<PAGE>
As filed with the Securities and Exchange Commission on March 1, 1996
1933 Act File No. 33-10976
1940 Act File No. 811-4945
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. [_]
----
Post-Effective Amendment No. 14 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 15 [X]
------
-----------------------
INVESTORS TRUST
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Suite 5600, Two Union Square, Seattle, Washington 98101
-------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (206) 625-1755
-------------
Edward J. Wiles, Esq.
Investors Trust
Suite 5600
Two Union Square
Seattle, Washington 98101
------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective under Rule 485:
[X] Immediately upon filing pursuant to paragraph (b), [_] On
pursuant to paragraph (b), ------------
[_] 60 days after filing pursuant to paragraph (a)(1), [_] On
pursuant to paragraph (a)(1). -------------
[_] 75 days after filing pursuant to paragraph (a)(2), [_] On
pursuant to paragraph (a)(2) of rule 485. -------------
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
-------------------------
The Registrant hereby declares that, pursuant to Rule 24f-2(a)(1)
promulgated under the Investment Company Act of 1940, as amended, it has
registered an indefinite number of shares of beneficial interest, no par value,
of Class A shares and Class B shares of each of the Investors Trust Government
Fund series, Investors Trust Growth Fund series, Investors Trust Value Fund
series, Investors Trust Tax Free Fund series and Investors Trust Adjustable Rate
Fund series of the Registrant. The Registrant filed its Rule 24f-2 notice for
the fiscal year ended October 31, 1995 on or about December 15, 1995.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
(REGISTRATION STATEMENT ON
FORM N-1A AND PROSPECTUS)
<TABLE>
<CAPTION>
Form N-1A Item No.
-----------------
Part A Caption or Location in each Prospectus
------ --------------------------------------
<S> <C>
1. Cover Page.......................... Cover page
2. Synopsis............................ Summary of Fund Expenses
3. Condensed Financial Information..... Not Applicable
4. General Description of Registrant... The Trust, the Funds and Management;
Investment Objective and Policies
5. Management of the Fund.............. The Trust, the Funds and Management;
Additional Information
6. Capital Stock and Other Securities.. The Trust, the Funds and Management;
Dividends, Distributions and Taxes
7. Purchase of Securities Being
Offered............................. How to Purchase Shares
8. Redemption or Repurchase............ How to Redeem Shares
9. Pending Legal Proceedings........... Not Applicable
Caption or Location in
Part B Statement of Additional Information
------ ------------------------------------
10. Cover Page.......................... Cover Page
11. Table of Contents................... Table of Contents
12. General Information and History..... General Information
13. Investment Objectives and Policies.. Additional Information Concerning
Certain Investment Techniques; Debt
Instruments and Permitted Cash
Investments; Debt Securities
Ratings; Investment Restrictions;
Portfolio Transactions
14. Management of the Registrant........ Management of the Funds
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Form N-1A Item No.
- ----------------- Caption or Location in
Part B Statement of Additional Information
------ -----------------------------------
<S> <C>
15. Control Persons and Principal
Holder of Securities............ Management of the Funds
16. Investment Advisory and Other
Services........................ The Investment Adviser and Sub-Advisers
17. Brokerage Allocation and
Other Practices................. Portfolio Transactions
18. Capital Stock and Other
Securities...................... General Information
19. Purchase, Redemption and Pricing
of Securities Being Offered..... Net Asset Value
20. Tax Status....................... Certain Tax Matters
21. Underwriters..................... Distribution of Shares of the Funds
22. Calculation of Performance Data.. Performance Information
23. Financial Statements............. Financial Statements
</TABLE>
(ii)
<PAGE>
INVESTORS TRUSTSM
ADJUSTABLE RATE FUND
GOVERNMENT FUND
TAX FREE FUND
VALUE FUND
GROWTH FUND
PROSPECTUS--MARCH 1, 1996 (LOGO)
Investors Trust is an open-end diversified management investment company
consisting of five funds, each of which has its own specific investment
objectives.
Investors TrustSM Adjustable Rate Fund seeks to produce a high level of
current income consistent with limiting fluctuations in net asset value of
Fund shares. This Fund will attempt to achieve its objective by investing
primarily in adjustable rate securities, including but not limited to
adjustable rate mortgage securities.
Investors TrustSM Government Fund seeks to produce a high level of current
income consistent with safety of principal. This Fund will attempt to achieve
its objective by investing primarily in obligations issued or guaranteed by
the U.S. Government or by its agencies or instrumentalities.
Investors TrustSM Tax Free Fund seeks to produce as high a level of income
exempt from federal income tax as is consistent with preservation of capital.
This Fund will attempt to achieve its objective by investing substantially all
of its assets in tax-exempt debt obligations.
Investors TrustSM Value Fund seeks to provide long-term growth of capital and
an above-average level of dividend income by investing primarily in equity
securities. This Fund seeks to provide a higher total return than that of the
Standard & Poor's 500 Stock Index. See "Investment Objective and Policies."
Investors TrustSM Growth Fund seeks to provide long term growth of capital.
This Fund will attempt to achieve its objective by investing primarily in
equity securities of companies which, in the opinion of the Fund's sub-
adviser, have above average prospects for growth. See "Investment Objectives
and Policies."
This Prospectus sets forth the information about each Fund that you ought to
know before investing. Please read the Prospectus and retain it for future
reference. A Statement of Additional Information (dated March 1, 1996) for the
Fund has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. This free Statement is available upon
written request to the Fund at Suite 5600, Two Union Square, 601 Union Street,
Seattle, Washington 98101 or by telephoning (800) 656-6626.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS WITH OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF FUND EXPENSES................................................... 3
FINANCIAL HIGHLIGHTS ...................................................... 7
ADJUSTABLE RATE FUND..................................................... 7
GOVERNMENT FUND.......................................................... 8
TAX FREE FUND............................................................ 10
VALUE FUND............................................................... 11
GROWTH FUND.............................................................. 12
INVESTMENT OBJECTIVE AND POLICIES.......................................... 13
ADJUSTABLE RATE FUND..................................................... 13
GOVERNMENT FUND.......................................................... 16
TAX FREE FUND............................................................ 17
VALUE FUND............................................................... 19
GROWTH FUND.............................................................. 20
FURTHER INFORMATION CONCERNING THE FUNDS' INVESTMENT PRACTICES........... 21
HOW TO PURCHASE SHARES..................................................... 30
SHAREHOLDER PROGRAMS AND SERVICES.......................................... 35
HOW TO REDEEM SHARES....................................................... 38
NET ASSET VALUE............................................................ 39
DIVIDENDS, DISTRIBUTIONS AND TAXES......................................... 39
PERFORMANCE INFORMATION.................................................... 41
THE TRUST, THE FUNDS AND MANAGEMENT........................................ 42
DISTRIBUTION PLAN.......................................................... 47
ADDITIONAL INFORMATION..................................................... 49
</TABLE>
2
<PAGE>
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES (ALL FUNDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)......................................... 4.5%(1) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price).............................. None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)
Redemption during year 1.................................. None(2) 5%
Redemption during year 2.................................. None 4%
Redemption during year 3.................................. None 3%
Redemption during year 4.................................. None 2%
Redemption during year 5.................................. None 1%
Redemption during year 6 and thereafter................... None None
Redemption Fees(3) (as a percentage of amount redeemed, if
applicable).............................................. None None
Exchange Fee.............................................. None None
</TABLE>
- --------
(1) Reduced sales charge purchase plans are available for Class A shares. See
"How to Purchase Shares."
(2) Although not subject to a sales charge, Class A share purchases of $1
million or more are subject to a 1% contingent deferred sales charge if
redeemed within one year of the purchase.
(3) A wire fee (currently $10.00) will be deducted from proceeds if a
shareholder elects to transfer redemption proceeds by wire.
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ADJUSTABLE RATE FUND
Annual Fund Operating Expenses (As a percentage of average
daily net assets)
Management Fee(1)........................................... .40% .40%
12b-1 Fees(2)............................................... .25% 1.00%
Other Expenses(3)........................................... .30% .30%
---- ----
Total Fund Operating Expenses(3).......................... .95% 1.70%
==== ====
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
GOVERNMENT FUND
Annual Fund Operating Expenses (As a percentage of average
daily net assets)
Management Fee(1)........................................... .59% .59%
12b-1 Fees(2)............................................... .25% 1.00%
Other Expenses(3)........................................... .17% .17%
---- ----
Total Fund Operating Expenses............................. 1.01% 1.76%
==== ====
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
TAX FREE FUND
Annual Fund Operating Expenses (As a percentage of average
daily net assets)
Management Fee(1)........................................... .60% .60%
12b-1 Fees(2)............................................... .25% 1.00%
Other Expenses(3)........................................... .30% .30%
---- ----
Total Fund Operating Expenses(3).......................... 1.15% 1.90%
==== ====
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
VALUE FUND
Annual Fund Operating Expenses (As a percentage of average
daily net assets)
Management Fee(1)........................................... .80% .80%
12b-1 Fees(2)............................................... .25% 1.00%
Other Expenses(3)........................................... .30% .30%
---- ----
Total Fund Operating Expenses(3).......................... 1.35% 2.10%
==== ====
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
GROWTH FUND
Annual Fund Operating Expenses (As a percentage of average
daily net assets)
Management Fee(1)........................................... .80% .80%
12b-1 Fees(2)............................................... .25% 1.00%
Other Expenses(3)........................................... .30% .30%
---- ----
Total Fund Operating Expenses(3).......................... 1.35% 2.10%
==== ====
</TABLE>
- --------
(1) Management Fees are reduced with respect to net assets of certain of the
Funds in excess of a specified threshold. This threshold is $500 million in
the case of the Government Fund, $20 million in the case of the Tax Free
Fund and $100 million in the case of the Growth Fund and the Value Fund.
See "The Trust, The Fund and Management."
(2) Of these fees, .25% represents a service fee for each of Class A shares and
Class B shares and any remaining amount represents an asset based sales
charge.
(3) "Other Expenses" are based upon actual expenses, after reimbursement by the
Adviser, incurred with respect to the Class A and Class B shares during the
fiscal year ended October 31, 1995. The Funds' investment adviser has
indicated that it intends to reimburse a portion of the expenses of the
Adjustable Rate Fund, Tax Free Fund, Value Fund and the Growth Fund, at
least through October 31, 1996, so that the "Total Fund Operating Expenses"
of each of those Funds will not exceed the amounts shown in the table
above. The actual "Other Expenses" and "Total Fund Operating Expenses" for
the fiscal year ended October 31, 1995 before such reimbursement were as
follows:
Adjustable Rate Fund, Class A shares, "Other Expenses": 2.36%; "Total Fund
Operating Expenses": 2.96%; Adjustable Rate Fund, Class B shares, "Other
Expenses": 2.35%; "Total Fund Operating Expenses": 3.71%; Tax Free Fund,
Class A shares, "Other Expenses": 0.97%; "Total Fund Operating Expenses":
1.81%; Tax Free Fund, Class B shares, "Other Expenses": 0.97%; "Total Fund
Operating Expenses": 2.57%; Value Fund, Class
4
<PAGE>
A shares, "Other Expenses": 1.40%; "Total Fund Operating Expenses": 2.45%;
Value Fund, Class B shares, "Other Expenses": 1.41%; "Total Fund Operating
Expenses": 3.17%: Growth Fund, Class A shares, "Other Expenses": 1.43%;
"Total Fund Operating Expenses": 2.45%; Growth Fund, Class B shares, "Other
Expenses": 1.41%; "Total Fund Operating Expenses": 3.19%. Because each of
these Funds is relatively small in size, these expenses are higher than
those of most other funds with similar investment objectives. As each of
these Funds increases in size, their expenses should decrease as a
percentage of net assets. See "The Trust, the Fund and Management." To the
extent expenses of a Fund are borne by its investment adviser, the total
return to shareholders will increase. Total return to shareholders will
decrease to the extent that expenses of a Fund are no longer borne by its
investment adviser.
The purpose of the above tables is to assist an investor in understanding
the various costs and expenses that a shareholder of the Funds will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, investors should refer to the appropriate sections of this
Prospectus.
The Deferred Sales Charges set forth in the table will be waived in certain
circumstances. For further information on waiver of the Deferred Sales Charges
see "How to Redeem Shares" below and "Waiver of Contingent Deferred Sales
Charge" in the Statement of Additional Information.
EXAMPLE:
You would pay the following expenses on a $1,000 investment assuming (a) 5%
annual return and (b) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Class A Shares................................ $54 $74 $ 95 $156
Class B Shares(1)............................. $67 $84 $102 $181
GOVERNMENT FUND
Class A Shares................................ $55 $76 $ 98 $163
Class B Shares(1)............................. $68 $85 $105 $187
TAX FREE FUND
Class A Shares................................ $56 $80 $105 $178
Class B Shares(1)............................. $69 $90 $113 $202
VALUE FUND
Class A Shares................................ $58 $86 $116 $200
Class B Shares(1)............................. $71 $96 $123 $224
GROWTH FUND
Class A Shares................................ $58 $86 $116 $200
Class B Shares(1)............................. $71 $96 $123 $224
</TABLE>
5
<PAGE>
You would pay the following expenses on the same investment assuming no
redemption:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Class A Shares................................ $54 $74 $ 95 $156
Class B Shares(1)............................. $17 $54 $ 92 $181
GOVERNMENT FUND
Class A Shares................................ $55 $76 $ 98 $163
Class B Shares(1)............................. $18 $55 $ 95 $187
TAX FREE FUND
Class A Shares................................ $56 $80 $105 $178
Class B Shares(1)............................. $19 $60 $103 $202
VALUE FUND
Class A Shares................................ $58 $86 $116 $200
Class B Shares(1)............................. $21 $66 $113 $224
GROWTH FUND
Class A Shares................................ $58 $86 $116 $200
Class B Shares(1)............................. $21 $66 $113 $224
</TABLE>
- --------
(1) Ten-year figure assumes conversion of Class B shares to Class A shares at
the end of eight years.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, WHICH ASSUME
THAT THE ADVISER CONTINUES TO REIMBURSE EXPENSES AND THUS LIMIT "TOTAL FUND
OPERATING EXPENSES" TO THE AMOUNTS SHOWN ABOVE UNDER "ANNUAL FUND OPERATING
EXPENSES." THE ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN 5%.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights set forth below include selected data for a share
outstanding throughout each period and other information derived from the
financial statements of each of the Funds that have been audited by Coopers &
Lybrand L.L.P., independent accountants, whose report thereon is contained in
each of the Fund's Annual Report which is incorporated by reference into the
Statement of Additional Information. The Statement of Additional Information
and each Fund's Annual Report may be obtained by writing or calling the Fund.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------------
CLASS A CLASS B
---------------------- ----------------------
ADJUSTABLE RATE FUND 1995 1994 1993+ 1995 1994 1993+
- -------------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 6.14 $ 6.49 $ 6.50 $ 6.14 $ 6.48 $ 6.50
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (a)..... .31 .25 .03 .26 .21 .02
Net realized and unrealized
gains (losses) on
investments.................. .24 (.35) (.01) .24 (.34) (.02)
------ ------ ------ ------ ------ ------
Total from Investment
Operations................... .55 (.10) .02 .50 (.13) --
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income......... (.30) (.23) (.03) (.25) (.19) (.02)
In excess of net investment
income....................... -- (.01) -- -- (.01) --
Tax return of capital......... -- (.01) -- -- (.01) --
------ ------ ------ ------ ------ ------
Total Distributions........... (.30) (.25) (.03) (.25) (.21) (.02)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD....................... $ 6.39 $ 6.14 $ 6.49 $ 6.39 $ 6.14 $ 6.48
====== ====== ====== ====== ====== ======
TOTAL RETURN (%)**............ 9.20 (1.49) .26 8.39 (2.07) .03
RATIOS/SUPPLEMENTAL DATA
Ratios (%):
Expenses, net, to average
daily net assets (a)......... .95 .95 .98* 1.70 1.70 1.61*
Net investment income to
average daily net assets (a). 4.91 4.04 2.78* 4.18 3.48 2.57*
Portfolio turnover............ 53.07 115.55 0.34* 53.07 115.55 0.34*
Net Assets, end of period
(millions)................... $5.5 $5.1 $5.1 $1.8 $2.4 $0.1
(a)Reimbursement for expenses
from Adviser................. $0.126 $0.120 $0.003 $0.124 $0.108 $0.003
Operating expenses ratio
excluding
reimbursement for expenses
(%)........................ 2.96 2.86 3.24* 3.71 3.51 3.58*
</TABLE>
- --------
+ For the period September 8, 1993 (commencement of operations) to October 31,
1993.
* Annualized.
** A sales charge of 4.5% (maximum) was not reflected in total return
calculations for Class A. A contingent deferred sales charge of 5% the first
year, declining by 1% per year for five years, was not reflected in total
return calculations for Class B. Periods less than one year are not
annualized.
7
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------
GOVERNMENT FUND--CLASS A 1995 1994 1993+
- ------------------------ ------------ ------------ -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD. $ 8.43 $ 10.14 $ 10.32
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ .58 .70 .12
Net realized and unrealized gains
(losses) on investments............. .38 (1.60) (.18)
------------ ------------ ------------
Total from Investment Operations..... .96 (.90) (.06)
------------ ------------ ------------
LESS DISTRIBUTIONS FROM
Net investment income................ (.58) (.70) (.12)
Net realized gains................... -- (.03) --
Tax return of capital................ (.11) (.08) --
------------ ------------ ------------
Total Distributions.................. (.69) (.81) (.12)
------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD....... $ 8.70 $ 8.43 $ 10.14
============ ============ ============
TOTAL RETURN (%)**................... 11.77 (9.17) (0.60)
RATIOS/SUPPLEMENTAL DATA
Ratios (%):
Expenses to average daily net assets. 1.01 .99 .95*
Net investment income to average
daily net assets.................... 6.78 7.09 6.81*
Portfolio turnover................... 315.71 128.82 75.96*
Net Assets, end of period (millions). $27 $22 $1
</TABLE>
- --------
+ For the period September 8, 1993 (commencement of operations) to October 31,
1993.
* Annualized.
** A sales charge of 4.5% (maximum) was not reflected in total return
calculations. Periods less than one year are not annualized.
8
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
-------------------------------------------------------------------
GOVERNMENT FUND--CLASS B 1995 1994 1993 1992 1991 1990 1989 1988 1987+
- ------------------------ ------ ------ ------ ------ ------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period.... $ 8.42 $10.14 $ 9.95 $ 9.98 $ 9.54 $9.70 $9.71 $9.62 $10.00
------ ------ ------ ------ ------ ----- ----- ----- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(a).................... .51 .60 .71 .73 .72 .81 .88 .87 .42
Net realized and
unrealized gains
(losses) on
investments............ .41 (1.58) .20 .03 .56 (.11) (.01) .14 (.36)
------ ------ ------ ------ ------ ----- ----- ----- ------
Total from Investment
Operations............. .92 (.98) .91 .76 1.28 .70 .87 1.01 .06
------ ------ ------ ------ ------ ----- ----- ----- ------
LESS DISTRIBUTIONS FROM
Net investment income... (.52) (.60) (.71) (.73) (.72) (.81) (.88) (.87) (.42)
In excess of net
investment income...... -- -- (.01) -- -- -- -- -- --
Net realized gains...... -- (.03) -- (.06) (.11) -- -- (.05) (.02)
Tax return of capital... (.11) (.11) -- -- (.01) (.05) -- -- --
------ ------ ------ ------ ------ ----- ----- ----- ------
Total Distributions..... (.63) (.74) (.72) (.79) (.84) (.86) (.88) (.92) (.44)
------ ------ ------ ------ ------ ----- ----- ----- ------
NET ASSET VALUE, END OF
PERIOD................. $ 8.71 $ 8.42 $10.14 $ 9.95 $ 9.98 $9.54 $9.70 $9.71 $ 9.62
====== ====== ====== ====== ====== ===== ===== ===== ======
TOTAL RETURN (%)**...... 11.19 (9.98) 9.48 7.74 14.08 7.55 9.59 10.96 .69
RATIOS/SUPPLEMENTAL DATA
Ratios (%):
Expenses to average
daily net assets (a)... 1.76 1.76 1.73 1.64 1.81 1.59 .89 .50 .50*
Net investment income to
average daily net
assets (a)............. 6.08 6.45 6.96 7.08 7.11 8.32 9.17 9.20 8.17*
Portfolio turnover...... 315.71 128.82 75.96 101.31 111.97 50.44 37.23 66.04 159.76*
Net Assets, end of
period (millions)...... $1,112 $1,252 $1,343 $ 786 $ 213 $ 72 $ 57 $ 35 $ 7
(a) Management fee
waived through
December 31, 1988... -- -- -- -- -- -- $0.01 $0.06 $ 0.03
Reimbursement for
expenses from Adviser. -- -- -- -- -- $0.03 $0.10 $0.10 $ 0.20
Operating expenses
ratio excluding
reimbursement for
expenses and
management fees waived
(%)................... 1.76 1.76 1.73 1.64 1.81 1.95 2.08 3.00 5.75*
</TABLE>
- --------
+ For the period April 22, 1987 (commencement of operations) to October 31,
1987.
* Annualized.
** A contingent deferred sales charge of 5% the first year, declining by 1% per
year for five years, was not reflected in total return calculations. Periods
less than one year are not annualized.
