for the purpose of voting on the Fund Accounting
Agreement.
[Under the Fund Accounting Agreement, Forum Accounting prepares and maintains
books and records of each Fund on behalf of the Trust that are required to be
maintained under the 1940 Act, calculates the net asset value per share of each
Fund (and class thereof) and dividends and capital gain distributions and
prepares periodic reports to shareholders and the SEC. For its services, Forum
Accounting receives from the Trust with respect to each Fund a fee of $3,000 per
month plus for each additional class of the Fund above one $1,000 per month. In
addition, Forum Accounting is paid additional surcharges for each of the
following: (1) Funds with asset levels exceeding $100 million - $500/month,
Funds with asset levels exceeding $250 million - $1000/month, Funds with asset
levels exceeding $500 million - $1,500/month, Funds with asset levels exceeding
$1,000 million - $2,000/month; (2) Funds requiring international custody -
$1,000/month; (3) Funds with more than 30 international positions -
$1,000/month; (4) Tax free money market Funds - $1,000/month; (5) Funds with
more than 25% of net assets invested in asset backed securities - $1,000/month,
Funds with more than 50% of net assets invested in asset backed securities -
$2,000/month; (6) Funds with more than 100 security positions - $1,000/month;
and (7) Funds with a monthly portfolio turnover rate of 10% or greater -
$1,000/month.]
[Forum Accounting receives from the Trust with respect to each Gateway Fund a
standard gateway fee of $1,000 per month plus for each additional class of the
Fund above one - $1,000 per month. Forum Accounting also receives a fee of
$2,000 per month for each Gateway Fund operating pursuant to Section 12(d)(1)(E)
of the 1940 Act that invests in more than one security. In addition to the
standard gateway fees, Forum Accounting is entitled to receive from the Trust
with respect to each Gateway Fund operating pursuant to Section 12(d)(1)(H) of
the 1940 Act additional surcharges as described above if the Fund invests in
securities other than investment companies (calculated as if the securities were
the Fund's only assets)]
Surcharges are determined based upon the total assets, security positions or
other factors as of the end of the prior month and on the portfolio turnover
rate for the prior month. The rates set forth above shall remain fixed through
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December 31, 1997. On January 1, 1998, and on each successive January 1, the
rates may be adjusted automatically by Forum without action of the Trust to
reflect changes in the Consumer Price Index for the preceding calendar year, as
published by the U.S. Department of Labor, Bureau of Labor Statistics. Forum
shall notify the Trust each year of the new rates, if applicable.
Forum Accounting is required to use its best judgment and efforts in rendering
fund accounting services and is not liable to the Trust for any action or
inaction in the absence of bad faith, willful misconduct or gross negligence.
Forum Accounting is not responsible or liable for any failure or delay in
performance of its fund accounting obligations arising out of or caused,
directly or indirectly, by circumstances beyond its reasonable control and the
Trust has agreed to indemnify and hold harmless Forum Accounting, its employees,
agents, officers and directors against and from any and all claims, demands,
actions, suits, judgments, liabilities, losses, damages, costs, charges, counsel
fees and other expenses of every nature and character arising out of or in any
way related to Forum Accounting's actions taken or failures to act with respect
to a Fund or based, if applicable, upon information, instructions or requests
with respect to a Fund given or made to Forum Accounting by an officer of the
Trust duly authorized. This indemnification does not apply to Forum
Accounting's actions taken or failures to act in cases of Forum Accounting's own
bad faith, willful misconduct or gross negligence.
Forum Accounting performs similar services for the Portfolios and, in addition,
acts as the Portfolios' transfer agent.
EXPENSES
Subject to the obligations of Norwest to reimburse the Trust for its excess
expenses as described above, the Trust has, under its Investment Advisory
Agreements, confirmed its obligation to pay all its other expenses, including:
(1) interest charges, taxes, brokerage fees and commissions; (2) certain
insurance premiums; (3) fees, interest charges and expenses of the Trust's
custodian, transfer agent and dividend disbursing agent; (4) telecommunications
expenses; (5) auditing, legal and compliance expenses; (6) costs of the Trust's
formation and maintenance of its existence; (7) costs of preparing and printing
the Trust's prospectuses, statements of additional information, account
application forms and shareholder reports and delivering them to existing and
prospective shareholders; (8) costs of maintaining books of original entry for
portfolio and fund accounting and other required books and accounts and of
calculating the net asset value of shares of the Trust; (9) costs of
reproduction, stationery and supplies; (10) compensation of the Trust's
trustees, officers and employees and costs of other personnel performing
services for the Trust who are not officers of Norwest, Forum or affiliated
persons of Norwest or Forum; (11) costs of corporate meetings; (12) registration
fees and related expenses for registration with the SEC and the securities
regulatory authorities of other countries in which the Trust's shares are sold;
(13) expenses incurred pursuant to state securities laws; 14) fees and
out-of-pocket expenses payable to Forum Financial Services, Inc. under any
distribution, management or similar agreement; (15) and all other fees and
expenses paid by the Trust pursuant to any distribution or shareholder service
plan adopted pursuant to Rule 12b-1 under the Act.
