NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
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CASH INVESTMENT FUND MINNESOTA INTERMEDIATE TAX-FREE FUND
READY CASH INVESTMENT FUND MINNESOTA TAX-FREE FUND
U. S. GOVERNMENT FUND MODERATE BALANCED FUND
TREASURY PLUS FUND GROWTH BALANCED FUND
TREASURY FUND AGGRESSIVE BALANCED-EQUITY FUND
MUNICIPAL MONEY MARKET FUND INDEX FUND
STABLE INCOME FUND INCOME EQUITY FUND
LIMITED TERM GOVERNMENT INCOME FUND VALUGROWTH SM STOCK FUND
INTERMEDIATE GOVERNMENT INCOME FUND DIVERSIFIED EQUITY FUND
DIVERSIFIED BOND FUND GROWTH EQUITY FUND
INCOME FUND LARGE COMPANY GROWTH FUND
TOTAL RETURN BOND FUND DIVERSIFIED SMALL CAP FUND
STRATEGIC INCOME FUND SMALL COMPANY STOCK FUND
LIMITED TERM TAX-FREE FUND SMALL CAP OPPORTUNITIES FUND
TAX-FREE INCOME FUND SMALL COMPANY GROWTH FUND
COLORADO TAX-FREE FUND INTERNATIONAL FUND
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NORWEST ADVANTAGE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING: DISTRIBUTION:
Norwest Bank Minnesota, N.A. Forum Financial Services, Inc.
Transfer Agent Manager and Distributor
733 Marquette Avenue Two Portland Square
Minneapolis, MN 55479-0040 Portland, Maine 04101
(612) 667-8833/(800) 338-1348 (207) 879-1900
Norwest Advantage Funds is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended.
This Statement of Additional Information supplements the Prospectuses dated
October 1, 1998, as may be amended from time to time, offering the following
classes of shares of the series of Norwest Advantage Funds: Cash Investment
Fund, Ready Cash Investment Fund (Public Entities Shares, Investor Shares and
Exchange Shares), U.S. Government Fund, Treasury Plus Fund, Treasury Fund,
Municipal Money Market Fund (Institutional Shares and Investor Shares), A
Shares, B Shares and I Shares of Stable Income Fund, I Shares of Limited Term
Government Income Fund, A Shares, B Shares, and I Shares of Intermediate
Government Income Fund, I Shares of Diversified Bond Fund, A Shares, B Shares
and I Shares of Income Fund and Total Return Bond Fund, I Shares of Strategic
Income Fund and Limited Term Tax-Free Fund, A Shares, B Shares and I Shares of
Tax-Free Income Fund and Colorado Tax-Free Fund, I Shares of Minnesota
Intermediate Tax-Free Fund, A Shares, B Shares and I Shares of Minnesota
Tax-Free Fund, I Shares of Moderate Balanced Fund, A Shares B Shares, C Shares
and I Shares of Growth Balanced Fund, I Shares of Aggressive Balanced Equity
Fund and Index Fund, A Shares, B Shares, C Shares and I Shares of Income Equity
Fund, A Shares, B Shares and I Shares of ValuGrowthSM Stock Fund, A Shares, B
Shares, C Shares and I Shares of Diversified Equity Fund and Growth Equity Fund,
I Shares of Large Company Growth Fund and Diversified Small Cap Fund, A Shares,
B Shares and I Shares of Small Company Stock Fund and Small Cap Opportunities
Fund, I Shares of Small Company Growth Fund and A Shares, B Shares and I Shares
of International Fund.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
A CORRESPONDING PROSPECTUS, COPIES OF WHICH MAY BE OBTAINED BY AN INVESTOR
WITHOUT CHARGE BY CONTACTING THE DISTRIBUTOR AT THE ADDRESS LISTED ABOVE.
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TABLE OF CONTENTS
Page
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1. Introduction 1
Glossary 1
Background Information 3
2. Additional Information Regarding Investments and Strategies 4
General Information 4
Equity Securities 4
Fixed Income Securities 6
General Money Market Fund Guidelines 12
Borrowing 13
Dollar Roll Transactions 13
Repurchase Agreements 13
Lending Fund Securities 13
When-Issued and Delayed Delivery Securities and Forward
Commitments 14
Illiquid Investments 14
Purchases on Margin and Short Sales 15
Options and Futures Contracts 15
Small Cap Opportunities Fund Options and Futures Contracts 17
Foreign Currency Transactions 19
Swaps, Caps, Floors and Collars 20
Temporary Defensive Position 20
3. Risk Considerations 21
Counterparty Risk 21
Fixed Income Securities 21
Foreign Securities 23
Leverage 24
Options and Futures Contracts 24
Small Capitalization Stocks 25
Geographic Concentration 25
Diversification 25
4. Information Concerning Colorado and Minnesota 26
Colorado 26
Minnesota 28
5. Investment Limitations 29
Fundamental Limitations 29
Non - Fundamental Limitations 33
6. Performance and Advertising Data 37
General 37
SEC Yield Calculations 38
Total Return Calculations 38
Multiclass, Collective Trust Fund and Core and Gateway
Performance 39
Other Advertisement Matters 40
7. Management 42
Trustees and Officers 42
Investment Advisory Services 49
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Management and Administrative Services 55
Distribution 59
Transfer Agent 62
Custodian 63
Portfolio Accounting 63
Expenses 64
8. Portfolio Transactions 66
9. Additional Purchase, Redemption and Exchange Information 68
General 68
Money Market Funds 69
Purchases Through Financial Institutions 69
Shareholder Services 69
Purchases of A Shares 70
Exchanges 72
Redemptions 73
Redemption Charge (A Shares) 73
Redemption Charge and Contingent Deferred Sales Charge
(A Shares, B Shares, and C Shares) 74
Conversion of B Shares and Exchange Shares 75
10. Taxation 75
11. Additional Information About the Trust and the Shareholders
of the Funds 76
Determination of Net Asset Value - Money Market Funds 76
Counsel and Auditors 77
General Information 77
Core and Gateway Structure 78
Banking Law Matters 79
Shareholdings 79
Financial Statements 79
Registration Statement 79
Appendix A - Description of Securities Ratings A-1
Appendix B - Miscellaneous Tables B-1
Table 1 - Investment Advisory Fees B-1
Table 2 - Management Fees B-5
Table 3 - Distribution Fees B-13
Table 4 - Sales Charges B-15
Table 5 - Accounting Fees B-18
Table 6 - Commissions B-21
Table 7 - 5% Shareholders B-23
Appendix C - Performance Data C-1
Table 1 - Money Market Fund C-1
Table 2 - Yields C-1
Table 3 - Total Returns C-4
Appendix D - Other Advertisement Matters D-1
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1. INTRODUCTION
GLOSSARY
"Adviser" means Norwest, Schroder or a Subadviser.
"Board" means the Board of Trustees of the Trust.
"Balanced Fund" means Moderate Balanced Fund, Growth Balanced Fund or
Aggressive Balanced-Equity Fund.
"CFTC" means the U.S. Commodities Futures Trading Commission.
"Code" means the Internal Revenue Code of 1986, as amended.
"Core and Gateway Structure" means a structure in which a Fund invests
in one or more Portfolios.
"Core Trust" means Core Trust (Delaware), an open-end, management
investment company registered under the 1940 Act.
"Core Trust Board" means the Board of Trustees of Core Trust.
"Crestone" means Crestone Capital Management, Inc., the investment
subadvisor to Small Company Stock Portfolio, Strategic Income Fund,
Moderate Balanced Fund, Growth Balanced Fund, Aggressive
Balanced-Equity Fund, Diversified Equity Fund, Growth Equity Fund,
Diversified Small Cap Fund and Small
Company Stock Fund.
"Custodian" means Norwest Bank acting in its capacity as custodian of
a Fund.
"Equity Fund" means Income Equity Fund, Index Fund, ValuGrowth Stock
Fund, Diversified Equity Fund, Growth Equity Fund, Large Company Growth
Fund, Diversified Small Cap Fund, Small Company Stock Fund, Small Cap
Opportunities Fund, Small Company Growth Fund or International Fund.
"FAS" means Forum Administrative Services, Limited Liability Company,
the Trust's administrator.
"Fitch" means Fitch IBCA, Inc.
"Fixed Income Funds" means Stable Income Fund, Limited Term Government
Income Fund, Intermediate Government Income Fund, Diversified Bond
Fund, Income Fund, Total Return Bond Fund and Strategic Income Fund.
"Forum" means Forum Financial Services, Inc., a registered
broker-dealer that is the Trust's manager and the distributor of the
Trust's shares.
"Forum Accounting" means Forum Accounting Services, Limited Liability
Company, the Trust's fund accountant.
"Fund" means each of the thirty-two separate series of the Trust to
which this SAI relates as identified on the cover page.
"Galliard" means Galliard Capital Management, Inc., the investment
subadviser to Stable Income Portfolio, Strategic Value Bond Portfolio,
Managed Fixed Income Portfolio, Stable Income Fund, Diversified Bond
Fund, Strategic Income Fund, Moderate Balanced Fund, Growth Balanced
Fund and Aggressive Balanced-Equity Fund.
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"Money Market Fund" means Cash Investment Fund, Ready Cash Investment
Fund, U.S. Government Fund, Treasury Plus Fund, Treasury Fund or
Municipal Money Market Fund.
"Moody's" means Moody's Investors Service.
"Norwest" means Norwest Investment Management, Inc., the investment
adviser to each Fund and each Portfolio except those for which Schroder
serves as investment adviser.
"Norwest Bank" means Norwest Bank Minnesota, N.A.
"NRSRO" means a nationally recognized statistical rating organization.
"Peregrine" means Peregrine Capital Management, Inc., the investment
subadviser to Positive Return Bond Portfolio, Small Company Value
Portfolio, Large Company Growth Portfolio, Small Company Growth
Portfolio, Diversified Bond Fund, Strategic Income Fund, Moderate
Balanced Fund, Growth Balanced Fund, Aggressive Balanced-Equity Fund,
Diversified Equity Fund, Growth Equity Fund, Large Company Growth Fund,
Diversified Small Cap Fund and Small Company Growth Fund.
"Portfolio" means Prime Money Market Portfolio, Money Market Portfolio,
Positive Return Bond Portfolio, Stable Income Portfolio, Managed Fixed
Income Portfolio, Strategic Value Bond Portfolio, Index Portfolio,
Income Equity Portfolio, Large Company Growth Portfolio, Disciplined
Growth Portfolio, Small Company Growth Portfolio, Small Company Stock
Portfolio, Small Company Value Portfolio, Small Cap Value Portfolio,
Small Cap Index Portfolio and International Portfolio, series of Core
Trust, and Schroder U.S. Smaller Companies Portfolio and Schroder EM
Core Portfolio, series of Schroder Core.
"Schroder" means Schroder Capital Management Inc., the investment
adviser to Schroder U.S. Smaller Companies Portfolio, Schroder EM Core
Portfolio and International Portfolio and the investment subadviser to
Strategic Income Fund, Moderate Balanced Fund, Growth Balanced Fund,
Aggressive Balanced-Equity Fund, Diversified Equity Fund, Growth Equity
Fund and International Fund.
"Schroder Advisors" means Schroder Fund Advisors Inc., the
administrator to Schroder U.S. Smaller Companies Portfolio and
Schroder EM Core Portfolio.
"Schroder Core" means Schroder Capital Funds, an open-end, management
investment company registered under the 1940 Act.
"Schroder Core Board" means the Board of Trustees of Schroder Core.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's Ratings Group.
"Smith" means Smith Asset Management Group, L.P., the investment
adviser to Disciplined Growth Portfolio, Small Cap Value Portfolio,
Aggressive Balanced-Equity Fund and Diversified Small Cap Fund.
"Stock Index Futures" means futures contracts that relate to
broadly-based stock indices.
"Subadviser" means Crestone, Galliard, Peregrine, Schroder and Smith.
"Tax-Free Income Fund" means Limited Term Tax-Free Fund, Tax-Free
Income Fund, Colorado Tax-Free Fund, Minnesota Intermediate Tax-Free
Fund or Minnesota Tax-Free Fund.
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"Transfer Agent" means Norwest Bank acting in its capacity as transfer
and dividend disbursing agent of a Fund.
"Trust" means Norwest Advantage Funds.
"U.S. Government Securities" means obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
BACKGROUND INFORMATION
The Trust was originally organized under the name "Prime Value Funds, Inc." as a
Maryland corporation on August 29, 1986. On July 30, 1993, Prime Value Funds,
Inc. was reorganized as a Delaware business trust under the name "Norwest
Funds." The Trust is currently named "Norwest Advantage Funds." Norwest, a
subsidiary of Norwest Bank, is each Fund's investment adviser.
Norwest also is the investment adviser of each Portfolio except those for which
Schroder serves as investment adviser.
Norwest employs the Subadvisers to subadvise certain of the Funds and
Portfolios. Norwest Bank, a subsidiary of Norwest Corporation, is the Trust's
transfer agent, dividend disbursing agent and custodian. Forum serves as the
Trust's manager and as distributor of the Trust's shares. FAS serves as the
Trust's administrator.
Each of the following Funds invests all its investable assets in a Portfolio
with substantially similar investment objectives and policies: Ready Cash
Investment Fund, Stable Income Fund, Total Return Bond Fund, Index Fund, Income
Equity Fund, Large Company Growth Fund, Small Company Stock Fund, Small Company
Growth Fund and Small Cap Opportunities Fund.
Each of the following Funds invests all of its investable assets in multiple
Portfolios with different investment policies: Cash Investment Fund, Diversified
Bond Fund, Strategic Income Fund, Moderate Balanced Fund, Growth Balanced Fund,
Aggressive Balanced-Equity Fund, Diversified Equity Fund, Growth Equity Fund,
Diversified Small Cap Fund and International Fund. The percentage of each of
these Fund's (except Cash Investment Fund's) assets invested in each Portfolio
may be changed at any time in response to market or other conditions.
Allocations are made within specified ranges as described in each Fund's
prospectus under "Investment Objectives and Policies."
The other Funds invest directly in portfolio securities.
Each Fund that invest in one or more Portfolios bears its pro rata share of the
expenses of the Portfolio(s) in which the it invests.
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2. ADDITIONAL INFORMATION REGARDING INVESTMENTS AND STRATEGIES
GENERAL INFORMATION
This section discusses in greater detail than the prospectus certain of the
investments the Funds may make. A Fund will make only those investments
described below that are in accordance with its investment objectives and
policies. If a Fund that invests in one or more Portfolios is described below as
being able to make a certain type of investment, the Fund makes that type of
investment through the Portfolio or Portfolios.
Each Fund's investment objective and all its investment policies that are
designated as fundamental may not be changed without approval by the lesser of:
(i) more than 50% of the outstanding shares of the Fund, or (ii) 67% or more of
the shares present or represented at an investors' meeting, if more than 50% of
the outstanding shares of the Fund are present or represented at the meeting in
person or by proxy. A Fund may change any other investment policy upon
appropriate notice to investors.
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible securities,
warrants, depositary receipts, shares of closed-end investment companies and
equity-related securities. The market value of all securities, particularly
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. Overall economic and market conditions also impact an equity
security's price. The market value of an equity security also may fluctuate
based on changes in a company's financial condition. It is possible that a Fund
may experience a substantial or complete loss on an individual equity
investment.
Equity securities owned by a Fund may be traded on a securities exchange or in
the over-the-counter market and may not be traded every day or in the volume
typical of securities traded on a major national securities exchange. As a
result, disposition by a Fund of equity securities to meet redemptions by
investors or otherwise may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over an extended period of time.
COMMON STOCK. Common stock represents an equity (ownership) interest in a
company, and usually possesses voting rights and earns 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 and, if applicable, preferred stockholders are paid. Dividends on
common stock are not fixed but are declared at the discretion of the issuer.
Common stock generally represents the riskiest investment in a company. In
addition, common stock generally has the greatest appreciation and depreciation
potential because increases and decreases in earnings are usually reflected in a
company's stock price.
PREFERRED STOCK. Preferred stock is a class of stock having a preference over
common stock as to the payment of dividends and the recovery of investment
should a company be liquidated. Preferred stock, however, is usually junior to
the debt securities of the issuer. Preferred stock typically does not possess
voting rights and its market value may change based on changes in interest
rates.
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CONVERTIBLE SECURITIES. Convertible securities are fixed income securities,
preferred stock or other securities that may be converted into or exchanged for
a given amount of common stock of the same or a different issuer during a
specified period of time at a specified price or formula. A convertible security
entitles the holder to receive interest on debt or the dividend on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities ordinarily provide a stream
of income with generally higher yields than those of common stock of the same or
similar issuers, but lower than the yield of nonconvertible debt. Convertible
securities rank senior to common stock in a company's capital structure but are
usually subordinated to comparable nonconvertible securities. By investing in
convertible securities, a Fund obtains the right to benefit from the capital
appreciation potential in the underlying common stock upon the exercise of the
conversion right, while earning higher current income than could be available if
the stock was purchased directly.
In general, the value of a convertible security is the higher of its investment
value (its value as a fixed income security) and its conversion value (the value
of the underlying shares of common stock if the security is converted). As a
fixed income security, the value of a convertible security generally increases
when interest rates decline and generally decreases when interest rates rise.
The 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. Generally, a convertible security's conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price of
the convertible security will be increasingly influenced by its conversion
value. In addition, a convertible security generally will sell at a premium over
its conversion value determined by the extent to which investors place value on
the right to acquire the underlying common stock while holding a fixed income
security.
Because convertible securities are typically issued by smaller capitalized
companies whose stock price may be volatile, the price of a convertible security
may reflect variations in the price of the underlying common stock in a way that
nonconvertible debt does not. Also, while convertible securities generally have
higher yields than common stock, they have lower yields than comparable
nonconvertible securities and are subject to less fluctuations in value than
underlying stock since they have fixed income characteristics. 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 is called for redemption, the Fund will be required to permit the
issuer to redeem the security, convert it into the underlying common stock or
sell it to a third party.
WARRANTS. Warrants are securities, typically issued with preferred stock or
bonds, that give the holder the right to purchase a given number of shares of
common stock at a specified price, usually during a specified period of time.
The price usually represents a premium over the applicable market value of the
common stock at the time of the warrant's issuance. Warrants have no voting
rights with respect to the common stock, receive no dividends and have no rights
with respect to the assets of the issuer. 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 common
stock to rise. A warrant becomes worthless if it is not exercised within the
specified time period.
EQUITY-RELATED SECURITIES. Equity-related securities are securities whose
interest and/or principal payment obligations are linked to a specified index of
equity securities, or determined pursuant to specific formulas. A Fund may
invest in these instruments when the securities provide a higher amount of
dividend income than is available from a company's common stock. The amount
received by an investor at maturity of these securities is not fixed but is
based on the price of the underlying common stock, which may rise or fall.
Adverse changes in the securities markets may reduce interest payments made
under, and/or the principal of, equity-linked securities held by a Fund. In
addition, it is not possible to predict how equity-related securities will trade
in the secondary market or whether the market for the securities will be liquid.
DEPOSITARY RECEIPTS. A depositary receipt is a receipt for shares of a
foreign-based company that entitles the holder to distributions on the
underlying security. Depositary receipts include sponsored and unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
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other similar global instruments. ADRs typically are issued by a U.S. bank or
trust company, evidence ownership of underlying securities issued by a foreign
company, and are designed for use in U.S. securities markets. EDRs (sometimes
called Continental Depositary Receipts) are receipts issued by a European
financial institution evidencing an arrangement similar to that of ADRs, and are
designed for use in European securities markets. The Funds invest in depositary
receipts in order to obtain exposure to foreign securities markets.
Unsponsored depositary receipts may be created without the participation of the
foreign issuer. Holders of these receipts generally bear all the costs of the
depositary receipt facility, whereas foreign issuers typically bear certain
costs in a sponsored depositary receipt. The bank or trust company depositary of
an unsponsored depositary receipt may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
voting rights. Accordingly, available information concerning the issuer may not
be current and the prices of unsponsored depositary receipts may be more
volatile than the prices of sponsored depositary receipts.
CLOSED-END INVESTMENT COMPANIES. International Fund may invest in the securities
of closed-end investment companies that invest primarily in foreign securities.
Because of restrictions on direct investment by U.S. entities in certain
countries, other investment companies may provide the most practical or only way
for the Fund to invest in certain markets. The Fund will invest in such
companies when, in the Adviser's judgment, the potential benefits of the
investment justify the payment of any applicable premium or sales charge. Other
investment companies incur their own fees and expenses.
FIXED INCOME SECURITIES
Fixed income securities include corporate debt obligations, U.S. Government
Securities, municipal securities, mortgage-related securities, asset-backed
securities, guaranteed investment contracts, zero coupon securities, variable
and floating rate securities, financial institution obligations, commercial
paper and participation interests.
CORPORATE DEBT OBLIGATIONS. The Funds may invest in corporate bonds, debentures,
notes, commercial paper and other similar corporate debt instruments. Companies
use these instruments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and must repay the amount borrowed
at maturity. Companies issue commercial paper (short-term unsecured promissory
notes) to finance their current obligations. Commercial paper normally has a
maturity of less than 9 months.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include securities issued
by the U.S. Treasury and by U.S. Government agencies and instrumentalities. U.S.
Government Securities may be supported by the full faith and credit of the
United States (e.g., mortgage-related securities and certificates of the
Government National Mortgage Association and securities of the Small Business
Administration); by the right of the issuer to borrow from the U.S. Treasury
(e.g., Federal Home Loan Bank securities); by the discretionary authority of the
U.S. Treasury to lend to the issuer (e.g., Fannie Mae (formerly the Federal
National Mortgage Association) securities); or solely by the creditworthiness of
the issuer (e.g., Federal Home Loan Mortgage Corporation securities).
Holders of U.S. Government Securities not backed by the full faith and credit of
the United States must look principally to the agency or instrumentality issuing
the obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. There is no assurance that the U.S. Government will support
securities not backed by its full faith and credit. Neither the U.S. Government
nor any of its agencies or instrumentalities guarantees the market value of the
securities they issue.
MUNICIPAL SECURITIES. 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 sanitation districts) issue municipal securities. In addition,
municipal securities include securities issued by or on behalf of public
authorities to finance various privately operated facilities, such as industrial
development bonds, that are backed only by the assets and revenues of the
non-governmental user (such as hospitals and airports).
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Municipal securities are issued to obtain funds for a variety of public
purposes, including general financing for state and local governments, or
financing for specific projects or public facilities. Municipal securities
generally are classified as bonds, notes and leases. Municipal securities may be
zero-coupon securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable from revenue derived from a particular facility,
class of facilities or the proceeds of a special excise tax or other specific
revenue source but not from the issuer's general taxing power. 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. Private activity bonds and industrial revenue bonds do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Municipal
bonds may also be moral obligation bonds, which are normally issued by special
purpose public authorities. If the issuer is unable to meet its obligations
under the bonds from current revenues, it may draw on a reserve fund that is
backed by the moral commitment (but not the legal obligation) of the state or
municipality that created the issuer.
Municipal bonds meet longer term capital needs of a municipal issuer and
generally have maturities of more than one year when issued. Municipal notes are
intended to fulfill the short-term capital needs of the issuer and generally
have maturities not exceeding one year. They include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, construction loan notes and
tax-exempt commercial paper. Municipal notes also include longer term issues
that are remarketed to investors periodically, usually at one year intervals or
less. Municipal leases generally 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 equipment and facilities
such as fire and sanitation vehicles, telecommunications equipment and other
capital assets. 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. Generally, the
Funds will invest in municipal lease obligations through certificates of
participation.
STAND-BY COMMITMENTS. The Funds may purchase municipal securities together with
the right to resell them to the seller or a third party at an agreed-upon price
or yield within specified periods prior to their maturity dates. Such a right to
resell is commonly known as a stand-by commitment, and the aggregate price which
a Fund pays for securities with a stand-by commitment may be higher than the
price which otherwise would be paid. The primary purpose of this practice is to
permit a Fund to be as fully invested as practicable in municipal securities
while preserving the necessary flexibility and liquidity to meet unanticipated
redemptions. In this regard, a Fund acquires stand-by commitments solely to
facilitate portfolio liquidity and does not exercise its rights thereunder for
trading purposes. Stand-by commitments involve certain expenses and risks,
including the inability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, non-marketability of the
commitment, and differences between the maturity of the underlying security and
the maturity of the commitment.
The acquisition of a stand-by commitment does not affect the valuation or
maturity of the underlying municipal securities. A Fund values stand-by
commitments at zero in determining net asset value. When a Fund pays directly or
indirectly for a stand-by commitment, its cost is reflected as unrealized
depreciation for the period during which the commitment is held. Stand-by
commitments do not affect the average weighted maturity of the Fund's portfolio
of securities.
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PUTS. The Funds may acquire "puts" with respect to municipal securities. A put
gives the Fund the right to sell the municipal security at a specified price at
any time on or before a specified date. The Funds may sell, transfer or assign
puts only in conjunction with the sale, transfer or assignment of the underlying
securities. The amount payable to a Fund upon its exercise of a "put" is
normally: (1) the Fund's acquisition cost of the municipal securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (2) all interest accrued
on the securities since the last interest payment date during that period.
The Funds may acquire puts to facilitate the liquidity of portfolio assets. The
Funds may use puts to facilitate the reinvestment of assets at a rate of return
more favorable than that of the underlying security. The Funds expect that they
will generally acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, the Funds may pay for a put either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities).
MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent interests in
a pool of mortgage loans originated by lenders such as commercial banks, savings
associations and mortgage bankers and brokers. Mortgage-related securities may
be issued by governmental or government-related entities or by non-governmental
entities such as special purpose trusts created by commercial lenders.
Pools of mortgages consist of whole mortgage loans or participations in mortgage
loans. The majority of these loans are made to purchasers of 1-4 family homes.
The terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Funds may purchase pools of adjustable-rate mortgages,
growing equity mortgages, graduated payment mortgages and other types. Mortgage
poolers apply qualification standards to lending institutions which originate
mortgages for the pools as well as credit standards and underwriting criteria
for individual mortgages included in the pools. In addition, many mortgages
included in pools are insured through private mortgage insurance companies.
Mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or on specified call dates. Most mortgage-related
securities, however, are pass-through securities, which means that investors
receive payments consisting of a pro-rata share of both principal and interest
(less servicing and other fees), as well as unscheduled prepayments, as loans in
the underlying mortgage pool are paid off by the borrowers. Additional
prepayments 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. As prepayment rates of individual pools of mortgage loans vary
widely, it is not possible to predict accurately the average life of a
particular mortgage-related security. Although mortgage-related securities are
issued with stated maturities of up to forty years, unscheduled or early
payments of principal and interest on the mortgages may shorten considerably the
securities' effective maturities. See "Risk Considerations."
GOVERNMENT AND AGENCY MORTGAGE-RELATED SECURITIES. The principal issuers or
guarantors of mortgage-related securities are the Government National Mortgage
Association ("GNMA"), Fannie Mae ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). GNMA, a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development ("HUD"), creates pass-through
securities from pools of government guaranteed (Federal Housing Authority or
Veterans Administration) mortgages. The principal and interest on GNMA
pass-through securities are backed by the full faith and credit of the U.S.
Government.
FNMA, which is a U.S. Government-sponsored corporation owned entirely by private
stockholders that is subject to regulation by the Secretary of HUD, and FHLMC, a
corporate instrumentality of the U.S. Government, issue pass-through securities
from pools of conventional and federally insured and/or guaranteed residential
mortgages. FNMA guarantees full and timely payment of all interest and
principal, and FHMLC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Mortgage-related
securities from FNMA and FHLMC are not backed by the full faith and credit of
the U.S. Government.
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PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related securities
offered by private issuers include pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds, which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations that are collateralized by mortgage-related securities issued by
GNMA, FNMA or FHLMC or by pools of conventional mortgages of multi-family or of
commercial mortgage loans.
Privately-issued mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than securities issued by
U.S. Government issuers because there are no direct or indirect governmental
guarantees of payment. Many non-governmental issuers or servicers of
mortgage-related securities guarantee or provide insurance for timely payment of
interest and principal on the securities. The market for privately-issued
mortgage-related securities is smaller and less liquid than the market for
mortgage-related securities issued by U.S. government issuers.
STRIPPED MORTGAGE-RELATED SECURITIES. Stripped mortgage-related securities are
multi-class mortgage-related securities that are created by separating the
securities into their principal and interest components and selling each piece
separately. Stripped mortgage-related securities are usually structured with two
classes that receive different proportions of the interest and principal
distributions in a pool of mortgage assets. The market values of these
securities are extremely sensitive to prepayment rates.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through securities representing interests in pools of mortgage
loans with adjustable interest rates that are reset at periodic intervals,
usually by reference to some interest rate index or market interest rate, and
that may be subject to certain limits. Although the rate adjustment feature may
reduce sharp changes in the value of adjustable rate securities, these
securities can change in value based on changes in market interest rates or
changes in the issuer's creditworthiness. Changes in the interest rates on ARMs
may lag behind changes in prevailing market interest rates. 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. A Fund could suffer some
principal loss if the Fund sold the securities before the interest rates on the
underlying mortgages were adjusted to reflect current market rates. Some
adjustable rate securities (or the underlying mortgages) are subject to caps or
floors, that limit the maximum change in interest rates during a specified
period or over the life of the security.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are multiple-class debt obligations that are fully collateralized by
mortgage-related pass-through securities or by pools of mortgages ("Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets are passed
through to the holders of the CMOs as they are received, although certain
classes (often referred to as "tranches") of CMOs have priority over other
classes with respect to the receipt of mortgage prepayments.
Multi-class mortgage pass-through securities are interests in trusts that hold
Mortgage Assets and that have multiple classes similar to those of CMOs.
Payments of principal of and interest on the underlying Mortgage Assets (and in
the case of CMOs, any reinvestment income thereon) provide funds to pay debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities. Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. Planned amortization class mortgage-related
securities ("PAC Bonds") are a form of parallel pay CMO. PAC Bonds are designed
to provide relatively predictable payments of principal provided that, among
other things, the actual prepayment experience on the underlying mortgage loans
falls within a contemplated range. CMOs may have complicated structures and
generally involve more risks than simpler forms of mortgage-related securities.
Delinquency or loss in excess of that covered by credit enhancement protection
could adversely affect the return on an investment in such a security.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a "Z-tranche"). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
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outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increases the face amount of the security at a
compounded rate, but is not paid to the bond holder. After all previous tranches
are retired, accrual bond holders start receiving cash payments that include
both principal and continuing interest. The market value of accrual bonds can
fluctuate widely and their average life depends on the other aspects of the CMO
offering. Interest on accrual bonds is taxable when accrued even though the
holders receive no accrual payment. The Funds distribute all of their net
investment income, and may have to sell portfolio securities to distribute
imputed income, which may occur at a time when an Adviser would not have chosen
to sell such securities and which may result in a taxable gain or loss.
CREDIT ENHANCEMENTS. To lessen the effect of the failures by obligors on
Mortgage Assets to make payments, CMOs and other mortgage-related securities may
contain elements of credit enhancement, consisting of either (1) liquidity
protection or (2) protection against losses resulting after default by an
obligor on the underlying assets and allocation of all amounts recoverable
directly from the obligor and through liquidation of the collateral. This
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 these methods.
The Funds will not pay any additional fees for credit enhancements for
mortgage-related securities, although the credit enhancement may increase the
costs of the mortgage-related securities. Delinquency or loss in excess of that
covered by credit enhancement protection could adversely affect the return on an
investment in such a security.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-related securities but have underlying assets that are not
mortgage loans or interests in mortgage loans. Asset-backed securities represent
fractional interests in, or are secured by and payable from, pools of 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 (e.g., credit card) agreements. 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 have structures and characteristics
similar to those of mortgage-related securities and, accordingly, are subject to
many of the same risks, although often to a greater extent. See "Risk
Considerations." No Fund may invest more than 10% of its net assets in
asset-backed securities that are backed by a particular type of credit, (e.g.,
credit card receivables).
FOREIGN GOVERNMENT AND SUPRANATIONAL ORGANIZATIONS DEBT SECURITIES. A Fund may
invest in fixed income securities issued by the governments of foreign countries
or by those countries' political subdivisions, agencies or instrumentalities as
well as by supranational organizations such as the International Bank for
Reconstruction and Development and the Inter-American Development Bank if the
Adviser believes that the securities do not present risks inconsistent with the
Fund's investment objective.
GUARANTEED INVESTMENT CONTRACTS. Guaranteed investment contracts ("GICs") are
issued by insurance companies. In purchasing a GIC, a Fund contributes cash to
the insurance company's general account and the insurance company then credits
to the Fund's deposit fund on a monthly basis guaranteed interest at a specified
rate. The GIC provides 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. There is no secondary
market for GICs and, accordingly, GICs are generally treated as illiquid
investments. GICs are typically unrated.
ZERO-COUPON SECURITIES. Zero-coupon securities are debt obligations that are
issued or sold at a significant discount from their face value and do not pay
current interest to holders prior to maturity, a specified redemption date or
cash payment date. The discount approximates the total interest the securities
will accrue and compound over the period to maturity or the first interest
payment date at a rate of interest reflecting the market rate of interest at the
time of issuance. The original issue discount on the zero-coupon securities must
be included ratably in the income of a Fund (and thus an investor's) as the
income accrues, even though payment has not been received. The Funds distribute
all of their net investment income, and may have to sell portfolio securities to
distribute imputed income, which may occur at a time when an Adviser would not
have chosen to sell such securities and which may result in a taxable gain or
loss. Because interest on zero-coupon securities is not paid on a current basis
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but is in effect compounded, the value of these securities is subject to greater
fluctuations in response to changing interest rates, and may involve greater
credit risks, than the value of debt obligations which distribute income
regularly.
Zero-coupon securities may be securities that have been stripped of their
unmatured interest stream. Zero-coupon securities may be custodial receipts or
certificates, underwritten by securities dealers or banks, that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Government securities. The underwriters of these certificates or receipts
generally purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the purchased unmatured
coupon payments and the final principal payment of the U.S. Government Security.
These certificates or receipts have the same general attributes as zero-coupon
stripped U.S. Treasury securities but are not supported by the issuer of the
U.S. Government Security. The risks associated with stripped securities are
similar to those of other zero-coupon securities, although stripped securities
may be more volatile, and the value of certain types of stripped securities may
move in the same direction as interest rates.
VARIABLE AND FLOATING RATE SECURITIES. Certain debt securities 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 according 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. These
adjustments minimize changes in the market value of the obligation. Similar to
fixed rate debt instruments, variable and floating rate instruments are subject
to changes in value based on changes in market interest rates or changes in the
issuer's creditworthiness. The rate of interest on securities purchased by a
Fund may be tied to U.S. Government Securities or indices on those securities as
well as any other rate of interest or index. Certain variable rate securities
pay interest at a rate that varies inversely to prevailing short-term interest
rates (sometimes referred to as "inverse floaters"). Certain inverse floaters
may have an interest rate reset mechanism that multiplies the effects of changes
in the underlying index. This mechanism may increase the volatility of the
security's market value while increasing the security's yield. The Money Market
Funds may not invest in inverse floaters.
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.
Variable and floating rate demand notes of corporations include master demand
notes that permit investment of fluctuating amounts at varying interest rates
under direct arrangements with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
Because master demand notes are direct lending arrangements between a Fund and
the issuer, they are not normally traded. Although there is no secondary market
in the notes, the Fund may demand payment of principal and accrued interest at
any time upon a specified period of notice.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, a Fund might be entitled to
less than the initial principal amount of the security upon the security's
maturity. A Fund will purchase these securities only when its Adviser believes
the interest income from the instrument justifies any principal risks associated
with the instrument. The Advisers 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 the Advisers
will be able to limit the effects of principal fluctuations and, accordingly, a
Fund may incur losses on those securities even if held to maturity without
issuer default.
There may not be an active secondary market for any particular floating or
variable rate instruments, which could make it difficult for a Fund to dispose
of the instrument during periods that the Fund is not entitled to exercise any
demand rights it may have. A Fund could, for this or other reasons, suffer a
loss with respect to those instruments. The Advisers monitor the liquidity of
each Fund's investment in variable and floating rate instruments, but there can
be no guarantee that an active secondary market will exist.
FINANCIAL INSTITUTION OBLIGATIONS. A Fund may invest in obligations of financial
institutions, including certificates of deposit, bankers' acceptances, time
deposits and other short-term debt obligations. Certificates of deposit
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represent an institution's obligation to repay funds deposited with it that earn
a specified interest rate over a given period. Bankers' acceptances are
negotiable obligations of a bank to pay a draft which has been drawn by a
customer and are usually backed by goods in international trade. Time deposits
are non-negotiable deposits with a banking institution that earn a specified
interest rate over a given period. Certificates of deposit and fixed time
deposits, which are payable at the stated maturity date and bear a fixed rate of
interest, generally may be withdrawn on demand by a Fund but may be subject to
early withdrawal penalties which could reduce a Fund's performance. Although
fixed time deposits do not in all cases have a secondary market, there are no
contractual restrictions on a Fund's right to transfer a beneficial interest in
the deposits to third parties.
Funds that invest in foreign securities may invest in Eurodollar certificates of
deposit, which are issued by offices of foreign and domestic banks located
outside the United States; Yankee certificates of deposit, which are issued by a
U.S. branch of a foreign bank and held in the United States; Eurodollar time
deposits, which are deposits in a foreign branch of a U.S. bank or a foreign
bank; and Canadian time deposits, which are issued by Canadian offices of major
Canadian banks. Each of these instruments is U.S. dollar denominated.
Small Cap Opportunities Fund may invest in obligations (including certificates
of deposit and bankers' acceptances) of U.S. banks that have total assets at the
time of purchase in excess of $1 billion and are members of the Federal Deposit
Insurance Corporation.
PARTICIPATION INTERESTS. A Fund may purchase participation interests in loans or
instruments in which the Fund may invest directly that are owned by banks or
other institutions. A participation interest gives a Fund an undivided
proportionate interest in a loan or instrument. Participation interests may
carry a demand feature permitting the holder to tender the interests back to the
bank or other institution. Participation interests, however, do not provide the
Fund with any right to enforce compliance by the borrower, nor any rights of
set-off against the borrower and the Fund may not directly benefit from any
collateral supporting the loan in which it purchased a participation interest.
As a result, the Fund will assume the credit risk of both the borrower and the
lender that is selling the participation interest. A Fund will not invest more
than 10% of its total assets in participation interests in which the Fund does
not have demand rights. Each Tax-Free Income Fund will obtain appropriate
assurances that the interest earned by the Fund from the municipal securities in
which it holds participation interests is exempt from federal and, in the case
of Colorado Tax-Free Fund, Minnesota Tax-Free Fund and Minnesota Intermediate
Tax-Free Fund, applicable state income tax.
GENERAL MONEY MARKET FUND GUIDELINES
Each Money Market Fund will invest only in high-quality, U.S. dollar-denominated
instruments. As used herein, high-quality instruments include those that (1) are
rated (or, if unrated, are issued by an issuer with comparable outstanding
short-term debt that is rated) in one of the two highest rating categories by
two NRSROs or, if only one NRSRO has issued a rating, by that NRSRO; or (2) are
otherwise unrated and determined by the Adviser, pursuant to procedures adopted
by the Board, to be of comparable quality. A Money Market Fund (except for
Municipal Money Market Fund) will not invest in a security that has received, or
is deemed comparable in quality to a security that has received, the second
highest rating by an NRSRO (a "second tier security") if, immediately after the
acquisition, the Fund would have invested more than (1) the greater of 1% of its
total assets in any single second tier security; or (2) 5% of its total assets
in second tier securities. Municipal Money Market Fund is subject to certain
issuer diversification rules described below under "Investment Limitations,
Non-fundamental Limitations." Appendix A to this SAI contains a description of
the rating categories of Standard & Poor's, Moody's and certain other NRSROs.
In addition, each Money Market Fund (1) will invest only in instruments that
have a remaining maturity of 397 days or less (as calculated in accordance with
Rule 2a-7 under the 1940 Act); (2) will maintain a dollar-weighted average
maturity of 90 days or less; (3) will not invest more than 5% of its total
assets in the securities of any one issuer (except U.S. Government Securities
and to the extent permitted by Rule 2a-7); and (4) will not purchase a security
if the value of all securities held by the Fund and issued or guaranteed by the
same issuer (including letters of credit in support of a security) would exceed
10% of the Fund's total assets. These limitations apply with respect to only 75%
of the total assets of Municipal Money Market Fund.
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INVESTMENT BY FEDERAL CREDIT UNIONS. U.S. Government Fund and Treasury Fund seek
to limit their investments to investments that are legally permissible for
Federally chartered credit unions under applicable provisions of the Federal
Credit Union Act (including 12 U.S.C. Section 1757(7), (8) and (15)) and the
applicable rules and regulations of the National Credit Union Administration
(including 12 C.F.R. Part 703, Investment and Deposit Activities), as these
statutes and rules and regulations may be amended.
BORROWING
Each Fund may borrow money in accordance with its investment policies set forth
under "Investment Limitations." Interest costs on borrowings may offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when investment considerations would
not favor such sales. A Fund's use of borrowed proceeds to make investments
would subject the Fund to the risks of leveraging. Reverse repurchase
agreements, short sales not against the box, dollar roll transactions and other
similar investments that involve a form of leverage have characteristics similar
to borrowings but are not considered borrowings if the Fund maintains a
segregated account.
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions are transactions in which a Fund sells securities to a
bank or securities dealer, and makes a commitment to purchase similar, but not
identical, securities at a later date from the same party. During the period
between the commitment and settlement, no payment is made for the securities
purchased and no interest or principal payments on the securities accrue to the
purchaser, but the Fund assumes the risk of ownership. A Fund is compensated for
entering into dollar roll transactions by the difference between the current
sales price and the forward price for the future purchase, as well as by the
interest earned on the cash proceeds of the initial sale. The Funds will engage
in dollar roll transactions for the purpose of acquiring securities for their
investment portfolios. Each Fund will limit its obligations on dollar roll
transactions to 35% of the Fund's net assets.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which a Fund purchases securities from
a bank or securities dealer and simultaneously commits to resell the securities
to the bank or dealer at an agreed-upon date and at a price reflecting a market
rate of interest unrelated to the purchased security. During the term of a
repurchase agreement, the Funds' custodian maintains possession of the purchased
securities and any underlying collateral, which is maintained at not less than
100% of the repurchase price. Repurchase agreements allow a Fund to earn income
on its uninvested cash for periods as short as overnight, while retaining the
flexibility to pursue longer-term investments. A Money Market Fund will only
enter into a repurchase agreement with a primary dealer that reports to the
Federal Reserve Bank of New York ("primary dealers") or one of the largest 100
commercial banks in the United States. International Fund may enter into
repurchase agreements with foreign entities. Small Cap Opportunities Fund may
invest only in repurchase agreements maturing in seven days or less.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand agreements,
there is no agreed upon repurchase date and interest payments are calculated
daily, often based upon the prevailing overnight repurchase rate.
LENDING FUND SECURITIES
Each Fund may lend Fund securities in an amount up to 33-1/3% (25% in the case
of Small Cap Opportunities Fund) of its total assets to brokers, dealers and
other financial institutions. Securities loans must be continuously
collateralized and the collateral must have market value at least equal to value
of the Fund's loaned securities, plus accrued interest. In a portfolio
securities lending transaction, the Fund receives from the borrower an amount
equal to the interest paid or the dividends declared on the loaned securities
during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower. The terms of a Fund's loans permit the
Fund to reacquire loaned securities on five business days' notice or in time to
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vote on any important matter. Loans are subject to termination at the option of
a Fund or the borrower at any time, and the borrowed securities must be returned
when the loan is terminated. The Funds will not lend portfolio securities to any
officer, director, employee or affiliate of the Funds or an Adviser.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase or sell portfolio securities on a "when-issued," "delayed
delivery" or "forward commitment" basis. When-issued securities may be purchased
on a "when, as and if issued" basis under which the issuance of the securities
depends upon the occurrence of a subsequent event. When these transactions are
negotiated, the price is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date, but
the Funds enter into these transactions only with the intention of actually
receiving securities or delivering them, as appropriate. The Funds may dispose
of the right to acquire these securities before the settlement date if deemed
advisable. During the period between the time of commitment and settlement, no
payment is made for the securities purchased and no interest or dividends on the
securities accrue to the purchaser. At the time a Fund makes a commitment to
purchase securities in this manner, the Fund immediately assumes the risk of
ownership, including price fluctuation. The use of when-issued transactions and
forward commitments enables a Fund to protect against anticipated changes in
interest rates and prices, but also tends to increase the volatility of the
Fund's net asset value per share. Except for dollar-roll transactions, a Fund
will not purchase securities on a when-issued, delayed delivery or forward
commitment basis if, as a result, more than 15% (35% in the case of Total Return
Bond Fund) of the value of the Fund's total assets would be committed to such
transactions.
The use of when-issued transactions and forward commitments enables the Funds to
hedge against anticipated changes in interest rates and prices. If an Adviser
were to forecast incorrectly the direction of interest rate movements, however,
a Fund might be required to complete when-issued or forward transactions at
prices inferior to the current market values.
At the time a Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, the Fund will record the transaction as a purchase
and thereafter reflect the value each day of such securities in determining its
net asset value.
ILLIQUID INVESTMENTS
No Fund may knowingly invest more than 15% (10% in the case of the Money Market
Funds) of the Fund's net assets in illiquid investments. Illiquid investments
are investments that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
investment and include, among other instruments, repurchase agreements not
entitling the Fund to payment of principal within seven days.
An institutional market has developed for certain securities that are not
registered under the 1933 Act. Institutional investors usually will not seek to
sell these instruments to the general public, but instead will often depend on
either an efficient institutional market in which the unregistered security can
be readily resold or on an 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 therefore may not be
determinative of the liquidity of such investments.
If unregistered securities are eligible for purchase by institutional buyers in
accordance with applicable exemptions under guidelines adopted by the Board, an
Adviser may determine that the securities are liquid. Under these guidelines,
the Advisers are required to take into account: (1) the frequency of trades and
quotations for the investment; (2) the number of dealers willing to purchase or
sell the investment; (3) the number of dealers that have undertaken to make a
market in the investment; (4) the number of other potential purchasers; and (5)
the nature of the marketplace trades, including the time needed to dispose of
the investment, the method of soliciting offers and the mechanics of the
transfer.
Illiquid investments may be more difficult to value than liquid investments and
the sale of illiquid investments generally may require more time and result in
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higher selling expenses than the sale of liquid investments. A Fund might not be
able to dispose of restricted or other securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions.
Restrictions on resale may have an adverse effect on the marketability of
illiquid investments and a Fund might also have to register certain investments
in order to dispose of them, resulting in expense and delay.
PURCHASES ON MARGIN AND SHORT SALES
Limited Term Government Income Fund and Intermediate Government Income Fund may
purchase securities on margin and make short sales that are not "against the
box." When a Fund purchases securities on margin, it only pays part of the
purchase price and borrows the remainder. As a borrowing, a Fund's purchase of
securities on margin is subject to the limitations and risks of borrowing. In
addition, if the value of the securities purchased on margin decreases such that
the Fund's borrowing with respect to the security exceeds the maximum
permissible borrowing amount, the Fund will be required to make margin payments.
A Fund's obligation to satisfy margin calls may require the Fund to sell
securities at an inappropriate time.
Each of these Funds also may make short sales of securities which it does not
own or have the right to acquire in anticipation of a decline in the market
price for the security. When a Fund makes a short sale, the proceeds it receives
are retained by the broker until the Fund replaces the borrowed security. In
order to deliver the security to the buyer, a Fund must arrange through a broker
to borrow the security and, in so doing, the Fund becomes obligated to replace
the security borrowed at its market price at the time of replacement, whatever
that price may be. Short sales create opportunities to increase a Fund's return
but, at the same time, involve special risk considerations and may be considered
a speculative technique. Since a Fund in effect profits from a decline in the
price of the securities sold short without the need to invest the full purchase
price of the securities on the date of the short sale, the Fund's net asset
value per share, will tend to increase more when the securities it has sold
short decrease in value, and to decrease more when the securities it has sold
short increase in value, than would otherwise be the case if it had not engaged
in such short sales. Short sales theoretically involve unlimited loss potential,
as the market price of securities sold short may continuously increase, although
a Fund may mitigate such losses by replacing the securities sold short before
the market price has increased significantly. Under adverse market conditions, a
Fund might have difficulty purchasing securities to meet its short sale delivery
obligations and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor those sales.
All Funds may engage in short sales "against the box." A short sale is "against
the box" to the extent that while the short position is open, the Fund must own
an equal amount of the securities sold short, or by virtue of ownership of
securities have the right, without payment of further consideration, to obtain
an equal amount of the securities sold short. Short sales against-the-box may in
certain cases be made to defer, for Federal income tax purposes, recognition of
gain or loss on the sale of securities "in the box" until the short position is
closed out. If a Portfolio has unrealized gain with respect to a long position
and enters into a short sale against-the-box, the Portfolio generally will be
deemed to have sold the long position for tax purposes and thus will recognize
gain. Prohibitions on entering short sales other than against the box does not
restrict a Fund's ability to use short-term credits necessary for the clearance
of portfolio transactions and to make margin deposits in connection with
permitted transactions in options and futures contracts. No Fund except Treasury
Plus Fund, Diversified Small Cap Fund and Small Cap Opportunities Fund may make
short sales if, as a result, more than 25% of the Fund's total assets would be
so invested or such a position would represent more than 2% of the outstanding
voting securities of any single issuer or class of an issuer.
OPTIONS AND FUTURES CONTRACTS
Each Fund (except for Small Cap Opportunities Fund, whose use of options and
futures contracts is described separately below) may (1) purchase or sell
(write) put and call options on securities to enhance the Fund's performance and
(2) seek to hedge against a decline in the value of securities owned by the Fund
or an increase in the price of securities that the Fund 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 interest-rate futures contracts and options on those
futures contracts. A Fund may only write options that are covered. To the extent
a Fund invests in foreign securities, it may in the future invest in options on
foreign currencies, foreign currency futures contracts and options on those
futures contracts. These instruments are considered to be derivatives. Use of
these instruments is subject to regulation by the SEC, the several options and
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futures exchanges on which futures and options are traded or the CFTC. No
assurance can be given that any hedging or option income strategy will achieve
its intended result. Certain futures strategies employed by Strategic Income
Fund and the Balanced Funds in allocating assets temporarily may not be deemed
to be for bona fide hedging purposes, as defined by the CFTC. A Fund may enter
into futures contracts only if the aggregate of initial margin deposits for open
futures contract positions does not exceed 5% of the Fund's total assets.
COVER FOR OPTIONS AND FUTURES CONTRACTS. A Fund will hold securities,
currencies, or other options or futures positions whose values are expected to
offset ("cover") its obligations under the transactions. A Fund will enter into
a hedging strategy that exposes it to an obligation to another party only if the
Fund owns either (1) an offsetting ("covered") position in the underlying
security, currency or options or futures contract, or (2) cash, receivables and
liquid debt securities with a value sufficient at all times to cover its
potential obligations. Each Fund will comply with SEC guidelines with respect to
coverage of these strategies and, if the guidelines require, will set aside
cash, liquid debt securities and other permissible assets ("Segregated Assets")
in a segregated account with the Custodian in the prescribed amount. Segregated
Assets cannot be sold or closed out while the hedging or option income strategy
is outstanding, unless the Segregated Assets are replaced with similar assets.
As a result, there is a possibility that the use of cover or segregation
involving a large percentage of a Fund's assets could impede portfolio
management or a Fund's ability to meet redemption requests or other current
obligations.
The Funds have no current intention of investing in futures contracts and
options thereon for purposes other than hedging. No Fund may purchase any call
or put option on a futures contract if the premiums associated with all such
options held by the Fund would exceed 5% of the Fund's total assets as of the
date the option is purchased. No Fund may sell a put option if the exercise
value of all put options written by the Fund would exceed 50% of the Fund's
total assets or sell a call option if the exercise value of all call options
written by the Fund would exceed the value of the Fund's assets. In addition,
the current market value of all open futures positions held by a Fund will not
exceed 50% of its total assets.
OPTIONS ON SECURITIES. A call option is a contract under which the purchaser of
the call option, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. A put option
gives its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying security
upon exercise at the exercise price during the option period. The amount of
premium received or paid is based upon certain factors, including the market
price of the underlying assets, 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.
OPTIONS ON STOCK INDICES. A stock index assigns relative values to the stock
included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional options on securities except that exercises of
stock index options are effected with cash payments and do not involve delivery
of securities (i.e., stock index options are settled exclusively in cash). Thus,
upon exercise of stock index options, the purchaser will realize and the writer
will pay an amount based on the differences between the exercise price and the
closing price of the stock index.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract rather than to purchase or sell stock, at a specified exercise
price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by transfer to the holder of an accumulated balance representing the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future.
FUTURES CONTRACTS AND INDEX FUTURES CONTRACTS. A futures contract is a bilateral
agreement where one party agrees to accept, and the other party agrees to make,
delivery of cash, an underlying debt security or a currency, as called for in
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the contract, at a specified date and at an agreed-upon price. A bond or stock
index futures contract involves the delivery of an amount of cash equal to a
specified dollar amount times the difference between the bond or stock index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the securities comprising
the index is made. Generally, these futures contracts are closed out prior to
the expiration date of the contracts.
SMALL CAP OPPORTUNITIES FUND OPTIONS AND FUTURES CONTRACTS
Small Cap Opportunities Fund may write covered calls on up to 100% of its total
assets or employ one or more types of instruments to hedge ("Hedging
Instruments"). When hedging to attempt to protect against declines in the market
value of the Fund's securities, to permit the Fund to retain unrealized gains in
the value of Fund securities which have appreciated, or to facilitate selling
securities for investment reasons, the Fund would: (1) sell Stock Index Futures;
(2) purchase puts on such futures or securities; or (3) write covered calls on
securities or on Stock Index Futures. When hedging to establish a position in
the equities markets as a temporary substitute for purchasing particular equity
securities (which the Fund will normally purchase and then terminate the hedging
position), the Fund would: (1) purchase Stock Index Futures, or (2) purchase
calls on such Futures or on securities. The Fund's strategy of hedging with
Stock Index Futures and options on such Futures will be incidental to the Fund's
activities in the underlying cash market.
The Fund may write (i.e., sell) call options ("calls") if: (1) the calls are
listed on a domestic securities or commodities exchange and (2) the calls are
"covered" (i.e., the Fund owns the securities subject to the call or other
securities acceptable for applicable escrow arrangements) while the call is
outstanding. A call written on a Stock Index Future must be covered by
deliverable securities or segregated liquid assets. If a call written by the
Fund is exercised, the Fund forgoes any profit from any increase in the market
price above the call price of the underlying investment on which the call was
written.
When the Fund writes a call on a security, it receives a premium and agrees to
sell the underlying securities to a purchaser of a corresponding call on the
same security during the call period (usually not more than 9 months) at a fixed
exercise price (which may differ from the market price of the underlying
security), regardless of market price changes during the call period. The risk
of loss will have been retained by the Fund if the price of the underlying
security should decline during the call period, which may be offset to some
extent by the premium.
To terminate its obligation on a call it has written, the Fund may be purchase a
corresponding call in a "closing purchase transaction." A profit or loss will be
realized, depending upon whether the net of the amount of option transaction
costs and the premium previously received on the call written was more or less
than the price of the call subsequently purchased. A profit may also be realized
if the call lapses unexercised, because the Fund retains the underlying security
and the premium received. Any such profits are considered short-term capital
gains for Federal income tax purposes, and when distributed by the Fund are
taxable as ordinary income. If the Fund could not effect a closing purchase
transaction due to the lack of a market, it would have to hold the callable
securities until the call lapsed or was exercised.
The Fund may also write calls on Stock Index Futures without owning a futures
contract or a deliverable bond, provided that at the time the call is written,
the Fund covers the call by segregating in escrow an equivalent dollar amount of
liquid assets. The Fund will segregate additional liquid assets if the value of
the escrowed assets drops below 100% of the current value of the Stock Index
Future. In no circumstances would an exercise notice require the Fund to deliver
a futures contract; it would simply put the Fund in a short futures position,
which is permitted by the Fund's hedging policies.
PURCHASING CALLS AND PUTS. The Fund may purchase put options ("puts") which
relate to: (1) securities held by it; (2) Stock Index Futures (whether or not it
holds such Stock Index Futures in its Fund); or (3) broadly-based stock indices.
The Fund may not sell puts other than those it previously purchased, nor
purchase puts on securities it does not hold. The Fund may purchase calls: (1)
as to securities, broadly-based stock indices or Stock Index Futures or (2) to
effect a "closing purchase transaction" to terminate its obligation on a call it
has previously written. A call or put may be purchased only if, after such
purchase, the value of all put and call options held by the Fund would not
exceed 5% of the Fund's total assets.
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When the Fund purchases a call (other than in a closing purchase transaction),
it pays a premium and, except as to calls on stock indices, has the right to buy
the underlying investment from a seller of a corresponding call on the same
investment during the call period at a fixed exercise price. The Fund benefits
only if the call is sold at a profit or if, during the call period, the market
price of the underlying investment is above the sum of the call price plus the
transaction costs and the premium paid for the call and the call is exercised.
If the call is not exercised or sold (whether or not at a profit), it will
become worthless at its expiration date and the Fund will lose its premium
payments and the right to purchase the underlying investment. When the Fund
purchases a call on a stock index, it pays a premium, but settlement is in cash
rather than by delivery of an underlying investment.
When the Fund purchases a put, it pays a premium and, except as to puts on stock
indices, has the right to sell the underlying investment to a seller of a
corresponding put on the same investment during the put period at a fixed
exercise price. Buying a put on a security or Stock Index Future the Fund owns
enables the Fund to attempt to protect itself during the put period against a
decline in the value of the underlying investment below the exercise price by
selling the underlying investment at the exercise price to a seller of a
corresponding put. If the market price of the underlying investment is equal to
or above the exercise price and, as a result, the put is not exercised or
resold, the put will become worthless at its expiration date and the Fund will
lose its premium payment and the right to sell the underlying investment; the
put may, however, be sold prior to expiration (whether or not at a profit).
Purchasing a put on either a stock index or on a Stock Index Future not held by
the Fund permits the Fund either to resell the put or to buy the underlying
investment and sell it at the exercise price. The resale price of the put will
vary inversely with the price of the underlying investment. If the market price
of the underlying investment is above the exercise price and, as a result, the
put is not exercised, the put will become worthless on its expiration date. In
the event of a decline in price of the underlying investment, the Fund could
exercise or sell the put at a profit to attempt to offset some or all of its
loss on its Fund securities. When the Fund purchases a put on a stock index, or
on a Stock Index Future not held by it, the put protects the Fund to the extent
that the index moves in a similar pattern to the securities held. In the case of
a put on a stock index or Stock Index Future, settlement is in cash rather than
by the Fund's delivery of the underlying investment.
STOCK INDEX FUTURES. The Fund may buy and sell futures contracts only if they
are Stock Index Futures. A stock index is "broadly-based" if it includes stocks
that are not limited to issuers in any particular industry or group of
industries. Stock Index Futures obligate the seller to deliver (and the
purchaser to take) cash to settle the futures transaction, or to enter into an
offsetting contract. No physical delivery of the underlying stocks in the index
is made.
No price is paid or received upon the purchase or sale of a Stock Index Future.
Upon entering into a futures transaction, the Fund will be required to deposit
an initial margin payment in cash or U.S. Treasury bills with a futures
commission merchant (the "futures broker"). The initial margin will be deposited
with the Fund's custodian in an account registered in the futures broker's name;
however the futures broker can gain access to that account only under specified
conditions. As the future is marked to market to reflect changes in its market
value, subsequent margin payments, called variation margin, will be paid to or
by the futures broker on a daily basis. Prior to expiration of the future, if
the Fund elects to close out its position by taking an opposite position, a
final determination of variation margin is made, additional cash is required to
be paid by or released to the Fund, and any loss or gain is realized for tax
purposes. Although Stock Index Futures by their terms call for settlement by the
delivery of cash, in most cases the obligation is fulfilled without such
delivery, by entering into an offsetting transaction. All futures transactions
are effected through a clearinghouse associated with the exchange on which the
contracts are traded.
Puts and calls on broadly-based stock indices or Stock Index Futures are similar
to puts and calls on securities or futures contracts except that all settlements
are in cash and gain or loss depends on changes in the index in question (and
thus on price movements in the stock market generally) rather than on price
movements in individual securities or futures contracts. When the Fund buys a
call on a stock index or Stock Index Future, it pays a premium. During the call
period, upon exercise of a call by the Fund, a seller of a corresponding call on
the same index will pay the Fund an amount of cash to settle the call if the
closing level of the stock index or Stock Index Future upon which the call is
based is greater than the exercise price of the call; that cash payment is equal
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to the difference between the closing price of the index and the exercise price
of the call times a specified multiple (the "multiplier") which determines the
total dollar value for each point of difference. When the Fund buys a put on a
stock index or Stock Index Future, it pays a premium and has the right during
the put period to require a seller of a corresponding put, upon the Fund's
exercise of its put, to deliver to the Fund an amount of cash to settle the put
if the closing level of the stock index or Stock Index Future upon which the put
is based is less than the exercise price of the put; that cash payment is
determined by the multiplier, in the same manner as described above as to calls.
FOREIGN CURRENCY TRANSACTIONS
Funds that make foreign investments may conduct foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign exchange market or by entering into a forward foreign currency
contract. A forward foreign currency contract ("forward contract") involves an
obligation to purchase or sell a specific amount of 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. Forward contracts are considered to be derivatives. A Fund
enters into forward contracts in order to "lock in" the exchange rate between
the currency it will deliver and the currency it will receive for the duration
of the contract. In addition, a Fund may enter into forward contracts to hedge
against risks arising from securities a Fund owns or anticipates purchasing, or
the U.S. dollar value of interest and dividends paid on those securities. A Fund
will not enter into forward contracts for speculative purposes. A Fund will not
have more than 25% of its total assets committed to forward contracts, or
maintain a net exposure to forward contracts that would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
investment securities or other assets denominated in that currency.
If a Fund makes delivery of the foreign currency at or before the settlement of
a forward contract, it may be required to obtain the currency through the
conversion of assets of the Fund into the currency. The Fund may close out a
forward contract obligating it to purchase a foreign currency by selling an
offsetting contract, in which case it will realize a gain or a loss.
Foreign currency transactions involve certain costs and risks. The Fund incurs
foreign exchange expenses in converting assets from one currency to another.
Forward contracts involve a risk of loss if the Adviser is inaccurate in its
prediction of currency movements. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The precise matching of forward contract
amounts and the value of the securities involved is generally not possible.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency if the market value of the security is less than the amount of the
foreign currency the Fund is obligated to deliver under the forward contract and
the decision is made to sell the security and make delivery of the foreign
currency. The use of forward contracts as a hedging technique does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. Although forward
contracts can reduce the risk of loss due to a decline in the value of the
hedged currencies, they also limit any potential gain that might result from an
increase in the value of the currencies.
In addition, there is no systematic reporting of last sale information for
foreign currencies, and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or revised on a timely
basis. Quotation information available is generally representative of very large
transactions in the interbank market. The interbank market in foreign currencies
is a global around-the-clock market. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, a Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
The Funds have no present intention to enter into currency futures or options
contracts, but may do so in the future. A Fund might 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.
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SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and mortgage (or other asset)
swaps, and may purchase and sell interest rate "caps," "floors" and "collars."
Interest rate swaps involve the exchange by a Fund and a counterparty of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments). Mortgage swaps are similar to interest
rate swap agreements, except that the contractually-based principal amount (the
"notional principal amount") is tied to a reference pool of mortgages. Currency
swaps' notional principal amount is tied to one or more currencies, and the
exchange commitments can involve payments in the same or different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on the notional principal amount from the party selling the cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined value, to receive payments on a
notional principal amount from the party selling the floor. A collar entitles
the purchaser to receive payments to the extent a specified interest rate falls
outside an agreed range.
A Fund will enter into these transactions primarily to preserve a return or a
spread on a particular investment or portion of its portfolio or to protect
against any interest rate fluctuations or increase in the price of securities it
anticipates purchasing at a later date. The Funds intend to use these
transactions as a hedge and not as a speculative investment, and will enter into
the transactions in order to shift a Fund's investment exposure from one type of
investment to another.
A Fund may enter into interest rate protection transactions on an asset-based
basis, depending on whether it is hedging its assets or its liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments.
The use of interest rate protection transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If an Adviser
incorrectly forecasts market values, interest rates and other applicable
factors, there may be considerable impact on a Fund's performance. Even if the
Advisers are correct in their forecasts, there is a risk that the transaction
may correlate imperfectly with the price of the asset or liability being hedged.
TEMPORARY DEFENSIVE POSITION
When, in the judgment of an Adviser, market or economic conditions warrant, each
Fund, other than a Money Market Fund, may assume a defensive position and
temporarily hold cash or invest without limit in cash equivalents to retain
flexibility in meeting redemptions, paying expenses and timing of new
investments. These investments will be rated in one of the two highest
short-term rating categories by an NRSRO or, if not rated, determined by the
Adviser to be of comparable quality, 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 that have, at the time of investment, except in the case of
International Fund, total assets in excess of one billion dollars and that are
insured by the Federal Deposit Insurance Corporation; (3) commercial paper; (4)
repurchase agreements covering any of the securities in which the Fund may
invest directly; and (5) shares of money market funds registered under the 1940
Act within the limits specified therein. To the extent that a Fund assumes a
temporary defensive position, it may not be invested to pursue its investment
objective. International Fund may hold cash and invest in bank instruments
denominated in any major foreign currency.
Apart from temporary defensive purposes, a Fund may at any time invest a portion
of its assets in cash and cash equivalents as described above. When a Tax-Exempt
Fixed Income Fund assumes a temporary defensive position, it is likely that its
shareholders will be subject to federal and applicable state income taxes on a
greater portion of their income distributions received from the Fund.
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3. RISK CONSIDERATIONS
COUNTERPARTY RISK
The Funds may be exposed to the risks of financial failure or insolvency of
another party. To help reduce those risks, the Advisers, subject to the Board's
supervision, monitor and evaluate the creditworthiness of counterparties to the
Funds' transactions and intend to enter into a transaction only when they
believe that the counterparty presents minimal credit risks and the benefits
from the transaction justify the attendant risks.
The use of repurchase agreements, securities lending, reverse repurchase
agreements, interest rate protection transactions (such as swaps, caps, collars
and floors), forward commitments (including dollar roll transactions) and
forward contracts involving currencies present particular counterparty risk. In
the event that bankruptcy, insolvency or similar proceedings were commenced
against a counterparty while these transactions remained open or a counterparty
defaulted on its obligations, a Fund may have difficulties in exercising its
rights to the underlying securities or currencies, as applicable, it may incur
costs and expensive time delays in disposing of the underlying securities and it
may suffer a loss. Failure by the other party to deliver a security or currency
purchased by a Fund may result in a missed opportunity to make an alternative
investment. Counterparty insolvency risk with respect to repurchase agreements
is reduced by favorable insolvency laws that allow a Fund, among other things,
to liquidate the collateral held in the event of the bankruptcy of the
counterparty. Those laws do not apply to securities lending, reverse repurchase
agreements and dollar roll transactions, and therefore, those transactions
involve more risk than repurchase agreements. For example, in the event the
purchaser of securities in a dollar roll transaction files for bankruptcy or
becomes insolvent, a Fund's use of the proceeds of the transaction may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
As a result of entering into forward commitments and reverse repurchase
agreements, as well as lending its securities, a Fund may be exposed to greater
potential fluctuations in the value of its assets and net asset value per share.
FIXED INCOME SECURITIES
GENERAL. The market value of the interest-bearing fixed income securities held
by the Funds will be affected by changes in interest rates. There is normally an
inverse relationship between the market value of securities sensitive to
prevailing interest rates and actual changes in interest rates. The longer the
remaining maturity (and duration) of a security, the more sensitive the security
is to changes in interest rates. All fixed income securities, including U.S.
Government Securities, can change in value when there is a change in interest
rates. Changes in the ability of an issuer to make payments of interest and
principal and in the markets' perception of an issuer's creditworthiness will
also affect the market value of that issuer's debt securities. As a result, an
investment in a Fund is subject to risk even if all fixed income securities in
the Fund's investment portfolio are paid in full at maturity. In addition,
certain fixed income securities may be subject to extension risk, which refers
to the change in total return on a security resulting from an extension or
abbreviation of the security's maturity.
Yields on fixed income securities, including municipal securities, are dependent
on a variety of factors, including the general conditions of the 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. A portion of the
municipal securities held by the Funds may be supported by credit and liquidity
enhancements, such as letters of credit (which are not covered by federal
deposit insurance) or puts or demand features of third party financial
institutions, generally domestic and foreign banks.
The issuers of fixed income securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors that may restrict the ability of the issuer to pay, when due, the
principal of and interest on its debt securities. The possibility exists
therefore, that, as a result of bankruptcy, litigation or other conditions, the
ability of an issuer to pay, when due, the principal of and interest on its debt
securities may become impaired.
CREDIT RISK. The Funds' investments in fixed income securities are subject to
credit risk relating to the financial condition of the issuers of the securities
that each Fund holds. To limit credit risk, each Fixed Income Fund, Tax-Free
Fixed Income Fund and Balanced Fund will generally buy debt securities that are
rated in the top four long-term rating categories by an NRSRO or in the top two
short-term rating categories by an NRSRO (although certain Funds have greater
restrictions). Moody's, Standard & Poor's and other NRSROs are private services
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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 securities by several NRSROs is included in Appendix A. The
Advisers may use these ratings to determine whether to purchase, sell or hold a
security. Ratings are not, however, absolute standards of quality. Credit
ratings attempt to evaluate the safety of principal and interest payments and do
not evaluate the risks of fluctuations in market value. Consequently, similar
securities with the same rating may have different market prices. In addition,
rating agencies may fail to make timely changes in credit ratings and the
issuer's current financial condition may be better or worse than a rating
indicates.
Each Fund may retain a security that ceases to be rated or whose rating has been
lowered below the Fund's lowest permissible rating category (except in certain
cases with respect to the Money Market Funds) if the Adviser determines that
retaining the security is in the best interests of the Fund. Because a downgrade
often results in a reduction in the market price of the security, sale of a
downgraded security may result in a loss.
Each Fund may purchase unrated securities if the Adviser determines that the
security is of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not be as actively traded as rated securities.
MORTGAGE-RELATED SECURITIES. The value of mortgage-related securities may be
significantly affected by changes in interest rates, the markets' perception of
issuers, the structure of the securities and the creditworthiness of the parties
involved. The ability of the Funds to successfully utilize mortgage-related
securities depends in part upon the ability of the Advisers to forecast interest
rates and other economic factors correctly. Some mortgage-related securities
have structures that make their reaction to interest rate changes and other
factors difficult to predict.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related
securities. 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 mortgages and other social and demographic conditions.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool. The volume of prepayments of principal on
the mortgages underlying a particular mortgage-related security will influence
the yield of that security, affecting the Fund's yield. Because prepayments of
principal generally occur when interest rates are declining, it is likely that
the Funds, to the extent they retain the same percentage of debt securities, may
have to reinvest the proceeds of prepayments at lower interest rates then those
of their previous investments. If this occurs, a Fund's yield will
correspondingly decline. Thus, mortgage-related securities may have less
potential for capital appreciation in periods of falling interest rates (when
prepayment of principal is more likely) than other fixed income securities of
comparable duration, although they may have a comparable risk of decline in
market value in periods of rising interest rates. A decrease in the rate of
prepayments may extend the effective maturities of mortgage-related securities,
increasing their sensitivity to changes in market interest rates. To the extent
that the Funds purchase mortgage-related securities at a premium, unscheduled
prepayments, which are made at par, result in a loss equal to any unamortized
premium.