9
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------------
CLASS A CLASS B
---------------------- ----------------------
TAX FREE FUND 1995 1994 1993+ 1995 1994 1993+
- ------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $10.59 $11.48 $11.50 $10.60 $11.48 $11.50
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (a)..... .55 .45 .05 .55 .43 .06
Net realized and unrealized
gains (losses) on
investments.................. .73 (.78) .01 .73 (.82) (.01)
------ ------ ------ ------ ------ ------
Total from Investment
Operations................... 1.28 (.33) .06 1.28 (.39) .05
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income......... (.55) (.45) (.05) (.55) (.43) (.03)
Distributions in excess of net
investment income............ (.01) (.11) (.02) (.01) (.06) (.03)
Tax return of capital......... -- -- (.01) -- -- (.01)
------ ------ ------ ------ ------ ------
Total Distributions........... (.56) (.56) (.08) (.56) (.49) (.07)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD....................... $11.31 $10.59 $11.48 $11.32 $10.60 $11.48
====== ====== ====== ====== ====== ======
TOTAL RETURN (%)**............ 12.24 (2.99) .54 12.33 (3.45) .43
RATIOS/SUPPLEMENTAL DATA
Ratios (%):
Expenses, net, to average
daily net assets (a)......... -- 0.77 1.15* -- 1.14 1.84*
Net investment income to
average daily net assets (a). 5.01 4.08 2.73* 5.01 3.75 2.27*
Portfolio turnover............ 24.95 -- -- 24.95 -- --
Net Assets, end of period
(millions)................... $16.0 $14.3 $15.1 $7.7 $5.0 $1.2
(a)Reimbursement for expenses
from Adviser................. $0.199 $0.094 $0.002 $0.287 $0.122 $0.003
Operating expenses ratio
excluding reimbursement
for expenses (%)........... 1.81 1.62 2.09* 2.56 2.30 2.48*
</TABLE>
- --------
+ For the period September 8, 1993 (commencement of operations) to October 31,
1993.
* Annualized.
** A sales charge of 4.5% (maximum) was not reflected in total return
calculations for Class A. A contingent deferred sales charge of 5% the first
year, declining by 1% per year for five years, was not reflected in total
return calculations for Class B. Periods less than one year are not
annualized.
10
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------
CLASS A CLASS B
----------------------- ----------------------
VALUE FUND 1995 1994 1993+ 1995 1994 1993+
- ---------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $ 7.51 $ 7.63 $ 7.50 $ 7.50 $ 7.64 $ 7.50
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss)
(a)......................... .14 .13 .01 .07 .08 (.01)
Net realized and unrealized
gains (losses) on
investments................. 1.45 (.16) .12 1.45 (.17) .15
------ ------ ------ ------ ------ ------
Total from Investment
Operations.................. 1.59 (.03) .13 1.52 (.09) .14
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income........ (.14) (.09) -- (.07) (.05) --
Distributions in excess of
net investment income....... (.01) -- -- (.02) -- --
------ ------ ------ ------ ------ ------
Total Distributions.......... (.15) (.09) -- (.09) (.05) --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD...................... $ 8.95 $ 7.51 $ 7.63 $ 8.93 $ 7.50 $ 7.64
====== ====== ====== ====== ====== ======
TOTAL RETURN (%) **.......... 21.45 (0.32) 1.73 20.50 (1.10) 1.87
RATIOS/SUPPLEMENTAL DATA
Ratios (%):
Expenses, net, to average
daily net assets (a)........ 1.35 1.35 1.42* 2.10 2.10 2.04*
Net investment income (loss)
to average daily net
assets (a).................. 1.71 1.92 0.73* 0.94 1.09 (1.07)*
Portfolio turnover........... 27.41 14.53 6.04* 27.41 14.53 6.04*
Net Assets, end of period
(millions).................. $ 4.1 $3.2 $2.2 $ 14.4 $8.0 $0.5
(a)Reimbursement for expenses
from Adviser................ $0.086 $0.165 $0.008 $0.083 $0.163 $0.002
Operating expenses ratio
excluding
reimbursement for
expenses (%)............ 2.43 3.55 6.37* 3.18 4.02 6.38*
</TABLE>
- --------
+ For the period September 8, 1993 (commencement of operations) to October 31,
1993.
* Annualized.
** A sales charge of 4.5% (maximum) was not reflected in total return
calculations for Class A. A contingent deferred sales charge of 5% the first
year, declining by 1% per year for five years, was not reflected in total
return calculations for Class B. Periods less than one year are not
annualized.
11
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------------
CLASS A CLASS B
--------------------- ----------------------
GROWTH FUND 1995 1994 1993+ 1995 1994 1993+
- ----------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 8.81 $ 8.69 $ 8.50 $ 8.74 $ 8.70 $ 8.50
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss)
(a).......................... .01 (.01) -- (.05) (.04) --
Net realized and unrealized
gains on investments......... 2.56 .21 .19 2.52 .16 .20
------ ------ ------ ------ ------ ------
Total from Investment
Operations................... 2.57 .20 .19 2.47 .12 .20
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Distributions in excess of net
realized gains............... -- (.08) -- -- (.08) --
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD....................... $11.38 $ 8.81 $ 8.69 $11.21 $ 8.74 $ 8.70
====== ====== ====== ====== ====== ======
TOTAL RETURN (%) **........... 29.17 2.48 2.24 28.26 1.67 2.35
RATIOS/SUPPLEMENTAL DATA
Ratios (%):
Expenses, net, to average
daily net assets (a)......... 1.35 1.34 1.39* 2.10 2.09 1.86*
Net investment income (loss)
to average daily net assets
(a).......................... 0.10 (0.11) (0.30)* (0.66) (0.82) (1.38)*
Portfolio turnover............ 73.74 100.41 46.31* 73.74 100.41 46.31*
Net Assets, end of period
(millions)................... $ 6.0 $ 4.2 $ 3.3 $ 14.3 $ 5.8 $ 0.6
(a)Reimbursement for expenses
from Adviser................. $0.100 $0.182 $0.006 $0.082 $0.176 $0.001
Operating expenses ratio
excluding reimbursement for
expenses (%)............... 2.44 3.53 4.83* 3.19 4.06 5.04*
</TABLE>
- --------
+ For the period September 8, 1993 (commencement of operations) to October 31,
1993.
* Annualized.
** A sales charge of 4.5% (maximum) was not reflected in total return
calculations for Class A. A contingent deferred sales charge of 5% the first
year, declining by 1% per year for five years, was not reflected in total
return calculations for Class B. Periods less than one year are not
annualized.
12
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTORS TRUST ADJUSTABLE RATE FUND
The investment objective of Investors TrustSM Adjustable Rate Fund (the
"Adjustable Rate Fund") is to produce a high level of current income
consistent with limiting fluctuations in the net asset value of its shares.
This investment objective is a fundamental policy and cannot be changed
without shareholder approval. Except as expressly provided in this Prospectus
and the Statement of Additional Information, the other investment policies of
the Adjustable Rate Fund are not fundamental and may be changed without such
approval.
The Adjustable Rate Fund will seek to achieve its investment objective by
investing primarily in adjustable rate securities, including, but not limited
to, adjustable rate mortgage securities ("ARMs"). ARMs are collateralized by
adjustable rate, rather than fixed rate, mortgages. The Adjustable Rate Fund
intends to invest at least 65% of the value of its total assets in adjustable
rate securities under normal market conditions.
Adjustable rate mortgages, like fixed rate mortgages, have a specified
maturity date, and the principal amount of the mortgage is repaid over the
life of the mortgage. Unlike fixed rate mortgages, the interest rate on
adjustable rate mortgages is adjusted at regular intervals based on a
specified, published interest rate "index." The new rate is determined by
adding a specific interest amount, the "margin" or "spread," to the interest
rate of the index. As a result, ARMs generally provide higher yields than
money market securities and more stable principal values than longer term
fixed rate mortgage securities. Investment in ARMs allows the Adjustable Rate
Fund to participate in changing interest rate levels through regular
adjustments in the coupons of the underlying mortgages, resulting in more
variable current income and lower price volatility than longer term fixed rate
mortgage securities. ARMs are a less effective means of locking in long-term
rates than securities collateralized by fixed rate mortgages because the
income from adjustable rate mortgages will increase during periods of rising
interest rates and decline during periods of falling rates.
The ARMs in which the Adjustable Rate Fund expects to invest will generally
adjust their interest rates at regular intervals of two years or less. The
interest rates paid on the adjustable rate mortgages underlying ARMs are reset
at regular intervals by adding an interest rate margin to a specified interest
rate index. There are two main categories of indices: rates tied to the yield
on U.S. Treasury securities or the London interbank offered rate; and those
derived from a calculated measure such as a cost of living index or a moving
average of mortgage rates. Some indices, such as the one-year constant
maturity Treasury rate, closely mirror changes in interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds Index, tend to
lag behind changes in market rate levels and tend to be somewhat less
volatile. Due to the inverse relationship between interest rates and the value
of certain securities, such a delay in adjusting to changes in interest rates
may cause the Adjustable Rate Fund's net asset value to increase or decrease
in value, particularly during periods between interest adjustment dates.
The underlying adjustable rate mortgages in which the Adjustable Rate Fund
invests will frequently have caps and floors which limit the maximum amount by
which the interest rate to the residential borrower may move up or down,
respectively, during each adjustment period and over the life of the loan.
Interest rate caps on mortgages underlying ARMs may prevent their income from
increasing to prevailing interest rate levels, and cause these securities to
decrease in value. Conversely, interest rate floors on mortgages underlying
ARMs may cause their income to remain higher than prevailing interest rate
levels and result in an increase in the value of such securities. In addition,
some residential mortgage loans limit adjustments to the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may cause the outstanding principal balance of the mortgage
to increase.
Mortgage securities generally have a maximum maturity of 15 to 30 years.
However, due to the adjustable rate feature of the mortgages underlying ARMs,
their prices are considered to have volatility characteristics which
approximate the average period of time until the next adjustment of the
interest rate. As a result, the principal
13
<PAGE>
volatility of ARMs may be more comparable to short- and intermediate-term
securities than to longer term fixed rate mortgage securities.
At least 50% of the Adjustable Rate Fund's total assets will be invested in
obligations issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities ("U.S. Government Securities"), or securities that are
collateralized by U.S. Government Securities. The Adjustable Rate Fund may
also invest in high-grade fixed and adjustable rate mortgage and debt
securities rated within the three highest credit categories by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("Standard
& Poor's") or Fitch Investors Service ("Fitch") or, if unrated, determined by
the Adjustable Rate Fund's sub-adviser, Standish, Ayer & Wood, Inc. (the "Sub-
Adviser") to be of equivalent quality. In the event the rating of a security
is downgraded, the Sub-Adviser will determine whether the securities should be
retained or sold depending on an assessment of all facts and circumstances at
that time.
The Adjustable Rate Fund will concentrate at least 25% of its total assets
in asset-backed securities, including mortgage securities of governmental and
non-governmental issuers, collateralized mortgage obligations and other asset-
backed securities. Asset-backed securities represent a participation in, or
are secured by and payable from, a stream of payments generated by particular
assets, for example, credit card or automobile receivables and home equity
loans. Asset-backed commercial paper, one type of asset-backed security, is
issued by a special purpose entity, organized solely to issue the commercial
paper and to purchase interests in the assets. The credit quality of these
securities depends primarily upon the quality of the underlying assets and the
level of credit support and/or enhancement provided. The underlying assets
(e.g., loans) are subject to prepayments which shorten the securities'
weighted average life and may lower their return. If the credit support or
enhancement is exhausted, losses or delays in payment may result if the
required payments of principal and interest are not made. The value of these
securities also may change because of changes in the market's perception of
the creditworthiness of the servicing agent for the pool, the originator of
the pool, or the financial institution providing the credit support or
enhancement.
The Adjustable Rate Fund is expected to have an effective duration ranging
from 1 year to 2 1/2 years. A bond's duration is the weighted average life of
its principal and interest payments and is often considered a useful
indication of its price volatility.
The Adjustable Rate Fund may purchase securities on a "when-issued" or
delayed delivery basis or may purchase or sell securities on a forward
commitment basis. No more than 25% of the Adjustable Rate Fund's assets will
be invested in these types of securities, including forward roll transactions
described below. When such transactions are negotiated, the price is fixed at
the time of the commitment, but delivery and payment for the securities can
take place a month or more after the date of the commitment to purchase. The
securities so purchased or sold are subject to market fluctuation, and no
interest accrues to the purchaser during this period. At the time of delivery
of the securities, their value may be more or less than the purchase or sale
price. The Adjustable Rate Fund may receive a fee for entering into forward
commitment contracts.
The Adjustable Rate Fund may invest up to 35% of its total assets in
securities other than adjustable rate mortgage securities, either alone or in
combination with money market securities. The Adjustable Rate Fund may invest
in short-term debt securities, such as commercial paper, that are rated at
least A3 by Standard & Poor's or Fitch or Prime-3 by Moody's or, if not rated,
are of equivalent investment quality as determined by the Sub-Adviser. Debt
securities within the top credit categories comprise what are generally known
as high-quality bonds.
To preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic adjustable rate mortgage securities or for
other nonspeculative purposes, the Adjustable Rate Fund may enter into various
transactions, such as interest rate swaps and the purchase or sale of interest
rate collars, caps and floors. The Adjustable Rate Fund will not use these
transactions for speculative purposes and will not sell interest collars, caps
or floors with respect to a position that it does not own. Interest rate swaps
involve the exchange by the Adjustable Rate
14
<PAGE>
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
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 a contractually-based principal amount from the party
selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
floor. In an interest rate collar, the Adjustable Rate Fund combines the
elements of purchasing a cap and selling a floor. The collar protects the
Adjustable Rate Fund against an interest rate rise above the maximum amount
but causes the Adjustable Rate Fund to forego the benefits of an interest rate
decline below the minimum amount.
The Adjustable Rate Fund may enter into interest rate swaps, collars, caps
and floors on either an asset-based or liability-based basis, depending upon
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 Adjustable Rate Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Adjustable Rate Fund will not
enter into any interest rate swap, collar, cap or floor transaction unless the
unsecured senior debt or the claims paying ability of the other party thereto
is rated at least AA by Standard & Poor's or Aa by Moody's. If there is a
default by the other party to such a transaction, the Adjustable Rate Fund
will have contractual remedies 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. As a result, the swap
market has become relatively liquid. Collars, caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps. The use of interest rate
swaps is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. If the Sub-Adviser is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment
performance of the Adjustable Rate Fund would diminish compared with what it
would have been if these investment techniques were not used. Moreover, even
if the Sub-Adviser is correct in its forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged. In connection with entering rate swaps, collars, and floors, the
Adjustable Rate Fund will create and maintain a segregated account with the
Custodian consisting of U.S. Government Securities or cash or cash equivalents
in accordance with current policies determined by the Securities and Exchange
Commission.
The Adjustable Rate Fund will not generally trade in securities for short-
term profits but, when circumstances warrant, securities may be purchased and
sold without regard to length of time held. The Sub-Adviser anticipates that
the Adjustable Rate Fund's annual portfolio turnover rate may exceed 100% but
generally will not exceed 150%. A high portfolio turnover rate in any year
will increase brokerage commissions which are borne directly by the Adjustable
Rate Fund and could result in a high amount of realized investment gain
subject to the payment of tax by shareholders. Any realized net short term
investment gain will be taxed to shareholders as ordinary income. See
"Portfolio Transactions," "Portfolio Turnover" and "Certain Tax Matters" in
the Statement of Additional Information.
Risk Factors
The types of securities in which the Adjustable Rate Fund invests have
certain unique attributes that warrant special consideration or that present
risks that may not exist in other types of mutual fund investments. Some of
these considerations and risks pertain to the characteristics of mortgage
backed securities generally, while others are peculiar to ARMs. One of the
principal risks regarding mortgage backed securities is the risk of
prepayments. Recently, prepayment rates on mortgage backed securities have
been high, however, prepayment rates may vary significantly over relatively
short periods of time. The net asset value of a share of the Adjustable Rate
Fund will increase or decrease as market conditions change. The amount
received upon redemption may be more or less than a purchaser's original cost.
15
<PAGE>
INVESTORS TRUST GOVERNMENT FUND
The investment objective of Investors TrustSM Government Fund (the
"Government Fund") is to produce a high level of current income consistent
with safety of principal. This investment objective is a fundamental policy
and cannot be changed without shareholder approval. Except as expressly
provided in this Prospectus or the Statement of Additional Information, the
other investment policies of the Government Fund are not fundamental and may
be changed without such approval.
The Government Fund will seek to achieve its investment objective by
investing primarily in U.S. Government Securities (as defined below in
"Further Information Concerning the Funds' Investment--Practices") having
remaining maturities of one year or more. The Government Fund intends to
invest at least 65% of the value of its total assets in U.S. Government
Securities except during times when the adoption of a temporary defensive
position by investing more heavily in cash or high-quality money market
instruments is desirable due to prevailing market or economic conditions.
There is no limit upon the Government Fund's investments in mortgage-backed
U.S. Government Securities and from time-to-time a majority of the Government
Fund's portfolio may be invested in such securities.
The remainder of the Government Fund's assets will be invested in other debt
instruments having a rating from Standard & Poor's of AAA and cash or cash
equivalents. Cash equivalents, for purposes of the Government Fund, are highly
liquid instruments which include commercial paper having a rating from
Standard & Poor's of A-1 or A-1+.
The composition and weighted average maturity of the Government Fund's
portfolio will vary from time to time, based upon a determination of how best
to further the Government Fund's investment objective. The Government Fund is
expected to have an average duration of approximately 4 years. A bond's
duration is the weighted average life of its principal and interest payments
and is often considered a useful indication of its price volatility.
The Government Fund may experience a very substantial turnover of its
portfolio because of its options transactions. Although it is anticipated that
the annual portfolio turnover rate will exceed 100%, portfolio turnover is not
expected to exceed 200%. Generally, a 100% turnover rate would occur if all of
the securities in the portfolio (except those excluded from the calculation of
portfolio turnover by the Securities and Exchange Commission (the "SEC")) were
sold and either repurchased or replaced within one year. While the Government
Fund will pay commissions in connection with its options transactions, U.S.
Government Securities are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission.
Nevertheless, high portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs, which will be borne
directly by the Government Fund. See "Portfolio Transactions," "Portfolio
Turnover" and "Certain Tax Matters" in the Statement of Additional
Information.
Risk Factors
There are risks in any investment program, and there is no assurance that
the Government Fund will achieve its investment objective. The securities in
which the Government Fund may invest are subject to relative degrees of credit
risk and market volatility. Credit risk relates to the issuer's (and any
guarantor's) ability to make timely payments of principal and interest. Market
volatility relates to the changes in market price that occur as a result of
variations in the level of prevailing interest rates and yield relationships
between sectors in the market and other market factors. The net asset value of
a share of the Government Fund will increase or decrease as market conditions
change. The amount received upon redemption may be more or less than a
purchaser's original cost.
16
<PAGE>
INVESTORS TRUST TAX FREE FUND
The investment objective of Investors TrustSM Tax Free Fund (the "Tax Free
Fund") is to provide investors with as high a level of income exempt from
federal income tax as is consistent with preservation of capital. This
investment objective is a fundamental policy and cannot be changed without
shareholder approval.
It is also a fundamental policy of the Tax Free Fund to invest its assets so
that, during any fiscal year, at least 80% of the income generated by the Tax
Free Fund is exempt from federal personal income taxes and federal alternative
minimum tax. Except as expressly provided in this Prospectus or the Statement
of Additional Information, the other investment policies of the Tax Free Fund
are not fundamental and may be changed without such approval.
Under normal market conditions, the Tax Free Fund will invest substantially
all of its assets in tax-exempt debt obligations which at the time of purchase
are considered investment grade i.e., rated AAA, AA, A or BBB by Standard &
Poor's or Fitch or Aaa, Aa, A or Baa by Moody's, or which are not rated but
believed by the Fund's sub-adviser, Brown Brothers Harriman & Co. (the "Sub-
Adviser") to be of comparable quality. Bonds rated Baa by Moody's or BBB by
Standard & Poors or Fitch or unrated securities of comparable investment
quality lack outstanding investment characteristics and in fact have
speculative characteristics as well, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal and investments of this type will be limited to
10% of the Tax Free Fund's assets. In the event the rating of a security is
downgraded below investment grade, the Sub-Adviser will determine whether the
securities should be retained or sold depending on an assessment of all facts
and circumstances at that time. No more than 5% of the Tax Free Fund's net
assets will remain invested in such downgraded securities.
The tax-exempt debt obligations to be purchased by the Tax Free Fund include
securities issued by or on behalf of states, territories and possessions of
the United States, the District of Columbia and their subdivisions, agencies
and instrumentalities, the interest upon which, in the opinion of bond counsel
to the issuer, is exempt from federal income taxes. The two principal
classifications of tax-exempt bonds are general obligation bonds and limited
obligation (or revenue) bonds. General obligation bonds are obligations
involving the credit of an issuer possessing taxing power and are payable from
the issuer's general unrestricted revenues and not from any particular fund or
source. Limited obligation (or revenue) bonds are 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 tax or other specific revenue
source. The Tax Free Fund intends to invest in tax-exempt obligations of a
broad range of issuers, consistent with prudent regional diversification.
Investors in certain states may be subject to state taxation on all or a
portion of the income and capital gains produced by such securities.
The Tax Free Fund is expected to have an effective duration ranging from 5
to 7 1/2 years. A bond's duration is the weighted average life of its
principal and interest payments and is often considered a useful indication of
its price volatility. The Tax Free Fund is an appropriate investment for those
investors who seek tax-exempt income returns greater than those provided by
tax free money market funds and are able to accept fluctuation in the net
asset value of their investment. The Tax Free Fund is designed to have smaller
price fluctuations than longer-term tax-free bond funds.
The Tax Free Fund may invest in obligations which have fixed interest rates
or variable or floating interest rates, including short-term obligations which
have daily adjustable rates. Variable or floating rates may be adjusted in
relation to market rates for other instruments, prime rates, indices or
similar indicators. Certain of these adjustable obligations may carry a demand
feature that permits the Tax Free Fund to receive the par value of the
security upon demand prior to maturity. These obligations may also be subject
to prepayment without penalty at the option of the issuer.
17
<PAGE>
While the majority of the Tax Free Fund's investments will consist of tax-
exempt notes and bonds, the Tax Free Fund may also invest in lease obligations
or installment purchase contract obligations, which are instruments supported
by lease payments made by a municipality ("municipal lease obligations").