5. PORTFOLIO TRANSACTIONS
The following discussion of portfolio transactions, while referring generally to
the Funds, relates equally to the Portfolios.
Purchases and sales of portfolio securities for Funds that invest in
fixed-income investments 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 Funds generally will effect purchases and sales of equity
securities through brokers who charge commissions except in the over-the-counter
markets. Purchases of debt and equity securities from underwriters of the
securities include a disclosed fixed commission or concession paid by the issuer
to the underwriter, and purchases from dealers serving as market makers include
the spread between the bid and asked price. In the case of debt securities and
equity securities traded in the foreign and domestic over-the-counter markets,
there is generally no stated commission, but the price usually includes an
undisclosed commission or markup. Allocations of transactions to brokers and
dealers and the frequency of transactions are determined by the Advisers in
their best judgment and in a manner deemed to
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be in the best interest of shareholders of each Fund rather than by any formula.
The primary consideration is prompt execution of orders in an effective manner
and at the most favorable price available to the Fund. In transactions on stock
exchanges in the United States, commissions are negotiated, whereas on foreign
stock exchanges commissions are generally fixed. Where transactions are
executed in the over-the-counter market, each Fund will seek to deal with the
primary market makers; but when necessary in order to obtain best execution,
they will utilize the services of others. In all cases the Funds will attempt
to negotiate best execution.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, each of the Board, and Core Trust Board has authorized the
Investment Advisers to employ their respective affiliates to effect securities
transactions of the Funds or the Portfolios, provided certain other conditions
are satisfied. Payment of brokerage commissions to an affiliate of an
Investment Adviser for effecting such transactions is subject to Section 17(e)
of the 1940 Act, which requires, among other things, that commissions for
transactions on securities exchanges paid by a registered investment company to
a broker which is an affiliated person of such investment company, or an
affiliated person of another person so affiliated, not exceed the usual and
customary brokers' commissions for such transactions. It is the Fund's policy
that commissions paid to Schroder Securities Limited, Norwest Investment
Services, Inc. ("NISI") and other affiliates of an Investment Adviser will, in
the judgment of the Investment Adviser responsible for making portfolio
decisions and selecting brokers, be: (1) at least as favorable as commissions
contemporaneously charged by the affiliate on comparable transactions for its
most favored unaffiliated customers and (2) at least as favorable as those which
would be charged on comparable transactions by other qualified brokers having
comparable execution capability. The Board, including a majority of the
disinterested Trustees, has adopted procedures to ensure that commissions paid
to affiliates of an Adviser by the Funds satisfy the foregoing standards. The
Core Trust has adopted similar policies with respect to the Portfolios.
No Fund has an understanding or arrangement to direct any specific portion of
its brokerage to an affiliate of an Investment Adviser, and will not direct
brokerage to an affiliate of an Investment Adviser in recognition of research
services. The practice of placing orders with NISI is consistent with each
Fund's objective of obtaining best execution and is not dependent on the fact
that NISI is an affiliate of Norwest.
From time to time, a Fund may purchase securities of a broker or dealer through
which it regularly engages in securities transactions.
A Fund or Portfolio 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, the Investment
Adviser of the Fund or Portfolio takes into account factors such as size of the
order, difficulty of execution, efficiency of the executing broker's facilities
(including the services described below) and any risk assumed by the executing
broker. The Investment Advisers may also take into account payments made by
brokers effecting transactions for a Fund or Portfolio: (1) to the Fund or
Portfolio or (2) to other persons on behalf of the Fund or Portfolio for
services provided to the Fund or Portfolio for which it would be obligated to
pay.
In addition, the Investment Advisers may give consideration to research services
furnished by brokers to the Advisers for their use and may cause the Funds and
Portfolios to pay these brokers a higher amount of commission than may be
charged by other brokers. Such research and analysis is of the types described
in Section 28(e)(3) of the Securities Exchange Act of 1934, as amended, and is
designed to augment the Investment Adviser's own internal research and
investment strategy capabilities. Such research and analysis may be used by the
Investment Advisers in connection with services to clients other than the Funds
and Portfolios, and not all such services may be used by the Investment Adviser
in connection with the Funds. An Investment Adviser's fees are not reduced by
reason of the Investment Adviser's receipt of the research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the obligation to seek the most
favorable price and execution available and such other policies as the Boards
may determine, an Adviser may consider sales of shares of a Fund as a factor in
the selection of broker-dealers to execute portfolio transactions for the Fund.