ASSET-BACKED SECURITIES. Like mortgages underlying mortgage-related securities,
the collateral underlying assets are subject to prepayment, which may reduce the
overall return to holders of asset-backed securities. Asset-backed securities
present certain additional and unique risks. Primarily, these securities do not
always have the benefit of a security interest in collateral comparable to the
security interests associated with mortgage-related securities. 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. 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
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mortgage-related securities. In addition, because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of an interest rate or
economic cycle has not been tested.
NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities are securities
rated below the fourth highest rating category by an NRSRO or which are unrated
and judged by the Adviser to be of comparable quality. Such high risk securities
(commonly referred to as "junk bonds") are not considered to be investment grade
and have speculative or predominantly speculative characteristics.
Non-investment grade, high risk securities provide poor protection for payment
of principal and interest but may have greater potential for capital
appreciation than do higher quality securities. These lower rated securities
involve greater risk of default or price changes due to changes in the issuers'
creditworthiness than do higher quality 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 or rising interest
rates. Under such conditions, the Funds may have to use subjective rather than
objective criteria to value its high yield/high risk securities investments
accurately and rely more heavily on the judgment of the Fund's Adviser.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund's
Adviser may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. If a Fund experiences unexpected
net redemptions, the Fund's Adviser may be forced to sell the Fund's higher
rated securities, resulting in a decline in the overall credit quality of the
Fund's portfolio and increasing the exposure of the Fund to the risks of high
yield/high risk securities.
FOREIGN SECURITIES
All investments, domestic and foreign, involve certain risks. Investments in the
securities of foreign issuers may involve risks in addition to those normally
associated with investments in the securities of U.S. issuers. 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, and
changes in foreign governmental attitudes towards private investment, possibly
leading to nationalization, increased taxation or confiscation of foreign
investors' assets.
Moreover, dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income available for distribution to a
Fund's shareholders; commission rates payable on foreign transactions are
generally higher than in the United States; foreign accounting, auditing and
financial reporting standards differ from those in the United States and,
accordingly, less information may be available about foreign companies than is
available about issuers of comparable securities in the United States; and
foreign securities may trade less frequently and with lower volume and may
exhibit greater price volatility than United States securities.
Changes in foreign exchange rates will also affect the value in U.S. dollars of
all foreign currency-denominated securities held by a Fund. 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.
Income from foreign securities will be received and realized in foreign
currencies, and a Fund is required to compute and distribute income in U.S.
dollars. Accordingly, a decline in the value of a particular foreign currency
against the U.S. dollar occurring after the Fund's income has been earned and
computed in U.S. dollars may require the Fund to liquidate portfolio securities
to acquire sufficient U.S. dollars to make a distribution. Similarly, if the
exchange rate declines between the time a Fund incurs expenses in U.S. dollars
and the time such expenses are paid, the Fund may be required to liquidate
additional foreign securities to purchase the U.S. dollars required to meet such
expenses.
Certain Funds may purchase foreign bank obligations. In addition to the risks
described above that are generally applicable to foreign investments, the
investments that the Funds make in obligations of foreign banks, branches or
subsidiaries may involve further risks, including differences between foreign
banks and U.S. banks in applicable accounting, auditing and financial reporting
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standards, and the possible establishment of exchange controls or other foreign
government laws or restrictions applicable to the payment of certificates of
deposit or time deposits that may affect adversely the payment of principal and
interest on the securities held by the Funds.
LEVERAGE
The Funds may use leverage in an effort to increase their returns. Leverage
involves special risks and may involve speculative investment techniques.
Leverage exists when cash made available to a Fund through an investment
technique is used to make additional Fund investments. Borrowing for other than
temporary or emergency purposes, lending portfolio securities, entering into
reverse repurchase agreements, purchasing securities on a when-issued, delayed
delivery or forward commitment basis (including dollar roll transactions) and
the use of swaps and related agreements are transactions that result in
leverage. Certain Funds also may purchase securities on margin or enter into
short sales. The Funds use these investment techniques only when the Advisers
believe that the leveraging and the returns available to the Funds from
investing the cash will provide investors a potentially higher return.
Leverage creates the risk of magnified capital losses which occur when losses
affect an asset base, enlarged by borrowings or the creation of liabilities,
that exceeds the equity base of the Fund. Leverage may involve the creation of a
liability that requires a Fund to pay interest (for instance, reverse repurchase
agreements) or the creation of a liability that does not entail any interest
costs (for instance, forward commitment costs). The risks of leverage include a
higher volatility of the net asset value of the Fund's interests and the
relatively greater effect on the net asset value of the interests caused by
favorable or adverse market movements or changes in the cost of cash obtained by
leveraging and the yield from invested cash. So long as a Fund 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 for the Fund than if a Fund were not leveraged. Changes in interest rates
and related economic factors could cause the relationship between the cost of
leveraging and the yield to change so that rates involved in the leveraging
arrangement may substantially increase relative to the yield on the obligations
in which the proceeds of the leveraging have been invested. To the extent that
the interest expense involved in leveraging approaches the net return on the
Fund's investment portfolio, the benefit of leveraging will be reduced, and, if
the interest expense on borrowings were to exceed the net return to investors,
the Fund's use of leverage would result in a lower rate of return than if the
Fund were not leveraged. In an extreme case, if the Fund's current investment
income were not sufficient to meet the interest expense of leveraging, it could
be necessary for the Fund to liquidate certain of its investments at an
inappropriate time.
SEGREGATED ACCOUNTS. In order to attempt to reduce the risks involved in various
transactions involving leverage, a Fund's custodian will set aside and maintain,
in a segregated account, cash and liquid securities. The account's value, which
is marked to market daily, will be at least equal to the Fund's commitments
under these transactions. The use of a segregated account in connection with
leveraged transactions may result in a Fund's investment portfolio being 100%
leveraged.
OPTIONS AND FUTURES CONTRACTS
A Fund's use of options and futures contracts subjects the Fund to certain
unique investment risks. These risks include: (1) dependence on an Adviser's
ability to correctly predict movements in the prices of individual securities
and fluctuations in interest rates, the general securities markets and other
economic factors; (2) imperfect correlations between movements in the prices of
options or futures contracts and movements in the price of the securities hedged
or used for cover which may cause a given hedge not to achieve its objective;
(3) the fact that the skills and techniques needed to trade these instruments
are different from those needed to select the other securities in which a Fund
invests; (4) lack of assurance that a liquid secondary market will exist for any
particular instrument at any particular time, which, among other things, may
hinder a Fund's ability to limit exposures by closing its positions; (5) the
possible need to defer closing out certain options, futures contracts and
related options to avoid adverse tax consequences; and (6) the potential for
unlimited losses when investing in futures contracts or writing options for
which an offsetting position is not held.
Other risks include the inability of a Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price and the possible loss of the entire premium paid for options
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purchased by the Fund. In addition, the futures exchanges may limit the amount
of fluctuation permitted in certain futures contract prices on related options
during a single trading day. A Fund may be forced, therefore, to liquidate or
close out a futures contract position at a disadvantageous price. There is no
assurance that a counterparty in an over-the-counter option transaction will be
able to perform its obligations. There are a limited number of options on
interest rate futures contracts and exchange-traded options contracts on fixed
income securities. The Funds may use various futures contracts that are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market in those contracts
will develop or continue to exist. A Fund's activities in the futures and
options markets may result in higher portfolio turnover rates and additional
brokerage costs, which could reduce a Fund's yield.
SMALL CAPITALIZATION STOCKS
Investments in smaller capitalization companies carry greater risk than
investments in larger capitalization companies. Smaller capitalization companies
generally experience higher growth rates and higher failure rates than do larger
capitalization companies; and the trading volume of smaller capitalization
companies' securities is normally lower than that of larger capitalization
companies and, consequently, generally has a disproportionate effect on market
price (tending to make prices rises more in response to buying demand and fall
more in response to selling pressure).
Securities owned by a Fund that are traded in the over-the-counter market or on
a regional securities exchange may not be traded every day or in the volume
typical of securities trading on a national securities exchange. As a result,
disposition by a Fund of a portfolio security, to meet redemption requests by
investors or otherwise, may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over a lengthy period of time.
Investments in small, unseasoned issuers generally carry greater risk than is
customarily associated with larger, more seasoned companies. Such issuers 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 a Fund may purchase when
they are offered to the public for the first time) may have a limited trading
market which can adversely affect their sale by the Fund and can result in such
securities being priced lower than otherwise might be the case. If other
institutional investors engage in trading this type of security, a Fund may be
forced to dispose of its holdings at prices lower than might otherwise be
obtained.
GEOGRAPHIC CONCENTRATION
To the extent a Fund's investments are primarily concentrated in issuers located
in a particular state, region or country, the value of the Fund's shares may be
especially affected by factors pertaining to that state, region or country's
economy and other factors specifically affecting the ability of issuers of that
state, region or country to meet their obligations. As a result, the value of
the Fund's assets may fluctuate more widely than the value of shares of a more
geographically diverse portfolio.
Colorado Tax-Free Fund, Minnesota Intermediate Tax-Free Fund and Minnesota
Tax-Free Fund invest principally in municipal securities issued by issuers
within a particular state and the state's political subdivisions. Those Funds
are more susceptible to factors adversely affecting issuers of those municipal
securities than would be a more geographically diverse municipal securities
portfolio. In addition, to the extent they may concentrate their investments in
a particular jurisdiction, Municipal Money Market Fund, Limited Term Tax-Free
Fund and Tax-Free Income Fund will be subject to similar risks. These risks
arise from the financial condition of the state and its political subdivisions.
To the extent state or local governmental entities are unable to meet their
financial obligations, the income derived by a Fund, its ability to preserve or
realize appreciation of its portfolio assets or its liquidity could be impaired.
DIVERSIFICATION
Colorado Tax-Free Fund, Minnesota Intermediate Tax-Free Fund and Minnesota
Tax-Free Fund are non-diversified, which means that they have greater latitude
than a diversified fund with respect to the investment of their assets in the
securities of a relatively small number of issuers. As non-diversified
portfolios, these Funds may present greater risks than a diversified fund
because each Fund's performance will generally be more heavily influenced by an
adverse movement in a single security's price. Each Fund intends to comply with
applicable diversification requirements of the Internal Revenue Code. These
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requirements provide that, as of the last day of each fiscal quarter: (1) with
respect to 50% of its assets, a Fund may not: (a) own the securities of a single
issuer, other than a U.S. Government security, with a value of more than 5% of
the Fund's total assets; or (b) own more than 10% of the outstanding voting
securities of a single issuer; and (2) a Fund may not own the securities of a
single issuer, other than a U.S. Government security, with a value of more than
25% of the Fund's total assets.
4. INFORMATION CONCERNING COLORADO AND MINNESOTA
Following is a brief summary of some of the factors that may affect the
financial condition of the State of Colorado and the State of Minnesota and
their respective political subdivisions. It is not a complete or comprehensive
description of these factors or an analysis of financial conditions and may not
be indicative of the financial condition of issuers of obligations held by
Colorado Tax Free Fund, Minnesota Intermediate Tax-Free Fund and Minnesota
Tax-Free Fund or any particular projects financed with the proceeds of such
obligations. Many factors not included in the summary, such as the national
economy, social and environmental policies and conditions, and the national and
international markets for products produced in each state could have an adverse
impact on the financial condition of a State and its political subdivisions,
including the issuers of obligations held by a Fund. It is not possible to
predict whether and to what extent those factors may affect the financial
condition of a State and its political subdivisions, including the issuers of
obligations held by a Fund.
The following summary is based on publicly available information that has not
been independently verified by the Trust or its legal counsel.
COLORADO
THE COLORADO STATE ECONOMY. Among the most significant sectors of the State's
economy are services, trade, manufacture of durable and non-durable goods and
tourism. During the mid-1980's, the State's economy was adversely affected by
numerous factors, including the contraction of the energy sector, layoffs by
advanced technology firms and an excess supply of both residential and
nonresidential buildings causing employment in the construction sector to
decline. As a result of these conditions, certain areas of the State experienced
particularly high unemployment. Furthermore, in 1986, for the first time in 32
years, job generation in the State was negative and, in 1986, for the first time
in 21 years, the State experienced negative migration, with more people leaving
the State than moving in.
From 1993 through 1997, there has been steady improvement in the Colorado
economy: per-capita income increased approximately 21.1% (5.35% in 1997) and
retail trade sales increased approximately 32.3% (5.6% in 1997). The State's
estimated growth rate is above the national growth rate and the State's
unemployment rate is still below the national unemployment rate (in 1997 the
State's unemployment rate was 3.3% and the United State's unemployment rate was
5.0%).
The State of Colorado's political subdivisions include approximately 1,600 units
of local government in Colorado, including counties, statutory cities and towns,
home-rule cities and counties, school districts and a variety of water,
irrigation, and other special districts and special improvement districts, all
with various constitutional and statutory authority to levy taxes and incur
indebtedness.
STATE REVENUES. The State operates on a fiscal year beginning July 1 and ending
June 30. Fiscal year 1997 refers to the fiscal year ended June 30, 1997.
The State derives all of its General Fund revenues from taxes. The two most
important sources of these revenues are sales and use taxes and personal income
taxes, which accounted for approximately 31.0% and 54.3%, respectively, of total
General Fund revenues during fiscal year 1996 and approximately 30.5% and 55.0%,
respectively, of total General Fund revenues during fiscal year 1997. The ending
General Fund balance for fiscal year 1996 was $368.5 million and for fiscal year
1997 was approximately $514.1 million.
The Colorado Constitution contains strict limitations on the ability of the
State to create debt except under certain very limited circumstances. However,
the constitutional provision has been interpreted not to limit the ability of
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the State to issue certain obligations which do not constitute debt, including
short-term obligations which do not extend beyond the fiscal year in which they
are incurred and lease purchase obligations which are subject to annual
appropriation. The State is authorized pursuant to State statutes to issue
short-term notes to alleviate temporary cash flow shortfalls. The most recent
issue of such notes, issued on July 1, 1998, was given the highest rating
available for short-term obligations by S&P (SP-1+) and Fitch (F-1+) (A rating
on such notes was not requested from, and consequently no rating was given by,
Moody's). Because of the short-term nature of such notes, their ratings should
not be considered necessarily indicative of the State's general financial
condition.
TAX AND SPENDING LIMITATION AMENDMENT. On November 3, 1992, the Colorado voters
approved a State constitutional amendment (the "Amendment") that restricts the
ability of the State and local governments to increase taxes, revenues, debt and
spending. The Amendment provides that its provisions supersede conflicting State
constitutional, State statutory, charter or other State or local provisions.
The provisions of the Amendment apply to "districts," which are defined in the
Amendment as the State or any local government, with certain exclusions. Under
the terms of the Amendment, districts must have prior voter approval to impose
any new tax, tax rate increase, mill levy increase, valuation for assessment
ratio increase and extension of an expiring tax. Such prior voter approval is
also required, except in certain limited circumstances, for the creation of "any
multiple-fiscal year direct or indirect district debt or other financial
obligation." The Amendment prescribes the timing and procedures for any
elections required by the Amendment.
Because the Amendment's voter approval requirements apply to any "multiple
fiscal year" debt or financial obligation, short-term obligations which do not
extend beyond the fiscal year in which they are incurred are exempt from the
voter approval requirements of the Amendment. In addition, the Colorado Court of
Appeals has determined that lease purchase obligations subject to annual
appropriation are not subject to the voter approval requirements of the
Amendment. The Amendment's voter approval requirements and other limitations
(discussed in the following paragraph) do not apply to "enterprises," which are
defined in the Amendment as follows: "a government-owned business authorized to
issue its own revenue bonds and receiving under 10% of annual revenue in grants
from all Colorado state and local governments combined."
Among other provisions, the Amendment requires the establishment of emergency
reserves, limits increases in district revenues and limits increases in district
fiscal year spending. As a general matter, annual State fiscal year spending may
change not more than inflation plus the percentage change in State population in
the prior calendar year. Annual local district fiscal year spending may change
no more than inflation in the prior calendar year plus annual local growth, as
defined in and subject to the adjustments provided in the Amendment. The
Amendment provides that annual district property tax revenues may change no more
than inflation in the prior calendar year plus annual local growth, as defined
in and subject to the adjustments provided in the Amendment. District revenues
in excess of the limits prescribed by the Amendment are required, absent voter
approval, to be refunded by any reasonable method, including temporary tax
credits or rate reductions. During fiscal year 1998, revenues in excess of the
limits applicable for the 1997 fiscal year, in the amount of approximately
$139.0 million were refunded to certain taxpayers in the State in accordance
with the Amendment. In fiscal year 1999, preliminary figures indicate that
aproximately $562 million would be refunded for the excess over the fiscal year
1998 limit. In addition, the Amendment prohibits new or increased real property
transfer taxes, new State real property taxes and new local district income
taxes. The Amendment also provides that a local district may reduce or end its
subsidy to any program (other than public education through grade 12 or as
required by federal law) delegated to it by the State General Assembly for
administration.
This description is not intended to constitute a complete description of all of
the provisions of the Amendment. Furthermore, many provisions of the Amendment
and their application are unclear. Several statutes have been enacted since the
passage of the Amendment attempting to clarify the application of the Amendment
with respect to certain governmental entities and activities and numerous court
decisions have been rendered interpreting certain of the Amendment's provisions.
However, many provisions of the Amendment may require further legislative or
judicial clarification. The future impact of the Amendment on the financial
operations and obligations of the State and local governments in the State
cannot be determined at this time. Attempts to apply the provisions of the
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Amendment to obligations issued prior to the approval of the Amendment may be
challenged as violation of protections afforded by the federal constitution
against impairment of contracts.
MINNESOTA
The following information has been derived from the 1997 edition of Historical
Economic Statistics and the Economic Report to the Governor for 1993 and 1994,
both prepared by the Economic Resource Group, and Compare Minnesota: An Economic
and Statistical Fact Book 1996/1997 by the Minnesota Department of Trade and
Economic Development. Generally, the information below is current only through
1994.
THE GENERAL STRUCTURE OF THE STATE'S ECONOMY
Based on the most current information readily available, derived from the
sources referred to above, a number of general conclusions can be drawn about
Minnesota's economy taken as a whole.
Diversity and a significant natural resource base are two important
characteristics of the State's economy.
When viewed on an aggregate level, the structure of the State's economy,
according to the most recent readily available information, parallels the
structure of the United States economy as a whole. State employment in 10 major
sectors is distributed in approximately the same proportions as national
employment.
Some unique characteristics of the State's economy are apparent in employment
concentrations in many major industries. The State's concentration of employment
in high technology industries is higher than the United States average. This
emphasis is partly explained by the location in the State of Honeywell, IBM, 3M
Company, Unisys and Seagate Technology.
The importance of the State's resource base for overall employment is apparent
in the employment mix in non durable goods industries. According to the most
recent readily available information, the State's concentration of employment is
higher than the United States average in the food and kindred products industry
and in the forest and forestry products industry. Both of these industries rely
heavily on renewable resources in the State. Over half of the State's acreage is
devoted to agricultural purposes, and nearly one-third to forestry.
The printing and publishing industry and the medical products manufacturing
industry are also relatively more important to employment in the State than in
the United States.
Mining is currently a less significant factor in the State economy than it once
was. Mining employment, primarily in the iron ore or taconite industry, dropped
from 17.3 thousand in 1979 to 7.4 thousand in 1994. It is not expected that
mining employment will return to 1979 levels. However, Minnesota retains
significant quantities of taconite as well as copper, nickel, cobalt, and peat
which may be utilized in the future.
PERFORMANCE OF THE STATE'S ECONOMY
Since 1980, State per capita personal income has been within a few percentage
points of national per capita personal income. The State's per capita income,
which is computed by dividing personal income by total resident population, has
generally remained above the national average in spite of the early 1980's
recessions and some difficult years in agriculture.
According to the most recent readily available information, the annual
unemployment rate in Minnesota has been below that of the United States since
1985.
POPULATION TRENDS IN THE STATE
Minnesota resident population grew from 4,074,000 in 1980 to 4,565,000 in 1994,
for a growth rate of 12.1%. The United States growth rate between 1980 and 1994
was 15.1% and the overall growth rate for the twelve north central states was
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4.4%. Based on the most recent readily available information, the Minnesota
population is forecast to grow 12.3% between 1994 and 2010.
5. INVESTMENT LIMITATIONS
For purposes of all fundamental and nonfundamental investment policies of the
Fund: (1) the term 1940 Act includes the rules thereunder, SEC interpretations
and any exemptive order upon which the Fund may rely and (2) the term Code
includes the rules thereunder, IRS interpretations and any private letter ruling
or similar authority upon which the Fund may rely.
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.
FUNDAMENTAL LIMITATIONS
Each Fund has adopted the following fundamental investment policies.
(1) DIVERSIFICATION
EACH FUND (other than Colorado Tax-Free Fund, Minnesota
Intermediate Tax-Free Fund and Minnesota Tax-Free Fund) may
not, with respect to 75% of its assets, purchase a security
(other than a U.S. Government Security or a security of an
investment company) if, as a result: (1) more than 5% of the
Fund's total assets would be invested in the securities of a
single issuer or (2) the Fund would own more than 10% of the
outstanding voting securities of any single issuer.
(2) CONCENTRATION
(a) CASH INVESTMENT FUND and READY CASH INVESTMENT FUND may not
purchase a security if, as a result, more than 25% of the
Fund's total assets would be invested in securities of
issuers conducting their principal business activities in
the same industry; provided: (1) there is no limit on
investments in U.S. Government Securities, in repurchase
agreements covering U.S. Government Securities or in foreign
government securities; (2) municipal securities are not
treated as involving a single industry; (3) there is no
limit on investment in issuers domiciled in a single
country; (4) financial service companies are classified
according to the end users of their services (for example,
automobile finance, bank finance and diversified finance);
and (5) utility companies are classified according to their
services (for example, gas, gas transmission, electric and
gas, electric and telephone); and provided the Fund will
invest more than 25% of the value of the Fund's total assets
in obligations of domestic and foreign financial
institutions and their holding companies. Notwithstanding
anything to the contrary, to the extent permitted by the
1940 Act, the Fund may invest in one or more investment
companies; provided that, except to the extent the Fund
invests in other investment companies pursuant to Section
12(d)(1)(A) of the 1940 Act, the Fund treats the assets of
the investment companies in which it invests as its own for
purposes of this policy.
(b) TREASURY FUND, U.S. GOVERNMENT FUND and MUNICIPAL MONEY
MARKET FUND may not purchase a security if, as a result,
more than 25% of the Fund's total assets would be invested
in securities of issuers conducting their principal business
activities in the same industry; provided: (1) there is no
limit on investments in U.S. Government Securities, in
repurchase agreements covering U.S. Government Securities,
in foreign government securities, or in obligations of
domestic commercial banks (including U.S. branches of
foreign banks subject to regulations under U.S. laws
applicable to domestic banks and, to the extent that its
parent is unconditionally liable for the obligation, foreign
branches of U.S. banks); (2) municipal securities are not
treated as involving a single industry; (3) there is no
limit on investment in issuers domiciled in a single
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country; (4) financial service companies are classified
according to the end users of their services (for example,
automobile finance, bank finance and diversified finance);
and (5) utility companies are classified according to their
services (for example, gas, gas transmission, electric and
gas, electric and telephone). Notwithstanding anything to
the contrary, to the extent permitted by the 1940 Act, the
Fund may invest in one or more investment companies;
provided that, except to the extent the Fund invests in
other investment companies pursuant to Section 12(d)(1)(A)
of the 1940 Act, the Fund treats the assets of the
investment companies in which it invests as its own for
purposes of this policy.
(c) TREASURY PLUS FUND may not purchase a security if, as a
result, more than 25% of the Fund's total assets would be
invested in securities of issuers conducting their principal
business activities in the same industry. For purposes of
this limitation, there is no limit on (i) investments in
U.S. Government securities, in repurchase agreements
covering U.S. Government securities, in securities issued by
the states, territories and possessions of the United States
("municipal securities") or in foreign government securities
or (ii) investment in issuers domiciled in a single
jurisdiction. Notwithstanding anything to the contrary, to
the extent permitted by the 1940 Act, the Fund may invest in
one or more investment companies; provided that, except to
the extent the Fund invests in other investment companies
pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund
treats the assets of the investment companies in which it
invests as its own for purposes of this policy. For purposes
of this policy (i) "mortgage related securities," as that
term is defined in the 1934 Act are treated as securities of
an issuer in the industry of the primary type of asset
backing the security, (ii) financial service companies are
classified according to the end users of their services (for
example, automobile finance, bank finance and diversified
finance) and (iii) utility companies are classified
according to their services (for example, gas, gas
transmission, electric and gas, electric and telephone).
(d) INCOME FUND, LIMITED TERM TAX-FREE FUND, TAX-FREE INCOME
FUND, COLORADO TAX-FREE FUND, MINNESOTA INTERMEDIATE
TAX-FREE FUND, MINNESOTA TAX-FREE FUND and VALUGROWTH STOCK
FUND may not purchase a security if, as a result, more than
25% of the Fund's total assets would be invested in
securities of issuers conducting their principal business
activities in the same industry; provided: (1) there is no
limit on investments in repurchase agreements covering U.S.
Government Securities; (2) municipal securities are not
treated as involving a single industry; (3) financial
service companies are classified according to the end users
of their services (for example, automobile finance, bank
finance and diversified finance); and (4) utility companies
are classified according to their services (for example,
gas, gas transmission, electric and gas, electric and
telephone). Notwithstanding anything to the contrary, to the
extent permitted by the 1940 Act, the Fund may invest in one
or more investment companies; provided that, except to the
extent the Fund invests in other investment companies
pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund
treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
(e) TOTAL RETURN BOND FUND may not purchase a security if, as a
result, more than 25% of the Fund's total assets would be
invested in securities of issuers conducting their principal
business activities in the same industry; provided: (1)
there is no limit on investments in U.S. Government
Securities, or in repurchase agreements covering U.S.
Government Securities; (2) mortgage-related or
housing-related securities (including mortgage-related or
housing-related U.S. Government Securities) and municipal
securities are not treated as involving a single industry;
(3) financial service companies are classified according to
the end users of their services (for example, automobile
finance, bank finance and diversified finance); and (4)
utility companies are classified according to their services
(for example, gas, gas transmission, electric and gas,
electric and telephone). Notwithstanding anything to the
contrary, to the extent permitted by the 1940 Act, the Fund
may invest in one or more investment companies; provided
that, except to the extent the Fund invests in other
investment companies pursuant to Section 12(d)(1)(A) of the
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1940 Act, the Fund treats the assets of the investment
companies in which it invests as its own for purposes of
this policy.
(f) SMALL COMPANY STOCK FUND may not purchase a security if, as
a result, more than 25% of the Fund's total assets would be
invested in securities of issuers conducting their principal
business activities in the same industry; provided: (1)
there is no limit on investments in U.S. Government
Securities, or in repurchase agreements covering U.S.
Government Securities; (2) municipal securities are not
treated as involving a single industry; (3) financial
service companies are classified according to the end users
of their services (for example, automobile finance, bank
finance and diversified finance); and (4) utility companies
are classified according to their services (for example,
gas, gas transmission, electric and gas, electric and
telephone). Notwithstanding anything to the contrary, to the
extent permitted by the 1940 Act, the Fund may invest in one
or more investment companies; provided that, except to the
extent the Fund invests in other investment companies
pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund
treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
(g) DIVERSIFIED SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND
may not purchase a security if, as a result, more than 25%
of the Fund's total assets would be invested in securities
of issuers conducting their principal business activities in
the same industry; provided, however, that there is no limit
on investments in U.S. Government Securities.
Notwithstanding anything to the contrary, to the extent
permitted by the 1940 Act, the Fund may invest in one or
more investment companies; provided that, except to the
extent the Fund invests in other investment companies
pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund
treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
(h) STABLE INCOME FUND, LIMITED TERM GOVERNMENT INCOME FUND,
INTERMEDIATE GOVERNMENT INCOME FUND, DIVERSIFIED BOND FUND,
STRATEGIC INCOME FUND, MODERATE BALANCED FUND, GROWTH
BALANCED FUND, AGGRESSIVE BALANCED FUND, INCOME EQUITY FUND,
INDEX FUND, DIVERSIFIED EQUITY FUND, GROWTH EQUITY FUND,
LARGE COMPANY GROWTH FUND, and SMALL COMPANY GROWTH FUND may
not purchase a security if, as a result, more than 25% of
the Fund's total assets would be invested in securities of
issuers conducting their principal business activities in
the same industry; provided, however, that there is no limit
on investments in U.S. Government Securities, repurchase
agreements covering U.S. Government Securities, foreign
government securities, mortgage-related or housing-related
securities, municipal securities and issuers domiciled in a
single country; that financial service companies are
classified according to the end users of their services (for
example, automobile finance, bank finance and diversified
finance); and that utility companies are classified
according to their services (for example, gas, gas
transmission, electric and gas, electric and telephone.
Notwithstanding anything to the contrary, to the extent
permitted by the 1940 Act, the Fund may invest in one or
more investment companies; provided that, except to the
extent the Fund invests in other investment companies
pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund
treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
(i) INTERNATIONAL FUND may not purchase a security if, as a
result, more than 25% of the Fund's total assets would be
invested in securities of issuers conducting their principal
business activities in the same industry; provided: (1)
there is no limit on investments in U.S. Government
Securities, or in repurchase agreements covering U.S.
Government Securities; (2) there is no limit on investment
in issuers domiciled in a single country; (3) financial
service companies are classified according to the end users
of their services (for example, automobile finance, bank
finance and diversified finance); and (4) utility companies
are classified according to their services (for example,
gas, gas transmission, electric and gas, electric and
telephone). Notwithstanding anything to the contrary, to the
extent permitted by the 1940 Act, the Fund may invest in one
or more investment companies; provided that, except to the
extent the Fund invests in other investment companies
31
<PAGE>
pursuant to Section 12(d)(1)(A) of the 1940 Act, the Fund
treats the assets of the investment companies in which it
invests as its own for purposes of this policy.
(3) BORROWING
(a) Each MONEY MARKET FUND, INCOME FUND, TOTAL RETURN BOND FUND,
each TAX-FREE INCOME FUND, VALUGROWTH STOCK FUND, SMALL
COMPANY STOCK FUND, DIVERSIFIED SMALL CAP FUND and SMALL CAP
OPPORTUNITIES FUND may borrow money from banks or by entering
into reverse repurchase agreements, but the Fund will limit
borrowings to amounts not in excess of 33 1/3% of the value of
the Fund's total assets (computed immediately after the
borrowing).
(b) STABLE INCOME FUND, LIMITED TERM GOVERNMENT INCOME FUND,
INTERMEDIATE GOVERNMENT INCOME FUND, DIVERSIFIED BOND FUND,
STRATEGIC INCOME FUND, MODERATE BALANCED FUND, GROWTH BALANCED
FUND, AGGRESSIVE BALANCED-EQUITY FUND, INDEX FUND, INCOME
EQUITY FUND, DIVERSIFIED EQUITY FUND, GROWTH EQUITY FUND,
LARGE COMPANY GROWTH FUND, SMALL COMPANY GROWTH FUND and
INTERNATIONAL FUND may borrow money for temporary or emergency
purposes, including the meeting of redemption requests, but
not in excess of 33 1/3% of the value of the Fund's total
assets (as computed immediately after the borrowing).
(c) TREASURY PLUS FUND may not borrow money if, as a result,
outstanding borrowings would exceed an amount equal to 33 1/3%
of the Fund's total assets. For purposes of this limitation,
the following are not treated as borrowing to the extent they
are fully collateralized: (i) the delayed delivery of
purchased securities (such as the purchase of when-issued
securities), (ii) reverse repurchase agreements; (iii) dollar
roll transactions; and (iv) the lending of securities.
(4) ISSUANCE OF SENIOR SECURITIES
NO FUND may issue senior securities except to the extent permitted by
the 1940 Act.
(5) UNDERWRITING ACTIVITIES
(a) TREASURY PLUS FUND may not underwrite (as that term is defined
by 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 considered to be an
underwriter.
(b) NO OTHER FUND may underwrite securities of other issuers,
except to the extent that the Fund may be considered to be
acting as an underwriter in connection with the disposition of
portfolio securities.
(6) MAKING LOANS
(a) TREASURY PLUS FUND may not 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.
(b) NO OTHER FUND may make loans, except a Fund may enter into
repurchase agreements, purchase debt securities that are
otherwise permitted investments and lend portfolio securities.
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(7) PURCHASES AND SALES OF REAL ESTATE
(a) EACH FUND (other than DIVERSIFIED SMALL CAP FUND, SMALL CAP
OPPORTUNITIES FUND AND TREASURY PLUS FUND) may not purchase or
sell real estate or any interest therein or real estate
limited partnership interests, except that the Fund may invest
in debt obligations secured by real estate or interests
therein or securities issued by companies that invest in real
estate or interests therein.
(b) DIVERSIFIED SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND
may not purchase or sell real estate or any interest therein,
except that it may invest in debt obligations secured by real
estate or interests therein or securities issued by companies
that invest in real estate or interests therein.
(c) TREASURY PLUS FUND may not purchase or sell real estate,
unless acquired as a result of ownership of securities or
other investments (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).
(8) PURCHASES AND SALES OF COMMODITIES
(a) EACH FIXED INCOME FUND, EQUITY FUND (other than DIVERSIFIED
SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND) and BALANCED
FUND may not purchase or sell physical commodities or
contracts, options or options on contracts to purchase or sell
physical commodities; provided that currency and
currency-related contracts and contracts on indices will not
be deemed to be physical commodities.
(b) DIVERSIFIED SMALL CAP FUND and SMALL CAP OPPORTUNITIES FUND
may not purchase or sell physical commodities unless acquired
as a result of owning securities or other instruments, but it
may purchase, sell or enter into financial options and futures
and forward currency contracts and other financial contracts
or derivative instruments.
(c) TREASURY PLUS FUND may not purchase or sell physical
commodities unless acquired as a result of the 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).
NONFUNDAMENTAL LIMITATIONS
Each Fund has adopted the following nonfundamental investment policies. The
Board may change any nonfundamental policy.
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<PAGE>
(1) DIVERSIFICATION
(a) To the extent required to qualify as a regulated investment
company, and with respect to 50% of its assets, MUNICIPAL
MONEY MARKET FUND may not purchase a security other than a
U.S. Government Security, if as a result, more than 5% of the
Fund' s total assets would be invested in a single issuer or
the Fund would own more than 10% of the outstanding rated
securities of any single issuer.
(b) COLORADO TAX-FREE FUND, MINNESOTA INTERMEDIATE TAX-FREE FUND
and MINNESOTA TAX-FREE FUND are "non-diversified" as that term
is defined in the 1940 Act.
(c) With respect to each of COLORADO TAX-FREE FUND, MINNESOTA
INTERMEDIATE TAX-FREE FUND and MINNESOTA TAX-FREE FUND, to
the extent required to qualify as a regulated investment
company under the Code, as amended, the Fund may not
purchase a security (other than a U.S. Government security
or a security of an investment company) if, as a result: (1)
with respect to 50% of its assets, more than 5% of the
Fund's total assets would be invested in the securities of
any single issuer; (2) with respect to 50% of its assets,
the Fund would own more than 10% of the outstanding
securities of any single issuer; or (3) more than 25% of the
Fund's total assets would be invested in the securities of
any single issuer.
(2) BORROWING
(a) EACH FUND'S (other than TREASURY PLUS FUND'S, INTERMEDIATE
GOVERNMENT INCOME FUND'S and DIVERSIFIED BOND FUND'S)
borrowings for other than temporary or emergency purposes or
meeting redemption requests may not exceed an amount equal
to 5% of the value of the Fund's net assets. When STABLE
INCOME FUND, LIMITED TERM GOVERNMENT INCOME FUND,
INTERMEDIATE GOVERNMENT INCOME FUND, DIVERSIFIED BOND FUND,
STRATEGIC INCOME FUND, MODERATE BALANCED FUND, GROWTH
BALANCED FUND, AGGRESSIVE BALANCED-EQUITY FUND, INCOME
EQUITY FUND, INDEX FUND, DIVERSIFIED EQUITY FUND, GROWTH
EQUITY FUND, LARGE COMPANY GROWTH FUND, SMALL COMPANY GROWTH
FUND and INTERNATIONAL FUND establish a segregated account
to limit the amount of leveraging with respect to certain
investment techniques, they do not treat those techniques as
involving borrowings for purposes of this or other borrowing
limitations.
(b) TREASURY PLUS FUND may not purchase or sell physical
commodities unless acquired as a result of the 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).
(3) ILLIQUID SECURITIES
(a) No MONEY MARKET FUND other than TREASURY PLUS FUND may acquire
securities or invest in repurchase agreements with respect to
any securities if, as a result, more than 10% of the Fund's
net assets (taken at current value) would be invested in
repurchase agreements not entitling the holder to payment of
principal within seven days and in securities which are not
readily marketable, including securities that are not readily
marketable by virtue of restrictions on the sale of such
securities to the public without registration under the 1933
Act, as amended ("Restricted Securities").
(b) EACH FIXED INCOME FUND, EQUITY FUND and BALANCED FUND may not
acquire securities or invest in repurchase agreements with
respect to any securities if, as result, more than 15% of the
Fund's net assets (taken at current value) would be invested
in repurchase agreements not entitling the holder to payment
of principal within seven days and in securities which are not
readily marketable, including securities that are not readily
34
<PAGE>
marketable by virtue of restrictions on the sale of such
securities to the public without registration under the 1933
Act, as amended ("Restricted Securities").
(c) TREASURY PLUS FUND may not invest more than 10% of its net
assets in illiquid assets such as: (i) securities that cannot
be disposed of within seven days at their then-current value,
(ii) repurchase agreements not entitling the holder to payment
of principal within seven days and (iii) securities subject to
restrictions on the sale of the securities to the public
without registration under the 1933 Act ("restricted
securities") that are not readily marketable. The Fund may
treat certain restricted securities as liquid pursuant to
guidelines adopted by the Board of Trustees.
(4) OTHER INVESTMENT COMPANIES
NO FUND may invest in securities of another investment company, except
to the extent permitted by the 1940 Act.
(5) MARGIN AND SHORT SALES
(a) EACH FUND (other than TREASURY PLUS FUND, LIMITED TERM
GOVERNMENT INCOME FUND and INTERMEDIATE GOVERNMENT INCOME
FUND) may not purchase securities on margin, or make short
sales of securities (except short sales against the box),
except for the use of short-term credit necessary for the
clearance of purchases and sales of portfolio securities.
EACH FUND other than TREASURY PLUS FUND may make margin
deposits in connection with permitted transactions in
options, futures contracts and options on futures contracts.
NO FUND (other than TREASURY PLUS FUND, DIVERSIFIED SMALL
CAP FUND and SMALL CAP OPPORTUNITIES FUND) may enter short
sales if, as a result, more that 25% of the value of the
Fund's total assets would be so invested, or such a position
would represent more than 2% of the outstanding voting
securities of any single issuer or class of an issuer.
(b) TREASURY PLUS FUND may not 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. The Fund may not purchase securities on margin, except
that the Fund may use short-term credit for clearance of the
Fund's transactions, and provided that the initial and
variation margin payments in connection with futures contracts
and options on futures contracts shall not constitute
purchasing securities on margin.
(6) UNSEASONED ISSUERS
NO FUND (other than TREASURY PLUS FUND, DIVERSIFIED SMALL CAP FUND and
SMALL CAP OPPORTUNITIES FUND) may invest in securities (other than
fully-collateralized debt obligations) issued by companies that have
conducted continuous operations for less than three years, including
the operations of predecessors, unless guaranteed as to principal and
interest by an issuer in whose securities the Fund could invest, if, as
a result, more than 5% of the value of the Fund's total assets would be
so invested; provided, that each Fund may invest all or a portion of
its assets in another diversified, open-end management investment
company with substantially the same investment objective, policies and
restrictions as the Fund.
(7) PLEDGING
NO FUND may pledge, mortgage, hypothecate or encumber any of its assets
except to secure permitted borrowings or to secure other permitted
transactions.
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<PAGE>
(8) SECURITIES WITH VOTING RIGHTS
NO MONEY MARKET FUND or FIXED INCOME FUND may purchase securities
having voting rights except securities of other investment companies;
provided that the Funds may hold securities with voting rights obtained
through a conversion or other corporate transaction of the issuer of
the securities, whether or not the Fund was permitted to exercise any
rights with respect to the conversion or other transaction.
(9) LENDING OF PORTFOLIO SECURITIES
NO FUND (other than SMALL CAP OPPORTUNITIES FUND) may lend portfolio
securities if the total value of all loaned securities would exceed 33
1/3% of the Fund's total assets, as determined by SEC guidelines.
SMALL CAP OPPORTUNITIES FUND may not lend portfolio securities if the
total value of all loaned securities would exceed 25% of its total
assets.
(10) REAL ESTATE LIMITED PARTNERSHIPS
NO FUND other than TREASURY PLUS FUND may invest in real estate limited
partnerships.
(11) OPTIONS AND FUTURES CONTRACTS
(a) NO MONEY MARKET FUND may invest in options, futures contracts or
options on futures contracts.
(b) NO FIXED INCOME FUND, EQUITY FUND (other than SMALL CAP
OPPORTUNITIES FUND) or BALANCED FUND may purchase an option
if, as a result, more that 5% of the value of the Fund's total
assets would be so invested.
(12) WARRANTS
NO FUND may invest in warrants if: (1) more than 5% of the value of the
Fund's net assets would will be invested in warrants (valued at the
lower of cost or market) or (2) more than 2% of the value of the Fund's
net assets would be invested in warrants which are not listed on the
New York Stock Exchange or the American Stock Exchange; provided, that
warrants acquired by a Fund attached to securities are deemed to have
no value.
(13) TREASURY FUND INVESTMENT LIMITATIONS
TREASURY FUND may not enter into repurchase agreements or purchase any
security other than those that are issued or guaranteed by the U.S.
Treasury, including separately traded principal and interest components
of securities issued or guaranteed by the U.S. Treasury.
(14) PURCHASES AND SALES OF COMMODITIES
NO MONEY MARKET FUND except TREASURY PLUS FUND may purchase or sell
physical commodities or contracts, options or options on contracts to
purchase or sell physical commodities, provided that currencies and
currency-related contracts and contracts on indices are not be deemed
to be physical commodities.
TREASURY PLUS FUND may not purchase or sell physical commodities or
contracts, options or options on contracts to purchase or sell physical
commodities.
(15) VALUGROWTH STOCK FUND INVESTMENT LIMITATIONS
VALUGROWTH STOCK FUND may not enter into commitments under when-issued
and forward commitment obligations in an amount greater than 15% of the
value of the Fund's total assets.
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<PAGE>
(16) EXERCISING CONTROL OF ISSUERS
TREASURY PLUS FUND may not make investments for the purpose of
exercising control of an issuer. Investments by the 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.
6. PERFORMANCE AND ADVERTISING DATA
GENERAL
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. All performance
information for a Fund is calculated on a class basis. Each Fund's yield and
total return fluctuate in response to market conditions and other factors.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost.
A Fund's performance may be quoted in terms of yield or total return. A Fund's
yield is a way of showing the rate of income the Fund earns on its investments
as a percentage of the Fund's share price. Municipal Money Market Fund and the
Tax-Exempt Fixed Income Funds may also quote tax-equivalent yields, which show
the taxable yields a shareholder would have to earn to equal the Fund's tax-free
yield, after taxes.
A Fund's total return shows its overall change in value, including changes in
share price and assuming all the Fund's dividends and distributions are
reinvested. A cumulative total return reflects a Fund's performance over a
stated period of time. An average annual total return reflects the hypothetical
annually compounded return that would have produced the same cumulative total
return if the Fund's performance had been constant over the entire period.
Because average annual returns tend to smooth out variations in the Fund's
returns, they are not the same as actual year-by-year results. Published yield
quotations are, and total return figures may be, based on amounts invested in a
Fund net of sales charges that may be paid by an investor. A computation of
yield or total return that does not take into account sales charges will be
higher than a similar computation that takes into account payment of sales
charges.
For a listing of certain performance data as of May 31, 1998 (see Appendix C--
Performance Data, Table 3-- Total Returns).
In performance advertising, the Funds may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Inc., Lipper Analytical Services, Inc., or other companies which track the
investment performance of investment companies ("Fund Tracking Companies"). The
Funds may also compare any of their performance information with the performance
of recognized stock, bond and other indexes, including but not limited to the
Municipal Bond Buyers Indices, the Salomon Brothers Bond Index, Shearson Lehman
Bond Index, the Standard & Poor's 500 Composite Stock Price Index, Russell 2000
Index, Morgan Stanley - Europe, Australian and Far East Index, Lehman Brothers
Intermediate Government Index, Lehman Brothers Intermediate Government/Corporate
Index, the Dow Jones Industrial Average, U.S. Treasury bonds, bills or notes and
changes in the Consumer Price Index as published by the U.S. Department of
Commerce. These indices may be comprised of a composite of various recognized
securities indices to reflect the investment policies of a Fund that invests its
assets using different investment styles. Indexes are not used in the management
of a Fund but rather are standards by which an Adviser and shareholders may
compare the performance of a Fund to an unmanaged composite of securities with
similar, but not identical, characteristics as the Fund. This material is not to
be considered representative or indicative of future performance. 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.
37
<PAGE>
SEC YIELD CALCULATIONS
Although published yield information is useful in reviewing a Fund's
performance, the Fund's yield fluctuates from day to day and 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, financial
institutions that sell Fund shares and others may charge their customers,
various retirement plans or other shareholders that invest in a Fund fees in
connection with an investment in a Fund, which will have the effect of reducing
the Fund's net yield to those shareholders. The yields of a Fund are not fixed
or guaranteed, and an investment in a Fund is not insured or guaranteed.
Accordingly, yield information may not necessarily be used to compare shares of
a Fund with investment alternatives which, like money market instruments or bank
accounts, may provide a fixed rate of interest. Also, it may not be appropriate
to compare a Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
MONEY MARKET FUNDS. Yield quotations for the Money Market Funds will include an
annualized historical yield, carried at least to the nearest hundredth of one
percent, based on a specific seven-calendar-day period and are calculated by
dividing the net change during the seven-day period in the value of an account
having a balance of one share at the beginning of the period by the value of the
account at the beginning of the period, and multiplying the quotient by 365/7.
For this purpose, the net change in account value reflects the value of
additional shares purchased with dividends declared on the original share and
dividends declared on both the original share and any such additional shares,
but would not reflect any realized gains or losses from the sale of securities
or any unrealized appreciation or depreciation on portfolio securities. In
addition, any effective annualized yield quotation used by a Money Market Fund
is calculated by compounding the current yield quotation for such period by
adding 1 to the product, raising the sum to a power equal to 365/7, and
subtracting 1 from the result. The standardized tax equivalent yield is the rate
an investor would have to earn from a fully taxable investment in order to equal
a Fund's yield after taxes. Tax equivalent yields are calculated by dividing the
Fund's yield by one minus the stated Federal or combined Federal and state tax
rate. If a portion of a Fund's yield is tax-exempt, only that portion is
adjusted in the calculation.
FIXED INCOME FUNDS, TAX-FREE FIXED INCOME FUNDS, BALANCED FUNDS AND EQUITY
FUNDS. Standardized yields for the Funds used in advertising are computed by
dividing a Fund's interest income (in accordance with specific standardized
rules) for a given 30 days or one month period, net of expenses, by the average
number of shares entitled to receive distributions during the period, dividing
this figure by the Fund's net asset value per share at the end of the period and
annualizing the result (assuming compounding of income in accordance with
specific standardized rules) in order to arrive at an annual percentage rate. In
general, interest income is reduced with respect to municipal securities
purchased at a premium over their par value by subtracting a portion of the
premium from income on a daily basis. In general, interest income is increased
with respect to municipal securities purchased at original issue at a discount
by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from these calculations.
The standardized tax equivalent yield is the rate an investor would have to earn
from a fully taxable investment in order to equal a Fund's yield after taxes.
Tax equivalent yields are calculated by dividing the Fund's yield by one minus
the stated Federal or combined Federal and state tax rate. If a portion of a
Fund's yield is tax-exempt, only that portion is adjusted in the calculation.
Income calculated for the purpose of determining each Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Fund's return, including the effect of reinvesting dividends
and capital gain distributions, any change in the Fund's net asset value per
share over the period and maximum sales charge, if any, applicable to purchases
of the Fund's shares. Average annual total returns are calculated, through the
use of a formula prescribed by the SEC, by determining the growth or decline in
value of a hypothetical historical investment in a Fund over a stated period,
and then calculating the annually compounded percentage rate that would have
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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, performance is not constant over time but changes from
year to year, and average annual returns represent averaged figures as opposed
to the actual year-to-year performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period
Standardized total return quotes may be accompanied by non-standardized total
return figures calculated by alternative methods. For example, average annual
total return may be calculated without assuming payment of the sales load
according to the following formula:
P(1+U)n = ERV
Where P = a hypothetical initial payment of $1,000.
U = average annual total return assuming non payment of
the maximum sales load at the beginning of the stated
period.
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
at the end of the stated 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
MULTICLASS, COLLECTIVE INVESTMENT FUND, COMMON TRUST FUND AND CORE AND GATEWAY
PERFORMANCE MULTICLASS PERFORMANCE. When a Fund has more than one class of
shares, performance calculations for the classes of shares that are created
after the initial class may be stated so as to include the performance of the
initial class or classes of the Fund. Generally, performance of the initial
class is not restated to reflect the expenses or expense ratio of the subsequent
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<PAGE>
class. For instance, if A Shares of a Fund are created after I Shares have been
in existence, the inception of performance for the A Shares will be deemed to be
the inception date of the I Shares and the performance of the I Shares (based on
the I Shares actual expenses) from the inception of I Shares to the inception of
A Shares will be deemed to be the performance of A Shares for that period. For
standardized total return calculations, the current maximum initial sales load
and applicable 12b-1 fees on A Shares would be used in determining the total
return of A Shares as if assessed at the inception of I Shares. Generally, the
performance of B Shares and C Shares will be calculated only from the inception
date of B Shares, regardless of the existence of prior share classes in the same
Fund.
COLLECTIVE INVESTMENT AND COMMON TRUST FUND PERFORMANCE. Prior to November 11,
1994, Norwest Bank managed several collective investment funds each of which had
an investment objective and investment policies that were in all material
respects equivalent to a particular Fund which became the successor to the
collective investment fund. Therefore, the performance for these Funds includes
the performance of their predecessor collective investment funds for periods
before those Funds became mutual funds on November 11, 1994. The collective
investment fund performance was adjusted to reflect those Funds' 1994 estimate
of their expense ratios for the first year of operations as a mutual fund
(without giving effect to any fee waivers or expense reimbursements). Prior to
October 1, 1997, Norwest Bank managed a common trust fund which had an
investment objective and investment policies that were in all material respects
equivalent to one of the Funds which became the successor to the common trust
fund. Therefore, the performance for the Fund includes the performance of the
predecessor common trust fund for the period before the Fund became a mutual
fund on October 1, 1997. The common trust fund performance was adjusted to
reflect the Fund's 1997 estimate of its expense ratio for the first year of
operation as a mutual fund (without giving effect to any fee waivers or expense
reimbursements). The collective investment funds and common trust fund were not
registered under the 1940 Act nor subject to certain investment limitations,
diversification requirements, and other restrictions imposed by the 1940 Act and
the Code, which, if applicable, may have adversely affected the performance
result. The performance of International Fund reflects the historical
performance of Schroder International Equity Fund (managed by Schroder Capital
Management International Inc.) in which International Fund's predecessor
collective investment fund invested.
CORE AND GATEWAY PERFORMANCE. When a Fund invests all of its investable assets
in a Portfolio that has a performance history prior to the investment by the
Fund, the Fund will assume the performance history of the Portfolio. That
history may be restated to reflect the estimated expenses of the Fund.
OTHER ADVERTISEMENT MATTERS. The Funds may advertise other forms of performance.
For example, the Funds may quote unaveraged or cumulative total returns
reflecting the change in the value of an investment over a stated period.
Average annual and cumulative total returns may be quoted as a percentage or as
a dollar amount, and may be calculated for a single investment, a series of
investments and/or a series of redemptions over any time period. Total returns
may be broken down into their components of income and capital (including
capital gains and changes in share price) in order to illustrate the
relationship of these factors and their contributions to total return. Total
returns may be quoted with or without taking into consideration a Fund's
front-end sales charge or contingent deferred sales charge; excluding sales
charges from a total return calculation produces a higher return figure. Any
performance information may be presented numerically or in a table, graph or
similar illustration.
The Funds may also include various information in their advertisements
including, but not limited to: (1) portfolio holdings and portfolio allocation
as of certain dates, such as portfolio diversification by instrument type, by
instrument, by location of issuer or by maturity; (2) statements or
illustrations relating to the appropriateness of types of securities and/or
mutual funds that may be employed by an investor to meet specific financial
goals, such as funding retirement, paying for children's education and
financially supporting aging parents; (3) information (including charts and
illustrations) showing the effects of compounding interest (compounding is the
process of earning interest on principal plus interest that was earned earlier;
interest can be compounded at different intervals, such as annually, quarterly
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) biographical descriptions of the Funds'
portfolio managers and the portfolio management staff of the Advisers or
summaries of the views of the portfolio managers with respect to the financial
40
<PAGE>
markets; (7) the results of a hypothetical investment in a Fund over a given
number of years, including the amount that the investment would be at the end of
the period; (8) the effects of earning Federally and, if applicable, state
tax-exempt income from a Fund or investing in a tax-deferred account, such as an
individual retirement account or Section 401(k) pension plan; and (9) the net
asset value, net assets or number of shareholders of a Fund as of one or more
dates.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of any Fund's performance.
The Funds may advertise information regarding the effects of automatic
investment and systematic withdrawal plans, including the principal of dollar
cost averaging. In a dollar cost averaging program, an investor invests a fixed
dollar amount in a Fund at period intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
<TABLE>
<S> <C> <C> <C>
SYSTEMATIC SHARE SHARES
PERIOD INVESTMENT PRICE PURCHASED
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
Total Invested $600 Average Price $15.17 Total Shares 41.81
</TABLE>
With respect to the Funds that invest in municipal securities and distribute
Federally tax-exempt (and in certain cases state tax exempt) dividends, the
Funds may advertise the benefits of and other effects of investing in municipal
securities. For instance, the Funds' advertisements may note that municipal
bonds have historically offered higher after tax yields than comparable taxable
alternatives for those persons in the higher tax brackets, that municipal bond
yields may tend to outpace inflation and that changes in tax law have eliminated
many of the tax advantages of other investments. The combined Federal and state
income tax rates for a particular state may also be described and advertisements
may indicate equivalent taxable and tax-free yields at various approximate
combined marginal Federal and state tax bracket rates. All yields so advertised
are for illustration only are not necessarily representative of a Fund's yield.
In connection with its advertisements each Fund may provide "shareholders
letters" which serve to provide shareholders or investors an introduction into
the Fund's, the Trust's or any of the Trust's service provider's policies or
business practices. For instance, advertisements may provide for a message from
Norwest or its parent corporation that Norwest has for more than 60 years been
committed to quality products and outstanding service to assist its customers in
meeting their financial goals and setting forth the reasons that Norwest
believes that it has been successful as a national financial service firm.
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7. MANAGEMENT
Those officers, as well as certain other officers and Trustees of the Trust, may
be directors, officers or employees of (and persons providing services to the
Trust may include) Forum, its affiliates or certain non-banking affiliates of
Norwest.
TRUSTEES AND OFFICERS
TRUSTEES AND OFFICERS OF THE TRUST. The Trustees and officers of the Trust and
their principal occupations during the past five years and age as of October 1,
1998 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 56.
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 67.
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 72.
Principal of The Burkhardt Law Firm. His address is 777 South Steele
Street, Denver, Colorado 80209.
JAMES C. HARRIS, Trustee, Age 78.
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 65.
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 53.
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 46.
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.
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<PAGE>
DONALD C. WILLEKE, Trustee, Age 58.
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
SARA M. MORRIS, Vice President and Treasurer, Age 35.
Managing Director, Forum Financial Services, Inc., with which she has
been associated since 1994. Prior thereto, from 1991 to 1994 Ms. Morris
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. Morris is also an officer of various
registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor.
Her address is Two Portland Square, Portland, Maine 04101.
DAVID I. GOLDSTEIN, Vice President and Secretary, Age 37.
Managing Director and General 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
Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
THOMAS G. SHEEHAN, Vice President and Assistant Secretary, Age 44.
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 Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
PAMELA J. WHEATON, Assistant Treasurer, Age 39.
Manager - Tax and Compliance Group, Forum Financial Services, Inc.,
with which she has been associated since 1989. Ms. Wheaton is also an
officer of various registered investment companies for which Forum
Administrative Services, LLC or 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 50.
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 Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine.
EDWARD C. LAWRENCE, Assistant Secretary, Age 29.
Fund Administrator, Forum Financial Services, Inc., with which he has
been associated since 1997. Prior thereto, Mr. Lawrence was a
self-employed contractor on antitrust cases with the law firm of White
& Case. After graduating from law school, from 1994-1996, Mr. Lawrence
worked as an assistant public defender for the Missouri State Public
Defender's Office. His address is Two Portland Square, Portland, Maine
04101.
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<PAGE>
COMPENSATION OF TRUSTEES AND OFFICERS OF THE TRUST. Each Trustee of the Trust is
paid a retainer fee in the total amount of $5,000, payable quarterly, for the
Trustee's service to the Trust and to Norwest Select Funds, a separate
registered open-end management investment company for which each Trustee serves
as trustee. In addition, each Trustee is paid $3,000 for each regular Board
meeting attended (whether in person or by electronic communication) and is paid
$1,000 for each Committee meeting attended on a date when a Board meeting is not
held. Trustees are also reimbursed for travel and related expenses incurred in
attending meetings of the Board. Mr. Keffer received no compensation for his
services as Trustee for the past year or compensation or reimbursement for his
associated expenses. In addition, no officer of the Trust is compensated by the
Trust.
Mr. Burkhardt, Chairman of the Trust's and Norwest Select Funds' audit
committees, receives additional compensation of $6,000 from the Trust and
Norwest Select Funds allocated pro rata between the Trust and Norwest Select
Funds based upon relative net assets, for his services as Chairman. Each Trustee
was elected by shareholders on April 30, 1997.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Select Funds, combined. Norwest Select Funds
have a December 31 fiscal year end. Information is presented for the twelve
month period ended May 31, 1998, 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 $32,870 $33,000
Mr. Burkhardt $39,344 $39,500
Mr. Harris $32,870 $33,000
Mr. Leach $32,870 $33,000
Mr. Penny $32,870 $33,000
Mr. Willeke $32,870 $33,000
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,
1998 total expenses of the Trustees (other than Mr. Keffer) was $20,869 and
total expenses of the trustees of Norwest Select Funds was $77 .
As of October 1, 1998, 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 the Trust and
their principal occupations during the past five years are set forth below. Each
Trustee who is an "interested person" (as defined by the 1940 Act) of the Trust
is indicated by an asterisk.
JOHN Y. KEFFER*, Chairman and President (Age 56).
President , Forum Financial Group, LLC (mutual fund services company
holding company). Mr. Keffer is a Trustee/Director and/or 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.
COSTAS AZARIADIS, Trustee (Age 55).
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.
44
<PAGE>
JAMES C. CHENG, Trustee (Age 56).
President, Technology Marketing Associates (a marketing company for
small and medium size businesses in New England) since 1991. Prior
thereto, Mr. Cheng was President of Network Dynamics, Inc. (a software
development company). His address is 27 Temple Street, Belmont, MA
02718.
J. MICHAEL PARISH, Trustee (Age 55).
Partner at the law firm of Reid & Priest L.L.P. since 1995. From 1989
to 1995, he was a partner at Winthrop, Stimson, Putnam & Roberts. His
address is 40 West 57th Street, New York, New York 10019.
STACEY HONG, Treasurer (Age 32)
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hong was a
Senior Accountant at Ernst & Young, LLP. His address is Two Portland
Square, Portland, Maine 04101.
THOMAS G. SHEEHAN, Vice President (Age 44).
Managing Director, Forum Financial Group, LLC with which he has been
associated since October 1993. Prior thereto, Mr. Sheehan was Special
Counsel to the Division of Investment Management of the SEC. Mr.
Sheehan also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provides services. His address is Two Portland Square, Portland, Maine
04101.
DAVID I. GOLDSTEIN, Secretary (Age 37).
General Counsel, Forum Financial Group , LLC, with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart, LLP. 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.
LESLIE K. KLENK, Secretary (Age 34)
Assistant Counsel, Forum Financial Group, LLC with which she has been
associated since April 1998. Prior thereto, Ms. Klenk was Vice
President and Associate General Counsel of Smith Barney Inc. Ms. Klenk
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. Her address is Two Portland Square, Portland, Maine 04101.
PAMELA STUTCH, Assistant Secretary (Age 31)
Fund Administrator, Forum Financial Group, LLC with which she has been
associated since May 1998. Prior thereto, Ms. Stutch attended Temple
University School of Law and graduated in 1997. Ms. Stutch was also a
legal intern for the Maine Department of the Attorney General. Ms.
Stutch also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provides services. Her address is Two Portland Square, Portland, Maine
04101.
TRUSTEES AND OFFICERS OF SCHRODER CORE. 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 Schroder Core is indicated by an asterisk. Messrs. Keffer and Sheehan,
officers of Schroder Core, currently serve as officers of the Trust.
45
<PAGE>
OFFICERS AND TRUSTEES. The following information relates to the principal
occupations during the past five years of each Trustee and executive officer of
the Trust and shows the nature of any affiliation with Schroder Capital
Management, International, Inc. ("SCMI"). Except as noted, each of these
individuals currently serves in the same capacity for Schroder Capital Funds,
Schroder Capital Funds II and Schroder Series Trust, other registered investment
companies in the Schroder family of funds.
PETER E. GUERNSEY, (Age 75)
Trustee of the Trust; Insurance Consultant since August 1986; prior
thereto Senior Vice President, Marsh & McLennan, Inc., insurance
brokers. His address is c/o the Trust, Two Portland Square, Portland,
Maine
JOHN I. HOWELL, (Age 80)
Trustee of the Trust; Private Consultant since February 1987; Honorary
Director, American International Group, Inc.; Director, American
International Life Assurance Company of New York. His address is c/o
the Trust, Two Portland Square, Portland, Maine.
CLARENCE F. MICHALIS, (Age 75)
Trustee of the Trust; Chairman of the Board of Directors, Josiah Macy,
Jr. Foundation (charitable foundation). His address is c/o the Trust,
Two Portland Square, Portland, Maine.
HERMANN C. SCHWAB, (Age 77)
Chairman and Trustee of the Trust; retired since March, 1988; prior
thereto, consultant to SCMI since February 1, 1984. His address is c/o
the Trust, Two Portland Square, Portland, Maine.
HON. DAVID N. DINKINS, (Age 69)
Trustee of the Trust; Professor, Columbia University School of
International and Public Affairs; Director, American Stock Exchange,
Carver Federal Savings Bank, Transderm Laboratory Corporation, and The
Cosmetic Center, Inc.; formerly, Mayor, The City of New York. His
address is c/o the Trust, Two Portland Square, Portland, Maine.
PETER S. KNIGHT, (Age 46)
Trustee of the Trust; Partner, Wunder, Knight, Levine, Thelen & Forcey;
Director, Comsat Corp., Medicis Pharmaceutical Corp., and Whitman
Education Group Inc., Formerly, Campaign Manager, Clinton/Gore `96.
His address is c/o the Trust, Two Portland Square, Portland, Maine.
SHARON L. HAUGH*, (Age 51)
Trustee of the Trust; Chairman, Schroder Capital Management Inc.
("SCM"), Executive Vice President and Director, SCMI; Chairman and
Director, Schroder Advisors. Her address is 787 Seventh Avenue, New
York, New York.
MARK J. SMITH*, (Age 35)
President and Trustee of the Trust; Senior Vice President and Director
of SCMI since April 1990; Director and Senior Vice President, Schroder
Advisors. His address is 33 Gutter Lane, London, England.
46
<PAGE>
MARK ASTLEY, (Age 33).
Vice President of the Trust; First Vice President of SCMI, prior
thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1987.
His address is 787 Seventh Avenue, New York, New York.
ROBERT G. DAVY, (Age 36)
Vice President of the Trust; Director of SCMI and Schroder Capital
Management International Ltd. since 1994; First Vice President of SCMI
since July, 1992; prior thereto, employed by various affiliates of
SCMI in various positions in the investment research and portfolio
management areas since 1986. His address is 787 Seventh Avenue, New
York, New York.
MARGARET H. DOUGLAS-HAMILTON, (Age 55)
Vice President of the Trust; Secretary of SCM since July 1995; Senior
Vice President (since April 1997) and General Counsel of Schroders
U.S. Holdings Inc. since May 1987; prior thereto, partner of Sullivan
& Worcester, a law firm. Her address is 787 Seventh Avenue, New York,
New York.
RICHARD R. FOULKES, (Age 51)
Vice President of the Trust; Deputy Chairman of SCMI since October
1995; Director and Executive Vice President of Schroder Capital
Management International Ltd. since 1989. His address is 787 Seventh
Avenue, New York, New York.
FERGAL CASSIDY, (Age 28)
Treasurer of the Trust. Her address is 787 Seventh Avenue, New York,
New York.
JOHN Y. KEFFER, (Age 56)
Vice President of the Trust, President of FAS and other affiliated
entities including Forum Financial Services, Inc., Forum and, Forum
Advisors, Inc. His address is 787 Seventh Avenue, New York, New York.
JANE P. LUCAS, (Age 35)
Vice President of the Trust; Director and Senior Vice President SCMI;
Director of SCM since September 1995; Director of Schroder Advisors
since September 1996; Assistant Director Schroder Investment
Management Ltd. since June 1991. Her address is 787 Seventh Avenue,
New York, New York.
CATHERINE A. MAZZA, (Age 37)
Vice President of the Trust; President of Schroder Advisors since
1997; First Vice President of SCMI and SCM since 1996; prior thereto,
held various marketing positions at Alliance Capital, an investment
adviser, since July 1985. Her address is 787 Seventh Avenue, New York,
New York.
MICHAEL PERELSTEIN, (Age 41)
Vice President of the Trust; Director since May 1997 and Senior Vice
President of SCMI since January 1997; prior thereto, Managing Director
of MacKay - Shields Financial Corp. His address is 787 Seventh Avenue,
New York, New York.
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<PAGE>
ALEXANDRA POE, (Age 37)
Secretary and Vice President of the Trust; Vice President of SCMI
since August 1996; Fund Counsel and Senior Vice President of Schroder
Advisors since August 1996; Secretary of Schroder Advisors; 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. Her address is 787 Seventh
Avenue, New York, New York.
NICHOLAS ROSSI, (Age 35)
Assistant Secretary of the Trust, Associate of SCMI since October 1997
and Assistant Vice President Schroder Advisors since March 1998; prior
thereto Mutual Fund Specialist, Willkie Farr & Gallagher since May
1996; prior thereto, Fund Administrator with Furman Selz LLC since
1992. His address is 787 Seventh Avenue, New York, New York.
THOMAS G. SHEEHAN, (Age 44)
Assistant Treasurer and Assistant Secretary of the Trust; Relationship
Manager, Forum Administrative Services, LLC since 1993; prior thereto,
Special Counsel, U.S. Securities and Exchange Commission, Division of
Investment Management, Washington, D.C. His address is Two Portland
Square, Portland, Maine.
FARIBA TALEBI, (Age 36)
Vice President of the Trust; Group Vice President of SCMI since April
1993, employed in various positions in the investment research and
portfolio management areas since 1987; Director of SCM since April
1997. His address is 787 Seventh Avenue, New York, New York.
JOHN A. TROIANO, (Age 38)
Vice President of the Trust; Director of SCM since April 1997; Chief
Executive Officer, since July 1, 1997, of SCMI and Managing Director
and Senior Vice President of SCMI since October 1995; prior thereto,
employed by various affiliates of SCMI in various positions in the
investment research and portfolio management areas since 1981. His
address is 787 Seventh Avenue, New York, New York.
CHERYL O. TUMLIN, (Age 32)
Assistant Treasurer and Assistant Secretary of the Trust; Assistant
Counsel, Forum Administrative Services, LLC since July 1996, prior
thereto, attorney with the U.S. Securities and Exchange Commission,
Division of Market Regulation since 1995; prior thereto, attorney with
Robinson Silverman Pearce Aronsohn & Berman since 1991. Her address is
787 Seventh Avenue, New York, New York -
IRA L. UNSCHULD, (Age 31)
Vice President of the Trust; Vice President of SCMI since April, 1993
and an Associate from July, 1990 to April, 1993. His address is 787
Seventh Avenue, New York, New York.
* Interested Trustee of the Trust within the meaning of the 1940 Act.
48
<PAGE>
INVESTMENT ADVISORY SERVICES
GENERAL. Table 1 in Appendix B shows, with respect to each Fund that invests
directly in portfolio securities, the dollar amount of fees payable by the Fund
to Norwest under its Investment Advisory Agreement. The table shows, with
respect to each Fund that invests in a Core and Gateway Structure, the aggregate
dollar amount of (i) the Fund's share of the aggregate investment advisory fees
payable by the Portfolio(s) in which the Fund invests to Norwest and/or
Schroder, as the case may be, under the Investment Advisory Agreement(s) of the
Portfolio(s) and (ii) the asset allocation fees payable by the Fund to Norwest,
if any, if the Fund invests in multiple Portfolios. The table also shows the
amount of the fee that was waived by Norwest and/or Schroder, if any, and the
actual fee received by Norwest and/or Schroder. The data is for the past three
fiscal years or for a shorter period if the Fund has been in operation for a
shorter period.
The advisory fee for each Fund investing directly in portfolio securities is
disclosed in the Fund's prospectuses. If a Fund invests in a Core and Gateway
Structure, the asset allocation fee payable to Norwest, if any, and the
aggregate of the advisory fees payable with respect to the Fund's assets by the
Portfolio or Portfolios in which the Fund invests are also disclosed in the
Fund's prospectuses. All investment advisory fees are accrued daily and paid
monthly. Each 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 Adviser or its
affiliates may act and be compensated as investment manager for its clients with
respect to assets which are invested in a Fund. In some instances Norwest or its
affiliates may elect to credit against any investment management, custodial or
other fee received from, or rebate to, a client who is also a shareholder in a
Fund an amount equal to all or a portion of the fees received by Norwest or any
of its affiliates from a Fund with respect to the client's assets invested in
the Fund.
NORWEST INVESTMENT MANAGEMENT. For each Fund investing directly in portfolio
securities, Norwest makes investment decisions for the Fund and continuously
reviews, supervises and administers the Fund's investment program or oversees
the investment decisions of the Fund's Subadviser, as applicable. For Funds that
invest in a Core and Gateway Structure, Norwest provides investment advisory
services to the Funds indirectly through its investment advisory services to the
Portfolios other than those for which Schroder serves as investment adviser. In
this capacity, Norwest makes investment decisions for those Portfolios and
continuously reviews, supervises and administers those Portfolios' investment
programs or oversees the investment decisions of the Subadvisers, as applicable.
For each Fund investing in a Core and Gateway Structure pursuant which the Fund
invests in multiple Portfolios and Norwest allocates the Fund's assets among the
Portfolios, Norwest makes investment decisions regarding the asset allocations
of the Fund and continuously reviews, supervises and administers the Fund's
asset allocations. Norwest provides these investment advisory services to the
Funds and the Portfolios subject to the supervision of the Board or the Core
Board, as appropriate.