Although municipal lease obligations do not normally constitute general
obligations of the municipality, a lease obligation is ordinarily backed by
the municipality's agreement to make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in later years unless money is appropriated in
the future. Municipal lease obligations are a relatively new form of financing
instrument and the market for such obligations is still developing. Some
municipal lease obligations may be, and could become, illiquid.
Depending on the development of such markets, such municipal lease
obligations may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. In determining the liquidity and appropriate
valuation of a municipal lease obligation, the following factors relating to
the security are considered, among others: (1) the frequency of trades and
quotes; (2) the number of dealers willing to purchase or sell the security;
(3) the willingness of dealers to undertake to make a market; (4) the nature
of the marketplace trades; and (5) the likelihood that the obligation will
continue to be marketable based on the credit quality of the municipality or
relevant obligor.
For information concerning the risks and ratings of tax-exempt bonds, see
"Debt Securities Ratings" in the Statement of Additional Information.
While the Tax Free Fund intends to invest substantially all of its assets in
tax-exempt debt obligations, under normal market conditions up to 10% of the
Tax Free Fund's total assets may temporarily be held in cash or invested in
short-term taxable securities. Taxable temporary investments of the Tax Free
Fund may include certificates of deposit issued by U.S. banks with assets of
at least $1 billion, or commercial paper or corporate notes, bonds or
debentures with a remaining maturity of one year or less, or repurchase
agreements. To the extent the Tax Free Fund invests in temporary investments,
the income on which is subject to regular Federal income taxes or state
personal income taxes, or both, the Tax Free Fund may not at such times be in
a position to achieve its investment objective.
The Tax Free Fund will not generally trade in securities for short-term
profits but, when circumstances warrant, securities may be purchased and sold
without regard to length of time held. The Sub-Adviser anticipates that the
Tax Free Fund's annual portfolio turnover rate may exceed 50% but generally
will not exceed 100%. A high portfolio turnover rate in any year will increase
brokerage commissions which are borne directly by the Tax Free Fund and could
result in a high amount of realized investment gain subject to the payment of
tax by shareholders. Any realized net short term investment gain will be taxed
to shareholders as ordinary income. See "Portfolio Transactions," "Portfolio
Turnover" and "Certain Tax Matters" in the Statement of Additional
Information.
Risk Factors
There are risks in any investment program, and there is no assurance that
the Tax Free Fund will achieve its investment objective. Tax-exempt securities
are subject to relative degrees of credit risk and market volatility. Credit
risk relates to the issuer's (and any guarantor's) ability to make timely
payments of principal and interest. Market volatility relates to the changes
in market price that occur as a result of variations in the level of
prevailing interest rates and yield relationships between sectors in the tax-
exempt bond market and other market factors. The net asset value of a share of
the Tax Free Fund will increase or decrease as market conditions change. The
amount received upon redemption may be more or less than a purchaser's
original cost.
18
<PAGE>
INVESTORS TRUST VALUE FUND
The investment objective of Investors TrustSM Value Fund (the "Value Fund")
is to provide long-term growth of capital and an above-average level of
dividend income by investing in equity securities. This investment objective
is a fundamental policy and cannot be changed without shareholder approval.
Except as expressly provided in this Prospectus and the Statement of
Additional Information, the other investment policies of the Value Fund are
not fundamental and may be changed without such approval.
The Value Fund invests primarily in equity securities, including common
stock, preferred stock, warrants and "investment grade" securities convertible
into common stock. Under normal market conditions, the Value Fund's sub-
adviser, Duff & Phelps Investment Management Co. (the "Sub-Adviser") will seek
to invest substantially all of the Value Fund's assets in a diversified
portfolio of equity securities. It is a fundamental policy of the Value Fund
under normal market conditions to invest at least 65% of its total assets in
such equity securities. The Value Fund will attempt to generate relatively
high levels of dividend income and provide the potential for capital
appreciation. The Value Fund seeks to provide a higher total return than that
of the Standard & Poor's 500 Stock Index. No assurance can be given that the
Value Fund will achieve its objective.
In seeking an above-average level of dividend income, the Value Fund will
invest primarily in companies with established operating histories, potential
for dividend growth and low price-to-earnings ratios relative to the Standard
& Poor's 500 Stock Index. The Value Fund's investments will tend to be in
issuers with medium to large capitalizations, although the Value Fund is not
limited by issuer size in selecting equity securities for investment. It is
anticipated that a majority of the equity securities in which the Value Fund
invests will be listed on a national securities exchange.
The Value Fund will generally consider debt securities to be "investment
grade" if such securities are rated investment grade by a nationally
recognized statistical rating agency (i.e., BBB or better by Standard & Poor's
or Baa or better by Moody's Investors Service, Inc.), or if such securities
are not so rated but are considered by the Sub-Adviser to be of equivalent
investment quality. Bonds rated BBB by Standard & Poor's or Baa by Moody's or
unrated securities of comparable investment quality lack outstanding
characteristics and in fact have speculative characteristics as well, and
changes in economic conditions and other circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal. In the event the
rating of a security is downgraded, the Sub-Adviser will determine whether the
security should be retained or sold depending on an assessment of all facts
and circumstances at that time. For further information concerning the ratings
of debt securities, see the Statement of Additional Information. The mix of
convertible and nonconvertible securities in different rating categories
varies over time depending on, among other factors, changes in investment
strategy.
It is the Value Fund's policy not to purchase and sell securities with a
view toward obtaining short-term profits. The Value Fund will not ordinarily
trade in securities for short-term profits. However, when circumstances
warrant, securities may be sold without regard to the length of time held. The
Sub-Adviser anticipates that the Value Fund's annual portfolio turnover rate
may exceed 50% but generally will not exceed 100%. A high portfolio turnover
rate in any year will increase brokerage commissions paid and could result in
a high amount of realized investment gain subject to the payment of tax by
shareholders. Any realized net short term investment gain will be taxed to
shareholders as ordinary income. See "Portfolio Transactions," "Portfolio
Turnover" and "Certain Tax Matters" in the Statement of Additional
Information.
Risk Factors
As a mutual fund investing primarily in equity securities, the Value Fund is
subject to market risk--i.e., the possibility that stock prices in general
will decline over short or even extended periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when stock
prices generally decline. The net asset
19
<PAGE>
value of a share of the Value Fund will increase or decrease as market
conditions change. The amount received upon redemption may be more or less
than a purchaser's original cost.
INVESTORS TRUST GROWTH FUND
The investment objective of Investors TrustSM Growth Fund (the "Growth
Fund") is to provide long-term growth of capital. This investment objective is
a fundamental policy and cannot be changed without shareholder approval.
Except as expressly provided in the Prospectus and the Statement of Additional
Information, the other investment policies of the Growth Fund are not
fundamental and may be changed without such approval.
The Growth Fund will seek to achieve its investment objective by investing
substantially all of its assets in common stocks under normal market
conditions. However, a portion of the Growth Fund's assets may be held from
time to time in other equity securities including preferred stock and
warrants. The Growth Fund intends to invest in securities of companies which,
in the opinion of the Growth Fund's sub-adviser, have above average prospects
for growth. No assurance can be given that the Growth Fund will achieve its
objective. The Growth Fund may also invest less than 5% of its total assets in
equity securities convertible into common stocks.
In seeking long-term growth of capital, the Growth Fund will invest
primarily in companies whose earnings and/or assets are expected to grow at a
rate above the average for the Standard & Poor's 500 Stock Index over the long
term. Consequently, the Growth Fund's sub-adviser, Value Line, Inc. (the "Sub-
Adviser") seeks to identify those industries which offer the greatest
possibilities for profitable expansion and, within such industries, those
companies which appear most capable of sustained growth. Investments may also
be made in securities of companies which the Sub-Adviser believes are selling
below their intrinsic values or in securities of cyclical companies which the
Sub-Adviser believes are at a low point in their cycles. It is anticipated
that the Growth Fund will have a higher level of price volatility than the
Standard & Poor's 500 Stock Index. The Growth Fund's investments will tend to
be in issuers with small to medium capitalizations, although the Growth Fund
is not limited by issuer size in selecting equity securities for investment.
The Sub-Adviser considers issuers with small to medium capitalization to be
those companies which are less mature and have the potential to grow
substantially faster than the economy. Investments in these securities may
involve greater than average risks because of the limited marketability of
such securities and the possibility that their prices may fluctuate more
widely than the securities of larger, more established companies or than the
market as a whole. It is anticipated that a majority of the equity securities
in which the Growth Fund invests will be listed on a national securities
exchange.
In selecting securities for purchase or sale, the Sub-Adviser will rely on
the Value Line Ranking System for Timeliness which has evolved after many
years of research and has been used in substantially its present form since
1965. The Value Line Ranking System is based upon historical prices and
reported earnings, recent earnings and price momentum and the degree to which
the latest reported earnings deviate from estimated earnings. The Rankings are
published weekly in The Value Line Investment Survey for approximately 1,700
stocks. On a scale of 1 (highest) to 5 (lowest), the Rankings compare the Sub-
Adviser's estimate of the probable market performance of each stock during the
coming twelve months relative to all 1,700 stocks under review. The Value Line
Rankings are updated weekly to reflect the most recent information. The Value
Line Rankings do not eliminate market risk, but the Sub-Adviser believes that
they provide objective standards for determining whether the market is
undervaluing or overvaluing a particular security. The Growth Fund will
usually invest in securities ranked 1 or 2, although it may invest in
securities ranked 3 if the Sub-Adviser believes such securities are
appropriate for the Growth Fund. Reliance on the Rankings is no assurance that
the Growth Fund will perform more favorably than the market in general over
any particular period.
20
<PAGE>
The Growth Fund may trade in securities for short-term profits in order to
achieve its objective. The Sub-Adviser anticipates that the Growth Fund's
annual portfolio turnover rate may exceed 100% but generally will not exceed
200%. A high portfolio turnover rate in any year will increase brokerage
commissions paid and could result in high amount of realized investment gain
subject to the payment of tax by shareholders. Any realized net short term
investment gain will be taxed to shareholders as ordinary income. See
"Portfolio Transactions," "Portfolio Turnover" and "Certain Tax Matters" in
the Statement of Additional Information.
Risk Factors
As a mutual fund investing primarily in equity securities, the Growth Fund
is subject to market risk--i.e., the possibility that stock prices in general
will decline over short or even extended periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when stock
prices generally decline. The net asset value of a share of the Growth Fund
will increase or decrease as market conditions change. The amount received
upon redemption may be more or less than a purchaser's original cost.
FURTHER INFORMATION CONCERNING THE FUNDS' INVESTMENT PRACTICES
U.S. Government Securities.
Under normal market conditions, the Government Fund intends to invest at
least 65% of the value of its total assets in U.S. Government Securities. The
Adjustable Rate Fund will invest at least 50% of its total assets in U.S.
Government Securities and may also hold short-term U.S. government cash
reserves (money market securities maturing in one year or less) if its sub-
adviser believes such holdings are advisable to facilitate the Adjustable Rate
Fund's cash flow needs (e.g., redemptions and expenses) or for temporary
defensive purposes. Each of the other Funds may hold U.S. Government
Securities for temporary defensive purposes.
The U.S. Government Securities which the Funds may purchase include but are
not limited to (1) U.S. Treasury obligations: Treasury Notes (maturities of
one to ten years) and Treasury Bonds (generally maturities of greater than ten
years); and (2) obligations issued, guaranteed or otherwise backed by U.S.
Government agencies and instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S. Treasury (such as
obligations of the Government National Mortgage Association ("GNMA"), the
General Services Administration and Federal Maritime Administration), (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Treasury (such as obligations of the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Federal Housing Administration ("FHA"), and the U.S. Postal Service); the
U.S. Treasury has discretionary authority to provide financial assistance to
such entities, however, it is not obligated to do so by law and may take steps
to restrict or eliminate such support in the future; or (c) the credit of the
agency or instrumentality (such as obligations of the Federal Home Loan Bank
and Federal Farm Credit System). AS DESCRIBED BELOW, UNDER CERTAIN CONDITIONS,
MORTGAGE SECURITIES MAY ALSO BE U.S. GOVERNMENT SECURITIES.
U.S. Government Securities of the type to be included in the Funds'
portfolios have historically involved little risk of loss of principal if held
to maturity. However, the prices of such securities are inversely affected by
changes in interest rate levels. A decrease in rates generally produces an
increase in the value of a Fund's investments while an increase in rates
generally reduces the value of these investments.
Mortgage Securities.
Both the Adjustable Rate Fund and the Government Fund are authorized to make
substantial investments in mortgage securities. A mortgage security is an
interest in a pool of mortgage loans. WITH THE REQUISITE DEGREE OF GOVERNMENT
BACKING, A MORTGAGE SECURITY MAY CONSTITUTE A U.S. GOVERNMENT SECURITY. The
primary issuers of
21
<PAGE>
mortgage securities that constitute U.S. Government Securities are the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation and
the Government National Mortgage Association. The principal and interest on
GNMA securities are guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. While the mortgage securities issued by FNMA and FHLMC
are not backed by the full faith and credit of the U.S. Government, their
close relationship with the U.S. Government makes them high quality securities
with minimal credit risk.
The Adjustable Rate and Government Funds may purchase mortgage securities
issued by private issuers. Privately issued mortgage securities may take a
form similar to mortgage securities issued or guaranteed by GNMA, FNMA or
FHLMC. Private issuers include originators of or investors in mortgage loans
and receivables such as savings and loan associations, savings banks,
commercial banks, investment banks, finance companies and special purpose
finance subsidiaries of any of the above. Securities issued by private issuers
purchased by the Adjustable Rate Fund must be rated at least A by Standard &
Poor's, Moody's or Fitch or, if unrated, be judged by the Adjustable Rate
Fund's sub-adviser to be of equivalent quality. Securities issued by private
issuers purchased by the Government Fund must be rated AAA by Standard &
Poor's. Such rating may be based, in part, on certain types of credit
enhancements issued in respect of such securities. Such credit enhancements
may include insurance policies, bank letters of credit, or guaranties by third
parties. Certain private issuers of mortgage securities may be considered
investment companies under the Investment Company Act of 1940. In such event,
the Adjustable Rate and Government Funds may be restricted from investing in
the securities of such issuers.
Investments by the Adjustable Rate or Government Fund in mortgage-backed
securities may have maturities shorter than anticipated if the underlying
mortgages are prepaid. This prepayment feature will make such mortgage-backed
securities less effective than other types of securities as a means of locking
in attractive long-term interest rates. This is caused by the need to reinvest
prepayments of principal generally and the possibility of significant
unscheduled prepayments resulting from declines in mortgage interest rates. At
the time principal payments or prepayments are received, prevailing interest
rates may be higher or lower than the current yield of that Fund's portfolio.
As a result, GNMA certificates and other mortgage-backed securities will have
less potential for capital appreciation during periods of declining interest
rates than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. If the
Adjustable Rate or Government Fund buys mortgage-backed securities at a
premium, mortgage foreclosures and prepayment of principal by mortgagors
(which may be made at any time without penalty) may result in some loss of
that Fund's principal investment to the extent of the premium paid.
As prepayment rates of individual mortgage pools vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
certificates or other mortgage-backed security. However, statistics published
by FHA indicate that the average life of single-family dwelling mortgages with
25- to 30-year maturities, the type of mortgages backing the vast majority of
GNMA certificates, is approximately 12 years. Therefore, it is customary to
treat GNMA certificates as 30-year mortgage-backed securities which prepay
fully in the twelfth year.
The coupon rate of interest on GNMA certificates is lower than the interest
rate paid on the mortgages underlying the certificates, by the amount of the
fees paid to GNMA and the issuer. The coupon rate by itself, however, does not
indicate the yield which will be earned on GNMA certificates. First, GNMA
certificates may be issued at a premium or discount, rather than at par, and,
after issuance, GNMA certificates may trade in the secondary market at a
premium or discount. Second, interest is earned monthly, rather than semi-
annually as with traditional bonds; monthly compounding raises the effective
yield earned. Finally, the actual yield of a GNMA certificate is influenced by
the prepayment experience of the mortgage pool underlying it.
Some mortgage securities are called "pass-through certificates" because a
pro rata share of interest (less GNMA, FHLMC or FNMA fees and any applicable
loan servicing fees) as well as scheduled and unscheduled principal
22
<PAGE>
payments on the underlying mortgage pool are passed through each month to the
owner of the security (e.g., the Adjustable Rate and Government Funds).
The Adjustable Rate and Government Funds may also invest in Collateralized
Mortgage Obligations (CMOs), which are another type of debt obligation fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Typically, CMOs are collateralized by mortgage securities guaranteed or issued
by GNMA, FNMA or FHLMC. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as they are
received, however certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending
on the types of CMOs in which the Adjustable Rate or Government Fund invests,
the investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities.
The Adjustable Rate and Government Funds may invest in Multi-Class
Residential Mortgage Securities. Such securities represent interests in pools
of mortgage loans to residential home buyers made by commercial banks, savings
and loan associations or other financial institutions. Unlike GNMA, FNMA and
FHLMC securities, the payment of principal and interest on Multi-Class
Residential Mortgage Securities is not guaranteed or otherwise backed by the
U.S. Government or any of its agencies. Accordingly, yields on Multi-Class
Residential Mortgage Securities have been historically higher than the yields
on U.S. Government mortgage securities. However, the risk of loss due to
default on such instruments is higher since they are not guaranteed by the
U.S. Government, its agencies or instrumentalities. Additionally, pools of
such securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on the
underlying mortgage loans must be borne by persons holding subordinated
securities before those holding senior mortgage securities.
The Adjustable Rate and Government Funds may also invest in stripped
mortgage securities. With such securities, the principal and interest payments
on a pool of mortgages are separated or "stripped" to create two classes of
securities. In general, the interest-only, or "IO" class of stripped
securities, receives all interest and no principal payments, while the
principal-only, or "PO" class, is entitled to receive all principal and no
interest payments. Stripped mortgage securities are expected to be acutely
sensitive to fluctuations in interest rates which, in turn, affect prepayment
rates on the mortgages underlying stripped securities. The Adjustable Rate and
Government Funds will invest principally in IO securities for the purpose of
reducing, or hedging against, the decline in principal value of mortgage
securities which may occur as a result of increasing interest and prepayment
rates.
The Adjustable Rate and Government Funds may invest in mortgage securities
and other instruments that are "inverse floating obligations." The interest
rates on these instruments typically decline as market interest rates
increase, and increase as market rates decline. Such instruments have the
effect of providing the opportunity for incremental returns, because they will
generally increase or decrease in value in response to changes in market
interest rates at a rate which is a multiple of the rate at which fixed-rate
securities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the
market values of conventional securities.
Forward Roll Transactions.
In order to enhance current income, the Adjustable Rate Fund and the
Government Fund may enter into forward roll transactions with respect to
mortgage-backed securities. In a forward roll transaction, the Adjustable Rate
or Government Fund sells a mortgage-backed security to a financial
institution, such as a bank or broker-dealer, and simultaneously agrees to
repurchase a similar security from the institution at a later date at an
agreed-upon price. The mortgage-backed securities that are repurchased will
bear the same interest rate as those sold, but with different
23
<PAGE>
prepayment histories than those sold. The Adjustable Rate or Government Fund
is compensated by the difference between the current sales price and the lower
forward price for the future purchase as well as by the interest earned on the
cash proceeds of the initial sale. The value of securities sold by the
Adjustable Rate or Government Fund in forward roll transactions may decline
below the repurchase price of the corresponding similar securities. At the
time the Adjustable Rate or Government Fund enters into a forward roll
transaction, it will place in an account with the Custodian cash, U.S.
Government Securities or high grade debt obligations having a value equal to
the repurchase price (including accrued interest) and will subsequently
monitor the account to insure that the equivalent value is maintained.
Repurchase Agreements.
Each of the Funds may enter into repurchase agreements in order to generate
additional income. When a Fund acquires securities from a bank or broker-
dealer, it may simultaneously enter into a repurchase agreement with the
seller wherein the seller agrees at the time of sale to repurchase the
security at the cost plus interest within a specified time (normally one day).
Except as further provided, each repurchase agreement entered into by a Fund
will provide that the value of the collateral underlying the repurchase
agreement will always be at least 102% of the repurchase price, including
accrued interest. With respect to repurchase agreements entered into with a
broker/dealer or bank whose unsecured debt is rated AAA or whose commercial
paper is rated A-1+ by Standard & Poor's, the value of the collateral will
always be at least 100% of the repurchase price, including accrued interest.
In the event of default or bankruptcy by the seller, the Fund will seek to
liquidate such collateral. The exercise of the Fund's right to such a
liquidation could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase are less
than the repurchase price, the Fund could suffer a loss. In addition, if the
Seller becomes involved and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control of the
Fund and therefore subject to sale by the trustee in Bankruptcy. Finally, it
is possible that the Fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other party
to the agreement. While the Funds acknowledge these risks, it is expected that
they can be controlled through careful monitoring procedures, including the
monitoring by a Fund's sub-adviser of the creditworthiness of broker-dealers
or the financial institutions engaging in repurchase agreements with such
Fund. A Fund will not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities which are not readily marketable, would exceed 10% of the net
assets of such Fund. In addition, not more than one-third of the current
market value of a Fund's total assets shall constitute secured "loans" by such
Fund under repurchase agreements.
Borrowing.
Each of the Funds may borrow for temporary purposes in an aggregate amount
of up to 10% of its total assets. As a non-fundamental policy, a Fund will not
purchase any security while borrowings representing more than 5% of such
Fund's total assets are outstanding. Such borrowing may be made by obtaining a
loan from a bank or by entering into a reverse purchase agreement with a bank
or broker-dealer. Reverse repurchase agreements involve the sale of a security
held by a Fund and its agreement to repurchase the instrument at a stated
price, date and interest payment. A Fund will use the proceeds of a reverse
repurchase agreement to purchase securities or to honor redemption requests
made of such Fund. The use of reverse repurchase agreements to purchase
portfolio securities involves the borrowing of money to purchase securities
and entails additional risks such as the incurrence of interest expenses and
fluctuation of the Fund's net asset value. There is no guarantee that the
securities purchased will maintain a value equal to or greater than the amount
borrowed to purchase them. The technique of leveraging the value of portfolio
securities for the purpose of purchasing additional portfolio securities is
speculative. A Fund may
24
<PAGE>
not enter into reverse repurchase agreements with broker-dealers if its
obligations under such agreements would exceed 5% of the current market value
of its total assets.