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Investment decisions for the Funds (and for the Portfolios) will be made
independently from those for any other account or investment company that is or
may in the future become managed by the Investment Advisers or their affiliates.
Investment decisions are the product of many factors, including basic
suitability for the particular client involved. Thus, a particular security may
be bought or sold for certain clients even though it could have been bought or
sold for other clients at the same time. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling the
security. In some instances, one client may sell a particular security to
another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which, in the respective
Investment Adviser's opinion, is equitable to each and in accordance with the
amount being purchased or sold by each. There may be circumstances when
purchases or sales of a portfolio security for one client could have an adverse
effect on another client that has a position in that security. In addition,
when purchases or sales of the same security for a Fund and other client
accounts managed by the Investment Advisers occur contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales.
Certain Funds may acquire securities issued by their "regular brokers and
dealers" or the parents of those brokers and dealers. Regular brokers and
dealers means the 10 brokers or dealers that: (1) received the greatest amount
of brokerage commissions during the Fund's last fiscal year, (2) engaged in the
largest amount of principal transactions for portfolio transactions of the Fund
during the Fund's last fiscal year; or (3) sold the largest amount of the Fund's
shares during the Fund's last fiscal year.
PORTFOLIO TURNOVER. A high rate of portfolio turnover involves corresponding
greater expenses than a lower rate, which expenses must be borne by a Fund and
its shareholders. High portfolio turnover also may result in the realization of
substantial net short-term capital gains. In order to continue for Federal tax
purposes, less than 30% of the annual gross income of the Fund must be desired
from the sale of securities held by the Fund for less than three months. (See
"Taxation.")
6. ADDITIONAL PURCHASE, REDEMPTION AND EXCHANGE INFORMATION
GENERAL
Shares of all Funds 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 may purchase, with the proceeds from a redemption of all
or part of their shares, Shares of the other Funds.
REDEMPTIONS
In addition to the situations described in the Prospectus with respect to the
redemptions of shares, the Trust may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to a Fund's shares as provided in the Prospectus from time to time.
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Proceeds of redemptions normally are paid in cash. However, payments may be
made wholly or partially in portfolio securities if the Board determines that
payment in cash would be detrimental to the best interests of the Fund. The
Funds 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 Fund.
If redemption proceeds are paid in investment securities, such securities will
be valued as set forth in the Prospectus and a redeeming shareholder would
normally incur brokerage expenses if he or she were to convert the securities to
cash.
7. TAXATION
Each Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Code. Such qualification does not, of
course, involve governmental supervision of management or investment practices
or policies. Investors should consult their own counsel for a complete
understanding of the requirements each Fund must meet to qualify for such
treatment, and of the application of state and local tax laws to his or her
particular situation.
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: (1) 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; (2) 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); (3) losses
recognized with respect to certain straddle positions which are part of a mixed
straddle and which are non-section 1256 positions be treated as 60% long-term
and 40% short-term capital loss; (4) losses recognized with respect to certain
straddle positions which would otherwise constitute short-term capital losses be
treated as long-term capital losses; and (5) the deduction of interest and
carrying charges attributable to certain straddle positions may be deferred.
Various elections are available to a 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.
For federal income tax purposes, gains and losses attributable to fluctuations
in exchange rates which occur between the time a Portfolio accrues interest or
other receivables or accrues expenses or other liabilities denominated in a
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foreign currency and the time the Portfolio actually collects such receivables
or pays such liabilities are treated as ordinary income or ordinary loss.
Similarly, gains or losses from the disposition of foreign currencies, from the
disposition of debt securities denominated in a foreign currency, or from the
disposition of a forward contract denominated in a foreign currency which are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the asset and the date of disposition also are treated as
ordinary gain or loss.
A 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.
If Performa Global Growth Fund is eligible to do so, the Fund intends to file an
election with the Internal Revenue Service to pass through to its shareholders
its share of the foreign taxes paid by the Global Growth Portfolio. Pursuant to
this election, a shareholder will be required to: (1) include in gross income
(in addition to taxable dividends actually received) his pro rata share of
foreign taxes considered to have been paid by the Fund; (2) treat his pro rata
share of such foreign taxes as having been paid by him; and (3) either deduct
such pro rata share of foreign taxes in computing his taxable income or treat
such foreign taxes as a credit against federal income taxes. No deduction for
foreign taxes may be claimed by an individual shareholder who does not itemize
deductions. In addition, certain shareholders may be subject to rules which
limit or reduce their ability to fully deduct, or claim a credit for, their pro
rata share of the foreign taxes considered to have been paid by the Fund. Under
recently enacted legislation, a shareholder's foreign tax credit with respect to
a dividend received from the Fund will be disallowed unless the shareholder
holds shares in the Fund at least 16 days during the 30-day period beginning 15
days before the date on which the shareholder becomes entitled to receive the
dividend.