Norwest provides investment advisory services to the Funds under the Investment
Advisory Agreement between the Trust and Norwest. Norwest provides investment
advisory services to the Portfolios under an Investment Advisory Agreement
between Core Trust and Norwest. The Investment Advisory Agreement between
Norwest and Core Trust is identical to the Investment Advisory Agreement between
Norwest and the Trust, except for the fees payable thereunder and certain
immaterial matters. Accordingly, the description of the Investment Advisory
Agreement set forth below applies equally to the Investment Advisory Agreement
between Norwest and Core Trust.
Norwest furnishes at its expense all services, facilities and personnel
necessary in connection with managing each Fund's investments and effecting
portfolio transactions for each Fund. Under the Investment Advisory Agreement,
Norwest may delegate its responsibilities to any Subadviser approved by the
Board and, as applicable, shareholders, with respect to all or a portion of the
assets of the Fund. With respect to each Fund, the Investment Advisory Agreement
will continue in effect only if such continuance is specifically approved at
least annually by the Board or by vote of the shareholders, and in either case,
by a majority of the Trustees who are not interested persons of any party to the
Investment Advisory Agreement, at a meeting called for the purpose of voting on
the Investment Advisory Agreement.
49
<PAGE>
The Investment Advisory Agreement is terminable without penalty with respect to
a Fund on 60 days' written notice: (1) by the Trust to Norwest, if the Board
determines to terminate the Investment Advisory Agreement with respect to the
Fund or a majority of the outstanding voting securities of the Fund vote to
terminate the Investment Advisory Agreement with respect to the Fund or (2) by
the Adviser to the Trust. The Investment Advisory Agreement terminates if
assigned. The Investment Advisory Agreement also provides that, with respect to
the Funds, neither Norwest nor its personnel shall be liable for any mistake of
judgment or in any event whatsoever, except for lack of good faith, provided
that nothing in the Investment Advisory Agreement 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 Agreement. The Investment Advisory Agreement provides
that Norwest may render services to others.
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. Norwest Corporation currently has assets in excess of $83 billion. Norwest
and its affiliates currently manage assets with a value of approximately $52.9
billion. Norwest Corporation and Wells Fargo & Company, the parent company of
Wells Fargo Bank, have signed a definitive agreement to merge. The merger is
subject to certain regulatory approvals and must be approved by shareholders of
both holding companies. The merger is expected to close in the fourth quarter of
1998.
"DORMANT" INVESTMENT ADVISORY ARRANGEMENTS. Under its Investment Advisory
Agreement with the Trust, Norwest has been retained as a "dormant" or "back-up"
investment adviser for the Funds currently investing in a Core and Gateway
Structure. In this capacity, Norwest does not receive any compensation from the
Funds as long as the Funds invest entirely in Portfolios. If a Fund were to
redeem assets from a Portfolio and invest them directly, Norwest would receive
an investment advisory fee from the Fund for the management of those assets at
the following rates:
<TABLE>
<S> <C> <C>
Fee as a
Fund % of the Fund's average daily net assets
---- ----------------------------------------
Cash Investment Fund 0.20% for the first $300 million;
0.16% for the next $400 million;
0.12% for the remaining assets.
Ready Cash Investment Fund 0.40% for the first $300 million;
0.36% for the next $400 million;
0.32% for the remaining assets
Stable Income Fund 0.30%
Diversified Bond Fund 0.35%
Total Return Bond Fund 0.50%
Strategic Income Fund 0.45%
Moderate Balanced Fund 0.53%
Growth Balanced Fund 0.58%
Aggressive Balanced-Equity Fund 0.63%
Index Fund 0.15%
Income Equity Fund 0.50%
Diversified Equity Fund 0.65%
Growth Equity Fund 0.90%
Large Company Growth Fund 0.65%
Diversified Small Cap Fund 0.90%
Small Company Stock Fund 0.90%
Small Cap Opportunities Fund 0.60%
Small Company Growth Fund 0.90%
International Fund 0.85%
</TABLE>
50
<PAGE>
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC. Subject to the general
supervision of the Core Boards, Schroder Capital Management International Inc.
makes investment decisions for Schroder U.S. Smaller Companies Portfolio,
International Portfolio and Schroder EM Core Portfolio and continuously reviews,
supervises and administers those Portfolios' investment programs.
Small Cap Opportunities Fund invests all of its assets in Schroder U.S. Smaller
Companies Portfolio and International Fund invests all of its assets in
International Portfolio and Schroder EM Core Portfolio. Pursuant to an Advisory
Agreement between Schroder Core and Schroder, Schroder acts as investment
adviser to Schroder U.S. Smaller Companies Portfolio and Schroder EM Core
Portfolio, and is required to furnish at its expense all services, facilities
and personnel necessary in connection with managing those Portfolios'
investments and effecting portfolio transactions for those Portfolios. Pursuant
to a separate Advisory Agreement between Core Trust and Schroder, Schroder acts
as investment adviser to International Portfolio, and is required to furnish at
its expense all services, facilities and personnel necessary in connection with
managing that Portfolio's investments and effecting portfolio transactions for
that Portfolio. These Advisory Agreements will continue in effect with respect
to a Portfolio only if such continuance is specifically approved at least
annually: (1) by the Schroder Core Board or the Core Trust Board, as applicable,
or by vote of a majority of the outstanding voting interests of the Portfolio
and, in either case, (2) by a majority of the trustees of Schroder Core or Core
Trust, as applicable, who are not parties to the Advisory Agreement or
interested persons of any such party (other than as trustees of the Schroder
Core or Core Trust, as applicable), 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 Advisory Agreement is not approved
as to a Portfolio, Schroder may continue to render to that Portfolio the
services described herein in the manner and to the extent permitted by the 1940
Act and the rules and regulations thereunder.
The Advisory Agreements between Schroder and Core Trust and Schroder and
Schroder Core are substantially identical to the Investment Advisory Agreement,
except for the parties, the fees payable thereunder and certain immaterial
matters.
"DORMANT" INVESTMENT SUBADVISORY ARRANGEMENTS. Norwest and the Trust have
entered into an Investment Subadvisory Agreement with Schroder on behalf of each
Fund that invests all or a portion of its assets in Schroder U.S. Smaller
Companies Portfolio, International Portfolio or Schroder EM Core Portfolio. The
Investment Subadvisory Agreement would become operative and Schroder would
directly manage a Fund's assets if the Board determined it was no longer in the
best interest of the Fund to invest in smaller companies or international
securities by investing in another registered investment company. In that event,
pursuant to the Investment Subadvisory Agreement, Schroder would make investment
decisions directly for the Fund and would 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 furnish at
its own expense all services, facilities and personnel necessary in connection
with managing of the Fund's investments and effecting portfolio transactions for
the Fund, to the extent of Norwest's delegation.
The Investment Subadvisory Agreement will continue in effect only if such
continuance is specifically approved at least annually: (1) by the Board or by
vote of a majority of the outstanding voting securities of the applicable 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 Agreement; provided further,
however, that if the Investment Subadvisory Agreement or the continuation of the
Investment Subadvisory Agreement is not approved as to a Fund, Schroder may
continue to render to that 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 a 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 provide that, with respect
to the Funds, neither Schroder nor its personnel shall be liable for any mistake
of judgment or in any event whatsoever, except for lack of good faith, provided
that nothing shall be deemed to protect the Adviser against liability by reason
51
<PAGE>
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.
The Funds do not currently pay any fees to Schroder under the Investment
Subadvisory Agreement because the Funds currently invest all of their assets in
Portfolios.
SUBADVISERS. As set forth in the Prospectuses, Norwest and Core Trust have
retained the services of Crestone, Galliard, Peregrine and Smith pursuant to
Investment Subadvisory Agreements to assist Norwest in carrying out its
obligations with respect to certain Portfolios. Norwest pays a fee to each such
Subadviser for the investment subadvisory services provided to each Portfolio by
that Subadviser. These fees do not increase the fees paid by the interestholders
of the Portfolios. 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 matters such as the nature and extent of the services (other than
investment selection and order placement activities) provided by the Subadviser,
the cost and complexity of providing services, 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
Norwest in overseeing the Portfolio.
Generally, Norwest has entered into a dormant Investment Subadvisory Agreement
with each Subadviser on behalf of each Fund that invests all or a portion of its
assets in a Portfolio subadvised by that Subadviser. This is not the case only
with respect to Galliard and Total Return Bond Fund and Smith and Strategic
Income Fund, Moderate Balanced Fund, Growth Balanced Fund, Diversified Equity
Fund and Growth Equity Fund. With respect to each Subadviser, the terms of the
Investment Subadvisory Agreement between Core Trust, Norwest and the Subadviser
and the dormant Investment Subadvisory Agreement between the Trust, Norwest and
the Subadviser are identical, except with respect to the fees payable (no fee is
payable under the investment subadvisory agreements with respect to a Fund to
the extent that the Fund is invested in an investment company) and certain
immaterial matters.
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 fundamental investment objectives and policies, authorizing Subadvisers to
engage in certain investment techniques, and recommending to the Core Board
whether investment subadvisory agreements should be renewed, modified or
terminated. Norwest also may from time to time recommend that the Core Board
replace one or more Subadvisers or appoint additional Subadvisers, depending on
Norwest's assessment of what combination of Subadvisers it believes will
optimize each Portfolio's chances of achieving its investment objectives.
CRESTONE CAPITAL MANAGEMENT, INC. To assist Norwest in carrying out its
obligations with respect to Small Company Stock Portfolio, Norwest and Core
Trust have entered into an Investment Subadvisory Agreement with Crestone,
located at 7720 East Belleview Avenue, Suite 220, Englewood, Colorado 80111.
Strategic Income Fund, Moderate Balanced Fund, Growth Balanced Fund, Aggressive
Balanced-Equity Fund, Diversified Equity Fund, Growth Equity Fund, Small Company
Stock Fund and Diversified Small Cap Fund each invest all or a portion of their
assets in Small Company Stock Portfolio. Crestone is registered with the SEC as
an investment adviser and is a non-wholly owned subsidiary of Norwest. Pursuant
to the Investment Subadvisory Agreement, Crestone 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
Portfolio's investment portfolio that Norwest believes should be invested using
Crestone as a subadviser. Crestone is required to furnish at its own expense all
services, facilities and personnel necessary in connection with managing of the
Funds' investments and effecting portfolio transactions for each Fund (to the
extent of Norwest's delegation). Currently, Crestone manages all of the assets
of Small Company Stock Portfolio and has done so since the Portfolio's
inception. Norwest supervises the performance of Crestone including its
adherence to the Funds' investment objectives and policies and pays Crestone a
fee for its investment management services. The fee Norwest pays does not affect
the total fees paid by the Portfolio to Norwest.
52
<PAGE>
The Investment Subadvisory Agreement will continue in effect with respect to the
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 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
Agreement; provided further, however, that if the Investment Subadvisory
Agreement or the continuation of the agreement is not approved, the Crestone 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 Portfolio's shareholders or by the Core Trust Board, or by Crestone
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 the Portfolio, neither Crestone nor its personnel shall be
liable for any mistake of judgment or in any event whatsoever, except for lack
of good faith, provided that nothing shall be deemed to protect Crestone against
liability by reason of willful misfeasance, bad faith or gross negligence in the
performance of Crestone's duties or by reason of reckless disregard of its
obligations and duties under the Investment Subadvisory Agreement. The
Investment Subadvisory Agreement provides that Crestone may render services to
others.
GALLIARD CAPITAL MANAGEMENT, INC. To assist Norwest in carrying out its
obligations with respect to Stable Income Portfolio, Strategic Value Bond
Portfolio and Managed Fixed Income Portfolio, Norwest has entered into an
Investment Subadvisory Agreement with Galliard, located at 800 LaSalle Avenue,
Suite 2060, Minneapolis, Minnesota 55479. Stable Income Fund, Diversified Bond
Fund, Total Return Bond Fund, Strategic Income Fund, Moderate Balanced Fund,
Growth Balanced Fund and Aggressive Balanced-Equity Fund each invest all or a
portion of their assets in at least one of those Portfolios. Galliard is
registered with the SEC as an investment adviser and is an investment advisory
subsidiary of Norwest Bank. Galliard is required to furnish at its own expense
all services, facilities and personnel necessary in connection with managing
each Portfolio's investments and effecting portfolio transactions for each
Portfolio (to the extent of Norwest's delegation). Pursuant to the Investment
Subadvisory Agreement, Galliard makes investment decisions for each of the
Portfolios and continuously reviews, supervises and administers each Portfolio's
investment program with respect to that portion, if any, of the Portfolio's
investment portfolio that Norwest believes should be invested using Galliard as
a subadviser. Currently, Galliard manages all the assets of each Portfolio and
has done so since each Portfolio's inception. Norwest supervises the performance
of Galliard including its adherence to the Portfolios' investment objectives and
policies and pays Galliard a fee for its investment management services. The fee
Norwest pays Galliard does not affect the total fees paid by the Portfolios to
Norwest.
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
Agreement; 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 1940 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 Galliard
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 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
53
<PAGE>
disregard of its obligations and duties under the Investment Subadvisory
Agreement. The Investment Subadvisory Agreement provides that Galliard may
render services to others.
PEREGRINE CAPITAL MANAGEMENT, INC. To assist Norwest in carrying out its
obligations with respect to Positive Bond Portfolio, Large Company Growth
Portfolio, Small Company Growth Portfolio and Small Company Value Portfolio,
Norwest has entered into an Investment Subadvisory Agreement with Peregrine,
located at 800 LaSalle Avenue, Suite 1850, Minneapolis, Minnesota 55479.
Diversified Bond Fund, Strategic Income Fund, Moderate Balanced Fund, Growth
Balanced Fund, Aggressive Balanced-Equity Fund, Diversified Equity Fund, Growth
Equity Fund, Large Company Growth Fund, Diversified Small Cap Fund and Small
Company Growth Fund each invest all or a portion of their assets in at least one
of those Portfolios. Peregrine is registered with the SEC as an investment
adviser and is an investment advisory subsidiary of Norwest Bank. Peregrine is
required to furnish at its own expense all services, facilities and personnel
necessary in connection with managing each Portfolio's investments and effecting
portfolio transactions for each Portfolio (to the extent of Norwest's
delegation). Pursuant to the Investment Subadvisory Agreement, Peregrine makes
investment decisions for each of the Portfolios and continuously reviews,
supervises and administers each Portfolio's investment program with respect to
that portion, if any, of the Portfolio's investment portfolio that Norwest
believes should be invested using Peregrine as a subadviser. Currently,
Peregrine manages all the assets of each Portfolio and has done so since each
Portfolio's inception. Norwest supervises the performance of Peregrine including
its adherence to the Portfolios' investment objectives and policies and pays
Peregrine a fee for its investment management services. The fee Norwest pays
Peregrine does not affect the total fees paid by the Portfolios to Norwest.
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 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
Agreement; 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 1940 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 Peregrine
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 Peregrine nor its personnel shall
be liable for any mistake of judgment or in any event whatsoever, except for
lack of good faith, provided that nothing shall be deemed to protect Peregrine
against liability by reason of willful misfeasance, bad faith or gross
negligence in the performance of Peregrine's duties or by reason of reckless
disregard of its obligations and duties under the Investment Subadvisory
Agreement. The Investment Subadvisory Agreement provides that Peregrine may
render services to others.
54
<PAGE>
SMITH ASSET MANAGEMENT GROUP, L.P. To assist Norwest in carrying out its
obligations with respect to Disciplined Growth Portfolio and Small Cap Value
Portfolio, Norwest has entered into an Investment Subadvisory Agreement with
Smith, located at 500 Crescent Court, Suite 250, Dallas, Texas. Strategic Income
Fund, Moderate Balanced Fund, Growth Balanced Fund, Aggressive Balanced-Equity
Fund, Diversified Equity Fund, Growth Equity Fund and Diversified Small Cap Fund
each invest all or a portion of their assets in at least one of those
Portfolios. Smith is registered with the SEC as an investment adviser. Smith is
required to furnish at its own expense all services, facilities and personnel
necessary in connection with managing each Portfolio's investments and effecting
portfolio transactions for each Portfolio (to the extent of Norwest's
delegation). Pursuant to the Investment Subadvisory Agreement, Smith makes
investment decisions for each of the Portfolios and continuously reviews,
supervises and administers each Portfolio's investment program with respect to
that portion, if any, of the Portfolio's investment portfolio that Norwest
believes should be invested using Smith as a subadviser. Currently, Smith
manages all the assets of each Portfolio and has done so since each Portfolio's
inception. Norwest supervises the performance of Smith including its adherence
to the Portfolios' investment objectives and policies and pays Smith a fee for
its investment management services. The fee Norwest pays Smith does not affect
the total fees paid by the Portfolios to Norwest.
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 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
Agreement; 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 1940 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 Agreement provides that Smith may render services to
others.
MANAGEMENT AND ADMINISTRATIVE SERVICES
FORUM AND FAS MANAGEMENT AND ADMINISTRATIVE SERVICES. Forum manages all aspects
of the Trust's operations with respect to each Fund except those which are the
responsibility of FAS, Norwest, any other investment adviser or investment
subadviser to a Fund, or Norwest in its capacity as administrator pursuant to an
investment administration or similar agreement. With respect to each Fund, Forum
has entered into a Management Agreement that will continue in effect only if
such continuance is specifically approved at least annually by the Board or by
the shareholders and, in either case, by a majority of the Trustees who are not
interested persons of any party to the Management Agreement.
On behalf of the Trust and with respect to each Fund, Forum: (1) oversees: (a)
the preparation and maintenance by the Advisers and the Trust's administrator,
custodian, transfer agent, dividend disbursing agent and fund accountant (or if
appropriate, prepares and maintains) in such form, for such periods and in such
locations as may be required by applicable law, of all documents and records
relating to the operation of the Trust required to be prepared or maintained by
the Trust or its agents pursuant to applicable law; (b) the reconciliation of
account information and balances among the Advisers and the Trust's custodian,
transfer agent, dividend disbursing agent and fund accountant; (c) the
transmission of purchase and redemption orders for Shares; (d) the notification
of the Advisers of available funds for investment; and (e) the performance of
fund accounting, including the calculation of the net asset value per Share; (2)
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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, 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 Code, as amended, and oversees the
preparation and distribution to appropriate parties of notices announcing the
declaration of dividends and other distributions to shareholders; (12) reviews
and negotiates on behalf of the Trust normal course of business contracts and
agreements; (13) maintains and reviews periodically the Trust's fidelity bond
and errors and omission insurance coverage; and (14) advises the Trust and the
Board on matters concerning the Trust and its affairs.
The Management Agreement terminates automatically if assigned and may be
terminated without penalty with respect to any Fund by vote of that Fund's
shareholders or by either party on not more than 60 days' nor less than 30 days'
written notice. The Management Agreement also provides that neither Forum nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the administration or management of the Trust, except for
willful misfeasance, bad faith or gross negligence in the performance of Forum's
or their duties or by reason of reckless disregard of their obligations and
duties under the Management Agreement.
FAS manages all aspects of the Trust's operations with respect to each Fund
except those which are the responsibility of Forum, Norwest, or any other
investment adviser or investment subadviser to a Fund, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Fund, Forum has entered into a Administrative
Agreement that will continue in effect only if such continuance is specifically
approved at least annually by the Board or by the shareholders and, in either
case, by a majority of the Trustees who are not interested persons of any party
to the Management Agreement.
On behalf of the Trust and with respect to each Fund, FAS: (1) provides the
Trust with, or arranges for the provision of, the services of persons competent
to perform such supervisory, administrative and clerical functions as are
necessary to provide effective operation of the Trust; (2) assists in the
preparation and the printing and the periodic updating of the Trust's
registration statement, Prospectuses and SAIs, the Trust's tax returns, and
reports to its shareholders, the SEC and state and other securities
administrators; (3) assists in the preparation of proxy and information
statements and any other communications to shareholders; (4) assists the
Advisers in monitoring Fund holdings for compliance with Prospectus and SAI
investment restrictions and assist in preparation of periodic compliance
reports; (5) with the cooperation of the Trust's counsel, the Advisers, the
officers of the Trust and other relevant parties, is responsible for the
preparation and dissemination of materials for meetings of the Board; (6) is
responsible for preparing, filing and maintaining the Trust's governing
documents, including the Trust Instrument, Bylaws and minutes of meetings of
Trustees, Board committees and shareholders; (7) is responsible for maintaining
the Trust's existence and good standing under state law; (8) monitors sales of
shares and ensures that such shares are properly and duly registered with the
SEC and applicable state and other securities commissions; (9) is responsible
for the calculation of performance data for dissemination to information
services covering the investment company industry, sales literature of the Trust
and other appropriate purposes; and (10) is responsible for the determination of
the amount of and supervises the declaration of dividends and other
distributions to shareholders as necessary to, among other things, maintain the
qualification of each Fund as a regulated investment company under the Code, as
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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, respectively. Forum and FAS may compensate those agents for their
services; however, no such compensation may increase the aggregate amount of
payments by the Trust to Forum or FAS pursuant to their Management and
Administration Agreements with the Trust.
For their services, Forum and FAS each receives a fee with respect to U.S.
Government Fund, Treasury Fund, Institutional Shares of Municipal Money Market
Fund, Limited Term Government Income Fund, Intermediate Government Income Fund,
Income Fund, each Tax-Free Fixed Income Fund, ValuGrowth Stock Fund and
International Fund at an annual rate of 0.05% of the Fund's (of class') average
daily net assets, with respect to Investor Shares of Municipal Money Market Fund
at an annual rate of 0.10% of the class' average daily net assets, with respect
to Investor Shares of Ready Cash Investment Fund at an annual rate of 0.075% of
the class' average daily net asset, and with respect to each other Fund at an
annual rate of 0.025% of the Fund's average daily net assets.
As of August 31, 1998, Forum and FAS provided management and administrative
services to registered investment companies and collective investment funds with
assets of approximately $38 billion.
Table 2 in Appendix B shows the dollar amount of fees payable to Forum and FAS
for management and administrative services with respect to each Fund (or class
thereof for those periods when multiple classes were outstanding), the amount of
fees that were waived by Forum and FAS, if any, and the actual fees received by
Forum and FAS. The data is for the past three fiscal years or shorter period if
the Fund has been in operation for a shorter period.
PORTFOLIOS OF CORE TRUST. FAS 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, FAS has entered into an
Administration Agreement that will continue in effect only if such continuance
is specifically approved at least annually by the Core Trust Board or by the
shareholders and, in either case, by a majority of the Trustees who are not
interested persons of any party to the Administration Agreement. Under the
Administration Agreement, FAS performs similar services for each Portfolio as it
and Forum perform for the Funds under the Management Agreement and
Administration Agreement, to the extent the services are applicable to the
Portfolios and their structure.
The Administration Agreement provides that FAS shall not be liable to Core Trust
or any of Core Trust's interestholders for any action or inaction of FAS
relating to any event whatsoever in the absence of bad faith, willful
misfeasance or gross negligence in the performance of FAS' duties or obligations
under the Agreement or by reason of FAS' reckless disregard of its duties and
obligations under this Agreement.
The Administration Agreement may be terminated with respect to a Portfolio at
anytime, without the payment of any penalty (i) by the Core Board on 60 days'
written notice to FAS or (ii) by FAS on 60 days' written notice to Core Trust.
For its services FAS receives a fee with respect to each Portfolio of Core Trust
at an annual rate of 0.05% of the Portfolio's average daily net assets (0.15% in
the case of International Portfolio).
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NORWEST ADMINISTRATIVE SERVICES. Under an Administrative Services Agreement
between the Trust and Norwest Bank with respect to Small Cap Opportunities Fund
and International Fund, Norwest performs ministerial, administrative and
oversight functions for the Funds and undertakes to reimburse certain excess
expenses of the Funds. Among other things, Norwest Bank gathers performance and
other data from Schroder as the adviser of Schroder U.S. Smaller Companies
Portfolio, International Portfolio and Schroder EM Core Portfolio and from other
sources, formats the data and prepares reports to the Funds' shareholders and
the Trustees. Norwest Bank 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 Bank 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 Bank under the
Administrative Services Agreement unless each of the Fund's assets are invested
solely in Schroder U.S. Smaller Companies Portfolio or International Portfolio
and Schroder EM Core Portfolio (in the case of Small Cap Opportunities Fund and
International Fund, respectively) or in a portfolio of another registered
investment company. This agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by the
shareholders and, in either case, by a majority of the Trustees who are not
parties to the Administrative Services Agreement or interested persons of any
such party.
The Administrative Services Agreement provides that neither Norwest Bank 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.
Under the agreement, Norwest Bank receives a fee with respect to Small Cap
Opportunities Fund and International Fund at an annual rate of 0.25% of the
Funds' average daily net assets. Small Cap Opportunities Fund and International
Fund incur total management and administrative fees at a higher rate than many
other mutual funds, including other funds of the Trust.
Table 2 in Appendix B shows the dollar amount of fees payable under the
Administrative Services Agreement, the amount of the fee that was waived, if
any, and the amount received by Norwest Bank for the past three fiscal years of
the Funds.
SCHRODER ADMINISTRATIVE SERVICES. Schroder Core has entered into an
Administrative Services Agreement with Schroder Advisors, 787 Seventh Avenue,
New York, New York 10019, pursuant to which Schroder Advisors provides
management and administrative services necessary for the operation of Schroder
U.S. Smaller Companies Portfolio and Schroder EM Core Portfolio, including
coordination of the services performed by the Portfolios' Adviser, transfer
agent, custodian, independent accountants, legal counsel and others. Schroder
Advisors is a wholly-owned subsidiary of Schroder, and is a registered
broker-dealer organized to act as administrator and distributor of mutual funds.
The Administrative Services Agreement is terminable with respect to the
Portfolio without penalty, at any time, by vote of a majority of the trustees of
Schroder Core who are not "interested persons" of Schroder Core and who have no
direct or indirect financial interest in the operation of the Administrative
Services Agreement, upon not more than 60 days' written notice to Schroder
Advisors or by vote of the holders of a majority of the shares of the Portfolio,
or, upon 60 days' notice, by Schroder Advisors. The Administrative Services
Agreement will terminate automatically in the event of its assignment.
On behalf of the Portfolios, Schroder Core has entered into a Sub-Administration
Agreement with FAS. Pursuant to the Sub-Administration Agreement, FAS assists
Schroder Advisors with certain of its responsibilities under the Administrative
Services Agreement, including shareholder reporting and regulatory compliance.
The Sub-Administration Agreement is terminable with respect to the Portfolio
without penalty, at any time, by the board of trustees of Schroder Core upon 60
days' written notice to Forum or by Forum upon 60 days' written notice to the
Portfolio.
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For its services, Schroder Advisors receives no fee from Schroder U.S. Smaller
Companies Portfolio and 0.10% annually of average daily net assets from Schroder
EM Core Portfolio. FAS, for its services, receives 0.075% annually of average
daily net assets from each Portfolio.
DISTRIBUTION
Forum also acts as distributor of the shares of the Fund. Forum acts as the
agent of the Trust in connection with the offering of shares of the Funds on a
"best efforts" basis pursuant to a Distribution Services Agreement.
Under the Distribution Services Agreement, the Trust has agreed to indemnify,
defend and hold Forum, and any person who controls Forum within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which Forum or any such controlling person may incur,
under the 1933 Act, or under common law or otherwise, arising out of or based
upon any alleged untrue statement of a material fact contained in the Trust's
Registration Statement or a Fund's Prospectus or Statement of Additional
Information in effect from time to time under the 1933 Act or arising out of or
based upon any alleged omission to state a material fact required to be stated
in any one thereof or necessary to make the statements in any one thereof not
misleading. Forum is not, however, protected against any liability to the Trust
or its shareholders to which Forum would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of Forum's reckless disregard of its obligations and duties
under the Distribution Services Agreement.
With respect to each Fund, the Distribution Services Agreement will continue in
effect only if such continuance is specifically approved at least annually by
the Board or by the shareholders and, in either case, by a majority of the
Trustees who are not parties to the Distribution Services Agreement or
interested persons of any such party and, with respect to each class of a Fund
for which there is an effective plan of distribution adopted pursuant to Rule
12b-1, who do not have any direct or indirect financial interest in any
distribution plan of the Fund or in any agreement related to the distribution
plan cast in person at a meeting called for the purpose of voting on such
approval ("12b-1 Trustees").
The Distribution Services Agreement terminates automatically if assigned. With
respect to each Fund, the Distribution Services Agreement may be terminated at
any time without the payment of any penalty: (1) by the Board or by a vote of
the Fund's shareholders or, with respect to each class of a Fund for which there
is an effective plan of distribution adopted pursuant to Rule 12b-1, a majority
of 12b-1 Trustees, on 60 days' written notice to Forum or (2) by Forum on 60
days' written notice to the Trust.
Under the Distribution Services Agreement related to the Funds that offer A
Shares, Forum receives, and may reallow to certain financial institutions, the
initial sales charges assessed on purchases of A Shares of the Funds. The Funds
have also adopted the distribution plans described below.
A SHARES DISTRIBUTION PLAN. The Trust, on behalf of Growth Balanced Fund, Large
Company Growth Fund and Diversified Small Cap Fund, has adopted a distribution
plan pursuant to Rule 12b-1 under the 1940 Act (the "A Shares Plan") providing
for distribution payments with respect to A Shares. Each of the Funds
compensates Forum for its distribution activities with respect to A Shares by
making distribution payments on A Shares to Forum at an annual rate of up to
0.10% per annum of the average daily net assets of the Fund attributable to A
Shares (the "distribution services fee"). In consideration of the payment of the
distribution services fee, Forum provides the Funds with distribution-related
services that are primarily intended to result in the sale of A Shares,
including, but not limited to, compensation of employees of Forum, compensation
and expenses, including overhead and telephone and other communication expenses,
of Forum and other broker-dealers, banks and other financial intermediaries that
engage in or support the distribution of A Shares, the preparation, printing and
distribution of prospectuses, statements of additional information, sales
literature and advertising materials relating to the A Shares, and such other
promotional activities in such amounts Forum deems necessary or appropriate. The
amount of distribution services fees is not related directly to the amount of
expenses incurred by Forum in connection with providing distribution services,
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which expenses may be greater or less than those fees and charges. The Fund will
not be obligated to reimburse Forum for those expenses.
B SHARES AND C SHARES DISTRIBUTION PLANS. The Trust, on behalf of Funds offering
B Shares and C Shares, has adopted distribution plans pursuant to Rule 12b-1
under the 1940 Act (each, a "Plan") providing for distribution payments with
respect to B Shares and C Shares. Each of the Funds compensates Forum for its
distribution activities with respect to B Shares by paying a distribution
services fee on B Shares to Forum at an annual rate of up to 0.75% of the
average daily net assets of the Fund attributable to the B Shares. Each Fund
offering C Shares compensates Forum for its distribution activities with respect
to C Shares by paying a distribution services fee to Forum of up to 0.75% of the
average daily net assets of the Fund attributable to the C Shares. The
distribution payments due to Forum from each Fund comprise: (1) sales
commissions at levels set from time to time by the Board ("sales commissions");
and (2) an interest fee calculated by applying the rate of 1% over the prime
rate to the outstanding balance of uncovered distribution charges.
Under the distribution services agreement between Forum and the Trust, Forum
will receive, in addition to the distribution services fee, all contingent
deferred sales charges due upon redemptions of B Shares and C Shares. The
combined contingent deferred sales charge and distribution services fee on B
Shares and C Shares is intended to finance the distribution of those shares by
permitting an investor to purchase shares through broker-dealers without the
assessment of an initial sales charge and, at the same time, permitting Forum to
compensate broker-dealers in connection with the sales of the shares. Proceeds
from the contingent deferred sales charge with respect to a Fund are paid to
Forum to defray the expenses related to providing distribution-related services
in connection with the sales of B Shares or C Shares, such as the payment of
compensation to broker-dealers selling B Shares or C Shares. Forum may spend the
distribution services fees it receives with respect to B Shares or C Shares as
it deems appropriate on any activities primarily intended to result in the sale
of B Shares or C Shares, respectively.
Under the Plans, a Fund will make distribution services fee payments to Forum
only for periods during which there are outstanding uncovered distribution
charges attributable to the appropriate class of that Fund. Uncovered
distribution charges for a class are equivalent to all sales commissions
previously due (plus interest), less amounts received pursuant to the Plan and
all contingent deferred sales charges previously paid to Forum. At May 31, 1998,
Ready Cash Investment Fund (Exchange Shares), Stable Income Fund, Intermediate
Government Income Fund, Income Fund, Total Return Bond Fund, Tax-Free Income
Fund, Colorado Tax-Free Fund, Minnesota Tax-Free Fund, Income Equity Fund,
ValuGrowth Stock Fund, Diversified Equity Fund, Growth Equity Fund, Small
Company Stock Fund, Small Cap Opportunities Fund and International Fund had
uncovered distribution expenses of $18,785; $112,707; $90,244; $38,700;
$152,328; $99,195; $273,966; $1,561,075; $115,392; $2,350,252; $465,310;
$111,593; $229,014 and $57,510, respectively, or approximately 1.04%, 1.36%,
1.88%, 1.47%, 1.38%, 1.09%, 1.66%, 2.32%, 1.28%, 2.89%, 2.80%, 1.93%, 3.73%, and
2.56% of each respective Fund's net assets attributable to B Shares as of the
same date.
The amount of distribution services fees and contingent deferred sales charge
payments received by Forum with respect to B Shares or C Shares of a Fund are
not related directly to the amount of expenses incurred by Forum in connection
with providing distribution services to the B Shares or C Shares and may be
higher or lower than those expenses. Forum may be considered to have realized a
profit under a Plan if, at any time, the aggregate amounts of all distribution
services fees and contingent deferred sales charge payments previously made to
Forum with respect to B Shares or C Shares exceed the total expenses incurred by
Forum in distributing B Shares or C Shares.
A Fund does not accrue future distribution services fees as a liability of the
Fund with respect to the B Shares or C Shares or reduce the Fund's current net
assets in respect of distribution services fees which may become payable under a
Plan in the future.
In the event that a Plan is terminated or not continued with respect to B Shares
or C Shares of a Fund, the Fund may, under certain circumstances, continue to
pay distribution services fees to Forum (but only with respect to sales of the
class that occurred prior to the termination or discontinuance of the Plan). In
deciding whether to purchase B Shares and C Shares of a Fund, investors should
consider that payments of distribution services fees could continue until such
time as there are no uncovered distribution charges under the Plans attributable
to that Fund. In approving the Plans, the Board determined that there was a
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reasonable likelihood that the Plans would benefit each Fund and its B Shares
shareholders and its C Shares shareholders.
Periods with a high level of sales of B Shares or C Shares of a Fund accompanied
by a low level of redemptions of those shares that are subject to contingent
deferred sales charges will tend to increase uncovered distribution charges with
respect to B Shares or C Shares. Conversely, periods with a low level of sales
of B Shares or C Shares of a Fund accompanied by a high level of redemptions of
those shares that are subject to contingent deferred sales charges will tend to
reduce uncovered distribution charges with respect to B Shares or C Shares. A
high level of sales of B Shares or C Shares during the first few years of
operations, coupled with the limitation on the amount of distribution services
fees payable by a Fund with respect to B Shares or C Shares during any fiscal
year, would cause a large portion of the distribution services fees attributable
to a sale of the B Shares or C Shares to be accrued and paid by the Fund to
Forum with respect to those shares in fiscal years subsequent to the years in
which those shares were sold. The payment delay would in turn result in the
incurrence and payment of increased interest fees under the applicable Plan.
Each Plan provides that all written agreements relating to the Plan must be in a
form satisfactory to the Board. In addition, the Plans require the Trust and
Forum to prepare, at least quarterly, written reports setting forth all amounts
expended for distribution purposes by the Funds and Forum pursuant to the Plans
and identifying the distribution activities for which those expenditures were
made.
Each Plan provides that, with respect to each class of each Fund to which it
applies, it will remain in effect for one year from the date of its adoption and
thereafter may continue in effect for successive annual periods provided it is
approved by the shareholders of the respective class or by the Board, including
a majority of the 12b-1 Trustees. Each Plan further provides that it may not be
amended to increase materially the costs which may be borne by the Trust for
distribution pursuant to the Plan without shareholder approval and that other
material amendments to the Plan must be approved by the trustees in the manner
described in the preceding sentence. The Plans may be terminated at any time by
a vote of the Board or by the shareholders of the respective classes.
The Plans are "semi-enhanced" in that under the circumstances described below,
payments to Forum under a Plan continue while there are uncovered distribution
charges even though the Plan has been terminated. With respect to each Plan,
uncovered distribution charges include all sales commissions previously due,
plus interest, less amounts previously received by Forum (or other distributor)
pursuant to the Plan and contingent deferred sales charges previously paid to
Forum. Each Plan provides that in the event of a Complete Termination (as
defined below) of the Plan with respect to a Fund, payments by a Fund in
consideration of sales of B Shares that occurred prior to termination of the
Plan will cease. A Complete Termination in respect of any Fund means: (1) the
12b-1 Trustees acting in good faith have determined that termination is in the
best interest of the Trust and the shareholders of the Fund; (2) the Trust does
not alter the terms of the CDSC applicable to the B Shares or C Shares of the
Fund outstanding at the time of the termination; (3) the Trust does not pay any
portion of the asset based sales charge or service fees to an entity other than
the distributor or its assignee (unless the distributor at the time of the
termination was in material breach under the Distribution Agreement in respect
of the Fund); and (4) the Fund does not adopt a distribution plan relating to a
class of shares of the Fund that has a sales load structure substantially
similar (as defined in the Plan) to that of the B shares or C Shares.
In the event of a termination of the B Shares Plan that does not satisfy clauses
(2), (3) and (4) of the definition of a Complete Termination above, Ready Cash
Investment Fund, ValuGrowth Stock Fund, Small Company Stock Fund, Income Fund,
Tax-Free Income Fund, Total Return Bond Fund and Minnesota Tax-Free Fund would
continue to pay distribution services fees for no more than four years. In
contrast, payments by Stable Income Fund, Intermediate Government Income Fund,
Growth Equity Fund and Diversified Equity Fund would continue until such time as
there exist no outstanding uncovered distribution charges attributable to the
Fund and, therefore, could continue for periods of time beyond four years after
the date of termination. In the event of a termination of the C Shares Plan that
does not satisfy clauses (2), (3) and (4) of the definition of a Complete
Termination above, the Funds would continue to pay distribution fees for no more
than four years.
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In addition, pursuant to the B Shares Plan, each of Stable Income Fund, Income
Equity Fund and Intermediate Government Income Fund and, pursuant to the C
Shares Plan, each Fund offering C Shares may, subject to approval by the Rule
12b-1 Trustees, assume and pay: (i) any uncovered distribution charges of the
distributor of a fund whose assets are being acquired by the Fund and (ii) any
other amounts expended for distribution on behalf of such fund that are not
reimbursed or paid by the fund upon the merger or combination with or
acquisition of substantially all of the assets of that fund.
Pursuant to the B Shares Plan, each Fund has agreed also to pay Forum a
maintenance fee for B Shares in an amount equal to 0.25% of the average daily
net assets of the Fund attributable to B Shares for providing personal services
to shareholder accounts. The maintenance fee may be paid by Forum to
broker-dealers in an amount not to exceed 0.25% of the value of the B Shares
held by the customers of the broker-dealers.
The fees assessed under the Plans are accrued daily and paid monthly and will
cause a Fund's B Shares or C Shares to have a higher expense ratio and to pay
lower dividends than A Shares of that Fund. Notwithstanding the discontinuation
of distribution services fees with respect to B Shares of a Fund, the Fund's B
Shares may continue to pay maintenance fees.
Table 3 in Appendix B shows the dollar amount of fees payable to Forum for its
distribution services with respect to each Fund (or class thereof), the amount
of fee that was waived by Forum, if any, and the actual fee received by Forum.
All maintenance fees were waived by Forum during the fiscal years ended May 31,
1996, 1997 and 1998. With respect to each Fund, Forum has paid brokers that sold
B Shares in amounts greater than the distribution fees received by Forum with
respect to that Fund. The data is for the past three fiscal years or shorter
period if the Fund has been in operation for a shorter period.
Table 4 in Appendix B shows the dollar amount of sales charges payable to Forum
with respect to sales of A Shares (or of the respective Funds prior to the
offering of multiple classes of shares) and the amount of sales charge retained
by Forum and not reallowed to other persons. The data is for the past three
fiscal years or shorter period if the Fund has been in operation for a shorter
period.
TRANSFER AGENT
Norwest Bank, Sixth Street and Marquette, Minneapolis, Minnesota 55479, serves
as transfer agent and dividend disbursing agent for the Trust pursuant to a
Transfer Agency Agreement. The Transfer Agent maintains an account for each
shareholder of the Trust (unless such accounts are maintained by sub-transfer
agents or processing agents), performs other transfer agency functions and acts
as dividend disbursing agent for the Trust. The Transfer Agent is permitted to
subcontract any or all of its functions with respect to all or any portion of
the Trust's shareholders to one or more qualified sub-transfer agents or
processing agents, which may be affiliates of the Transfer Agent. Sub-transfer
agents and processing agents may sell Fund shares. 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.
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
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transmitting to the Trust proxies executed by shareholders with respect to
meetings of shareholders of the Trust; and (10) providing such other related
services as the Trust or a shareholder may request.
For its services, the Transfer Agent receives a fee computed daily and paid
monthly from the Trust, with respect to each Fund, at an annual rate of 0.25% of
the Fund's average daily net assets attributable to each class of the Fund
(0.10% in the case of Municipal Money Market Fund - Institutional Shares and
Ready Cash Investment Fund Investor Shares and Institutional Shares).
CUSTODIAN
Norwest Bank, Sixth Street and Marquette, Minneapolis, Minnesota 55479, serves
as each Fund's and each Portfolio's (other than Schroder U.S. Smaller Companies
Portfolio and Schroder EM Core Portfolio) custodian and may appoint
subcustodians for the foreign securities and other assets held in foreign
countries. For its custodial services, Norwest Bank receives a fee with respect
to each Fund and each Portfolio at an annual rate of 0.02% of the first $100
million of the Fund's or Portfolio's average daily net assets, 0.015% of the
next $100 million of the Fund's or Portfolio's average daily net assets and
0.01% of the Fund's or Portfolio's remaining average daily net assets. Norwest
Bank assesses certain administration, holding and transaction fees in connection
with its custodial services. No fee is directly payable by a Fund to the extent
the Fund is invested in a Portfolio in accordance with Section 12(d)(1)(E) of
the 1940 Act. With respect to International Portfolio, Norwest Bank receives a
fee at an annual rate of 0.075% of the Portfolio's average daily net assets. The
Chase Manhattan Bank, N.A. serves as custodian of Schroder U.S. Smaller
Companies Portfolio and Schroder EM Core Portfolio and is paid a fee for its
services.
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.
Each Fund invested in one or more Portfolios incurs its proportionate share of
the custodial fees of the Portfolio(s) in which it invests.
PORTFOLIO ACCOUNTING
Forum Accounting, an affiliate of Forum, performs portfolio accounting services
for each Fund pursuant to a Fund Accounting Agreement with the Trust. The Fund
Accounting Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by a vote of the
shareholders of the Trust and in either case by a majority of the Trustees who
are not parties to the Fund Accounting Agreement or interested persons of any
such party, at a meeting called for the purpose of voting on the Fund Accounting
Agreement.
Under the Fund Accounting Agreement, Forum Accounting prepares and maintains
books and records of each Fund on behalf of the Trust that are required to be
maintained under the 1940 Act, calculates the net asset value per share of each
Fund (and class thereof) and dividends and capital gain distributions and
prepares periodic reports to shareholders and the SEC. For its services, Forum
Accounting receives from the Trust with respect to each Fund (other than a Fund
investing in a Core and Gateway Structure) 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.
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Forum Accounting receives from the Trust with respect to each Fund investing in
a Core and Gateway Structure 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 Fund investing in a Core and
Gateway Structure 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 Fund
investing in a Core and Gateway Structure pursuant to Section 12(d)(1)(H) of the
1940 Act additional surcharges as described above if the Fund invests in
securities other than investment companies (calculated as if the securities were
the Fund's only assets).
Surcharges are determined based upon the total assets, security positions or
other factors as of the end of the prior month and on the portfolio turnover
rate for the prior month. The rates set forth above shall remain fixed through
December 31, 1998. On January 1, 1999, and on each successive January 1, the
rates may be adjusted automatically by Forum without action of the Trust to
reflect changes in the Consumer Price Index for the preceding calendar year, as
published by the U.S. Department of Labor, Bureau of Labor Statistics. Forum
shall notify the Trust each year of the new rates, if applicable
Forum Accounting is required to use its best judgment and efforts in rendering
fund accounting services and is not be liable to the Trust for any action or
inaction in the absence of bad faith, willful misconduct or gross negligence.
Forum Accounting is not responsible or liable for any failure or delay in
performance of its fund accounting obligations arising out of or caused,
directly or indirectly, by circumstances beyond its reasonable control and the
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.
Forum, FAS, and Forum Accounting are members of the Forum Financial Group of
companies which together provide a full range of services to the investment
company and financial services industry. As of October 1, 1998, Forum, FAS and
Forum Accounting were controlled by John Y. Keffer, President and Chairman of
the Trust.
Table 5 in Appendix B shows the dollar amount of fees payable to Forum
Accounting for its accounting services with respect to each Fund, the amount of
fee that was waived by Forum Accounting, if any, and the actual fee received by
Forum Accounting. The data is for the past three fiscal years or shorter period
if the Fund has been in operation for a shorter period.
EXPENSES
Each Fund bears all costs of its operations. The costs borne by the Funds
include a pro rata portion of the following: legal and accounting expenses;
Trustees' fees and expenses; insurance premiums, custodian and transfer agent
fees and expenses; brokerage fees and expenses; expenses of registering and
qualifying the Fund's shares for sale with the SEC and with various state
securities commissions; expenses of obtaining quotations on fund securities and
pricing of the Fund's shares; a portion of 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 the 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.
Each service provider to the Trust or their agents and affiliates also may act
in various capacities for, and receive compensation from, their customers who
are shareholders of a Fund. Under agreements with those customers, these
entities may elect to credit against the fees payable to them by their customers
or to rebate to customers all or a portion of any fee received from the Trust
with respect to assets of those customers invested in a Fund.
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The expenses of each Fund that invest in one or more Portfolios include the
Fund's pro rata share of the expenses of the Portfolio or Portfolios in which
the Fund invests.
Subject to the obligations of Norwest to reimburse the Trust for its excess
expenses as described above, the Trust has, under its Investment Advisory
Agreements, confirmed its obligation to pay all its other expenses, including:
(1) interest charges, taxes, brokerage fees and commissions; (2) certain
insurance premiums; (3) fees, interest charges and expenses of the Trust's
custodian, transfer agent and dividend disbursing agent; (4) telecommunications
expenses; (5) auditing, legal and compliance expenses; (6) costs of the Trust's
formation and maintaining its existence; (7) costs of preparing and printing the
Trust's prospectuses, statements of additional information, account application
forms and shareholder reports and delivering them to existing and prospective
shareholders; (8) costs of maintaining books of original entry for portfolio and
fund accounting and other required books and accounts and of calculating the net
asset value of shares of the Trust; (9) costs of reproduction, stationery and
supplies; (10) compensation of the Trust's trustees, officers and employees and
costs of other personnel performing services for the Trust who are not officers
of Norwest, Forum or affiliated persons of Norwest or Forum; (11) costs of
corporate meetings; (12) registration fees and related expenses for registration
with the SEC and the securities regulatory authorities of other countries in
which the Trust's shares are sold; (13) state securities law registration fees
and related expenses; (14) fees and out-of-pocket expenses payable to Forum
Financial Services, Inc. under any distribution, management or similar
agreement; (15) and all other fees and expenses paid by the Trust pursuant to
any distribution or shareholder service plan adopted pursuant to Rule 12b-1
under the Act.
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8. PORTFOLIO TRANSACTIONS
The following discussion of portfolio transactions, while referring to the
Funds, relates equally to the Portfolios.
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.
The Funds have no obligation to deal with any specific broker or dealer in the
execution of portfolio transactions. The Advisers seek "best execution" for all
portfolio transactions, but a Fund may pay higher than the lowest available
commission rates when its 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 Fund that
invests in foreign securities than would be the case for comparable transactions
effected on U.S. securities exchanges.
Purchases and sales of portfolio securities for the Money Market Funds and Fixed
Income Funds usually are principal transactions. Debt instruments are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually are no brokerage commissions paid for such
purchases. The Equity Funds and the Balanced Funds generally will effect
purchases and sales of equity securities through brokers who charge commissions
except in the over-the-counter markets. Purchases of debt and equity securities
from underwriters of the securities include a disclosed fixed commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and asked price. In
the case of debt securities and equity securities traded in the foreign and
domestic over-the-counter markets, there is generally no stated commission, but
the price usually includes an undisclosed commission or markup. Allocations of
transactions to brokers and dealers and the frequency of transactions are
determined by the Advisers in their best judgment and in a manner deemed to be
in the best interest of shareholders of each Fund rather than by any formula.
The primary consideration is prompt execution of orders in an effective manner
and at the most favorable price available to the Fund. In transactions on stock
exchanges in the United States, commissions are negotiated, whereas on foreign
stock exchanges commissions are generally fixed. Where transactions are executed
in the over-the-counter market, each Fund will seek to deal with the primary
market makers; but when necessary in order to obtain best execution, they will
utilize the services of others. In all cases the Funds will attempt to negotiate
best execution.
The Money Market Funds and Fixed Income Funds may effect purchases and sales
through brokers who charge commissions, although the Trust does not anticipate
that the Money Market Funds will do so. Table 6 in Appendix B shows the
aggregate brokerage commissions with respect to each Fund. The data presented is
for the past three fiscal years or a shorter period if the Fund has been in
operation for a shorter period, except as otherwise noted. Any material change
in the last two years in the amount of brokerage commissions paid by a fund was
due to an increase or decrease in the Fund's assets.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, each of the Board, Core Trust Board and Schroder Core Board has
authorized the Advisers to employ their respective affiliates to effect
securities transactions of the Funds or the Portfolios, provided certain other
conditions are satisfied. No Fund has an understanding or arrangement to direct
any specific portion of its brokerage to an affiliate of an Adviser, and will
not direct brokerage to an affiliate of an Adviser in recognition of research
services. Payment of brokerage commissions to an affiliate of an Adviser for
effecting such transactions is subject to Section 17(e) of the 1940 Act, which
requires, among other things, that commissions for transactions on securities
exchanges paid by a registered investment company to a broker which is an
affiliated person of such investment company, or an affiliated person of another
person so affiliated, not exceed the usual and customary brokers' commissions
for such transactions. It is the Fund's policy that commissions paid to Schroder
Securities Limited, Norwest Investment Services, Inc. ("NISI") and other
affiliates of an Adviser will, in the judgment of the 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
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standards. The Core Trust and Schroder Core Boards have adopted similar policies
with respect to the Portfolios.
During the last three fiscal years certain Funds paid brokerage commissions to
NISI, a wholly-owned broker-dealer subsidiary of the parent of Norwest, Norwest
Corporation. The following table indicates the Funds that paid commissions to
NISI, the aggregate amounts of commissions paid, the percentage of aggregate
brokerage commissions paid to NISI and the percentage of the aggregate dollar
amount of transactions involving payment of commissions that were effected
through NISI.
<TABLE>
<S> <C> <C> <C>
PERCENTAGE OF
COMMISSION
AGGREGATE PERCENTAGE TRANSACTIONS
COMMISSIONS OF COMMISSIONS EXECUTED
PAID TO NISI PAID TO NISI THROUGH NISI
VALUGROWTH STOCK FUND
Year Ended May 31, 1998 N/A N/A N/
Year Ended May 31, 1997 $41,474 8.25% 8.05%
Year Ended May 31, 1996 $10,494 2.41% 1.73%
</TABLE>
The practice of placing orders with NISI is consistent with each Fund's
objective of obtaining best execution and is not dependent on the fact that NISI
is an affiliate of Norwest.
The Funds and the Portfolios may not always pay the lowest commission or spread
available. Rather, in determining the amount of commissions, including certain
dealer spreads, paid in connection with securities transactions, an Adviser
takes into account factors such as size of the order, difficulty of execution,
efficiency of the executing broker's facilities (including the services
described below) and any risk assumed by the executing broker. The 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 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 Adviser's own internal research and investment strategy
capabilities. Such research and analysis may be used by the Advisers in
connection with services to clients other than the Funds and Portfolios, and not
all such services may be used by the Adviser in connection with the Funds. An
Adviser's fees are not reduced by reason of the Adviser's receipt of the
research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the obligation to seek the most
favorable price and execution available and such other policies as the Boards
may determine, an Adviser may consider sales of shares of the Fund as a factor
in the selection of broker-dealers to execute portfolio transactions for the
Fund.
Investment decisions for the Funds (and for the Portfolios) will be made
independently from those for any other account or investment company that is or
may in the future become managed by the 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 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
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and other client accounts managed by the Advisers occur contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales.
The Advisers monitor the creditworthiness of counterparties to the Funds'
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal credit risks and the benefits from the
transaction justify the attendant risks.
During their last fiscal year, certain Funds acquired securities issued by their
"regular brokers and dealers" or the parents of those brokers and dealers.
Regular brokers and dealers means the 10 brokers or dealers that: (1) received
the greatest amount of brokerage commissions during the Fund's last fiscal year;
(2) engaged in the largest amount of principal transactions for portfolio
transactions of the Fund during the Fund's last fiscal year; or (3) sold the
largest amount of the Fund's shares during the Fund's last fiscal year.
Following is a list of the regular brokers and dealers of the Funds whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of May 31, 1998.
REGULAR BROKER VALUE OF
OR DEALER SECURITIES HELD
Morgan Stanley Dean Witter, Discover & Co. $124,627
Charles Schwab Corp. 63,253
Bear Stearns & Co., Inc. 56,603
CS First Boston, Inc. 25,000
Donaldson, Lufkin & Jenrette, Inc. 17,211
Amresco, Inc. 10,729
Paine Webber Group, Inc. 4,935
Lehman Brothers Holding, Inc. 4,797
HSBC Holdings PLC 4,222
Merrill Lynch & Co., Inc. 3,257
PORTFOLIO TURNOVER
The frequency of portfolio transactions of a Fund (the portfolio turnover rate)
will vary from year to year depending on many factors. From time to time a Fund
may engage in active short-term trading to take advantage of price movements
affecting individual issues, groups of issues or markets. An annual portfolio
turnover rate of 100% would occur if all of the securities in a Fund were
replaced once in a period of one year. Higher portfolio turnover rates may
result in increased brokerage costs to a Fund or a Portfolio and a possible
increase in short-term capital gains or losses. In order to qualify as a
regulated investment company for Federal tax purposes for taxable years
beginning on or before August 5, 1997, less than 30% of the gross income of the
Fund in that year must be derived from the sale of securities held by the Fund
for less than three months. See "Taxation" below. The change in portfolio
turnover rate for Income Fund and Intermediate Government Income Fund from 1995
to 1996 was due in part to the change in portfolio managers. Other significant
changes in portfolio turnover rates was due to changing market conditions and
the effect of those conditions on the Funds' investment policies.
9. ADDITIONAL PURCHASE, REDEMPTION AND
EXCHANGE INFORMATION
GENERAL
Shares of all Funds are sold on a continuous basis by the distributor.
The per share net asset values of each class of shares of a Fund are expected to
be substantially the same. Under certain circumstances, however, the per share
net asset value of each class may vary. Due to the higher expenses of B Shares,
the net asset value of B Shares will generally be lower than the net asset value
of the other classes. The per share net asset value of each class of a Fund
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eventually will tend to converge immediately after the payment of dividends,
which will differ by approximately the amount of the expense accrual
differential among the classes.
MONEY MARKET FUNDS
As described in the Prospectuses, under certain circumstances a Money Market
Fund may close early and advance time by which the Fund must receive a purchase
or redemption order and payments. In that case, if an investor placed an order
after the cut-off time the order would be processed on the next business day and
the investor's access to the fund would be temporarily limited.
PURCHASES THROUGH FINANCIAL INSTITUTIONS
You may purchase and redeem shares through certain broker-dealers, banks and
other financial institutions. These financial institutions may charge their
customers a fee for their services and are responsible for promptly transmitting
purchase, redemption and other requests to the Funds.
If you purchase shares through a financial institution, you will be subject to
the financial institution's procedures, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or different
from, those applicable when you invest in a Fund directly. When you purchase a
Fund's shares through a financial institution, you may or may not be the
shareholder of record and, subject to your institution's procedures, you may
have Fund shares transferred into your name. There is typically a three-day
settlement period for purchases and redemptions through broker-dealers. Certain
financial institutions may also enter purchase orders with payment to follow.
You may not be eligible for certain shareholder services when you purchase
shares through a financial institution. Contact your financial institution for
further information. If you hold shares through a financial institution, the
Funds may confirm purchases and redemptions to the financial institution, which
will provide you with confirmations and periodic statements. The Funds are not
responsible for the failure of any financial institution to carry out its
obligations.
SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN. You may elect the Automatic Investment Plan if you
purchase A Shares, B Shares, C Shares, I Shares or Investor Shares. Under the
Automatic Investment Plan, you may authorize monthly amounts of $50 or more to
be withdrawn automatically from a designated bank account (other than a passbook
savings account) and sent to the Transfer Agent for investment in a Fund. Call
or write the Transfer Agent for an application. The Trust may modify or
terminate the Automatic Investment Plan if it is unable to settle any
transaction with your bank. If the Automatic Investment Plan is terminated
before your account totals $1,000, the Funds may redeem your account.
RETIREMENT ACCOUNTS. The Funds (except Municipal Money Market Fund and the
Tax-Free Fixed Income Funds) may be a suitable investment vehicle for part or
all of the assets held in Traditional or Roth individual retirement accounts
(collectively, "IRAs"). Call the Funds at 1-800-338-1348 or 1-612-667-8833 to
obtain an IRA account application. Generally, all contributions and investment
earnings in an IRA will be tax-deferred until withdrawn. If certain requirements
are met, investment earnings held in a Roth IRA will not be taxed even when
withdrawn. You may contribute up to $2,000 annually to an IRA. Only
contributions to Traditional IRAs are tax-deductible. However, that deduction
may be reduced if you or your spouse is an active participant in an
employer-sponsored retirement plan and you have adjusted gross income above
certain levels. Your ability to contribute to a Roth IRA also may be restricted
if you or, if you are married, you and your spouse has adjusted gross income
above certain levels.
Your employer may also contribute to your IRA as part of a Savings Incentive
Match Plan for Employees, or "SIMPLE plan," established after December 31, 1996.
Under a SIMPLE plan, you may contribute up to $6,000 annually to your IRA, and
your employer must generally match such contributions up to 3% of your annual
salary. Alternatively, your employer may elect to contribute to your IRA 2% of
the lesser of your earned income or $160,000.
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This information on IRAs is based on regulations in effect as of January 1, 1998
and summarizes only some of the important federal tax considerations affecting
IRA contributions. These comments are not meant to be a substitute for tax
planning. Consult your tax advisors about your specific tax situation.
AUTOMATIC WITHDRAWAL PLAN. If you hold more than $1,000 of a Fund's A Shares, B
Shares, C Shares, I Shares or Investor Shares or $10,000 of a Fund's
Institutional Shares in an account, you may establish an "Automatic Withdrawal
Plan" to provide for the preauthorized payment from your account of $250 or more
on a monthly, quarterly, semi-annual or annual basis. The Transfer Agent will
redeem the number of shares necessary to provide the amount of the payment. Any
taxable gain or loss is recognized upon redemption of the shares. Call or write
the Transfer Agent for an application. The Funds may suspend a withdrawal plan
without notice if the account contains insufficient funds to effect a withdrawal
or if the account balance is less than the required minimum amounts at any time.
CHECKWRITING. You may elect checkwriting privileges if you own shares of a Money
Market Fund. Call or write the Transfer Agent for an application. If you elect
checkwriting privileges, you will receive checks that may be made payable to any
person in any amount of $500.00 or more. When a check is presented for payment,
the Transfer Agent will redeem the number of shares necessary to cover the
amount of the check. You cannot write checks against shares for which
certificates have been issued. The Funds will not honor a check for an amount
greater than the value of the uncertificated shares held in your account. In
addition, you may not liquidate your entire account by means of a check. Normal
restrictions on your ability to redeem shares will apply to redemptions by
check. The Transfer Agent may also restrict your ability to use checks.
Checkwriting procedures may be changed, modified or terminated at any time upon
written notification.
REOPENING ACCOUNTS You may reopen an account without filing a new account
application at any time within one year after your account is closed, provided
that the information on the account application on file with the Funds is still
applicable.
PURCHASES OF A SHARES WAIVERS OF SALES CHARGES. The Trust does not assess sales
charges on the following types of purchases:
* purchases by any bank, trust company or other institution acting on behalf
of its fiduciary customer accounts or any other account maintained by its
trust department (including a pension, profit sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended);
* purchases by any financial intermediary acting on behalf of its asset based
fee account customers;
* purchases by trustees and officers of the Trust; directors, officers and
full-time employees of the Trust's manager, of Norwest Corporation or of
any of their affiliates; the spouse, direct ancestor or direct descendant
("relatives") of any such person; any trust or individual retirement
account or self-employed retirement plan for the benefit of any such person
or relative; or the estate of any such person or relative;
* purchases by any registered investment adviser with whom the distributor
has entered into a share purchase agreement and which is acting on behalf
of its fiduciary customer accounts;
* purchases of A Shares made pursuant to the Directed Dividend Option from
the proceeds of dividends and distributions of another fund of the Trust
that assesses a sales charge; or
* purchases of at least $50,000 through an individual retirement account in A
Shares of Diversified Equity Fund or Growth Equity Fund, when the
shareholder makes a non-binding commitment to subsequently enroll the
assets in the Norwest WealthBuilder IRA program, an asset allocation
program offered by Norwest Investment Services, Inc. ("NISI"). In
connection with purchases of A Shares of Diversified Equity Fund or Growth
Equity Fund with no sales charge, Forum makes payments to NISI of up to
1.00% of the value of the shares purchased.
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If you purchase A Shares without paying a sales charge, you many only resell the
shares to the Fund and you must make the purchase with the intent of investing
in the Fund.
If you qualify for a reduced sales charge, you or your financial institution
must both notify the Transfer Agent when you purchase the shares that you intend
to qualify for the reduced sales charge and verify that you qualify. The Trust
may modify or terminate reduced sales charge privileges at any time.
REINSTATEMENT PRIVILEGE. If you redeem a Fund's A Shares, you will not have to
pay a sales charge if you repurchase some or all of the shares you redeemed
within 60 days of the redemption.
INVESTORS IN OTHER FUND FAMILIES. You will not have to pay a sales charge on a
purchase of A Shares if, within the past 60 days, you have redeemed at net asset
value shares of a mutual fund that imposed a sales charge equal to or greater
than that applicable to the A Shares and you use those redemption proceeds to
purchase the Fund's shares.
SELF-DIRECTED 401(K) PROGRAMS. If you purchase less than $100,000 of a Fund's A
Shares through a self-directed 401(k) program or other qualified retirement plan
offered by Norwest, the Trust's manager or their affiliates, your purchase will
eligible for the reduced sales charge applicable to a single purchase of
$100,000.
RIGHT OF ACCUMULATION. If you purchase A Shares, you may qualify for a
cumulative quantity discount or right of accumulation ("ROA"). If you elect a
ROA, the applicable sales charge will be based on the total of your current
purchase and the net asset value (at the end of the previous Fund Business Day,
as defined in the Prospectus) of some or all of the A Shares you hold. For
example, if you own A Shares of Income Fund with a net asset value of $500,000
and purchase an additional $50,000 of the Fund's A Shares, the additional
purchase would be subject to a sales charge at the 2.0% rate applicable to a
$550,000 purchase rather than at the 3.5% rate applicable to a $50,000 purchase.
In addition, if you have previously purchased A Shares of a Fund other than the
Fund you wish to purchase that is sold with a sales charge equal to or greater
than the sales charge imposed on the Fund's A Shares, you also may qualify for a
ROA and may aggregate existing investments in A Shares of all those funds with
your current purchase of the Fund's A Shares to determine the applicable sales
charge. In addition, if your spouse, direct ancestor or direct descendant holds
A Shares, those shareholdings also may be combined for purposes of the ROA.
STATEMENT OF INTENTION. You also may obtain a reduced sales charge by making
cumulative purchases under a Statement of Intention (an "SOI"). A SOI is a
written statement expressing your intent to invest $50,000 or more in a Fund's A
Shares within a period of 13 months. Under an SOI, you may make a series of
purchases of shares where each purchase will be at net asset value plus the
sales charge applicable at the time of the purchase to a single purchase of the
total dollar amount of shares you promised to purchase. Complete the appropriate
portion of the account application to select the SOI.
The SOI is not a binding obligation upon you to purchase the full amount
indicated. A Shares purchased with the first 5% of such amount will be held
subject to a registered pledge (while remaining registered in the name of the
investor) to secure payment of the higher sales charge applicable to the shares
actually purchased if the full amount indicated is not purchased, and such
pledged shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. When the full amount indicated has been purchased, the
shares will be released from pledge.
CALCULATION OF OFFERING PRICE. Set forth below is an example of the method of
computing the offering price of the A Shares of the Funds that offer A Shares.
Other shares of the Trust are offered at their next determined net asset value.
The example assumes a purchase of A Shares of each Fund in an amount such that
the purchase would be subject to each Fund's maximum sales charges set forth in
the Prospectus at a price based on the net asset value per share of A Shares of
each Fund at May 31, 1998. As of October 1, 1998, the maximum sales charges were
5.5% for each Equity Fund and Growth Balanced Fund and 4.0% for each Fixed
Income Fund, except Stable Income Fund, for which it was 1.50%. Offering price
is determined as follows: Net asset value per share times the sum of one (1)
plus the sales charge expressed as a percentage (for example 5.5% would equal
0.055).
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<TABLE>
<S> <C> <C>
NET ASSET OFFERING
VALUE PER SHARE PRICE
--------------- -----
STABLE INCOME FUND $10.31 $10.72
INTERMEDIATE GOVERNMENT INCOME FUND $11.22 $11.67
INCOME FUND $9.79 $10.18
TOTAL RETURN BOND FUND $9.63 $10.02
TAX-FREE INCOME FUND $10.54 $10.96
COLORADO TAX-FREE FUND $10.69 $11.12
MINNESOTA TAX-FREE FUND $11.05 $11.49
INCOME EQUITY FUND $41.19 $43.46
VALUGROWTH STOCK FUND $26.18 $27.62
DIVERSIFIED EQUITY FUND $43.06 $45.43
GROWTH EQUITY FUND $35.73 $37.70
SMALL COMPANY STOCK FUND $12.00 $12.66
SMALL CAP OPPORTUNITIES FUND $23.60 $24.90
INTERNATIONAL FUND $23.84 $25.15
</TABLE>
EXCHANGES
By making an exchange by telephone, the investor authorizes the Transfer Agent
to act on telephonic instructions believed by the Transfer Agent to be genuine
instructions from any person representing himself or herself to be the investor.
The records of the Transfer Agent of such instructions are binding. The exchange
procedures may be modified or terminated at any time upon appropriate notice to
shareholders. For Federal income tax purposes, exchanges are treated as sales on
which a purchaser will realize a capital gain or loss depending on whether the
value of the shares redeemed is more or less than the shareholder's basis in
such shares at the time of such transaction.
Shareholders of A Shares may purchase, with the proceeds from a redemption of
all or part of their shares, A Shares of the other Funds that offer A Shares or
Investor Shares of Ready Cash Investment Fund or Municipal Money Market Fund.
Shareholders of B Shares may purchase, with the proceeds from a redemption of
all or part of their shares, B Shares of the other Funds that offer B Shares or
Exchange Shares of Ready Cash Investment Fund. Shareholders of C Shares may
purchase, with the proceeds from a redemption of all or part of their shares, C
Shares of the other Funds. Shareholders of I Shares may purchase, with the
proceeds from a redemption of all or part of their shares, I Shares of the other
Funds or Institutional Shares of Ready Cash Investment Fund or Municipal Money
Market Fund or shares of U.S. Government Fund and Treasury Fund.
Shareholders of Investor Shares of Ready Cash Investment Fund and Municipal
Money Market Fund may purchase, with the proceeds from a redemption of all or
part of their shares, Investor Shares of the other Fund or A Shares of the Funds
that offer A Shares. Shareholders of Exchange Shares of Ready Cash Investment
Fund may purchase, with the proceeds from a redemption of all or part of their
shares, B Shares of the Funds that offer B Shares.
Shareholders of Public Entities Shares of Ready Cash Investment Fund and of
Municipal Money Market Fund and others who are eligible to purchase I Shares may
purchase, with the proceeds from a redemption of all or part of their shares,
Institutional Shares of these Funds, or I Shares of the other Funds of the
Trust.
Shareholders of Institutional Shares of Municipal Money Market Fund who are not
eligible to purchase I Shares may purchase, with the proceeds from a redemption
of all or part of their shares, shares of Cash Investment Fund, U.S. Government
Fund and Treasury Fund. Similarly, shareholders of Cash Investment Fund, U.S.
Government Fund and Treasury Fund who are not eligible to purchase I Shares may
purchase, with the proceeds from a redemption of all or part of their shares,
shares of the other two Funds or Institutional Shares of Municipal Money Market
Fund.
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Shareholders of A Shares or Investor Shares making an exchange will be subject
to the applicable sales charge of any A Shares acquired in the exchange;
provided, that the sales charge charged with respect to the acquired shares will
be assessed at a rate that is equal to the excess (if any) of the rate of the
sales charge that would be applicable to the acquired shares in the absence of
an exchange over the rate of the sales charge previously paid on the exchanged
shares. For purposes of the preceding sentence, A Shares acquired through the
reinvestment of dividends or distributions are deemed to have been acquired with
a sales charge rate equal to that paid on the shares on which the dividend or
distribution was paid.
In addition, A Shares and Investor Shares acquired by a previous exchange
transaction involving shares on which a sales charge has directly or indirectly
been paid (e.g., shares purchased with a sales charge or issued in connection
with an exchange transaction involving shares that had been purchased with a
sales charge), as well as additional shares acquired through reinvestment of
dividends or distributions on such shares will be treated as if they had been
acquired subject to that sales charge.
Exchange Shares may only be acquired in exchange for B Shares of a Fund. B
Shares ("original B Shares") may be exchanged for Exchange Shares without the
payment of any contingent deferred sales charge; however, B Shares or Exchange
Shares acquired as a result of an exchange and subsequently redeemed will
nonetheless be subject to the contingent deferred sales charge applicable to the
original B Shares as if those shares were being redeemed at that time. Exchange
Shares may be exchanged without the payment of any contingent deferred sales
charge; however, B Shares acquired as a result of such exchange and subsequently
redeemed will nonetheless be subject to the contingent deferred sales charge
applicable to the original B Shares as if those shares were being redeemed at
that time.
REDEMPTIONS
In addition to the situations described in the Prospectus with respect to the
redemptions of shares, the Trust may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to a Fund's shares as provided in the Prospectus from time to time.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partially in portfolio securities if the Board determines that payment
in cash would be detrimental to the best interests of the Fund. If payment for
shares redeemed is made wholly or partially in portfolio securities, brokerage
costs may be incurred by the shareholder in converting the securities to cash.
The Trust has filed a formal election with the SEC pursuant to which a Fund will
only effect a redemption in portfolio securities if the particular shareholder
is redeeming more than $250,000 or 1% of the Fund's total net assets, whichever
is less, during any 90-day period.