Options.
Each of the Funds may write (i.e., sell) options to increase the return of
the Fund's portfolio and to hedge against a decline in the market value of the
underlying securities held by the Fund to the extent of the premium income
received. A covered call option ("call") is an option to purchase underlying
securities which the Fund either owns or has the right to acquire, or for
which the Fund maintains a segregated account with its Custodian of cash, cash
equivalents or U.S. Government Securities having a value sufficient to meet
its obligations under the call. By writing a covered call option a Fund might
lose the potential for gain on the underlying security while the option is
open. When a Fund writes a "secured" put option ("put"), it receives a premium
and gives the purchaser of the put the right to sell the underlying security
to the Fund at a specified price ("exercise price") at any time during the
option period. A put is "secured" if the Fund maintains with the Custodian
cash, cash equivalents, or U.S. Government Securities having a value equal to
the exercise price or holds a put on the same underlying security at an equal
or greater exercise price. The Funds will write only covered call options and
secured put options. Neither the Government Fund nor the Tax Free Fund will
write puts if more than 50% of such Fund's total assets would be needed to
cover its obligations in connection therewith, and neither Fund will write
calls if more than 100% of its total assets would be needed to cover its
obligations in connection with such calls. The Adjustable Rate Fund, the Value
Fund, and the Growth Fund will not write puts if more than 25% of its total
assets would be needed to cover its obligations in connection therewith, and
will not write calls if more than 25% of such Fund's total assets would be
needed to cover its obligations in connection with such calls.
The Funds may also purchase calls and puts to effect a "closing purchase
transaction" or a straddle. See "Additional Information Concerning Certain
Investment Techniques--Options" in the Statement of Additional Information. By
purchasing a call, a Fund pays a premium for the right to buy the underlying
security at the exercise price at any time during the option period. When a
Fund purchases a put, it pays a premium in return for the right to sell the
underlying security at the exercise price at any time during the option
period. If any call or put purchased by a Fund is not exercised or sold, it
will become worthless on its expiration date. A Fund will not purchase puts or
calls if more than 5% of its total assets would be invested in premiums on
puts or calls.
The Funds may write or purchase options on securities held in their
portfolios. The Funds will write and purchase only exchange-traded options. A
Fund's option positions may be closed only in a secondary market for options
written or purchased by the Fund. Each Fund's sub-adviser will consider the
liquidity of the secondary market in writing or purchasing options for the
Fund, but there can be no assurance that a liquid secondary market will exist
at a given time for any particular option. A Fund could be unable to control
losses by closing the position where a liquid secondary market does not exist.
Futures Contracts and Options on Such Contracts.
Each of the Funds may purchase and sell futures contracts, subject to
certain limitations. A futures contract is an agreement between two parties to
buy and sell a security for a set price on a future date. Futures contracts
are traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts.
Typically, maintaining a futures contract or selling an option thereon
requires the Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may
be higher in some circumstances). Additional cash or assets (variation margin)
may be required to be deposited thereafter on a daily basis as the value of
25
<PAGE>
the contract fluctuates. The purchase of an option on a futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If a Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Positions in interest rate futures may be closed out by an offsetting
transaction only on an exchange which provides a secondary market for such
futures. A Fund will enter into a futures position only if there appears to be
a liquid secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist at a specific time.
Utilization of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and movements in
the price of the securities which are the subject of the transaction. If the
price of the futures contract moves more or less than the price of the
security, a Fund will experience a gain or loss which will not be completely
offset by movements in the price of the debt securities which are the subject
of the transaction. There is also a risk of imperfect correlation where the
securities underlying futures contracts have different maturities than the
portfolio securities. Transactions in options on futures contracts involve
similar risks.
Each of the Funds also may purchase and sell listed put and call options on
futures contracts. 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, at a specified exercise price at any time during the option period.
When an option on a futures contract is exercised, settlement is effected by
the payment of cash representing the difference between the current market
price of the futures contract and the exercise price of the option.
Options on futures contracts do not require the purchaser to enter into the
futures contract, but rather grant the purchaser the right to do so. Thus, the
risk of loss to the purchaser of an option is limited to the premium paid for
the option.
The success of a Fund's transactions in futures contracts and options
thereon is dependent upon its sub-adviser's ability to predict fluctuations in
interest rates and the price of futures contracts and options thereon. A Fund
may suffer losses on futures contracts or options thereon, as well as on the
underlying securities. There is no limit to the potential exposure of a Fund
from investments in futures contracts. There can be no assurance that a Fund's
transactions in futures contracts and options thereon will be successful.
Each Fund's use of financial futures and options thereon will in all cases
be consistent with the applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that a Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted
by the entity's principal regulator (in the case of the Funds, the Securities
and Exchange Commission) to the extent that the aggregate initial margin and
option premiums required to establish such non-hedging positions do not exceed
5% of the liquidation value (i.e., the net asset value) of a Fund's portfolio.
For further information regarding futures contracts and options thereon, see
the Statement of Additional Information.
Securities Lending.
Each of the Funds may lend its portfolio securities to qualified
institutional investors for the purpose of realizing additional income. Loans
may be made pursuant to agreements which provide safeguards for the Fund,
e.g., that the loans will be continuously secured by collateral in any
combination of cash, letters of credit and securities of the U.S. Government
or its agencies, equal to at least the market value at all times of the
securities lent. The bank or banks
26
<PAGE>
issuing any such letters of credit must meet creditworthiness standards
approved by the Trust's Board of Trustees. A Fund will not make securities
loans if as a result the aggregate of all outstanding securities loans exceeds
one-third of the value of the Fund's total assets. A Fund receives
compensation for lending its securities in the form of fees or it retains a
portion of interest on the investment of any cash collateral it receives. A
Fund also continues to receive interest or dividends on the securities lent.
However, the amounts received by a Fund may be reduced by finders' fees paid
to broker-dealers and related expenses.
The primary risk in lending securities is that the borrower may become
insolvent at a time at which the loaned security is rapidly increasing in
value. In such event, if the borrower fails to return the loaned security, the
existing collateral might be insufficient to purchase back the full amount of
the security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the lending
Fund would be an unsecured creditor with respect to such shortage and might
not be able to recover all or any thereof. However, this may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.
Temporary Investments.
Each of the Funds may hold up to 100% of its assets in cash or short-term,
high-grade debt securities for temporary defensive purposes if, in the opinion
of its sub-adviser, unusual market conditions warrant such a position. The
Government Fund will invest in highly liquid instruments including commercial
paper having a rating from Standard & Poor's of A-1 or A-1+. The types of
short-term instruments in which the other Funds may invest for such purposes
include short-term money market securities such as repurchase agreements and
U.S. Government Securities, certificates of deposit, time deposits and
bankers' acceptances of certain qualified financial institutions and corporate
commercial paper rated at the time of purchase at least "A" by Standard &
Poor's or "Prime" by Moody's (or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least "A" by Standard &
Poor's or Moody's). See the Statement of Additional Information.
Rule 144A Securities.
Each of the Funds may invest in restricted securities in accordance with
Rule 144A under the Securities Act of 1933, which allows for the resale of
such securities to certain qualified institutional buyers. Because the market
for such securities is still developing, such securities could possibly become
illiquid in particular circumstances. See the Statement of Additional
Information.
Investments in Foreign Companies.
The Adjustable Rate Fund, the Value Fund, and the Growth Fund may each
invest up to 10% of its total assets in U.S. dollar denominated American
Depository Receipts ("ADRs") which represent securities of foreign companies.
ADRs are traded in the United States on national securities exchanges or over-
the-counter and are issued by domestic banks. The Funds will not make
investments in foreign securities other than through ADRs.
When investing in ADRs, a Fund assumes certain additional risks that are not
present with investments in stocks of domestic companies. These risks include
political and economic developments such as possible expropriation or
confiscatory taxation that might adversely affect the market value of such
ADRs. In addition, there might be less publicly available information about
such foreign issuers than about domestic issuers, and such foreign issuers may
not be subject to the same accounting, auditing and financial standards and
requirements as domestic issuers.
Other Investment Techniques.
Each of the Funds may engage in when issued and delayed delivery
transactions, short sales against the box, lending of portfolio securities,
and payment of premiums with respect to straddles and real estate investment
trusts
27
<PAGE>
but presently has no intention to engage in any such investment techniques to
the extent that more than 5% of the Fund's net assets would be at risk (except
that the Adjustable Rate Fund may invest up to 25% of its assets in securities
on a "when-issued," delayed delivery or forward commitment basis). For further
information on these investment techniques, see the Statement of Additional
Information.
INVESTMENT RESTRICTIONS
In seeking to reduce investment risk, the Funds operate under certain
investment restrictions. Certain of the restrictions have been designated as
fundamental and are set forth in the first paragraph under each Fund's heading
below. These restrictions may not be changed except by a vote of the
shareholders of the particular Fund. Each of the Fund's remaining restrictions
and policies are subject to change by the Trustees. For further information on
the following policies and the Funds' other investment restrictions, including
more detailed information regarding which restrictions have been designated as
fundamental and which ones are nonfundamental investment restrictions which
may be changed without a shareholder vote, see the Statement of Additional
Information.
Adjustable Rate Fund.
The Adjustable Rate Fund may not invest in a security if, at the time of
purchase, the transaction would result in: (a) more than 5% of the Adjustable
Rate Fund's total assets being invested in any one issuer (excluding
securities issued or guaranteed by U.S. Government, its agencies and
instrumentalities); or (b) the Adjustable Rate Fund's owning more than 10% of
the outstanding voting securities of an issuer (excluding securities issued or
guaranteed by U.S. Government, its agencies and instrumentalities).
The Adjustable Rate Fund may not: (a) invest more than 15% of its net assets
in illiquid securities, including certain IOs and POs and securities
restricted as to resale (which restricted securities are limited to 5% of
total assets), repurchase agreements extending for more than seven days and
other securities which are not readily marketable; (b) invest in securities of
foreign issuers other than through ADRs; (c) borrow in excess of 10% of the
value of its total assets (through reverse repurchase agreements, forward
rolls or otherwise) and then only as a temporary measure or (d) make cash
loans except that it may purchase debt obligations, including money market
instruments, directly from the issuer thereof or in the open market and may
engage in repurchase transactions collateralized by obligations of the U.S.
Government and its agencies and instrumentalities.
Government Fund.
The Government Fund may not invest in a security if, at the time of
purchase, the transaction would result in: (a) more than 5% of the Government
Fund's total assets being invested in any one issuer; or (b) more than 25% of
its assets being invested in any one industry. These restrictions do not apply
to investments in securities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities.
The Government Fund may not: (a) purchase more than 10% of any class of
securities of any one issuer (except U.S. Government Securities); (b) purchase
securities of any other investment company, except in the open market in a
transaction involving no commission or profit to a sponsor or dealer (other
than the customary brokerage commission) and only to the extent of 10% of its
assets or as part of a merger, consolidation, reorganization or acquisition of
assets; (c) invest in or retain the securities of any issuer, if, to the
knowledge of the Government Fund officers and trustees of Investors Trust who
individually own in excess of 1/2 of 1% of the issuer's securities, own more
than 5% of such securities in the aggregate.
28
<PAGE>
Tax Free Fund.
The Tax Free Fund may not invest in a security if, at the time of purchase,
the transaction would result in: (a) more than 5% of the Tax Free Fund's total
assets being invested in any one issuer; (b) the Tax Free Fund's owning more
than 10% of any class of securities of an issuer; or (c) more than 5% of the
Tax Free Fund's total assets being invested in securities of issuers
(including predecessors) with less than three years continuous operations
except in the case of debt securities rated BBB or higher by Standard & Poor's
or Baa or higher by Moody's. These restrictions do not apply to investments in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or fully collateralized by securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
The Tax Free Fund may not: (a) invest more than 15% of its net assets in
illiquid securities, including securities restricted as to resale (which
restricted securities are limited to 5% of total assets), repurchase
agreements extending for more than seven days and other securities which are
not readily marketable; (b) borrow in excess of 10% of the value of its total
assets and then only as a temporary measure; or (c) make cash loans except
that it may purchase debt obligations, including money market instruments,
directly from the issuer thereof or in the open market and may engage in
repurchase transactions collateralized by obligations of the U.S. Government
and its agencies and instrumentalities.
Value Fund.
The Value Fund may not invest in a security if, at the time of purchase, the
transaction would result in: (a) more than 5% of the Value Fund's total assets
being invested in any one issuer; (b) the Value Fund's owning more than 5% of
the outstanding voting securities of an issuer; (c) more than 5% of the Value
Fund's total assets being invested in securities of issuers (including
predecessors) with less than three years of continuous operations except in
the case of debt securities rated BBB or higher by Standard & Poor's or Baa or
higher by Moody's; (d) more than 5% of the Value Fund's total assets being
invested in warrants of all types, or more than 2% of the Value Fund's total
assets being invested in warrants other than warrants attached to the other
securities; or (e) more than 20% of the Value Fund's total assets being
invested in any one industry. These restrictions do not apply to investments
in securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
The Value Fund may not: (a) invest more than 15% of its net assets in
illiquid securities, including securities restricted as to resale (which
restricted securities are limited to 5% of total assets), repurchase
agreements extending for more than seven days and other securities which are
not readily marketable; (b) invest in securities of foreign issuers other than
through ADRs; (c) borrow in excess of 10% of the value of its total assets and
then only as a temporary measure; or (d) make cash loans except that it may
purchase debt obligations, including money market instruments, directly from
the issuer thereof or in the open market and may engage in repurchase
transactions collateralized by obligations of the U.S. Government and its
agencies and instrumentalities.
Growth Fund.
The Growth Fund may not invest in a security if, at the time of purchase,
the transaction would result in: (a) more than 5% of the Growth Fund's total
assets being invested in any one issuer; (b) the Growth Fund's owning more
than 10% of the outstanding voting securities of an issuer; (c) more than 5%
of the Growth Fund's total assets being invested in securities of issuers
(including predecessors) with less than three years continuous operations
except in the case of debt securities rated BBB or higher by Standard & Poor's
or Baa or higher by Moody's; (d) more than 5% of the Growth Fund's total
assets being invested in warrants of all types, or more than 2% of the Growth
Fund's total assets being invested in warrants other than warrants attached to
other securities; or (e) more than 25% of the
29
<PAGE>
Growth Fund's total assets being invested in any one industry. These
restrictions do not apply to investments in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
The Growth Fund may not: (a) invest more than 15% of its net assets in
illiquid securities, including securities restricted as to resale (which
restricted securities are limited to 5% of total assets), repurchase
agreements extending for more than seven days and other securities which are
not readily marketable; (b) invest in securities of foreign issuers other than
through ADRs; (c) borrow in excess of 10% of the value of its total assets and
then only as a temporary measure; or (d) make cash loans except that it may
purchase debt obligations, including money market instruments, directly from
the issuer thereof or in the open market and may engage in repurchase
transactions collateralized by obligations of the U.S. Government and its
agencies and instrumentalities.
HOW TO PURCHASE SHARES
Shares of each of the Funds are distributed by GNA Distributors, Inc. (the
"Distributor") through its affiliate, GNA Securities, Inc. ("GNA Securities"),
and other authorized broker/dealers and financial institutions ("Authorized
Firms") which have entered into sales agreements with the Distributor. State
Street Bank and Trust Company, through its affiliate National Financial Data
Services, P.O. Box 419031, Kansas City, MO 64141-6031, acts as the Funds'
transfer agent and shareholder servicing agent ("Transfer Agent").
Accompanying this Prospectus is an account application to purchase shares.
Your initial investment must be at least $500, or $100 if the purchase is for
an Individual Retirement Account ("IRA"). All subsequent investments must be
at least $50. The minimum initial investment amount is waived for systematic
investment plan accounts. See "Shareholder Programs and Services."
Initial purchases should be made with the assistance of a sales
representative from GNA Securities or another Authorized Firm (a "Sales
Representative"). Subsequent investments may be made with a Sales
Representative or mailed directly to the Transfer Agent. When making
subsequent investments directly to the Transfer Agent, please make your check
payable to the appropriate Investors Trust Fund and include your account
number on the check.
Initial or subsequent purchase payments can also be made by Federal Funds
wire, transferred along with proper instructions directly to your account.
Before an initial wire transfer can be accepted, an account must be
established for you. See your Sales Representative or call (800) 433-0684 for
further instructions. Your financial institution may charge a fee for wiring
funds to your account.
Your purchase order will be processed at the net asset value next determined
with respect to the Class of shares being purchased after your purchase order
(or your wire, if applicable) has been received and accepted by the Funds'
Transfer Agent. See "Net Asset Value." If you purchase shares through a Sales
Representative, your Authorized Firm will be responsible for transmitting your
order promptly to the Transfer Agent. Consult your Sales Representative for
further information regarding the transmission. You begin to earn income as of
the first business day following the day the Transfer Agent has received
payment for your order. Orders will be accepted only upon receipt by the
Transfer Agent of all documentation required to be submitted in connection
with such order.
When you purchase shares of a Fund by personal check, certified check, or
cashier's check, the Fund reserves the right to hold payment on redemptions
until it is reasonably satisfied that the investment has been collected (which
can take up to 15 days). If you anticipate the need for more immediate access
to your investment you should purchase shares by Federal Funds wire, as
described above.
For specific information on the various ways to purchase shares, see
"Shareholder Programs and Services."
30
<PAGE>
Each of the Funds reserves the right to suspend the offering of shares for a
period of time. Each Fund also reserves the right to reject any specific
purchase order.
MULTIPLE CLASS SYSTEM
General
The Multiple Class System permits you to choose the class of shares that you
believe to be the most advantageous for you, given the amount of your
purchase, the length of time you anticipate holding the shares and other
factors. You will be able to determine whether in your particular
circumstances it is more advantageous to incur an initial sales charge and be
subject to lower ongoing charges or to have your entire initial purchase price
invested in the Fund with the investment being subject thereafter to higher
ongoing distribution fees for the first eight years that such shares are held.
As described in greater detail below, Authorized Firms are paid differing
amounts of commission and other compensation depending on which class of
shares they sell.
The major differences between the two classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------- -------------------------------
<S> <C> <C>
Sales Charges Initial sales charge at time of CDSC of 5% to 1% applies to any
investment of up to 4.5% de- shares redeemed within first
pending on amount of invest- five years following their pur-
ment* chase; no CDSC after five years
Distribution None 0.75% for first eight years;
Fee Class B shares convert automat-
ically to Class A shares after
eight years
Service Fee Up to 0.25% each year Up to 0.25% each year
Initial Com- Above described initial sales 4%
mission Re- charge less 0.25% retained by
ceived by Distributor**
Authorized
Firm
</TABLE>
- --------
*Class A share purchases of $1 million or more are not subject to an initial
sales charge but are subject to a 1% contingent deferred sales charge if
such shares are redeemed within one year of the purchase.
**On any sale of Class A shares to an investor in the amount of $1 million or
more, the Distributor will pay the Authorized Firm a commission equal to 1%
of the amount of the sale that is less than $2.5 million, .50% of the
amount of the sale that equals or exceeds $2.5 million but is less than $5
million, and .25% of the amount of the sale that equals or exceeds $5
million.
In deciding which class of shares to purchase, you should consider the
amount of the investment, the length of time the investment is expected to be
held, the initial or contingent deferred sales charges and the ongoing service
fee and distribution fee, among other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested. Class B shareholders pay no
initial sales charge. For Class B shareholders, therefore, the entire purchase
amount is immediately invested in the applicable
31
<PAGE>
Fund, but a contingent deferred sales charge of up to 5.0% may apply to shares
redeemed within five years of purchase.
If you qualify for a reduced initial sales charge for the purchase of Class
A shares, you might elect that option to take advantage of the lower ongoing
service and distribution fees that characterize Class A shares compared with
Class B shares. All purchases of $250,000 or more must be made in Class A
shares.
Class A and Class B shares are assessed an annual service fee of up to 0.25%
of daily net assets for as long as the shares are held. Class B shares are
also assessed an annual distribution fee of 0.75% of daily net assets, but
automatically convert into Class A shares at the end of eight years following
the date of purchase.
The service fee is paid to Authorized Firms (see "Distribution Plan" below).
The distribution fee is retained by the Distributor to reimburse expenses it
incurs in connection with the distribution of the Class B shares, including
commissions paid to Authorized Firms. In addition, the Distributor may, at its
expense, provide additional cash and noncash incentives to Authorized Firms
that sell shares. In certain cases, such incentives may be extended only to
those Authorized Firms who have sold or may sell significant amounts of shares
and/or meet other conditions established by the Distributor; for example, the
Distributor may sponsor special promotions to develop particular distribution
channels or to reach certain investor groups.
CLASS A SHARES--INITIAL SALES CHARGES
Sales Charges
The purchase price of a Class A share of a Fund is the Fund's per share net
asset value next determined after the purchase order is received, plus a sales
charge which varies depending on the dollar amount of the shares purchased as
set forth in the table below. A major portion of this sales charge is
reallowed by the Distributor to the Authorized Firm responsible for the sale.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE AUTHORIZED
PAID BY PAID BY FIRM CONCESSION
DOLLAR AMOUNT OF INVESTOR AS % OF INVESTOR AS % OF AS % OF
PURCHASE TRANSACTION PURCHASE PRICE NET ASSET VALUE PURCHASE PRICE
-------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Less than $50,000....... 4.50% 4.71% 4.25%
$50,000 or above but
less than $100,000..... 4.25% 4.44% 4.00%
$100,000 or above but
less than $250,000..... 3.75% 3.90% 3.50%
$250,000 or above but
less than $500,000..... 2.50% 2.56% 2.25%
$500,000 or above but
less than $1 million... 2.00% 2.04% 1.75%
$1 million or above..... 0.00% 0.00% up to 1.00%*
</TABLE>
- --------
*On any sale of Class A shares to an investor in the amount of $1 million or
more, the Distributor will pay the Authorized Firm a commission equal to 1%
of the amount of the sale that is less than $2.5 million, .50% of the
amount of the sale that equals or exceeds $2.5 million but is less than $5
million and .25% of the amount of the sale that equals or exceeds $5
million.