8. ADDITIONAL INFORMATION ABOUT THE TRUST AND THE SHAREHOLDERS
OF THE FUNDS
COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, One Battery
Park Plaza, New York, NY 10004.
KPMG Peat Marwick LLP, 99 High Street, Boston, MA 02110, independent auditors,
serve as the independent auditors for the Trust.
GENERAL INFORMATION
The Trust is divided into thirty-nine separate series representing shares of the
Funds. The Trust received an order from the SEC permitting the issuance and
sale of separate classes of shares representing interests in each of the Trust's
existing funds; however, the Trust currently issues and operates the various
Funds, and separate classes of shares under the provisions of 1940 Act.
The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states. As a
result, to the extent that the Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject the Trust shareholders to liability. To guard against
this risk, the Trust Instrument of the Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which: (1) a court refuses
to apply Delaware law; (2) no
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contractual limitation of liability is in effect; and (3) the Trust itself is
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the Board believes that the risk
of personal liability to a Trust shareholder is extremely remote.
In order to adopt the name Norwest Funds, the Trust agreed in each Investment
Advisory Agreement with Norwest that if Norwest ceases to act as investment
adviser to the Trust or any Fund whose name includes the word "Norwest," or if
Norwest requests in writing, the Trust shall take prompt action to change the
name of the Trust and any such Fund to a name that does not include the word
"Norwest." Norwest may from time to time make available without charge to the
Trust for the Trust's use any marks or symbols owned by Norwest, including marks
or symbols containing the word "Norwest" or any variation thereof, as Norwest
deems appropriate. Upon Norwest's request in writing, the Trust shall cease to
use any such mark or symbol at any time. The Trust has acknowledged that any
rights in or to the word "Norwest" and any such marks or symbols which exist or
may exist, and under any and all circumstances, shall continue to be, the sole
property of Norwest. Norwest may permit other parties, including other
investment companies, to use the word "Norwest" in their names without the
consent of the Trust. The Trust shall not use the word "Norwest" in conducting
any business other than that of an investment company registered under the Act
without the permission of Norwest.
SHAREHOLDINGS
As of September 30, 1997, due to its initial investment in each Fund, prior to
the public offering of each Fund, Forum may be deemed to control each Fund.
From time to time, these shareholders or other 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.
FINANCIAL STATEMENTS
The fiscal year end of the Funds is May 31. Financial statements for each
Fund'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 Fund.
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 - DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE ("MOODY'S")
Moody's rates corporate bond issues, including convertible debt issues, as
follows:
Bonds which are rated Aaa are judged by Moody's to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payment and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Those bonds in the Aa, A, Baa, Ba or B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
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STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated C typically are subordinated to senior debt which as assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
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FITCH INVESTORS SERVICE, L.P. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rated F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
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PREFERRED STOCK
MOODY'S INVESTORS SERVICE
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of
the issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
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An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
SHORT TERM MUNICIPAL LOANS
MOODY'S INVESTORS SERVICE. Moody's highest rating for short-term municipal
loans is MIG-1/VMIG-1. A rating of MIG-1/VMIG-1 denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broadbased access to the market for refinancing. Loans bearing
the MIG-2/VMIG-2 designation are of high quality. Margins of protection are
ample although not so large as in the MIG-1/VMIG-1 group. A rating of MIG
3/VMIG 3 denotes favorable quality. All security elements are accounted for but
there is lacking the undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for refinancing is likely
to be less well established. A rating of MIG 4/VMIG 4 denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
STANDARD & POOR'S. S&P's highest rating for short-term municipal loans is SP-1.
S&P states that short-term municipal securities bearing the SP-1 designation
have very strong or strong capacity to pay principal and interest. Those issues
rated SP-1 which are determined to possess overwhelming safety characteristics
will be given a plus (+) designation. Issues rated SP-2 have satisfactory
capacity to pay principal and interest. Issues rated SP-3 have speculative
capacity to pay principal and interest.
FITCH INVESTORS SERVICE, L.P. Fitch's short-term ratings apply to debt
obligations that are payable on demand or have original maturities of generally
up to three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.
Short-term issues rated F-1+ are regarded as having the strongest degree of
assurance for timely payment. Issues assigned a rating of F-1 reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
Issues assigned a rating of F-2 have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1.
OTHER MUNICIPAL SECURITIES AND COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Moody's two highest ratings for short-term debt, including commercial paper, are
Prime-1 and Prime-2. Both are judged investment grade, to indicate the relative
repayment ability of rated issuers.
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Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics: Leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A-1 and A-2. Issues assigned an
A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are delineated with the numbers 1, 2 and 3 to indicate
the relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues
with an A-2 designation is strong. However, the relative degree of safety is
not as high as for issues designated A-1. A-3 issues have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. Issues rated A-2 are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
FITCH INVESTORS SERVICE, L.P.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
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