REDEMPTION CHARGE (A SHARES)
A Shares of a Fund on which no initial sales charge was assessed due to the
amount purchased in a single transaction or pursuant to the Cumulative Quantity
Discount or an SOI and that are redeemed (including certain redemptions in
connection with an exchange) within specified periods after the purchase date of
the shares will be subject to charges equal to the percentages set forth below
of the dollar amount subject to the charge. The charge will be assessed on an
amount equal to the lesser of the cost of the shares being redeemed and their
net asset value at the time of redemption. Accordingly, no charge will be
imposed on increases in net asset value above the initial purchase price. In
addition, no charge will be assessed on shares derived from the reinvestment of
dividends and distributions.
<TABLE>
<S> <C> <C>
STABLE INCOME FUND
AMOUNT OF PURCHASE PERIOD SHARES HELD CHARGE
$1,000,000 to $4,999,999 Less than one year 0.50%
One to two years 0.25%
Over $5,000,000 Less than one year 0.25%
</TABLE>
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<TABLE>
<S> <C> <C>
INTERMEDIATE GOVERNMENT INCOME FUND,
INCOME FUND, TOTAL RETURN BOND FUND AND THE
TAX-FREE FIXED INCOME FUNDS
AMOUNT OF PURCHASE PERIOD SHARES HELD CHARGE
$1,000,000 to $2,499,999 Less than one year 0.75%
One to two years 0.50%
$2,500,000 to $4,999,999 Less than one year 0.50%
Over $5,000,000 Less than one year 0.25%
EQUITY FUNDS
AMOUNT OF PURCHASE PERIOD SHARES HELD CHARGE
$1,000,000 to $2,499,999 Less than one year 1.00%
One to two years 0.75%
$2,500,000 to $4,999,999 Less than one year 0.50%
Over $5,000,000 Less than one year 0.25%
</TABLE>
The charge on shares purchased through an exchange from another Fund is based
upon the original purchase date and price of the other Fund's shares. As
discussed below, there may be charges in connection with the SOI and the ROA in
certain cases.
STATEMENT OF INTENTION. There may be charges on redemptions of A Shares
purchased without an initial sales charge pursuant to an SOI that are redeemed
within the first two years after purchase. If a shareholder purchases $1,000,000
or more within a 13 month period under an SOI, no initial sales charge will
apply with respect to the entire amount purchased. However, a charge will apply
with respect to the entire amount purchased if the shareholder fails to purchase
$1,000,000 or more of A Shares under the SOI. The holding period for each A
Share shall be determined from the date the share was purchased. If the
shareholder redeems A Shares during the period that the SOI is in effect, a
charge will be assessed at the time the shareholder has purchased $1,000,000 or
more worth of A Shares pursuant to the SOI at the rate applicable in the case of
a single purchase of the minimum amount specified in the SOI. If the shareholder
purchases less than the amount specified under the SOI, an additional contingent
deferred sales charge may be assessed in respect of A Shares previously redeemed
based on the amount actually purchased pursuant to the SOI.
RIGHT OF ACCUMULATION. The charge will be a charge assessed on A Shares
purchased without an initial sales charge pursuant to the ROA that are redeemed
within the first two years after purchase. No initial sales charge will apply to
A Shares purchased if the value of those shares on the date of purchase plus the
net asset value of all A Shares held by the shareholder (as of the close of
business on the previous Fund Business Day) exceed $1,000,000. In that case, the
charge will apply to redemptions of shares within the first two years after
purchase. For example, if a shareholder has made prior purchases of A Shares
which now have a value of $900,000, the purchase of $150,000 of A Shares will
not be subject to an initial sales charge but will be subject to the charge upon
redemption described above. The $900,000 of A Shares would not be subject to the
charge.
REINSTATEMENT PRIVILEGE. A Shares purchased by a shareholder within 60 days
following the redemption by the shareholder of A Shares in the same Fund with a
value at least equal to the A Shares being purchased will not be subject to a
contingent deferred sales charge; provided, however, that this exemption is not
applicable to more than two purchases within a 12-month period.
REDEMPTION CHARGE AND CONTINGENT DEFERRED SALES CHARGE (A SHARES, B SHARES AND C
SHARES) With respect to A Shares, B Shares and C Shares of the Funds, certain
redemptions are not subject to any redemption or contingent deferred sales
charge. No such charge is imposed on: (1) redemptions of shares acquired through
the reinvestment of dividends and distributions; (2) involuntary redemptions by
a Fund of shareholder accounts with low account balances; (3) redemptions of
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shares following the death or disability of a shareholder if the Fund is
notified within one year of the shareholder's death or disability; (4)
redemptions to effect a distribution (other than a lump sum distribution) from
an IRA, Keogh plan or Section 403(b) custodial account or from a qualified
retirement plan; and (5) redemptions by any registered investment adviser with
whom Forum has entered into a share purchase agreement and which is acting on
behalf of its fiduciary customer accounts. For these purposes, the term
disability shall have the meaning ascribed thereto in Section 72(m)(7) of the
Code. Under that provision, a person is considered disabled if the person is
unable to engage in any substantial activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long-continued and indefinite duration. Appropriate
documentation satisfactory to the Fund is required to substantiate any
shareholder death or disability.
CONVERSION OF B SHARES AND EXCHANGE SHARES
The conversion of Exchange Shares to Investor Shares and B Shares to A Shares is
subject to the continuing availability of an opinion of counsel to the effect
that: (1) the assessment of the distribution services fee with respect to the
Exchange Shares and B Shares does not result in the Funds dividends or
distributions constituting "preferential dividends" under the Code and (2) the
conversion of Exchange Shares and B Shares does not constitute a taxable event
under Federal income tax law. The conversion of Exchange Shares to Investor
Shares and B Shares to A Shares may be suspended if such an opinion is no longer
available at the time the conversion is to occur. In that event, no further
conversions would occur, and shares might continue to be subject to a
distribution services fee for an indefinite period, which may extend beyond the
specified number of years for conversion of the original B Shares.
10. TAXATION
Each Fund intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Code. Such qualification does not, of
course, involve governmental supervision of management or investment practices
or policies. Investors should consult their own counsel for a complete
understanding of the requirements each Fund must meet to qualify for such
treatment, and of the application of state and local tax laws to his or her
particular situation.
Since each Money Market Fund and Fixed Income Fund expects to derive
substantially all of its gross income (exclusive of capital gains) from sources
other than dividends, it is expected that none of such Funds' dividends or
distributions will qualify for the dividends-received deduction for
corporations.
Certain listed options, regulated futures contracts and forward currency
contracts are considered "section 1256 contracts" for Federal income tax
purposes. Section 1256 contracts held by a Fund or Portfolio at the end of each
taxable year will be "marked to market" and treated for Federal income tax
purposes as though sold for fair market value on the last business day of such
taxable year. Gain or loss realized by a Fund or Portfolio on section 1256
contracts generally will be considered 60% long-term and 40% short-term capital
gain or loss. Each Fund or Portfolio can elect to exempt its section 1256
contracts which are part of a "mixed straddle" (as described below) from the
application of section 1256.
With respect to over-the-counter put and call options, gain or loss realized by
a Fund or Portfolio upon the lapse or sale of such options held by such Fund or
Portfolio will be either long-term or short-term capital gain or loss depending
upon the Fund's (or Portfolio's) holding period with respect to such option.
However, gain or loss realized upon the lapse or closing out of such options
that are written by a Fund or Portfolio will be treated as short-term capital
gain or loss. In general, if a Fund or Portfolio exercises an option, or an
option that a Fund or Portfolio has written is exercised, gain or loss on the
option will not be separately recognized but the premium received or paid will
be included in the calculation of gain or loss upon disposition of the property
underlying the option.
Any option, futures contract, or other position entered into or held by a Fund
in conjunction with any other position held by such Fund or 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
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affect the character and timing of a Fund's (or Portfolio's) gains and losses
with respect to straddle positions by requiring, among other things, that: (1)
loss realized on disposition of one position of a straddle not be recognized to
the extent that a Fund has unrealized gains with respect to the other position
in such straddle; (2) a Fund's (or 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 Fund or Portfolio which may mitigate the
effects of the straddle rules, particularly with respect to mixed straddles. In
general, the straddle rules described above do not apply to any straddles held
by a Fund or Portfolio all of the offsetting positions of which consist of
section 1256 contracts.
For federal income tax purposes, gains and losses attributable to fluctuations
in exchange rates which occur between the time a Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities are treated as ordinary income or ordinary loss. Similarly, gains or
losses from the disposition of foreign currencies, from the disposition of debt
securities denominated in a foreign currency, or from the disposition of a
forward contract denominated in a foreign currency which are attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the asset and the date of disposition also are treated as
ordinary gain or loss.
A Fund's (or Portfolio's) investments in zero coupon securities will be subject
to special provisions of the Code which may cause the Fund to recognize income
without receiving cash necessary to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding federal
income and excise taxes. In order to satisfy those distribution requirements the
Fund or Portfolio may be forced to sell other portfolio securities.
If International Fund is eligible to do so, the Fund intends to file an election
with the Internal Revenue Service to pass through to its shareholders its share
of the foreign taxes paid by the Fund. Pursuant to this election, a shareholder
will be required to: (1) include in gross income rata share of foreign taxes
paid by the Fund; (2) treat his pro rata share of such foreign taxes as having
been paid by him; and (3) either deduct such pro rata share of foreign taxes in
computing his taxable income or treat such foreign taxes as a credit against
federal income taxes. No deduction for foreign taxes may be claimed by an
individual shareholder who does not itemize deductions. In addition, certain
shareholders may be subject to rules which limit or reduce their ability to
fully deduct, or claim a credit for, their pro rata share of the foreign taxes
paid by the Fund. Under recently enacted legislation, a shareholder's foreign
tax credit with respect to a dividend received from the Fund will be disallowed
unless the shareholder holds shares in the Fund at least 16 days during the
30-day period beginning 15 days before the date on which the shareholder becomes
entitled to receive the dividend.
11. ADDITIONAL INFORMATION ABOUT THE TRUST AND
THE SHAREHOLDERS OF THE FUNDS
DETERMINATION OF NET ASSET VALUE - MONEY MARKET FUNDS
Pursuant to the rules of the SEC, the Board has established procedures to
stabilize each Money Market Funds' net asset value at $1.00 per share. These
procedures include a review of the extent of any deviation of net asset value
per share as a result of fluctuating interest rates, based on available market
rates, from the Fund's $1.00 amortized cost price per share. Should that
deviation exceed 1/2 of 1%, the Board will consider whether any action should be
initiated to eliminate or reduce material dilution or other unfair results to
shareholders. Such action may include redemption of shares in kind, selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations.
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COUNSEL AND AUDITORS
Legal matters in connection with the issuance of shares of beneficial interest
of the Trust are passed upon by the law firm of Seward & Kissel, 1200 G Street,
NW, Washington DC 20005.
KPMG Peat Marwick LLP, 99 High Street, Boston, MA 02110, independent auditors,
served as the independent auditors for the Trust for the fiscal years ended May
31, 1994 and thereafter. For the prior fiscal periods another audit firm acted
as independent auditors of the Trust's predecessor corporation.
GENERAL INFORMATION
The Trust is divided into thirty nine separate series representing shares of the
Funds. The Trust received an order from the SEC permitting the issuance and sale
of separate classes of shares representing interests in each of the Trust's
existing funds; however, the Trust currently issues and operates the various
Funds, separate classes of shares under the provisions of 1940 Act.
The Board has determined that currently no conflict of interest exists between
or among each Fund's classes of shares. On an ongoing basis, the Board, pursuant
to its fiduciary duties under the 1940 Act and state law, will seek to ensure
that no such conflict arises.
The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states. As a
result, to the extent that the Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject the Trust shareholders to liability. To guard against
this risk, the Trust Instrument of the Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which: (1) a court refuses
to apply Delaware law; (2) no contractual limitation of liability is in effect;
and (3) the Trust itself is unable to meet its obligations. In light of Delaware
law, the nature of the Trust's business, and the nature of its assets, the Board
believes that the risk of personal liability to a Trust shareholder is extremely
remote.
In order to adopt the name Norwest Funds, the Trust agreed in the investment
advisory agreement with Norwest that if Norwest ceases to act as 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.
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 (such as Exchange Shares);
the costs of doing so will be borne by the Trust.
Each share of each series of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
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and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertains to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular series or class, except if the
matter affects only one series or class or voting by series or class is required
by law, in which case shares will be voted separately by series or class, as
appropriate. Delaware law does not require the Trust to hold annual meetings of
shareholders, and it is anticipated that shareholder meetings will be held only
when specifically required by federal or state law. Shareholders (and Trustees)
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares, when issued in accordance with the terms of the offering, will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. 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.
A 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. When required
by the 1940 Act and other applicable law, a Fund investing in a Portfolio will
solicit proxies from its shareholders and will vote its interest in the
Portfolio in proportion to the votes cast by its shareholders.
From time to time, certain shareholders may own a large percentage of the shares
of the Fund and, accordingly, may be able to greatly affect (if not determine)
the outcome of a shareholder vote.
CORE AND GATEWAY STRUCTURE
Certain Funds seek to achieve their investment objectives by investing all of
their investable assets in Portfolios. Accordingly, the Portfolios directly
acquires portfolio securities and the Funds acquire an indirect interest in
those securities. The Portfolios are separate series of Core Trust and Schroder
Core, business trusts organized under the laws of the State of Delaware in 1994.
The assets of each Portfolio belong only to, and the liabilities of each
Portfolio are borne solely by, that Portfolio and no other series of Core Trust
or Schroder Core.
THE PORTFOLIOS. The Funds' investments in the Portfolios are in the form of
non-transferable beneficial interests. All investors in a Portfolio will invest
on the same terms and conditions and will pay a proportionate share of the
Portfolio's expenses.
Portfolios do not sell its shares directly to members of the general public.
Other investors in Portfolios, such as other investment companies, that might
sell their shares to the public are not be required to sell their shares at the
same public offering price as the Funds, and could have different advisory and
other fees and expenses than the Funds. Therefore, Fund shareholders may have
different returns than shareholders in other investment companies that invest in
the Portfolios. Information regarding any such funds is available by calling
Forum at (207) 879-0001.
CERTAIN RISKS OF INVESTING IN PORTFOLIOS. The Funds' investment in the
Portfolios may be affected by the actions of other large investors in the
Portfolios. For example, if a Portfolio had a large investor other than a Fund
that redeemed its interest, the Portfolio's remaining investors (including the
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
the Portfolio; indeed, other investors holding a majority interest in a
Portfolio could have voting control of the Portfolio.
A 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, 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 the Portfolio, the Board would consider
78
<PAGE>
what action might be taken, including the management of the Fund's assets
directly by the Adviser 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 the Adviser to manage
the Fund's assets directly, could have a significant impact on shareholders of
the Fund.
BANKING LAW MATTERS
Federal banking rules generally permit a bank or bank affiliate to act as
investment adviser, transfer agent, and custodian to an investment company 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. Forum believes that Norwest and any bank or other bank affiliate that
may also perform transfer agency or similar services for the Trust and its
shareholders without violating applicable federal banking rules. If a bank or
bank affiliate were prohibited in the future from so acting, changes in the
operation of the Trust 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.
SHAREHOLDINGS
Table 7 to Appendix B lists the persons who owned of record 5% or more of the
outstanding shares of a class of shares of a Fund as of September 1, 1998.
FINANCIAL STATEMENTS
The financial statements of each Fund for the fiscal year ended May 31, 1998
(which include statements of assets and liabilities, statements of operations,
statements of changes in net assets, notes to financial statements, financial
highlights and portfolios of investments) are included in the Annual Report to
Shareholders of the Trust delivered along with this SAI and are incorporated
herein by reference.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the SEC. The registration
statement, including the exhibits filed therewith, may be examined at the
offices 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,
reference is made to the copy of such contract or other documents filed as
exhibits to the registration statement.
79
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates municipal and corporate bond issues, including convertible 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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
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 risk 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 payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 ranks in the
higher end of its generic rating category are designated by the symbols AA1, A1,
BAA1, BA1 and B1.
STANDARD & POOR'S ("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. The capacity to meet
the financial commitment on the obligation is extremely strong.
A-1
<PAGE>
Bonds rated AA have a very strong capacity to meet the financial commitment on
the obligation and differ from the highest-rated issues only in small degree.
Bonds rated A have a strong capacity to meet the financial commitment on the
obligation, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations rated in
higher-rated categories.
Bonds rated BBB exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet the financial commitment on the obligation than in
higher-rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions. Bonds rated BB have less vulnerability to
nonpayment 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 the financial commitment on the
obligation.
Bonds rated B are more vulnerable to nonpayment then bonds rated BB, but
currently have the capacity to meet the financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to meet the financial commitment on the obligation.
Bonds rated CCC are currently vulnerable to nonpayment, and are dependent upon
favorable business, financial, and economic conditions to meet the financial
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, they are not likely to have the capacity to meet the
financial commitment on the obligation.
Bonds rated CC are currently highly vulnerable to nonpayment.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments are being continued.
Bonds are rated D when the issue is in payment default. The D rating category is
used when payments on an obligation 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. The D rating will also be used upon the
filing of the bankruptcy petition or the taking of a similar action if payments
on the obligation are jeopardized.
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 major rating
categories.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and/or
dividends 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/or dividends 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, short-term debt of these issuers is generally
rate F-1+.
A-2
<PAGE>
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and/or dividends 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 or dividends 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 or
dividends 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 or paying dividends, 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 that if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD or D categories.
PREFERRED STOCK
MOODY'S
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
within the universe of preferred stock.
An issue rated AA is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance the 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 preferred stock, 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.
A-3
<PAGE>
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. 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.
S&P
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality, fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
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.
FITCH
Fitch utilizes the same ratings criteria in rating preferred stock as it does in
rating corporate bond issues, as described earlier in this Appendix.
A-4
<PAGE>
SHORT TERM MUNICIPAL LOANS
MOODY'S. 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.
S&P. 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'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.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
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.
SHORT TERM DEBT (INCLUDING COMMERCIAL PAPER)
MOODY'S
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 capacity of rated issuers.
Issuers rated PRIME-1 have a superior capacity for repayment of short-term
promissory obligations. PRIME-1 repayment capacity will normally be evidenced by
the following characteristics: Leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structures 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 have a strong capacity for repayment of short-term
promissory 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, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. An A-1
designation indicates the highest category and that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
capacity for timely payment on issues with an A-2 designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1. Issues carrying an A-3 designation have an adequate capacity for timely
A-5
<PAGE>
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
FITCH
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.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+. Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good credit quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 rating.
F-3. Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated below
investment grade.
F-5. Weak credit quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D. Default. Issues assigned this rating are in actual or imminent payment
default.
LOC. The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
A-6
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following Table shows the dollar amount of fees payable under the Investment
Advisory Agreements between Norwest and the Trust with respect to each Fund, the
amount of fee that was waived by Norwest, if any, and the actual fee received by
Norwest. That table also shows the dollar amount of fees payable under the
investment advisory agreements between Schroder and Core Trust with respect to
each applicable portfolio the amount of fee that was waived by Schroder, if any,
and the actual fee received by Schroder. The data is for the past three fiscal
years or shorter period if the Fund/Portfolio has been in operation for a
shorter period.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
CASH INVESTMENT FUND
Year Ended May 31, 1998 8,604,888 640,532 7,964,356
Year Ended May 31, 1997 2,805,919 0 2,805,919
Year Ended May 31, 1996 2,383,128 0 2,383,128
READY CASH INVESTMENT FUND
Year Ended May 31, 1998 3,344,445 0 3,344,445
Year Ended May 31, 1997 6,267,045 50,148 6,216,897
Year Ended May 31, 1996 4,128,532 44,547 4,083,985
U.S. GOVERNMENT FUND
Year Ended May 31, 1998 3,114,327 0 3,114,327
Year Ended May 31, 1997 2,538,240 0 2,538,240
Year Ended May 31, 1996 2,205,102 0 2,205,102
TREASURY FUND
Year Ended May 31, 1998 1,836,567 0 1,836,567
Year Ended May 31, 1997 1,548,275 0 1,548,275
Year Ended May 31, 1996 1,308,984 0 1,308,984
MUNICIPAL MONEY MARKET FUND
Year Ended May 31, 1998 2,961,387 165,379 2,796,008
Year Ended May 31, 1997 2,394,475 369,405 2,025,070
Year Ended May 31, 1996 1,907,103 303,321 1,603,782
STABLE INCOME FUND
Year Ended May 31, 1998 406,937 0 406,937
Year Ended May 31, 1997 334,768 0 334,768
Year Ended May 31, 1996 106,127 0 106,127
</TABLE>
B-1
<PAGE>
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
LIMITED TERM GOVERNMENT INCOME FUND
Year Ended May 31, 1998 141,185 119,793 21,392
INTERMEDIATE GOVERNMENT INCOME FUND
Year Ended May 31, 1998 1,315,676 0 1,315,676
Year Ended May 31, 1997 1,355,907 0 1,355,907
Year Ended May 31, 1996 142,125 0 142,125
DIVERSIFIED BOND FUND
Year Ended May 31, 1998 928,687 376,973 551,714
Year Ended May 31, 1997 598,019 0 598,019
Year Ended May 31, 1996 344,777 0 344,777
INCOME FUND
Year Ended May 31, 1998 1,404,711 90,387 1,314,324
Year Ended May 31, 1997 1,385,988 277,198 1,108,790
Year Ended May 31, 1996 981,244 196,249 784,995
TOTAL RETURN BOND FUND
Year Ended May 31, 1998 524,944 0 524,944
Year Ended May 31, 1997 651,181 357,998 293,183
Year Ended May 31, 1996 584,872 352,590 232,282
LIMITED TERM TAX-FREE FUND
Year Ended May 31, 1998 242,621 89,967 152,654
Year Ended May 31, 1997 88,741 63,145 25,596
Year Ended May 31, 1996 N/A N/A N/A
TAX-FREE INCOME FUND
Year Ended May 31, 1998 1,566,676 488,601 1,078,075
Year Ended May 31, 1997 1,537,966 1,236,539 301,427
Year Ended May 31, 1996 1,187,026 1,032,179 154,847
COLORADO TAX-FREE FUND
Year Ended May 31, 1998 332,299 137,295 195,005
Year Ended May 31, 1997 299,582 238,690 60,892
Year Ended May 31, 1996 286,768 286,768 0
MINNESOTA INTERMEDIATE TAX-FREE FUND
Year Ended May 31, 1998 348,564 0 348,564
</TABLE>
B-2
<PAGE>
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
MINNESOTA TAX-FREE FUND
Year Ended May 31, 1998 298,301 163,748 134,553
Year Ended May 31, 1997 212,616 190,702 21,914
Year Ended May 31, 1996 154,733 154,733 0
STRATEGIC INCOME FUND
Year Ended May 31, 1998 1,096,749 289,099 807,650
Year Ended May 31, 1997 589,365 0 589,365
Year Ended May 31, 1996 376,529 0 376,529
MODERATE BALANCED FUND
Year Ended May 31, 1998 2,851,253 561,191 2,290,062
Year Ended May 31, 1997 2,185,490 0 2,185,490
Year Ended May 31, 1996 1,208,825 0 1,208,825
GROWTH BALANCED FUND
Year Ended May 31, 1998 4,082,857 713,392 3,369,466
Year Ended May 31, 1997 2,688,223 0 2,688,223
Year Ended May 31, 1996 1,424,260 0 1,424,260
AGGRESSIVE BALANCED-EQUITY FUND
Year Ended May 31, 1998 17,317 6,163 11,154
INCOME EQUITY FUND
Year Ended May 31, 1998 5,115,544 0 5,115,544
Year Ended May 31, 1997 1,906,693 0 1,906,693
Year Ended May 31, 1996 227,790 0 227,790
INDEX FUND
Year Ended May 31, 1998 915,590 0 915,590
Year Ended May 31, 1997 563,081 212,327 350,754
Year Ended May 31, 1996 193,373 143,795 49,578
VALUGROWTH STOCK FUND
Year Ended May 31, 1998 4,141,066 25,276 4,115,790
Year Ended May 31, 1997 1,475,664 18,446 1,457,218
Year Ended May 31, 1996 1,335,281 16,691 1,318,590
DIVERSIFIED EQUITY FUND
Year Ended May 31, 1998 11,044,445 1,443,556 9,600,889
Year Ended May 31, 1997 6,874,776 0 6,874,776
Year Ended May 31, 1996 3,038,858 0 3,038,858
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
GROWTH EQUITY FUND
Year Ended May 31, 1998 9,442,925 410,824 9,032,101
Year Ended May 31, 1997 7,205,405 0 7,205,405
Year Ended May 31, 1996 3,342,391 0 3,342,390
LARGE COMPANY GROWTH FUND
Year Ended May 31, 1998 1,153,835 0 1,153,835
Year Ended May 31, 1997 651,110 0 651,110
Year Ended May 31, 1996 274,152 0 274,152
SMALL COMPANY STOCK FUND
Year Ended May 31, 1998 1,679,232 0 1,679,232
Year Ended May 31, 1997 1,481,914 419,413 1,062,501
Year Ended May 31, 1996 909,200 327,218 581,982
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1998 6,198,447 0 6,198,447
Year Ended May 31, 1997 3,513,581 0 3,513,581
Year Ended May 31, 1996 1,653,578 0 1,653,578
DIVERSIFIED SMALL CAP FUND
Year Ended May 31, 1998 24,811 5,712 19,099
Year Ended May 31, 1997 N/A N/A N/A
SMALL CAP OPPORTUNITIES FUND
Year Ended May 31, 1998 1,161,941 0 1,161,941
Year Ended May 31, 1997 N/A N/A N/A
INTERNATIONAL FUND*
Year Ended May 31, 1998 1,550,535 75,568 1,474,967
Year Ended May 31, 1997 812,485 0 812,485
Year Ended May 31, 1996 316,701 0 316,701
* Represents investment advisory fees paid to Schroder Capital Management
Inc. by International Portfolio of Core Trust.
</TABLE>
B-4
<PAGE>
TABLE 2 - MANAGEMENT FEES
The following table shows the dollar amount of fees payable to: (1) Forum for
its management services with respect to each Fund (or class thereof for those
periods when multiple classes were outstanding); (2) Norwest for its
administrative services with respect to Small Cap Opportunities Fund and
International Fund; and (3) Forum with respect to its administrative securities
with respect to each applicable Portfolio. Also shown are the amount of fees
that were waived by Forum and Norwest, if any, and the actual fees received by
Forum and Norwest. The data is for the past three fiscal years or shorter period
if the Fund has been in operation for a shorter period.
<TABLE>
<S> <C> <C> <C>
(I) MANAGEMENT FEES TO FORUM
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
CASH INVESTMENT FUND
Year Ended May 31, 1998 3,708,842 2,416,284 1,292,558
Year Ended May 31, 1997 1,252,466 127,192 1,125,274
Year Ended May 31, 1996 1,076,303 160,959 915,344
U.S. GOVERNMENT FUND
Year Ended May 31, 1998 2,134,700 281,603 1,853,097
Year Ended May 31, 1997 1,140,934 12,114 1,128,820
Year Ended May 31, 1996 1,002,126 40,949 961,177
TREASURY FUND
Year Ended May 31, 1998 1,154,681 854,503 300,178
Year Ended May 31, 1997 728,447 595,668 132,779
Year Ended May 31, 1996 627,992 448,841 179,151
READY CASH INVESTMENT FUND
Investor Shares
Year Ended May 31, 1998 1,181,535 0 1,181,535
Year Ended May 31, 1997 1,070,654 14,082 1,056,572
Year Ended May 31, 1996 760,979 60,072 700,907
Institutional Shares
Year Ended May 31, 1998 343,952 334,461 9,492
Year Ended May 31, 1997 2,595,399 2,413,208 182,191
Year Ended May 31, 1996 1,569,081 1,569,081 0
Exchange Shares
Year Ended May 31, 1998 643 511 132
Year Ended May 31, 1997 850 850 0
Year Ended May 31, 1996 273 273 0
</TABLE>
B-5
<PAGE>
<TABLE>
<S> <C> <C> <C>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
MUNICIPAL MONEY MARKET FUND
Investor Shares
Year Ended May 31, 1998 90,303 54,201 36,102
Year Ended May 31, 1997 121,330 78,834 42,496
Year Ended May 31, 1996 115,294 65,869 49,425
Institutional Shares
Year Ended May 31, 1998 806,431 581,515 224,915
Year Ended May 31, 1997 1,275,270 1,017,363 257,907
Year Ended May 31, 1996 990,763 814,669 176,094
STABLE INCOME FUND
A Shares
Year Ended May 31, 1998 10,850 10,698 152
Year Ended May 31, 1997 12,730 12,730 0
Year Ended May 31, 1996 623 623 0
B Shares
Year Ended May 31, 1998 1,632 1,608 24
Year Ended May 31, 1997 799 799 0
Year Ended May 31, 1996 33 33 0
I Shares
Year Ended May 31, 1998 143,795 135,804 7,991
Year Ended May 31, 1997 98,060 98,060 0
Year Ended May 31, 1996 34,720 34,720 0
LIMITED TERM GOVERNMENT INCOME FUND
I Shares
Year Ended May 31, 1998 42,783 35,705 7,078
INTERMEDIATE GOVERNMENT INCOME FUND
A Shares
Year Ended May 31, 1998 12,708 12,708 0
Year Ended May 31, 1997 14,471 14,471 0
Year Ended May 31, 1996 666 666 0
B Shares
Year Ended May 31, 1998 8,527 8,527 0
Year Ended May 31, 1997 9,953 9,953 0
Year Ended May 31, 1996 412 412 0
I Shares
Year Ended May 31, 1998 373,544 169,833 203,711
Year Ended May 31, 1997 386,457 151,928 234,529
Year Ended May 31, 1996 41,991 41,991 0
</TABLE>
B-6
<PAGE>
<TABLE>
<S> <C> <C> <C>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
DIVERSIFIED BOND FUND
I Shares
Year Ended May 31, 1998 175,669 143,270 32,399
Year Ended May 31, 1997 170,862 110,901 59,961
Year Ended May 31, 1996 98,508 69,269 29,239
INCOME FUND
A Shares
Year Ended May 31, 1998 5,783 5,783 0
Year Ended May 31, 1997 10,585 10,585 0
Year Ended May 31, 1996 11,894 11,894 0
B Shares
Year Ended May 31, 1998 3,966 3,966 0
Year Ended May 31, 1997 6,826 6,826 0
Year Ended May 31, 1996 6,732 6,732 0
I Shares
Year Ended May 31, 1998 271,193 155,655 115,539
Year Ended May 31, 1997 536,985 436,300 100,685
Year Ended May 31, 1996 373,872 353,908 19,964
TOTAL RETURN BOND FUND
A Shares
Year Ended May 31, 1998 3,833 3,557 275
Year Ended May 31, 1997 5,187 5,187 0
Year Ended May 31, 1996 2,416 2,416 0
B Shares
Year Ended May 31, 1998 2,996 2,890 107
Year Ended May 31, 1997 4508 4508 0
Year Ended May 31, 1996 3,264 3,264 0
I Shares
Year Ended May 31, 1998 149,374 108,471 40,903
Year Ended May 31, 1997 250,777 24,127 226,650
Year Ended May 31, 1996 228,269 12,744 215,525
LIMITED TERM TAX-FREE FUND
I Shares
Year Ended May 31, 1998 48,524 2,408 46,116
Year Ended May 31, 1997 17,748 17,748 0
Year Ended May 31, 1996 N/A N/A N/A
</TABLE>
B-7
<PAGE>
<TABLE>
<S> <C> <C> <C>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
TAX-FREE INCOME FUND
A Shares
Year Ended May 31, 1998 30,973 21,230 9,743
Year Ended May 31, 1997 58,862 42,638 16,224
Year Ended May 31, 1996 67,046 27,085 39,961
B Shares
Year Ended May 31, 1998 9,109 9,109 0
Year Ended May 31, 1997 13,295 13,295 0
Year Ended May 31, 1996 9,866 9,866 0
I Shares
Year Ended May 31, 1998 273,202 13,953 259,249
Year Ended May 31, 1997 543,029 288,245 254,784
Year Ended May 31, 1996 397,898 304,725 93,173
COLORADO TAX-FREE FUND
A Shares
Year Ended May 31, 1998 30,680 13,964 16,715
Year Ended May 31, 1997 54,902 49,840 5,062
Year Ended May 31, 1996 53,988 48,022 5,966
B Shares
Year Ended May 31, 1998 7,903 3,625 4,279
Year Ended May 31, 1997 13,532 13,115 417
Year Ended May 31, 1996 11,566 11,566 0
I Shares
Year Ended May 31, 1998 27,877 2,466 25,411
Year Ended May 31, 1997 51,399 44,432 6,967
Year Ended May 31, 1996 49,153 41,507 7,646
MINNESOTA INTERMEDIATE TAX-FREE FUND
I Shares
Year Ended May 31, 1998 139,426 97,043 42,382
MINNESOTA TAX-FREE FUND
A Shares
Year Ended May 31, 1998 30,180 13,327 16,853
Year Ended May 31, 1997 51,795 33,434 18,361
Year Ended May 31, 1996 43,885 26,289 17,596
B Shares
Year Ended May 31, 1998 13,523 6,377 7,146
Year Ended May 31, 1997 20,364 14,581 5,783
Year Ended May 31, 1996 13,910 10,499 3,411
I Shares
Year Ended May 31, 1998 15,957 2,320 13,637
Year Ended May 31, 1997 12,888 10,362 2,526
Year Ended May 31, 1996 4,098 2,630 1,468
</TABLE>
B-8
<PAGE>
<TABLE>
<S> <C> <C> <C>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
STRATEGIC INCOME FUND
Year Ended May 31, 1998 205,059 175,249 29,810
Year Ended May 31, 1997 130,970 115,223 15,747
Year Ended May 31, 1996 83,673 69,584 14,089
MODERATE BALANCED FUND
Year Ended May 31, 1998 515,913 362,625 153,288
Year Ended May 31, 1997 412,357 278,998 133,359
Year Ended May 31, 1996 228,080 126,077 102,003
GROWTH BALANCED FUND
Year Ended May 31, 1998 706,519 467,784 238,734
Year Ended May 31, 1997 463,486 303,389 160,097
Year Ended May 31, 1996 245,562 136,905 108,657
AGGRESSIVE BALANCED-EQUITY FUND
I Shares
Year Ended May 31, 1998 2,799 2,363 436
INCOME EQUITY FUND
A Shares
Year Ended May 31, 1998 63,767 57,043 6,724
Year Ended May 31, 1997 37,101 30,944 6,157
Year Ended May 31, 1996 1,196 1,196 0
B Shares
Year Ended May 31, 1998 53,134 49,294 3,840
Year Ended May 31, 1997 23,583 23,583 0
Year Ended May 31, 1996 670 670 0
I Shares
Year Ended May 31, 1998 998,134 508,066 490,067
Year Ended May 31, 1997 320,654 168,477 152,177
Year Ended May 31, 1996 43,691 43,691 0
INDEX FUND
Year Ended May 31, 1998 688,118 460,858 227,260
Year Ended May 31, 1997 375,387 213,759 161,628
Year Ended May 31, 1996 128,916 93,961 34,955
</TABLE>
B-9
<PAGE>
<TABLE>
<S> <C> <C> <C>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
VALUGROWTH STOCK FUND
A Shares
Year Ended May 31, 1998 22,896 13,687 9,209
Year Ended May 31, 1997 33,232 29,323 3,909
Year Ended May 31, 1996 27,427 27,427 0
B Shares
Year Ended May 31, 1998 7,763 7,763 0
Year Ended May 31, 1997 11,318 11,318 0
Year Ended May 31, 1996 8,763 8,763 0
I Shares
Year Ended May 31, 1998 499,641 22,453 477,188
Year Ended May 31, 1997 324,366 194,534 129,832
Year Ended May 31, 1996 297,630 147,086 150,544
DIVERSIFIED EQUITY FUND
A Shares
Year Ended May 31, 1998 48,577 39,759 8,818
Year Ended May 31, 1997 14,322 14,322 0
Year Ended May 31, 1996 99 99 0
B Shares
Year Ended May 31, 1998 68,828 55,455 13,373
Year Ended May 31, 1997 15,913 15,913 0
Year Ended May 31, 1996 96 96 0
I Shares
Year Ended May 31, 1998 1,699,994 938,395 761,599
Year Ended May 31, 1997 1,027,423 723,040 304,383
Year Ended May 31, 1996 467,322 238,224 229,098
GROWTH EQUITY FUND
A Shares
Year Ended May 31, 1998 25,645 17,603 8,042
Year Ended May 31, 1997 10,336 10,336 0
Year Ended May 31, 1996 100 100 0
B Shares
Year Ended May 31, 1998 16,845 11,552 5,292
Year Ended May 31, 1997 4,347 4,347 0
Year Ended May 31, 1996 25 25 0
I Shares
Year Ended May 31, 1998 1,342,900 788,748 554,152
Year Ended May 31, 1997 785,917 545,815 240,102
Year Ended May 31, 1996 371,252 187,661 183,591
LARGE COMPANY GROWTH FUND
Year Ended May 31, 1998 204,037 127,981 76,056
Year Ended May 31, 1997 100,171 87,896 12,275
Year Ended May 31, 1996 42,177 40,150 2,027
</TABLE>
B-10
<PAGE>
<TABLE>
<S> <C> <C> <C>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
DIVERSIFIED SMALL CAP FUND
I Shares
Year Ended May 31, 1998 2,430 2,294 136
SMALL COMPANY STOCK FUND
A Shares
Year Ended May 31, 1998 10,418 10,094 324
Year Ended May 31, 1997 11,966 10,318 1,648
Year Ended May 31, 1996 5,800 5,800 0
B Shares
Year Ended May 31, 1998 6,721 6,646 75
Year Ended May 31, 1997 8,329 8,329 0
Year Ended May 31, 1996 4,426 4,426 0
I Shares
Year Ended May 31, 1998 200,997 124,654 76,342
Year Ended May 31, 1997 276,089 90,214 185,875
Year Ended May 31, 1996 171,614 15,664 155,950
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1998 766,560 383,589 382,971
Year Ended May 31, 1997 390,398 185,644 204,754
Year Ended May 31, 1996 183,731 76,278 107,453
SMALL CAP OPPORTUNITIES FUND
A Shares
Year Ended May 31, 1998 4,015 1,641 2,374
Year Ended May 31, 1997 122 122 0
B Shares
Year Ended May 31, 1998 2,836 1,147 1,689
Year Ended May 31, 1997 44 44 0
I Shares
Year Ended May 31, 1998 243,348 39,205 204,143
Year Ended May 31, 1997 26,560 26,560 0
INTERNATIONAL FUND
A Shares
Year Ended May 31, 1998 6,976 1,907 5,069
Year Ended May 31, 1997 1,494 1,494 0
Year Ended May 31, 1996 345 345 0
B Shares
Year Ended May 31, 1998 4,704 1,709 2,995
Year Ended May 31, 1997 1,247 1,247 0
Year Ended May 31, 1996 395 395 0
I Shares
Year Ended May 31, 1998 601,498 850 600,649
Year Ended May 31, 1997 177,707 4,264 173,443
Year Ended May 31, 1996 69,616 0 69,616
</TABLE>
B-11
<PAGE>
<TABLE>
<S> <C> <C> <C>
(II) ADMINISTRATIVE FEES TO NORWEST
ADMINISTRATIVE ADMINISTRATIVE ADMINISTRATIVE
FEE FEE FEE
PAYABLE WAIVED RETAINED
SMALL CAP OPPORTUNITIES FUND
A Shares
Year Ended May 31, 1998 7,924 0 7,924
B Shares
Year Ended May 31, 1998 5,640 0 5,640
I Shares
Year Ended May 31, 1998 471,297 0 471,297
INTERNATIONAL FUND
A Shares
Year Ended May 31, 1998 7,230 0 7,230
B Shares
Year Ended May 31, 1998 4,875 0 4,875
I Shares
Year Ended May 31, 1998 623,325 0 623,325
Year Ended May 31, 1997 451,118 0 451,118
Year Ended May 31, 1996 175,887 0 175,887
</TABLE>
B-12
<PAGE>
TABLE 3 - DISTRIBUTION FEES
The following table shows the dollar amount of fees payable to Forum for its
distribution services with respect to each Fund (or class thereof), the amount
of fee that was waived by Forum, if any, and the actual fee received by Forum.
All maintenance fees were waived by Forum during the fiscal year ended May 31,
1996. The data is for the past three fiscal years or shorter period if the Fund
has been in operation for a shorter period. Only Exchange Shares and B Shares
incur distribution fees.
<TABLE>
<S> <C> <C> <C>
DISTRIBUTION DISTRIBUTION DISTRIBUTION
FEE FEE FEE
PAYABLE WAIVED RETAINED
READY CASH INVESTMENT FUND
Exchange Shares
Year Ended May 31, 1998 3,759 940 2,819
Year Ended May 31, 1997 4,249 1,062 3,187
Year Ended May 31, 1996 1,023 1,023 0
STABLE INCOME FUND
B Shares
Year Ended May 31, 1998 14,253 3,563 10,690
Year Ended May 31, 1997 7,992 1,998 5,994
Year Ended May 31, 1996 245 245 0
INTERMEDIATE GOVERNMENT INCOME FUND
B Shares
Year Ended May 31, 1998 86,167 21,542 64,625
Year Ended May 31, 1997 99,968 24,882 75,086
Year Ended May 31, 1996 2,646 2,646 0
INCOME FUND
B Shares
Year Ended May 31, 1998 39,664 9,916 29,748
Year Ended May 31, 1997 34,127 8,532 25,595
Year Ended May 31, 1996 25,247 6,666 18,581
TOTAL RETURN BOND FUND
B Shares
Year Ended May 31, 1998 24,563 6,141 18,422
Year Ended May 31, 1997 22,540 5,635 16,905
Year Ended May 31, 1996 12,239 3,619 8,620
TAX-FREE INCOME FUND
B Shares
Year Ended May 31, 1998 91,107 22,777 68,330
Year Ended May 31, 1997 66,476 16,619 49,857
Year Ended May 31, 1996 36,997 2,390 34,607
COLORADO TAX-FREE FUND
B Shares
Year Ended May 31, 1998 79,031 19,758 59,273
Year Ended May 31, 1997 67,660 16,915 50,745
Year Ended May 31, 1996 43,374 207 43,167
</TABLE>
B-13
<PAGE>
<TABLE>
<S> <C> <C> <C>
DISTRIBUTION DISTRIBUTION DISTRIBUTION
FEE FEE FEE
PAYABLE WAIVED RETAINED
MINNESOTA TAX-FREE FUND
B Shares
Year Ended May 31, 1998 135,230 33,808 101,423
Year Ended May 31, 1997 101,817 25,454 76,363
Year Ended May 31, 1996 52,163 0 52,163
INCOME EQUITY FUND
B Shares
Year Ended May 31, 1998 481,065 120,266 360,799
Year Ended May 31, 1997 235,827 58,957 176,872
Year Ended May 31, 1996 5,031 0 5,031
VALUGROWTH STOCK FUND
B Shares
Year Ended May 31, 1998 77,628 19,407 58,221
Year Ended May 31, 1997 56,592 14,148 42,444
Year Ended May 31, 1996 32,860 5,269 27,591
DIVERSIFIED EQUITY FUND
B Shares
Year Ended May 31, 1998 567,355 141,839 425,516
Year Ended May 31, 1997 159,132 39,783 119,349
Year Ended May 31, 1996 719 719 0
GROWTH EQUITY FUND
B Shares
Year Ended May 31, 1998 124,429 31,107 93,322
Year Ended May 31, 1997 43,471 10,868 32,603
Year Ended May 31, 1996 187 187 0
SMALL COMPANY STOCK FUND
B Shares
Year Ended May 31, 1998 57,698 14,424 43,273
Year Ended May 31, 1997 41,641 10,410 31,231
Year Ended May 31, 1996 16,598 4,077 12,521
SMALL CAP OPPORTUNITIES FUND
B Shares
Year Ended May 31, 1998 22,558 5,640 16,919
Year Ended May 31, 1997 431 108 323
INTERNATIONAL FUND
B Shares
Year Ended May 31, 1998 19,501 4,875 14,626
Year Ended May 31, 1997 12,465 3,116 9,349
Year Ended May 31, 1996 2,959 2,930 29
</TABLE>
B-14
<PAGE>
TABLE 4 - SALES CHARGES
The following table shows: (1) the dollar amount of sales charges payable to
Forum with respect to sales of A Shares (or of the respective Funds prior to the
offering of multiple classes of shares); (2) the amount of sales charge retained
by Forum and not reallowed to other persons; and (3) the amount of contingent
deferred sales charge ("CDSL") paid to Forum. The data is for the past three
fiscal years or shorter period if the Fund has been in operation for a shorter
period.
<TABLE>
<S> <C> <C> <C>
SALES RETAINED CDSL
CHARGES AMOUNT PAID
STABLE INCOME FUND
A Shares
Year Ended May 31, 1998 1,000 1,000 --
Year Ended May 31, 1997 3,200 320 --
Year Ended May 31, 1996 423 52 --
B Shares
Year Ended May 31, 1998 -- -- 1,000
Year Ended May 31, 1997 -- -- 6,526
Year Ended May 31, 1996 -- -- 75
INTERMEDIATE GOVERNMENT INCOME FUND
A Shares
Year Ended May 31, 1998 26,000 -- --
Year Ended May 31, 1997 13,182 1,187 --
Year Ended May 31, 1996 1,482 129 --
B Shares
Year Ended May 31, 1998 -- -- 14,000
Year Ended May 31, 1997 -- -- 31,694
Year Ended May 31, 1996 -- -- 964
INCOME FUND
A Shares
Year Ended May 31, 1998 68,000 8,000 --
Year Ended May 31, 1997 11,979 1,121 --
Year Ended May 31, 1996 1,567,755 4,428 --
B Shares
Year Ended May 31, 1998 -- -- 6,000
Year Ended May 31, 1997 -- -- 11,887
Year Ended May 31, 1996 -- -- 8,272
TOTAL RETURN BOND FUND
A Shares
Year Ended May 31, 1998 8 000 1,000 --
Year Ended May 31, 1997 3,908 363 --
Year Ended May 31, 1996 1,194,198 3,074 --
B Shares
Year Ended May 31, 1998 -- -- 4,000
Year Ended May 31, 1997 -- -- 7,505
Year Ended May 31, 1996 -- -- 2,853
</TABLE>
B-15
<PAGE>
<TABLE>
<S> <C> <C> <C>
SALES RETAINED CDSL
CHARGES AMOUNT PAID
TAX-FREE INCOME FUND
A Shares
Year Ended May 31, 1998 132,000 2,000 --
Year Ended May 31, 1997 74,101 6,646 --
Year Ended May 31, 1996 5,429,389 12,264 --
B Shares
Year Ended May 31, 1998 -- -- 9,000
Year Ended May 31, 1997 -- -- 15,724
Year Ended May 31, 1996 -- -- 6,576
COLORADO TAX-FREE FUND
A Shares
Year Ended May 31, 1998 127,000 4,000 --
Year Ended May 31, 1997 38,085 3,321 --
Year Ended May 31, 1996 2,889,945 7,135 --
B Shares
Year Ended May 31, 1998 -- -- 12,000
Year Ended May 31, 1997 -- -- 11,889
Year Ended May 31, 1996 -- -- 12,557
MINNESOTA TAX-FREE FUND
A Shares
Year Ended May 31, 1998 139,000 6,000 --
Year Ended May 31, 1997 53,290 4,744 --
Year Ended May 31, 1996 4,598,204 12,506 --
B Shares
Year Ended May 31, 1998 -- -- 13,000
Year Ended May 31, 1997 -- -- 13,097
Year Ended May 31, 1996 -- -- 8,412
INCOME EQUITY FUND
A Shares
Year Ended May 31, 1998 692,000 69,000 --
Year Ended May 31, 1997 320,385 1,121 --
Year Ended May 31, 1996 10,996 1,088 --
B Shares
Year Ended May 31, 1998 -- -- 62,000
Year Ended May 31, 1997 -- -- 38,812
Year Ended May 31, 1996 -- -- 570
VALUGROWTH STOCK FUND
A Shares
Year Ended May 31, 1998 92,000 9,000 --
Year Ended May 31, 1997 38,540 3,759 --
Year Ended May 31, 1996 1,162,647 4,628 --
B Shares
Year Ended May 31, 1998 -- -- 9,000
Year Ended May 31, 1997 -- -- 10,770
Year Ended May 31, 1996 -- -- 12,911
</TABLE>
B-16
<PAGE>
<TABLE>
<S> <C> <C> <C>
SALES RETAINED CDSL
CHARGES AMOUNT PAID
DIVERSIFIED EQUITY FUND
A Shares
Year Ended May 31, 1998 853,000 70,000 --
Year Ended May 31, 1997 485,324 8,286 --
Year Ended May 31, 1996 50,658 15 --
B Shares
Year Ended May 31, 1998 -- -- 87,000
Year Ended May 31, 1997 -- -- 23,510
Year Ended May 31, 1996 -- -- --
GROWTH EQUITY FUND
A Shares
Year Ended May 31, 1998 173,000 17,000 --
Year Ended May 31, 1997 175,495 5,347 --
Year Ended May 31, 1996 26,825 7 --
B Shares
Year Ended May 31, 1998 -- -- 25,000
Year Ended May 31, 1997 -- -- 6,972
Year Ended May 31, 1996 -- -- --
SMALL COMPANY STOCK FUND
A Shares
Year Ended May 31, 1998 28,000 3,000 --
Year Ended May 31, 1997 23,419 2,335 --
Year Ended May 31, 1996 1,309,565 5,153 2,972
B Shares
Year Ended May 31, 1998 -- -- 7,000
Year Ended May 31, 1997 -- -- 6,411
Year Ended May 31, 1996 -- -- --
SMALL CAP OPPORTUNITIES FUND
A Shares
Year Ended May 31, 1998 148,000 12,000 --
Year Ended May 31, 1997 11,604 1,178 --
B Shares
Year Ended May 31, 1998 -- -- 5,000
Year Ended May 31, 1997 -- -- --
INTERNATIONAL FUND
A Shares
Year Ended May 31, 1998 12,000 1,000 --
Year Ended May 31, 1997 8,728 874 --
Year Ended May 31, 1996 269 30 --
B Shares
Year Ended May 31, 1998 -- -- 3,000
Year Ended May 31, 1997 -- -- 2,086
Year Ended May 31, 1996 -- -- 213
</TABLE>
B-17
<PAGE>
TABLE 5 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to Forum Accounting
for its accounting services with respect to each Fund, the amount of fee that
was waived by Forum Accounting, if any, and the actual fee received by Forum
Accounting. The table also shows similar information with respect to each
applicable Portfolio. The data is for the past three fiscal years or shorter
period if the Fund has been in operation for a shorter period.
<TABLE>
<S> <C> <C> <C>
FEE FEE FEE
PAYABLE WAIVED RETAINED
CASH INVESTMENT FUND
Year Ended May 31, 1998 151,975 0 151,975
Year Ended May 31, 1997 65,000 0 65,000
Year Ended May 31, 1996 49,000 0 49,000
U.S. GOVERNMENT FUND
Year Ended May 31, 1998 65,500 0 65,500
Year Ended May 31, 1997 60,000 0 60,000
Year Ended May 31, 1996 46,000 0 46,000
TREASURY FUND
Year Ended May 31, 1998 63,000 0 63,000
Year Ended May 31, 1997 54,500 0 54,500
Year Ended May 31, 1996 43,500 0 43,500
READY CASH INVESTMENT FUND
Year Ended May 31, 1998 61,678 0 61,678
Year Ended May 31, 1997 86,000 0 86,000
Year Ended May 31, 1996 63,000 0 63,000
MUNICIPAL MONEY MARKET FUND
Year Ended May 31, 1998 95,000 0 95,000
Year Ended May 31, 1997 90,000 0 90,000
Year Ended May 31, 1996 72,500 0 72,500
STABLE INCOME FUND
Year Ended May 31, 1998 93,585 0 93,585
Year Ended May 31, 1997 92,500 26,041 66,459
Year Ended May 31, 1996 37,452 7,136 30,316
LIMITED TERM GOVERNMENT INCOME FUND
I Shares
Year Ended May 31, 1998 33,000 0 33,000
INTERMEDIATE GOVERNMENT INCOME FUND
Year Ended May 31, 1998 84,000 0 84,000
Year Ended May 31, 1997 85,500 24,146 61,354
Year Ended May 31, 1996 29,452 5,322 24,130
DIVERSIFIED BOND FUND
Year Ended May 31, 1998 60,241 0 60,241
Year Ended May 31, 1997 54,000 15,223 38,777
Year Ended May 31, 1996 29,500 5,561 23,939
</TABLE>
B-18
<PAGE>
<TABLE>
<S> <C> <C> <C>
FEE FEE FEE
PAYABLE WAIVED RETAINED
INCOME FUND
Year Ended May 31, 1998 89,000 0 89,000
Year Ended May 31, 1997 93,000 0 93,000
Year Ended May 31, 1996 79,500 0 79,500
TOTAL RETURN BOND FUND
Year Ended May 31, 1998 77,536 0 77,536
Year Ended May 31, 1997 66,000 0 66,000
Year Ended May 31, 1996 57,500 0 57,500
LIMITED TERM TAX-FREE FUND
Year Ended May 31, 1998 38,000 0 38,000
Year Ended May 31, 1997 24,000 0 24,000
Year Ended May 31, 1996 N/A N/A N/A
TAX-FREE INCOME FUND
Year Ended May 31, 1998 91,000 0 91,000
Year Ended May 31, 1997 91,000 0 91,000
Year Ended May 31, 1996 66,000 0 66,000
COLORADO TAX-FREE FUND
Year Ended May 31, 1998 62,000 0 62,000
Year Ended May 31, 1997 66,000 0 66,000
Year Ended May 31, 1996 60,000 0 60,000
MINNESOTA INTERMEDIATE TAX-FREE FUND
I Shares
Year Ended May 31, 1998 39,000 0 39,000
MINNESOTA TAX-FREE FUND
Year Ended May 31, 1998 64,000 0 64,000
Year Ended May 31, 1997 64,000 0 64,000
Year Ended May 31, 1996 56,000 0 56,000
STRATEGIC INCOME FUND
Year Ended May 31, 1998 61,046 0 61,046
Year Ended May 31, 1997 60,000 17,019 42,981
Year Ended May 31, 1996 32,500 6,054 26,446
MODERATE BALANCED FUND
Year Ended May 31, 1998 123,798 0 123,798
Year Ended May 31, 1997 62,000 17,546 44,454
Year Ended May 31, 1996 36,000 7,104 28,896
</TABLE>
B-19
<PAGE>
<TABLE>
<S> <C> <C> <C>
FEE FEE FEE
PAYABLE WAIVED RETAINED
GROWTH BALANCED FUND
Year Ended May 31, 1998 131,371 0 131,371
Year Ended May 31, 1997 61,000 17,237 43,763
Year Ended May 31, 1996 34,000 6,591 27,409
AGGRESSIVE BALANCED-EQUITY FUND
I Shares
Year Ended May 31, 1998 9,943 9,468 475
INCOME EQUITY FUND
Year Ended May 31, 1998 88,615 0 88,615
Year Ended May 31, 1997 71,500 20,160 51,340
Year Ended May 31, 1996 22,935 4,293 18,642
VALUGROWTH STOCK FUND
Year Ended May 31, 1998 77,500 0 77,500
Year Ended May 31, 1997 66,000 0 66,000
Year Ended May 31, 1996 57,500 0 57,500
INDEX FUND
Year Ended May 31, 1998 89,560 0 89,560
Year Ended May 31, 1997 60,000 8,393 51,607
Year Ended May 31, 1996 30,500 5,659 24,841
DIVERSIFIED EQUITY FUND
Year Ended May 31, 1998 253,735 0 253,735
Year Ended May 31, 1997 81,500 22,995 58,505
Year Ended May 31, 1996 30,306 6,216 24,090
GROWTH EQUITY FUND
Year Ended May 31, 1998 242,383 0 242,383
Year Ended May 31, 1997 79,000 22,311 56,689
Year Ended May 31, 1996 30,306 6,216 24,090
LARGE COMPANY GROWTH FUND
Year Ended May 31, 1998 27,725 0 27,725
Year Ended May 31, 1997 38,000 10,750 27,250
Year Ended May 31, 1996 21,000 3,755 17,245
DIVERSIFIED SMALL CAP FUND
I Shares
Year Ended May 31, 1998 8,779 7,694 1,085
SMALL COMPANY STOCK FUND
Year Ended May 31, 1998 79,136 0 79,136
Year Ended May 31, 1997 76,000 0 76,000
Year Ended May 31, 1996 60,500 0 60,500
</TABLE>
B-20
<PAGE>
<TABLE>
<S> <C> <C> <C>
FEE FEE FEE
PAYABLE WAIVED RETAINED
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1998 75,865 0 75,865
Year Ended May 31, 1997 55,000 5,536 49,464
Year Ended May 31, 1996 30,000 5,759 24,241
SMALL CAP OPPORTUNITIES FUND
Year Ended May 31, 1998 70,244 0 70,244
Year Ended May 31, 1997 26,057 26,057 0
INTERNATIONAL FUND
Year Ended May 31, 1998 84,830 0 84,830
Year Ended May 31, 1997 36,000 10,148 25,852
Year Ended May 31, 1996 23,000 3,952 19,048
</TABLE>
<PAGE>
TABLE 6 - COMMISSIONS
The following table shows the aggregate brokerage commissions with respect to
each Fund that incurred brokerage costs. The data is for the past three fiscal
years or shorter period if the Fund has been in operation for a shorter period.
AGGREGATE
COMMISSIONS PAID
DIVERSIFIED BOND FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 N/A
Year Ended May 31, 1996 5,261
Year Ended October 31, 1995 1,750
STRATEGIC INCOME FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 14,867
Year Ended May 31, 1996 8,406
Year Ended October 31, 1995 9,298
MODERATE BALANCED FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 50,414
Year Ended May 31, 1996 54,332
Year Ended October 31, 1995 57,931
GROWTH BALANCED FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 83,720
Year Ended May 31, 1996 69,732
Year Ended October 31, 1995 66,361
INCOME EQUITY FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 301,308
Year Ended May 31, 1996 52,904
Year Ended October 31, 1995 25,321
INDEX FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 157,319
Year Ended May 31, 1996 121,170
Year Ended October 31, 1995 107,321
VALUGROWTH STOCK FUND
Year Ended May 31, 1998 1,011,840
Year Ended May 31, 1997 502,785
Year Ended May 31, 1996 436,274
B-21
<PAGE>
AGGREGATE
COMMISSIONS PAID
DIVERSIFIED EQUITY FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 226,652
Year Ended May 31, 1996 175,648
GROWTH EQUITY FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 130,483
Year Ended May 31, 1996 127,666
LARGE COMPANY GROWTH FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 59,924
Year Ended May 31, 1996 42,229
SMALL COMPANY STOCK FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 458,447
Year Ended May 31, 1996 208,021
SMALL COMPANY GROWTH FUND
Year Ended May 31, 1998
Year Ended May 31, 1997 1,365,750
Year Ended May 31, 1996 785,875
SMALL CAP OPPORTUNITIES FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 N/A
INTERNATIONAL FUND*
Year Ended May 31, 1998 N/A
Year Ended May 31, 1997 N/A
Year Ended May 31, 1996 188,849
* Reflects commission paid by the Portfolio(s) in which the Fund invests, the
Funds paid no commissions directly during either year.
B-22
<PAGE>
TABLE 7 - 5% SHAREHOLDERS
The following table lists the persons who owned of record 5% or more of the
outstanding shares of a class of shares of a Fund as of September 1, 1998, as
well as their percentage holding of all shares of the Fund. Certain persons own
shares of the Funds of record only, including Alpine & Co., BHC Securities,
Inc., EMSEG & Co., First Stock Co., Norwest Bank Minnesota, N.A. and Stout & Co.
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
CASH INVESTMENT FUND Norwest Investment Services 2,187,733,420.880 41.81 41.81
c/o Andrew Duffy
608 2nd Ave S
8th Floor MS 0130
Minneapolis, MN 55479-0130
Norwest Bank Minnesota NA 1,685,535,639.280 32.21 32.21
VP4500022
Attn Cash Sweep Processing - Judy
Jeska
733 Marquette Ave 4th Floor
Minneapolis, MN 55479-0050
Dentru & Co 643,087,524.248 12.29 12.29
Non Discretionary
1740 Broadway MS 8751
Denver, CO 80274
READY CASH INVESTMENT FUND
Investor Shares Norwest Investment Services 79,680,342.950 99.17 99.11
c/o Andrew Duffy
608 2nd Ave S
8th Floor MS 0130
Minneapolis, MN 55479-0130
Exchange Shares Norwest Bank MN Custodian for IRA 30,250.900 5.80 0.00
Account of
Ralph F. Henkensiefken
918 S Broadway
New Ulm, MN 56075
Norwest Bank MN Custodian for IRA 99,332.460 19.85 0.01
Account of
Walter W. Pillsbury
2849 Evergreen Road
Fargo, ND 58102-1712
Norwest Bank MN Custodian for IRA 48,048.750 9.21 0.00
Account of
Raymond C. Sink
1315 Anderson Rd
Duluth, MN 55811
</TABLE>
B-23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
READY CASH INVESTMENT FUND Norwest Bank MN Custodian for IRA 60,572.380 11.61 0.01
Exchange Shares (cont.) Account of
John D. Jeffries
301 E Howard St
Hibbing, MN 55746
Norwest Bank MN Custodian for IRA 127,891.648 24.52 0.02
Account of Norwest Mank MN NA IRA
C/F Cust
Mary G. Koerber
Mason City, IA 50401
U.S. GOVERNMENT FUND Alpine & Co 212,815,376.650 8.57 8.57
Non Discretionary
1740 Broadway MS 8751
Denver, CO 80274
Norwest Bank Minnesota NA AMS 1,843,998,761.370 74.21 74.21
Collective Trust Funds Clearing
Acct
Attn Cash Sweep Processing - Judy
Jeska
733 Marquette Ave 4th Fl
Minneapolis, MN 55479-0050
Norwest Investment Services 375,216,323.730 15.18 15.81
c/o Andrew Duffy
608 2nd Ave S 8th Fl MS 0130
Minneapolis, MN 55479-0130
TREASURY FUND Norwest Bank Minnesota NA AMS 858,796,225.160 60.34 60.34
Collective Trust Funds Clearing
Acct
Attn Cash Sweep Processing - Judy
Jeska
733 Marquette Ave 4th Fl
Minneapolis, MN 55479-0050
Norwest Bank Investment Services 308,801,383.250 21.70 21.70
c/o Andrew Duffy
608 2nd Ave S 8th Fl MS 0130
Minneapolis, MN 55479-0130
</TABLE>
B-24
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
MUNICIPAL MONEY MARKET FUND
Investor Shares
Norwest Bank Investment Services 39,979,447.550 97.95 3.60
c/o Andrew Duffy
608 2nd Ave S 8th Fl MS 0130
Minneapolis, MN 5547-0130
STABLE INCOME FUND
A Shares Norwest Investment Services Inc. 216,969.473 23.67 20.16
FBO 018193581
Norwest Building East - 8th Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
Norwest Investment Services Inc. 90,810.63 9.90 8.44
FBO 021219031
Northstar Building East - 8th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
Koch Industries Inc. 113,735.098 12.41 10.57
c/o Wilshire Asset Mgmt
1299 Ocean Ave Suite 700
Santa Monica, CA 90401
Norwest Investment Services Inc. 80,847.464 8.82 7.51
FBO 705734561
Northstar Building East - 9th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
B Shares Fred P. Mattson 7,979.911 5.01 0.74
and Betty J. Mattson
JT Ten
PO Box 248
Elmwood, WI 54740-0248
Charles Amjad-Ali 10,161.595 6.38 0.94
1305 Dayton Ave
St Paul, MN 55104
</TABLE>
B-25
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
STABLE INCOME FUND Ute Plumbing Heating Inc 17,299.590 10.86 1.61
B Shares Retirement Account
Employee Pension Plan Trust
U A DTO 07-01-86
2315 Bott Ave
Colorado Springs, CO 80904-3727
Norwest Investment Services Inc. 19,591.464 12.30 1.82
FBO 102953761
Norwest Building East - 8th Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
Norwest Investment Services Inc. 8,081.444 5.07 0.75
FBO 019657481
Northstar Building East - 8th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
INTERMEDIATE GOVERNMENT INCOME
FUND
A Shares WealthBuilder II Growth Balanced 158,524.584 10.48 10.48
Intermediate US Govt Fund
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
Norwest Investment Services, Inc. 90,994.208 6.02 6.02
FBO 106727721
Northstar Building East - 8th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
</TABLE>
B-26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
INCOME FUND Norwest Investment Services, Inc. 33,364.834 5.89 0.10
B Shares FBO 705648691
Northstar Building East - 9th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
I Shares Dentru & co 5,918,741.212 19.06 18.24
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver, Co 80274
FINABA 2,460,089.376 7.93 7.58
Non-Discretionary Cash Account
Attn John Ruttter
PO Box 10523
Lubbock, TX 79408
EMSEG & Co 6,398,685.123 20.63 19.72
Income Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 12,514,035.063 40.34 38.56
Income Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
TOTAL RETURN BOND FUND
A Shares Norwest WealthBuilder 160,548.312 53.92 1.38
Reinvest Account
733 Marquette Ave
Minneapolis, MN 55479-0040
I Shares Dentru & Co 3,290,530.434 29.72 28.23
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver, CO 80274
Kiwils & Co 630,932.725 5.70 5.41
Discretionary Reinvest
1700 Broadway MS 0076
Denver, CO 80274
</TABLE>
B-27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
TOTAL RETURN BOND FUND Seret & Co 4,364,276.706 39.41 37.44
I Shares (cont.) Discretionary Reinvest
1740 Broadway MS 8751
Denver, CO 80274
EMSEG & Co 598,343.719 5.40 5.13
Total Return Bond Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-0477
EMSEG & Co 796,940.767 7.20 6.84
Total Return Bond Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
LIMITED TERM TAX-FREE FUND
I Shares FIHABA 1,532,715.059 28.24 28.24
Non-Discretionary Cash Acct
Attn Jon Rutter
PO Box 10523
Lubbock, TX 79408
Victoria & Co 663,868.836 12.23 12.23
c/o Regional Mutual Funds
PO Box 6000
San Antonio, TX 78286-7646
EMSEG & Co 595,453.000 10.97 10.97
Limited Term Tax Free Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 1,753,257.638 32.30 32.30
Limited Term Tax Free Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 759,336.828 13.99 13.99
Limited Term Tax Free Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
</TABLE>
B-28
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
TAX-FREE INCOME FUND
A Shares Norwest WealthBuilder 283,525.342 7.40 0.86
Reinvest Account
733 Marquette Ave
Minneapolis, MN 55479-0040
I Shares Dentru & Co 7,650,475.013 27.46 23.32
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver, CO 80274
FINABA 1,695,872.179 6.09 5.17
Non-Discretionary Cash Acct
Attn Jon Rutter
PO Box 10523
Lubbock, TX 79408
EMSEG & Co 2,991,785.112 10.74 9.12
Tax Free Income I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 12,145,369.987 43.60 37.02
Tax Free Income Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 2,094,448.257 7.52 6.38
Tax Free Income Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
COLORADO TAX-FREE FUND
A Shares Norwest Investment Services, 576,171.628 16.44 7.48
Inc.
FBO 017357991
Northstar Building East - 8th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
I Shares Dentru & Co 3,076,770.798 92.27 39.95
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver, CO 80274
</TABLE>
B-29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
MINNESOTA TAX-FREE FUND
I Shares EMSEG & Co 300,588.366 15.14 4.42
Minnesota Tax Free I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 117,349.088 5.91 1.72
Minnesota Tax Free I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 478,607.041 24.10 7.04
Minnesota Tax Free I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 1,069,236.870 53.85 15.72
Minnesota Tax Free I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
VALUGROWTH STOCK FUND
A Shares WealthBuilder II Growth And 61,332.807 6.01 0.27
Income
ValuGrowth Stock Fund
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
VALUGROWTH STOCK FUND
I Shares Dentru & Co 3,160,584.713 14.56 13.69
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver, CO 80274
Victoria & Co 1,146,811.465 5.28 4.97
c/o Regional Mutual Funds
PO Box 6000
San Antonio, TX 78286-9646
</TABLE>
B-30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
VALUGROWTH STOCK FUND EMSEG & Co 2,703,893.522 12.45 11.71
I Shares (cont.) ValuGrowth Stock Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 12,506,074.748 57.60 54.17
ValuGrowth Stock Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
GROWTH EQUITY FUND
A Shares Norwest WealthBuilder 191,406.805 32.76 0.68
Reinvest Account
733 Marquette Ave
Minneapolis, MN 55479-0040
SMALL COMPANY STOCK FUND
A Shares Norwest WealthBuilder 144,076.453 22.49 1.61
Reinvest Account
733 Marquette Ave
Minneapolis, MN 55479-0040
B Shares Norwest Investment Services, Inc. 34,177.234 6.93 0.38
FBO 731400141
Northstar Building East - 8th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
I Shares Dentru & Co 1,103,824.065 14.15 12.36
Non-Discretionary Cash
1740 Broadway Mail 8676
Denver, CO 80274
EMSEG & Co 3,873,860.726 49.68 43.37
Small Company Stock Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
</TABLE>
B-31
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
SMALL COMPANY STOCK FUND EMSEG & Co 945,101.317 12.12 10.58
I Shares (cont.) Small Company Stock Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 1,041,262.497 13.35 11.66
Small Company Stock Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
INTERNATIONAL FUND
A Shares Norwest WealthBuilder 42,263.743 29.95 0.35
Reinvest Account
733 Marquette Ave
Minneapolis, MN 55479-0040
Wells Fargo Bank NA 15,295.794 10.84 0.13
Agnt Noggle Crat I Trust
MAC 913-027
Mutual Fund Transfer Unit
26610 West Agoura Rd
Calabasa, CA 91302
B Shares Norwest Investment Services, Inc. 9,936.114 10.52 0.08
FBO 015097851
Northstar Building East - 8th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
Norwest Investment Services, Inc. 4,779.933 5.06 .04
FBO 012957081
Northstar Building East - 8th
Floor
608 Second Avenue South
Minneapolis, MN 55479-0162
</TABLE>
B-32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SHARE BALANCE % OF % OF FUND
NAME AND ADDRESS CLASS
INTERNATIONAL FUND EMSEG & Co 1,1220,273.442 10.18 9.98
I Shares International Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
EMSEG & Co 8,156,430.569 68.03 66.72
International Fund I
c/o Mutual Fund Processing
PO Box 1450 NW 8477
Minneapolis, MN 55480-8477
Dentru & Co 1,183,127.346 9.87 9.68
1740 Broadway Mail 8676
Denver, CO 80274
DIVERSIFIED EQUITY FUND
A Shares Norwest Investment Svcs., Inc. 70,355.633 5.06
FBO 019023601
Northstar Building East-8th Fl.
608 Second Ave. South
Minneapolis, MN 55479-0162
</TABLE>
B-33
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - MONEY MARKET FUND YIELDS
As of May 31, 1998, the seven day yield, seven day effective yield and, for
Municipal Money Market Fund, the seven day tax equivalent yield, of each class
of the Money Market Funds was as follows. For the tax-equivalent yield
quotations, the assumed federal income tax rate is 39.6%.