32
<PAGE>
Reduced Sales Charges
The reduced sales charges described above are applicable to Class A share
purchases of all Investors Trust Funds made at any one time or as described
below under "Letter of Intent" and "Right of Accumulation," by any "person,"
as defined in Appendix A.
Letter of Intent
You may provide a Letter of Intent and qualify for a reduced sales charge on
purchases of $50,000 or more of Class A shares of any of the Funds within a
13-month period. Additional information on a Letter of Intent is available
from Authorized Firms, or from the Distributor, and also appears in Appendix
A.
Right of Accumulation
You may purchase Class A shares of any one or more of the Funds at reduced
sales charges pursuant to a Right of Accumulation. Under a Right of
Accumulation, the sales charge is determined by combining the current purchase
amount with the value of shares of any the Funds already held by you and
certain related parties at the time of purchase. See Appendix A for details.
Other Programs
No sales charge is imposed in connection with the sale of Class A shares to:
(A) the Adviser or any affiliate thereof; (B) officers, directors, trustees,
employees and sales representatives (and their respective spouses, children
under age 21, parents and beneficial accounts) of the Funds, the Distributor,
the Adviser, the applicable Sub-Adviser, the Transfer Agent, the Custodian and
any affiliate of such firms; or (C) officers, directors, employees and sales
representatives (and their respective spouses, children under age 21 and
beneficial accounts) of Authorized Firms or financial institutions having an
arrangement with an Authorized Firm or the Distributor with respect to the
sale of the Funds' shares. This privilege terminates with respect to future
purchases for any individual or firm which no longer meets these criteria.
Class A shares of the Funds may be sold at a reduced sales charge or without
a sales charge pursuant to certain sponsored arrangements, which include
programs under which a company, employee benefit plan or other organization
makes recommendations to, or permits group solicitation of, its employees,
members, customers or participants, except that such privilege shall not be
available to any organization created primarily for the purpose of obtaining
shares of the Funds at a reduced sales charge or without a sales charge.
Information on such arrangements and further conditions and limitations is
available from the Distributor.
CLASS B SHARES--CONTINGENT DEFERRED SALES CHARGES
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is received. No sales charge is
imposed at the time of purchase; thus the applicable Fund will receive the
full amount of the investor's purchase payment. However, a contingent deferred
sales charge is imposed upon redemptions of Class B shares as described below.
Investments in Class B shares of $250,000 or more per purchase will not be
accepted. Because of the reduced sales charges available on such purchases,
Class A shares must be purchased instead.
Class B shares that are redeemed will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents
(1) reinvestment of dividends or capital gains distributions, (2) shares held
more than five years or (3) capital appreciation of shares redeemed. The
amount of any applicable contingent deferred sales
33
<PAGE>
charge will be calculated by multiplying the net asset value of shares subject
to the charge at the time of redemption or at the time of purchase, whichever
is lower, by the applicable percentage shown in the table below:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
REDEMPTION DURING NET ASSET VALUE AT REDEMPTION
----------------- --------------------------------
<S> <C>
1st Year Since Purchase.................. 5%
2nd Year Since Purchase.................. 4
3rd Year Since Purchase.................. 3
4th Year Since Purchase.................. 2
5th Year Since Purchase.................. 1
6th Year Since Purchase and Thereafter... None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of shares representing reinvestment of dividends and capital gains
distributions and then of the remaining shares held by the shareholder for the
longest period of time. The holding period for purposes of applying a
contingent deferred sales charge on shares of a Fund acquired through an
exchange from another Investors Trust Fund shall include the holding period of
the shares from which such shares were exchanged. Class B shares acquired
through an exchange from another Investors Trust Fund being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in the shares from which they were
exchanged. These determinations will result in any contingent deferred sales
charge being imposed at the lowest possible rate. For federal income tax
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid to
the Distributor, to reimburse it for the 4% commission paid to Authorized
Firms at the time of a sale of Class B shares.
Contingent Deferred Sales Charge Waivers
The Contingent Deferred Sales Charge will be waived for a total or partial
redemption made due to the death or subsequent disability (caused by injury or
the sudden onset of a life threatening illness) of a sole individual
shareholder (but not for shares held in "family," "living" or other trusts)
and for redemptions representing a minimum required distribution from an IRA
processed under the systematic withdrawal plan. The Contingent Deferred Sales
Charge will also be waived in connection with certain redemptions from the
Government Fund made under the Systematic Withdrawal Plan. See "Shareholder
Programs and Services-- Systematic Withdrawal Plan."
In addition, the contingent deferred sales charge does not apply to
exchanges or transfers to other Investors Trust Funds. However, if you
exchange your Class B shares of a Fund for shares of the GE Money Market Fund,
as described below, the holding period of shares acquired through the exchange
will be "tolled" for purposes of calculating any contingent deferred sales
charge, that is, the contingent deferred sales charge will stop declining
during the period your investment is in the GE Money Market Fund. If you
choose to redeem shares of the GE Money Market Fund acquired by exchanging
from Class B shares, such shares will be subject to a contingent deferred
sales charge imposed by the Fund at the time of such redemption at the same
level as was in effect at the time of the original exchange into the GE Money
Market Fund. See "Shareholder Programs and Services--Exchange Privilege."
Conversion of Class B Shares to Class A Shares
Your Class B shares, including a pro rata portion of the shares received as
dividends or distributions with respect
to such shares, will automatically convert into Class A shares of the same
Fund at the end of eight years following the issuance of the Class B shares;
consequently, they will no longer be subject to the higher expenses borne by
Class
34
<PAGE>
B shares. Holding periods of shares of an Investors Trust Fund that are
exchanged for Class B shares of another Investors Trust Fund will be counted
toward the eight-year period. Holding periods of shares of the GE Money Market
Fund will not be counted toward the eight-year period.
SHAREHOLDER PROGRAMS AND SERVICES
Choice of Distributions
Distributions from your account in a particular Fund will automatically be
reinvested in additional shares of that Fund unless you indicate on your
account application that you would prefer to reinvest in an account in the
same class of another Investors Trust Fund or receive your distributions in
cash (either directly, to a special payee, or deposited into a pre-authorized
bank account). If you elect to receive dividends or distributions in cash, you
may elect one of two options: (1) reinvest long-term capital gains and receive
all other distributions in cash, or (2) receive all distributions in cash. New
shares will be purchased based on their net asset value as of the close of
business on the day of the distribution. You may change your distribution
option by writing to the Fund or calling (800) 433-0684 for instructions. A
change may take up to 15 days to become effective.
Tax-Deferred Retirement Plans. (All funds except the Tax Free Fund)
You may establish an account in any Fund (other than the Tax Free Fund) as
an Individual Retirement Account. IRA accounts let you save for retirement and
shelter your investment income from current taxes. In addition, such Funds are
eligible investment vehicles for a Simplified Employer Pension Plan ("SEP"),
if your employer has established such a plan. You should consult your tax
adviser to determine if you qualify to deduct all or part of your IRA
contribution for purposes of your federal and state income tax returns. See
your Sales Representative or call (800) 656-6626 and select option 2 for more
information regarding IRA accounts.
Fund shares may also be purchased as an investment for other qualified
retirement plans in which you participate, such as profit-sharing and money
purchase plans, 401(k) programs, 403(b) plans and others. You should consult
your plan administrator before investing.
Systematic Investment and Withdrawal Plans. To elect either the Systematic
Investment Plan or the Systematic Withdrawal Plan, ask your Sales
Representative, or call (800) 656-6626 and select option 2, for instructions.
A. The Systematic Investment Plan allows you to automatically add to your
account on a periodic basis in a minimum amount of at least $50 per month.
Funds will be drawn the 3rd and/or 18th business day of each month by the
Transfer Agent from a checking account designated by you and invested in
Fund shares of the designated class at the net asset value next determined.
If no date is specified, the 3rd business day will be used as the date for
the Systematic Investment Plan. A sales charge may apply to purchases of
Class A shares pursuant to the Systematic Investment Plan.
B. The Systematic Withdrawal Plan allows you to receive cash payments from the
Fund on a regular basis. You may establish a Systematic Withdrawal Plan at
any time if your account has a balance of $10,000 or more. As of the date
of this prospectus, Trust management intended to recommend to the Board of
Trustees, at its March 15, 1996 meeting, that in response to lower market
interest rates affecting the yield on debt securities, the Board should
reduce the monthly dividend paid with respect to shares of the Government
Fund, to bring the dividend in line with the Government Fund's income.
Pursuant to the Systematic Withdrawal Plan, shareholders of the Government
Fund who purchased their shares prior to March 1, 1996 may elect to
continue to receive monthly cash payments with respect to their investment
at the current rate; 5.1 cents per share for Class B shares, 5.62 cents per
share for Class A shares. This will require that the shareholder elect to
have all dividends reinvested and that a systematic withdrawal plan be
established in the amount of the former dividend. Any contingent deferred
sales charge that would otherwise be assessed on any such withdrawal will
be waived. A contingent deferred sales charge may apply to other
withdrawals of Class B shares pursuant to the Systematic Withdrawal Plan.
35
<PAGE>
Autobuy and Autosell. To elect either the Autobuy or Autosell option, call
(800) 656-6626 and select option 2, for instructions.
A. Autobuy: The Autobuy option allows you to purchase shares by moving money
directly from your checking account to an Investors Trust Fund. If you have
established the Autobuy option, you may purchase additional shares in an
existing account by calling the Transfer Agent at (800) 433-0684 and
instructing the Transfer Agent as to the dollar amount you wish to invest.
A minimum investment of $50 is required each Autobuy transaction. The
investment automatically will be processed through the Automated Clearing
House (ACH) system. There is no fee for this option other than the regular
sales charges, if any, which apply. If you previously established banking
information with us, you may initiate an Autobuy transaction over the
telephone (if your request is received after 2:30 p.m. Central Time, your
transaction may be processed the next business day); otherwise, send a
signature guaranteed letter or Shareholder Privilege Form, along with a
voided check, to the Transfer agent.
B. Autosell: The Autosell option allows you to redeem shares from your
Investors Trust accounts and have the proceeds sent directly to your
checking account. If you have established the Autosell option, you may
redeem shares in an existing account by calling the Transfer Agent at (800)
433-0684 and instructing the Transfer Agent as to the dollar amount or
number of shares you wish to redeem. A minimum of $50 is required for each
Autosell transaction. The proceeds automatically will be sent to your bank
through the Automated Clearing House (ACH) system. There is no fee for this
option other than the regular sales charges, if any, which apply. If you
previously established banking information with us, you may initiate an
Autosell transaction over the telephone (if your request is received after
2:30 p.m. Central Time, your transaction may be processed the next business
day); otherwise, send a signature guaranteed letter or Shareholder
Privilege Form, along with a voided check, to the Transfer Agent.
Payroll deductions. If your employer allows for automatic payroll
deductions, you may invest in the Investors Trust funds using our payroll
deduction feature. To start investing in the Investors Trust Funds by payroll
deductions, call (800) 656-6626 and select option 2, to request a Payroll
Deduction Authorization Form.
Statements, Reports and Certificates. You will receive a statement of
account each time shares are purchased or redeemed and a quarterly statement
showing the activity in your account with respect to each of the Funds owned
by you.
In the interest of economy and convenience, physical certificates
representing a Fund's shares will not be issued unless specifically requested
by you in writing.
EXCHANGE PRIVILEGE
You may exchange your shares of any Fund for shares of a corresponding class
of shares, when available, of any of the other Funds at any time on the basis
of the relative net asset values of the respective shares to be exchanged,
subject to compliance with applicable securities laws. You may also exchange
your shares of any of the Funds for shares of the GE Money Market Fund at any
time on the basis of the relative net asset values of the shares to be
exchanged, subject to compliance with applicable securities laws. GE Money
Market Fund is a no-load money market fund and a series of GE Funds, an open-
end management investment company managed by GE Investment Management
Incorporated, an affiliate of the Adviser. GE Money Market Fund presently
offers a single class of shares. Shares of GE Money Market Fund which are
acquired as a result of such an exchange may, in turn, be exchanged back into
shares of the same class of the Fund that you held originally or shares of a
corresponding class of any Investors Trust Fund. For more complete information
about the GE Money Market Fund, including charges and expenses, obtain a
prospectus by calling (800) 433-0684. Read it carefully before you invest or
exercise your exchange privilege.
36
<PAGE>
Upon an exchange you will be provided with a Prospectus for the particular
Investors Trust Fund into which you are exchanging or the GE Money Market
Fund, as the case may be. In an exchange, shares will not be subject to any
contingent deferred sales charge that might otherwise be due upon the
redemption of such shares. The holding period of shares acquired through an
exchange shall include the holding period of the shares from which such shares
were exchanged. If you exchange your Class B shares of a Fund for shares of
the GE Money Market Fund, the holding period of shares acquired through the
exchange will be "tolled" for purposes of calculating any contingent deferred
sales charge, that is, the contingent deferred sales charge will stop
declining during the period your investment is in the GE Money Market Fund.
With respect to shares of the GE Money Market Fund acquired by exchanging
Class B shares of a Fund, if such shares are subsequently exchanged back into
Class B shares of such Fund or Class B shares of any of the other Funds, the
holding period of the Class B shares acquired through such exchange will
include the holding period of Class B shares of the Fund owned prior to the
exchange into GE Money Market Fund. The holding period of the Class B shares
of a Fund acquired through such exchange will not, however, include the
holding period of shares of the GE Money Market Fund.
If you choose to redeem shares of the GE Money Market Fund acquired by
exchanging from Class B shares of any of the Funds, such shares will be
subject to a contingent deferred sales charge imposed by such Fund at the time
of such redemption. Such contingent deferred sales charge will be calculated
based on the length of the holding period of Class B shares of such Fund prior
to the exchange into the GE Money Market Fund.
Unless you have declined exchange privileges on your account application,
each Fund automatically permits exchanges by telephone request from either you
or your Authorized Firm. The toll-free number for exchanges is (800) 433-0684.
Telephone exchange instructions will be accepted between 9:00 a.m. and 6:00
p.m., eastern time, on any day the New York Stock Exchange is open. It may be
difficult to implement your exchange privilege by telephone during periods of
drastic economic or market changes. If you are unable to reach the Funds by
telephone, you may implement similar procedures by sending a written request
to the Transfer Agent. The Funds will employ reasonable procedures to attempt
to confirm that instructions communicated by telephone are genuine, and if the
Fund does not, it may be liable for any losses due to unauthorized or
fraudulent instructions. See "How to Redeem Shares."
A pattern of frequent exchanges may be deemed to be contrary to the best
interests of the Funds' other shareholders and a Fund may, in its discretion,
limit or otherwise restrict the number of times an investor may exercise the
exchange privilege. Any such restriction will be made by such Fund on a
prospective basis only, upon notice to the investor.
Shares may be exchanged by telephone only if the registration of the two
accounts is the same. All exchanges must meet the minimum investment amount
requirements. See "How to Purchase Shares."
The exchange privilege may be exercised only in those states where shares of
the relevant Fund or the GE Money Market Fund, as the case may be, may legally
be sold. For tax purposes, each exchange actually represents the sale of
shares of one fund and the purchase of shares of another. Accordingly,
exchanges may produce a capital gain or loss for tax purposes. The exchange
privilege may be terminated or suspended or its terms changed at any time,
subject to 60 days' prior notice if required under applicable regulations.
Related administrative policies and procedures may also be adopted with regard
to a series of exchanges, street name accounts, sponsored arrangements and
other matters.
Your exchange order will be processed at the net asset value next determined
after your exchange order has been received and accepted by the Fund's
Transfer Agent. For further information regarding the exchange privilege, call
(800) 656-6626 and select option 2.
37
<PAGE>
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares in a Fund on any day on which
that Fund's net asset value is calculated. Your shares will be redeemed at the
net asset value next determined after the Transfer Agent has received and
accepted your redemption request. See "Net Asset Value."
To redeem your shares by mail, send a written redemption request to the
Transfer Agent at P.O. Box 419031, Kansas City, Missouri 64141-6031 specifying
the Fund's name and share class, the number of shares or the dollar amount to
be redeemed, your account number, and the additional requirements listed below
that apply to your particular account. If you own more than one class of
shares and do not specify which class to redeem, Class B shares will be
redeemed. You should also specify whether you wish to have the proceeds sent
to the account registration address or to your pre-authorized account if you
have established this option. If you request: (i) a redemption of more than
$50,000; (ii) a redemption of any amount to be sent to an address other than
that on record with the Fund; or (iii) a redemption payable other than as your
account is registered, you (all owners) must have your signature guaranteed. A
signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request; it may not be provided by a notary
public. The following institutions should be able to provide you with a
signature guarantee: a commercial bank, trust company or savings association
insured by the FDIC; a broker/dealer; or a credit union. If you hold
certificates representing your shares, such certificates must be properly
executed and returned to the Transfer Agent before your redemption request
will be accepted.
The Funds automatically permit limited redemptions by telephone request up
to $25,000 ("Quick Cash"). These proceeds will only be mailed to your address
of record payable exactly as registered. This privilege is not available if
you have changed your address within the last 15 days. You may also select an
optional feature on your account application which permits unlimited
redemptions by telephone request ("Telephone Redemption"). If you elect this
privilege after your account is established, a signature guarantee is required
from all registered owners. To redeem by telephone, call (800) 433-0684 and
specify the name of the Fund and share class, the number of shares or the
dollar amount to be redeemed, your name and your account number. Quick Cash
and Telephone Redemption instructions will be accepted between 9:00 a.m. and
6:00 p.m., eastern time, on any day the New York Stock Exchange is open.
Following an address change made over the telephone, a 15 day hold will be
placed on the account prior to the processing of any telephone redemptions. It
may be difficult to implement Quick Cash or Telephone Redemptions during
periods of drastic economic or market changes. If you are unable to reach the
Fund by telephone, you may implement similar procedures by sending a written
request to the Transfer Agent. If you hold certificates representing your
shares, you are not eligible to redeem by telephone. The Fund will employ
reasonable procedures, as described below, to attempt to confirm that
instructions communicated by telephone are genuine, and if the Fund does not,
it may be liable for any losses due to unauthorized or fraudulent
instructions. Specifically, the Fund requires that the person initiating the
call identify the account registration and tax identification number of the
account from which shares are to be redeemed or exchanged. In addition, the
Fund records all telephone calls and provides written confirmation of such
transactions. The Fund and its agents will not be liable for following
instructions communicated by telephone that it reasonably believes to be
genuine.
The Transfer Agent will normally send the redemption proceeds, less any
applicable contingent deferred sales charge, on the first business day
following receipt of your redemption request. If you request that your
redemption proceeds be sent by wire transfer to a pre-authorized account, the
amount redeemed must be at least $1,000 and a $10 wire fee will be deducted
from your redemption proceeds. If making immediate payment could adversely
affect a Fund, it may take up to seven days to pay you. The Funds cannot
suspend the right of redemption for more than seven days except when the New
York Stock Exchange is closed (or when trading is restricted) for any reason
other than its customary weekend or holiday closings, or under any emergency
circumstances as determined by the Securities and Exchange Commission to merit
such action.
38
<PAGE>
If any portion of the shares to be redeemed represents an investment made by
personal check, certified or cashier's check, the Funds reserve the right to
hold payment on such redemption until it is reasonably satisfied that the
investment has been collected (which could take up to 15 days). If you
anticipate the need for more immediate access to your investment, you should
purchase shares by Federal Funds wire.
If you want to keep your account open, please leave at least $250 in it.
Otherwise, the applicable Fund may close it and mail you the proceeds at the
address it has in its records. The Fund will give you 60 days' written notice
that your account will be closed unless you make an additional investment to
increase your account balance to the $250 minimum. Please note that your
shares will be redeemed at the net asset value on the day your account is
closed. Your account will not be involuntarily redeemed if a systematic
investment plan is in effect or its balance falls below $250 because of a
change in a Fund's net asset value.
For additional information on the variety of ways to redeem shares, see
"Shareholder Programs and Services."
Reinstatement Privilege. If you make a partial or complete redemption of
shares of any class of a Fund, you may reinvest all or part of the redemption
proceeds in shares of the same class of any of the Funds and receive a pro
rata credit for any contingent deferred sales charges paid, provided such
reinstatement is effected within 90 days after the redemption. Such
reinstatement will be made at the net asset value next determined after
receipt of the reinstatement order.
You may exercise this privilege only once. If you realized a gain on the
redemption, the transaction is taxable and reinstatement will not alter any
capital gains tax payable. If there has been a loss on the redemption, under
certain circumstances (when your reinvestment is within 30 days of your
redemption) the loss may be disallowed as a tax deduction to the extent of the
amount reinvested. Consult your tax adviser for information on the
consequences of exercising your reinvestment privilege.
For purposes of determining the amount of any contingent deferred sales
charges payable on any subsequent redemptions, the purchase payment made
through exercise of the reinstatement privilege will be deemed to have been
made at the time of the initial purchase (rather than at the time the
reinstatement was effected).