<TABLE>
<S> <C> <C> <C> <C>
7 DAY 7 DAY EFFECTIVE 7 DAY TAX-EQUIV 7 DAY TAX-EQUIV
YIELD YIELD YIELD EFFECTIVE YIELD
CASH INVESTMENT FUND 5.24% 5.37% N/A N/A
READY CASH INVESTMENT FUND
Investor Shares 4.86% 4.97% N/A N/A
Exchange Shares 4.11% 4.19% N/A N/A
U.S. GOVERNMENT FUND 5.05% 5.18% N/A N/A
TREASURY PLUS FUND N/A N/A N/A N/A
TREASURY FUND 4.77% 4.89% N/A N/A
MUNICIPAL MONEY MARKET FUND
Investor Shares 3.21% 3.26% 5.31% 5.40%
Institutional Shares 3.41% 3.47% 5.65% 5.75%
</TABLE>
TABLE 2 - YIELDS
For the 30-day period ended May 31, 1998 the annualized yield and, where
applicable, the tax equivalent yield of each class of the Fixed Income Funds,
Balanced Funds and Equity Funds was as follows. For the tax-equivalent yield
quotations, the assumed Federal income tax rate is 39.6%. In addition, for the
tax-equivalent yields of the Colorado and Minnesota Tax-Free Funds, the assumed
Colorado and Minnesota income tax rates are 5% and 8.5%, respectively.
<TABLE>
<S> <C> <C>
TAX EQUIVALENT
YIELD YIELD
STABLE INCOME FUND
A Shares 5.60% N/A
B Shares 4.88% N/A
I Shares 5.69% N/A
LIMITED TERM GOVERNMENT INCOME FUND
I Shares 5.65% N/A
INTERMEDIATE GOVERNMENT INCOME FUND
A Shares 5.27% N/A
B Shares 4.75% N/A
I Shares 5.50% N/A
DIVERSIFIED BOND FUND
I Shares 5.67% N/A
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C> <C>
TAX EQUIVALENT
YIELD YIELD
INCOME FUND
A Shares 5.40% N/A
B Shares 4.89% N/A
I Shares 5.64% N/A
TOTAL RETURN BOND FUND
A Shares 5.42% N/A
B Shares 4.88% N/A
I Shares 5.64% N/A
LIMITED TERM TAX-FREE FUND
I Shares 4.11% N/A
TAX-FREE INCOME FUND
A Shares 4.98% 8.25%
B Shares 4.44% 7.35%
I Shares 5.19% 8.60%
COLORADO TAX-FREE FUND
A Shares 4.63% 8.07%
B Shares 4.07% 7.10%
I Shares 4.83% 8.42%
MINNESOTA INTERMEDIATE TAX-FREE FUND
I Shares 4.14% 7.49%
MINNESOTA TAX-FREE FUND
A Shares 4.47% 8.09%
B Shares 3.91% 7.08%
I Shares 4.66% 8.43%
STRATEGIC INCOME FUND
I Shares N/A N/A
MODERATE BALANCED FUND
I Shares N/A N/A
GROWTH BALANCED FUND
I Shares N/A N/A
AGGRESSIVE BALANCED-EQUITY FUND
I Shares 0.19% N/A
DIVERSIFIED EQUITY FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
GROWTH EQUITY FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
C-2
<PAGE>
TAX EQUIVALENT
YIELD YIELD
INDEX FUND
I Shares 1.61% N/A
VALUGROWTH STOCK FUND
A Shares 0.66% N/A
B Shares -0.04% N/A
I Shares 0.68% N/A
INCOME EQUITY FUND
A Shares 1.53% N/A
B Shares 0.87% N/A
I Shares 1.63% N/A
LARGE COMPANY GROWTH FUND
I Shares -0.33% N/A
DIVERSIFIED SMALL CAP FUND
I Shares -0.42% N/A
SMALL COMPANY STOCK FUND
A Shares -0.49% N/A
B Shares -1.27% N/A
I Shares -0.51% N/A
SMALL COMPANY GROWTH FUND
I Shares -0.96% N/A
SMALL CAP OPPORTUNITIES FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
CONTRARIAN STOCK FUND
I Shares 0.88% N/A
INTERNATIONAL FUND
A Shares N/A N/A
B Shares N/A N/A
I Shares N/A N/A
</TABLE>
C-3
<PAGE>
TABLE 3 - TOTAL RETURNS
The average annual total return of each class of each Fund for the periods ended
May 31, 1998 was as follows. For the money market funds, the yields shown in
Table 1 more closely reflect the current earnings of each fund than the total
return quotation. The actual dates of the commencement of each Fund's
operations, or the commencement of the offering of each class' shares, is listed
in the Fund's financial statements. The performance of the Funds marked with an
asterisk (*) includes the performance of a collective investment fund or a
common trust fund prior to its conversion into the Fund. (See "Performance and
Advertising Data -- Multiclass, Collective Investment Fund, Common Trust Fund
and Core-Gateway Performance.") Prior to 1989, the collective investment funds
and common trust fund were valued on the calendar quarter; therefore the
following chart does not reflect a Since Inception figure as of the fiscal year
end for those funds adopting collective investment or common trust fund
performance. Calendar quarter performance is available from the adviser.
SEC STANDARDIZED RETURNS
ONE YEAR FIVE TEN SINCE
YEARS YEARS INCEPTION
CASH INVESTMENT FUND 5.42% 4.85% 5.72% 5.80%
READY CASH INVESTMENT FUND
Investor Shares 5.07% 4.49% 5.38% 5.42%
Exchange Shares 4.29% N/A N/A 4.13%
U.S. GOVERNMENT FUND 5.20% 4.68% 5.49% 5.55%
TREASURY FUND 5.00% 4.47% N/A 4.45%
MUNICIPAL MONEY MARKET FUND
Investor Shares 3.18% 2.96% 3.65% 3.68%
Institutional Shares 3.39% 3.15% 3.76% 3.78%
STABLE INCOME FUND
A Shares 4.74% N/A N/A 5.95%
B Shares 4.75% N/A N/A 5.06%
I Shares 6.28% N/A N/A 6.38%
LIMITED TERM GOVERNMENT INCOME FUND
I Shares N/A N/A N/A 4.42%
INTERMEDIATE GOVERNMENT INCOME FUND*
A Shares 5.80% 4.15% 6.78% 7.47%
B Shares 7.38% N/A N/A 6.10%
I Shares 10.19% 5.00% 7.21% 7.75%
DIVERSIFIED BOND FUND*
I Shares 12.39% 6.22% 7.57% 8.50%
INCOME FUND
A Shares 7.97% 4.78% 7.83% 7.70%
B Shares 9.52% N/A N/A 4.63%
I Shares 12.35% 5.62% 8.26% 8.09%
TOTAL RETURN BOND FUND
A Shares 5.08% N/A N/A 5.09%
B Shares 6.64% N/A N/A 5.15%
I Shares 9.45% N/A N/A 6.10%
LIMITED TERM TAX-FREE FUND
I Shares 6.70% N/A N/A 8.27%
TAX-FREE INCOME FUND
A Shares 5.91% 5.93% N/A 6.55%
B Shares 7.52% N/A N/A 5.83%
I Shares 10.22% 6.80% N/A 7.04%
COLORADO TAX-FREE FUND
A Shares 5.56% N/A N/A 5.85%
B Shares 7.25% N/A N/A 5.93%
I Shares 9.97% N/A N/A 6.72%
C-4
<PAGE>
SEC STANDARDIZED RETURNS (CONTINUED)
ONE YEAR FIVE TEN SINCE
YEARS YEARS INCEPTION
MINNESOTA INTERMEDIATE TAX-FREE FUND*
I Shares 7.90% 5.72% 6.87% 6.30%
MINNESOTA TAX-FREE FUND
A Shares 5.33% 5.53% 7.00% 6.61%
B Shares 6.89% N/A N/A 5.43%
I Shares 9.71% 6.39% 7.44% 7.03%
STRATEGIC INCOME FUND*
I Shares 14.13% 9.25% N/A 9.51%
MODERATE BALANCED FUND*
I Shares 17.04% 11.35% N/A 11.29%
GROWTH BALANCED FUND*
I Shares 21.40% 14.57% N/A 13.41%
AGGRESSIVE BALANCED
EQUITY FUND
I Shares N/A N/A N/A 10.55%
INCOME EQUITY FUND*
A Shares 21.56% 19.15% N/A 17.00%
B Shares 24.67% N/A N/A 23.60%
I Shares 28.61% 20.50% N/A 17.72%
INDEX FUND*
I Shares 30.32% 21.44% 17.96% 15.62%
VALUGROWTH STOCK FUND
A Shares 14.48% 14.09% 14.56% 13.73%
B Shares 17.30% N/A N/A 15.08%
I Shares 21.18% 15.35% 15.19% 14.33%
DIVERSIFIED EQUITY FUND*
A Shares 19.16% 18.00% N/A 16.85%
B Shares 22.13% N/A N/A 22.72%
I Shares 26.12% 19.34% N/A 17.56%
GROWTH EQUITY FUND*
A Shares 15.82% 16.14% N/A 15.97%
B Shares 18.63% N/A N/A 17.23%
I Shares 22.52% 17.45% N/A 16.69%
LARGE COMPANY GROWTH FUND*
I Shares 32.29% 20.39% 18.97% 16.03%
DIVERSIFIED SMALL CAP FUND
I Shares N/A N/A N/A 5.20%
SMALL COMPANY STOCK FUND
A Shares 2.14% N/A N/A 11.86%
B Shares 4.29% N/A N/A 12.14%
I Shares 8.12% N/A N/A 13.20%
SMALL COMPANY GROWTH FUND*
I Shares 22.38% 18.79% 20.76% 18.05%
SMALL CAP OPPORTUNITIES FUND
A Shares 15.26% N/A N/A 22.93%
B Shares 18.03% N/A N/A 20.85%
I Shares 21.95% N/A N/A 24.39%
CONTRARIAN STOCK FUND
I Shares 8.87% N/A N/A 9.85%
INTERNATIONAL FUND*
A Shares 5.09% 12.03% 9.10% 7.82%
B Shares 7.39% N/A N/A 11.26%
I Shares 11.19% 13.30% 9.72% 8.38%
C-5
<PAGE>
NON STANDARDIZED RETURNS (WITHOUT A SALES LOAD)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR
ONE MONTH THREE YEAR TO ONE YEAR THREE FIVE TEN SINCE
MONTHS DATE YEARS YEARS YEARS INCEPTION
CASH INVESTMENT FUND 0.45% 1.33% 2.20% 5.42% 5.38% 4.85% 5.72% 5.80%
READY CASH INVESTMENT FUND
Investor Shares 0.41% 1.23% 2.06% 5.07% 5.04% 4.49% 5.38% 5.42%
Exchange Shares 0.35% 1.04% 1.74% 4.29% 4.25% N/A N/A 4.13%
U.S. GOVERNMENT FUND 0.43% 1.27% 2.11% 5.20% 5.17% 4.68% 5.49% 5.55%
TREASURY FUND 0.41% 1.24% 2.04% 5.00% 4.97% 4.47% N/A 4.45%
MUNICIPAL MONEY MARKET FUND
Investor Shares 0.27% 0.78% 1.27% 3.18% 3.19% 2.96% 3.65% 3.68%
Institutional Shares 0.29% 0.84% 1.35% 3.39% 3.40% 3.15% 3.76% 3.78%
STABLE INCOME FUND
A Shares 0.35% 1.13% 2.23% 6.38% 6.08% N/A N/A 6.41%
B Shares 0.30% 0.86% 1.83% 5.50% N/A N/A N/A 5.41%
I Shares 0.26% 1.04% 2.13% 6.28% 6.04% N/A N/A 6.38%
LIMITED TERM GOVERNMENT
INCOME FUND
I Shares 0.68% 1.52% 2.38% N/A N/A N/A N/A N/A
INTERMEDIATE GOVERNMENT
INCOME FUND*
A Shares 0.95% 1.57% 2.78% 10.19% 6.62% 5.01% 7.21% 7.75%
B Shares 0.80% 1.38% 2.38% 9.38% N/A N/A N/A 7.01%
I Shares 0.86% 1.48% 2.69% 10.19% 6.62% 5.00% 7.21% 7.75%
DIVERSIFIED BOND FUND*
I Shares 1.20% 1.81% 3.05% 12.39% 7.49% 6.22% 7.57% 8.50%
INCOME FUND
A Shares 1.35% 2.00% 3.04% 12.47% 7.20% 5.64% 8.26% 8.10%
B Shares 1.19% 1.81% 2.72% 11.52% 6.42% N/A N/A 4.63%
I Shares 1.35% 2.01% 3.04% 12.35% 7.20% 5.62% 8.26% 8.09%
TOTAL RETURN BOND FUND
A Shares 1.03% 1.84% 2.55% 9.46% 6.54% N/A N/A 6.07%
B Shares 0.96% 1.65% 2.23% 8.64% 5.82% N/A N/A 5.34%
I Shares 1.02% 1.73% 2.54% 9.45% 6.58% N/A N/A 6.10%
LIMITED TERM TAX-FREE FUND
I Shares 1.14% 1.12% 1.85% 6.70% N/A N/A N/A 8.27%
TAX-FREE INCOME FUND
A Shares 2.27% 1.47% 2.20% 10.33% 8.00% 6.80% N/A 7.04%
B Shares 2.20% 1.18% 1.89% 9.52% 7.20% N/A N/A 5.83%
I Shares 2.17% 1.38% 2.20% 10.22% 8.00% 6.80% N/A 7.04%
COLORADO TAX-FREE FUND
A Shares 2.03% 1.15% 2.06% 9.96% 8.08% N/A N/A 6.72%
B Shares 1.97% 1.05% 1.74% 9.25% 7.31% N/A N/A 5.93%
I Shares 1.94% 1.15% 2.06% 9.97% 8.09% N/A N/A 6.72%
</TABLE>
C-6
<PAGE>
NON STANDARDIZED RETURNS (WITHOUT A SALES LOAD) (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR
ONE MONTH THREE YEAR TO ONE YEAR THREE FIVE TEN SINCE
MONTHS DATE YEARS YEARS YEARS INCEPTION
MINNESOTA INTERMEDIATE
TAX-FREE FUND*
I Shares 0.68% 1.52% 2.38% N/A N/A N/A N/A N/A
MINNESOTA TAX-FREE FUND
A Shares 1.98% 1.30% 2.37% 9.71% 7.19% 6.39% 7.44% 7.03%
B Shares 1.91% 1.20% 2.05% 8.89% 6.43% N/A N/A 5.43%
I Shares 1.98% 1.30% 2.37% 9.71% 7.19% 6.39% 7.44% 7.03%
STRATEGIC INCOME FUND*
I Shares 0.20% 2.09% 4.88% 14.13% 11.26% 9.25% N/A 9.51%
MODERATE BALANCED FUND*
I Shares -0.39% 2.50% 6.78% 17.04% 14.28% 11.35% N/A 11.29%
GROWTH BALANCED FUND*
I Shares -1.02% 3.05% 9.06% 21.40% 18.95% 14.57% 0.00% 13.41%
INCOME EQUITY FUND*
A Shares -1.46% 4.68% 11.85% 28.64% 26.42% 20.50% N/A 17.72%
B Shares -1.51% 4.49% 11.51% 27.67% N/A N/A N/A 24.74%
I Shares -1.46% 4.66% 11.85% 28.61% 26.41% 20.50% N/A 17.72%
INDEX FUND*
I Shares -1.76% 4.27% 12.99% 30.32% 28.88% 21.44% 17.96% 15.62%
VALUGROWTH STOCK FUND
A Shares -3.04% 1.75% 10.53% 21.15% 22.05% 15.41% 15.20% 14.35%
B Shares -3.11% 1.58% 10.21% 20.30% 21.14% N/A N/A 15.32%
I Shares -3.04% 1.79% 10.54% 21.18% 22.06% 15.35% 15.19% 14.33%
DIVERSIFIED EQUITY FUND*
A Shares 0.95% 1.57% 2.78% 10.19% 6.62% 5.01% 7.21% 7.75%
B Shares 0.80% 1.38% 2.38% 9.38% N/A N/A N/A 7.01%
I Shares 0.86% 1.48% 2.69% 10.19% 6.62% 5.00% 7.21% 7.75%
GROWTH EQUITY FUND*
A Shares -3.09% 2.29% 11.38% 22.55% 21.72% 17.46% N/A 16.70%
B Shares -3.16% 2.09% 11.03% 21.63% N/A N/A N/A 18.44%
I Shares -2.09% 3.68% 12.28% 26.12% 24.99% 19.34% N/A 17.56%
LARGE COMPANY GROWTH FUND*
I Shares -3.22% 1.86% 12.82% 32.29% 28.73% 20.39% 18.97% 16.03%
SMALL COMPANY STOCK FUND
A Shares -7.69% -4.76% 2.30% 8.07% 16.68% N/A N/A 13.30%
B Shares -7.81% -4.93% 1.94% 7.29% 15.83% N/A N/A 12.44%
I Shares -7.73% -4.71% 2.32% 8.12% 16.70% N/A N/A 13.20%
SMALL COMPANY GROWTH FUND*
I Shares -8.05% -2.74% 3.89% 22.38% 23.97% 18.79% 20.76% 18.05%
SMALL CAP OPPORTUNITIES FUND
A Shares -5.14% 0.85% 5.50% 21.97% 28.99% N/A N/A 24.38%
B Shares -5.16% 0.69% 5.19% 21.03% N/A N/A N/A 22.57%
I Shares -5.10% 0.90% 5.50% 21.95% 29.01% N/A N/A 24.39%
INTERNATIONAL FUND*
A Shares 0.80% 7.34% 17.09% 11.20% 12.32% 13.30% 9.72% 8.42%
B Shares 0.72% 7.14% 16.75% 10.39% 11.46% N/A N/A 11.79%
I Shares 0.76% 7.34% 17.08% 11.19% 12.29% 13.30% 9.72% 8.38%
</TABLE>
C-7
<PAGE>
APPENDIX D - OTHER ADVERTISEMENT MATTERS
From time to time, the sales material for the Funds may include a discussion of,
and commentary by senior management of the Adviser on, the following.
The Trust may compare the Fund family against other bank-managed mutual funds or
other investment companies based on asset size. The Adviser believes the Funds'
growth may be attributed to three things: disciplined investment process,
utilizing talented people and focusing on customer needs.
The Funds utilize a disciplined process which relies heavily upon its investment
managers and an experienced investment research team. This approach maximizes
consistency by ensuring that no individual manager's style unduly influences a
fund's style.
NORWEST CORPORATION
1929 Northwestern National Bank and several upper midwest banks form a
holding company called Northwestern National Bancorporation. "Banco"
acquires 90 banks in its first year.
1932 At is peak, Banco owns a total of 139 affiliate banks.
1982 Banco enters the consumer finance business by acquiring Dial Finance
Company.
1983 The 87 affiliates of Banco are reborn as
"Norwest Corporation."
1989 Norwest consolidates its operations in the new 57-story Norwest Center
in downtown Minneapolis.
1997 Norwest reaches $50 billion in assets under management, including $19
billion in mutual funds.
NORWEST ADVANTAGE FUNDS
1946 Inception of the Common Trust Funds, the company's first pooled
investment vehicles.
1987 Norwest introduces two new open-ended
registered investment company funds
(commonly known as mutual funds), called the Prime Value Funds. In less
than one year, assets under management reach $500 million.
1992 The Norwest mutual fund family expands to 11 mutual funds. Assets under
management grow to $3.2 billion.
1994 Conversion to Norwest Collective Funds (bank collective investment
funds) into NORWEST ADVANTAGE FUNDS (mutual funds).
1998 NORWEST ADVANTAGE FUNDS family includes 41 mutual funds with over $20
billion in assets under management.
NORWEST CENTER
MINNEAPOLIS, MINNESOTA
DESIGNED BY WORLD-RENOWNED ARCHITECT CESAR PELLI, THE NORWEST CENTER WAS
CONSTRUCTED IN 1988. SINCE THEN, IT HAS RECEIVED SEVERAL PRESTIGIOUS
ARCHITECTURAL AWARDS, INCLUDING THE LARGE SCALE OFFICE AWARD OF EXCELLENCE, FROM
THE URBAN LAND INSTITUTE (1989); THE NAIOP (MINNESOTA) AWARD FOR EXCELLENCE --
DOWNTOWN BUILDING OF THE YEAR (1989); THE BOMA (MINNEAPOLIS) OFFICE BUILDING OF
THE YEAR, OVER 500,000 SQ. FT. (1993); AND THE BOMA (MIDWEST NORTHERN REGION)
OFFICE BUILDING OF THE YEAR, OVER 500,000 SQ. FT. (1994). THE NORWEST CENTER IS
LOCATED IN THE FINANCIAL DISTRICT OF MINNEAPOLIS AT 90 SOUTH SEVENTH STREET.
D-1
<PAGE>
PERFORMA FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
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, 1998, 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
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>
TABLE OF CONTENTS
<S> <C>
Page
1. Introduction 1
Glossary 1
Background Information 2
2. Investment Policies 2
General Information 2
Equity Securities 3
Fixed Income Securities 5
Borrowing 9
Dollar Roll Transactions 9
Repurchase Agreements 10
Reverse Repurchase Agreements 10
Lending Fund Securities 10
When-Issued and Delayed Delivery Securities and Forward Commitments 10
Illiquid Investments 11
Short Sales 11
Options and Futures Contracts 11
Foreign Currency Transactions 12
Swaps, Caps, Floors and Collars 13
Temporary Defensive Position 14
3. Risk Considerations 14
Counterparty Risk 14
Fixed Income Securities 15
Risks of International Investing 17
Leverage 18
Options and Futures Contracts 18
Small Capitalization Stocks 19
Geographic Concentration 19
4. Investment Limitations 19
Fundamental Limitations 20
Non-Fundamental Limitations 21
5. Performance and Advertising Data 22
General 22
SEC Yield Calculations 23
Total Return Calculations 23
Core and Gateway Performance 24
Other Advertisement Matters 24
6. Management 25
Trustees and Officers 26
Investment Advisory Services 32
Management and Administrative Services 37
Distribution 40
Transfer Agent 41
Custodian 41
Portfolio Accounting 42
Expenses 43
7. Portfolio Transactions 43
i
<PAGE>
TABLE OF CONTENTS
Page
8. Additional Purchase and Redemption Information 46
General 46
Redemptions 46
9. Taxation 46
10. Additional Information About the Trust and the Shareholders of the Funds 48
Counsel and Auditors 48
Ownership of Fund Shares 48
General Information 48
Voting and Other Rights 49
Core and Gateway Structure 50
Banking Law Matters 50
Financial Statements 51
Registration Statement 51
Appendix A - Description of Securities Ratings A-1
Appendix B - Miscellaneous Tables B-1
Appendix C - Performance Data C-1
</TABLE>
ii
<PAGE>
1. INTRODUCTION
GLOSSARY
"Adviser" means Norwest, Schroder or a Subadviser.
"Board" means the Board of Trustees of the Trust.
"CFTC" means the U.S. Commodities Futures Trading Commission.
"Code" means the Internal Revenue Code of 1986, as amended.
"Core and Gateway Structure" means a structure in which a
Fund invests in one or more Portfolios.
"Core Trust" means Core Trust (Delaware), an open-end,
management investment company registered under the 1940 Act.
"Core Trust Board" means the Board of Trustees of Core Trust.
"Custodian" means Norwest acting in its capacity as custodian
of a Fund.
"FAS" means Forum Administrative Services, Limited Liability
Company, the Trust's administrator.
"Fitch" means Fitch IBCA, Inc.
"Forum" means Forum Financial Services, Inc., a registered
broker-dealer and the distributor of the Trust's shares.
"Forum Accounting" means Forum Accounting Services, Limited
Liability Company, the Trust's fund accountant.
"Fund" means each of the four separate series of the Trust to
which this Statement of Additional Information relates as
identified on the cover page.
"Galliard" means Galliard Capital Management, Inc., the
investment subadviser to Strategic Value Bond Portfolio and
Performa Strategic Value Bond Fund.
"Moody's" means Moody's Investors Service.
"Norwest" means Norwest Investment Management, Inc., a
subsidiary of Norwest Bank Minnesota, N.A.
"Norwest Bank" means Norwest Bank Minnesota, N.A., a
subsidiary of Norwest Corporation.
"NRSRO" means a nationally recognized statistical rating
organization.
"Performa Funds" means the Funds set forth on the cover page
of this Statement of Additional Information.
"Portfolio" means, Disciplined Growth Portfolio, Small Cap
Value Portfolio, Strategic Value Bond Portfolio and Schroder
Global Growth Portfolio, each a separate portfolio of Core
Trust or Schroder Core.
1
<PAGE>
"Schroder" means Schroder Capital Management International
Inc., the investment adviser to Schroder Global Growth
Portfolio.
"Schroder Core" means Schroder Capital Funds, an open-end,
management investment company registered under the 1940 Act.
"Schroder Core Board" means the Board of Trustees of Schroder
Capital Funds.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's.
"Smith" means Smith Asset Management Group, L.P.
"Stock Index Futures" means futures contracts that relate to
broadly based stock indices.
"Subadviser" means Galliard, Smith or Schroder.
"Transfer Agent" means Norwest Bank acting in its capacity as
transfer and dividend disbursing agent of a Fund.
"Trust" means Norwest Advantage Funds, an open-end,
management investment company registered under the 1940 Act.
"U.S. Government Securities" means obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as
amended.
BACKGROUND INFORMATION
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." The Trust is
currently named "Norwest Advantage Funds."
Norwest is each Fund's investment adviser. Norwest also is the investment
adviser of each Portfolio other than Schroder Global Growth Portfolio. Norwest
Bank serves as the Trust's transfer agent, dividend disbursing agent and
custodian. Schroder serves as investment adviser to Schroder Global Growth
Portfolio.
Smith serves as investment subadviser of Performa Disciplined Growth Fund,
Disciplined Growth Portfolio, Performa Small Cap Value Fund and Small Cap Value
Portfolio. Galliard serves as investment subadviser of Performa Strategic Value
Bond Fund and Strategic Value Bond Portfolio. Schroder serves as an investment
subadviser of Performa Global Growth Fund.
Forum serves as the Trust's manager and as distributor of the Trust's shares.
FAS serves as each Fund's administrator.
2. INVESTMENT POLICIES
GENERAL INFORMATION
This section discusses in greater detail than the prospectus certain of the
investments the Funds may make. A Fund will make only those investments
described below that are in accordance with its investment objectives and
policies. The Funds make the investments described below through the Portfolios.
2
<PAGE>
Each Fund's investment objective and all its investment policies that are
designated as fundamental may not be changed without approval by the lesser of:
(i) more than 50% of the outstanding shares of the Fund, or (ii) 67% or more of
the shares present or represented at an investors' meeting, if more than 50% of
the outstanding shares of the Fund are present or represented at the meeting in
person or by proxy. A Fund may change any other investment policy upon
appropriate notice to investors.
EQUITY SECURITIES
Equity securities include common stock, preferred stock, convertible securities,
warrants, depository receipts, shares of closed-end investment companies and
equity-related securities. The market value of all securities, particularly
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. Overall economic and market conditions also impact an equity
security's price. The market value of an equity security also may fluctuate
based on changes in a company's financial condition. It is possible that a Fund
may experience a substantial or complete loss on an individual equity
investment.
Equity securities owned by a Fund may be traded on a securities exchange or in
the over-the-counter market and may not be traded every day or in the volume
typical of securities traded on a major national securities exchange. As a
result, disposition by a Fund of equity securities to meet redemptions by
investors or otherwise may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over an extended period of time.
COMMON STOCK. Common stock represents an equity (ownership) interest in a
company, and usually possesses voting rights and earns 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 and, if applicable, preferred stockholders are paid. Dividends on
common stock are not fixed but are declared at the discretion of the issuer.
Common stock generally represents the riskiest investment in a company. In
addition, common stock generally has the greatest appreciation and depreciation
potential because increases and decreases in earnings are usually reflected in a
company's stock price.
PREFERRED STOCK. Preferred stock is a class of stock having a preference over
common stock as to the payment of dividends and the recovery of investment
should a company be liquidated. Preferred stock, however, is usually junior to
the debt securities of the issuer. Preferred stock typically does not possess
voting rights and its market value may change based on changes in interest
rates.
CONVERTIBLE SECURITIES. Convertible securities are fixed income securities,
preferred stock or other securities that may be converted into or exchanged for
a given amount of common stock of the same or a different issuer during a
specified period of time at a specified price or formula. A convertible security
entitles the holder to receive interest on debt or the dividend on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities ordinarily provide a stream
of income with generally higher yields than those of common stock of the same or
similar issuers, but lower than the yield of nonconvertible debt. Convertible
securities rank senior to common stock in a company's capital structure but are
usually subordinated to comparable nonconvertible securities. By investing in
convertible securities, a Fund obtains the right to benefit from the capital
appreciation potential in the underlying common stock upon the exercise of the
conversion right, while earning higher current income than could be available if
the stock was purchased directly.
In general, the value of a convertible security is the higher of its investment
value (its value as a fixed income security) and its conversion value (the value
of the underlying shares of common stock if the security is converted). As a
fixed income security, the value of a convertible security generally increases
when interest rates decline and generally decreases when interest rates rise.
The 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. Generally, a convertible security's conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
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underlying common stock approaches or exceeds the conversion price, the price of
the convertible security will be increasingly influenced by its conversion
value. In addition, a convertible security generally will sell at a premium over
its conversion value determined by the extent to which investors place value on
the right to acquire the underlying common stock while holding a fixed income
security.
Because convertible securities are typically issued by smaller capitalized
companies whose stock price may be volatile, the price of a convertible security
may reflect variations in the price of the underlying common stock in a way that
nonconvertible debt does not. Also, while convertible securities generally have
higher yields than common stock, they have lower yields than comparable
nonconvertible securities and are subject to less fluctuations in value than
underlying stock since they have fixed income characteristics. 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 is called for redemption, the Fund will be required to permit the
issuer to redeem the security, convert it into the underlying common stock or
sell it to a third party.
WARRANTS. Warrants are securities, typically issued with preferred stock or
bonds, that give the holder the right to purchase a given number of shares of
common stock at a specified price, usually during a specified period of time.
The price usually represents a premium over the applicable market value of the
common stock at the time of the warrant's issuance. Warrants have no voting
rights with respect to the common stock, receive no dividends and have no rights
with respect to the assets of the issuer. 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 common
stock to rise. A warrant becomes worthless if it is not exercised within the
specified time period.
EQUITY-RELATED SECURITIES. Equity-related securities are securities whose
interest and/or principal payment obligations are linked to a specified index of
equity securities, or determined pursuant to specific formulas. A Fund may
invest in these instruments when the securities provide a higher amount of
dividend income than is available from a company's common stock. The amount
received by an investor at maturity of these securities is not fixed but is
based on the price of the underlying common stock, which may rise or fall.
Adverse changes in the securities markets may reduce interest payments made
under, and/or the principal of, equity-linked securities held by a Fund. In
addition, it is not possible to predict how equity-related securities will trade
in the secondary market or whether the market for the securities will be liquid.
DEPOSITARY RECEIPTS. A depositary receipt is a receipt for shares of a
foreign-based company that entitles the holder to distributions on the
underlying security. Depositary receipts include sponsored and unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
other similar global instruments. ADRs typically are issued by a U.S. bank or
trust company, evidence ownership of underlying securities issued by a foreign
company, and are designed for use in U.S. securities markets. EDRs (sometimes
called Continental Depositary Receipts) are receipts issued by a European
financial institution evidencing an arrangement similar to that of ADRs, and are
designed for use in European securities markets. Depositary receipts provide
exposure to foreign securities markets.
Unsponsored depositary receipts may be created without the participation of the
foreign issuer. Holders of these receipts generally bear all the costs of the
depositary receipt facility, whereas foreign issuers typically bear certain
costs in a sponsored depositary receipt. The bank or trust company depositary of
an unsponsored depositary receipt may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
voting rights. Accordingly, available information concerning the issuer may not
be current and the prices of unsponsored depositary receipts may be more
volatile than the prices of sponsored depositary receipts.
CLOSED-END INVESTMENT COMFPANIES. Performa Global Growth Fund may invest in the
securities of closed-end investment companies that invest primarily in foreign
securities. Because of restrictions on direct investment by U.S. entities in
certain countries, other investment companies may provide the most practical or
only way for the Fund to invest in certain markets. The Fund will invest in such
companies when, in the Adviser's judgment, the potential benefits of the
investment justify the payment of any applicable premium or sales charge. Other
investment companies incur their own fees and expenses.
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FIXED INCOME SECURITIES
Fixed income securities include corporate debt obligations, U.S. Government
Securities, municipal securities, mortgage-related securities, asset-backed
securities, guaranteed investment contracts, zero coupon securities, variable
and floating rate securities, financial institution obligations, commercial
paper and participation interests.
CORPORATE DEBT OBLIGATIONS. The Funds may invest in corporate bonds, debentures,
notes, commercial paper and other similar corporate debt instruments. Companies
use these instruments to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and must repay the amount borrowed
at maturity. Companies issue commercial paper (short-term unsecured promissory
notes) to finance their current obligations. Commercial paper normally has a
maturity of less than 9 months.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include securities issued
by the U.S. Treasury and by U.S. Government agencies and instrumentalities. U.S.
Government Securities may be supported by the full faith and credit of the
United States (e.g., mortgage-related securities and certificates of the
Government National Mortgage Association and securities of the Small Business
Administration); by the right of the issuer to borrow from the U.S. Treasury
(e.g., Federal Home Loan Bank securities); by the discretionary authority of the
U.S. Treasury to lend to the issuer (e.g., Fannie Mae (formerly the Federal
National Mortgage Association) securities); or solely by the creditworthiness of
the issuer (e.g., Federal Home Loan Mortgage Corporation securities).
Holders of U.S. Government Securities not backed by the full faith and credit of
the United States must look principally to the agency or instrumentality issuing
the obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. There is no assurance that the U.S. Government will support
securities not backed by its full faith and credit. Neither the U.S. Government
nor any of its agencies or instrumentalities guarantees the market value of the
securities they issue.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent interests in
a pool of mortgage loans originated by lenders such as commercial banks, savings
associations and mortgage bankers and brokers. Mortgage-related securities may
be issued by governmental or government-related entities or by non-governmental
entities such as special purpose trusts created by commercial lenders.
Pools of mortgages consist of whole mortgage loans or participations in mortgage
loans. The majority of these loans are made to purchasers of 1-4 family homes.
The terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Funds may purchase pools of adjustable-rate mortgages,
growing equity mortgages, graduated payment mortgages and other types. Mortgage
poolers apply qualification standards to lending institutions which originate
mortgages for the pools as well as credit standards and underwriting criteria
for individual mortgages included in the pools. In addition, many mortgages
included in pools are insured through private mortgage insurance companies.
Mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or on specified call dates. Most mortgage-related
securities, however, are pass-through securities, which means that investors
receive payments consisting of a pro-rata share of both principal and interest
(less servicing and other fees), as well as unscheduled prepayments, as loans in
the underlying mortgage pool are paid off by the borrowers. Additional
prepayments 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. As prepayment rates of individual pools of mortgage loans vary
widely, it is not possible to predict accurately the average life of a
particular mortgage-related security. Although mortgage-related securities are
issued with stated maturities of up to forty years, unscheduled or early
payments of principal and interest on the mortgages may shorten considerably the
securities' effective maturities. See "Risk Considerations."
GOVERNMENT AND AGENCY MORTGAGE-RELATED SECURITIES. The principal issuers or
guarantors of mortgage-related securities are the Government National Mortgage
Association ("GNMA"), Fannie Mae ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). GNMA, a wholly-owned U.S. Government corporation within
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the Department of Housing and Urban Development ("HUD"), creates pass-through
securities from pools of government guaranteed (Federal Housing Authority or
Veterans Administration) mortgages. The principal and interest on GNMA
pass-through securities are backed by the full faith and credit of the U.S.
Government.
FNMA, which is a U.S. Government-sponsored corporation owned entirely by private
stockholders that is subject to regulation by the Secretary of HUD, and FHLMC, a
corporate instrumentality of the U.S. Government, issue pass-through securities
from pools of conventional and federally insured and/or guaranteed residential
mortgages. FNMA guarantees full and timely payment of all interest and
principal, and FHMLC guarantees timely payment of interest and ultimate
collection of principal of its pass-through securities. Mortgage-related
securities from FNMA and FHLMC are not backed by the full faith and credit of
the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related securities
offered by private issuers include pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds, which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations that are collateralized by mortgage-related securities issued by
GNMA, FNMA or FHLMC or by pools of conventional mortgages of multi-family or of
commercial mortgage loans.
Privately-issued mortgage-related securities generally offer a higher rate of
interest (but greater credit and interest rate risk) than securities issued by
U.S. Government issuers because there are no direct or indirect governmental
guarantees of payment. Many non-governmental issuers or servicers of
mortgage-related securities guarantee or provide insurance for timely payment of
interest and principal on the securities. The market for privately-issued
mortgage-related securities is smaller and less liquid than the market for
mortgage-related securities issued by U.S. government issuers.
STRIPPED MORTGAGE-RELATED SECURITIES. Stripped mortgage-related securities are
multi-class mortgage-related securities that are created by separating the
securities into their principal and interest components and selling each piece
separately. Stripped mortgage-related securities are usually structured with two
classes that receive different proportions of the interest and principal
distributions in a pool of mortgage assets. The market values of these
securities are extremely sensitive to prepayment rates.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through securities representing interests in pools of mortgage
loans with adjustable interest rates that are reset at periodic intervals,
usually by reference to some interest rate index or market interest rate, and
that may be subject to certain limits. Although the rate adjustment feature may
reduce sharp changes in the value of adjustable rate securities, these
securities can change in value based on changes in market interest rates or
changes in the issuer's creditworthiness. Changes in the interest rates on ARMs
may lag behind changes in prevailing market interest rates. 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. A Fund could suffer some
principal loss if the Fund sold the securities before the interest rates on the
underlying mortgages were adjusted to reflect current market rates. Some
adjustable rate securities (or the underlying mortgages) are subject to caps or
floors, that limit the maximum change in interest rates during a specified
period or over the life of the security.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are multiple-class debt obligations that are fully collateralized by
mortgage-related pass-through securities or by pools of mortgages ("Mortgage
Assets"). Payments of principal and interest on the Mortgage Assets are passed
through to the holders of the CMOs as they are received, although certain
classes (often referred to as "tranches") of CMOs have priority over other
classes with respect to the receipt of mortgage prepayments.
Multi-class mortgage pass-through securities are interests in trusts that hold
Mortgage Assets and that have multiple classes similar to those of CMOs.
Payments of principal of and interest on the underlying Mortgage Assets (and in
the case of CMOs, any reinvestment income thereon) provide funds to pay debt
service on the CMOs or to make scheduled distributions on the multi-class
mortgage pass-through securities. Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are
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taken into account in calculating the stated maturity date or final distribution
date of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired earlier.
Planned amortization class mortgage-related securities ("PAC Bonds") are a form
of parallel pay CMO. PAC Bonds are designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a contemplated range.
CMOs may have complicated structures and generally involve more risks than
simpler forms of mortgage-related securities. Delinquency or loss in excess of
that covered by credit enhancement protection could adversely affect the return
on an investment in such a security.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a "Z-tranche"). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increases the face amount of the security at a
compounded rate, but is not paid to the bond holder. After all previous tranches
are retired, accrual bond holders start receiving cash payments that include
both principal and continuing interest. The market value of accrual bonds can
fluctuate widely and their average life depends on the other aspects of the CMO
offering. Interest on accrual bonds is taxable when accrued even though the
holders receive no accrual payment. The Funds distribute all of their net
investment income, and may have to sell portfolio securities to distribute
imputed income, which may occur at a time when an Adviser would not have chosen
to sell such securities and which may result in a taxable gain or loss.
CREDIT ENHANCEMENTS. To lessen the effect of the failures by obligors on
Mortgage Assets to make payments, CMOs and other mortgage-related securities may
contain elements of credit enhancement, consisting of either (1) liquidity
protection or (2) protection against losses resulting after default by an
obligor on the underlying assets and allocation of all amounts recoverable
directly from the obligor and through liquidation of the collateral. This
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 these methods.
The Funds will not pay any additional fees for credit enhancements for
mortgage-related securities, although the credit enhancement may increase the
costs of the mortgage-related securities. Delinquency or loss in excess of that
covered by credit enhancement protection could adversely affect the return on an
investment in such a security.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-related securities but have underlying assets that are not
mortgage loans or interests in mortgage LOANS. Asset-backed securities represent
fractional interests in, or are secured by and payable from, pools of 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 (e.g., credit card) agreements. 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 have structures and characteristics
similar to those of mortgage-related securities and, accordingly, are subject to
many of the same risks, although often to a greater extent. See "Risk
Considerations." No Fund may invest more than 10% of its net assets in
asset-backed securities that are backed by a particular type of credit, (e.g.,
credit card receivables).
FOREIGN GOVERNMENT AND SUPRANATIONAL ORGANIZATIONS DEBT SECURITIES. A Fund may
invest in fixed income securities issued by the governments of foreign countries
or by those countries' political subdivisions, agencies or instrumentalities as
well as by supranational organizations such as the International Bank for
Reconstruction and Development and the Inter-American Development Bank if the
Adviser believes that the securities do not present risks inconsistent with the
Fund's investment objective.
GUARANTEED INVESTMENT CONTRACTS. Guaranteed investment contracts ("GICs") are
issued by insurance companies. In purchasing a GIC, a Fund contributes cash to
the insurance company's general account and the insurance company then credits
to the Fund's deposit fund on a monthly basis guaranteed interest at a specified
rate. The GIC provides 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. There is no secondary
market for GICs and, accordingly, GICs are generally treated as illiquid
investments. GICs are typically unrated.
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ZERO-COUPON SECURITIES. Zero-coupon securities are debt obligations that are
issued or sold at a significant discount from their face value and do not pay
current interest to holders prior to maturity, a specified redemption date or
cash payment date. The discount approximates the total interest the securities
will accrue and compound over the period to maturity or the first interest
payment date at a rate of interest reflecting the market rate of interest at the
time of issuance. The original issue discount on the zero-coupon securities must
be included ratably in the income of a Fund (and thus an investor's) as the
income accrues, even though payment has not been received. The Funds distribute
all of their net investment income, and may have to sell portfolio securities to
distribute imputed income, which may occur at a time when an Adviser would not
have chosen to sell such securities and which may result in a taxable gain or
loss. Because interest on zero-coupon securities is not paid on a current basis
but is in effect compounded, the value of these securities is subject to greater
fluctuations in response to changing interest rates, and may involve greater
credit risks, than the value of debt obligations which distribute income
regularly.
Zero-coupon securities may be securities that have been stripped of their
unmatured interest stream. Zero-coupon securities may be custodial receipts or
certificates, underwritten by securities dealers or banks, that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Government securities. The underwriters of these certificates or receipts
generally purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the purchased unmatured
coupon payments and the final principal payment of the U.S. Government Security.
These certificates or receipts have the same general attributes as zero-coupon
stripped U.S. Treasury securities but are not supported by the issuer of the
U.S. Government Security. The risks associated with stripped securities are
similar to those of other zero-coupon securities, although stripped securities
may be more volatile, and the value of certain types of stripped securities may
move in the same direction as interest rates.
VARIABLE AND FLOATING RATE SECURITIES. Certain debt securities 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 according 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. These
adjustments minimize changes in the market value of the obligation. Similar to
fixed rate debt instruments, variable and floating rate instruments are subject
to changes in value based on changes in market interest rates or changes in the
issuer's creditworthiness. The rate of interest on securities purchased by a
Fund may be tied to U.S. Government Securities or indices on those securities as
well as any other rate of interest or index. Certain variable rate securities
pay interest at a rate that varies inversely to prevailing short-term interest
rates (sometimes referred to as "inverse floaters"). Certain inverse floaters
may have an interest rate reset mechanism that multiplies the effects of changes
in the underlying index. This mechanism may increase the volatility of the
security's market value while increasing the security's yield.
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.
Variable and floating rate demand notes of corporations include master demand
notes that permit investment of fluctuating amounts at varying interest rates
under direct arrangements with the issuer of the instrument. The issuer of these
obligations often has the right, after a given period, to prepay the outstanding
principal amount of the obligations upon a specified number of days' notice.
Because master demand notes are direct lending arrangements between a Fund and
the issuer, they are not normally traded. Although there is no secondary market
in the notes, the Fund may demand payment of principal and accrued interest at
any time upon a specified period of notice.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, a Fund might be entitled to
less than the initial principal amount of the security upon the security's
maturity. A Fund will purchase these securities only when its Adviser believes
the interest income from the instrument justifies any principal risks associated
with the instrument. The Advisers 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 the Advisers
will be able to limit the effects of principal fluctuations and, accordingly, a
Fund may incur losses on those securities even if held to maturity without
issuer default.
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There may not be an active secondary market for any particular floating or
variable rate instruments, which could make it difficult for a Fund to dispose
of the instrument during periods that the Fund is not entitled to exercise any
demand rights it may have. A Fund could, for this or other reasons, suffer a
loss with respect to those instruments. The Advisers monitor the liquidity of
each Fund's investment in variable and floating rate instruments, but there can
be no guarantee that an active secondary market will exist.
FINANCIAL INSTITUTION OBLIGATIONS. A Fund may invest in obligations of financial
institutions, including certificates of deposit, bankers' acceptances, time
deposits and other short-term debt obligations. Certificates of deposit
represent an institution's obligation to repay funds deposited with it that earn
a specified interest rate over a given period. Bankers' acceptances are
negotiable obligations of a bank to pay a draft which has been drawn by a
customer and are usually backed by goods in international trade. Time deposits
are non-negotiable deposits with a banking institution that earn a specified
interest rate over a given period. Certificates of deposit and fixed time
deposits, which are payable at the stated maturity date and bear a fixed rate of
interest, generally may be withdrawn on demand by a Fund but may be subject to
early withdrawal penalties which could reduce a Fund's performance. Although
fixed time deposits do not in all cases have a secondary market, there are no
contractual restrictions on a Fund's right to transfer a beneficial interest in
the deposits to third parties.
Funds that invest in foreign securities may invest in Eurodollar certificates of
deposit, which are issued by offices of foreign and domestic banks located
outside the United States; Yankee certificates of deposit, which are issued by a
U.S. branch of a foreign bank and held in the United States; Eurodollar time
deposits, which are deposits in a foreign branch of a U.S. bank or a foreign
bank; and Canadian time deposits, which are issued by Canadian offices of major
Canadian banks. Each of these instruments is U.S. dollar denominated.
PARTICIPATION INTERESTS. A Fund may purchase participation interests in loans or
instruments in which the Fund may invest directly that are owned by banks or
other institutions. A participation interest gives a Fund an undivided
proportionate interest in a loan or instrument. Participation interests may
carry a demand feature permitting the holder to tender the interests back to the
bank or other institution. Participation interests, however, do not provide the
Fund with any right to enforce compliance by the borrower, nor any rights of
set-off against the borrower and the Fund may not directly benefit from any
collateral supporting the loan in which it purchased a participation interest.
As a result, the Fund will assume the credit risk of both the borrower and the
lender that is selling the participation interest.
BORROWING
Each Fund may borrow money in accordance with its investment policies set forth
under "Investment Limitations." Interest costs on borrowings may offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when investment considerations would
not favor such sales. A Fund's use of borrowed proceeds to make investments
would subject the Fund to the risks of leveraging. Reverse repurchase
agreements, short sales not against the box, dollar roll transactions and other
similar investments that involve a form of leverage have characteristics similar
to borrowings but are not considered borrowings if the Fund maintains a
segregated account.
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions are transactions in which a Fund sells securities to a
bank or securities dealer, and makes a commitment to purchase similar, but not
identical, securities at a later date from the same party. During the period
between the commitment and settlement, no payment is made for the securities
purchased and no interest or principal payments on the securities accrue to the
purchaser, but the Fund assumes the risk of ownership. A Fund is compensated for
entering into dollar roll transactions by the difference between the current
sales price and the forward price for the future purchase, as well as by the
interest earned on the cash proceeds of the initial sale. The Funds will engage
in dollar roll transactions for the purpose of acquiring securities for their
investment portfolios. Each Fund will limit its obligations on dollar roll
transactions to 35% of the Fund's net assets.
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REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which a Fund purchases securities from
a bank or securities dealer and simultaneously commits to resell the securities
to the bank or dealer at an agreed-upon date and at a price reflecting a market
rate of interest unrelated to the purchased security. During the term of a
repurchase agreement, the Funds' custodian maintains possession of the purchased
securities and any underlying collateral, which is maintained at not less than
100% of the repurchase price. Repurchase agreements allow a Fund to earn income
on its uninvested cash for periods as short as overnight, while retaining the
flexibility to pursue longer-term investments.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Fund sells a security
and simultaneously commits to repurchase that security from the buyer at an
agreed upon price on an agreed upon future date. The resale price in a reverse
repurchase agreement reflects a market rate of interest that is not related to
the coupon rate or maturity of the sold security. For certain demand agreements,
there is no agreed upon repurchase date and interest payments are calculated
daily, often based upon the prevailing overnight repurchase rate.
LENDING FUND SECURITIES
Each Fund may lend Fund securities in an amount up to 33-1/3% of its total
assets to brokers, dealers and other financial institutions. Securities loans
must be continuously collateralized and the collateral must have market value at
least equal to value of the Fund's loaned securities, plus accrued interest. In
a portfolio securities lending transaction, the Fund receives from the borrower
an amount equal to the interest paid or the dividends declared on the loaned
securities during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower. The terms of a Fund's loans permit the
Fund to reacquire loaned securities on five business days' notice or in time to
vote on any important matter. Loans are subject to termination at the option of
a Fund or the borrower at any time, and the borrowed securities must be returned
when the loan is terminated. The Funds will not lend portfolio securities to any
officer, director, employee or affiliate of the Funds or an Adviser.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase or sell portfolio securities on a "when-issued," "delayed
delivery" or "forward commitment" basis. When-issued securities may be purchased
on a "when, as and if issued" basis under which the issuance of the securities
depends upon the occurrence of a subsequent event. When these transactions are
negotiated, the price is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date, but
the Funds enter into these transactions only with the intention of actually
receiving securities or delivering them, as appropriate. The Funds may dispose
of the right to acquire these securities before the settlement date if deemed
advisable. During the period between the time of commitment and settlement, no
payment is made for the securities purchased and no interest or dividends on the
securities accrue to the purchaser. At the time a Fund makes a commitment to
purchase securities in this manner, the Fund immediately assumes the risk of
ownership, including price fluctuation. The use of when-issued transactions and
forward commitments enables a Fund to protect against anticipated changes in
interest rates and prices, but also tends to increase the volatility of the
Fund's net asset value per share. Except for dollar-roll transactions, a Fund
will not purchase securities on a when-issued, delayed delivery or forward
commitment basis if, as a result, more than 15% (35% in the case of Total Return
Bond Fund) of the value of the Fund's total assets would be committed to such
transactions.
The use of when-issued transactions and forward commitments enables the Funds to
hedge against anticipated changes in interest rates and prices. If an Adviser
were to forecast incorrectly the direction of interest rate movements, however,
a Fund might be required to complete when-issued or forward transactions at
prices inferior to the current market values.
At the time a Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, the Fund will record the transaction as a purchase
and thereafter reflect the value each day of such securities in determining its
net asset value.
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ILLIQUID INVESTMENTS
No Fund may knowingly invest more than 15% of the Fund's net assets in illiquid
investments. Illiquid investments are investments that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the investment and include, among other
instruments, repurchase agreements not entitling the Fund to payment of
principal within seven days.
An institutional market has developed for certain securities that are not
registered under the 1933 Act. Institutional investors usually will not seek to
sell these instruments to the general public, but instead will often depend on
either an efficient institutional market in which the unregistered security can
be readily resold or on an 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 therefore may not be
determinative of the liquidity of such investments.
If unregistered securities are eligible for purchase by institutional buyers in
accordance with applicable exemptions under guidelines adopted by the Board, an
Adviser may determine that the securities are liquid. Under these guidelines,
the Advisers are required to take into account: (1) the frequency of trades and
quotations for the investment; (2) the number of dealers willing to purchase or
sell the investment; (3) the number of dealers that have undertaken to make a
market in the investment; (4) the number of other potential purchasers; and (5)
the nature of the marketplace trades, including the time needed to dispose of
the investment, the method of soliciting offers and the mechanics of the
transfer.
Illiquid investments may be more difficult to value than liquid investments and
the sale of illiquid investments generally may require more time and result in
higher selling expenses than the sale of liquid investments. A Fund might not be
able to dispose of restricted or other securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions.
Restrictions on resale may have an adverse effect on the marketability of
illiquid investments and a Fund might also have to register certain investments
in order to dispose of them, resulting in expense and delay.
SHORT SALES
All Funds may engage in short sales "against the box." A short sale is "against
the box" to the extent that while the short position is open, the Fund must own
an equal amount of the securities sold short, or by virtue of ownership of
securities have the right, without payment of further consideration, to obtain
an equal amount of the securities sold short. Short sales against-the-box may in
certain cases be made to defer, for Federal income tax purposes, recognition of
gain or loss on the sale of securities "in the box" until the short position is
closed out. If a Fund has unrealized gain with respect to a long position and
enters into a short sale against-the-box, the Fund generally will be deemed to
have sold the long position for tax purposes and thus will recognize gain.
Prohibitions on entering short sales other than against the box does not
restrict a Fund's ability to use short-term credits necessary for the clearance
of portfolio transactions and to make margin deposits in connection with
permitted transactions in options and futures contracts.
OPTIONS AND FUTURES CONTRACTS
Each Fund may (1) purchase or sell (write) put and call options on securities to
enhance the Fund's performance and (2) seek to hedge against a decline in the
value of securities owned by the Fund or an increase in the price of securities
that the Fund 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
interest-rate futures contracts and options on those futures contracts. A Fund
may only write options that are covered. To the extent a Fund invests in foreign
securities, it may in the future invest in options on foreign currencies,
foreign currency futures contracts and options on those futures contracts. These
instruments are considered to be derivatives. Use of these instruments is
subject to regulation by the SEC, the several options and futures exchanges on
which futures and options are traded or the CFTC. A Fund may enter into futures
contracts only if the aggregate of initial margin deposits for open futures
contract positions does not exceed 5% of the Fund's total assets.
COVER FOR OPTIONS AND FUTURES CONTRACTS. A Fund will hold securities,
currencies, or other options or futures positions whose values are expected to
offset ("cover") its obligations under the transactions. A Fund will enter into
a hedging strategy that exposes it to an obligation to another party only if the
Fund owns either (1) an offsetting
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("covered") position in the underlying security, currency or options or futures
contract, or (2) cash, receivables and liquid debt securities with a value
sufficient at all times to cover its potential obligations. Each Fund will
comply with SEC guidelines with respect to coverage of these strategies and, if
the guidelines require, will set aside cash, liquid debt securities and other
permissible assets ("Segregated Assets") in a segregated account with the
Custodian in the prescribed amount. Segregated Assets cannot be sold or closed
out while the hedging or option income strategy is outstanding, unless the
Segregated Assets are replaced with similar assets. As a result, there is a
possibility that the use of cover or segregation involving a large percentage of
a Fund's assets could impede portfolio management or a Fund's ability to meet
redemption requests or other current obligations.
The Funds have no current intention of investing in futures contracts and
options thereon for purposes other than hedging. No Fund may purchase any call
or put option on a futures contract if the premiums associated with all such
options held by the Fund would exceed 5% of the Fund's total assets as of the
date the option is purchased. No Fund may sell a put option if the exercise
value of all put options written by the Fund would exceed 50% of the Fund's
total assets or sell a call option if the exercise value of all call options
written by the Fund would exceed the value of the Fund's assets. In addition,
the current market value of all open futures positions held by a Fund will not
exceed 50% of its total assets.
OPTIONS ON SECURITIES. A call option is a contract under which the purchaser of
the call option, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. A put option
gives its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying security
upon exercise at the exercise price during the option period. The amount of
premium received or paid is based upon certain factors, including the market
price of the underlying assets, 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.
OPTIONS ON STOCK INDICES. A stock index assigns relative values to the stock
included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional options on securities except that exercises of
stock index options are effected with cash payments and do not involve delivery
of securities (i.e., stock index options are settled exclusively in cash). Thus,
upon exercise of stock index options, the purchaser will realize and the writer
will pay an amount based on the differences between the exercise price and the
closing price of the stock index.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract rather than to purchase or sell stock, at a specified exercise
price at any time during the period of the option. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by transfer to the holder of an accumulated balance representing the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future.
FUTURES CONTRACTS AND INDEX FUTURES CONTRACTS. A futures contract is a bilateral
agreement where one party agrees to accept, and the other party agrees to make,
delivery of cash, an underlying debt security or a currency, as called for in
the contract, at a specified date and at an agreed-upon price. A bond or stock
index futures contract involves the delivery of an amount of cash equal to a
specified dollar amount times the difference between the bond or stock index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the securities comprising
the index is made. Generally, these futures contracts are closed out prior to
the expiration date of the contracts.
FOREIGN CURRENCY TRANSACTIONS
Funds that make foreign investments may conduct foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign exchange market or by entering into a forward foreign currency
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contract. A forward foreign currency contract ("forward contract") involves an
obligation to purchase or sell a specific amount of 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. Forward contracts are considered to be derivatives. A Fund
enters into forward contracts in order to "lock in" the exchange rate between
the currency it will deliver and the currency it will receive for the duration
of the contract. In addition, a Fund may enter into forward contracts to hedge
against risks arising from securities a Fund owns or anticipates purchasing, or
the U.S. dollar value of interest and dividends paid on those securities.
Performa Global Value Fund may also enter into forward transactions in
anticipation of placing a trade. A Fund will not enter into forward contracts
for speculative purposes, although Schroder may seek to enhance the Performa
Global Growth Fund's investment return through active currency management. A
Fund will not have more than 25% of its total assets committed to forward
contracts, or maintain a net exposure to forward contracts that would obligate
the Fund to deliver an amount of foreign currency in excess of the value of the
Fund's investment securities or other assets denominated in that currency.
If a Fund makes delivery of the foreign currency at or before the settlement of
a forward contract, it may be required to obtain the currency through the
conversion of assets of the Fund into the currency. The Fund may close out a
forward contract obligating it to purchase a foreign currency by selling an
offsetting contract, in which case it will realize a gain or a loss.
Foreign currency transactions involve certain costs and risks. The Fund incurs
foreign exchange expenses in converting assets from one currency to another.
Forward contracts involve a risk of loss if the Adviser is inaccurate in its
prediction of currency movements. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. The precise matching of forward contract
amounts and the value of the securities involved is generally not possible.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency if the market value of the security is less than the amount of the
foreign currency the Fund is obligated to deliver under the forward contract and
the decision is made to sell the security and make delivery of the foreign
currency. The use of forward contracts as a hedging technique does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. Although forward
contracts can reduce the risk of loss due to a decline in the value of the
hedged currencies, they also limit any potential gain that might result from an
increase in the value of the currencies.
In addition, there is no systematic reporting of last sale information for
foreign currencies, and there is no regulatory requirement that quotations
available through dealers or other market sources be firm or revised on a timely
basis. Quotation information available is generally representative of very large
transactions in the interbank market. The interbank market in foreign currencies
is a global around-the-clock market. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, a Fund may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
The Funds have no present intention to enter into currency futures or options
contracts, but may do so in the future. A Fund might 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.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and mortgage (or other asset)
swaps, and may purchase and sell interest rate "caps," "floors" and "collars."
Interest rate swaps involve the exchange by a Fund and a counterparty of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments). Mortgage swaps are similar to interest
rate swap agreements, except that the contractually-based principal amount (the
"notional principal amount") is tied to a reference pool of mortgages. Currency
swaps' notional principal amount is tied to one or more currencies, and the
exchange commitments can involve payments in the same or different currencies.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on the notional principal
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amount from the party selling the cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined value, to receive payments on a notional principal amount from the
party selling the floor. A collar entitles the purchaser to receive payments to
the extent a specified interest rate falls outside an agreed range.
A Fund will enter into these transactions primarily to preserve a return or a
spread on a particular investment or portion of its portfolio or to protect
against any interest rate fluctuations or increase in the price of securities it
anticipates purchasing at a later date. The Funds intend to use these
transactions as a hedge and not as a speculative investment, and will enter into
the transactions in order to shift a Fund's investment exposure from one type of
investment to another.
A Fund may enter into interest rate protection transactions on an asset-based
basis, depending on whether it is hedging its assets or its liabilities, and
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments.
The use of interest rate protection transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If an Adviser
incorrectly forecasts market values, interest rates and other applicable
factors, there may be considerable impact on a Fund's performance. Even if the
Advisers are correct in their forecasts, there is a risk that the transaction
may correlate imperfectly with the price of the asset or liability being hedged.
TEMPORARY DEFENSIVE POSITION
When, in the judgment of an Adviser, market or economic conditions warrant, each
Fund may assume a defensive position and temporarily hold cash or invest without
limit in cash equivalents to retain flexibility in meeting redemptions, paying
expenses and timing of new investments. These investments will be rated in one
of the two highest short-term rating categories by an NRSRO or, if not rated,
determined by the Adviser to be of comparable quality, 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 that have, at the time of investment, except in the case of
International Fund, total assets in excess of one billion dollars and that are
insured by the Federal Deposit Insurance Corporation; (3) commercial paper; (4)
repurchase agreements covering any of the securities in which the Fund may
invest directly; and (5) shares of money market funds registered under the 1940
Act within the limits specified therein. To the extent that a Fund assumes a
temporary defensive position, it may not be invested to pursue its investment
objective. Performa Global Growth Fund may hold cash and invest in bank
instruments denominated in any major foreign currency.
Apart from temporary defensive purposes, a Fund may at any time invest a portion
of its assets in cash and cash equivalents as described above.
3. RISK CONSIDERATIONS
COUNTERPARTY RISK
The Funds may be exposed to the risks of financial failure or insolvency of
another party. To help reduce those risks, the Advisers, subject to the Board's
supervision, monitor and evaluate the creditworthiness of counterparties to the
Funds' transactions and intend to enter into a transaction only when they
believe that the counterparty presents minimal credit risks and the benefits
from the transaction justify the attendant risks.
The use of repurchase agreements, securities lending, reverse repurchase
agreements, interest rate protection transactions (such as swaps, caps, collars
and floors), forward commitments (including dollar roll transactions) and
forward contracts involving currencies present particular counterparty risk. In
the event that bankruptcy, insolvency or similar proceedings were commenced
against a counterparty while these transactions remained open or a counterparty
defaulted on its obligations, a Fund may have difficulties in exercising its
rights to the underlying securities or currencies, as applicable, it may incur
costs and expensive time delays in disposing of the underlying securities and it
may suffer a loss. Failure by the other party to deliver a security or currency
purchased by a Fund
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may result in a missed opportunity to make an alternative investment.
Counterparty insolvency risk with respect to repurchase agreements is reduced by
favorable insolvency laws that allow a Fund, among other things, to liquidate
the collateral held in the event of the bankruptcy of the counterparty. Those
laws do not apply to securities lending, reverse repurchase agreements and
dollar roll transactions, and therefore, those transactions involve more risk
than repurchase agreements. For example, in the event the purchaser of
securities in a dollar roll transaction files for bankruptcy or becomes
insolvent, a Fund's use of the proceeds of the transaction may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities. As a result of
entering into forward commitments and reverse repurchase agreements, as well as
lending its securities, a Fund may be exposed to greater potential fluctuations
in the value of its assets and net asset value per share.
FIXED INCOME SECURITIES
GENERAL. The market value of the interest-bearing fixed income securities held
by the Funds will be affected by changes in interest rates. There is normally an
inverse relationship between the market value of securities sensitive to
prevailing interest rates and actual changes in interest rates. The longer the
remaining maturity (and duration) of a security, the more sensitive the security
is to changes in interest rates. All fixed income securities, including U.S.
Government Securities, can change in value when there is a change in interest
rates. Changes in the ability of an issuer to make payments of interest and
principal and in the markets' perception of an issuer's creditworthiness will
also affect the market value of that issuer's debt securities. As a result, an
investment in a Fund is subject to risk even if all fixed income securities in
the Fund's investment portfolio are paid in full at maturity. In addition,
certain fixed income securities may be subject to extension risk, which refers
to the change in total return on a security resulting from an extension or
abbreviation of the security's maturity.
Yields on fixed income securities are dependent on a variety of factors,
including the general conditions of the 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.
The issuers of fixed income securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors that may restrict the ability of the issuer to pay, when due, the
principal of and interest on its debt securities. The possibility exists
therefore, that, as a result of bankruptcy, litigation or other conditions, the
ability of an issuer to pay, when due, the principal of and interest on its debt
securities may become impaired.
CREDIT RISK. The Funds' investments in fixed income securities are subject to
credit risk relating to the financial condition of the issuers of the securities
that each Fund holds. To limit credit risk, Performa Strategic Value Bond Fund
will generally buy debt securities that are rated in the top four long-term
rating categories by an NRSRO or in the top two short-term rating categories by
an NRSRO (although certain Funds have greater restrictions). Moody's, Standard &
Poor's 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 securities by several NRSROs
is included in Appendix A. The Advisers may use these ratings to determine
whether to purchase, sell or hold a security. Ratings are not, however, absolute
standards of quality. Credit ratings attempt to evaluate the safety of principal
and interest payments and do not evaluate the risks of fluctuations in market
value. Consequently, similar securities with the same rating may have different
market prices. In addition, rating agencies may fail to make timely changes in
credit ratings and the issuer's current financial condition may be better or
worse than a rating indicates.
A Fund may retain a security that ceases to be rated or whose rating has been
lowered below the Fund's lowest permissible rating category if the Adviser
determines that retaining the security is in the best interests of the Fund.
Because a downgrade often results in a reduction in the market price of the
security, sale of a downgraded security may result in a loss.
A Fund may purchase unrated securities if the Fund's Adviser determines that the
security is of comparable quality to a rated security that the Fund may
purchase. Unrated securities may not be as actively traded as rated securities.
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MORTGAGE-RELATED SECURITIES. The value of mortgage-related securities may be
significantly affected by changes in interest rates, the markets' perception of
issuers, the structure of the securities and the creditworthiness of the parties
involved. The ability of a Fund to successfully utilize mortgage-related
securities depends in part upon the ability of its Adviser to forecast interest
rates and other economic factors correctly. Some mortgage-related securities
have structures that make their reaction to interest rate changes and other
factors difficult to predict.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related
securities. 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 mortgages and other social and demographic conditions.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool. The volume of prepayments of principal on
the mortgages underlying a particular mortgage-related security will influence
the yield of that security, affecting a Fund's yield. Because prepayments of
principal generally occur when interest rates are declining, it is likely that a
Fund, to the extent it retains the same percentage of debt securities, may have
to reinvest the proceeds of prepayments at lower interest rates then those of
their previous investments. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates (when prepayment of principal
is more likely) than other fixed income securities of comparable duration,
although they may have a comparable risk of decline in market value in periods
of rising interest rates. A decrease in the rate of prepayments may extend the
effective maturities of mortgage-related securities, increasing their
sensitivity to changes in market interest rates. To the extent that a Fund
purchases mortgage-related securities at a premium, unscheduled prepayments,
which are made at par, result in a loss equal to any unamortized premium.
ASSET-BACKED SECURITIES. Like mortgages underlying mortgage-related securities,
the collateral underlying assets are subject to prepayment, which may reduce the
overall return to holders of asset-backed securities. Asset-backed securities
present certain additional and unique risks. Primarily, these securities do not
always have the benefit of a security interest in collateral comparable to the
security interests associated with mortgage-related securities. 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. 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, because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of an interest rate or
economic cycle has not been tested.
NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities are securities
rated below the fourth highest rating category by an NRSRO or which are unrated
and judged by the Adviser to be of comparable quality. Such high risk securities
(commonly referred to as "junk bonds") are not considered to be investment grade
and have speculative or predominantly speculative characteristics.
Non-investment grade, high risk securities provide poor protection for payment
of principal and interest but may have greater potential for capital
appreciation than do higher quality securities. These lower rated securities
involve greater risk of default or price changes due to changes in the issuers'
creditworthiness than do higher quality 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 or rising interest
rates. Under such conditions, a Fund may have to use subjective rather than
objective criteria to value its high yield/high risk securities investments
accurately and rely more heavily on the judgment of the Fund's Adviser.
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Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund's
Adviser may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. If a Fund experiences unexpected
net redemptions, the Fund's Adviser may be forced to sell the Fund's higher
rated securities, resulting in a decline in the overall credit quality of the
Fund's portfolio and increasing the exposure of the Fund to the risks of high
yield/high risk securities.
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 a Fund will
generally invest only in securities of companies and governments in countries
that its 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 Fund assets.
Moreover, (1) dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income earned by the Fund; (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 Fund to increased risk in the event of a failed trade
or the insolvency of a foreign broker-dealer or registrar.
A Fund that makes foreign investments may purchase foreign bank obligations. In
addition to the risks described above that are generally applicable to foreign
investments, the investments that a Fund makes in obligations of foreign banks,
branches or subsidiaries may involve further risks, including differences
between foreign banks and U.S. banks in applicable accounting, auditing and
financial reporting standards, and the possible establishment of exchange
controls or other foreign government laws or restrictions applicable to the
payment of certificates of deposit or time deposits that may affect adversely
the payment of principal and interest on the securities held by the Funds.
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 of
expropriation, nationalization or other confiscation, the Fund 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 Fund adopt special procedures, seek local
government approvals or take other actions that may incur costs for the Fund.
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 Fund. 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.
17
<PAGE>
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because Performa Global Growth Fund will
invest heavily in non-U.S. currency-denominated securities, changes in foreign
currency exchange rates will affect the value of the Fund's investments. A
decline against the dollar in the value of currencies in which the Fund's
investments are denominated will result in a corresponding decline in the dollar
value of the Fund's assets. This risk is heightened in some emerging market
countries.
The Fund 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.
LEVERAGE
The Funds may use leverage in an effort to increase their returns. Leverage
involves special risks and may involve speculative investment techniques.
Leverage exists when cash made available to a Fund through an investment
technique is used to make additional Fund investments. Borrowing for other than
temporary or emergency purposes, lending portfolio securities, entering into
reverse repurchase agreements, purchasing securities on a when-issued, delayed
delivery or forward commitment basis (including dollar roll transactions) and
the use of swaps and related agreements are transactions that result in
leverage. Certain Funds also may purchase securities on margin or enter into
short sales. The Funds use these investment techniques only when the Advisers
believe that the leveraging and the returns available to the Funds from
investing the cash will provide investors a potentially higher return.
Leverage creates the risk of magnified capital losses which occur when losses
affect an asset base, enlarged by borrowings or the creation of liabilities,
that exceeds the equity base of the Fund. Leverage may involve the creation of a
liability that requires a Fund to pay interest (for instance, reverse repurchase
agreements) or the creation of a liability that does not entail any interest
costs (for instance, forward commitment costs). The risks of leverage include a
higher volatility of the net asset value of the Fund's interests and the
relatively greater effect on the net asset value of the interests caused by
favorable or adverse market movements or changes in the cost of cash obtained by
leveraging and the yield from invested cash. So long as a Fund 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 for the Fund than if a Fund were not leveraged. Changes in interest rates
and related economic factors could cause the relationship between the cost of
leveraging and the yield to change so that rates involved in the leveraging
arrangement may substantially increase relative to the yield on the obligations
in which the proceeds of the leveraging have been invested. To the extent that
the interest expense involved in leveraging approaches the net return on the
Fund's investment portfolio, the benefit of leveraging will be reduced, and, if
the interest expense on borrowings were to exceed the net return to investors,
the Fund's use of leverage would result in a lower rate of return than if the
Fund were not leveraged. In an extreme case, if the Fund's current investment
income were not sufficient to meet the interest expense of leveraging, it could
be necessary for the Fund to liquidate certain of its investments at an
inappropriate time.