NET ASSET VALUE
The net asset value ("NAV") of a share of a Fund is determined based upon
the aggregate value of the Fund's assets, less expenses, and is calculated by
the Fund's Custodian as of 4:00 p.m. eastern time, Monday through Friday,
exclusive of national business holidays during which the New York Stock
Exchange is closed. Assets held by the Funds are valued on the basis of the
last reported sale price or quotations as of the close of business on the
valuation date, except that securities and assets for which market quotations
are not readily available are valued as determined in good faith by or under
the authority of the Trustees of the Trust. In determining the value of
certain assets for which market quotations are not readily available
(including most tax-exempt debt obligations), the Funds may use one or more
pricing services. The pricing services utilize information with respect to
market transactions, quotations from dealers and various relationships among
securities in determining value and may provide prices determined as of times
prior to the close of the New York Stock Exchange. U.S. Government Securities
and asset-backed securities are valued primarily based on market quotations
provided by recognized dealers of such securities. Certain short-term
obligations are valued at amortized cost which approximates market value.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Adjustable Rate Fund
Dividends from net investment income will be declared daily and paid
monthly.
39
<PAGE>
Government Fund and Tax Free Fund only
The Government Fund and Tax Free Fund will each declare a distribution each
day in an amount based on periodic projections of its future net investment
income and will pay such distributions monthly. Consequently, the amount of
each daily distribution may differ from actual net investment income. The
purpose of these distribution procedures is to attempt to eliminate, to the
extent possible, fluctuations in the level of monthly distribution payments
that might result if such Fund declared dividends in the exact amount of its
daily net investment income.
It is possible, however, as a result of this policy that total distributions
in a year could exceed the total of the Government Fund's or the Tax Free
Fund's current year net investment income and capital gains. If this should
occur, a portion of the distributions received by shareholders of such Fund
could be a "return of capital" for federal income tax purposes and thereby
reduce the shareholder's cost basis in shares of the Fund. If distributions
are received in additional shares rather than cash, the capital "returned"
would be automatically reinvested and the shareholder's total cost basis in
the Fund would remain the same.
Value Fund
Dividends from net investment income will be declared and paid quarterly.
Growth Fund
Dividends from net investment income will be declared and paid annually.
Each of the Funds intends to qualify and elect to be treated each taxable
year as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, each of the Funds
will not be liable for federal income taxes to the extent its taxable
investment income and net capital gain are distributed to its shareholders,
provided that at least 90% of its net investment income and net short-term
capital gain for the taxable year are distributed.
Each Fund is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of taxable ordinary income and
capital gain net income. The Funds intend to make such additional
distributions of taxable ordinary income and capital gain net income as may be
necessary to avoid this excise tax.
Distributions of net investment income and net short-term capital gain are
taxable as ordinary income to shareholders. Distributions of net capital gain
are taxable to shareholders as long-term capital gain, provided that the Fund
properly designates such distributions as capital gain dividends, regardless
of the length of time the shares of the Fund have been held by such
shareholders. Dividends of the Adjustable Rate Fund, the Government Fund and
the Tax Free Fund will generally not be eligible for the 70% corporate
dividends-received deduction. Whether you take dividends and distributions in
cash or reinvest them in additional shares, they will be taxable as described
above.
Gains or losses realized upon redemption of your shares are taxable as short
or long-term capital gains or losses, depending upon the length of time which
you have held your shares. Any loss realized upon a disposition of shares
within 6 months from the date of their purchase will be treated as a long-term
capital loss to the extent of any long-term capital gain distributions
received during such period.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually by January 31. Shareholders may wish to
consult their tax advisers about any state and local taxes that may apply to
payments received and, in particular, to determine whether dividends paid by a
Fund that represent interest derived from U.S. Government Securities are
exempt from any applicable state or local income taxes.
40
<PAGE>
Each of the Funds is required to withhold and remit to the U.S. Treasury a
portion of the dividends and proceeds of redemptions paid with respect to any
shareholder who fails to furnish the applicable Fund with a correct taxpayer
identification number, who under-reports dividend or interest income or who
fails to certify to the Fund that he/she is not subject to withholding. An
individual's taxpayer identification number is his/her social security number.
The foregoing discussion relates only to generally applicable federal income
tax provisions in effect as of the date of this Prospectus. You are urged to
consult your own tax adviser regarding taxes, including state and local taxes,
applicable to distributions and redemptions by any of the Funds.
PERFORMANCE INFORMATION
YIELD
From time to time each of the Funds may advertise the 30-day yields of its
Class A and Class B shares. The yield of a Fund is calculated separately for
each class of shares and refers to the income generated by an investment in
the Fund over the 30-day period identified in the advertisement, and is
computed by dividing the net investment income per share earned by the Fund
during the period by the net asset value per share of the Fund on the last day
of the period. The result is "annualized" by assuming that the amount of
income is generated each month over a one-year period and is compounded
semiannually. The annualized income is then shown as a percentage.
Each of the Funds may quote its yields in advertisements or in reports to
shareholders. Yield information may be useful in reviewing the performance of
the Funds and for providing a basis for comparison with other investment
alternatives. However, since net investment income of a Fund changes in
response to fluctuations in interest rates and the Fund's expenses, any given
yield quotation should not be considered representative of the Fund's yields
for any future period. Investors reviewing yield comparisons of each of the
Fund should also bear in mind that their net asset value will increase or
decrease, depending upon market conditions, and could be more or less than on
investors cost. Current yield and price quotations for any of the Funds may be
obtained by calling toll free at (800) 433-0684.
TOTAL RETURN
Each of the Funds may advertise "average annual total return" over various
periods of time separately for each class of shares. Such total return figures
show the average percentage change in value of an investment in a Fund from
the beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the Fund's shares, assume that
any income dividends and/or capital gains distributions made by the Fund
during the period were reinvested in shares of the Fund, and reflect any
initial or contingent deferred sales charge imposed at the end of the
measuring period. Figures will be given for recent one-, five- and ten-year
periods (if applicable), and may be given for other periods as well (such as
from commencement of the Fund's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
it is important to note that the Fund's annual total return for any one year
in the period might have been greater or less than the average for the entire
period.
Each of the Funds may also use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund for the specific period (again reflecting changes in Fund share prices
and assuming reinvestment of dividends and distributions but not necessarily
reflecting any initial or contingent deferred sales charge imposed at the end
of the period). Aggregate total returns may be shown by means of schedules,
charts, or graphs, and may indicate subtotals of the various components of
total return (i.e., change in value of initial investment, income dividends,
and capital gains distributions).
41
<PAGE>
Additional performance information is contained in each Fund's annual report
which may be obtained, without charge, by contacting the Fund at (800) 656-
6626 and selecting option 2. See "Performance Information" in the Statement of
Additional Information.
PERIODICALS AND INDICES
In advertisements or in reports to shareholders, each of the Funds may
compare the performance of its Class A and Class B shares to that of other
mutual funds with similar investment objectives and to other relevant indices.
For example, a Fund may compare its performance to appropriate peer group
rankings prepared by Lipper Analytical Services, Inc. or Morningstar, Inc.,
widely recognized independent services which monitor the performance of mutual
funds; or, as appropriate to a government bond index; to an equity index; to
an adjustable rate mortgage index; to a municipal bond index; or to the
Consumer Price Index.
THE TRUST, THE FUNDS AND MANAGEMENT
Each of the Funds is a series of Investors Trust, an open-end diversified
management investment company established as a Massachusetts business trust on
November 11, 1986. Overall responsibility for management and supervision of
the Funds rests with the Board of Trustees in accordance with the laws of the
Commonwealth of Massachusetts. The Trustees approve all significant agreements
between the Trust and the persons and companies that furnish services to the
Trust and the Funds, including agreements with the Funds' investment advisers,
custodians, transfer agents and distributors.
Each of the Funds has the ability to issue multiple classes of shares
representing interests in the applicable investment portfolio. Except for
those differences between the classes of shares described below and elsewhere
in the Prospectus, each share of each Fund has equal dividend, redemption and
liquidation rights with other shares of that Fund and when issued is fully
paid and nonassessable. The Trustees have currently authorized shares of the
Funds to be issued in two classes: Class A and Class B shares, but have
reserved the right to authorize shares of other classes to be issued in the
future.
Each share of each class of shares in each Fund represents an identical
legal interest in the same portfolio of investments of that Fund, has the same
rights and is identical in all respects, except that Class B shares bear the
expenses of the contingent deferred sales charge arrangement (distribution
fees) and certain other incremental expenses related to a class. Each class
will have exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares of each
Fund are identical, it is likely that the different expenses borne by each
class will result in different net asset values and dividends.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material, adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
The Trust is not required to hold annual shareholder meetings and, at this
time, does not intend to do so. However, special meetings may be called for
any of the Funds or the Trust as a whole for purposes such as electing or
removing Trustees, changing fundamental policies or approving an advisory
contract.
GNA Capital Management, Inc., (the "Adviser") is the investment adviser of
the Funds and is a wholly-owned subsidiary of GNA Corporation having its
principal business at Suite 5600, Two Union Square, 601 Union Street, Seattle,
Washington 98101. As the Funds' adviser, the Adviser shall manage, supervise
and conduct the affairs of
42
<PAGE>
each of the Funds, including the selection of a sub-adviser to furnish an
investment program for each Fund as described below. GNA Corporation also is
the parent company of GNA Securities, Inc., which is an Authorized Firm for
sales of the Funds' shares, and GNA Distributors Inc., which acts as the
Fund's Distributor. GNA Corporation is a direct subsidiary of General Electric
Capital Corporation. The officers of the Adviser manage the investments of
seven affiliated companies, General Electric Capital Assurance Company, Great
Northern Insured Annuity Corporation, GE Capital Life Assurance Company of New
York, Amex Life Assurance Company, Federal Home Life Insurance Company, The
Harvest Life Insurance Company, and PHF Life Insurance Company which had
combined assets of approximately $21.8 billion as of December 31, 1995.
SUB-ADVISERS
Adjustable Rate Fund
The Adjustable Rate Fund's sub-adviser, Standish, Ayer & Wood, Inc.
("Standish"), One Financial Center, Boston, Massachusetts 02111, a registered
investment adviser, has been retained by the Adviser to act as portfolio
manager of the Adjustable Rate Fund under a sub-advisory contract with the
Adviser dated July 15, 1993. Standish acted as investment adviser for total
assets in excess of $29.0 billion as of December 31, 1995. As portfolio
manager, Standish is responsible for the actual investment management of the
Adjustable Rate Fund's assets including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security, under
the general supervision of the Adviser and the Board of Trustees. Pursuant to
the sub-advisory contract, the Adviser periodically reviews the investment
activities of, and the Adviser has the right to terminate the sub-advisory
contract upon 60 days written notice to Standish.
Overall portfolio management strategy for the Adjustable Rate Fund is
determined by Standish under the supervision and direction of Dolores S.
Driscoll, a Managing Director of Standish. Ms. Driscoll has been employed by
Standish since 1974. Ms. Driscoll previously worked as a bond manager for
Davis L. Babson, Inc. Ms. Driscoll holds a B.A. degree in Mathematics from
Indiana University and an MBA degree in Finance from Boston University and is
a Chartered Financial Analyst.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Adjustable Rate Fund's average daily net assets, equal to an annual rate
of .40% of average daily net assets. Until the Adjustable Rate Fund grows
large enough to achieve additional economies of scale, the sharing of fixed
costs among a relatively small base of net assets may result in certain
operating expenses, such custodial and transfer agency fees, being
substantially higher, as a percentage of average daily net assets, than the
amounts of "Other Expenses" indicated under the caption "Summary of Fund
Expenses--Annual Fund Operating Expenses" on page 3 of this Prospectus. The
Adviser has indicated that it intends to reimburse such portion of these
expenses as is necessary to cause the total annual operating expenses of the
Class B Shares not to exceed 1.70% of the Adjustable Rate Fund's average daily
net asset value through the fiscal year ending October 31, 1996. A comparable
reimbursement will also be made with respect to the Class A Shares. The
Adviser may also elect to continue these voluntary expense reimbursements with
respect to subsequent fiscal years.
For its services under the sub-advisory contract, Standish receives from the
Adviser a fee, payable monthly, based upon the Adjustable Rate Fund's average
daily net assets equal to an annual rate of .20% of the Adjustable Rate Fund's
average daily net assets.
For the fiscal year ended October 31, 1995 the Adjustable Rate Fund paid the
Adviser $29,643 or .40% of the average daily net assets of the Fund.
Government Fund
The Government Fund's Sub-Adviser, BlackRock Financial Management, Inc.
("BlackRock"), 345 Park Avenue, New York, New York 10154, a registered
investment adviser, has been retained by the Adviser to act as portfolio
manager of the Government Fund under a sub-advisory contract with the Adviser
dated April 1, 1995.
43
<PAGE>
BlackRock is a wholly-owned subsidiary of PNC Asset Management Group, Inc., an
indirect subsidiary of PNC Bank Corp., a bank holding company organized under
the laws of the Commonwealth of Pennsylvania. BlackRock acted as investment
adviser for total assets in excess of $36 billion as of December 31, 1995. As
portfolio manager, BlackRock is responsible for the actual investment
management of the Government Fund's assets including the responsibility for
making decisions and placing orders to buy, sell or hold a particular
security, under the general supervision of the Adviser and the Board of
Trustees. Pursuant to the sub-advisory contract, the Adviser will periodically
review the investment activities of BlackRock, and the Adviser will have the
right to terminate the sub-advisory contract upon 60 days written notice to
BlackRock. Prior to April 1, 1995, Weiss, Peck & Greer Advisers, Inc. served
as the Fund's sub-adviser.
Overall portfolio management strategy for the Government Fund is determined
by a team composed of individuals who are officers of BlackRock. Keith
Anderson, a Managing Director of BlackRock, and E.G. Fisher, a Principal of
BlackRock, are the members of this team who have primary responsibility for
the day-to-day management of the Government Fund. Mr. Anderson and Mr. Fisher
have served as the Fund's portfolio managers since April 1, 1995.
Mr. Anderson is co-head of BlackRock's Portfolio Management Group and is a
member of its Management Committee. Mr. Anderson previously served as a Vice
President in Fixed Income Research at The First Boston Corporation. Mr.
Anderson holds a B.S. degree in Economics and Finance from Nichols College and
an M.B.A. degree from Rice University. Mr. Fisher is a member of BlackRock's
Investment Strategy Committee. Mr. Fisher joined BlackRock in 1990 after
receiving a B.A. degree in Economics from Dartmouth College.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Government Fund's average daily net assets, equal to an annual rate of
.65% of the first $500 million, .60% of the next $250 million, .55% of the
next $500 million, .50% of the next $250 million and .45% of average daily net
assets over $1.5 billion.
For its services under the sub-advisory contract, BlackRock receives from
the Adviser a fee, payable monthly, based upon the Government Fund's average
daily net assets equal to an annual rate of .15% of the first $500 million,
.10% of the next $250 million, .05% of the next $500 million and .04% of
average daily net assets over $1.25 billion.
For the fiscal year ended October 31, 1995 the Government Fund paid the
Adviser $7,200,540 or .60% of the average daily net assets of the Government
Fund.
Tax Free Fund
The Tax Free Fund's sub-adviser, Brown Brothers Harriman & Co. ("Brown
Brothers"), 59 Wall Street, New York, New York 10005, has been retained by the
Adviser to act as portfolio manager of the Tax Free Fund under a sub-advisory
contract with the Adviser dated July 15, 1993. Brown Brothers managed total
assets in excess of $22.8 billion as of December 31, 1995. As portfolio
manager, Brown Brothers is responsible for the actual investment management of
the Tax Free Fund's assets including the responsibility for making decisions
and placing orders to buy, sell or hold a particular security, under the
general supervision of the Adviser and the Board of Trustees. Pursuant to the
sub-advisory contract, the Adviser will periodically review the investment
activities of Brown Brothers, and the Adviser will have the right to terminate
the sub-advisory contract upon 60 days written notice to Brown Brothers.
Overall portfolio management strategy for the Tax Free Fund is determined by
Brown Brothers. Barbara A. Brinkley, a Manager of Brown Brothers and a member
of its U.S. Bond Policy Group and its Fixed Income Credit Committee, serves as
the portfolio manager. Ms. Brinkley has been employed by the sub-adviser since
1976.
44
<PAGE>
Throughout her career with Brown Brothers, and during her previous four years
with American Re-Insurance Company, Ms. Brinkley has specialized as a
municipal bond credit analyst, trader and portfolio manager. Ms. Brinkley is a
member and former chairman of the Municipal Analysts Group of New York, and is
a member of the Fixed Income Analysts Society, Inc. Ms. Brinkley holds a B.A.
degree from Smith College.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Tax Free Fund's average daily net assets, equal to an annual rate of .60%
of the first $20 million, .50% of the next $80 million and .45% of average
daily net assets in excess of $100 million. Until the Tax Free Fund grows
large enough to achieve additional economies of scale, the sharing of fixed
costs among a relatively small base of net assets may result in certain
operating expenses, such custodial and transfer agency fees, being
substantially higher, as a percentage of average daily net assets, than the
amounts of "Other Expenses" indicated under the caption "Summary of Fund
Expenses--Annual Fund Operating Expenses" on page 4 of this Prospectus. The
Adviser has indicated that it intends to reimburse such portion of these
expenses as is necessary to cause the total annualized operating expenses of
the Class B Shares not to exceed 1.90% of the Tax Free Fund's average daily
net asset value through the fiscal year ending October 31, 1996. A comparable
reimbursement will also be made with respect to the Class A Shares. The
Adviser may also elect to continue these voluntary expense reimbursements with
respect to subsequent fiscal years.
For its services under the sub-advisory contract, Brown Brothers receives
from the Adviser a fee, payable monthly, based upon the Tax Free Fund's
average daily net assets equal to an annual rate of .30% of the first $20
million, .20% of the next $80 million and .15% of average daily net assets in
excess of $100 million.
For the fiscal year ended October 31, 1995 the Tax Free Fund paid the
Adviser $125,333 or .59% of the average daily net assets of the Tax Free Fund.
Value Fund
The Value Fund's sub-adviser, Duff & Phelps Investment Management Co. ("Duff
& Phelps"), Suite 3800, 55 East Monroe Street, Chicago, Illinois 60603, a
registered investment adviser, has been retained by the Adviser to act as
portfolio manager of the Value Fund under a sub-advisory contract with Adviser
dated November 1, 1995. Duff & Phelps acted as investment adviser for total
assets of $42 billion as of December 31, 1995. Duff & Phelps is a wholly owned
subsidiary of Phoenix Duff & Phelps Corporation, which is itself a majority
owned subsidiary of Phoenix Home Life Mutual Insurance Company. As portfolio
manager, Duff & Phelps is responsible for the actual investment management of
the Value Fund's assets including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security, under the general
supervision of the Adviser and the Board of Trustees. Pursuant to the sub-
advisory contract, the Adviser will periodically review the investment
activities of Duff & Phelps, and the Adviser will have the right to terminate
the sub-advisory contract upon 60 days written notice to Duff & Phelps.
Overall portfolio management strategy for the Value Fund is determined by
Duff & Phelps under the supervision and direction of Carl F. Faust, an
Executive Vice President of Duff & Phelps and a member of its Equity Strategy
Committee. Mr. Faust has been employed by Duff & Phelps since 1988. Mr. Faust
previously worked as an investment analyst with Harris Bank, followed by three
years as the Director of the Illinois State Board of Investment before joining
First National Bank of Chicago as Vice President and Director of Equity
Research. He then served as Vice President and Senior Account Manager for
First Chicago Investment Advisors prior to joining Duff & Phelps. Mr. Faust is
a Chartered Financial Analyst and holds a B.S. degree from the University of
Illinois and an M.B.A. degree from the Harvard Graduate School of Business. He
is a member and past Director of the Investment Analysts Society of Chicago.
45
<PAGE>
The Adviser receives an investment advisory fee, payable monthly, based upon
the Value Fund's average daily net assets, equal to an annual rate of .80% of
the first $100 million of average daily net assets and .70% of average daily
net assets in excess of $100 million. Until the Value Fund grows large enough
to achieve additional economies of scale, the sharing of fixed costs among a
relatively small base of net assets may result in certain operating expenses,
such custodial and transfer agency fees, being substantially higher, as a
percentage of average daily net assets, than the amounts of "Other Expenses"
indicated under the caption "Summary of Fund Expenses--Annual Fund Operating
Expenses" on page 4 of this Prospectus. The Adviser has indicated that it
intends to reimburse such portion of these expenses as is necessary to cause
the total annual operating expenses of the Class B Shares not to exceed 2.10%
of the Value Fund's average daily net asset value through the fiscal year
ending October 31, 1996. A comparable reimbursement will also be made with
respect to the Class A Shares. The Adviser may also elect to continue these
voluntary expense reimbursements with respect to subsequent fiscal years.
For its services under the sub-advisory contract, the Duff & Phelps receives
from the Adviser a fee, payable monthly, based upon the Value Fund's average
daily net assets equal to an annual rate of .30% of the first $100 million of
average daily net assets, and .20% of average daily net assets in excess of
$100 million.
For the fiscal year ended October 31, 1995 the Value Fund paid the Adviser
$117,557 or .80% of the average daily net assets of the Value Fund.
Growth Fund
The Growth Fund's sub-adviser, Value Line, Inc.("Value Line"), 220 East 42nd
Street, New York, New York 10017, a registered investment adviser, has been
retained by the Adviser to act as portfolio manager of the Growth Fund under a
sub-advisory contract with Adviser dated August 20, 1993. Value Line managed
total assets of approximately $5.3 billion as of December 31, 1995. As
portfolio manager, Value Line is responsible for the actual investment
management of the Growth Fund's assets including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security, under
the general supervision of the Adviser and the Board of Trustees. Pursuant to
the sub-advisory contract, the Adviser will periodically review the investment
activities of Value Line, and the Adviser will have the right to terminate the
sub-advisory contract upon 60 days written notice to Value Line.
Overall portfolio management strategy for the Growth Fund is determined by
committee. No person is primarily responsible for making recommendations to
the committee.