SEGREGATED ACCOUNTS. In order to attempt to reduce the risks involved in various
transactions involving leverage, a Fund's custodian will set aside and maintain,
in a segregated account, cash and liquid securities. The account's value, which
is marked to market daily, will be at least equal to the Fund's commitments
under these transactions. The use of a segregated account in connection with
leveraged transactions may result in a Fund's investment portfolio being 100%
leveraged.
OPTIONS AND FUTURES CONTRACTS
A Fund's use of options and futures contracts subjects the Fund to certain
unique investment risks. These risks include: (1) dependence on an Adviser's
ability to correctly predict movements in the prices of individual securities
and fluctuations in interest rates, the general securities markets and other
economic factors; (2) imperfect correlations between movements in the prices of
options or futures contracts and movements in the price of the securities hedged
or used for cover which may cause a given hedge not to achieve its objective;
(3) the fact that the skills and techniques needed to trade these instruments
are different from those needed to select the other securities in which a Fund
invests; (4) lack of assurance that a liquid secondary market will exist for any
particular instrument at any particular time, which, among other things, may
hinder a Fund's ability to limit exposures by closing its
18
<PAGE>
positions; (5) the possible need to defer closing out certain options, futures
contracts and related options to avoid adverse tax consequences; and (6) the
potential for unlimited losses when investing in futures contracts or writing
options for which an offsetting position is not held.
Other risks include the inability of a Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price and the possible loss of the entire premium paid for options
purchased by the Fund. In addition, the futures exchanges may limit the amount
of fluctuation permitted in certain futures contract prices on related options
during a single trading day. A Fund may be forced, therefore, to liquidate or
close out a futures contract position at a disadvantageous price. There is no
assurance that a counterparty in an over-the-counter option transaction will be
able to perform its obligations. There are a limited number of options on
interest rate futures contracts and exchange-traded options contracts on fixed
income securities. The Funds may use various futures contracts that are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market in those contracts
will develop or continue to exist. A Fund's activities in the futures and
options markets may result in higher portfolio turnover rates and additional
brokerage costs, which could reduce a Fund's yield.
SMALL CAPITALIZATION STOCKS
Investments in smaller capitalization companies carry greater risk than
investments in larger capitalization companies. Smaller capitalization companies
generally experience higher growth rates and higher failure rates than do larger
capitalization companies; and the trading volume of smaller capitalization
companies' securities is normally lower than that of larger capitalization
companies and, consequently, generally has a disproportionate effect on market
price (tending to make prices rises more in response to buying demand and fall
more in response to selling pressure).
Securities owned by a Fund that are traded in the over-the-counter market or on
a regional securities exchange may not be traded every day or in the volume
typical of securities trading on a national securities exchange. As a result,
disposition by a Fund of a portfolio security, to meet redemption requests by
investors or otherwise, may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over a lengthy period of time.
Investments in small, unseasoned issuers generally carry greater risk than is
customarily associated with larger, more seasoned companies. Such issuers 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 a Fund may purchase when
they are offered to the public for the first time) may have a limited trading
market which can adversely affect their sale by the Fund and can result in such
securities being priced lower than otherwise might be the case. If other
institutional investors engage in trading this type of security, a Fund may be
forced to dispose of its holdings at prices lower than might otherwise be
obtained.
GEOGRAPHIC CONCENTRATION
To the extent a Fund's investments are primarily concentrated in issuers located
in a particular state, region or country, the value of the Fund's shares may be
especially affected by factors pertaining to that state, region or country's
economy and other factors specifically affecting the ability of issuers of that
state, region or country to meet their obligations. As a result, the value of
the Fund's assets may fluctuate more widely than the value of shares of a more
geographically diverse portfolio.
4. 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.
19
<PAGE>
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.
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.
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).
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<PAGE>
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.
NON-FUNDAMENTAL 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 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.
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<PAGE>
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 except Performa Global Growth Fund may
invest in futures or options contracts regulated by the CFTC
except 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.
5. PERFORMANCE AND ADVERTISING DATA
GENERAL
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.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Advertisements may include
comparisons of the Funds' performance relative to their peers, mutual fund
averages or recognized stock market indices. The Funds may measure performance
in terms of yield and 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
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<PAGE>
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 net
asset value. 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 invested in a Fund for a year and the Fund continued to have
the same yield for the entire year.
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, Australasia 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 in reviewing a Fund's
performance, each Fund's yield fluctuates from day to day and 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, financial
institutions and others that sell fund shares 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.
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.
Income calculated for the purpose of determining each Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distribution the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Fund's return, including the effect of reinvesting dividends
and capital gain distributions, any change in the Fund's net asset value per
share over the period and maximum sales charge, if any, applicable to purchases
of the Fund's shares. Average annual total returns are calculated, through the
use of a formula prescribed by the SEC, by determining the growth or
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<PAGE>
decline in value of a hypothetical historical investment in a Fund over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady
annual rate that would equal 100% growth on a compounded basis in ten years. The
average annual total return is computed separately for each class of shares of a
Fund. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of the Funds.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return n = number of years
ERV = ending redeemable value: ERV is the value, at
the end of the applicable period, of a hypothetical
$1,000 payment made at the beginning of the applicable
period
In addition to average annual returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Period total return
is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return
The other definitions are the same as in average
annual total return above
CORE AND GATEWAY PERFORMANCE
When a Fund invests all of its investable assets in a Portfolio that has a
performance history prior to the investment by the Fund, the Fund will assume
the performance history of the Portfolio. That history may be restated to
reflect the estimated expenses of the Fund.
OTHER ADVERTISEMENT MATTERS
The Funds may advertise other forms of performance. For example, the Funds may
quote unaveraged or cumulative total returns reflecting the change in the value
of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments and/or a series of
redemptions over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. 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
24
<PAGE>
earning interest on principal plus interest that was earned earlier; interest
can be compounded at different intervals, such as annually, quartile or daily);
(4) information relating to inflation and its effects on the dollar; for
example, after ten years the purchasing power of $25,000 would shrink to
$16,621, $14,968, $13,465 and $12,100, respectively, if the annual rates of
inflation were 4%, 5%, 6% and 7%, respectively; (5) information regarding the
effects of automatic investment and systematic withdrawal plans, including the
principal of dollar cost averaging; (6) descriptions of the Funds' portfolio
managers and the portfolio management staff of the Advisers or summaries of the
views of the portfolio managers with respect to the financial markets; (7) the
results of a hypothetical investment in a Fund over a given number of years,
including the amount that the investment would be at the end of the period; (8)
the effects of earning Federally and, if applicable, state tax-exempt income
from a Fund or investing in a tax-deferred account, such as an individual
retirement account or Section 401(k) pension plan; and (9) the net asset value,
net assets or number of shareholders of a Fund as of one or more dates.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of any Fund's performance.
The Funds may advertise information regarding the effects of automatic
investment and systematic withdrawal plans, including the principal of dollar
cost averaging. In a dollar cost averaging program, an investor invests a fixed
dollar amount in a Fund at period intervals, thereby purchasing fewer shares
when prices are high and more shares when prices are low. While such a strategy
does not insure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
had been purchased at those intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares through periods of
low price levels. For example, if an investor invests $100 a month for a period
of six months in a Fund the following will be the relationship between average
cost per share ($14.35 in the example given) and average price per share:
<TABLE>
<S> <C> <C> <C>
SYSTEMATIC SHARE SHARES
PERIOD INVESTMENT PRICE PURCHASED
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
Total Invested $600 Average Price $15.17 Total Shares 41.81
</TABLE>
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.
6. 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.
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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 April 1,
1998 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 56.
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 67.
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 72.
Principal of The Burkhardt Law Firm. His address is 777 South Steele
Street, Denver, Colorado 80209.
JAMES C. HARRIS, Trustee, Age 78.
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 65.
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 53.
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 46.
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.
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DONALD C. WILLEKE, Trustee, Age 58.
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
SARA M. MORRIS, Vice President and Treasurer, Age 35.
Managing Director, Forum Financial Services, Inc., with which she has
been associated since 1994. Prior thereto, from 1991 to 1994 Ms.
Morris 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. Morris is also an officer of
various registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
DAVID I. GOLDSTEIN, Vice President and Secretary, Age 37.
Managing Director and General 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 Administrative Services, LLC or Forum Financial
Services, Inc. serves as manager, administrator and/or distributor. His
address is Two Portland Square, Portland, Maine 04101.
THOMAS G. SHEEHAN, Vice President and Assistant Secretary, Age 44.
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 Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
PAMELA J. WHEATON, Assistant Treasurer, Age 39.
Manager - Tax and Compliance Group, Forum Financial Services, Inc.,
with which she has been associated since 1989. Ms. Wheaton is also an
officer of various registered investment companies for which Forum
Administrative Services, LLC or 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 50.
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 Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine.
EDWARD C. LAWRENCE, Assistant Secretary, Age 29.
Fund Administrator, Forum Financial Services, Inc., with which he has
been associated since 1997. Prior thereto, Mr. Lawrence was a
self-employed contractor on antitrust cases with the law firm of White
& Case. After graduating from law school, from 1994-1996, Mr. Lawrence
worked as an assistant public defender for the Missouri State Public
Defender's Office. His 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
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registered open-end management investment company for which each Trustee serves
as trustee. In addition, each Trustee is paid $3,000 for each regular Board
meeting attended (whether in person or by electronic communication) and is paid
$1,000 for each Committee meeting attended on a date when a Board meeting is not
held. Trustees are also reimbursed for travel and related expenses incurred in
attending meetings of the Board. Mr. Keffer received no compensation for his
services as Trustee for the past year or compensation or reimbursement for his
associated expenses. In addition, no officer of the Trust is compensated by the
Trust.
Mr. Burkhardt, Chairman of the Trust's and Norwest Select Funds' audit
committees, receives additional compensation of $6,000 from the Trust and
Norwest Select Funds allocated pro rata between the Trust and Norwest Select
Funds based upon relative net assets, for his services as Chairman. Each Trustee
was elected by shareholders on April 30, 1997.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Select Funds, combined. Norwest Select Funds
have a December 31 fiscal year end. Information is presented for the twelve
month period ended May 31, 1998, 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 $32,870 $33,000
Mr. Burkhardt $39,344 $39,500
Mr. Harris $32,870 $33,000
Mr. Leach $32,870 $33,000
Mr. Penny $32,870 $33,000
Mr. Willeke $32,870 $33,000
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,
1998 total expenses of the Trustees (other than Mr. Keffer) was $20,869 and
total expenses of the trustees of Norwest Select Funds was $77.
As of October 1, 1998, 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 the Trust and
their principal occupations during the past five years are set forth below. Each
Trustee who is an "interested person" (as defined by the 1940 Act) of the Trust
is indicated by an asterisk.
JOHN Y. KEFFER*, Chairman and President (Age 56).
President , Forum Financial Group, LLC (mutual fund services company
holding company). Mr. Keffer is a Trustee/Director and/or 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.
COSTAS AZARIADIS, Trustee (Age 55).
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.
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JAMES C. CHENG, Trustee (Age 56).
President, Technology Marketing Associates (a marketing company for
small and medium size businesses in New England) since 1991. Prior
thereto, Mr. Cheng was President of Network Dynamics, Inc. (a software
development company). His address is 27 Temple Street, Belmont, MA
02718.
J. MICHAEL PARISH, Trustee (Age 55).
Partner at the law firm of Reid & Priest L.L.P. since 1995. From 1989
to 1995, he was a partner at Winthrop, Stimson, Putnam & Roberts . His
address is 40 West 57th Street, New York, New York 10019.
STACEY HONG, Treasurer (Age 32)
Director, Fund Accounting, Forum Financial Group, LLC, with which he
has been associated since April 1992. Prior thereto, Mr. Hong was a
Senior Accountant at Ernst & Young, LLP. His address is Two Portland
Square, Portland, Maine 04101.
THOMAS G. SHEEHAN, Vice President (Age 44).
Managing Director, Forum Financial Group, LLC with which he has been
associated since October 1993. Prior thereto, Mr. Sheehan was Special
Counsel to the Division of Investment Management of the SEC. Mr.
Sheehan also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provides services. His address is Two Portland Square, Portland, Maine
04101.
DAVID I. GOLDSTEIN, Secretary (Age 37).
General Counsel, Forum Financial Group , LLC, with which he has been
associated since 1991. Prior thereto, Mr. Goldstein was associated
with the law firm of Kirkpatrick & Lockhart, LLP. 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.
LESLIE K. KLENK, Secretary (Age 34)
Assistant Counsel, Forum Financial Group, LLC with which she has been
associated since April 1998. Prior thereto, Ms. Klenk was Vice
President and Associate General Counsel of Smith Barney Inc. Ms. Klenk
also serves as an officer of other registered investment companies for
which the various Forum Financial Group of Companies provides
services. Her address is Two Portland Square, Portland, Maine 04101.
PAMELA STUTCH, Assistant Secretary (Age 31)
Fund Administrator, Forum Financial Group, LLC with which she has been
associated since May 1998. Prior thereto, Ms. Stutch attended Temple
University School of Law and graduated in 1997. Ms. Stutch was also a
legal intern for the Maine Department of the Attorney General. Ms.
Stutch also serves as an officer of other registered investment
companies for which the various Forum Financial Group of Companies
provides services. Her address is Two Portland Square, Portland, Maine
04101.
TRUSTEES AND OFFICERS OF SCHRODER CORE. 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 Schroder Core is indicated by an asterisk. Messrs. Keffer and Sheehan,
officers of Schroder Core, currently serve as officers of the Trust.
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<PAGE>
OFFICERS AND TRUSTEES. The following information relates to the principal
occupations during the past five years of each Trustee and executive officer of
the Trust and shows the nature of any affiliation with Schroder Capital
Management, International, Inc. ("SCMI"). Except as noted, each of these
individuals currently serves in the same capacity for Schroder Capital Funds,
Schroder Capital Funds II and Schroder Series Trust, other registered investment
companies in the Schroder family of funds.
PETER E. GUERNSEY, (Age 75)
Trustee of the Trust; Insurance Consultant since August 1986; prior
thereto Senior Vice President, Marsh & McLennan, Inc., insurance
brokers. His address is c/o the Trust, Two Portland Square, Portland,
Maine
JOHN I. HOWELL, (Age 80)
Trustee of the Trust; Private Consultant since February 1987; Honorary
Director, American International Group, Inc.; Director, American
International Life Assurance Company of New York. His address is c/o
the Trust, Two Portland Square, Portland, Maine.
CLARENCE F. MICHALIS, (Age 75)
Trustee of the Trust; Chairman of the Board of Directors, Josiah Macy,
Jr. Foundation (charitable foundation). His address is c/o the Trust,
Two Portland Square, Portland, Maine.
HERMANN C. SCHWAB, (Age 77)
Chairman and Trustee of the Trust; retired since March, 1988; prior
thereto, consultant to SCMI since February 1, 1984. His address is c/o
the Trust, Two Portland Square, Portland, Maine.
HON. DAVID N. DINKINS, (Age 69)
Trustee of the Trust; Professor, Columbia University School of
International and Public Affairs; Director, American Stock Exchange,
Carver Federal Savings Bank, Transderm Laboratory Corporation, and The
Cosmetic Center, Inc.; formerly, Mayor, The City of New York. His
address is c/o the Trust, Two Portland Square, Portland, Maine.
PETER S. KNIGHT, (Age 46)
Trustee of the Trust; Partner, Wunder, Knight, Levine, Thelen &
Forcey; Director, Comsat Corp., Medicis Pharmaceutical Corp., and
Whitman Education Group Inc., Formerly, Campaign Manager, Clinton/Gore
`96. His address is c/o the Trust, Two Portland Square, Portland,
Maine.
SHARON L. HAUGH*, (Age 51)
Trustee of the Trust; Chairman, Schroder Capital Management Inc.
("SCM"), Executive Vice President and Director, SCMI; Chairman and
Director, Schroder Advisors. Her address is 787 Seventh Avenue, New
York, New York.
MARK J. SMITH*, (Age 35)
President and Trustee of the Trust; Senior Vice President and Director
of SCMI since April 1990; Director and Senior Vice President, Schroder
Advisors. His address is 33 Gutter Lane, London, England.
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<PAGE>
MARK ASTLEY, (Age 33).
Vice President of the Trust; First Vice President of SCMI, prior
thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1987.
His address is 787 Seventh Avenue, New York, New York.
ROBERT G. DAVY, (Age 36)
Vice President of the Trust; Director of SCMI and Schroder Capital
Management International Ltd. since 1994; First Vice President of SCMI
since July, 1992; prior thereto, employed by various affiliates of
SCMI in various positions in the investment research and portfolio
management areas since 1986. His address is 787 Seventh Avenue, New
York, New York.
MARGARET H. DOUGLAS-HAMILTON, (Age 55)
Vice President of the Trust; Secretary of SCM since July 1995; Senior
Vice President (since April 1997) and General Counsel of Schroders
U.S. Holdings Inc. since May 1987; prior thereto, partner of Sullivan
& Worcester, a law firm. Her address is 787 Seventh Avenue, New York,
New York.
RICHARD R. FOULKES, (Age 51)
Vice President of the Trust; Deputy Chairman of SCMI since October
1995; Director and Executive Vice President of Schroder Capital
Management International Ltd. since 1989. His address is 787 Seventh
Avenue, New York, New York.
FERGAL CASSIDY, (Age 28)
Treasurer of the Trust. Her address is 787 Seventh Avenue, New York,
New York.
JOHN Y. KEFFER, (Age 56)
Vice President of the Trust, ; President of FAS and other affiliated
entities including Forum Financial Services, Inc., Forum and, Forum
Advisors, Inc. His address is 787 Seventh Avenue, New York, New York.
JANE P. LUCAS, (Age 35)
Vice President of the Trust; Director and Senior Vice President SCMI;
Director of SCM since September 1995; Director of Schroder Advisors
since September 1996; Assistant Director Schroder Investment
Management Ltd. since June 1991. Her address is 787 Seventh Avenue,
New York, New York.
CATHERINE A. MAZZA, (Age 37)
Vice President of the Trust; President of Schroder Advisors since
1997; First Vice President of SCMI and SCM since 1996; prior thereto,
held various marketing positions at Alliance Capital, an investment
adviser, since July 1985. Her address is 787 Seventh Avenue, New York,
New York.
MICHAEL PERELSTEIN, (Age 41)
Vice President of the Trust; Director since May 1997 and Senior Vice
President of SCMI since January 1997; prior thereto, Managing Director
of MacKay - Shields Financial Corp. His address is 787 Seventh Avenue,
New York, New York.
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ALEXANDRA POE, (Age 37)
Secretary and Vice President of the Trust; Vice President of SCMI
since August 1996; Fund Counsel and Senior Vice President of Schroder
Advisors since August 1996; Secretary of Schroder Advisors; 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. Her address is 787 Seventh
Avenue, New York, New York.
NICHOLAS ROSSI, (Age 35)
Assistant Secretary of the Trust, Associate of SCMI since October 1997
and Assistant Vice President Schroder Advisors since March 1998; prior
thereto Mutual Fund Specialist, Willkie Farr & Gallagher since May
1996; prior thereto, Fund Administrator with Furman Selz LLC since
1992. His address is 787 Seventh Avenue, New York, New York.
THOMAS G. SHEEHAN, (Age 44)
Assistant Treasurer and Assistant Secretary of the Trust; Relationship
Manager, Forum Administrative Services, LLC since 1993; prior thereto,
Special Counsel, U.S. Securities and Exchange Commission, Division of
Investment Management, Washington, D.C. His address is Two Portland
Square, Portland, Maine.
FARIBA TALEBI, (Age 36)
Vice President of the Trust; Group Vice President of SCMI since April
1993, employed in various positions in the investment research and
portfolio management areas since 1987; Director of SCM since April
1997. His address is 787 Seventh Avenue, New York, New York.
JOHN A. TROIANO, (Age 38)
Vice President of the Trust; Director of SCM since April 1997; Chief
Executive Officer, since July 1, 1997, of SCMI and Managing Director
and Senior Vice President of SCMI since October 1995; prior thereto,
employed by various affiliates of SCMI in various positions in the
investment research and portfolio management areas since 1981. His
address is 787 Seventh Avenue, New York, New York.
CHERYL O. TUMLIN, (Age 32)
Assistant Treasurer and Assistant Secretary of the Trust; Assistant
Counsel, Forum Administrative Services, LLC since July 1996, prior
thereto, attorney with the U.S. Securities and Exchange Commission,
Division of Market Regulation since 1995; prior thereto, attorney with
Robinson Silverman Pearce Aronsohn & Berman since 1991. Her address is
787 Seventh Avenue, New York, New York -
IRA L. UNSCHULD, (Age 31)
Vice President of the Trust; Vice President of SCMI since April, 1993
and an Associate from July, 1990 to April, 1993. His address is 787
Seventh Avenue, New York, New York.
* Interested Trustee of the Trust within the meaning of the 1940 Act.
INVESTMENT ADVISORY SERVICES
GENERAL. Table 1 in Appendix B shows, with respect to each Fund, the Fund's pro
rata share of the dollar amount of the investment advisory fees payable to
Norwest or Schroder, as the case may be, by the Portfolio in which the Fund
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invests under the Portfolio's Investment Advisory Agreement. The table also
shows the amount of the fee that was waived by Norwest or Schroder, if any, and
the actual fee received by Norwest or Schroder.
All investment advisory fees are accrued daily and paid monthly. Each Adviser,
in its sole discretion, may waive or continue to waive all or any portion of its
investment advisory fees. The advisory fee for each Portfolio is based on the
average daily net assets of the Portfolio at the annual rate disclosed in the
Fund's prospectus. To the extent that a Fund invests in a Portfolio, the
advisory fee paid by the Fund will be with respect to the Portfolio for advisory
services rendered at the Portfolio level.
In addition to receiving its advisory fee from the Portfolios, each 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
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 Adviser or any of its affiliates from a Portfolio with respect to the
client's assets invested in the Portfolio.
NORWEST INVESTMENT MANAGEMENT. Subject to the general supervision of the Core
Board, Norwest makes investment decisions for Disciplined Growth Portfolio,
Small Cap Value Portfolio and Strategic Value Bond Portfolio and continuously
oversees the investment decisions of the Subadvisers of those Portfolios.
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. Under an Investment Advisory
Agreement between Norwest and Core Trust on behalf of the Portfolios, 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 Portfolios. 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 interestholders, 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.
The Investment Advisory Agreement is terminable without penalty with respect to
a Portfolio on 60 days' written notice: (1) by the Board or by a vote of a
majority of the outstanding voting securities of the Portfolio to the Adviser or
(2) by the Adviser on 60 days' written notice to Core Trust. The Investment
Advisory Agreement shall terminate upon assignment. The Investment Advisory
Agreement also provides that, with respect to the Portfolios, neither Norwest
nor its personnel shall be liable for any mistake of judgment or in any event
whatsoever, except for lack of good faith, provided that nothing in the
Investment Advisory Agreements shall be deemed to protect, or purport to
protect, the Adviser against liability by reason of willful misfeasance, bad
faith or gross negligence in the performance of Norwest's duties or by reason of
reckless disregard of its obligations and duties under the Investment Advisory
Agreement. The Investment Advisory Agreement provides that Norwest may render
services to others.
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. Norwest Corporation currently has assets in excess of $83 billion. Norwest
and its affiliates currently manage assets with a value of approximately $52.9
billion. Norwest Corporation and Wells Fargo & Company, the parent company of
Wells Fargo Bank, have signed a definitive agreement to merge. The merger is
subject to certain regulatory approvals and must be approved by shareholders of
both holding companies. The merger is expected to close in the fourth quarter of
1998.
DORMANT INVESTMENT ADVISORY ARRANGEMENTS. Norwest also has been retained as a
"dormant" or "backup" investment adviser to each Fund. The Investment Advisory
Agreement between Norwest and the Trust on behalf of the Funds is identical to
the Investment Advisory Agreement between Core Trust and Norwest on behalf of
the Portfolios of Core Trust, except for the fees payable thereunder (no fee is
payable to the extent that a Fund is invested in a Portfolio or another
investment company) and certain immaterial matters.
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<PAGE>
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
expense all services, facilities and personnel necessary in connection with
managing the Portfolio's investments and effecting portfolio transactions for
the Portfolio. Schroder, whose principal business address is 787 seventh Avenue,
34th Floor, New York, New York 10019, is a registered investment adviser.
Subject to the general supervision of the Schroder Core Board, Schroder makes
investment decisions for the Schroder Global Growth Portfolio and continuously
reviews, supervises and administers the Portfolio's investment program.
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 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);
provided further, however, that if the Advisory Agreement or the continuation of
the Agreement is not approved as to the Portfolio, Schroder 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.
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 (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. Schroder Group currently has over $175
billion in assets under management.
DORMANT INVESTMENT SUBADVISORY AGREEMENT. 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. In the event that Performa Global Growth Fund were to
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<PAGE>
withdraw its assets from Schroder Global Growth Portfolio, Norwest would receive
an advisory fee from the Fund at an annual rate of 0.65% of the Fund's average
daily net assets.
SUBADVISERS. As set forth in the Prospectus, Norwest and Core Trust have
retained the services of Galliard and Peregrine pursuant to Investment
Subadvisory Agreements to assist Norwest in carrying out its obligations with
respect to Strategic Value Bond Portfolio, Disciplined Growth Portfolio and
Small Cap Value Portfolio. Norwest pays a fee to each such Subadviser for the
investment subadvisory services provided to each Portfolio by that Subadviser.
These fees do not increase the fees paid by the interestholders of the
Portfolios. 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 matters such as the nature and extent of the services (other than
investment selection and order placement activities) provided by the Subadviser,
the cost and complexity of providing services, 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
Norwest in overseeing the Portfolio.
Norwest has entered into a dormant Investment Subadvisory Agreement with each
Subadviser on behalf of each Fund that invests its assets in a Portfolio
subadvised by that Subadviser. With respect to each Subadviser, the terms of the
Investment Subadvisory Agreement between Core Trust, Norwest and the Subadviser
and the dormant Investment Subadvisory Agreement between the Trust, Norwest and
the Subadviser are identical, except with respect to the fees payable (no fee is
payable under the Investment Subadvisory Agreements with respect to a Fund to
the extent that the Fund is invested in an investment company) and certain
immaterial matters.
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 fundamental investment objectives and policies, authorizing Subadvisers to
engage in certain investment techniques, and recommending to the Core Board
whether investment subadvisory agreements should be renewed, modified or
terminated. Norwest also may from time to time recommend that the Core Board
replace one or more Subadvisers or appoint additional Subadvisers, depending on
Norwest's assessment of what combination of Subadvisers it believes will
optimize each Portfolio's chances of achieving its investment objectives.
GALLIARD CAPITAL MANAGEMENT, INC. To assist Norwest in carrying out its
obligations under the Investment Advisory Agreement with Strategic Value Bond
Portfolio, Norwest has entered into an Investment Subadvisory Agreement with
Galliard, located at 800 LaSalle Avenue, Suite 2060, Minneapolis, Minnesota
55479. Galliard specializes in fixed income management. Galliard is registered
with the SEC as an investment adviser and is an investment advisory subsidiary
of Norwest Bank. The firm manages assets on the premise that outstanding
performance is achieved through fundamental security analysis and strategic
portfolio diversification. As of June 30, 1998, Galliard had approximately $3.8
billion in assets under management.
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
Portfolio'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 Portfolio'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 the Portfolio (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 October 1, 1998, for its services under
the Investment Subadvisory Agreement, Norwest pays Galliard a fee based on each
Portfolio's average daily net assets at an annual rate of 0.50%.
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 Agreement; provided further,
however, that if the Investment
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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 Agreement provides that Galliard may render services to
others.
SMITH ASSET MANAGEMENT GROUP, L.P. To assist Norwest in carrying out its
obligations under the Investment Advisory Agreement with Disciplined Growth
Portfolio and Small Cap Value Portfolio, Norwest has entered into an Investment
Subadvisory Agreement with Smith, located at 500 Crescent Court, Suite 250,
Dallas, Texas. Smith is registered with the SEC as an investment adviser and is
an investment advisory affiliate of Norwest Bank. Smith provides investment
management services to company retirement plans, foundations, endowments, trust
companies, and high net worth individuals. As of June 30, 1998, the Smith Group
managed over $634 million in assets.
Pursuant to the Investment Subadvisory Agreement, Smith makes investment
decisions for each of the Portfolios and continuously reviews, supervises and
administers each Portfolio's investment program with respect to that portion, if
any, of the Portfolio's portfolio that Norwest believes should be invested using
Smith as a subadviser. 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). Currently, Smith manages the entire
investment portfolio of each Portfolio and has done so since the Portfolio's
inception. Norwest supervises the performance of Smith including its adherence
to the Portfolio's investment objectives and policies and pays Smith a fee for
its investment management services. As of October 1, 1998, 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.
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 1940 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.
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During the past 17 years, Smith has developed a proprietary model investment
style which utilizes the concept of earnings surprise to aid in successful stock
selection. This proprietary model, known as the EARNINGS SURPRISE PREDICTOR
("ESP") model, is based on the idea that companies reporting positive earnings
surprises have consistently outperformed those companies reporting negative
earnings surprises. The ESP model works on the following three-discipline
approach: (1) Buy Discipline - buy based on an objective strategy driven by
earnings surprise; (2) Portfolio Discipline - eliminate factors that may dilute
the positive impact of earnings surprise on return; and (3) Sell Discipline -
sell using objective criteria to eliminate factors that cloud judgment,
including emotion.
MANAGEMENT AND ADMINISTRATIVE SERVICES
MANAGEMENT SERVICES. 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 Adviser or Subadviser to a Fund, or Norwest in its capacity
as administrator pursuant to an investment administration or similar agreement.
With respect to each Fund, Forum has entered into a Management Agreement that
will continue in effect only if such continuance is specifically approved at
least annually by the Board or by the shareholders and, in either case, by a
majority of the Trustees who are not interested persons of any party to the
Management Agreement.
On behalf of the Trust and with respect to each Fund, Forum: (1) oversees (a)
the preparation and maintenance by the Advisers and the Trust's administrator,
custodian, transfer agent, dividend disbursing agent and fund accountant (or if
appropriate, prepares and maintains) in such form, for such periods and in such
locations as may be required by applicable law, of all documents and records
relating to the operation of the Trust required to be prepared or maintained by
the Trust or its agents pursuant to applicable law; (b) the reconciliation of
account information and balances among the Advisers and the Trust's custodian,
transfer agent, dividend disbursing agent and fund accountant; (c) the
transmission of purchase and redemption orders for Shares; (d) the notification
of the Advisers of available funds for investment; and (e) the performance of
fund accounting, including the calculation of the net asset value per Share; (2)
oversees the Trust's receipt of the services of persons competent to perform
such supervisory, administrative and clerical functions as are necessary to
provide effective operation of the Trust; (3) oversees the performance of
administrative and professional services rendered to the Trust by others,
including its administrator, custodian, transfer agent, dividend disbursing
agent and fund accountant, as well as accounting, auditing, legal and other
services performed for the Trust; (4) provides the Trust with adequate general
office space and facilities and provides, at the Trust's request and expense,
persons suitable to the Board to serve as officers of the Trust; (5) oversees
the preparation and the printing of the periodic updating of the Trust's
registration statement, Prospectuses and SAIs, the Trust's tax returns, and
reports to its shareholders, the SEC and state and other securities
administrators; (6) oversees the preparation of proxy and information statements
and any other communications to shareholders; (7) with the cooperation of the
Trust's counsel, 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.
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Pursuant to its agreement with the Trust, Forum may subcontract any or all of
its duties to one or more qualified submanagers who agree to comply with the
terms of Forum's Management Agreement. Forum may compensate those agents for
their services; however, no such compensation may increase the aggregate amount
of payments by the Trust to Forum pursuant to its Management Agreement with the
Trust.
For its services, Forum receives a fee equal to 0.025% annually of the average
daily net assets of each Fund.
ADMINISTRATIVE SERVICES. 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 Adviser or 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 Administration
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 Advisers, the
officers of the Trust and other relevant parties, is responsible for the
preparation and dissemination of materials for meetings of the Board; (6) is
responsible for preparing, filing and maintaining the Trust's governing
documents, including the Trust Instrument, Bylaws and minutes of meetings of
Trustees, Board committees and shareholders; (7) is responsible for maintaining
the Trust's existence and good standing under state law; (8) monitors sales of
shares and ensures that such shares are properly and duly registered with the
SEC and applicable state and other securities commissions; (9) is responsible
for the calculation of performance data for dissemination to information
services covering the investment company industry, sales literature of the Trust
and other appropriate purposes; and (10) is responsible for the determination of
the amount of and supervises the declaration of dividends and other
distributions to shareholders as necessary to, among other things, maintain the
qualification of each Fund as a regulated investment company under the Code, as
amended, and prepares and distributes to appropriate parties notices announcing
the declaration of dividends and other distributions to shareholders.
The Administration 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 Administration 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 Administration Agreement.
Pursuant to its agreement with the Trust, FAS may subcontract any or all of its
duties to one or more qualified subadministrators who agree to comply with the
terms of FAS' Administration Agreement. FAS may compensate those agents for
their services; however, no such compensation may increase the aggregate amount
of payments by the Trust to FAS pursuant to its Administration Agreement with
the Trust.
For its services, FAS receives a fee equal to 0.025% annually of the average
daily net assets of each Fund.
As of August 31, 1998, Forum and FAS provided management and administrative
services to registered investment companies and collective investment funds with
assets of approximately $38 billion.
Table 2 in Appendix B shows the dollar amount of fees payable to Forum and FAS
for management and administrative services with respect to each Fund (or class
thereof for those periods when multiple classes were
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outstanding), the amount of fees that were waived by Forum and FAS, if any, and
the actual fees received by Forum and FAS.
PORTFOLIOS OF CORE TRUST. FAS manages all aspects of Core Trust's operations
with respect to the Portfolios of Core Trust except those which are the
responsibility of Norwest or Schroder. With respect to each Portfolio, FAS has
entered into an Administration Agreement that will continue in effect only if
such continuance is specifically approved at least annually by the Core Trust
Board or by the shareholders and, in either case, by a majority of the Trustees
who are not interested persons of any party to the Administration Agreement.
Under the Administration Agreement, FAS performs similar services for each
Portfolio as it and Forum perform for the Funds under the Management Agreement
and Administration Agreement, to the extent the services are applicable to the
Portfolios and their structure.
The Administration Agreement provides that FAS shall not be liable to Core Trust
or any of Core Trust's interestholders for any action or inaction of FAS
relating to any event whatsoever in the absence of bad faith, willful
misfeasance or gross negligence in the performance of FAS' duties or obligations
under the Agreement or by reason of FAS' reckless disregard of its duties and
obligations under this Agreement.
The Administration Agreement may be terminated with respect to a Portfolio at
anytime, without the payment of any penalty (i) by the Core Board on 60 days'
written notice to FAS or (ii) by FAS on 60 days' written notice to Core Trust.
For its services with respect to each 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.
NORWEST ADMINISTRATIVE SERVICES. Under an Administrative Services Agreement
between the Trust and Norwest Bank with respect to Performa Global Growth Fund,
Norwest Bank performs ministerial, administrative and oversight functions for
the Funds and undertakes to reimburse certain excess expenses of the Funds.
Among other things, Norwest Bank gathers performance and other data from
Schroder as the adviser of Schroder Global Growth Portfolio and from other
sources, formats the data and prepares reports to the Fund's shareholders and
the trustees. Norwest Bank also ensures that Schroder is aware of pending net
purchases or redemptions of the Fund's shares and other matters that may affect
Schroder's performance of its duties. Lastly, Norwest Bank 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 Fund's shares
are qualified for sale. No fees will be paid to Norwest Bank under the
Administrative Services Agreement unless the Fund invests its assets solely in
Schroder Global Growth Portfolio or in a portfolio of another registered
investment company. This agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by the
shareholders and, in either case, by a majority of the frustees who are not
parties to the Administrative Services Agreement or interested persons of any
such party.
The Administrative Services Agreement provides that neither Norwest Bank 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.
The Agreement provides for a fee of 0.25% annually of the Fund's average daily
net assets. Performa Global Growth Fund incurs total management and
administrative fees at a higher rate than many other mutual funds, including
other funds of the Trust.
Table 2 in Appendix B shows the dollar amount of fees payable under the
Administrative Services Agreement, the amount of the fee that was waived, if
any, and the amount received by Norwest Bank for the past three fiscal years of
the Funds.
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SCHRODER ADMINISTRATIVE SERVICES. Schroder Core has entered into an
Administrative Services Agreement with Schroder Advisors, 787 Seventh Avenue,
New York, New York 10019, pursuant to which Schroder Advisors provides
management and administrative services necessary for the operation of Schroder
Global Growth Portfolio, including coordination of the services performed by
Schroder and the Portfolio's transfer agent, custodian, independent accountants,
legal counsel and others. Schroder Advisors is a wholly-owned subsidiary of
Schroder, and is a registered broker-dealer organized to act as administrator
and distributor of mutual funds.
The Administrative Services Agreement is terminable with respect to the
Portfolio without penalty, at any time, by vote of a majority of the trustees of
Schroder Core who are not "interested persons" of Schroder Core and who have no
direct or indirect financial interest in the operation of the Administrative
Services Agreement, upon not more than 60 days' written notice to Schroder
Advisors or by vote of the holders of a majority of the shares of the Portfolio,
or, upon 60 days' notice, by Schroder Advisors. The Administrative Services
Agreement will terminate automatically in the event of its assignment.
On behalf of the Portfolio, Schroder Core has entered into a Sub-Administration
Agreement with FAS. Pursuant to the Sub-Administration Agreement, FAS assists
Schroder Advisors with certain of its responsibilities under the Administrative
Services Agreement, including shareholder reporting and regulatory compliance.
The Sub-Administration Agreement is terminable with respect to the Portfolio
without penalty, at any time, by the board of trustees of Schroder Core upon 60
days' written notice to Forum or by Forum upon 60 days' written notice to the
Portfolio.
For its services, Schroder Advisors receives 0.15% annually of average daily net
assets of Schroder Global Growth Portfolio. FAS, for its services, receives
0.075% annually of average daily net assets of Schroder Global Growth Portfolio.
DISTRIBUTION
Forum, a registered broker dealer and member of the National Association of
Securities Dealers, Inc., 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 Forum on 60 days'
written notice to the Trust.
Forum also acts as placement agent for the Portfolios.
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TRANSFER AGENT
Norwest Bank, Sixth Street and Marquette, Minneapolis, Minnesota 55479, serves
as transfer agent and dividend disbursing agent for the Funds. 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.
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.
CUSTODIAN
Pursuant to a Custodian Agreement, Norwest Bank, Sixth Street and Marquette,
Minneapolis, Minnesota 55479, 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 an asset-based 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 $100 million of the
Portfolio's average daily net assets and 0.01% of the Portfolio's remaining
average daily net assets. The fee is computed and paid monthly, based on the
number of portfolio transactions of the Fund and the number of securities in the
Fund's portfolio in addition to the average daily net assets of the Fund. 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.
The custodian's responsibilities include safeguarding and controlling the
Trust's cash and securities, determining income and collecting interest on Fund
investments.
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.
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No Fund will pay custodian fees to the extent the Fund invests in shares of
another registered investment company in accordance with Section 12(d)(1)(E) of
the 1940 Act. 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 $1,000 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) 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; (5) 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 Fund that invests
in a Core and Gateway Structure 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 Fund investing in a
Core and Gateway Structure 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 Fund
that invests in a Core and Gateway Structure pursuant to Section 12(d)(1)(H) of
the 1940 Act additional surcharges as described above if the Fund invests in
securities other than investment companies (calculated as if the securities were
the Fund's only assets)
Surcharges are determined based upon the total assets, security positions or
other factors as of the end of the prior month and on the portfolio turnover
rate for the prior month. The rates set forth above shall remain fixed through
December 31, 1998. On January 1, 1999, and on each successive January 1, the
rates may be adjusted automatically by Forum Accounting 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 Accounting 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.
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Forum, FAS and Forum Accounting 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, 1998, they were controlled by John Y. Keffer,
President and Chairman of the Trust.
EXPENSES
Each Fund bears all costs of its operations. The costs borne by the Funds
include a pro rata portion of the following: legal and accounting expenses;
Trustees' fees and expenses; insurance premiums, custodian and transfer agent
fees and expenses; brokerage fees and expenses; expenses of registering and
qualifying the Fund's shares for sale with the SEC and with various state
securities commissions; expenses of obtaining quotations on fund securities and
pricing of the Fund's shares; a portion of 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 the 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.
Each service provider to the Trust or their agents and affiliates also may act
in various capacities for, and receive compensation from, their customers who
are shareholders of a Fund. Under agreements with those customers, these
entities may elect to credit against the fees payable to them by their customers
or to rebate to customers all or a portion of any fee received from the Trust
with respect to assets of those customers invested in a Fund.
The expenses of each Fund includes the Fund's pro rata share of the expenses of
the Portfolio in which the Fund invests.
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.
7. PORTFOLIO TRANSACTIONS
The following discussion of portfolio transactions, while referring generally to
the Funds, relates equally to the Portfolios.
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.
The Funds have no obligation to deal with any specific broker or dealer in the
execution of portfolio transactions. The Advisers seek "best execution" for all
portfolio transactions, but a Fund may pay higher than the lowest available
commission rates when its 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 Fund that
invests in foreign securities than would be the case for comparable transactions
effected on U.S. securities exchanges.
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Purchases and sales of portfolio securities for the Performa Strategic Value
Fund 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 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.
Performa Strategic Value Bond Fund may effect purchases and sales through
brokers who charge commissions. Table 4 in Appendix B shows the aggregate
brokerage commissions with respect to each Fund. Any material change in the
amount of brokerage commissions paid by a Fund was due to an increase or
decrease in the Fund's assets.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, each of the Board, Core Trust Board and Schroder Core Board has
authorized the Advisers to employ their respective affiliates to effect
securities transactions of the Funds or the Portfolios, provided certain other
conditions are satisfied. No Fund has an understanding or arrangement to direct
any specific portion of its brokerage to an affiliate of an Adviser, and will
not direct brokerage to an affiliate of an Adviser in recognition of research
services. Payment of brokerage commissions to an affiliate of an Adviser for
effecting such transactions is subject to Section 17(e) of the 1940 Act, which
requires, among other things, that commissions for transactions on securities
exchanges paid by a registered investment company to a broker which is an
affiliated person of such investment company, or an affiliated person of another
person so affiliated, not exceed the usual and customary brokers' commissions
for such transactions. It is the Fund's policy that commissions paid to Schroder
Securities Limited, Norwest Investment Services, Inc. ("NISI") and other
affiliates of an Adviser will, in the judgment of the Adviser responsible for
making portfolio decisions and selecting brokers, be: (1) at least as favorable
as commissions contemporaneously charged by the affiliate on comparable
transactions for its most favored unaffiliated customers and (2) at least as
favorable as those which would be charged on comparable transactions by other
qualified brokers having comparable execution capability. The Board, including a
majority of the disinterested Trustees, has adopted procedures to ensure that
commissions paid to affiliates of an Adviser by the Funds satisfy the foregoing
standards. The Core Trust and Schroder Core Boards have adopted similar policies
with respect to the Portfolios.
The Funds and the Portfolios may not always pay the lowest commission or spread
available. Rather, in determining the amount of commissions, including certain
dealer spreads, paid in connection with securities transactions, an Adviser
takes into account factors such as size of the order, difficulty of execution,
efficiency of the executing broker's facilities (including the services
described below) and any risk assumed by the executing broker. The 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 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 Adviser's own internal research and investment strategy
capabilities. Such research and analysis may be used by the Advisers in
connection with services to clients
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other than the Funds and Portfolios, and not all such services may be used by
the Adviser in connection with the Funds. An Adviser's fees are not reduced by
reason of the Adviser's receipt of the research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the obligation to seek the most
favorable price and execution available and such other policies as the Boards
may determine, an Adviser may consider sales of shares of the Fund as a factor
in the selection of broker-dealers to execute portfolio transactions for the
Fund.
Investment decisions for the Funds (and for the Portfolios) will be made
independently from those for any other account or investment company that is or
may in the future become managed by the 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 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 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.
The Advisers monitor the creditworthiness of counterparties to the Funds'
transactions and intends to enter into a transaction only when it believes that
the counterparty presents minimal credit risks and the benefits from the
transaction justify the attendant risks.
During their last fiscal year, certain Funds acquired securities issued by their
"regular brokers and dealers" or the parents of those brokers and dealers.
Regular brokers and dealers means the 10 brokers or dealers that: (1) received
the greatest amount of brokerage commissions during the Fund's last fiscal year;
(2) engaged in the largest amount of principal transactions for portfolio
transactions of the Fund during the Fund's last fiscal year; or (3) sold the
largest amount of the Fund's shares during the Fund's last fiscal year.
Following is a list of the regular brokers and dealers of the Funds whose
securities (or the securities of the parent company) were acquired during the
past fiscal year and the aggregate value of the Funds' holdings of those
securities as of May 31, 1998.
REGULAR BROKER VALUE OF
OR DEALER SECURITIES HELD
--------- ---------------
Morgan Stanley Dean Witter, Discover & Co. $124,627
Charles Schwab Corp. 63,253
Bear Stearns & Co., Inc. 56,603
CS First Boston, Inc. 25,000
Donaldson, Lufkin & Jenrette, Inc. 17,211
Amresco, Inc. 10,729
Paine Webber Group, Inc. 4,935
Lehman Brothers Holding, Inc. 4,797
HSBC Holdings PLC 4,222
Merrill Lynch & Co., Inc. 3,257
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.
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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 Fund 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.
8. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
GENERAL
Shares of all Funds are sold on a continuous basis by the distributor.
REDEMPTIONS
In addition to the situations described in the Prospectus with respect to the
redemptions of shares, the Trust may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder or to collect any charge
relating to transactions effected for the benefit of a shareholder which is
applicable to a Fund's shares as provided in the Prospectus from time to time.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partially in portfolio securities if the Board determines that payment
in cash would be detrimental to the best interests of the Fund. 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.
9. TAXATION
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. 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%) may apply 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%) may apply 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 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.
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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.
Qualification as a regulated investment company 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
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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
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 Schroder 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.
9. ADDITIONAL INFORMATION ABOUT THE TRUST AND
THE SHAREHOLDERSOF 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,1200 G Street,
NW, Washington, DC 20005.
KPMG Peat Marwick LLP, 99 High Street, Boston, MA 02110, independent auditors,
serve as the independent auditors for the Trust.
OWNERSHIP OF FUND SHARES
As of October 1, 1998, no persons owned of record 5% or more ot the outstanding
shares of a Fund.
GENERAL INFORMATION
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. The Core Board and the Schroder Core Board
perform similar functions with respect to the Portfolios. The Core Board and
Schroder Core Board also monitor the activities of each Portfolio and its
service providers.
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 SAI, each Fund offers one class of
shares. The Trust currently offers thirty-nine separate series.
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VOTING AND OTHER RIGHTS
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 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.
Each share of each series of the Trust and each class of shares has equal
dividend, distribution, liquidation and voting rights, and fractional shares
have those rights proportionately, except that expenses related to the
distribution of the shares of each class (and certain other expenses such as
transfer agency and administration expenses) are borne solely by those shares
and each class votes separately with respect to the provisions of any Rule 12b-1
plan which pertains to the class and other matters for which separate class
voting is appropriate under applicable law. Generally, shares will be voted in
the aggregate without reference to a particular series or class, except if the
matter affects only one series or class or voting by series or class is required
by law, in which case shares will be voted separately by series or class, as
appropriate. Delaware law does not require the Trust to hold annual meetings of
shareholders, and it is anticipated that shareholder meetings will be held only
when specifically required by federal or state law. Shareholders (and Trustees)
have available certain procedures for the removal of Trustees. There are no
conversion or preemptive rights in connection with shares of the Trust. All
shares, when issued in accordance with the terms of the offering, will be fully
paid and nonassessable. Shares are redeemable at net asset value, at the option
of the shareholders, subject to any contingent deferred sales charge that may
apply. 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.
A 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. When required
by the 1940 Act and other applicable law, a Fund investing in a Portfolio will
solicit proxies from its shareholders and will vote its interest in the
Portfolio in proportion to the votes cast by its shareholders.
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From time to time, certain shareholders may own a large percentage of the shares
of the Fund and, accordingly, may be able to greatly affect (if not determine)
the outcome of a shareholder vote.
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 substantially similar
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, a business trust organized under the laws of the
State of Delaware in 1994. Schroder Global Growth Portfolio is a separate series
of 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.
The Board retains the right to withdraw each Fund's investment in a Portfolio at
any time, and the Fund could thereafter invest directly in individual securities
or could re-invest its assets in one or more other Portfolios. 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, 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.
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.
50
<PAGE>
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.
51
<PAGE>
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS
MUNICIPAL AND CORPORATE BONDS (INCLUDING CONVERTIBLE BONDS)
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Moody's rates municipal and corporate bond issues, including convertible 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 edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
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 risk 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 payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 ranks in the
higher end of its generic rating category are designated by the symbols AA1, A1,
BAA1, BA1 and B1.
STANDARD & POOR'S ("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. The capacity to meet
the financial commitment on the obligation is extremely strong.
A-1
<PAGE>
Bonds rated AA have a very strong capacity to meet the financial commitment on
the obligation and differ from the highest-rated issues only in small degree.
Bonds rated A have a strong capacity to meet the financial commitment on the
obligation, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations rated in
higher-rated categories.
Bonds rated BBB exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet the financial commitment on the obligation than in
higher-rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions. Bonds rated BB have less vulnerability to
nonpayment 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 the financial commitment on the
obligation.
Bonds rated B are more vulnerable to nonpayment then bonds rated BB, but
currently have the capacity to meet the financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to meet the financial commitment on the obligation.
Bonds rated CCC are currently vulnerable to nonpayment, and are dependent upon
favorable business, financial, and economic conditions to meet the financial
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, they are not likely to have the capacity to meet the
financial commitment on the obligation.
Bonds rated CC are currently highly vulnerable to nonpayment.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments are being continued.
Bonds are rated D when the issue is in payment default. The D rating category is
used when payments on an obligation 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. The D rating will also be used upon the
filing of the bankruptcy petition or the taking of a similar action if payments
on the obligation are jeopardized.
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 major rating
categories.
FITCH INVESTORS SERVICE, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and/or
dividends 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/or dividends 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, short-term debt of these issuers is generally
rate F-1+.
A-2
<PAGE>
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and/or dividends 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 or dividends 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 or
dividends 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 or paying dividends, 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 that if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD or D categories.
PREFERRED STOCK
MOODY'S
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
within the universe of preferred stock.
An issue rated AA is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance the 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 preferred stock, 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.
A-3
<PAGE>
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. 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.
S&P
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality, fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
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.
FITCH
Fitch utilizes the same ratings criteria in rating preferred stock as it does in
rating corporate bond issues, as described earlier in this Appendix.
A-4
<PAGE>
SHORT TERM MUNICIPAL LOANS
MOODY'S. 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.
S&P. 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'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.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
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.
SHORT TERM DEBT (INCLUDING COMMERCIAL PAPER)
MOODY'S
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 capacity of rated issuers.
Issuers rated PRIME-1 have a superior capacity for repayment of short-term
promissory obligations. PRIME-1 repayment capacity will normally be evidenced by
the following characteristics: Leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structures 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 have a strong capacity for repayment of short-term
promissory 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, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. An A-1
designation indicates the highest category and that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation. The
capacity for timely payment on issues with an A-2 designation is
A-5
<PAGE>
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1. Issues carrying an A-3 designation have an adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
FITCH
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.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+. Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good credit quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 rating.
F-3. Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated below
investment grade.
F-5. Weak credit quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.
D. Default. Issues assigned this rating are in actual or imminent payment
default.
LOC. The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
A-6
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following Table shows the dollar amount of fees payable under the Investment
Advisory Agreements between Norwest and the Trust with respect to each Fund, the
amount of fee that was waived by Norwest, if any, and the actual fee received by
Norwest. The table also shows the dollar amount of fees payable under the
investment advisory agreements between Schroder and Core Trust with respect to
Schroder Global Growth Fund, the amount of fee that was waived by Schroder, if
any, and the actual fee received by Schroder. The data is for the past three
fiscal years or shorter period if the Fund/Portfolio has been in operation for a
shorter period.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
PERFORMA STRATEGIC VALUE BOND FUND
Year Ended May 31, 1998 16,556 0 16,556
PERFORMA DISCIPLINED GROWTH FUND
Year Ended May 31, 1998 29,904 0 29,904
PERFORMA SMALL CAP VALUE FUND
Year Ended May 31, 1998 15,710 0 15,710
PERFORMA GLOBAL GROWTH FUND
Year Ended May 31, 1998 2,503 2,503 0
</TABLE>
B-1
<PAGE>
TABLE 2 - MANAGEMENT FEES
The following table shows the dollar amount of fees payable to: (1) Forum for
its management services with respect to each Fund (or class thereof for those
periods when multiple classes were outstanding); (2) Norwest for its
administrative services with respect to Schroder Global Growth Fund; and (3) FAS
with respect to its administrative services with respect to each Fund. Also
shown are the amount of fees that were waived by Forum, FAS and Norwest, if any,
and the actual fees received by Forum, FAS and Norwest. The data is for the past
three fiscal years or shorter period if the Fund has been in operation for a
shorter period.
<TABLE>
<S> <C> <C> <C>
(I) MANAGEMENT FEES TO FORUM
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
PERFORMA STRATEGIC VALUE BOND FUND
Year Ended May 31, 1998 3,317 3,205 112
PERFORMA DISCIPLINED GROWTH FUND
Year Ended May 31, 1998 3,307 3,151 156
PERFORMA SMALL CAP VALUE FUND
Year Ended May 31, 1998 1,644 1,563 81
PERFORMA GLOBAL GROWTH FUND
Year Ended May 31, 1998 3,887 3,595 292
(II) ADMINISTRATIVE FEES TO NORWEST
PERFORMA GLOBAL GROWTH FUND
Year Ended May 31, 1998 968 968 0
</TABLE>
B-2
<PAGE>
TABLE 3 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to Forum Accounting
for its accounting services with respect to each Fund, the amount of fee that
was waived by Forum Accounting, if any, and the actual fee received by Forum
Accounting. The table also shows similar information with respect to
International Portfolio. The data is for the past three fiscal years or shorter
period if the Fund has been in operation for a shorter period.
<TABLE>
<S> <C> <C> <C>
FEE FEE FEE
PAYABLE WAIVED RETAINED
PERFORMA STRATEGIC VALUE BOND FUND
Year Ended May 31, 1998 12,411 10,500 1,911
PERFORMA DISCIPLINED GROWTH FUND
Year Ended May 31, 1998 13,225 10,500 2,725
PERFORMA SMALL CAP VALUE FUND
Year Ended May 31, 1998 12,320 10,500 1,820
PERFORMA GLOBAL GROWTH FUND
Year Ended May 31, 1998 19,935 10,500 9,435
</TABLE>
B-3
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS
The average annual total return of each Fund follows. The actual dates of the
commencement of each Fund's operations is listed in the Fund's financial
statements. Calendar quarter performance is available from the Adviser.
SEC STANDARDIZED RETURNS
<TABLE>
<S> <C> <C> <C> <C>
ONE YEAR FIVE TEN YEARS SINCE
YEARS INCEPTION
PERFORMA STRATEGIC VALUE N/A N/A N/A 6.20%
BOND FUND
PERFORMA DISCIPLINED GROWTH N/A N/A N/A 4.50%
FUND
PERFORMA SMALL CAP VALUE N/A N/A N/A 1.60%
FUND
PERFORMA GLOBAL GROWTH FUND N/A N/A N/A 6.30%
</TABLE>
C-1
<PAGE>
APPENDIX D - OTHER ADVERTISEMENT MATTERS
From time to time, the sales material for the Funds may include a discussion of,
and commentary by senior management of the Adviser on, the following.
The Trust may compare the Fund family against other bank-managed mutual funds or
other investment companies based on asset size. The Adviser believes the Funds'
growth may be attributed to three things: disciplined investment process,
utilizing talented people and focusing on customer needs.
The Funds utilize a disciplined process which relies heavily upon its investment
managers and an experienced investment research team. This approach maximizes
consistency by ensuring that no individual manager's style unduly influences a
fund's style.
<PAGE>
NORWEST CORPORATION
1929 Northwestern National Bank and several
upper midwest banks form a holding company called Northwestern
National Bancorporation. "Banco" acquires 90 banks in its first year.
1932 At is peak, Banco owns a total of 139 affiliate banks.
1982 Banco enters the consumer finance business by acquiring Dial Finance
Company.
1983 The 87 affiliates of Banco are reborn as
"Norwest Corporation."
1989 Norwest consolidates its operations in the new 57-story Norwest Center
in downtown Minneapolis.
1997 Norwest reaches $50 billion in assets under management, including $19
billion in mutual funds.
NORWEST ADVANTAGE FUNDS
1946 Inception of the Common Trust Funds, the company's first pooled
investment vehicles.
1987 Norwest introduces two new open-ended
registered investment company funds
(commonly known as mutual funds), called the Prime Value Funds. In less
than one year, assets under management reach $500 million.
1992 The Norwest mutual fund family expands to 11 mutual funds. Assets under
management grow to $3.2 billion.
1994 Conversion to Norwest Collective Funds (bank collective investment
funds) into NORWEST ADVANTAGE FUNDS (mutual funds).
1998 NORWEST ADVANTAGE FUNDS family includes 41 mutual funds with over $20
billion in assets under management.
NORWEST CENTER
MINNEAPOLIS, MINNESOTA
DESIGNED BY WORLD-RENOWNED ARCHITECT CESAR PELLI, THE NORWEST CENTER WAS
CONSTRUCTED IN 1988. SINCE THEN, IT HAS RECEIVED SEVERAL PRESTIGIOUS
ARCHITECTURAL AWARDS, INCLUDING THE LARGE SCALE OFFICE AWARD OF EXCELLENCE, FROM
THE URBAN LAND INSTITUTE (1989); THE NAIOP (MINNESOTA) AWARD FOR EXCELLENCE --
DOWNTOWN BUILDING OF THE YEAR (1989); THE BOMA (MINNEAPOLIS) OFFICE BUILDING OF
THE YEAR, OVER 500,000 SQ. FT. (1993); AND THE BOMA (MIDWEST NORTHERN REGION)
OFFICE BUILDING OF THE YEAR, OVER 500,000 SQ. FT. (1994). THE NORWEST CENTER IS
LOCATED IN THE FINANCIAL DISTRICT OF MINNEAPOLIS AT 90 SOUTH SEVENTH STREET.
D-1
<PAGE>
NORWEST WEALTHBUILDER II PORTFOLIOS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
NORWEST WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH PORTFOLIO
<PAGE>
NORWEST ADVANTAGE PORTFOLIOS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
ACCOUNT INFORMATION AND
SHAREHOLDER SERVICING: DISTRIBUTION:
Norwest Bank Minnesota, N.A. Forum Financial Services, Inc.
Transfer Agent Manager and Distributor
733 Marquette Avenue Two Portland Square
Minneapolis, MN 55479-0040 Portland, Maine 04101
(612) 667-8833/(800) 338-1348 (207) 879-1900
Norwest Advantage Funds is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended.
This Statement of Additional Information supplements the Prospectus dated
October 1, 1998, as may be amended from time to time, offering Class C shares of
the Norwest WealthBuilder II Portfolios of Norwest Advantage Funds: Norwest
WealthBuilder II Growth Portfolio, Norwest WealthBuilder II Growth and Income
Portfolio and Norwest WealthBuilder II Growth Balanced Portfolio.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH
A THE CURRENT PROSPECTUS OF THE PORTFOLIOS, COPIES OF WHICH MAY BE OBTAINED BY
AN INVESTOR WITHOUT CHARGE BY CONTACTING THE DISTRIBUTOR AT THE ADDRESS LISTED
ABOVE.
<PAGE>
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS
Page
Introduction 1
1. Investment Policies 3
Security Ratings Information 3
Fixed Income Investments 3
Mortgage-Backed And Asset-Backed Securities 9
Interest Rate Protection Transactions 11
Hedging And Option Income Strategies 11
Foreign Currency Transactions 19
Equity Securities 21
Illiquid Securities and Restricted Securities 23
Loans of Portfolio Securities 24
Borrowing And Transactions Involving Leverage 24
Repurchase Agreements 27
Temporary Defensive Position 27
2. Investment Limitations 27
Fundamental Limitations 28
Non-Fundamental Limitations 29
3. Performance and Advertising Data 30
SEC Yield Calculations 31
Total Return Calculations 31
Other Advertisement Matters 32
4. Management 34
Trustees and Officers 34
Investment Advisory Services 36
Management and Administrative Services 37
Distribution 39
Transfer Agent 40
Custodian 40
Portfolio Accounting 41
Expenses 41
5. Portfolio Transactions 42
6. Additional Purchase and Redemption Information 43
General 43
Exchanges 43
Redemptions 44
7. Taxation 44
i
<PAGE>
TABLE OF CONTENTS
Page
8. Additional Information About the Trust and the Shareholders of the Portfolios 45
Counsel and Auditors 45
Ownership of Portfolio Shares 45
General Information 46
Shareholdings 46
Financial Statements 46
Registration Statement 46
Appendix A - Investments, Strategies and Risk Considerations A-1
Appendix B - Description of Securities Ratings B-1
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INTRODUCTION
The Trust was originally organized under the name "Prime Value Portfolios, Inc."
as a Maryland corporation on August 29, 1986, and on July 30, 1993, was
reorganized as a Delaware business trust under the name "Norwest Funds." On
October 1, 1995, the Trust changed its name to "Norwest Advantage Funds" and on
June 1, 1997, changed its name back to "Norwest Funds." On August 4, 1997, the
Trust changed its name back to "Norwest Advantage Funds." The Portfolios
currently offer one class of shares: Class C shares.
Each Portfolio's investment adviser is Norwest Investment Management, Inc.
("Norwest"), a subsidiary of Norwest Bank Minnesota, N.A. ("Norwest Bank").
Norwest Bank, a subsidiary of Norwest Corporation, serves as the Trust's
transfer agent, dividend disbursing agent and custodian.
Forum Financial Services, Inc. ("Forum"), a registered broker-dealer, serves as
the Trust's manager and as distributor of the Trust's shares. Forum
Administrative Services, Limited Liability Company ("FAS") serves as each
Portfolio's administrator.
As used in this SAI, the following terms shall have the meanings listed:
"Adviser" or "Investment Adviser" shall mean Norwest.
"Board" shall mean the Board of Trustees of the Trust.
"CFTC" shall mean the U.S. Commodities Futures Trading Commission.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Custodian" shall mean Norwest acting in its capacity as custodian of a
Portfolio.
"FAS" shall mean Forum Administrative Services, LLC, the Trust's
administrator.
"Fitch" shall mean Fitch IBCA, Inc.
"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, LLC, the
Trust's accountant.
"Portfolio" shall mean each of the three separate series of the Trust
to which this Statement of Additional Information relates as identified
on the cover page.
"Moody's" shall mean Moody's Investors Service.
"Norwest" shall mean Norwest Investment Management, Inc., a subsidiary
of Norwest Bank Minnesota, N.A.
"Norwest Bank" shall mean Norwest Bank Minnesota, N.A., a subsidiary of
Norwest Corporation.
"NRSRO" shall mean a nationally recognized statistical rating
organization.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"S&P" shall mean Standard & Poor's.
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"Stock Index Futures" shall mean futures contracts that relate to
broadly-based stock indices.
"Transfer Agent" shall mean Norwest Bank acting in its capacity as
transfer and dividend disbursing agent of a Portfolio.
"Trust" shall mean Norwest Advantage Funds, an open-end, management
investment company registered under the 1940 Act.
"Underlying Funds" means the affiliated and non-affiliated open-end,
management investment companies or series in which the Portfolios
invest.
"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 disclosure in each
Prospectus concerning each Portfolio's investments, investment techniques and
strategies and the risks associated therewith. No Portfolio may make any
investment or employ any investment technique or strategy not referenced in the
Prospectus which relates to that Portfolio. Each Portfolio seeks to achieve its
investment objective by investing substantially all of its investable assets in
the Underlying Funds. Accordingly, the investment experience of each of these
Portfolios will correspond directly with the investment experience of its
respective Underlying Funds. Therefore, although the following discusses the
investment policies of the Portfolios, it applies equally to the Underlying
Funds.
SECURITY RATINGS INFORMATION
Moody's, S&P and other NRSROs are private services that provide ratings of the
credit quality of debt obligations, including convertible securities. A
description of the range of ratings assigned to various types of bonds and other
securities by several NRSROs is included in Appendix A to this SAI. The
Portfolios may use these ratings to determine whether to purchase, sell or hold
a security. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, securities with the same
maturity, interest rate and rating may have different market prices. If an issue
of securities ceases to be rated or if its rating is reduced after it is
purchased by a Portfolio (neither event requiring sale of such security by a
Portfolio), Norwest will determine whether the Portfolio should continue to hold
the obligation. To the extent that the ratings given by a NRSRO may change as a
result of changes in such organizations or their rating systems, the Investment
Adviser will attempt to substitute comparable ratings. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings. An issuer's current financial condition may be
better or worse than a rating indicates.
A Portfolio may purchase unrated securities if the 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 the Adviser
to be of comparable quality to securities whose rating has been lowered below
the lowest permissible rating category) if the Adviser determines that retaining
such security is in the best interests of the Portfolio.
To limit credit risks, certain Portfolios may only invest in securities that are
investment grade (rated in the top four long-term investment grades by an NRSRO
or in the top two short-term investment grades by an NRSRO.) Accordingly, the
lowest permissible long-term investment grades for corporate bonds, including
convertible bonds, are Baa in the case of Moody's and BBB in the case of S&P and
Fitch; the lowest permissible long-term investment grades for preferred stock
are Baa in the case of Moody's and BBB in the case of S&P and Fitch; and the
lowest permissible short-term investment grades for short-term debt, including
commercial paper, are Prime-2 (P-2) in the case of Moody's, A-2 in the case of
S&P and F-2 in the case of Fitch. All these ratings are generally considered to
be investment grade ratings, although Moody's indicates that securities with
long-term ratings of Baa have speculative characteristics.
FIXED INCOME INVESTMENTS
GENERAL INFORMATION CONCERNING FIXED INCOME SECURITIES
Yields on fixed income securities, including municipal securities, are dependent
on a variety of factors, including the general conditions of the money market
and other fixed income securities markets, the size of a particular offering,
the maturity of the obligation and the rating of the issue. Fixed income
securities with longer maturities tend to produce higher yields and are
generally subject to greater price movements than obligations with shorter
maturities. There is normally an inverse relationship between the market value
of securities sensitive to prevailing interest rates and actual changes in
interest rates. In other words, an increase in interest rates will generally
reduce the
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market value of portfolio investments, and a decline in interest rates will
generally increase the value of portfolio investments.
Obligations of issuers of fixed income securities (including municipal
securities) are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Reform Act of 1978. In addition, the obligations of municipal issuers
may become subject to laws enacted in the future by Congress, state
legislatures, or referenda extending the time for payment of principal and/or
interest, or imposing other constraints upon enforcement of such obligations or
upon the ability of municipalities to levy taxes. Changes in the ability of an
issuer to make payments of interest and principal and in the market's perception
of an issuer's creditworthiness will also affect the market value of the debt
securities of that issuer. The possibility exists, therefore, that, the ability
of any issuer to pay, when due, the principal of and interest on its debt
securities may become impaired.
U.S. GOVERNMENT SECURITIES
In addition to obligations of the U.S. Treasury, each of the Portfolios may
invest in U.S. Government Securities. Agencies and instrumentalities which issue
or guarantee debt securities and which have been established or sponsored by the
United States government include the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Home Loan Banks, the Federal
Home Loan Mortgage Corporation, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association, the Small
Business Administration, the Government National Mortgage Association and the
Student Loan Marketing Association. Others are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. government to purchase the agency's obligations; and still
others are supported primarily or solely by the creditworthiness of the issuer.
No assurance can be given that the U.S. government would provide financial
support to U.S. government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. Accordingly, although these securities have
historically involved little risk of loss of principal if held to maturity, they
may involve more risk than securities backed by the U.S. Government's full faith
and credit. A Portfolio will invest in the obligations of such agencies or
instrumentalities only when Norwest believes that the credit risk with respect
thereto is consistent with the Portfolio's investment policies.
BANK OBLIGATIONS
Each Portfolio may 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 Investment Adviser believes do not present undue
risk.
A certificate of deposit is an interest-bearing negotiable certificate issued by
a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date. Time deposits are non-negotiable
deposits with a banking institution that earn a specified interest rate over a
given period. Certificates of deposit and fixed time deposits, which are payable
at the stated maturity date and bear a fixed rate of interest, generally may be
withdrawn on demand by the Portfolio but may be subject to early withdrawal
penalties which vary depending upon market conditions and the remaining maturity
of the obligation and could reduce the Portfolio's yield. Although fixed-time
deposits do not in all cases have a secondary market, there are no contractual
restrictions on the 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
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deposit, which are certificates of deposit issued by a U.S. branch of a foreign
bank denominated in U.S. dollars and held in the United States; Eurodollar time
deposits ("ETDs"), which are U.S. dollar denominated deposits in a foreign
branch of a U.S. bank or a foreign bank; and Canadian time deposits, which are
essentially the same as ETDs, except that they are issued by Canadian offices of
major Canadian banks.
Investments that a Portfolio may make in instruments of foreign banks, branches
or subsidiaries may involve certain risks, including future political and
economic developments, the possible imposition of foreign withholding taxes on
interest income payable on such securities, the possible seizure or
nationalization of foreign deposits, differences from domestic banks in
applicable accounting, auditing and financial reporting standards, and the
possible establishment of exchange controls or other foreign governmental laws
or restrictions applicable to the payment of certificates of deposit or time
deposits which might affect adversely the payment of principal and interest on
such securities held by the Portfolio.
SHORT TERM DEBT SECURITIES/COMMERCIAL PAPER
Each Portfolio may assume a temporary defensive position and may invest without
limit in commercial paper that is rated in one of the two highest rating
categories by an NRSRO or, if not rated, determined by the Investment Adviser to
be of comparable quality. Portfolios also may invest in commercial paper as an
investment and not as a temporary defensive position. Except as noted below with
respect to variable master demand notes, issues of commercial paper normally
have maturities of less than nine months and fixed rates of return.
Variable amount master demand notes are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between a Portfolio and the issuer, they
are not normally traded. Although there is no secondary market in the notes, the
Portfolio may demand payment of principal and accrued interest at any time.
Variable amount master demand notes must satisfy the same criteria as set forth
above for commercial paper.
GUARANTEED INVESTMENT CONTRACTS
The Portfolios may invest in guaranteed investment contracts ("GICs") issued by
insurance companies. Pursuant to such contracts, a Portfolio makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the deposit Portfolio on a monthly basis
guaranteed interest at a rate based on an index. The GICs provide that this
guaranteed interest will not be less than a certain minimum rate. The insurance
company may assess periodic charges against a GIC for expense and service costs
allocable to it, and these charges will be deducted from the value of the
deposit Portfolio. A Portfolio will purchase a GIC only when the Investment
Adviser has determined that the GIC presents minimal credit risks to the
Portfolio and is of comparable quality to instruments in which the Portfolio may
otherwise invest. Because a Portfolio may not receive the principal amount of a
GIC from the insurance company on seven days' notice or less, a GIC may be
considered an illiquid investment. The term of a GIC will be one year or less.
The interest rate on a GIC may be tied to a specified market index and is
guaranteed not to be less than a certain minimum rate.
ZERO COUPON SECURITIES
Zero coupon securities are sold at original issue discount and pay no interest
to holders prior to maturity. Accordingly, these securities usually trade at a
deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Federal tax law requires that a Portfolio accrue a portion of the
discount at which a zero-coupon security was purchased as income each year even
though the Portfolio receives no interest payment in cash on the security during
the year. Interest on these securities, however, is reported as income by the
Portfolio and must be distributed to its shareholders. The Portfolios distribute
all of their net investment income, and may have to sell portfolio securities to
distribute imputed income, which may occur at a
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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 Norwest's
opinion, present minimal credit risks.
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. 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.
The acquisition of a stand-by commitment does not affect the valuation or
maturity of the underlying municipal securities which continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Portfolio are valued at zero in determining net asset value. When a Portfolio
pays directly or indirectly for a stand-by commitment, its cost is reflected as
unrealized depreciation for the period during which the commitment is held.
Stand-by commitments do not affect the average weighted maturity of the
Portfolio's portfolio of securities.
VARIABLE AND FLOATING RATE SECURITIES
The securities in which the Portfolios invest (including municipal securities or
mortgage- and asset-backed securities, as applicable) may have variable or
floating rates of interest and, under certain limited circumstances, may have
varying principal amounts. These securities pay interest at rates that are
adjusted periodically accordingly to a specified formula, usually with reference
to one or more interest rate indices or market interest rates (the "underlying
index"). The interest paid on these securities is a function primarily of the
underlying index upon which the interest rate adjustments are based. Such
adjustments minimize changes in the market value of the obligation and,
accordingly, enhance the ability of the Portfolio to maintain a stable net asset
value. Similar to fixed rate debt instruments, variable and floating rate
instruments are subject to changes in value based on changes in market interest
rates or changes in the issuer's creditworthiness. The rate of interest on
securities purchased by a Portfolio may be tied to Treasury or other government
securities or indices on those securities as well as any other rate of interest
or index. Certain variable rate securities (including mortgage-related
securities or mortgage-backed securities) pay interest at a rate that varies
inversely to prevailing short-term interest rates (sometimes referred to as
inverse floaters). For instance, upon reset the interest rate payable on a
security may go down when the underlying index has risen. During times when
short-term interest rates are relatively low as compared to long-term interest
rates a Portfolio may attempt to enhance its yield by purchasing inverse
floaters. Certain inverse floaters may have an interest rate reset mechanism
that multiplies the effects of changes in the underlying index. This form of
leverage may have the effect of increasing the volatility of the security's
market value while increasing the security's, and thus the Portfolio's, yield.
There may not be an active secondary market for any particular floating or
variable rate instruments (particularly inverse floaters and similar
instruments) which could make it difficult for a Portfolio to dispose of the
instrument if the issuer defaulted on its repayment obligation during periods
that the Portfolio is not entitled to exercise any
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demand rights it may have. A Portfolio could, for this or other reasons, suffer
a loss with respect to an instrument. The Portfolios' Investment Adviser
monitors the liquidity of the Portfolios' investment in variable and floating
rate instruments, but there can be no guarantee that an active secondary market
will exist.
Many variable rate instruments include the right of the holder to demand
prepayment of the principal amount of the obligation prior to its stated
maturity and the right of the issuer to prepay the principal amount prior to
maturity. The payment of principal and interest by issuers of certain securities
purchased by the Portfolios may be guaranteed by letters of credit or other
credit facilities offered by banks or other financial institutions. Such
guarantees will be considered in determining whether a municipal security meets
the Portfolios' investment quality requirements.
Variable rate obligations purchased by the Portfolios may include participation
interests in variable rate obligations purchased by the Portfolios from banks,
insurance companies or other financial institutions that are backed by
irrevocable letters of credit or guarantees of banks. The Portfolios can
exercise the right, on not more than thirty days' notice, to sell such an
instrument back to the bank from which it purchased the instrument and draw on
the letter of credit for all or any part of the principal amount of a
Portfolio's participation interest in the instrument, plus accrued interest, but
will do so only: (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.
The Portfolios will not purchase participation interests in variable rate
obligations unless it is advised by counsel or receives a ruling of the Internal
Revenue Service that interest earned by the Portfolios from the obligations in
which it holds participation interests is exempt from Federal income tax. The
Internal Revenue Service has announced that it ordinarily will not issue advance
rulings on certain of the Federal income tax consequences applicable to
securities, or participation interests therein, subject to a put. Each
Portfolio's investment adviser monitors the pricing, quality and liquidity of
variable rate demand obligations and participation interests therein held by the
Portfolio on the basis of published financial information, rating agency reports
and other research services to which the Investment Adviser may subscribe.
Certain securities may have an initial principal amount that varies over time
based on an interest rate index, and, accordingly, a Portfolio might be entitled
to less than the initial principal amount of the security upon the security's
maturity. The Portfolios intend to purchase such securities only when the
Investment Adviser believes the interest income from the instrument justifies
any principal risks associated with the instrument. A Portfolio may attempt to
limit any potential loss of principal by purchasing similar instruments that are
intended to provide an offsetting increase in principal. There can be no
assurance that a Portfolio will be able to limit principal fluctuations and,
accordingly, a Portfolio may incur losses on those securities even if held to
maturity without issuer default.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
TYPES OF CREDIT ENHANCEMENT
To lessen the effect of failures by obligors on Mortgage Assets 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.
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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 Portfolios" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets are
held in reserve against future losses); and (3) "over-collateralization" (where
the scheduled payments on, or the principal amount of, the underlying assets
exceeds that required to make payment of the securities and pay any servicing or
other fees). The degree of credit enhancement provided for each issue generally
is based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that covered by
credit enhancement protection could adversely affect the return on an investment
in such a security.
ASSET-BACKED SECURITIES
A 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.
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Unlike POs, IOs increase in value when interest rates rise and prepayment rates
slow; consequently they are often used to "hedge" portfolios against interest
rate risk. If prepayment rates are high, a Portfolio may receive less cash back
than it initially invested.
INTEREST RATE PROTECTION TRANSACTIONS
Certain Portfolios may enter into interest rate protection transactions,
including interest rate swaps, caps, collars and floors. Interest rate swap
transactions involve an agreement between two parties to exchange interest
payment streams that are based, for example, on variable and fixed rates that
are calculated on the basis of a specified amount of principal (the "notional
principal amount") for a specified period of time. Interest rate cap and floor
transactions involve an agreement between two parties in which the first party
agrees to make payments to the counterparty when a designated market interest
rate goes above (in the case of a cap) or below (in the case of a floor) a
designated level on predetermined dates or during a specified time period.
Interest rate collar transactions involve an agreement between two parties in
which the payments are made when a designated market interest rate either goes
above a designated ceiling or goes below a designated floor on predetermined
dates or during a specified time period.
A Portfolio expects to enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Portfolios intend to use these
transactions as a hedge and not as a speculative investment.
A Portfolio may enter into interest rate protection transactions on an
asset-based basis, depending on whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch as
these interest rate protection transactions are entered into for good faith
hedging purposes, and inasmuch as segregated accounts will be established with
respect to such transactions, the Portfolios believe such obligations do not
constitute senior securities. The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash, U.S. Government
Securities or other liquid high grade debt obligations having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by a custodian that satisfies the requirements of the 1940
Act. Each Portfolio also will establish and maintain such segregated accounts
with respect to its total obligations under any interest rate swaps that are not
entered into on a net basis and with respect to any interest rate caps, collars
and floors that are written by the Portfolio.
A Portfolio will enter into interest rate protection transactions only with
banks and other institutions believed by the Investment Adviser to 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. Accordingly,
those instruments are less liquid than swaps.
HEDGING AND OPTION INCOME STRATEGIES
COVERED CALLS AND HEDGING
The Portfolios may write covered calls on up to 100% of their total assets or
may employ one or more types of instruments to hedge ("Hedging Instruments").
When hedging to attempt to protect against declines in the market value of its
securities, to permit the it to retain unrealized gains in the value of
portfolio securities which have appreciated, or to facilitate selling securities
for investment reasons, a Portfolio would: (1) sell Stock Index Futures; (2)
purchase puts on such futures or securities; or (3) write covered calls on
securities or on Stock Index Futures.
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When hedging to establish a position in the equities markets as a temporary
substitute for purchasing particular equity securities (which a Portfolio will
normally purchase and then terminate the hedging position), a Portfolio would:
(1) purchase Stock Index Futures or (2) purchase calls on such Futures or on
securities. The Portfolios' strategy of hedging with Stock Index Futures and
options on such Futures will be incidental to the Portfolios' activities in the
underlying cash market.
WRITING COVERED CALL OPTIONS. A Portfolio may write (I.E., sell) call options
("calls") if: (1) the calls are listed on a domestic securities or commodities
exchange and (2) the calls are "covered" (I.E., the Portfolio owns the
securities subject to the call or other securities acceptable for applicable
escrow arrangements) while the call is outstanding. A call written on a Stock
Index Future must be covered by deliverable securities or segregated liquid
assets. If a call written by the Portfolio is exercised, the Portfolio forgoes
any profit from any increase in the market price above the call price of the
underlying investment on which the call was written.
When a Portfolio writes a call on a security, it receives a premium and agrees
to sell the underlying securities to a purchaser of a corresponding call on the
same security during the call period (usually not more than 9 months) at a fixed
exercise price (which may differ from the market price of the underlying
security), regardless of market price changes during the call period. The risk
of loss will have been retained by the Portfolio if the price of the underlying
security should decline during the call period, which may be offset to some
extent by the premium.
To terminate its obligation on a call it has written, a Portfolio may purchase a
corresponding call in a "closing purchase transaction." A profit or loss will be
realized, depending upon whether the net of the amount of option transaction
costs and the premium previously received on the call written was more or less
than the price of the call subsequently purchased. A profit may also be realized
if the call lapses unexercised, because the Portfolio retains the underlying
security and the premium received. Any such profits are considered short-term
capital gains for Federal income tax purposes, and when distributed by the
Portfolio are taxable as ordinary income. If the Portfolio could not effect a
closing purchase transaction due to the lack of a market, it would have to hold
the callable securities until the call lapsed or was exercised.
A Portfolio may also write calls on Stock Index Futures without owning a futures
contract or a deliverable bond, provided that at the time the call is written,
the Portfolio covers the call by segregating in escrow an equivalent dollar
amount of liquid assets. The Portfolio will segregate additional liquid assets
if the value of the escrowed assets drops below 100% of the current value of the
Stock Index Future. In no circumstances would an exercise notice require the
Portfolio to deliver a futures contract; it would simply put the Portfolio in a
short futures position, which is permitted by the Portfolio's hedging policies.
PURCHASING CALLS AND PUTS. A Portfolio may purchase put options ("puts") which
relate to: (1) securities held by it, (2) Stock Index Futures (whether or not it
holds such Stock Index Futures in its portfolio); or (3) broadly-based stock
indices. A Portfolio may not sell puts other than those it previously purchased,
nor purchase puts on securities it does not hold. A Portfolio may purchase
calls: (1) as to securities, broadly-based stock indices or Stock Index Futures
or (2) to effect a "closing purchase transaction" to terminate its obligation on
a call it has previously written. A call or put may be purchased only if, after
such purchase, the value of all put and call options held by a Portfolio would
not exceed 5% of the Portfolio's total assets.
When a Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and, except as to calls on stock indices, has
the right to buy the underlying investment from a seller of a corresponding call
on the same investment during the call period at a fixed exercise price. The
Portfolio benefits only if the call is sold at a profit or if, during the call
period, the market price of the underlying investment is above the sum of the
call price plus the transaction costs and the premium paid for the call and the
call is exercised. If the call is not exercised or sold (whether or not at a
profit), it will become worthless at its expiration date and the Portfolio will
lose its premium payments and the right to purchase the underlying investment.
When a Portfolio purchases a call on a stock index, it pays a premium, but
settlement is in cash rather than by delivery of an underlying investment.
When a Portfolio purchases a put, it pays a premium and, except as to puts on
stock indices, has the right to sell the underlying investment to a seller of a
corresponding put on the same investment during the put period at a fixed
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exercise price. Buying a put on a security or Stock Index Future a Portfolio
owns enables the Portfolio to attempt to protect itself during the put period
against a decline in the value of the underlying investment below the exercise
price by selling the underlying investment at the exercise price to a seller of
a corresponding put. If the market price of the underlying investment is equal
to or above the exercise price and, as a result, the put is not exercised or
resold, the put will become worthless at its expiration date and the Portfolio
will lose its premium payment and the right to sell the underlying investment;
the put may, however, be sold prior to expiration (whether or not at a profit).
Purchasing a put on either a stock index or on a Stock Index Future not held by
a Portfolio permits the Portfolio either to resell the put or to buy the
underlying investment and sell it at the exercise price. The resale price of the
put will vary inversely with the price of the underlying investment. If the
market price of the underlying investment is above the exercise price and, as a
result, the put is not exercised, the put will become worthless on its
expiration date. In the event of a decline in price of the underlying
investment, the Portfolio could exercise or sell the put at a profit to attempt
to offset some or all of its loss on its portfolio securities. When a Portfolio
purchases a put on a stock index, or on a Stock Index Future not held by it, the
put protects the Portfolio to the extent that the index moves in a similar
pattern to the securities held. In the case of a put on a stock index or Stock
Index Future, settlement is in cash rather than by the Portfolio's delivery of
the underlying investment.
STOCK INDEX FUTURES. A Portfolio may buy and sell futures contracts only if they
are Stock Index Futures. A stock index is "broadly-based" if it includes stocks
that are not limited to issuers in any particular industry or group of
industries. Stock Index Futures obligate the seller to deliver (and the
purchaser to take) cash to settle the futures transaction, or to enter into an
offsetting contract. No physical delivery of the underlying stocks in the index
is made.
No price is paid or received upon the purchase or sale of a Stock Index Future.
Upon entering into a futures transaction, a Portfolio will be required to
deposit an initial margin payment in cash or U.S. Treasury bills with a futures
commission merchant (the "futures broker"). The initial margin will be deposited
with the Portfolio's custodian in an account registered in the futures broker's
name; however the futures broker can gain access to that account only under
specified conditions. As the futures contract is marked to market to reflect
changes in its market value, subsequent margin payments, called variation
margin, will be paid to or by the futures broker on a daily basis. Prior to
expiration of the future, if a Portfolio elects to close out its position by
taking an opposite position, a final determination of variation margin is made,
additional cash is required to be paid by or released to the Portfolio, and any
loss or gain is realized for tax purposes. Although Stock Index Futures by their
terms call for settlement by the delivery of cash, in most cases the obligation
is fulfilled without such delivery, by entering into an offsetting transaction.
All futures transactions are effected through a clearinghouse associated with
the exchange on which the contracts are traded.
Puts and calls on broadly-based stock indices or Stock Index Futures are similar
to puts and calls on securities or futures contracts except that all settlements
are in cash and gain or loss depends on changes in the index in question (and
thus on price movements in the stock market generally) rather than on price
movements in individual securities or futures contracts. When a Portfolio buys a
call on a stock index or Stock Index Future, it pays a premium. During the call
period, upon exercise of a call by the Portfolio, a seller of a corresponding
call on the same index will pay the Portfolio an amount of cash to settle the
call if the closing level of the stock index or Stock Index Future upon which
the call is based is greater than the exercise price of the call; that cash
payment is equal to the difference between the closing price of the index and
the exercise price of the call times a specified multiple (the "multiplier")
which determines the total dollar value for each point of difference. When a
Portfolio buys a put on a stock index or Stock Index Future, it pays a premium
and has the right during the put period to require a seller of a corresponding
put, upon the Portfolio's exercise of its put, to deliver to the Portfolio an
amount of cash to settle the put if the closing level of the stock index or
Stock Index Future upon which the put is based is less than the exercise price
of the put; that cash payment is determined by the multiplier, in the same
manner as described above as to calls.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE. A Portfolio's
custodian, or a securities depository acting for the custodian, will act as the
Portfolio's escrow agent, through the facilities of the Options Clearing
Corporation ("OCC"), as to the securities on which the Portfolio has written
options, or as to other
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acceptable escrow securities, so that no margin will be required for such
transactions. The OCC will release the securities on the expiration of the
option or upon the Portfolio's entering into a closing transaction. An option
position may be closed out only on a market which provides secondary trading for
options of the same series, and there is no assurance that a liquid secondary
market will exist for any particular option.
A Portfolio's option activities may affect its portfolio turnover rate and
brokerage commissions. The exercise of calls written by a Portfolio may cause
the Portfolio to sell related portfolio securities, thus increasing its turnover
rate in a manner beyond the Portfolio's control. The exercise by a Portfolio of
puts on securities or Stock Index Futures may cause the sale of related
investments, also increasing portfolio turnover. Although such exercise is
within the Portfolio's control, holding a put might cause the Portfolio to sell
the underlying investment for reasons which would not exist in the absence of
the put. A Portfolio will pay a brokerage commission each time it buys or sells
a call, a put or an underlying investment in connection with the exercise of a
put or call. Such commissions may be higher than those which would apply to
direct purchases or sales of the underlying investments. Premiums paid for
options are small in relation to the market value of such investments, and,
consequently, put and call options offer large amounts of leverage. The leverage
offered by trading in options could result in a Portfolio's net asset value
being more sensitive to changes in the value of the underlying investments.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS AND COVERED CALLS. A Portfolio must
operate within certain restrictions as to its long and short positions in Stock
Index Futures and options thereon under a rule (the "CFTC Rule") adopted by the
CFTC under the Commodity Exchange Act (the "CEA"), which excludes the Portfolio
from registration with the CFTC as a "commodity pool operator" (as defined in
the CEA) if it complies with the CFTC Rule. Except as permitted by the CFTC
Rule, no Portfolio will, as to any positions, whether short, long or a
combination thereof, enter into Stock Index Futures and options thereon for
which the aggregate initial margins and premiums exceed 5% of the fair market
value of its total assets. Under the CFTC Rule also, a Portfolio must, as to its
short positions, use Stock Index Futures and options thereon solely for
bona-fide hedging purposes within the meaning and intent of the applicable
provisions under the CEA.
Transactions in options by a Portfolio are subject to limitations established by
each of the exchanges governing the maximum number of options that may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
exchanges or brokers. Thus, the number of options which a Portfolio may write or
hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Stock Index Futures. An exchange may order the
liquidation of positions found to be in violation of those limits and may impose
certain other sanctions. Due to requirements under the 1940 Act, when a
Portfolio purchases a Stock Index Future, the Portfolio will maintain, in a
segregated account or accounts with its custodian bank, cash or liquid assets in
an amount equal to the market value of the securities underlying such Stock
Index Future, less the margin deposit applicable to it.
LIMITS ON USE OF HEDGING INSTRUMENTS. Each Portfolio intends to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). One of the tests for such qualification is that less than
30% of its gross income must be derived from gains realized on the sale of
securities held for less than three months. Due to this limitation, each
Portfolio will limit the extent to which it engages in the following activities,
but will not be precluded from them: (1) selling investments, including Stock
Index Futures, held for less than three months, whether or not they were
purchased on the exercise of a call held by the Portfolio; (2) purchasing calls
or puts which expire in less than three months; (3) effecting closing
transactions with respect to calls or puts purchased less than three months
previously; (4) exercising puts held for less than three months; and (5) writing
calls on investments held for less than three months.
POSSIBLE RISK FACTORS IN HEDGING. In addition to the risks discussed above,
there is a risk in using short hedging by selling Stock Index Futures or
purchasing puts on stock indices that the prices of the applicable index (thus
the prices of the Hedging Instruments) will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of a Portfolio's equity
securities. The ordinary spreads between prices in the cash and futures markets
are subject to distortions due to differences in the natures of those markets.
First, all participants in the futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements,
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investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures markets depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
markets could be reduced, thus producing distortion. Third, from the point of
view of speculators, the deposit requirements in the futures markets are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions.
The risk of imperfect correlation increases as the composition of a Portfolio's
portfolio diverges from the securities included in the applicable index. To
compensate for the imperfect correlation of movements in the price of the equity
securities being hedged and movements in the price of the Hedging Instruments, a
Portfolio may use Hedging Instruments in a greater dollar amount than the dollar
amount of equity securities being hedged if the historical volatility of the
prices of such equity securities being hedged is more than the historical
volatility of the applicable index. It is also possible that where a Portfolio
has used Hedging Instruments in a short hedge, the market may advance and the
value of equity securities held in the Portfolio's portfolio may decline. If
this occurred, the Portfolio would lose money on the Hedging Instruments and
also experience a decline in value in its equity securities. However, while this
could occur for a very brief period or to a very small degree, the value of a
diversified portfolio of equity securities will tend to move over time in the
same direction as the indices upon which the Hedging Instruments are based.
If a Portfolio uses Hedging Instruments to establish a position in the equities
markets as a temporary substitute for the purchase of individual equity
securities (long hedging) by buying Stock Index Futures and/or calls on such
Futures, on securities or on stock indices, it is possible that the market may
decline; if the Portfolio then concludes not to invest in equity securities at
that time because of concerns as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the Hedging Instruments that is
not offset by a reduction in the price of the equity securities purchased.
Additionally, each Portfolio may: (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.
Except as otherwise noted in the Prospectus or herein, a Portfolio will not use
leverage in its option income and hedging strategies. In the case of
transactions entered into as a hedge, a Portfolio will hold securities,
currencies or other options or futures positions whose values are expected to
offset ("cover") its obligations thereunder. A Portfolio will not enter into a
hedging strategy that exposes it to an obligation to another party unless it
owns either: (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.
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Any assets used for cover or held in a segregated account cannot be sold or
closed out while the hedging or option income strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of a Portfolio's
assets could impede portfolio management or the Portfolio's ability to meet
redemption requests or other current obligations.
OPTIONS STRATEGIES
A Portfolio may purchase put and call options written by others and sell put and
call options covering specified individual securities, securities or financial
indices or currencies. A put option (sometimes called a "standby commitment")
gives the buyer of the option, upon payment of a premium, the right to deliver a
specified amount of currency to the writer of the option on or before a fixed
date at a predetermined price. A call option (sometimes called a "reverse
standby commitment") gives the purchaser of the option, upon payment of a
premium, the right to call upon the writer to deliver a specified amount of
currency on or before a fixed date, at a predetermined price. The predetermined
prices may be higher or lower than the market value of the underlying currency.
A Portfolio may buy or sell both exchange-traded and over-the-counter ("OTC")
options. A Portfolio will purchase or write an option only if that option is
traded on a recognized U.S. options exchange or if the Investment Adviser
believes that a liquid secondary market for the option exists. When a Portfolio
purchases an OTC option, it relies on the dealer from which it has purchased the
OTC option to make or take delivery of the currency underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Portfolio as well as the loss of the expected benefit of the transaction.
OTC options and the securities underlying these options currently are treated as
illiquid securities by the Portfolios.
Upon selling an option, a Portfolio receives a premium from the purchaser of the
option. Upon purchasing an option the Portfolio pays a premium to the seller of
the option. The amount of premium received or paid by the Portfolio is based
upon certain factors, including the market price of the underlying securities,
index or currency, the relationship of the exercise price to the market price,
the historical price volatility of the underlying assets, the option period,
supply and demand and interest rates.
Certain Portfolios may purchase call options on debt securities that Norwest
intends to include in the Portfolio's investment 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.
The Investment Adviser may write call options when it believes that the market
value of the underlying security will not rise to a value greater than the
exercise price plus the premium received. Call options may also be written to
provide limited protection against a decrease in the market price of a security,
in an amount equal to the call premium received less any transaction costs.
Certain Portfolios may purchase and write put and call options on fixed income
or equity security 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.
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FOREIGN CURRENCY OPTIONS AND RELATED RISKS
A Portfolio may take positions in options on foreign currencies in order to
hedge against the risk of foreign exchange fluctuation on foreign securities the
Portfolio holds in its portfolio or which it intends to purchase. Options on
foreign currencies are affected by the factors discussed in "Hedging and Option
Income Strategies --Options Strategies" and "Foreign Currency Transactions"
which influence foreign exchange sales and investments generally.
The value of foreign currency options is dependent upon the value of the foreign
currency relative to the U.S. dollar and has no relationship to the investment
merits of a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those that may be
involved in the use of foreign currency options, a Portfolio may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
To the extent that the U.S. options markets are closed while the market for the
underlying currencies remains open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
markets.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING
A Portfolio may effectively terminate its right or obligation under an option
contract by entering into a closing transaction. For instance, if the Portfolio
wished to terminate its potential obligation to sell securities or currencies
under a call option it had written, a call option of the same type would be
purchased by the Portfolio. Closing transactions essentially permit the
Portfolio to realize profits or limit losses on its options positions prior to
the exercise or expiration of the option. In addition:
(1) The successful use of options depends upon the Investment Adviser's
ability to forecast the direction of price fluctuations in the underlying
securities or currency markets, or in the case of an index option, fluctuations
in the market sector represented by the index.
(2) Options normally have expiration dates of up to nine months.
Options that expire unexercised have no value. Unless an option purchased by a
Portfolio is exercised or unless a closing transaction is effected with respect
to that position, a loss will be realized in the amount of the premium paid.
(3) A position in an exchange-listed option may be closed out only on
an exchange which provides a market for identical options. Most exchange-listed
options relate to equity securities. Exchange markets for options on foreign
currencies are relatively new, and the ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Closing transactions may be effected with respect to options traded in
the over-the-counter markets (currently the primary markets for options on
foreign currencies) only by negotiating directly with the other party to the
option contract or in a secondary market for the option if such market exists.
There is no assurance that a liquid secondary market will exist for any
particular option at any specific time. If it is not possible to effect a
closing transaction, a Portfolio would have to exercise the option which it
purchased in order to realize any profit. The inability to effect a closing
transaction on an option written by a Portfolio may result in material losses to
the Portfolio.
(4) A Portfolio's activities in the options markets may result in a
higher portfolio turnover rate and additional brokerage costs.
(5) When a Portfolio enters into an over-the-counter contract with a
counterparty, the Portfolio will assume the risk that the counterparty will fail
to perform its obligations, in which case the Portfolio could be worse off than
if the contract had not been entered into.
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FUTURES STRATEGIES
A futures contract is a bilateral agreement wherein one party agrees to accept,
and the other party agrees to make, delivery of cash, an underlying debt
security or the currency as called for in the contract at a specified future
date and at a specified price. For futures contracts with respect to an index,
delivery is of an amount of cash equal to a specified dollar amount times the
difference between the index value at the time of the contract and the close of
trading of the contract.
A Portfolio may sell interest rate futures contracts in order to continue to
receive the income from a fixed income security, while endeavoring to avoid part
of or all of a decline in the market value of that security which would
accompany an increase in interest rates.
A Portfolio may purchase index futures contracts for several reasons: to
simulate full investment in the underlying index while retaining a cash balance
for Portfolio management purposes, to facilitate trading, to reduce transactions
costs, or to seek higher investment returns when a futures contract is priced
more attractively than securities in the index.
A Portfolio may purchase call options on a futures contract as a means of
obtaining temporary exposure to market appreciation at limited risk. This
strategy is analogous to the purchase of a call option on an individual
security, in that it can be used as a temporary substitute for a position in the
security itself.
A Portfolio may sell foreign currency futures contracts to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the U.S. dollar. In addition, a Portfolio may sell foreign currency futures
contracts when its Investment Adviser anticipates a general weakening of foreign
currency exchange rates that could adversely affect the market values of the
Portfolio's foreign securities holdings. A Portfolio may purchase a foreign
currency futures contract to hedge against an anticipated foreign exchange rate
increase pending completion of anticipated transactions. Such a purchase would
serve as a temporary measure to protect the Portfolio against such increase. A
Portfolio may also purchase call or put options on foreign currency futures
contracts to obtain a fixed foreign exchange rate at limited risk. A Portfolio
may write call options on foreign currency futures contracts as a partial hedge
against the effects of declining foreign exchange rates on the value of foreign
securities.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES AND RELATED OPTIONS TRADING
No price is paid upon entering into futures contracts; rather, a Portfolio is
required to deposit (typically with its custodian in a segregated account in the
name of the futures broker) an amount of cash or U.S. Government Securities
generally equal to 5% or less of the contract value. This amount is known as
initial margin. Subsequent payments, called variation margin, to and from the
broker, would be made on a daily basis as the value of the futures position
varies. When writing a call on a futures contract, variation margin must be
deposited in accordance with applicable exchange rules. The initial margin in
futures transactions is in the nature of a performance bond or good-faith
deposit on the contract that is returned to the Portfolio upon termination of
the contract, assuming all contractual obligations have been satisfied.
Holders and writers of futures and options on futures contracts can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, a futures contract or related option with
the same terms as the position held or written. Positions in futures contracts
may be closed only on an exchange or board of trade providing a secondary market
for such futures contracts.
Under certain circumstances, futures exchanges may establish daily limits in the
amount that the price of a futures contract or related option may vary either up
or down from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several consecutive
trading days with little or no trading and thereby prevent prompt liquidation of
positions. In that event, it may not be possible for a Portfolio to close a
position, and in the event of adverse price movements, it would have to make
daily cash payments of variation margin. In addition:
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(1) Successful use by a Portfolio of futures contracts and related
options will depend upon the Investment Adviser's ability to predict movements
in the direction of the overall securities and currency markets, which requires
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
level of the underlying instrument but to the anticipated levels at some point
in the future; thus, for example, trading of stock index futures may not reflect
the trading of the securities which are used to formulate an index or even
actual fluctuations in the relevant index itself.
(2) The price of futures contracts may not correlate perfectly with
movement in the price of the hedged currencies due to price distortions in the
futures market or otherwise. There may be several reasons unrelated to the value
of the underlying currencies which causes this situation to occur. As a result,
a correct forecast of general market trends may still not result in successful
hedging through the use of futures contracts over the short term.
(3) There is no assurance that a liquid secondary market will exist for
any particular contract at any particular time. In such event, it may not be
possible to close a position, and in the event of adverse price movements, the
Portfolio would continue to be required to make daily cash payments of variation
margin.
(4) Like other options, options on futures contracts have a limited
life. A Portfolio will not trade options on futures contracts on any exchange or
board of trade unless and until, in Norwest's opinion, the market for such
options has developed sufficiently that the risks in connection with options on
futures transactions are not greater than the risks in connection with futures
transactions.
(5) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs is all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls which could be substantial in
the event of adverse price movements.
(6) A Portfolio's activities in the futures markets may result in a
higher portfolio turnover rate and additional transaction costs in the form of
added brokerage commissions.
(7) Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the buying and selling of futures
generally. In addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated with
options on foreign currencies described above. In addition, settlement of
foreign currency futures contracts must occur within the country issuing that
currency. Thus, a
Portfolio must accept or make delivery of the underlying foreign currency in
accordance with any U.S. or foreign restrictions or regulations regarding the
maintenance of foreign banking arrangements by U.S. residents, and the Portfolio
may be required to pay any fees, taxes or charges associated with such delivery
which are assessed in the issuing country.
COMMODITY FUTURES CONTRACTS AND COMMODITY OPTIONS
A Portfolio may invest in certain financial futures contracts and options
contracts in accordance with the policies described in the Prospectus and above.
A Portfolio will only invest in futures contracts, options on futures contracts
and other options contracts that are subject to the jurisdiction of the CFTC
after filing a notice of eligibility and otherwise complying with the
requirements of Section 4.5 of the rules of the CFTC. Under that section a
Portfolio will not enter into any futures contract or option on a futures
contract if, as a result, the aggregate initial margin and premiums required to
establish such positions would exceed 5% of the Portfolio's net assets.
FOREIGN CURRENCY TRANSACTIONS
Investments in foreign companies will usually involve the currencies of foreign
countries. In addition, a Portfolio may temporarily hold 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
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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 the 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
Portfolio to incur losses on these contracts and transaction costs. The Adviser
does not intend to enter into forward contracts on a regular or continuous basis
and will not do so with respect to a Portfolio if, as a result, a Portfolio will
have more than 25 percent of the value of its total assets committed to such
contracts or the contracts would obligate the Portfolio to deliver an amount of
foreign currency in excess of the value of the Portfolio's investment securities
or other assets denominated in that currency.
At or before the settlement of a forward contract, a Portfolio may either make
delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract. If the
Portfolio chooses to make delivery of the foreign currency, it may be required
to obtain the currency through the conversion of assets of the Portfolio into
the currency. The Portfolio may close out a forward contract obligating it to
purchase a foreign currency by selling an offsetting contract. If the Portfolio
engages in an offsetting transaction, it will realize a gain or a loss to the
extent that there has been a change in forward contract prices. Additionally,
although forward contracts may tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they tend to limit
any potential gain which might result should the value of such currency
increase.
There is no systematic reporting of last sale information for foreign
currencies, and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market. The interbank market in foreign currencies
is a global around-the-clock market.
When required by applicable regulatory guidelines, a Portfolio will set aside
cash, U.S. Government Securities or other liquid assets in a segregated account
with its custodian in the prescribed amount.
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EQUITY SECURITIES
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
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,
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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, a Portfolio may be compensated with the higher yield,
contingent on how well the underlying common stock does. Portfolios that seek
current income find ELKS attractive because ELKS provide a higher dividend
income than that paid with respect to a company's common stock.
Liquid Yield Option Notes ("LYONs") differ from ordinary debt securities in that
the amount received prior to maturity is not fixed but is based on the price of
the issuer's common stock. LYONs are zero-coupon notes that sell at a large
discount from face value. For an investment in LYONs, a Portfolio will not
receive any interest payments until the notes mature, typically in 15 or 20
years, when the notes are redeemed at face, or par, value. The yield on LYONs,
typically, is lower-than-market rate for debt securities of the same maturity,
due in part to the fact that the LYONs are convertible into common stock of the
issuer at any time at the option of the holder of the LYON. Commonly, LYONs are
redeemable by the issuer at any time after an initial period or if the issuer's
common stock is trading at a specified price level or better, or, at the option
of the holder, upon certain fixed dates. The redemption price typically is the
purchase price of the LYONs plus accrued original issue discount to the date of
redemption, which amounts to the lower-than-market yield. A Portfolio will
receive only the lower-than-market yield unless the underlying common stock
increases in value at a substantial rate. LYONs are attractive to investors when
it appears that they will increase in value due to the rise in value of the
underlying common stock.
WARRANTS
A warrant is an option to purchase an equity security at a specified price
(usually representing a premium over the applicable market value of the
underlying equity security at the time of the warrant's issuance) and usually
during a specified period of time. The price of warrants does not necessarily
move parallel to the prices of the underlying securities. Warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer. Unlike convertible securities and preferred stocks,
warrants do not pay a fixed dividend. Investments in warrants involve certain
risks, including the possible lack of a liquid market for the resale of the
warrants, potential
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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, the Portfolio could find
it more difficult to sell these securities or may be able to sell the securities
only at prices lower than if such securities were widely traded. Prices realized
upon the sale of such lower rated or unrated securities, under these
circumstances, may be less than the prices used in calculating the Portfolio's
net asset value.
In periods of reduced market liquidity, prices of high yield/high risk
securities may become more volatile and may experience sudden and substantial
price declines. Also, there may be significant disparities in the prices quoted
for high yield/high risk securities by various dealers. Under such conditions,
the Portfolio may have to use subjective rather than objective criteria to value
its high yield/high risk securities investments accurately and rely more heavily
on the judgment of the 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 Investment
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 Investment 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 investment portfolio and increasing the
exposure of the Portfolio to the risks of high yield/high risk securities.
ILLIQUID AND RESTRICTED SECURITIES
Each Portfolio may invest up to 15 percent of its net assets in securities that
at the time of purchase are illiquid. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the 1933 Act ("restricted
securities"), securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Portfolio
has valued the securities and which are otherwise not readily marketable and
includes, among other things, purchased over-the-counter (OTC) options and
repurchase agreements not entitling the holder to repayment within seven days.
The Board has the ultimate responsibility for determining whether specific
securities are liquid or illiquid and has delegated
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the function of making day-to-day determinations of liquidity to the Investment
Adviser of the Portfolios, pursuant to guidelines approved by the Board. The
Investment Adviser takes into account a number of factors in reaching liquidity
decisions, including but not limited to: (1) the frequency of trades and
quotations for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential buyers; (3) the willingness
of dealers to undertake to make a market in the security; and (4) the nature of
the marketplace trades, including the time needed to dispose of the security,
the method of soliciting offers and the mechanics of the transfer. The
Investment Adviser monitors the liquidity of the securities held by each
Portfolio and reports periodically on such decisions to the Board.
In connection with a Portfolio's original purchase of restricted securities, it
may negotiate rights with the issuer to have such securities registered for sale
at a later time. Further, the expenses of registration of restricted securities
that are illiquid may also be negotiated by the Portfolio with the issuer at the
time such securities are purchased by the Portfolio. When registration is
required, however, a considerable period may elapse between a decision to sell
the securities and the time the Portfolio would be permitted to sell such
securities. A similar delay might be experienced in attempting to sell such
securities pursuant to an exemption from registration. Thus, the Portfolio may
not be able to obtain as favorable a price as that prevailing at the time of the
decision to sell.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a Portfolio might also have to register restricted
securities in order to dispose of them, resulting in expense and delay. A
Portfolio might not be able to dispose of restricted or other securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions. There can be no assurance that a liquid market will
exist for any security at any particular time.
A institutional market has developed for certain securities that are not
registered under the 1933 Act, including repurchase agreements, commercial
paper, foreign securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on the issuer's ability to honor a demand for repayment
of the unregistered security. A security's contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative of
the liquidity of the security. If such securities are eligible for purchase by
institutional buyers in accordance with Rule 144A under the 1933 Act under
guidelines adopted by the Board, the Investment Adviser may determine that such
securities are not illiquid securities. These guidelines take into account
trading activity in the securities and the availability of reliable pricing
information, among other factors. If there is a lack of trading interest in a
particular Rule 144A security, a Portfolio's holdings of that security may be
illiquid.
LOANS OF PORTFOLIO SECURITIES
Each Portfolio may lend its portfolio securities subject to the restrictions
stated in the Prospectus. Under applicable regulatory requirements (which are
subject to change), the loan collateral must, on each business day, at least
equal the market value of the loaned securities and must consist of cash, bank
letters of credit, U.S. Government securities, or other cash equivalents in
which the Portfolio is permitted to invest. To be acceptable as collateral,
letters of credit must obligate a bank to pay amounts demanded by the Portfolio
if the demand meets the terms of the letter. Such terms and the issuing bank
must be satisfactory to the Portfolio. In a portfolio securities lending
transaction, the Portfolio receives from the borrower an amount equal to the
interest paid or the dividends declared on the loaned securities during the term
of the loan as well as the interest on the collateral securities, less any
finders' or administrative fees the Portfolio pays in arranging the loan. The
Portfolio may share the interest it receives on the collateral securities with
the borrower as long as it realizes at least a minimum amount of interest
required by the lending guidelines established by the Board. The Portfolio will
not lend its portfolio securities to any officer, director, employee or
affiliate of the Portfolio or the Adviser. The terms of a Portfolio's loans must
meet certain tests under the 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 not expected to exceed five (5)
percent of the value of any Portfolio's assets. Borrowing
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involves special risk considerations. Interest costs on borrowings may fluctuate
with changing market rates of interest and may partially offset or exceed the
return earned on borrowed Portfolios (or on the assets that were retained rather
than sold to meet the needs for which Portfolios were borrowed). Under adverse
market conditions, a Portfolio might have to sell portfolio securities to meet
interest or principal payments at a time when investment considerations would
not favor such sales. Except as otherwise noted, no Portfolio may purchase
securities for investment while any borrowing equaling five percent or more of
the Portfolio's total assets is outstanding or borrow for purposes other than
meeting redemptions in an amount exceeding five percent of the value of the
Portfolio's total assets. A Portfolio's use of borrowed proceeds to make
investments would subject the Portfolio to the risks of leveraging. Reverse
repurchase agreements, short sales not against the box, dollar roll transactions
and other similar investments that involve a form of leverage have
characteristics similar to borrowings but are not considered borrowings if the
Portfolio maintains a segregated account.
OTHER TECHNIQUES INVOLVING LEVERAGE
Utilization of leveraging involves special risks and may involve speculative
investment techniques. Certain Portfolios may borrow for other than temporary or
emergency purposes, lend their securities, enter reverse repurchase agreements,
and purchase securities on a when issued or forward commitment basis. In
addition, certain Portfolios may engage in dollar roll transactions. Each of
these transactions involve the use of "leverage" when cash made available to a
Portfolio through the investment technique is used to make additional portfolio
investments. The Portfolios use these investment techniques only when Norwest
believes that the leveraging and the returns available to the Portfolio from
investing the cash will provide shareholders a potentially higher return.
Leverage exists when a Portfolio achieves the right to a return on a capital
base that exceeds the investment the Portfolio has invested. Leverage creates
the risk of magnified capital losses which occur when losses affect an asset
base, enlarged by borrowings or the creation of liabilities, that exceeds the
equity base of the Portfolio. Leverage may involve the creation of a liability
that requires the Portfolio to pay interest (for instance, reverse repurchase
agreements) or the creation of a liability that does not entail any interest
costs (for instance, forward commitment transactions).
The risks of leverage include a higher volatility of the net asset value of the
Portfolio's shares and the relatively greater effect on the net asset value of
the shares caused by favorable or adverse market movements or changes in the
cost of cash obtained by leveraging and the yield obtained from investing the
cash. So long as a Portfolio is able to realize a net return on its investment
portfolio that is higher than interest expense incurred, if any, leverage will
result in higher current net investment income being realized by the Portfolio
than if the Portfolio were not leveraged. On the other hand, interest rates
change from time to time as does their relationship to each other depending upon
such factors as supply and demand, monetary and tax policies and investor
expectations. Changes in such factors could cause the relationship between the
cost of leveraging and the yield to change so that rates involved in the
leveraging arrangement may substantially increase relative to the yield on the
obligations in which the proceeds of the leveraging have been invested. To the
extent that the interest expense involved in leveraging approaches the net
return on a Portfolio's investment portfolio, the benefit of leveraging will be
reduced, and, if the interest expense on borrowings were to exceed the net
return to shareholders, the Portfolio's use of leverage would result in a lower
rate of return than if the Portfolio were not leveraged. Similarly, the effect
of leverage in a declining market could be a greater decrease in net asset value
per share than if the Portfolio were not leveraged. In an extreme case, if the
Portfolio's current investment income were not sufficient to meet the interest
expense of leveraging, it could be necessary for the Portfolio to liquidate
certain of its investments at an inappropriate time. The use of leverage may be
considered speculative.
SEGREGATED ACCOUNT
In order to limit the risks involved in various transactions involving leverage,
the Trust's custodian will set and maintain in a segregated account cash, U.S.
Government Securities and liquid 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
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the Portfolio's obligations to repurchase securities under a reverse repurchase
agreement and settle when-issued and forward commitment transactions.
MARGIN AND SHORT SALES
Prohibitions on entering short sales do not restrict a Portfolio's ability to
use short-term credits necessary for the clearance of portfolio transactions and
to make margin deposits in connection with permitted transactions in options and
futures contracts.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are transactions in which a Portfolio sells a
security and simultaneously commits to repurchase that security from the buyer
at an agreed upon price on an agreed upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain demand
agreements, there is no agreed upon repurchase date and interest payments are
calculated daily, often based upon the prevailing overnight repurchase rate.
Generally, a reverse repurchase agreement enables the Portfolio to recover for
the term of the reverse repurchase agreement all or most of the cash invested in
the portfolio securities sold and to keep the interest income associated with
those portfolio securities. Such transactions are only advantageous if the
interest cost to the Portfolio of the reverse repurchase transaction is less
than the cost of obtaining the cash otherwise. In addition, interest costs on
the money received in a reverse repurchase agreement may exceed the return
received on the investments made by a Portfolio with those monies. The use of
reverse repurchase agreement proceeds to make investments may be considered to
be a speculative technique.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Portfolios may purchase or sell portfolio securities on a when-issued or
delayed delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased by a Portfolio with payment and delivery to take place
in the future in order to secure what is considered to be an advantageous price
and yield to the Portfolio at the time it enters into the transaction. In those
cases, the purchase price and the interest rate payable on the securities are
fixed on the transaction date and delivery and payment may take place a month or
more after the date of the transaction. When a Portfolio enters into a delayed
delivery transaction, it becomes obligated to purchase securities and it has all
of the rights and risks attendant to ownership of the security, although
delivery and payment occur at a later date. To facilitate such acquisitions, the
Portfolio will maintain with its custodian a separate account with portfolio
securities in an amount at least equal to such commitments.
At the time a Portfolio makes the commitment to purchase securities on a
when-issued or delayed delivery basis, the Portfolio will record the transaction
as a purchase and thereafter reflect the value each day of such securities in
determining its net asset value. The value of the fixed income securities to be
delivered in the future will fluctuate as interest rates and the credit of the
underlying issuer vary. On delivery dates for such transactions, the Portfolio
will meet its obligations from maturities, sales of the securities held in the
separate account or from other available sources of cash. A Portfolio generally
has the ability to close out a purchase obligation on or before the settlement
date, rather than purchase the security. If a Portfolio chooses to dispose of
the right to acquire a when-issued security prior to its acquisition, it could,
as with the disposition of any other portfolio obligation, realize a gain or
loss due to market fluctuation.
To the extent a Portfolio engages in when-issued or delayed delivery
transactions, it will do so for the purpose of acquiring securities consistent
with the Portfolio's investment objectives and policies and not for the purpose
of investment leverage or to speculate in interest rate changes. A Portfolio
will only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but the
Portfolio reserves the right to dispose of the right to acquire these securities
before the settlement date if deemed advisable.
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The use of when-issued and delayed delivery transactions enables the Portfolio
to hedge against anticipated changes in interest rates and prices. If the
Investment Adviser were to forecast incorrectly the direction of interest rate
movements, however, a Portfolio might be required to complete when-issued or
delayed delivery transactions at prices inferior to the current market values.
Securities purchased pursuant to when-issued and delayed delivery transactions
may be sold prior to the settlement date, but a Portfolio enters into
when-issued and delayed delivery transactions 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 Portfolio to "roll over" its
purchase commitment, the Portfolio may receive a negotiated fee. When-issued
securities may include bonds purchased on a "when, as and if issued" basis under
which the issuance of the securities depends upon the occurrence of a subsequent
event. Any significant commitment of a Portfolio's assets to the purchase of
securities on a "when, as and if issued" basis may increase the volatility of
the Portfolio's net asset value. For purposes of the Portfolios' investment
policies, the purchase of securities with a settlement date occurring on a
Public Securities Association approved settlement date is considered a normal
delivery and not a when-issued or delayed delivery purchase.
REPURCHASE AGREEMENTS
The Portfolios may invest in securities subject to repurchase agreements with
U.S. banks or broker-dealers. In a typical repurchase agreement, the seller of a
security commits itself at the time of the sale to repurchase that security from
the buyer at a mutually agreed-upon time and price. The repurchase price exceeds
the sale price, reflecting an agreed-upon interest rate effective for the period
the buyer owns the security subject to repurchase. The agreed-upon rate is
unrelated to the interest rate on that security. The Adviser will monitor the
value of the underlying security at the time the transaction is entered into and
at all times during the term of the repurchase agreement to ensure that the
value of the security always equals or exceeds the repurchase price (including
accrued interest). In the event of default by the seller under the repurchase
agreement, 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 Portfolios enter into repurchase agreements.
Securities subject to repurchase agreements will be held by the Portfolio's
custodian or another qualified custodian or in the Federal Reserve book-entry
system. Repurchase agreements are considered to be loans by a Portfolio for
certain purposes under the 1940 Act.
TEMPORARY DEFENSIVE POSITION
When a Portfolio, in accordance with the policies described in its Prospectus,
assumes a temporary defensive position, it may invest 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
Portfolio: (1) the term 1940 Act includes the rules thereunder, SEC
interpretations and any exemptive order upon which the Portfolio may rely and
(2) the term Code includes the rules thereunder, IRS interpretations and any
private letter ruling or similar authority upon which the Portfolio may rely.
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Each Portfolio has adopted the investment policies listed in this section which
are nonfundamental policies unless otherwise noted. Except for its investment
objective, which is Fundamental, the Portfolio has not adopted any Fundamental
policies except as required by the 1940 Act.
Except as required by the 1940 Act or the Code, if any percentage restriction on
investment or utilization of assets is adhered to at the time an investment is
made, a later change in percentage resulting from a change in the market values
of a Portfolio's assets or purchases and redemptions of shares will not be
considered a violation of the limitation.
A Fundamental policy of a Portfolio cannot be changed without the affirmative
vote of the lesser of: (1) more than 50% of the outstanding shares of the
Portfolio or (2) 67% of the shares of the Portfolio present or represented at a
shareholders meeting at which the holders of more than 50% of the outstanding
shares of the Portfolio are present or represented.
FUNDAMENTAL LIMITATIONS
Each Portfolio has adopted the following investment limitations that are
fundamental policies.
(1) DIVERSIFICATION
No Portfolio may, with respect to 75% of its assets, purchase
a security (other than a U.S. Government Security or a
security of an investment company) if, as a result: (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.
2. INDUSTRY CONCENTRATION
No Portfolio may purchase a security if, as a result, more
than 25% of the Portfolio's total assets would be invested in
securities of issuers conducting their principal business
activities in the same industry. For purposes of this
limitation, there is no limit on: (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.
Notwithstanding anything to the contrary, to the extent
permitted by the 1940 Act, each Portfolio may invest in one or
more investment companies; provided that, except to the extent
the Portfolio invests in other investment companies pursuant
to Section 12(d)(1)(A) of the 1940 Act, the Portfolio treats
the assets of the investment companies in which it invests as
its own for purposes of this policy.
For purposes of this policy: (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 Portfolio may borrow money if, as a result, outstanding
borrowings would exceed an amount equal to 33 1/3% of the
Portfolio's total assets.
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4. REAL ESTATE
No Portfolio may purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments
(but this shall not prevent the Portfolio from investing in
securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
5. LENDING
No Portfolio may make loans to other parties. For purposes of
this limitation, entering into repurchase agreements, lending
securities and acquiring any debt security are not deemed to
be the making of loans.
No Portfolio may lend a security if, as a result, the amount
of loaned securities would exceed an amount equal to 33 1/3%
of the Portfolio's total assets.
6. COMMODITIES
No Portfolio may purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Portfolio from
purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by
physical commodities).
7. UNDERWRITING
No Portfolio may underwrite (as that term is defined in the
1933 Act) securities issued by other persons except, to the
extent that in connection with the disposition of the
Portfolio's assets, the Portfolio may be deemed to be an
underwriter.
8. SENIOR SECURITIES
No Portfolio may issue senior securities except to the extent
permitted by the 1940 Act.
NONFUNDAMENTAL LIMITATIONS
Each Portfolio has adopted the following investment limitations which are not
fundamental policies of the Portfolio. A nonfundamental policy will not be used
to defeat a fundamental limitation of a Portfolio. These nonfundamental policies
may be changed by the Board.
(1) BORROWING
For purposes of the limitation on borrowing, the following are
not treated as borrowings to the extent they are fully
collateralized: (1) the delayed delivery of purchased
securities (such as the purchase of when-issued securities);
(2) reverse repurchase agreements; (3) dollar-roll
transactions; and (4) the lending of securities ("leverage
transactions").
2. LIQUIDITY
No Portfolio 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 Portfolio
may treat certain restricted securities as liquid pursuant to
guidelines adopted by the Board of Trustees.
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3. EXERCISING CONTROL OF ISSUERS
No Portfolio may make investments for the purpose of
exercising control of an issuer. Investments by a Portfolio in
entities created under the laws of foreign countries solely to
facilitate investment in securities in that country will not
be deemed the making of investments for the purpose of
exercising control.
4. 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
Under normal circumstances, no Portfolio may sell securities
short, provided that transactions in futures contracts and
options are not deemed to constitute selling securities short.
No Portfolio may purchase securities on margin, except that a
Portfolio may use short-term credit for the clearance of the
Portfolio's transactions, and provided that initial and
variation margin 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 Portfolio 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 Portfolio's
net assets would be invested in initial margin and premiums
(excluding amounts "in-the-money") required to establish the
contracts.
No Portfolio: (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 Portfolio's total assets; and (3)
will buy call options with a value exceeding [5%] of the
Portfolio's total assets.
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 Portfolios is
historical and is not intended to indicate future returns. Each Portfolio's
yield and total return fluctuate in response to market conditions and other
factors. The value of a Portfolio's shares when redeemed may be more or less
than their original cost.
In performance advertising, the Portfolios may compare any of their performance
information with data published by independent evaluators such as Morningstar,
Inc., Lipper Analytical Services, Inc., or other companies which track the
investment performance of investment companies ("Portfolio Tracking Companies").
The Portfolios may also compare any of their performance information with the
performance of recognized stock, bond and other 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 Portfolios may refer to general market
performances over past time periods such as those published by Ibbotson
Associates (for instance, its "Stocks, Bonds, Bills and Inflation Yearbook"). In
addition, the Portfolios may also refer in such materials to mutual Portfolio
performance rankings and other data published by Portfolio Tracking
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Companies. Performance advertising may also refer to discussions of the
Portfolios' 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
Portfolio's performance, investors should be aware that each Portfolio's yield
fluctuates from day to day and that the Portfolio's yield for any given period
is not an indication or representation by the Portfolio of future yields or
rates of return on the Portfolio's shares. Norwest, Processing Organizations and
others may charge their customers, various retirement plans or other
shareholders that invest in a Portfolio fees in connection with an investment in
a Portfolio, which will have the effect of reducing the Portfolio's net yield to
those shareholders. The yields of a Portfolio are not fixed or guaranteed, and
an investment in a Portfolio is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of a Portfolio with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to compare
a Portfolio's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.
FIXED INCOME AND EQUITY PORTFOLIOS
Standardized yields for the Portfolios used in advertising are computed by
dividing a Portfolio'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 Portfolio's net asset value per
share at the end of the period and annualizing the result (assuming compounding
of income in accordance with specific standardized rules) in order to arrive at
an annual percentage rate. In general, interest income is reduced with respect
to municipal securities purchased at a premium over their par value by
subtracting a portion of the premium from income on a daily basis. In general,
interest income is increased with respect to municipal securities purchased at
original issue at a discount by adding a portion of the discount to daily
income. Capital gains and losses generally are excluded from these calculations.
Income calculated for the purpose of determining each Portfolio's standardized
yield differs from income as determined for other accounting purposes. Because
of the different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for a Portfolio may differ from the rate
of distribution the Portfolio paid over the same period or the rate of income
reported in the Portfolio's financial statements.
TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Portfolio's return, including the effect of reinvesting
dividends and capital gain distributions, any change in the Portfolio's net
asset value per share over the period and maximum sales charge, if any,
applicable to purchases of the Portfolio's shares. Average annual total returns
are calculated, through the use of a formula prescribed by the SEC, by
determining the growth or decline in value of a hypothetical historical
investment in a Portfolio over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result if
the rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an average
annual return of 7.18%, which is the steady annual rate that would equal 100%
growth on a compounded basis in ten years. The average annual total return is
computed separately for each class of shares of a Portfolio. While average
annual returns are a convenient means of comparing investment alternatives,
investors should realize that the performance is not constant over time but
changes from year to year, and that average annual returns represent averaged
figures as opposed to the actual year-to-year performance of the Portfolios.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
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P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical $1,000
payment made at the beginning of the applicable period
Standardized total return quotes may be accompanied by non-standardized total
return figures calculated by alternative methods. For example, average annual
total return may be calculated without assuming payment of the sales load
according to the following formula:
P(1+U)n = ERV
Where P = a hypothetical initial payment of $1,000.
U = average annual total return assuming non payment of
the maximum sales load at the beginning of the stated
period.
n number of years
ERV = ending redeemable value of a hypothetical $1,000
payment at the end of the stated period
In addition to average annual returns, each Portfolio may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in order
to illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Period total return
is calculated according to the following formula:
PT = (ERV/P-1)
Where:
PT = period total return
The other definitions are the same as in average annual total
return above
OTHER ADVERTISEMENT MATTERS
The Portfolios may advertise other forms of performance. Average annual and
cumulative total returns may be quoted as a percentage or as a dollar amount,
and may be calculated for a single investment, a series of investments and/or a
series of redemptions over any time period. Total returns may be broken down
into their components of income and capital (including capital gains and changes
in share price) in order to illustrate the relationship of these factors and
their contributions to total return. Total returns may be quoted with or without
taking into consideration a Portfolio's front-end sales charge or contingent
deferred sales charge; excluding sales charges from a total return calculation
produces a higher return figure. Any performance information may be presented
numerically or in a table, graph or similar illustration.
The Portfolios may also include various information in their advertisements
including, but not limited to: (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 Portfolios that may be employed by an investor to meet specific financial
goals, such as fund retirement, paying for children's education and financially
supporting aging parents; (3) information
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(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 Portfolios' portfolio managers and the portfolio management
staff of the Investment Adviser or summaries of the views of the portfolio
managers with respect to the financial markets; (7) the results of a
hypothetical investment in a Portfolio over a given number of years, including
the amount that the investment would be at the end of the period; (8) the
effects of earning Federally and, if applicable, state tax-exempt income from a
Portfolio or investing in a tax-deferred account, such as an individual
retirement account or Section 401(k) pension plan; and (9) the net asset value,
net assets or number of shareholders of a Portfolio as of one or more dates.
As an example of compounding, $1,000 compounded annually at 9.00% will grow to
$1,090 at the end of the first year (an increase in $90) and $1,118 at the end
of the second year (an increase in $98). The extra $8 that was earned on the $90
interest from the first year is the compound interest. One thousand dollars
compounded annually at 9.00% will grow to $2,367 at the end of ten years and
$5,604 at the end of 20 years. Other examples of compounding are as follows: at
7% and 12% annually, $1,000 will grow to $1,967 and $3,106, respectively, at the
end of ten years and $3,870 and $9,646, respectively, at the end of twenty
years. These examples are for illustrative purposes only and are not indicative
of any Portfolio's performance.
The Portfolios may advertise information regarding the effects of automatic
investment and systematic withdrawal plans, including the principal of dollar
cost averaging. In a dollar cost averaging program, an investor invests a fixed
dollar amount in a Portfolio at period intervals, thereby purchasing fewer
shares when prices are high and more shares when prices are low. While such a
strategy does not insure a profit or guard against a loss in a declining market,
the investor's average cost per share can be lower than if fixed numbers of
shares had been purchased at those intervals. In evaluating such a plan,
investors should consider their ability to continue purchasing shares through
periods of low price levels. For example, if an investor invests $100 a month
for a period of six months in a Portfolio the following will be the relationship
between average cost per share ($14.35 in the example given) and average price
per share:
<TABLE>
<S> <C> <C> <C>
Systematic Share Shares
Period Investment Price Purchased
------ ---------- ----- ---------
1 $100 $10 10.00
2 $100 $12 8.33
3 $100 $15 6.67
4 $100 $20 5.00
5 $100 $18 5.56
6 $100 $16 6.25
---- --- ----
Total Invested $600 Average Price $15.17 Total Shares 41.81
</TABLE>
In connection with its advertisements each Portfolio may provide "shareholders
letters" which serve to provide shareholders or investors an introduction into
the Portfolio's, the Trust's or any of the Trust's service provider's policies
or business practices. For instance, advertisements may provide for a message
from Norwest or its parent corporation that Norwest has for more than 60 years
been committed to quality products and outstanding service to assist its
customers in meeting their financial goals and setting forth the reasons that
Norwest believes that it has been successful as a national financial service
firm.
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<PAGE>
4. MANAGEMENT
Those officers, as well as certain other officers and Trustees of the Trust, may
be directors, officers or employees of (and persons providing services to the
Trust may include) Forum, its affiliates or certain non-banking affiliates of
Norwest.
TRUSTEES AND OFFICERS
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust and their principal occupations during
the past five years and age as of October 1, 1998 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 56.
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 67.
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 72.
Principal of The Burkhardt Law Firm. His address is 777 South Steele
Street, Denver, Colorado 80209.
JAMES C. HARRIS, Trustee, Age 78.
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 65.
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 53.
President, Norwest Investment Services, Inc. (a broker-dealer
subsidiary of Norwest bank) His address is 608 2nd Avenue South,
Minneapolis, Minnesota 55479.
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<PAGE>
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 58.
Principal of the law firm of Willeke & Daniels. His address is 201
Ridgewood Avenue, Minneapolis, Minnesota 55403.
SARA M. MORRIS, Vice President and Treasurer, Age 35.
Managing Director, Forum Financial Services, Inc., with which she has
been associated since 1994. Prior thereto, from 1991 to 1994 Ms.
Morris 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. Morris is also an officer of
various registered investment companies for which Forum Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. Her address is Two Portland Square,
Portland, Maine 04101.
DAVID I. GOLDSTEIN, Vice President and Secretary, Age 37.
Managing Director and General 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
Administrative Services, LLC or Forum Financial Services, Inc. serves
as manager, administrator and/or distributor. His address is Two
Portland Square, Portland, Maine 04101.
THOMAS G. SHEEHAN, Vice President and Assistant Secretary, Age 44.
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 Administrative Services, LLC or Forum
Financial Services, Inc. serves as manager, administrator and/or
distributor. His address is Two Portland Square, Portland, Maine
04101.
PAMELA J. WHEATON, Assistant Treasurer, Age 39.
Manager - Tax and Compliance Group, Forum Financial Services, Inc.,
with which she has been associated since 1989. Ms. Wheaton is also an
officer of various registered investment companies for which Forum
Administrative Services, LLC or 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 50.
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 Administrative
Services, LLC or Forum Financial Services, Inc. serves as manager,
administrator and/or distributor. His address is Two Portland Square,
Portland, Maine.
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<PAGE>
EDWARD C. LAWRENCE, Assistant Secretary, Age 29.
Fund Administrator, Forum Financial Services, Inc., with which he has
been associated since 1997. Prior thereto, Mr. Lawrence was a
self-employed contractor on antitrust cases with the law firm of White
& Case. After graduating from law school, from 1994-1996, Mr. Lawrence
worked as an assistant public defender for the Missouri State Public
Defender's Office. His address is Two Portland Square, Portland, Maine
04101.
COMPENSATION OF TRUSTEES AND OFFICERS OF THE TRUST
Each Trustee of the Trust is paid a retainer fee in the total amount of $5,000,
payable quarterly, for the Trustee's service to the Trust and to Norwest Select
Funds, a separate registered open-end management investment company for which
each Trustee serves as trustee. In addition, each Trustee is paid $3,000 for
each regular Board meeting attended (whether in person or by electronic
communication) and is paid $1,000 for each Committee meeting attended on a date
when a Board meeting is not held. Trustees are also reimbursed for travel and
related expenses incurred in attending meetings of the Board. Mr. Keffer
received no compensation for his services as Trustee for the past year or
compensation or reimbursement for his associated expenses. In addition, no
officer of the Trust is compensated by the Trust.
Mr. Burkhardt, Chairman of the Trust's and Norwest Select Funds' audit
committees, receives additional compensation of $6,000 from the Trust and
Norwest Select Funds allocated pro rata between the Trust and Norwest Select
Funds based upon relative net assets, for his services as Chairman. Each Trustee
was elected by shareholders on April 30, 1997.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and Norwest Select Funds, combined. Norwest Select Funds
have a December 31 fiscal year end. Information is presented for the twelve
month period ended May 31, 1998, which was the fiscal year end of all of the
Trust's portfolios.
<TABLE>
<S> <C> <C>
TOTAL COMPENSATION FROM
TOTAL COMPENSATION THE TRUST AND NORWEST
FROM THE TRUST SELECT FUNDS
-------------- ------------
Mr. Brown $32,870 $33,000
Mr. Burkhardt $39,344 $39,500
Mr. Harris $32,870 $33,000
Mr. Leach $32,870 $33,000
Mr. Penny $32,870 $33,000
Mr. Willeke $32,870 $33,000
</TABLE>
Neither the Trust nor Norwest Select Funds has adopted any form of retirement
plan covering Trustees or officers. For the twelve month period ended May 31,
1998 total expenses of the Trustees (other than Mr. Keffer) was $20,870 and
total expenses of the trustees of Norwest Select Funds was $77.
As of October 1, 1998, the Trustees and officers of the Trust in the aggregate
owned less than 1% of the outstanding shares of the Portfolios.
INVESTMENT ADVISORY SERVICES
GENERAL
The advisory fee for each Portfolio is based on the average daily net assets of
the Portfolio at the annual rate disclosed in the Portfolio's prospectus.
All investment advisory fees are accrued daily and paid monthly. Norwest, the
investment adviser, in its sole discretion, may waive or continue to waive all
or any portion of its investment advisory fees.
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<PAGE>
In addition to receiving its advisory fee from the Portfolios, the investment
adviser or its affiliates may act and be compensated as investment manager for
its clients with respect to assets which are invested in a Portfolio. In some
instances Norwest or its affiliates may elect to credit against any investment
management, custodial or other fee received from, or rebate to, a client who is
also a shareholder in a Portfolio an amount equal to all or a portion of the
fees received by Norwest or any of its affiliates from a Portfolio with respect
to the client's assets invested in the Portfolio.
NORWEST INVESTMENT MANAGEMENT
Norwest furnishes at its expense all services, facilities and personnel
necessary in connection with managing each Portfolio's investments and effecting
portfolio transactions for each Portfolio. The Investment Advisory Agreement
between each Portfolio and Norwest will continue in effect only if such
continuance is specifically approved at least annually by the Board or by vote
of the shareholders, and in either case, by a majority of the Trustees who are
not interested persons of any party to the Investment Advisory Agreement, at a
meeting called for the purpose of voting on the Investment Advisory Agreement.
The 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 Portfolio to the Adviser or
(2) by the Adviser on 60 days' written notice to the Trust. The Investment
Advisory Agreement shall terminate upon assignment. The Investment Advisory
Agreement also provides that, with respect to the Portfolios, neither Norwest
nor its personnel shall be liable for any mistake of judgment or in any event
whatsoever, except for lack of good faith, provided that nothing in the
Investment Advisory Agreement 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 Agreement provides that Norwest may render
services to others.
MANAGEMENT AND ADMINISTRATIVE SERVICES
MANAGER AND ADMINISTRATOR
Forum manages all aspects of the Trust's operations with respect to each
Portfolio except those which are the responsibility of FAS, Norwest, any other
investment adviser or investment subadviser to a Portfolio, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Portfolio, Forum has entered into a Management
Agreement that will continue in effect only if such continuance is specifically
approved at least annually by the Board or by the shareholders and, in either
case, by a majority of the Trustees who are not interested persons of any party
to the Management Agreement.
On behalf of the Trust and with respect to each Portfolio, Forum: (1) oversees
(a) the preparation and maintenance by the Adviser and the Trust's
administrator, custodian, transfer agent, dividend disbursing agent and
Portfolio accountant (or if appropriate, prepares and maintains) in such form,
for such periods and in such locations as may be required by applicable law, of
all documents and records relating to the operation of the Trust required to be
prepared or maintained by the Trust or its agents pursuant to applicable law;
(b) the reconciliation of account information and balances among the Adviser and
the Trust's custodian, transfer agent, dividend disbursing agent and Portfolio
accountant; (c) the transmission of purchase and redemption orders for Shares;
(d) the notification of the Adviser of available funds for investment; and (e)
the performance of Portfolio 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 Portfolio 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
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<PAGE>
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 Adviser 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 Portfolio shares, to ensure that such shares are
properly and duly registered with the SEC and that appropriate action has been
taken under applicable state law; (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 Portfolio as a regulated investment
company under the Internal Revenue Code of 1986, as amended, and oversees the
preparation and distribution to appropriate parties of notices announcing the
declaration of dividends and other distributions to shareholders; (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 Portfolio by vote of that
Portfolio's shareholders or by either party on not more than 60 days' nor less
than 30 days' written notice. The Management Agreement also provides that
neither Forum nor its personnel shall be liable for any error of judgment or
mistake of law or for any act or omission in the administration or management of
the Trust, except for willful misfeasance, bad faith or gross negligence in the
performance of Forum's or their duties or by reason of reckless disregard of
their obligations and duties under the Management Agreement.
FAS manages all aspects of the Trust's operations with respect to each Portfolio
except those which are the responsibility of Forum, Norwest, or any other
investment adviser or investment subadviser to a Portfolio, or Norwest in its
capacity as administrator pursuant to an investment administration or similar
agreement. With respect to each Portfolio, Forum has entered into a
Administrative Agreement that will continue in effect only if such continuance
is specifically approved at least annually by the Board or by the shareholders
and, in either case, by a majority of the Trustees who are not interested
persons of any party to the Management Agreement.
On behalf of the Trust and with respect to each Portfolio, FAS: (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 Adviser
in monitoring Portfolio holdings for compliance with Prospectus and SAI
investment restrictions and assist in preparation of periodic compliance
reports; (5) with the cooperation of the Trust's counsel, the Investment
Adviser, 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 other applicable securities commissions; (9) is responsible for the
calculation of performance data for dissemination to information services
covering the investment company industry, sales literature of the Trust and
other appropriate purposes; and (10) is responsible for the determination of the
amount of and supervises the declaration of dividends and other distributions to
shareholders as necessary to, among other things, maintain the qualification of
each Portfolio as a regulated investment company under the Code, as amended, and
prepares and distributes to appropriate parties notices announcing the
declaration of dividends and other distributions to shareholders.
The Administrative Agreement terminates automatically if assigned and may be
terminated without penalty with respect to any Portfolio by vote of that
Portfolio's shareholders or by either party on not more than 60 days' nor less
than 30 days' written notice. The Administrative Agreement also provides that
neither FAS nor its personnel shall be liable for any error of judgment or
mistake of law or for any act or omission in the administration or management
38
<PAGE>
of the Trust, except for willful misfeasance, bad faith or gross negligence in
the performance of FAS's or their duties or by reason of reckless disregard of
their obligations and duties under the Administrative Agreement.
Pursuant to their agreements with the Trust, Forum and FAS may subcontract any
or all of their duties to one or more qualified subadministrators who agree to
comply with the terms of Forum's Management Agreement or FAS's Administration
Agreement, respectively. Forum and FAS may compensate those agents for their
services; however, no such compensation may increase the aggregate amount of
payments by the Trust to Forum or FAS pursuant to their Management and
Administration Agreements with the Trust.
The Administration Agreement became effective on June 1, 1997.
DISTRIBUTION
Forum also acts as distributor of the shares of each Portfolio. Forum acts as
the agent of the Trust in connection with the offering of shares of the
Portfolios on a "best efforts" basis pursuant to a Distribution Services
Agreement. Under the Distribution Services Agreement, the Trust has agreed to
indemnify, defend and hold Forum, and any person who controls Forum within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Forum or any such controlling
person may incur, under the 1933 Act, or under common law or otherwise, arising
out of or based upon any alleged untrue statement of a material fact contained
in the Trust's Registration Statement or a Portfolio's Prospectus or Statement
of Additional Information in effect from time to time under the 1933 Act or
arising out of or based upon any alleged omission to state a material fact
required to be stated in any one thereof or necessary to make the statements in
any one thereof not misleading. Forum is not, however, protected against any
liability to the Trust or its shareholders to which Forum would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of Forum's reckless disregard of its
obligations and duties under the Distribution Services Agreement.