The Adviser receives an investment advisory fee, payable monthly, based upon
the Growth Fund's average daily net assets, equal to an annual rate of .80% of
the first $100 million of average daily net assets and .70% of average daily
net assets in excess of $100 million. Until the Growth Fund grows large enough
to achieve additional economies of scale, the sharing of fixed costs among a
relatively small base of net assets may result in certain operating expenses,
such custodial and transfer agency fees, being substantially higher, as a
percentage of average daily net assets, than the amounts of "Other Expenses"
indicated under the caption "Summary of Fund Expenses--Annual Fund Operating
Expenses" on page 4 of this Prospectus. The Adviser has indicated that it
intends to reimburse such portion of these expenses as is necessary to cause
the total annualized operating expenses of the Class B Shares not to exceed
2.10% of the Growth Fund's average daily net asset value through the fiscal
year ending October 31, 1996. A comparable reimbursement will also be made
with respect to the Class A Shares. The Adviser may also elect to continue
these voluntary expense reimbursements with respect to subsequent fiscal
years.
For its services under the sub-advisory contract, Value Line receives from
the Adviser a fee, payable monthly, based upon the Adjustable Rate Fund's
average daily net assets equal to an annual rate of .30% of the first $100
million of average daily net assets, and .20% of average daily net assets in
excess of $100 million.
46
<PAGE>
For the fiscal year ended October 31, 1995, the Growth Fund paid the Adviser
$114,802 or .80% of the average daily net assets of the Growth Fund.
DISTRIBUTION PLAN
The Trust has adopted a Distribution Plan (the "Plan") under Rule 12b-1 of
the Investment Company Act of 1940, as amended. The Plan allows each of the
Funds to reimburse the Distributor for services the Distributor provides and
expenses it bears associated with the distribution of a Fund's shares or the
servicing of a Fund's shares. These expenses include, to the extent incurred,
commissions and fees paid to Authorized Firms that have entered into
agreements with the Distributor, advertising costs, the cost of printing and
mailing prospectuses and reports to potential investors, interest, carrying
charges and indirect and overhead costs of the Distributor associated with the
sale of Fund shares, including employee, lease, utility, equipment,
communications and sales promotion expenses.
Under the provisions of the Plan, each Fund makes payments to the
Distributor based on an annual percentage of the average daily value of the
net assets of each class of shares as follows:
<TABLE>
<CAPTION>
SHAREHOLDER DISTRIBUTION
CLASS SERVICING FEE FEE
----- ------------- ------------
<S> <C> <C>
A.............................................. up to 0.25% None
B.............................................. up to 0.25% 0.75%
</TABLE>
When expenses of the Distributor cannot be identified as relating to a
specific Investors Trust Fund, the Distributor allocates expenses among all
the Funds in a manner deemed fair and equitable to each Fund.
In the event the Distributor is not fully reimbursed for distribution
expenses incurred in any fiscal year of a Fund with respect to Class B shares,
the Distributor shall be entitled to carry forward such expenses to subsequent
fiscal years for submission to the Fund for payment, subject always to the
.75% annual maximum expenditure allowed by the Fund's Plan in addition to the
.25% service fee. For example, if the Distributor incurred distribution
expenses of $4,000,000 with respect to Class B shares of a Fund and received
reimbursement of $1,000,000 (through payment of the Rule 12b-1 fee and the
receipt of contingent deferred sales charges), the amount of expenses carried
forward would be $3,000,000. The Trustees or a majority of the shareholders of
any class of a Fund have the right, however, to terminate the Plan with
respect to any class and all payments thereunder at any time. The Funds will
not be obligated to reimburse the Distributor for carryover expenses
subsequent to the Plan's termination or non-continuance. The total amount of
carryover expenses with respect to Class B shares outstanding for each of the
Funds as of October 31, 1995 for which the Distributor intends to seek
repayment, are as follows: Adjustable Rate Fund: $94,000; Government Fund: $39
million; Growth Fund: $449,000; Tax Free Fund: $296,000; Value Fund: $484,000.
The aggregate of all payments to the Distributor shall not exceed at any time
the aggregate of all expenses incurred by the Distributor that are related to
sales and shareholder servicing.
To Authorized Firms selling Class B shares of a Fund and providing
shareholder support services to such Shareholders pursuant to a Selling
Agreement, the Distributor will pay a commission and a shareholder servicing
fee. The commission is equal to four percent of the aggregate net asset value
of Class B shares of the Fund sold by the Authorized Firm. A quarterly
shareholder servicing fee for all Authorized Firms (including GNA Securities)
that have entered into agreements with the Distributor will be paid. Each Fund
pays the Distributor a fee equal to the actual cost of the shareholder
servicing fees but in no event to exceed .25% of the average daily net assets
of the Fund with respect to such class.
In connection with shares of all classes of all Funds sold on or after March
1, 1995, the quarterly shareholder servicing fee for such shares will be
calculated and paid at the annual rate of .25% of the average daily net asset
value of any such shares that have been outstanding for a period of one
calendar year or more from the time they were sold.
47
<PAGE>
In connection with shares of all classes of all Funds sold prior to March 1,
1995, the quarterly shareholder servicing fee for such shares will be
calculated at the annual rate of .25% of the aggregate net asset value of
shares of all classes of all Investors Trust Funds sold by the Authorized Firm
prior to March 1, 1995 that remain on the books of the Trust on the last
business day of the quarter, if the aggregate net asset value of such shares
is greater than $25,000,000, and .10% of the aggregate net asset value of
shares of all classes of all Funds sold by the Authorized Firm prior to March
1, 1995 that remain on the books of the Trust on the last business day of the
quarter, if the aggregate net asset value of such shares is at least
$10,000,000 but not greater than $25,000,000. No shareholder servicing fee is
paid with respect to such shares if the aggregate net asset value of such
shares is below $10,000,000. In addition, no shareholder servicing fee will be
paid to an Authorized Firm with respect to such shares for any quarter in
which the Authorized Firm sold shares of Investors Trust Funds having an
aggregate net asset value of less than $300,000.
For purposes of the foregoing, any shares will be deemed to be redeemed on a
first-in-first-out basis.
GNA Securities may utilize office space, personnel, telephone systems
equipment, and other services of financial institutions (such as service
affiliates of savings and loan associations or commercial banks) in connection
with its sale of Fund shares and may reallow a portion of its shareholder
servicing fee to such financial institutions for these services. Such
"maintenance fee" is paid by GNA Securities to each financial institution that
has entered into an agreement with GNA Securities and at which the GNA
Securities program has independently satisfied the foregoing conditions.
Because certain of such programs at financial institutions individually may
not satisfy the foregoing conditions, the aggregate maintenance fee payable by
the Distributor to GNA Securities will generally exceed the amount payable by
GNA Securities to such financial institutions.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
effectively limits the annual expenditures which any of the Funds may incur
under the Plan to 1%, of which 0.75% may be used to pay distribution expenses
and 0.25% may be used to pay shareholder service fees. The NASD Rule also
effectively limits the aggregate amount which each of the Funds may pay for
distribution costs to 6.25% of gross share sales of a class since the
inception of any asset-based sales charge plus interest at the prime rate plus
1% on unpaid amounts thereof (less any contingent deferred sales charges
received by the Distributor). This limitation does not apply to shareholder
service fees.
The Glass-Steagall Act prohibits financial institutions (such as savings and
loan associations or commercial banks) from being an underwriter or
distributor of most securities. However, the Funds have been advised by the
Distributor that financial institutions are not prohibited from acting in
other capacities for investment companies such as the administrative
capacities described above. In the event the Glass-Steagall Act is deemed to
prohibit financial institutions from acting in these capacities or should
Congress relax current restrictions on financial institutions, the Trust's
Board of Trustees will consider appropriate changes in the services, but such
changes are not expected to affect the net asset value of any Fund.
Each of the Funds records all payments made under the Plan as expenses in
the calculation of its net investment income. The Funds do not accrue the
amount of distribution expenses incurred by the Distributor that may be paid
pursuant to the Plan in future periods as a liability, because the Funds
believe that the standards for accrual of a liability under generally accepted
accounting principles have not been satisfied. Such distribution expenses are
recorded as an expense in future periods as they are paid by each Fund.
48
<PAGE>
ADDITIONAL INFORMATION
Questions About the Funds. For further information about the Funds, please
call (800) 656-6626 and select Option 2.
Transfer Agent and Custodian. State Street Bank and Trust Company acts as
transfer agent for the Funds. State Street Bank and Trust Company also holds
all cash and securities of each of the Funds, as custodian.
Independent Accountants and Counsel. For the fiscal year of the Funds ending
October 31, 1996, Coopers & Lybrand L.L.P., One Post Office Square, Boston,
Massachusetts 02109 will act as the independent accountants for each of the
Funds. Messrs. Goodwin, Procter & Hoar, Exchange Place, Boston, Massachusetts
02109 will act as counsel to each of the Funds.
49
<PAGE>
APPENDIX A
Quantity Discounts. Purchasers of Class A Shares may be entitled to reduced
sales charges through a combination of investments under a Right of
Accumulation or a Letter of Intent (even if investors are not currently making
an investment of a size that would normally qualify for a quantity discount).
Investors, or their Authorized Firm must notify the Fund whenever a quantity
discount is applicable to purchases. Upon such notification, an investor will
receive the lowest applicable sales charge. Quantity discounts may be modified
or terminated at any time. For more information about quantity discounts,
investors should contact their Authorized Firm or the Distributor.
1. Combination of Investments. Purchases of Class A Shares of any of the
Funds which are made at any one time by "any person" may be combined to
receive a quantity discount. The term "any person" is defined as any one of
the following:
--an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned, either
alone or in combination, with any of the foregoing; or
--a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal
Revenue Code, as amended); or
--a "company" as defined in Section 2(a)(8) of the Investment Company Act
of 1940.
2. Right of Accumulation. Under a Right of Accumulation, in determining the
sales charge to be paid for a current purchase of Class A Shares, "any person"
(as defined above) may combine their current purchase with the current public
offering price of Class A Shares of any of the Funds which are owned by such
person. If the account an investor is combining for a Right of Accumulation
differs from the account into which the investor's current purchase is placed,
the investor must indicate to the Transfer Agent the account number (and, if
applicable, fund name) of such other account.
3. Letter of Intent. Purchasers of Class A Shares may qualify immediately
for a reduced sales charge by stating their intention to purchase an amount of
Class A Shares, during a 13 month period, that would qualify the investor for
a reduced sales charge. An investor may do this by signing a nonbinding Letter
of Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
within such 90 day period under a "Right of Accumulation" described above may
be, at the time of the signing of the Letter of Intent, applied towards
completion of an investor's Letter of Intent. In addition, if an investor's
Authorized Firm and the Distributor agree to refund the appropriate portion of
their respective concessions to the Fund, the sales charge on an investor's
previous purchases made within 90 days may be adjusted to the reduced sales
charge under the Letter of Intent, and the refunded concession will be used to
purchase shares of the Fund or Funds at the public offering price next
determined after receipt of such funds. Each investment made after signing the
Letter of Intent will be entitled to the initial sales charge applicable to
the total investment indicated in the Letter of Intent. If an investor does
not complete the necessary purchases under the Letter of Intent within 13
months from the date of the first purchase included thereunder, the sales
charge will be adjusted upward, corresponding to the amount actually
purchased.
When an investor signs a Letter of Intent, Class A Shares of the Funds
purchased with a value of 5% of the amount specified in the Letter of Intent
will be restricted; that is, these Class A Shares cannot be sold or redeemed
50
<PAGE>
until the Letter of Intent is satisfied or the additional sales charges have
been paid. If the total purchases made under the Letter of Intent, less
redemptions, equal or exceed the amount specified in the Letter of Intent,
these Class A Shares will no longer be restricted. If the total purchases,
less redemptions, exceed the amount so specified, and qualify an investor for
a further quantity discount, the Distributor and the investor's Authorized
Firm will, upon request, remit their respective portions of the sales
concession and with that amount, purchase additional Class A Shares of the
Fund for the investor's account at the next computed offering price. If an
investor does not complete the necessary purchases under the Letter of Intent,
the sales charges will be adjusted upward and if, after written notice, the
investor does not pay the increased sales charge, sufficient restricted Class
A Shares will be redeemed to pay such charge.
51
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
1 REGISTRATION
PLEASE PRINT
Personal Owner, Custodian or Trustee
qIndividual
qJoint Tenant
qEstate Co-owner, Minor or Trust
qUGMA/UTMA
qOther ________
Street address
Institutional
qCorporation
qPartnership City State Zip Code
qSole
Proprietor
qTrust ________
Date of Phone Number--Day Phone Number--Evening
Trust
2 qOther TAX IDENTIFICATION
Not for IRA's
______________ or ______________ Tax Residency
q U.S. q Other ____________
Social Security Number
Tax Identification Number
Under penalties of perjury, I certify with my signature below that the
number shown in this Section is the correct social security or taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
IF YOU ARE NOT A U.S. TAX RESIDENT, PLEASE ATTACH FORM W-8 TO THIS
APPLICATION.
qCheck here if you are subject to backup withholding.
3 INVESTMENTS
A. Enclosed is my check for $ ($500 minimum per Fund or waived if
establishing systematic monthly investing, see section 5).
q Class A or
q Class
q$ Adjustable Rate Fund q $ Value Fund B
q$ Government Fund q $ Growth Fund
q$ Tax Free Fund q $ GE Money Market Fund*
If class of shares is not specified, Class B shares will be purchased.
All purchases of $250,000 or more must be for Class A shares.
-------
*GE Money Market Fund consists of a single class of shares. However,
Shareholders who anticipate exchanging into an Investors Trust Fund must
designate which class of shares they intend to purchase upon exchange.
B. I qualify for a reduced sales charge due to the following privilege
(Class A only):
q
qNet Asset Value (attach signed NAV Account Eligibility Certification
Statement)
New Letter of Intent (if cumulative discount or 90-day backdate
privilege is applicable, provide account(s) information below).
qCumulative discount with the account(s) listed below.
qExisting Letter of Intent with account(s) listed below.
qAmendment to existing Letter of Intent with account(s) listed below.
--------------------------- --------------------------- orq New
Fund Name Account Number
To fulfill my Letter of Intent, I agree to purchase shares over a
thirteen-month period in accordance with the provisions in the
prospectus. The aggregate amount of purchases I anticipate I will make:
q$50,000 q $100,000 q $250,000 q $500,000 q $1,000,000
C. For Authorized Firm Use Only
Confirmed trade orders:
------------- ------------- -------------
Confirm Number Number of Shares Trade Date
<PAGE>
4 DISTRIBUTION OPTIONS
A.qReinvest all dividends and capital gains into additional shares in
this account (at net asset value).
B.q
Cross-reinvest all distributions into an existing account in a
different Investors Trust Fund.
(Must be same class of shares. Please review the "Shareholder Programs
& Services" section of the prospectus for details.)
From: ------------------------- ------------------------ or q New
Fund Name Account Number
To: -------------------------- ------------------------ or q New
Fund Name Account Number
C.qPay all dividends and reinvest capital gains.
D.qPay all dividends and capital gains.
If option C or D is chosen, send distributions to:
q Address of record.
q Bank or special payee listed in
section 6.
5 OPTIONAL SPECIAL FEATURES
A.q
Telephone Redemptions. In addition to the automatic Quick Cash
privilege, I authorize redemptions requested by telephone in amounts
greater than $25,000, or for redemption proceeds of any amount to be
sent to the bank account listed in Section 6.
B.
q
I wish to establish the autobuy feature (complete Section 6).
C.
q
Systematic Investing.
Amount $ , to draft from bank account in Section 6, into
Minimum Starting Fund
$50 Month Name(s)
Please debit my account on 3rd q and/or on 18th q business day of the
period. If no day is selected, 3rd business day will be used. See page
36 for details.
D.
qSystematic Withdrawal Plans.* I wish to automatically withdraw funds
from ________________________________________________________________
Fund
Amount $ to start . Name(s)
Minimum Month
$50
q Monthly q Quarterly q Semi-annually q Annually
I request withdrawals be sent to:
q Address of record.
q Bank or special payee
listed in section 6.
E.
qSystematic Monthly Exchange*. I wish to exchange $ (If elected must
be same class of shares.)
Minimum
$50
From: ------------------------- ------------------------ or q New
Fund Name Account Number
To: -------------------------- ------------------------ or q New
Fund Name Account Number
F.
qDecline Telephone Exchange. I do not want telephone exchange
privileges.
G.
q
Check Redemption Privilege--complete signature card in Section 10.
AVAILABLE ONLY ON GE MONEY MARKET FUND SHARES.
*Accounts must be for the same class of shares and have the same
registration. NOTE: For Systematic Withdrawal Plan's minimum account
values, please see the prospectus. Each withdrawal, redemption, or
exchange will be processed about the 23rd of the month and mailed as soon
as possible thereafter. Systematic Withdrawal Plans from Class B shares
may be subject to a CDSC. (Consult prospectus for details.) For
additional information on any of the above Special Features, please call
1-800-656-6626 and select option 2.
6 OPTIONAL ALTERNATIVE PAYEE
Bank account or special payee: (Attach voided check if providing bank
account information.)
Name of Bank or Individual
Street Address
City State Zip Code
Referencing: Name(s) on Account
Account Number ABA Routing Number (if bank)
Type of account: q Checking q Savings
<PAGE>
7 SIGNATURE
An account may not be established until a properly completed SIGNED
application has been received by NFDS (on accounts established via wire,
no redemptions from the account will be processed until a signed
application has been received). I (we) have full right, authority, and
legal capacity and am (are) of legal age in state of residence to
purchase shares of the designated Fund(s). I (we) affirm that I (we) have
received the current prospectus of the designated Fund(s) and agree to
its terms. I (we) agree that National Financial Data Services (NFDS), the
designated Fund(s), Investors Trust, or their officers or employees, will
not be liable for any loss, expense or cost for acting upon any
instructions, either written or by telephone, or inquiries believed to be
genuine. If Section 8 (Authorized Firm only) has been completed, I (we)
authorize said Authorized Firm to act on my (our) behalf by telephone
instructions. Under penalties of perjury, each undersigned certifies that
the Social Security or Taxpayer Identification Number given above is
correct and that I (we) am (are) not subject to backup withholding
because I (we) have not been notified that I (we) am (are) subject to
backup withholding or that the IRS has notified me (us) that I (we) am
(are) no longer subject to backup withholding.
Sign below exactly as the account is to be registered (when signing on
behalf of corporations, etc., indicate titles):
---------------------------------- ----------------------------------
Individual or Custodian Date Joint Registrant, if any
---------------------------------- ----------------------------------
Officer, Partner, Trustee, etc.
Date Title
---------------------------------- ----------------------------------
Officer, Partner, Trustee, etc.
Date Title
IMPORTANT: No investment can be redeemed from an account within 15 days
following the date of purchase. This limitation does not apply to
investments made by wire transfer from your bank. The Internal Revenue
Service requires that all taxpayers provide their Taxpayer Identification
Number or Social Security Number in the space provided in Section 2 of
the Application and certify to its correctness by signing above. Failure
by non-exempt taxpayers to furnish NFDS with their correct Taxpayer
Identification Number WILL result in withholding of 31% of all taxable
dividends paid to the account and/or withholding on certain other
payments to the account (this is referred to as "backup withholding").
8
AUTHORIZED FIRM INFORMATION
---------------------------------- ----------------------------------
Authorized Firm Name Authorized Firm Branch Number
------------------------------------------------------------------------
Authorized Firm Branch Address
------------------------------------------------------------------------
City State Zip Code
---------------------------------- ----------------------------------
Representative's Name and Number Representative's Phone Number
9 FOR FUND USE ONLY
--------------- --------------- --------------- ---------------
Account Number LOI# Cum Disc # Dealer #
--------------- -----------------------------------------------------
Distribution Options AMDM EXEX PAC/EX CWR SWP DVMO
10 SIGNATURE CARD
Available only on GE Money Market Fund (See Section 5)
CO FD ACCOUNT NO. ______________________________
IMPORTANT: By signing this card the undersigned agree to be subject to the
rules on the reverse side.
DATE ___________ Number of signatures PLEASE SIGN BELOW
required on draft
checks: one [_] two [_] all [_]
1 ______________________
2 ______________________
3 ______________________
Regardless of number of signatures required, 4 ______________________
all shareholders must sign this card.
<PAGE>
INVESTORS TRUST
q
Have you completed Sections 1, 2, 3, 4, 7 & 8?
q
If you have chosen to invest in more than one Fund, are the account
registrations and distribution options identical? If not, a separate
application will be necessary for each Fund purchased when the
account registrations and distribution options are different.
q
For Optional Special features, complete Section 5.
q
If distributions are to be made payable to someone other than the
registered owner, see Section 6.
q Have you signed and dated your application?
q
If you are investing by check, is it attached?
SUBMIT YOUR APPLICATION THROUGH YOUR AUTHORIZED FIRM OR MAIL TO:
INVESTORS TRUST C/O NFDS
P.O. BOX 419031
KANSAS CITY, MO 64141-6031
THIS FORM IS NOT TO BE USED TO ESTABLISH AN IRA. CALL 1-800-656-6626 AND
SELECT OPTION 2 TO REQUEST AN IRA KIT.
- --------------------------------------------------------------------------------
If you have elected the Check Redemption Privilege, this card must be
completed. The card is similar to one which must be signed when opening
any checking account.
All Joint Tenants named in the Account Registration must sign this card.
Names must be signed exactly as they appear in the Account Registration.
All persons authorized to sign for Corporate Accounts, Partnerships,
Associations, Trusts or Plans must sign this card.
In signing this card, the signator(s) agree to be subject to the
customary rules and regulations governing checking accounts and to the
conditions set forth below. If the Check Redemption Privilege is
established after the opening of the account or if any change is made in
the information on the reverse side, all signatures will have to be
guaranteed by a commercial bank, trust company, savings association
insured by the FDIC; a broker/dealer; or a Credit Union.