With respect to each Portfolio, the Distribution Services Agreement will
continue in effect only if such continuance is specifically approved at least
annually by the Board or by the shareholders and, in either case, by a majority
of the Trustees who are not parties to the Distribution Services Agreement or
interested persons of any such party and, with respect to each class of a
Portfolio for which there is an effective plan of distribution adopted pursuant
to Rule 12b-1, who do not have any direct or indirect financial interest in any
distribution plan of the Portfolio or in any agreement related to the
distribution plan cast in person at a meeting called for the purpose of voting
on such approval ("12b-1 Trustees").
The Distribution Services Agreement terminates automatically if assigned. With
respect to each Portfolio, the Distribution Services Agreement may be terminated
at any time without the payment of any penalty: (1) by the Board or by a vote of
the Portfolio's shareholders or, with respect to each class of a Portfolio for
which there is an effective plan of distribution adopted pursuant to Rule 12b-1,
a majority of 12b-1 Trustees, on 60 days' written notice to Forum or (2) by
Forum on 60 days' written notice to the Trust.
Under the Distribution Services Agreement, Forum receives, and may reallow to
certain financial institutions, the initial sales charges assessed on purchases
of C Shares of the Portfolios. With respect to C Shares of each Portfolio, Trust
has adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") which authorizes monthly payments to Forum under the Distribution
Services Agreement of a distribution services fee, at an annual rate of up to
0.75% of the average daily net assets of the Portfolio attributable to the C
Shares.
The Plan provides that all written agreements relating to the Plan must be in a
form satisfactory to the Board. In addition, the Plan requires the Trust and
Forum to prepare, at least quarterly, written reports setting forth all amounts
expended for distribution purposes by the Portfolios and Forum pursuant to the
Plan and identifying the distribution activities for which those expenditures
were made.
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<PAGE>
The Plan provides that, with respect to each class of each Portfolio to which it
applies, it will remain in effect for one year from the date of its adoption and
thereafter may continue in effect for successive annual periods provided it is
approved by the shareholders of the respective class or by the Board, including
a majority of the 12b-1 trustees. The Plan further provides that it may not be
amended to increase materially the costs which may be borne by the Trust for
distribution pursuant to the Plan without shareholder approval and that other
material amendments to the Plan must be approved by the Trustees in the manner
described in the preceding sentence. The Plan may be terminated at any time by a
vote of the Board or by the shareholders of the respective classes.
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 a Portfolio may be effected and certain other
matters pertaining to the Portfolios; (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 Portfolio, at an annual rate of
0.25% of the Portfolio's average daily net assets attributable to each class of
the Portfolio.
CUSTODIAN
Pursuant to a Custodian Agreement, Norwest Bank, Sixth Street and Marquette,
Minneapolis, Minnesota 55479 serves as each Portfolio's custodian (in this
capacity the "Custodian"). The Custodian's responsibilities include safeguarding
and controlling the Trust's cash and securities, determining income and
collecting interest on Portfolio investments. The fee is computed and paid
monthly, based on the average daily net assets of the Portfolios, the number of
portfolio transactions of the Portfolios and the number of securities in each
Portfolio's portfolio.
Pursuant to rules adopted under the 1940 Act, a Portfolio may maintain its
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board upon consideration of a number of factors, including (but not
limited to) the reliability and financial stability of the institution; the
ability of the institution to perform capably custodial services for the
Portfolio; the reputation of the institution in its national market; the
political and economic stability of the country in which the institution is
located; and possible risks of potential nationalization or expropriation of
Portfolio assets. The Custodian employs qualified foreign subcustodians to
provide custody of the Portfolios foreign assets in accordance with applicable
regulations.
PORTFOLIO ACCOUNTING
Forum Accounting, an affiliate of Forum, performs portfolio accounting services
for each Portfolio pursuant to a Portfolio Accounting Agreement with the Trust.
The Portfolio Accounting Agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by a vote
of the shareholders of the
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<PAGE>
Trust and in either case by a majority of the Trustees who are not parties to
the Portfolio Accounting Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on the Portfolio Accounting Agreement.
Under the Portfolio Accounting Agreement, Forum Accounting prepares and
maintains books and records of each Portfolio on behalf of the Trust that are
required to be maintained under the 1940 Act, calculates the net asset value per
share of each Portfolio (and class thereof) and dividends and capital gain
distributions and prepares periodic reports to shareholders and the SEC. For its
services, Forum Accounting receives from the Trust with respect to each
Portfolio a fee of $1,000 per month plus for each additional class of the
Portfolio above one $1,000 per month. In addition, Forum Accounting is paid
additional surcharges for each of the following: (1) Portfolios with asset
levels exceeding $100 million - $500/month, Portfolios with asset levels
exceeding $250 million - $1000/month, Portfolios with asset levels exceeding
$500 million - $1,500/month, Portfolios with asset levels exceeding $1,000
million - $2,000/month (2) Portfolios requiring international custody -
$1,000/month, (3) Portfolios with more than 30 international positions -
$1,000/month (4) Portfolios with more than 25% of net assets invested in asset
backed securities - $1,000/month, (5) Portfolios with more than 50% of net
assets invested in asset backed securities - $2,000/month, (6) Portfolios with
more than 100 security positions - $1,000/month; and (7) Portfolios with a
monthly portfolio turnover rate of 10% or greater - $1,000/month.
Surcharges are determined based upon the total assets, security positions or
other factors as of the end of the prior month and on the portfolio turnover
rate for the prior month. The rates set forth above shall remain fixed through
December 31, 1998. On January 1, 1999, and on each successive January 1, the
rates may be adjusted automatically by Forum without action of the Trust to
reflect changes in the Consumer Price Index for the preceding calendar year, as
published by the U.S. Department of Labor, Bureau of Labor Statistics. Forum
shall notify the Trust each year of the new rates, if applicable.
Forum Accounting is required to use its best judgment and efforts in rendering
Portfolio accounting services and is not be liable to the Trust for any action
or inaction in the absence of bad faith, willful misconduct or gross negligence.
Forum Accounting is not responsible or liable for any failure or delay in
performance of its Portfolio accounting obligations arising out of or caused,
directly or indirectly, by circumstances beyond its reasonable control and the
Trust has agreed to indemnify and hold harmless Forum Accounting, its employees,
agents, officers and directors against and from any and all claims, demands,
actions, suits, judgments, liabilities, losses, damages, costs, charges, counsel
fees and other expenses of every nature and character arising out of or in any
way related to Forum Accounting's actions taken or failures to act with respect
to a Portfolio or based, if applicable, upon information, instructions or
requests with respect to a Portfolio given or made to Forum Accounting by an
officer of the Trust duly authorized. This indemnification does not apply to
Forum Accounting's actions taken or failures to act in cases of Forum
Accounting's own bad faith, willful misconduct or gross negligence.
EXPENSES
Subject to the obligations of Norwest to reimburse the Trust for its excess
expenses as described above, the Trust has, under its Investment Advisory
Agreements, confirmed its obligation to pay all its other expenses, including:
(1) interest charges, taxes, brokerage fees and commissions; (2) certain
insurance premiums; (3) fees, interest charges and expenses of the Trust's
custodian, transfer agent and dividend disbursing agent; (4) telecommunications
expenses; (5) auditing, legal and compliance expenses; (6) costs of the Trust's
formation and maintaining its existence; (7) costs of preparing and printing the
Trust's prospectuses, statements of additional information, account application
forms and shareholder reports and delivering them to existing and prospective
shareholders; (8) costs of maintaining books of original entry for portfolio and
Portfolio 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; (9) 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; (10)
costs of corporate meetings; (11) 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; (12) state securities law
registration fees and related expenses; (13) fees and out-of-pocket expenses
payable to Forum Financial Services, Inc. under any distribution, management or
similar agreement; (14) and all other fees and expenses paid by the Trust
pursuant to
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any distribution or shareholder service plan adopted pursuant to Rule 12b-1
under the Act.
5. PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio securities for the Portfolios usually are
principal transactions. Debt instruments and shares of open-end investment
companies are normally purchased directly from the issuer or from an underwriter
or market maker for the securities. There usually are no brokerage commissions
paid for such purchases. The Portfolios generally will effect purchases and
sales of equity securities through brokers who charge commissions except in the
over-the-counter markets. Purchases of debt and equity securities from
underwriters of the securities include a disclosed fixed commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers include the spread between the bid and asked price. In
the case of debt securities and equity securities traded in the foreign and
domestic over-the-counter markets, there is generally no stated commission, but
the price usually includes an undisclosed commission or markup. The Portfolios
will not invest in an Underlying Fund if the investment would be subject to a
sales charge. Allocations of transactions to brokers and dealers and the
frequency of transactions are determined by the Adviser in its best judgment and
in a manner deemed to be in the best interest of shareholders of each Portfolio
rather than by any formula. The primary consideration is prompt execution of
orders in an effective manner and at the most favorable price available to the
Portfolio. In transactions on stock exchanges in the United States, commissions
are negotiated, whereas on foreign stock exchanges commissions are generally
fixed. Where transactions are executed in the over-the-counter market, each
Portfolio will seek to deal with the primary market makers; but when necessary
in order to obtain best execution, they will utilize the services of others.
In all cases the Portfolios will attempt to negotiate best execution.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized the Investment Adviser to employ its
affiliates to effect securities transactions of the Portfolios, provided certain
other conditions are satisfied. Payment of brokerage commissions to an affiliate
of an Investment Adviser for effecting such transactions is subject to Section
17(e) of the 1940 Act, which requires, among other things, that commissions for
transactions on securities exchanges paid by a registered investment company to
a broker which is an affiliated person of such investment company, or an
affiliated person of another person so affiliated, not exceed the usual and
customary brokers' commissions for such transactions. It is the Portfolio's
policy that commissions paid to Norwest Investment Services, Inc. ("NISI") and
other affiliates of an Investment Adviser will, in the judgment of the
Investment Adviser responsible for making portfolio decisions and selecting
brokers, be: (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 the Adviser
by the Portfolios satisfy the foregoing standards.
No Portfolio has an understanding or arrangement to direct any specific portion
of its brokerage to an affiliate of the Investment Adviser, and will not direct
brokerage to the affiliate of an Investment Adviser in recognition of research
services. The practice of placing orders with NISI is consistent with each
Portfolio's objective of obtaining best execution and is not dependent on the
fact that NISI is an affiliate of Norwest.
From time to time, a Portfolio may purchase securities of a broker or dealer
through which it regularly engages in securities transactions.
The Portfolios may not always pay the lowest commission or spread available.
Rather, in determining the amount of commissions, including certain dealer
spreads, paid in connection with securities transactions, the Investment Adviser
takes into account factors such as size of the order, difficulty of execution,
efficiency of the executing broker's facilities (including the services
described below) and any risk assumed by the executing broker. The Investment
Advisers may also take into account payments made by brokers effecting
transactions for a Portfolio: (1) to the Portfolio or (2) to other persons on
behalf of the Portfolio for services provided to the Portfolio for which it
would be obligated to pay.
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In addition, the Investment Advisers may give consideration to research services
furnished by brokers to the Advisers for their use and may cause the Portfolios
to pay these brokers a higher amount of commission than may be charged by other
brokers. Such research and analysis is of the types described in Section
28(e)(3) of the Securities Exchange Act of 1934, as amended, and is designed to
augment the Investment Adviser's own internal research and investment strategy
capabilities. Such research and analysis may be used by the Investment Adviser
in connection with services to clients other than the Portfolios, and not all
such services may be used by the Investment Adviser in connection with the
Portfolios. An Investment Adviser's fees are not reduced by reason of the
Investment Adviser's receipt of the research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the obligation to seek the most
favorable price and execution available and such other policies as the Board may
determine, the Investment Adviser may consider sales of shares of the Portfolio
as a factor in the selection of broker-dealers to execute portfolio transactions
for the Portfolio.
Investment decisions for the Portfolios will be made independently from those
for any other account or investment company that is or may in the future become
managed by the Investment Adviser or its affiliates. Investment decisions are
the product of many factors, including basic suitability for the particular
client involved. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling the security. In some instances, one client
may sell a particular security to another client. It also sometimes happens that
two or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as is possible,
averaged as to price and allocated between such clients in a manner which, in
the Investment Adviser's opinion, is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of a portfolio security for one client could have an adverse
effect on another client that has a position in that security. In addition, when
purchases or sales of the same security for a Portfolio and other client
accounts managed by the Investment Adviser occur contemporaneously, the purchase
or sale orders may be aggregated in order to obtain any price advantages
available to large denomination purchases or sales.
PORTFOLIO TURNOVER. A high rate of portfolio turnover involves corresponding
greater expenses than a lower rate, which expenses must be borne by a Portfolio
and its shareholders. High portfolio turnover also may result in the realization
of substantial net short-term capital gains. In order to continue for Federal
tax purposes, less than 30% of the annual gross income of the Portfolio must be
desired from the sale of securities held by the Portfolio for less than three
months. (See "Taxation.") Portfolio turnover rates are set forth under
"Financial Highlight's" in the Portfolios Prospectus.
6. ADDITIONAL PURCHASE, REDEMPTION AND EXCHANGE INFORMATION
GENERAL
Shares of all Portfolios are sold on a continuous basis by the distributor.
EXCHANGES
By making an exchange by telephone, the investor authorizes the Trust's transfer
agent to act on telephonic instructions believed by the Trust's transfer agent
to be genuine instructions from any person representing himself or herself to be
the investor. The records of the Trust's transfer agent of such instructions are
binding. The exchange procedures may be modified or terminated at any time upon
appropriate notice to shareholders. For Federal income tax purposes, exchanges
are treated as sales on which a purchaser will realize a capital gain or loss
depending on whether the value of the shares redeemed is more or less than the
shareholder's basis in such shares at the time of such transaction.
Shareholders of Shares making an exchange will be subject to the applicable
sales charge of any Shares acquired in the exchange; provided, that the sales
charge charged with respect to the acquired shares will be assessed at a rate
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that is equal to the excess (if any) of the rate of the sales charge that would
be applicable to the acquired shares in the absence of an exchange over the rate
of the sales charge previously paid on the exchanged shares. For purposes of the
preceding sentence, Shares acquired through the reinvestment of dividends or
distributions are deemed to have been acquired with a sales charge rate equal to
that paid on the shares on which the dividend or distribution was paid.
In addition, shares acquired by a previous exchange transaction involving shares
on which a sales charge has directly or indirectly been paid (E.G., shares
purchased with a sales charge or issued in connection with an exchange
transaction involving shares that had been purchased with a sales charge), as
well as additional shares acquired through reinvestment of dividends or
distributions on such shares will be treated as if they had been acquired
subject to that sales charge.
REDEMPTIONS
In addition to the situations described in the Prospectus with respect to the
redemptions of shares, the Trust may redeem shares involuntarily to reimburse a
Portfolio for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to transactions effected for the benefit of a shareholder which
is applicable to a Portfolio's shares as provided in the Prospectus from time to
time.
Proceeds of redemptions normally are paid in cash. However, payments may be made
wholly or partially in portfolio securities if the Board determines that payment
in cash would be detrimental to the best interests of the Portfolio. The
Portfolios have chosen not to make an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of its net assets at the beginning
of such period. Redemption requests in excess of applicable limits may be paid,
in whole or in part, in investment securities or in cash, as the Trust's Board
of Trustees may deem advisable; however, payment will be made wholly in cash
unless the Board of Trustees believes that economic or market conditions exist
that would make such a practice detrimental to the best interests of the
Portfolio. If redemption proceeds are paid in investment securities, such
securities will be valued as set forth in the Prospectus under "Other
Information - Determination of Net Asset Value" and a redeeming shareholder
would normally incur brokerage expenses if he or she were to convert the
securities to cash.
7. TAXATION
Each Portfolio intends for each taxable year to qualify for tax treatment as a
"regulated investment company" under the Code. Such qualification does not, of
course, involve governmental supervision of management or investment practices
or policies. Investors should consult their own counsel for a complete
understanding of the requirements each Portfolio must meet to qualify for such
treatment, and of the application of state and local tax laws to his or her
particular situation.
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
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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 or 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
foreign currency and the time the Portfolio actually collects such receivables
or pays such liabilities are treated as ordinary income and 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.
8. ADDITIONAL INFORMATION ABOUT THE TRUST AND THE SHAREHOLDERS
OF THE PORTFOLIOS
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.
OWNERSHIP OF PORTFOLIO SHARES
As of September 1, 1998, no persons owned of record 5% or more of the
outstanding shares of a Portfolio;
GENERAL INFORMATION
The Trust is divided into thirty-nine separate series representing shares of the
Trust Portfolios. The Trust received an order from the SEC permitting the
issuance and sale of separate classes of shares representing interests in each
of the Trust's existing Portfolios; however, the Trust currently issues and
operates the various Portfolios, separate classes of shares under the provisions
of 1940 Act.
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The Trust's shareholders are not personally liable for the obligations of the
Trust under Delaware law. The Delaware Business Trust Act (the "Delaware Act")
provides that a shareholder of a Delaware business trust shall be entitled to
the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust shareholder liability exists in many other states. As a
result, to the extent that the Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject the Trust shareholders to liability. To guard against
this risk, the Trust Instrument of the Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss beyond his investment because of
shareholder liability is limited to circumstances in which: (1) a court refuses
to apply Delaware law; (2) no contractual limitation of liability is in effect;
and (3) the Trust itself is unable to meet its obligations. In light of Delaware
law, the nature of the Trust's business, and the nature of its assets, the Board
believes that the risk of personal liability to a Trust shareholder is extremely
remote.
In order to adopt the name Norwest Advantage 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 Portfolio whose name includes the word
"Norwest," or if Norwest requests in writing, the Trust shall take prompt action
to change the name of the Trust and any such Portfolio to a name that does not
include the word "Norwest." Norwest may from time to time make available without
charge to the Trust for the Trust's use any marks or symbols owned by Norwest,
including marks or symbols containing the word "Norwest" or any variation
thereof, as Norwest deems appropriate. Upon Norwest's request in writing, the
Trust shall cease to use any such mark or symbol at any time. The Trust has
acknowledged that any rights in or to the word "Norwest" and any such marks or
symbols which exist or may exist, and under any and all circumstances, shall
continue to be, the sole property of Norwest. Norwest may permit other parties,
including other investment companies, to use the word "Norwest" in their names
without the consent of the Trust. The Trust shall not use the word "Norwest" in
conducting any business other than that of an investment company registered
under the Act without the permission of Norwest.
FINANCIAL STATEMENTS
The financial statements of each Fund for the year ended May 31, 1998 (which
include statements of assets and liabilities, statements of operations,
statements of changes in net assets, notes to financial statements, financial
highlights, portfolios of investments and the independednt auditors' report
thereon) are included in the Annual Report to Shareholders of the Trust
delivered along with this SAI and are incorporated herein by reference.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the SEC. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents are not necessarily complete, and, in each instance,
are qualified by, reference is made to the copy of such contract or other
documents filed as exhibits to the registration statement.
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APPENDIX A
INVESTMENTS, STRATEGIES AND RISK CONSIDERATIONS
Each of the Portfolios may invest in certain Underlying Funds which may have
investment objectives or investment policies which allow the Underlying Funds to
invest in one or more of the following types of investments:
COMMON STOCKS, WARRANTS 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, generally, as to the recovery of
investment. A preferred stockholder is a shareholder in the company and not a
creditor of the company as is a holder of the company's fixed income securities.
Dividends paid to common and preferred stockholders are distributions of the
earnings of the company and not interest payments, which are expenses of the
company. Equity securities owned by a Portfolio may be traded on a securities
exchange or in the over-the-counter market and may not be traded every day or in
the volume typical of securities traded on a major national securities exchange.
As a result, disposition by a Fund of a portfolio security to meet redemptions
by shareholders or otherwise may require the Fund to sell these securities at a
discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over an extended period of time. The
market value of all securities, including equity securities, is based upon the
market's perception of value and not necessarily the book value of an issuer or
other objective measure of a company's worth. A Fund may invest in warrants,
which are options to purchase an equity security at a specified price (usually
representing a premium over the applicable market value of the underlying equity
security at the time of the warrant's issuance) and usually during a specified
period of time. Unlike convertible securities and preferred stocks, warrants do
not pay a fixed dividend. Investments in warrants involve certain risks,
including the possible lack of a liquid market for the resale of the warrants,
potential price fluctuations as a result of speculation or other factors and
failure of the price of the underlying security to reach a level at which the
warrant can be prudently exercised (in which case the warrant may expire without
being exercised, resulting in the loss of the Portfolio's entire investment
therein).
CONVERTIBLE SECURITIES
Convertible securities, which include convertible debt, convertible preferred
stock and other securities exchangeable under certain circumstances for shares
of common stock, are fixed income securities or preferred stock which generally
may be converted at a stated price within a specific amount of time into a
specified number of shares of common stock. A convertible security entitles the
holder to receive interest paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible debt securities in that they ordinarily provide a
stream of income with generally higher yields than those of common stocks of the
same or similar issuers. These securities are usually senior to common stock in
a company's capital structure, but usually are subordinated to non-convertible
debt securities. In general, the value of a convertible security is the higher
of its investment value (its value as a fixed income security) and its
conversion value (the value of the underlying shares of common stock if the
security is converted). As a fixed income security, the value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise. The value of a convertible security is, however, also
influenced by the value of the underlying common stock.
A Fund may invest in equity-linked securities, including Preferred Equity
Redemption Cumulative Stock ("PERCS"), Equity-Linked Securities ("ELKS"), and
Liquid Yield Option Notes ("LYONS"). Equity-Linked
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Securities are securities that are convertible into or based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of these securities is not fixed but is based on the price
of the underlying common stock, which may rise or fall. In addition, it is not
possible to predict how equity-linked securities will trade in the secondary
market or whether the market for them will be liquid or illiquid.
ADRS AND EDRS
A Fund may invest in sponsored and unsponsored American Depositary Receipts
("ADRs"), which are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs,
in registered form, are designed for use in U.S. securities markets. Unsponsored
ADRs may be created without the participation of the foreign issuer. Holders of
these ADRs generally bear all the costs of the ADR facility, whereas foreign
issuers typically bear certain costs in a sponsored ADR. The bank or trust
company depository of an unsponsored ADR may be under no obligation to
distribute shareholder communications received from the foreign issuer or to
pass through voting rights. A may also invest in European Depositary Receipts
("EDRs"), receipts issued by a European financial institution evidencing an
arrangement similar to that of ADRs, and in other similar instruments
representing securities of foreign companies. EDRs, in bearer form, are designed
for use in European securities markets.
U.S. GOVERNMENT SECURITIES
The term U.S. Government Securities means obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies or
instrumentalities. The U.S. Government Securities in which a Portfolio may
invest include U.S. Treasury Securities and obligations issued or guaranteed by
U.S. Government agencies and instrumentalities and backed by the full faith and
credit of the U.S. Government, such as those guaranteed by the Small Business
Administration or issued by the Government National Mortgage Association. In
addition, the U.S. Government Securities in which the Portfolios may invest
include securities supported primarily or solely by the creditworthiness of the
issuer, such as securities of the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and the Tennessee Valley Authority. There
is no guarantee that the U.S. Government will support securities not backed by
its full faith and credit. Accordingly, although these securities have
historically involved little risk of loss of principal if held to maturity, they
may involve more risk than securities backed by the U.S. Government's full faith
and credit.
ZERO-COUPON SECURITIES
A Fund may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. These components are
traded independently under the Treasury's Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program or as Coupons Under Book
Entry Safekeeping ("CUBES"). The Funds may invest in other types of related
zero-coupon securities. For instance, a number of banks and brokerage firms
separate the principal and interest portions of U.S. Treasury securities and
sell them separately in the form of receipts or certificates representing
undivided interests in these instruments. These instruments are generally held
by a bank in a custodial or trust account on behalf of the owners of the
securities and are known by various names, including Treasury Receipts ("TRs"),
Treasury Investment Growth Receipts ("TIGRs") and Certificates of Accrual on
Treasury Securities ("CATS"). Zero-coupon securities also may be issued by
corporations and municipalities.
Zero-coupon securities are sold at original issue discount and pay no interest
to holders prior to maturity, but a Fund holding a zero-coupon security must
include a portion of the original issue discount of the security as income.
Because of this, zero-coupon securities may be subject to greater fluctuation of
market value than the other securities in which the Portfolios may invest. The
Funds distribute all of their net investment income, and may have to sell
portfolio securities to distribute imputed income, which may occur at a time
when an investment adviser would not have chosen to sell such securities and
which may result in a taxable gain or loss.
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CORPORATE DEBT SECURITIES AND COMMERCIAL PAPER
The corporate debt securities in which a Portfolio may invest include corporate
bonds and notes and short-term investments such as commercial paper and variable
rate demand notes. Commercial paper (short-term promissory notes) is issued by
companies to finance their or their affiliate's current obligations and is
frequently unsecured. Variable and floating rate demand notes are unsecured
obligations redeemable upon not more than 30 days' notice. These obligations
include master demand notes that permit investment of fluctuating amounts at
varying rates of interest pursuant to a direct arrangement with the issuer of
the instrument. The issuer of these obligations often has the right, after a
given period, to prepay the outstanding principal amount of the obligations upon
a specified number of days' notice. These obligations generally are not traded,
nor generally is there an established secondary market for these obligations. To
the extent a demand note does not have a 7 day or shorter demand feature and
there is no readily available market for the obligation, it is treated as an
illiquid security.
FINANCIAL INSTITUTION OBLIGATIONS
A Portfolio may invest in obligations of financial institutions, including
negotiable certificates of deposit, bankers' acceptances and time deposits of
U.S. banks (including savings banks and savings associations), foreign branches
of U.S. banks, foreign banks and their non-U.S. branches (Eurodollars), U.S.
branches and agencies of foreign banks (Yankee dollars), and wholly owned
banking-related subsidiaries of foreign banks.
Certificates of deposit represent an institution's obligation to repay
Portfolios deposited with it that earn a specified interest rate over a given
period. Bank notes are a debt obligation of a bank. Bankers' acceptances are
negotiable obligations of a bank to pay a draft which has been drawn by a
customer and are usually backed by goods in international trade. Time deposits
are non-negotiable deposits with a banking institution that earn a specified
interest rate over a given period. Certificates of deposit and fixed time
deposits, which are payable at the stated maturity date and bear a fixed rate of
interest, generally may be withdrawn on demand but may be subject to early
withdrawal penalties which could reduce a Portfolio's performance. Deposits
subject to early withdrawal penalties or that mature in more than 7 days are
treated as illiquid securities if there is no readily available market for the
securities. A Portfolio's investments in the obligations of foreign banks and
their branches, agencies or subsidiaries may be obligations of the parent, of
the issuing branch, agency or subsidiary, or both. Investments in foreign bank
obligations are limited to banks and branches located in countries which the
Advisers believe do not present undue risk.
PARTICIPATION INTERESTS
A Fund may purchase participation interests in loans or securities in which the
Fund may invest directly that are owned by banks or other financial
institutions. A participation interest gives the Portfolio an undivided interest
in a loan or security in the proportion that the Portfolio's interest bears to
the total principal amount of the security. Participation interests, which may
have fixed, floating or variable rates, may carry a demand feature backed by a
letter of credit or guarantee of the bank or institution permitting the holder
to tender them back to the bank or other institution. For certain participation
interests the Fund will have the right to demand payment, on not more than 7
days notice, for all or a part of the Portfolio's participation interest.
ILLIQUID SECURITIES AND RESTRICTED SECURITIES
A Portfolio may invest up to 15 percent of its net assets in securities that at
the time of purchase are illiquid. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933
("restricted securities"), securities which are otherwise not readily
marketable, such as over-the-counter options, and repurchase agreements not
entitling the holder to payment of principal in 7 days. Limitations on resale
may have an adverse effect on the marketability of portfolio securities and a
Portfolio might also have to register restricted securities in order to dispose
of them, resulting in expense and delay. A Fund might not be able to dispose of
restricted or other securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions. There can be no assurance
that a liquid market will exist for any security at any particular time. An
institutional market has developed for certain
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securities that are not registered under the Securities Act of 1933, including
repurchase agreements, commercial paper, foreign securities and corporate bonds
and notes. Institutional investors depend on an efficient institutional market
in which the unregistered security can be readily resold or on the issuer's
ability to honor a demand for repayment of the unregistered security. A
security's contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of the security.
If such securities are eligible for purchase by institutional buyers in
accordance with Rule 144A under the Securities Act of 1933 or other exemptions,
the Underlying Fund's investment adviser may determine that such securities are
not illiquid securities, under guidelines or other exemptions adopted by the.
These guidelines take into account trading activity in the securities and the
availability of reliable pricing information, among other factors. If there is a
lack of trading interest in a particular Rule 144A security, a Fund's holdings
of that security may be illiquid.
BORROWING
Borrowing involves special risk considerations. Interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed Portfolios (or on the assets that were
retained rather than sold to meet the needs for which Portfolios were borrowed).
Under adverse market conditions, a Fund might have to sell portfolio securities
to meet interest or principal payments at a time when investment considerations
would not favor such sales. A Fund's use of borrowed proceeds to make
investments would subject the Fund to the risks of leveraging. Reverse
repurchase agreements, short sales not against the box, dollar roll transactions
and other similar investments that involve a form of leverage have
characteristics similar to borrowings but are not considered borrowings.
PURCHASING SECURITIES ON MARGIN
When the Fund purchases securities on margin, it only pays part of the purchase
price and borrows the remainder. As a borrowing, a Portfolio's purchase of
securities on margin is subject to the limitations and risks described in
"Borrowing" above. In addition, if the value of the securities purchased on
margin decreases such that the Portfolio's borrowing with respect to the
security exceeds the maximum permissible borrowing amount, the Portfolio will be
required to make margin payments (additional payments to the broker to maintain
the level of borrowing at permissible levels). A Fund's obligation to satisfy
margin calls may require the Fund to sell securities at an inappropriate time.
TECHNIQUES INVOLVING LEVERAGE
Utilization of leveraging involves special risks and may involve speculative
investment techniques. The Funds may borrow for other than temporary or
emergency purposes, lend their securities, enter reverse repurchase agreements,
and purchase securities on a when-issued or forward commitment basis. In
addition, certain Funds may engage in dollar roll transactions and may purchase
securities on margin and sell securities short (other than against the box).
Each of these transactions involve the use of "leverage" when cash made
available to the Fund through the investment technique is used to make
additional portfolio investments. In addition, the use of swap and related
agreements may involve leverage.
Leverage exists when a Fund achieves the right to a return on a capital base
that exceeds the Fund's investment. Leverage creates the risk of magnified
capital losses which occur when losses affect an asset base, enlarged by
borrowings or the creation of liabilities, that exceeds the equity base of the
Portfolio.
The risks of leverage include a higher volatility of the net asset value of the
Fund's shares and the relatively greater effect on the net asset value of the
shares caused by favorable or adverse market movements or changes in the cost of
cash obtained by leveraging and the yield obtained from investing the cash. So
long as a 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
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involved in the leveraging arrangement may substantially increase relative to
the yield on the obligations in which the proceeds of the leveraging have been
invested. To the extent that the interest expense involved in leveraging
approaches the net return on the Fund's investment portfolio, the benefit of
leveraging will be reduced, and, if the interest expense on borrowings were to
exceed the net return to shareholders, the Portfolio's use of leverage would
result in a lower rate of return than if the Portfolio were not leveraged.
Similarly, the effect of leverage in a declining market could be a greater
decrease in net asset value per share than if the Portfolio were not leveraged.
In an extreme case, if the Portfolio's current investment income were not
sufficient to meet the interest expense of leveraging, it could be necessary for
the Portfolio to liquidate certain of its investments at an inappropriate time.
The use of leverage may be considered speculative.
SEGREGATED ACCOUNT. In order to limit the risks involved in various transactions
involving leverage, the Trust's custodian will set aside and maintain in a
segregated account cash and securities in accordance with SEC guidelines. The
account's value, which is marked to market daily, will be at least equal to the
Portfolio's commitments under these transactions. The Fund's commitments may
include: (1) the Fund's obligations to repurchase securities under a reverse
repurchase agreement, settle when-issued and forward commitment transactions and
make payments under a cap or floor; and (2) the greater of the market value of
securities sold short or the value of the securities at the time of the short
sale (reduced by any margin deposit). The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to each interest rate
swap will be calculated on a daily basis and an amount at least equal to the
accrued excess will be maintained in the segregated account. If the Portfolio
enters into an interest rate swap on other than a net basis, the Portfolio will
maintain the full amount accrued on a daily basis of the Portfolio's obligations
with respect to the swap in their segregated account. The use of a segregated
account in connection with leveraged transactions may result in a Portfolio's
portfolio being 100 percent leveraged.
REPURCHASE AGREEMENTS, SECURITIES LENDING, REVERSE REPURCHASE AGREEMENTS,
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DOLLAR ROLL TRANSACTIONS. A
Fund's use of repurchase agreements, securities lending, reverse repurchase
agreements and forward commitments (including "dollar roll" transactions)
entails certain risks not associated with direct investments in securities. For
instance, in the event that bankruptcy or similar proceedings were commenced
against a counterparty while these transactions remained open or a counterparty
defaulted on its obligations, the Portfolio might suffer a loss. Failure by the
other party to deliver a security purchased by the Fund may result in a missed
opportunity to make an alternative investment. Counterparty insolvency risk with
respect to repurchase agreements is reduced by favorable insolvency laws that
allow the Fund, among other things, to liquidate the collateral held in the
event of the bankruptcy of the counterparty. Those laws do not apply to
securities lending and, accordingly, securities lending involves more risk than
does the use of repurchase agreements. As a result of entering forward
commitments and reverse repurchase agreements, as well as lending its
securities, a Fund may be exposed to greater potential fluctuations in the value
of its assets and net asset value per share.
REPURCHASE AGREEMENTS. A Fund may enter into repurchase agreements, transactions
in which a Fund purchases a security and simultaneously commits to resell that
security to the seller at an agreed-upon price on an agreed-upon future date,
normally 1 to 7 days later. The resale price of a repurchase agreement reflects
a market rate of interest that is not related to the coupon rate or maturity of
the purchased security.
SECURITIES LENDING. A Portfolio may lend securities from its portfolios to
brokers, dealers and other financial institutions. Securities loans must be
continuously secured by cash or U.S. Government Securities with a market value,
determined daily, at least equal to the value of the Fund's securities loaned,
including accrued interest. A Fund receives interest in respect of securities
loans from the borrower or from investing cash collateral. A Fund may pay fees
to arrange the loans.
REVERSE REPURCHASE AGREEMENTS. A Fund may enter into reverse repurchase
agreements, transactions in which the Fund sells a security and simultaneously
commits to repurchase that security from the buyer at an agreed upon price on an
agreed upon future date. The resale price in a reverse repurchase agreement
reflects a market rate of interest that is not related to the coupon rate or
maturity of the sold security. For certain demand agreements, there is no agreed
upon repurchase date and interest payments are calculated daily, often based
upon
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the prevailing overnight repurchase rate. Because certain of the incidents of
ownership of the security are retained by the Portfolio, reverse repurchase
agreements may be viewed as a form of borrowing by the Fund from the buyer,
collateralized by the security sold by the Portfolio. A Portfolio will use the
proceeds of reverse repurchase agreements to Fund redemptions or to make
investments. In most cases these investments either mature or have a demand
feature to resell to the issuer on a date not later than the expiration of the
agreement. Interest costs on the money received in a reverse repurchase
agreement may exceed the return received on the investments made by the
Portfolio with those monies. Any significant commitment of a Fund's assets to
the reverse repurchase agreements will tend to increase the volatility of the
Fund's net asset value per share.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. A Fund may purchase fixed income
securities on a "when-issued" or "forward commitment" basis. When these
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within 3 months after the transaction. During the period between a commitment
and settlement, no payment is made for the securities purchased and no interest
on the security accrues to the purchaser. At the time a Portfolio makes a
commitment to purchase securities in this manner, the Fund immediately assumes
the risk of ownership, including price fluctuation. Failure by the other party
to deliver a security purchased by a Portfolio may result in a loss or a missed
opportunity to make an alternative investment. The use of when-issued
transactions and forward commitments enables a Fund to hedge against anticipated
changes in interest rates and prices. If the Underlying Funds were to forecast
incorrectly the direction of interest rate movements, however, a Fund might be
required to complete these transactions when the value of the security is lower
than the price paid by the Fund.
When-issued securities and forward commitments may be sold prior to the
settlement date. When-issued securities may include bonds purchased on a "when,
and if issued" basis under which the issuance of the securities depends upon the
occurrence of a subsequent event. Commitment of a Fund's assets to the purchase
of securities on a when-issued or forward commitment basis will tend to increase
the volatility of the Portfolios net asset value per share.
DOLLAR ROLL TRANSACTIONS. A Fund may enter into "dollar roll" transactions
wherein the Fund sells fixed income securities, typically mortgage-backed
securities, and makes a commitment to purchase similar, but not identical,
securities at a later date from the same party. Like a forward commitment,
during the roll period no payment is made for the securities purchased and no
interest or principal payments on the security accrue to the purchaser, but the
Fund assumes the risk of ownership. A Fund is compensated for entering into
dollar roll transactions by the difference between the current sales price and
the forward price for the future purchase, as well as by the interest earned on
the cash proceeds of the initial sale. Like other when-issued securities or firm
commitment agreements, dollar roll transactions involve the risk that the market
value of the securities sold by the Portfolio may decline below the price at
which a Portfolio is committed to purchase similar securities. In the event the
buyer of securities under a dollar roll transaction becomes insolvent, the Funds
use of the proceeds of the transaction may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the Funds
obligation to repurchase the securities.
SWAP AGREEMENTS
To manage its exposure to different types of investments, a Fund may enter into
interest rate, currency and mortgage (or other asset) swap agreements and may
purchase and sell interest rate "caps," "floors" and "collars." In a typical
interest rate swap agreement, one party agrees to make regular payments equal to
a floating interest rate on a specified amount (the "notional principal amount")
in return for payments equal to a fixed interest rate on the same amount for a
specified period. If a swap agreement provides for payment in different
currencies, the parties may also agree to exchange the notional principal
amount. Mortgage swap agreements are similar to interest rate swap agreements,
except that the notional principal amount is tied to a reference pool of
mortgages. In a cap or floor, one party agrees, usually in return for a fee, to
make payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
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interest rate exceeds an agreed upon level; the purchaser of an interest rate
floor has the right to receive payments to the extent a specified interest rate
falls below an agreed upon level. A collar entitles the purchaser to receive
payments to the extent a specified interest rate falls outside an agreed upon
range.
Swap agreements may involve leverage and may be highly volatile; depending on
how they are used, they may have a considerable impact on the Portfolio's
performance. Swap agreements involve risks depending upon the counterparties'
creditworthiness and ability to perform as well as the Fund's ability to
terminate its swap agreements or reduce its exposure through offsetting
transactions.
MUNICIPAL SECURITIES
The municipal securities in which the Portfolios may invest include municipal
bonds, notes and leases. Municipal securities may be zero-coupon securities.
Yields on municipal securities are dependent on a variety of factors, including
the general conditions of the municipal security markets and the fixed income
markets in general, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The achievement of a Fund's investment
objective is dependent in part on the continuing ability of the issuers of
municipal securities in which the Fund invests to meet their obligations for the
payment of principal and interest when due.
Municipal bonds can be classified as either "general obligation" or "revenue"
bonds. General obligation bonds are secured by a municipality's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are usually payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other tax, but not from general tax revenues. Municipal
bonds include industrial development bonds. Municipal bonds may also be "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer is unable to meet its obligations under the bonds
from current revenues, it may draw on a reserve Fund that is backed by the moral
commitment (but not the legal obligation) of the state or municipality that
created the issuer.
The Fund may invest in tax-exempt industrial development bonds, which in most
cases are revenue bonds and generally do not have the pledge of the credit of
the municipality. The payment of the principal and interest on these bonds is
dependent solely on the ability of an initial or subsequent user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. The Portfolio will acquire private activity securities only if the
interest payments on the security are exempt from federal income taxation (other
than the Alternative Minimum Tax (AMT)).
MUNICIPAL NOTES. Municipal notes, which may be either "general obligation" or
"revenue" securities, are intended to fulfill short-term capital needs and
generally have original maturities not exceeding one year. They include tax
anticipation notes, revenue anticipation notes (which generally are issued in
anticipation of various seasonal revenues), bond anticipation notes,
construction loan notes and tax-exempt commercial paper. Tax-exempt commercial
paper generally is issued with maturities of 270 days or less at fixed rates of
interest.
MUNICIPAL LEASES. Municipal Leases, which may take the form of a lease or an
installment purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications equipment
and other capital assets. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds. Lease and
installment purchase or conditional sale contracts (which normally provide for
title to the leased assets to pass eventually to the government issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. Generally, the Fund will invest in
municipal lease obligations through certificates of participation.
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PARTICIPATION INTERESTS. The Portfolios may purchase participation interests in
municipal securities that are owned by banks or other financial institutions.
Participation interests usually carry a demand feature backed by a letter of
credit or guarantee of the bank or institution permitting the holder to tender
them back to the bank or other institution. Prior to purchasing any
participation interest, the Funds will obtain appropriate assurances that the
interest earned by the Funds from the obligations in which it holds
participation interests is exempt from federal and, in the case of state
tax-free Funds, applicable state income tax.
STAND-BY COMMITMENTS. The Funds may purchase municipal securities together with
the right to resell them to the seller or a third party at an agreed-upon price
or yield within specified periods prior to their maturity dates. Such a right to
resell is commonly known as a stand-by commitment, and the aggregate price which
a Portfolio pays for securities with a stand-by commitment may be higher than
the price which otherwise would be paid. The primary purpose of this practice is
to permit a Portfolio to be as fully invested as practicable in municipal
securities while preserving the necessary flexibility and liquidity to meet
unanticipated redemptions. In this regard, a Portfolio acquires stand-by
commitments solely to facilitate portfolio liquidity and does not exercise its
rights thereunder for trading purposes. Stand-by commitments involve certain
expenses and risks, including the inability of the issuer of the commitment to
pay for the securities at the time the commitment is exercised,
non-marketability of the commitment, and differences between the maturity of the
underlying security and the maturity of the commitment.
PUTS ON MUNICIPAL SECURITIES. The Funds may acquire "puts" on municipal
securities they purchase. A put gives the Portfolio the right to sell the
municipal security at a specified price at any time on or before a specified
date. The Fund will acquire puts only to enhance liquidity, shorten the maturity
of the related municipal security or permit the Fund to invest its Funds at more
favorable rates. The Portfolios may pay an extra amount to acquire a put, either
in connection with the purchase of the related municipal security or separately
from the purchase of the security. Puts involve the same risks discussed above
with respect to stand-by commitments.
SHORT SALES
Certain Funds may make short sales of securities they own or have the right to
acquire at no added cost through conversion or exchange of other securities they
own (referred to as short sales "against the box") and to make short sales of
securities which they does not own or have the right to acquire. A short sale
that is not made "against the box" is a transaction in which a Fund sells a
security it does not own in anticipation of a decline in the market price for
the security. When the Fund makes a short sale, the proceeds it receives are
retained by the broker until the Fund replaces the borrowed security. In order
to deliver the security to the buyer, the Portfolio must arrange through a
broker to borrow the security and, in so doing, the Fund becomes obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. Short sales that are not made "against the box"
create opportunities to increase the Fund's return but, at the same time,
involve special risk considerations and may be considered a speculative
technique. Since the Fund in effect profits from a decline in the price of the
securities sold short without the need to invest the full purchase price of the
securities on the date of the short sale, the Fund's net asset value per share,
will tend to increase more when the securities it has sold short decrease in
value, and to decrease more when the securities it has sold short increase in
value, than would otherwise be the case if it had not engaged in such short
sales. Short sales theoretically involve unlimited loss potential, as the market
price of securities sold short may continuously increase, although a Fund may
mitigate such losses by replacing the securities sold short before the market
price has increased significantly. Under adverse market conditions a Fund might
have difficulty purchasing securities to meet its short sale delivery
obligations and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor those sales.
If the Fund makes a short sale "against the box," the Fund would not immediately
deliver the securities sold and would not receive the proceeds from the sale.
The seller is said to have a short position in the securities sold until it
delivers the securities sold, at which time it receives the proceeds of the
sale. The Portfolio's decision to make a short sale "against the box" may be a
technique to hedge against market risks when Investment Adviser believes that
the price of a security may decline, causing a decline in the value of a
security owned by the Portfolio or a security convertible into or exchangeable
for such security. In such case, any future losses in the Fund's long
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position would be reduced by an offsetting future gain in the short position.
The Portfolio's ability to enter into short sales transactions is limited by
certain tax requirements.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent an interest in a pool of mortgages
originated by lenders such as commercial banks, savings associations and
mortgage bankers and brokers. Mortgage-backed securities may be issued by
governmental or government-related entities or by non-governmental entities such
as special purpose trusts created by banks, savings associations, private
mortgage insurance companies or mortgage bankers.
Interests in mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or on specified call dates. In
contrast, mortgage-backed securities provide monthly payments which consist of
interest and, in most cases, principal. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of the
securities or a mortgage loan servicer. Additional payments to holders of these
securities are caused by prepayments resulting from the sale or foreclosure of
the underlying property or refinancing of the underlying loans.
UNDERLYING MORTGAGES. Pools of mortgages consist of whole mortgage loans or
participations in mortgage loans. The majority of these loans are made to
purchasers of 1-4 family homes, but may be made to purchasers of mobile homes or
other real estate interests. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Portfolio may
purchase pools of variable rate mortgages, growing equity mortgages, graduated
payment mortgages and other types of mortgages. Mortgage servicers impose
qualification standards for local lending institutions which originate mortgages
for the pools as well as credit standards and underwriting criteria for
individual mortgages included in the pools. In addition, many mortgages included
in pools are insured through private mortgage insurance companies.
LIQUIDITY AND MARKETABILITY. The market for mortgage-backed securities has
expanded considerably in recent years. The size of the primary issuance market
and active participation in the secondary market by securities dealers and many
types of investors make government and government-related pass-through pools
highly liquid. The recently introduced private conventional pools of mortgages
(pooled by commercial banks, savings and loan institutions and others, with no
relationship with government and government-related entities) have also achieved
broad market acceptance and consequently an active secondary market has emerged,
however, the market for conventional pools is smaller and less liquid than the
market for government and government-related mortgage pools.
AVERAGE LIFE AND PREPAYMENTS. The average life of a pass-through pool varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's terms may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. Prepayments with respect to securities
during times of declining interest rates will tend to lower the return of a 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.
As prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of
fixed-rate 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life. The assumed average life of pools of mortgages having terms of
less than 30 years is less than 12 years, but typically not less than 5 years.
YIELD CALCULATIONS. Yields on pass-through securities are typically quoted by
investment dealers based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgages.
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Conversely, in periods of rising rates, the rate of prepayment tends to
decrease, thereby lengthening the actual average life of the pool. Actual
prepayment experience may cause the yield to differ from the assumed average
life yield. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the yield of a Fund.
GOVERNMENT AND GOVERNMENT-RELATED GUARANTORS. The principal government guarantor
of mortgage-backed securities is the Government National Mortgage Association
("GNMA"), a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages.
The Federal National Mortgage Association ("FNMA") is a government-sponsored
corporation owned entirely by private stockholders that is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller-servicers. The Federal Home
Loan Mortgage Corporation ("FHLMC") is a corporate instrumentality of the United
States Government that was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues Participation
Certificates ("PCs") which represent interests in mortgages from FHLMCs national
portfolio. FNMA and FHLMC each guarantee the payment of principal and interest
on the securities they issue. These securities, however, are not backed by the
full faith and credit of the United States Government.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES. Mortgage-backed securities offered
by private issuers include pass-through securities comprised of pools of
conventional mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and which are
collateralized by mortgage loans; and collateralized mortgage obligations.
Mortgage-backed securities issued by non-governmental issuers may offer a higher
rate of interest than securities issued by government issuers because of the
absence of direct or indirect government guarantees of payment. Many
non-governmental issuers or servicers of mortgage-backed securities, however,
guarantee timely payment of interest and principal on such securities. Timely
payment of interest and principal may also be supported by various forms of
insurance, including individual loan, title, pool and hazard policies. There can
be no assurance that the private issuers or insurers will be able to meet their
obligations under the relevant guarantees and insurance policies.
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES. Adjustable rate mortgage-backed
securities ("ARMs") are securities that have interest rates that are reset at
periodic intervals, usually by reference to some interest rate index or market
interest rate. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because of the
resetting of interest rates, adjustable rate securities are less likely than
non-adjustable rate securities of comparable quality and maturity to increase
significantly in value when market interest rates fall. Also, most adjustable
rate securities (or the underlying mortgages) are subject to caps or floors.
"Caps" limit the maximum amount by which the interest rate paid by the borrower
may change at each reset date or over the life of the loan and, accordingly,
fluctuation in interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
securities.
ARMs may have less risk of a decline in value during periods of rapidly rising
rates, but they may also have less potential for capital appreciation than other
debt securities of comparable maturities due to the periodic adjustment of the
interest rate on the underlying mortgages and due to the likelihood of increased
prepayments of mortgages as interest rates decline. Furthermore, during periods
of declining interest rates, income to a Portfolio will decrease as the coupon
rate resets to reflect the decline in interest rates. During periods of rising
interest rates, changes in the coupon rates of the mortgages underlying a
Portfolio's ARMs may lag behind changes in market interest rates. This may
result in a slightly lower net value until the interest rate resets to market
rates. Thus, investors could suffer some principal loss if Fund shares were sold
before the interest rates on the underlying mortgages were adjusted to reflect
current market rates.
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COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are debt obligations that are collateralized by mortgages or mortgage
pass-through securities issued by GNMA, FHLMC or FNMA or by pools of
conventional mortgages ("Mortgage Assets"). CMOs may be privately issued or U.S.
Government Securities. Payments of principal and interest on the Mortgage Assets
are passed through to the holders of the CMOs on the same schedule as they are
received, although, certain classes (often referred to as tranches) of CMOs have
priority over other classes with respect to the receipt of payments. Multi-class
mortgage pass-through securities are interests in trusts that hold Mortgage
Assets and that have multiple classes similar to those of CMOs. Unless the
context indicates otherwise, references to CMOs include multi-class mortgage
pass-through securities. Payments of principal of and interest on the underlying
Mortgage Assets (and in the case of CMOs, any reinvestment income thereon)
provide Portfolios to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities. Parallel pay
CMOs are structured to provide payments of principal on each payment date to
more than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, as with other CMO structures, must be retired by its stated maturity date
or final distribution date but may be retired earlier. Planned amortization
class mortgage-based securities ("PAC Bonds") are a form of parallel pay CMO.
PAC Bonds are designed to provide relatively predictable payments of principal
provided that, among other things, the actual prepayment experience on the
underlying mortgage loans falls within a contemplated range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the contemplated range, or if deviations from other assumptions
occur, principal payments on a PAC Bond may be greater or smaller than
predicted. The magnitude of the contemplated range varies from one PAC Bond to
another; a narrower range increases the risk that prepayments will be greater or
smaller than contemplated. CMOs may have complicated structures and generally
involve more risks than simpler forms of mortgage-backed securities.
The final tranche of a CMO may be structured as an accrual bond (sometimes
referred to as a "Z-tranche"). Holders of accrual bonds receive no cash payments
for an extended period of time. During the time that earlier tranches are
outstanding, accrual bonds receive accrued interest which is a credit for
periodic interest payments that increases the face amount of the security at a
compounded rate, but is not paid to the bond holder. After all previous tranches
are retired, accrual bond holders start receiving cash payments that include
both principal and continuing interest. The market value of accrual bonds can
fluctuate widely and their average life depends on the other aspects of the CMO
offering. Interest on accrual bonds is taxable when accrued even though the
holders receive no accrual payment. The Funds distribute all of their net
investment income, and may have to sell portfolio securities to distribute
imputed income, which may occur at a time when an investment adviser would not
have chosen to sell such securities and which may result in a taxable gain or
loss.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities are
classes of mortgage-backed securities that receive different proportions of the
interest and principal distributions from the underlying Mortgage Assets. They
may be may be privately issued or U.S. Government Securities. In the most
extreme case, one class will be entitled to receive all or a portion of the
interest but none of the principal from the Mortgage Assets (the interest-only
or "IO" class) and one class will be entitled to receive all or a portion of the
principal, but none of the interest (the "PO" class).
ASSET-BACKED SECURITIES
Asset-backed securities represent direct or indirect participations in, or are
secured by and payable from, assets other than mortgage-backed assets such as
motor vehicle installment sales contracts, installment loan contracts, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. No Portfolio may invest more than 10 percent of
its net assets in asset-backed securities that are backed by a particular type
of credit, for instance, credit card receivables. Asset-backed securities,
including adjustable rate asset-backed securities, have yield characteristics
similar to those of mortgage-backed securities and, accordingly, are subject to
many of the same risks. Assets are securitized through the use of trusts and
special purpose corporations that issue securities that are often backed by a
pool of assets representing the obligations of a number of different parties.
Payments of principal and interest may be guaranteed up to certain amounts and
for a certain
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time period by a letter of credit issued by a financial institution.
Asset-backed securities do not always have the benefit of a security interest in
collateral comparable to the security interests associated with mortgage-backed
securities. As a result, the risk that recovery on repossessed collateral might
be unavailable or inadequate to support payments on asset-backed securities is
greater for asset-backed securities than for mortgage-backed securities. In
addition, because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of an interest rate or economic cycle has not been
tested.
FOREIGN EXCHANGE CONTRACTS AND FOREIGN CURRENCY FORWARD CONTRACTS. Changes in
foreign currency exchange rates will affect the U.S. dollar values of securities
denominated in currencies other than the U.S. dollar. The rate of exchange
between the U.S. dollar and other currencies fluctuates in response to forces of
supply and demand in the foreign exchange markets. These forces are affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. When
investing in foreign securities a Fund usually effects currency exchange
transactions on a spot (I.E., cash) basis at the spot rate prevailing in the
foreign exchange market. The Fund incurs foreign exchange expenses in converting
assets from one currency to another.
A Fund may enter into foreign currency forward contracts or currency futures or
options contracts for the purchase or sale of foreign currency to "lock in" the
U.S. dollar price of the securities denominated in a foreign currency or the
U.S. dollar value of interest and dividends to be paid on such securities, or to
hedge against the possibility that the currency of a foreign country in which a
Fund has investments may suffer a decline against the U.S. dollar. Like foreign
exchange contracts and foreign currency forward contracts, these instruments are
often referred to as derivatives, which may be defined as financial instruments
whose performance is derived, at least in part, from the performance of another
asset (such as a security, currency or an index of securities. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. This
method of attempting to hedge the value of a Fund's portfolio securities against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. Although the strategy of engaging in
foreign currency transactions could reduce the risk of loss due to a decline in
the value of the hedged currency, it could also limit the potential gain from an
increase in the value of the currency. No Portfolio intends to maintain a net
exposure to such contracts where the fulfillment of the Portfolio's obligations
under such contracts would obligate the Portfolio to deliver an amount of
foreign currency in excess of the value of the Portfolio's portfolio securities
or other assets denominated in that currency. A Portfolio will not enter into
these contracts for speculative purposes and will not enter into non-hedging
currency contracts. These contracts involve a risk of loss if Norwest fails to
predict currency values correctly.
FUTURES CONTRACTS AND OPTIONS
A Fund may seek to enhance its return through the writing (selling) and
purchasing of exchange-traded and over-the-counter options on fixed income
securities or indices. A Fund may also to attempt to hedge against a decline in
the value of securities owned by it or an increase in the price of securities
which it plans to purchase through the use of those options and the purchase and
sale of interest rate futures contracts and options on those futures contracts.
These instruments are often referred to as "derivatives," which may be defined
as financial instruments whose performance is derived, at least in part, from
the performance of another asset (such as a security, currency or an index of
securities. An option is covered if, so long as the Fund is obligated under the
option, it owns an offsetting position in the underlying security or futures
contract or maintains cash, U.S. Government Securities or other liquid debt
securities in a segregated account with a value at all times sufficient to cover
the Portfolio's obligation under the option. Certain futures strategies employed
by a Fund in making temporary allocations may not be deemed to be for bona fide
hedging purposes, as defined by the Commodity Futures Trading Commission. A
Portfolio may enter into these futures contracts only if the aggregate of
initial margin deposits for open futures contract positions does not exceed 5
percent of the Portfolio's total assets.
RISK CONSIDERATIONS. The Fund's use of options and futures contracts subjects
the Fund to certain investment risks and transaction costs to which it might not
otherwise be subject. These risks include: (1) dependence on Investment
Adviser's ability to predict movements in the prices of individual securities
and
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fluctuations in the general securities markets; (2) imperfect correlations
between movements in the prices of options or futures contracts and movements in
the price of the securities hedged or used for cover which may cause a given
hedge not to achieve its objective; (3) the fact that the skills and techniques
needed to trade these instruments are different from those needed to select the
other securities in which the Portfolio invests; (4) lack of assurance that a
liquid secondary market will exist for any particular instrument at any
particular time, which, among other things, may hinder a Portfolio's ability to
limit exposures by closing its positions; (5) the possible need to defer closing
out of certain options, futures contracts and related options to avoid adverse
tax consequences; and (6) the potential for unlimited loss when investing in
futures contracts or writing options for which an offsetting position is not
held.
Other risks include the inability of the Fund, as the writer of covered call
options, to benefit from any appreciation of the underlying securities above the
exercise price and the possible loss of the entire premium paid for options
purchased by the Portfolio. In addition, the futures exchanges may limit the
amount of fluctuation permitted in certain futures contract prices during a
single trading day. A Fund may be forced, therefore, to liquidate or close out a
futures contract position at a disadvantageous price. There can be no assurance
that a liquid market will exist at a time when a Fund seeks to close out a
futures position or that a counterparty in an over-the-counter option
transaction will be able to perform its obligations. There are a limited number
of options on interest rate futures contracts and exchange traded options
contracts on fixed income securities. Accordingly, hedging transactions
involving these instruments may entail "cross-hedging." As an example, a Fund
may wish to hedge existing holdings of mortgage-backed securities, but no listed
options may exist on those securities. In that event, Norwest may attempt to
hedge the Fund's securities by the use of options with respect to similar fixed
income securities. The Fund may use various futures contracts that are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market in those contracts
will develop or continue to exist.
LIMITATIONS. Except for the futures contracts strategies of a Portfolio used for
making temporary allocations among bonds and stocks, the Portfolios have no
current intention of investing in futures contracts and options thereon for
purposes other than hedging. Certain Underlying Portfolios may purchase a call
or put only if, after such purchase, the value of all put and call options held
by the Underlying Portfolio would not exceed 5% of its total assets. No
Portfolio may sell a put option if the exercise value of all put options written
by the Portfolio would exceed 50 percent of the Portfolio's total assets or sell
a call option if the exercise value of all call options written by the Portfolio
would exceed the value of the Portfolio's assets. In addition, the current
market value of all open futures positions held by a Portfolio will not exceed
50 percent of its total assets.
OPTIONS ON SECURITIES. A call option is a contract pursuant to which the
purchaser of the call option, in return for a premium paid, has the right to buy
the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. A put option gives its purchaser, in return for a premium, the right to
sell the underlying security at a specified price during the term of the option.
The writer of the put, who receives the premium, has the obligation to buy the
underlying security, upon exercise at the exercise price during the option
period. The amount of premium received or paid is based upon certain factors,
including the market price of the underlying security or index, the relationship
of the exercise price to the market price, the historical price volatility of
the underlying security or index, the option period, supply and demand and
interest rates.
OPTIONS ON STOCK INDICES. A stock index assigns relative values to the stock
included in the index, and the index fluctuates with changes in the market
values of the stocks included in the index. Stock index options operate in the
same way as the more traditional stock options except that exercises of stock
index options are effected with cash payments and do not involve delivery of
securities. Thus, upon exercise of stock index options, the purchaser will
realize and the writer will pay an amount based on the differences between the
exercise price and the closing price of the stock index.
INDEX FUTURES CONTRACTS. Bond and stock index futures contracts are bilateral
agreements pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the bond or stock index value at the close of trading of the contract and the
price at which the
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futures contract is originally struck. No physical delivery of the securities
comprising the index is made. Generally, these futures contracts are closed out
prior to the expiration date of the contract.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to stock
options except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract rather than to purchase or sell stock, at a specified exercise price at
any time during the period of the option. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by transfer to the holder of an accumulated balance representing the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future.
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APPENDIX B
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.
B-1
<PAGE>
STANDARD AND POOR'S CORPORATION ("S&P")
S&P rates corporate bond issues, including convertible debt issues, as follows:
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt rated in higher rated
categories.
Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal payments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
Bonds rated CCC have currently identifiable vulnerability to default, and are
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.
Bonds rated C typically are subordinated to senior debt which as assigned an
actual or implied CCC debt rating. This rating may also be used to indicate
imminent default.
The C rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating Cl is reserved
for income bonds on which no interest is being paid.
Bonds are rated D when the issue is in payment default, or the obligor has filed
for bankruptcy. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will made during
such grace period.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the rating category.
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<PAGE>
FITCH IBCA, INC. ("FITCH")
Fitch rates corporate bond issues, including convertible debt issues, as
follows:
AAA Bonds are considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds are considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, shorter-term debt of these issuers is generally rated F-1+.
A Bonds are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D categories.
B-3
<PAGE>
PREFERRED STOCK
MOODY'S INVESTORS SERVICE
Moody's rates preferred stock as follows:
An issue rated aaa is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
among preferred stock issues.
An issue rated aa is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue rated a is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
An issue rated baa is considered to be a medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
An issue rated ba is considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
An issue which is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
An issue which is rated ca is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payment.
An issue which is rated c can be regarded as having extremely poor prospects of
ever attaining any real investment standing. This is the lowest rated class of
preferred or preference stock.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issuer ranks in the lower end of its generic rating
category.
STANDARD & POOR'S
S&P rates preferred stock as follows:
AAA is the highest rating that is assigned by S&P to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
A preferred stock issue rated AA also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
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<PAGE>
An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
The rating CC is reserved for a preferred stock issue in arrears on dividends or
sinking Portfolio payments but that is currently paying.
A preferred stock rated C is a non-paying issue.
A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
To provide more detailed indications of preferred stock quality, the ratings
from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
SHORT TERM MUNICIPAL LOANS
MOODY'S INVESTORS SERVICE. 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 IBCA, INC. Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
Short-term issues rated F-1+ are regarded as having the strongest degree of
assurance for timely payment. Issues assigned a rating of F-1 reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
Issues assigned a rating of F-2 have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned
F-1+ or F-1.
B-5
<PAGE>
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.
Issuers rated Prime-1 have a superior ability for repayment of senior short-term
debt obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics: Leading market positions in well-established
industries; high rates of return on Portfolios employed; conservative
capitalization structure with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial charges and
high internal cash generation; well-established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated Prime-2 by Moody's have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD AND POOR'S CORPORATION
S&P's two highest commercial paper ratings are A-1 and A-2. Issues assigned an A
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety. An A-1 designation indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation. The capacity for timely payment on issues with
an A-2 designation is strong. However, the relative degree of safety is not as
high as for issues designated A-1. A-3 issues have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations. Issues rated A-2 are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing conditions
or short-term adversities.
FITCH IBCA, INC.
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+. Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION AND THE PORTFOLIOS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF THE PORTFOLIOS' SHARES, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
B-6
<PAGE>
APPENDIX B - MISCELLANEOUS TABLES
TABLE 1 - INVESTMENT ADVISORY FEES
The following Table shows the dollar amount of fees payable under the Investment
Advisory Agreements between Norwest and the Trust with respect to each Fund, the
amount of fee that was waived by Norwest, if any, and the actual fee received by
Norwest. The data is for the past three fiscal years or shorter period if the
Portfolio has been in operation for a shorter period.
<TABLE>
<S> <C> <C> <C>
ADVISORY FEE ADVISORY FEE ADVISORY FEE
PAYABLE WAIVED RETAINED
------- ------ --------
WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
C Shares
Year Ended May 31, 1998 9,786 9,786 0
WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
C Shares
Year Ended May 31, 1998 7,907 7,907 0
WEALTHBUILDER II GROWTH PORTFOLIO
C Shares
Year Ended May 31, 1998 5,939 5,939 0
</TABLE>
B-7
<PAGE>
TABLE 2 - MANAGEMENT FEES
The following table shows the dollar amount of fees payable to Forum for its
management services with respect to each Portfolio. The data is for the past
three fiscal years or shorter period if the Fund has been in operation for a
shorter period.
(I) MANAGEMENT FEES TO FORUM
<TABLE>
<S> <C> <C> <C>
MANAGEMENT MANAGEMENT MANAGEMENT
FEE FEE FEE
PAYABLE WAIVED RETAINED
------- ------ --------
WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
C Shares
Year Ended May 31, 1998 2,796 2,796 0
WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
C Shares
Year Ended May 31, 1998 2,259 2,259 0
WEALTHBUILDER II GROWTH PORTFOLIO
C Shares
Year Ended May 31, 1998 1,697 1,697 0
</TABLE>
B-8
<PAGE>
TABLE 3 - DISTRIBUTION FEES
The following table shows the dollar amount of fees payable to Forum for its
distribution services with respect to each Portfolio, the amount of fee that was
waived by Forum, if any, and the actual fee received by Forum. The data is for
the past three fiscal years or shorter period if the Portfolio has been in
operation for a shorter period.
<TABLE>
<S> <C> <C> <C>
DISTRIBUTION DISTRIBUTION DISTRIBUTION
FEE FEE FEE
PAYABLE WAIVED RETAINED
------- ------ --------
WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
C Shares
Year Ended May 31, 1998 20,971 0 20,971
WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
C Shares
Year Ended May 31, 1998 16,944 0 16,944
WEALTHBUILDER II GROWTH PORTFOLIO
C Shares
Year Ended May 31, 1998 12,726 0 12,726
</TABLE>
B-9
<PAGE>
TABLE 4 - SALES CHARGES
The following table shows: (1) the dollar amount of sales charges payable to
Forum with respect to sales of C Shares and (2) the amount of sales charge
retained by Forum and not reallowed to other persons. The data is for the past
three fiscal years or shorter period if the Portfolio has been in operation for
a shorter period.
SALES RETAINED
CHARGES AMOUNT
WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
Year Ended May 31, 1998 $116 $0
WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
Year Ended May 31, 1998 $94 $0
WEALTHBUILDER II GROWTH PORTFOLIO
Year Ended May 31, 1998 $55 $0
B-10
<PAGE>
TABLE 5 - ACCOUNTING FEES
The following table shows the dollar amount of fees payable to Forum Accounting
for its accounting services with respect to each Portfolio, the amount of fee
that was waived by Forum Accounting, if any, and the actual fee received by
Forum Accounting. The data is for the past three fiscal years or shorter period
if the Portfolio has been in operation for a shorter period.
<TABLE>
<S> <C> <C> <C>
FEE FEE FEE
PAYABLE WAIVED RETAINED
------- ------ --------
WEALTHBUILDER II GROWTH BALANCED PORTFOLIO
C Shares
Year Ended May 31, 1998 11,500 11,500 0
WEALTHBUILDER II GROWTH AND INCOME PORTFOLIO
C Shares
Year Ended May 31, 1998 11,500 11,500 0
WEALTHBUILDER II GROWTH PORTFOLIO
C Shares
Year Ended May 31, 1998 11,500 11,500 0
</TABLE>
B-11
<PAGE>
APPENDIX C - PERFORMANCE DATA
TABLE 1 - TOTAL RETURNS
The average annual total return of each class of each Portfolio for the period
ended May 31, 1998 was as follows. The actual dates of the commencement of each
Portfolio's operations is listed in the Portfolio's financial statements.
Calendar quarter performance is available from the adviser.
<TABLE>
SEC STANDARDIZED RETURNS
<S> <C> <C> <C> <C>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
- ----------------------------------------------------------------------------------
NORWEST WEALTHBUILDER II GROWTH BALANCED N/A N/A N/A 6.73%
PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH & INCOME N/A N/A N/A 8.11%
PORTFOLIO
NORWEST WEALTHBUILDER II GROWTH PORTFOLIO N/A N/A N/A 8.51%
</TABLE>
C-1
<PAGE>
<TABLE>
NON STANDARDIZED RETURNS (WITHOUT A SALES LOAD)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALENDAR
ONE THREE YEAR TO ONE THREE FIVE TEN SINCE
MONTH MONTHS DATE YEAR YEARS YEARS YEARS INCEPTION
WEALTHBUILDER II GROWTH (1.28)% 2.76% 7.68% N/A N/A N/A N/A 8.35%
BALANCED PORTFOLIO
WEALTHBUILDER II GROWTH AND (2.32)% 3.39% 11.14% N/A N/A N/A N/A 9.75%
INCOME PORTFOLIO
WEALTHBUILDER II GROWTH (2.39)% 3.28% 10.43% N/A N/A N/A N/A 10.17%
PORTFOLIO
</TABLE>
C-2
<PAGE>
APPENDIX D - OTHER ADVERTISEMENT MATTERS
From time to time, the sales material for the Portfolio may include a discussion
of, and commentary by senior management of the Adviser on, the following.
The Trust may compare the Portfolio family against other bank-managed mutual
funds or other investment companies based on asset size. The Adviser believes
the Portfolio' growth may be attributed to three things: disciplined investment
process, utilizing talented people and focusing on customer needs.
The Portfolios utilize a disciplined process which relies heavily upon its
investment managers and an experienced investment research team. This approach
maximizes consistency by ensuring that no individual manager's style unduly
influences a Portfolio's style.
NORWEST CORPORATION
1929 Northwestern National Bank and several
upper midwest banks form a holding company called Northwestern
National Bancorporation. "Banco" acquires 90 banks in its first year.
1932 At is peak, Banco owns a total of 139 affiliate banks.
1982 Banco enters the consumer finance business by acquiring Dial Finance
Company.
1983 The 87 affiliates of Banco are reborn as
"Norwest Corporation."
1989 Norwest consolidates its operations in the new 57-story Norwest Center
in downtown Minneapolis.
1997 Norwest reaches $50 billion in assets under management, including $19
billion in mutual funds.
NORWEST ADVANTAGE FUNDS
1946 Inception of the Common Trust Funds, the company's first pooled
investment vehicles.
1987 Norwest introduces two new open-ended
registered investment company funds
(commonly known as mutual funds), called the Prime Value Funds. In less
than one year, assets under management reach $500 million.
1992 The Norwest mutual fund family expands to 11 mutual funds. Assets under
management grow to $3.2 billion.
1994 Conversion to Norwest Collective Funds (bank collective investment
funds) into NORWEST ADVANTAGE FUNDS (mutual funds).
1998 NORWEST ADVANTAGE FUNDS family includes 41 mutual funds with over $20
billion in assets under management.
NORWEST CENTER
MINNEAPOLIS, MINNESOTA
DESIGNED BY WORLD-RENOWNED ARCHITECT CESAR PELLI, THE NORWEST CENTER WAS
CONSTRUCTED IN 1988. SINCE THEN, IT HAS RECEIVED SEVERAL PRESTIGIOUS
ARCHITECTURAL AWARDS, INCLUDING THE LARGE SCALE OFFICE AWARD OF EXCELLENCE, FROM
THE URBAN LAND INSTITUTE (1989); THE NAIOP (MINNESOTA) AWARD FOR EXCELLENCE --
DOWNTOWN BUILDING OF THE YEAR (1989); THE BOMA (MINNEAPOLIS) OFFICE BUILDING OF
THE YEAR, OVER 500,000 SQ. FT. (1993); AND THE BOMA (MIDWEST NORTHERN REGION)
OFFICE BUILDING OF THE YEAR, OVER 500,000 SQ. FT. (1994). THE NORWEST CENTER IS
LOCATED IN THE FINANCIAL DISTRICT OF MINNEAPOLIS AT 90 SOUTH SEVENTH STREET.