THE PAYMENT OF FUNDS ON THE CONDITIONS SET FORTH BELOW AND ON THE
REVERSE SIDE IS AUTHORIZED BY THE SIGNATURE(S) APPEARING ON THE REVERSE
SIDE. THE PERSON(S) SIGNING THIS FORM AUTHORIZE STATE STREET BANK &
TRUST CO. TO HONOR CHECKS DRAWN BY THE SIGNATOR(S) ON THEIR ACCOUNT.
National Financial Data Service (NFDS) is hereby appointed agent by the
person(s) signing this card and will cause the GE Money Market Fund to
redeem a sufficient number of shares from the account to cover checks
presented for payment without requiring signature guarantees. Neither
the GE Money Market Fund nor NFDS will be liable for any loss, expense
or cost arising out of check redemptions or checks returned without
payment. Shares outstanding in the account for less than 15 days will
not be liquidated to pay checks presented unless NFDS is assured that
good payment has been collected through normal banking channels. NFDS
has the right not to honor checks that are for less than $100 or checks
in an amount exceeding the value of the account at the time the check is
presented for payment. This privilege is subject to the provisions of
the current prospectus of the GE Money Market Fund as amended from time
to time. This agreement may be modified or terminated at any time by the
GE Money Market Fund or NFDS upon notification mailed to the
shareholder's address of record.
S02064 (3/96)
<PAGE>
[LOGO] GNA Distributors, Inc.
A GE Capital Service Company
Two Union Square . P.O. Box 490
Seattle, Washington 98111-0490
INVESTORS
TRUST/SM/ MUTUAL FUNDS
[LOGO FAMILY OF FUNDS]
PROSPECTUS
-----------------
March 1, 1996
ADJUSTABLE RATE FUND
GOVERNMENT FUND
TAX FREE FUND
VALUE FUND
GROWTH FUND
The Investors Trust Family of Funds
is offered by GNA Distributors, Inc.
Application Inside
<PAGE>
PART C
<PAGE>
PART C
------
Item 24.
- -------
Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements:
(1) Financial Statements included in PART A (Prospectus) of this
Registration Statement:
Financial Highlights for each Class B share of the Government
Fund series of the Trust Outstanding Throughout the Period
(for years ended October 31, 1994, October 31, 1993, October
31, 1992, October 31, 1991, October 31, 1990, October 31,
1989, October 31, 1988 and for the period from April 22, 1987
(commencement of operations) to October 31, 1987); and
Financial Highlights for each Class A share of the Government
Fund series of the Trust and each Class A and Class B share of
the Adjustable Rate Fund series, Growth Fund series, Tax Free
Fund series and Value Fund series of the Trust Outstanding
Throughout the Period (for the year ended October 31, 1994 and
for the period from September 8, 1993 (commencement of
operations) to October 31, 1993).
(2) Financial Statements included in PART B of this Registration
Statement:
The following documents are incorporated by reference to the
Annual Report to Shareholders for the fiscal year ended
October 31, 1994: Report of Independent Accountants,
Investment Portfolio, Statement of Assets and Liabilities,
Statement of Operations, Statements of Changes in Net Assets
and notes to financial statements.
(b) Exhibits:
Exhibit No. Description
- ----------- -----------
1(a) Master Trust Agreement (Agreement and Declaration of Trust) dated
November 11, 1986.*
1(b) Amendment No. 1 to Master Trust Agreement.***
1(c) Form of Amended and Restated Master Trust Agreement to become effective
September 8, 1993.*****
2 By-Laws.*
3 None.
4 Specimen share certificate for Government Fund.**
5(a) Advisory Agreement.**
<PAGE>
5(b) Form of engagement letter with respect to investment advisory services to
be rendered by the Advisor to each of the Growth Fund, Value Fund, Tax
Free Fund and Adjustable Rate Fund.****
5(c) Sub-Advisory Agreement for Government Fund.
5(d) Sub-Advisory Agreement for each of the Growth Fund, Tax Free Fund and
Adjustable Rate Fund.*****
5(e) Sub-Advisory Agreement for Value Fund.
6(a) Distribution Agreement, Dealer Agreement.**
6(b) Form of engagement letter with respect to distribution services to be
rendered to each of the Growth Fund, Value Fund, Tax Free Fund and
Adjustable Rate Fund.****
6(c) Distribution Agreement.*****
7 None.
8 Custodian contract.**
9 Transfer Agency Agreement.**
10(a) Opinion of Counsel regarding Class B shares of the Government Fund
series.**
10(b) Opinion of Counsel regarding Class A shares of the Government Fund series
and both Class A shares and Class B shares of each of the Growth Fund
series, Value Fund series, Tax Free Fund series and Adjustable Rate Fund
series.****
10(c) Consent of Counsel.
11 Auditors Consent.
12 Not Applicable.
13 Not Applicable.
14 Prototype IRA Plan.**
15(a) Form of Plan of Distribution under Rule 12b-1.**
15(b) Amended and Restated Plan of Distribution Pursuant to Rule 12b-1.***
15(c) Form of letter with respect to participation by each of the Growth Fund,
Value Fund, Tax Free Fund and Adjustable Rate Fund in the Amended and
Restated Plan of Distribution pursuant to Rule 12b-1.****
15(d) Second Amendment and Restatement of Plan of Distribution Pursuant to
Rule 12b-1.*****
2
<PAGE>
16 Not Applicable.
17 Powers of Attorney (previously filed).
- -----------------
* Incorporated by reference to Securities Act of 1933 filing No. 33-10976
filed December 19, 1986.
** Incorporated by reference to Pre-Effective Amendment No. 1 to Securities
Act of 1933 filing No. 33-10976 filed March 19, 1987.
*** Incorporated by reference to Post-Effective Amendment No. 7 to Securities
Act of 1933 filing No. 33-10976 filed January 14, 1993.
**** Incorporated by reference to Post-Effective Amendment No. 8 to Securities
Act of 1933 filing No. 33-10976 filed June 4, 1993.
***** Incorporated by references to Post-Effective Amendment No. 10 to
Securities Act of 1933 filing No. 33-10976 filed September 13, 1993.
Item 25. Persons Controlled by or Under Common Control with Registrant.
- ------- -------------------------------------------------------------
Information regarding persons controlled by or under common control with
Registrant is hereby incorporated by reference to the section captioned "The
Trust, The Portfolio and Management" in the Prospectus, and the section
captioned "Management of the Trust" in the Statement of Additional Information.
Item 26. Number of Holders of Securities.
- ------- -------------------------------
As of December 31, 1995, the record holders of each class of Registrant's
securities were as follows:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
Class A Class B
------- -------
<S> <C> <C>
Investors Trust Government Fund 942 48,585
Investors Trust Growth Fund 462 1,839
Investors Trust Value Fund 284 1,752
Investors Trust Tax Free Fund 53 308
Investors Trust Adjustable Rate Fund 15 86
</TABLE>
Item 27. Indemnification.
- ------- ---------------
Under Article VI of the Registrant's Master Trust Agreement each of
its Trustees and Officers or persons serving in such capacity with another
entity at the request of the Registrant ("Covered Person") shall be indemnified
against all liabilities, including, but not limited to, amounts paid in
satisfaction of judgments, in compromises or as fines or penalties, and
expenses, including reasonable legal and accounting fees, in connection with the
defense or disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or legislative body, in which such
Covered
3
<PAGE>
Person may be or may have been involved as a party or otherwise or with which
such person may be or may have been involved as a party or otherwise or with
which such person may be or may have been threatened, while in office or
thereafter, by reason of being or having been such a Trustee or officer,
director or trustee, except with respect to any matter as to which it has been
determined that such Covered Person (i) did not act in good faith in the
reasonable belief that such Covered Person's action was in or not opposed to the
best interests of the Trust or (ii) had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office (either and both of the conduct
described in (i) and (ii) being referred to hereafter as "Disabling Conduct"). A
determination that the Covered Person is entitled to indemnification may be made
by (i) a final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(19) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.
Item 28. Business and Other Connections of Investment Advisers.
- ------- -----------------------------------------------------
The following information is provided with respect to each director and
executive officer of the Adviser:
<TABLE>
<CAPTION>
Business and Other
Position Positions Within
Name With Adviser Last Two Years
---- ------------ ------------------
<S> <C> <C>
Patrick E. Welch Director, President President and Director of GNA
and CEO Corporation, Seattle, WA; Director,
President and CEO of its subsidiaries.
Geoffrey S. Stiff Director, Sr. Vice Senior Vice President, Chief
President and CFO Financial Officer of GNA Corporation,
Seattle, WA, since May 1993. Holds
similar executive positions with its
subsidiaries. Vice President, CFO and
Director of Employers Reinsurance
Corporation, Overland Park, Kansas;
1987-93.
Victor C. Moses Director and Sr. Vice President of GNA
Sr. Vice President Corporation, Seattle, WA, and holds similar
executive positions with its subsidiaries.
Thomas W. Casey Vice President and Vice President and Controller of GNA
Controller Corporation and its subsidiaries
since December 1993.
Jerome R. Powers Vice President Vice President of GNA Capital
Management, Inc., and its affiliates GE
Capital Assurance Company, Great Northern
</TABLE>
4
<PAGE>
<TABLE>
<C> <S>
Insured Annuity Corporation and GE Capital
Life Assurance Company of New York since
October 1995. Previously Vice President of
Northwestern Mutual Life Insurance
Company, 1991 to 1995.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Business and Other
Position Positions Within
Name With Adviser Last Two Years
---- ------------ -------------------
<C> <C> <S>
Edward J. Wiles, Jr. Vice President, Vice President, Counsel and Secretary
Counsel and of GNA Corporation, GNA Distributors,
Secretary Inc., GNA Mortgage Funding Corporation
and GNA Securities, Inc., Seattle, WA, and
holds similar executive positions with GNA
Corporation's subsidiaries.
Charles A. Kaminski Senior Vice President Senior Vice President of GNA Securities,
Inc., Senior Vice President and Director of
Great Northern Insured Annuity
Corporation, and General Electric Capital
Assurance Company, Seattle, WA.
Kenneth F. Starr Senior Vice President Senior Vice President GNA of Securities,
Inc., Senior Vice President and Director of
Great Northern Insured Annuity
Corporation, General Electric Capital
Assurance Company and GNA Mortgage
Funding Corporation, Seattle, WA.
John W. Attey Vice President Vice President of GNA Corporation and its
subsidiaries; Assistant Vice President of
GNA Corporation and its subsidiaries June
1989 - September 1994.
Jeff Hugunin Treasurer Vice President and Treasurer of HBI (now
HGI) Insurance Companies since December
1992; Treasurer of GNA Corporation since
December 1994.
</TABLE>
The business and other connections of the officers and directors of
(i) Black Rock Financial Management listed on the Form ADV as currently on file
with the Commission (File No. 801-48433), (ii) Value Line are listed on the Form
ADV for Value Line as currently on file with the Commission (File No. 801-625),
(iii) Duff & Phelps are listed on the Form ADV for Duff & Phelps as currently on
file with the Commission (File No. 801-14813), and (iv) Standish are listed on
the Form ADV for Standish currently on file with the Commission (File No. 801-
584), the text of each of which is hereby incorporated by reference. Brown
Brothers is a New York limited partnership which conducts a general banking
business and is a member of the New York Stock Exchange, Inc. To the knowledge
of the Registrant, none of the general partners or officers of Brown Brothers is
engaged in any other business, profession, vocation or employment of a
substantial nature.
Item 29. Principal Underwriters.
- ------- ----------------------
(a) GNA Distributors, Inc. acts as principal underwriter for the
Registrant. The Distributor acts as principal underwriter for GNA Variable
Series Trust, another investment company. The Distributor does not act as
investment adviser for any investment company.
6
<PAGE>
(b) The persons whose names and addresses are set forth below are all
directors or officers of the Distributor and also hold the offices indicated.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address With The Distributor With The Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Patrick E. Welch President, Chief Executive Trustee, Chairman
Two Union Square Officer and Director of the Board,
Suite 5600 President and Chief
Seattle, WA 98101 Executive Officer
Hans L. Carstensen, III Senior Vice President N/A
Two Union Square and Chief Marketing
Suite 5600 Officer
Seattle, WA 98101
Edward J. Wiles, Jr. Vice President & Counsel Vice President and
Two Union Square & Secretary Secretary
Suite 5600
Seattle, WA 98101
Julie M. Bodmer Assistant Secretary N/A
Two Union Square
Suite 5600
Seattle, WA 98101
Victor C. Moses Sr. Vice President Sr. Vice President
Two Union Square and Director
Suite 5600
Seattle, WA 98101
Thomas W. Casey Vice President and Vice President and
Two Union Square Controller Controller
Suite 5600
Seattle, WA 98101
Geoffrey S. Stiff Senior Vice President, Senior Vice President
Two Union Square CFO and Director and Treasurer
Suite 5600
Seattle, WA 98101
John W. Attey Vice President N/A
Two Union Square
Suite 5600
Seattle, WA 98101
Karri J. Harrington Assistant Secretary Assistant Secretary
Two Union Square
Suite 5600
Seattle, WA 98101
Stephen P. Joyce Senior Vice President N/A
Two Union Square Suite 5600
Seattle, WA 98101
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address With The Distributor With The Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Brian T. McAnaney Assistant Secretary N/A
260 Long Ridge Road
Stamford, CT 06927
Jeff Hugunin Treasurer N/A
6277 Sea Harbor Drive
Orlando, FL 32887
William Brennen Assistant Treasurer N/A
777 Long Ridge Road
Stamford, CT 06927
John Amato Assistant Treasurer N/A
777 Long Ridge Road
Stamford, CT 06927
Patricia Lecouras Assistant Treasurer N/A
777 Long Ridge Road
Stamford, CT 06927
Judith M. Van Cleave Assistant Treasurer N/A
4315 Metro Parkway
Ft. Myers, FL 33906
Gary Schulman Assistant Treasurer N/A
777 Long Ridge Road
Stamford, CT 06927
Brenda Daglish Assistant Treasurer N/A
601 Union Street, Suite 5600
P.O. Box 490
Seattle, WA 98111-0490
Kenneth E. Kempson Assistant Treasurer N/A
777 Long Ridge Road
Stamford, CT 06927
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address With The Distributor With The Registrant
- ------------------ ------------------------ ---------------------
<S> <C> <C>
Lester G. Gruner Assistant Vice President N/A
Two Union Square
Suite 5600
Seattle, WA 98101
Debora A. Ashworth Assistant Vice President N/A
Two Union Square
Suite 5600
Seattle, WA 98101
J. Neil McMurdle Assistant Vice President N/A
Two Union Square
Suite 5600
Seattle, WA 98101
Robert J. Buckley Assistant Treasurer N/A
777 Long Ridge Road
Stamford, CT 06927
</TABLE>
(c) Not Applicable.
Item 30. Location of Accounts and Records.
- ------- --------------------------------
The accounts and records of the Registrant are maintained at the
offices of Registrant at Suite 5600, Two Union Square, 601 Union Street,
Seattle, Washington 98101, and the offices of the Custodian and Transfer Agent,
P.O. Box 351, Boston, MA 02101.
Item 31. Management Services.
- ------- -------------------
There are no management-related service contracts other than the
Advisory Agreement and the Sub-Advisory Agreements relating to management
services described in Parts A and B.
Item 32. Undertakings.
- ------- ------------
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a
prospectus for a Fund is delivered with a copy of that Fund's latest annual
report to shareholders, upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to Article VI of the Registrant's Agreement
and Declaration of Trust, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registration of expenses incurred or paid by a director,
9
<PAGE>
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
10
<PAGE>
SIGNATURES
----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO
RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS AMENDMENT
TO ITS REGISTRATION STATEMENT ON FORM N-1A TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THERETO DULY AUTHORIZED.
INVESTORS TRUST
/s/ Patrick E. Welch
--------------------
Patrick E. Welch
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED:
Signature Title Date
--------- ----- ----
/s/ Patrick E. Welch Trustee and President
- -------------------- (Principal Executive Officer February 29, 1996
Patrick E. Welch
* Sr. Vice President and Treasurer
- -------------------- (Principal Financial and
Geoffrey S. Stiff Accounting Officer) February 29, 1996
* Trustee February 29, 1996
- --------------------
Douglas H. Pedersen
* Trustee February 29, 1996
- --------------------
Pierce T. Lindberg
* Trustee February 29, 1996
- --------------------
Edward R. McMillan
/*/ /s/ Edward J. Wiles
-------------------
Edward J. Wiles
(Attorney-in-fact pursuant to powers of
attorney previously filed and filed herewith)
11
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 1, 1996
INVESTORS TRUST
consisting of five series,
Investors Trust Adjustable Rate Fund
Investors Trust Government Fund
Investors Trust Tax Free Fund
Investors Trust Value Fund
Investors Trust Growth Fund
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus dated March 1, 1996, for Investors Trust
Adjustable Rate Fund, Investors Trust Government Fund, Investors Trust Tax Free
Fund, Investors Trust Value Fund, and Investors Trust Growth Fund which may be
obtained from GNA Distributors, Inc., Two Union Square, 601 Union Street, Suite
5600, Seattle, Washington 98101-2336. Unless otherwise defined herein,
capitalized terms have the meanings given to them in the Prospectuses.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS
STATEMENT OF ADDITIONAL INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS WITH OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENT AGENCY.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION...................................... 1
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT
TECHNIQUES.............................................. 2
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS.......... 9
DEBT SECURITIES RATINGS.................................. 22
INVESTMENT RESTRICTIONS.................................. 25
PORTFOLIO TRANSACTIONS................................... 35
PORTFOLIO TURNOVER....................................... 38
HOW TO PURCHASE SHARES................................... 39
HOW TO REDEEM SHARES..................................... 40
WAIVER OF CONTINGENT DEFERRED SALES CHARGE............... 41
NET ASSET VALUE.......................................... 41
CERTAIN TAX MATTERS...................................... 42
MANAGEMENT OF THE FUNDS.................................. 45
COMPENSATION OF TRUSTEES................................. 48
THE INVESTMENT ADVISER AND SUB-ADVISERS.................. 49
PERFORMANCE INFORMATION.................................. 55
DISTRIBUTION OF SHARES OF THE FUNDS...................... 58
INDEPENDENT ACCOUNTANTS.................................. 60
CUSTODIAN................................................ 60
FINANCIAL STATEMENTS..................................... 60
ii
<PAGE>
GENERAL INFORMATION
INVESTORS TRUST (the "Trust") is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 11,
1986. The Trust currently has five series of shares, Investors Trust Adjustable
Rate Fund (the "Adjustable Rate Fund"), Investors Trust Government Fund (the
"Government Fund"), Investors Trust Tax Free Fund (the "Tax Free Fund"),
Investors Trust Value Fund (the "Value Fund") and Investors Trust Growth Fund
(the "Growth Fund"). The Trustees of the Trust have the authority to create
additional series.
The Trust has received an order from the Securities and Exchange
Commission (the "SEC") permitting the issuance and sale of multiple classes of
shares representing interests in each Fund's investment portfolio. Except for
those differences between the classes of shares described below and in the
Prospectuses, each share of a Fund has equal dividend, redemption and
liquidation rights with other shares of that Fund and when issued is fully paid
and nonassessable. Each of the Funds currently offers two classes of shares
which may be purchased at a price equal to their net asset value per share, plus
a sales charge which, at the election of the purchaser, may be imposed either
(i) at the time of the purchase (the "Class A shares"), or (ii) on a deferred
basis (the "Class B shares").
These alternatives permit the purchaser to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the purchaser expects to hold the shares, whether the purchaser
wishes to receive dividends in cash or to reinvest them in additional shares of
the Funds, and other circumstances.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Funds, has the same rights and is
identical in all respects, except that Class B shares bear the expenses of the
deferred sales arrangement and any expenses (including the higher distribution
fee and incremental transfer agency costs) resulting from such sales
arrangement. Each class will have exclusive voting rights with respect to
provisions of the Rule 12b-1 distribution plan which relate to a specific class,
pursuant to which its service fee and distribution fee, if any, is paid.
Although the legal rights of holders of each class of shares are identical, it
is likely that the different expenses borne by each class will result in
different net asset values and dividends. The different classes of shares of
the Funds also have different exchange and conversion privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not adversely affect the rights of any
shareholder. On any matter submitted to the shareholders, the holder of each
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof.
Shareholders of a Fund are not entitled to vote on any matter which does not
affect that Fund.
The assets received by the Trust from the sale of any class of shares of
a Series or Fund (the terms "Series" and "Fund" are used interchangeably
herein), and all income, earnings, profits
<PAGE>
and proceeds thereof, subject only to the rights of creditors, constitute the
underlying assets of that Fund. The underlying assets of each Fund are required
to be segregated on the books of account and are to be charged with the expenses
in respect of that Fund and the Trust. Any general expenses of the Trust not
readily identifiable as belonging to a particular Fund shall be allocated by or
under the direction of the Trustees in such manner as the Trustees determine to
be fair and equitable, taking into consideration, among other things, the nature
and type of expense and the relative sizes of the Funds.
Each share of any class of a Fund represents an equal proportionate
interest in that Fund with each other share and is entitled to such dividends
and distributions out of the income belonging to the Fund as are declared by the
Trustees. Upon liquidation of a Fund, shareholders of that Fund are entitled to
share pro rata in the net assets belonging to the Fund available for
distribution.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. In addition, after the Trustees have been initially
elected by shareholders, the Board of Trustees is a self-perpetuating body.
Thus, there will ordinarily be no shareholder meetings unless otherwise required
by the Investment Company Act of 1940, as amended (the "Investment Company
Act").
Shares do not have cumulative voting rights, which means that in
situations in which shareholders elect trustees, holders of more than 50% of the
shares voting for the election of trustees can elect 100% of the Trust's
trustees, and the holders of less than 50% of the shares voting for the election
of trustees will not be able to elect any person as a trustee.
Shares have no preemptive or subscription rights and are fully
transferable.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement 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 or instrument entered into or
executed by the Trust or the Trustees. The Master Trust Agreement provides for
indemnification out of the Trust's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Investment Manager believes that, in view of the
above, the risk of personal liability to shareholders is remote.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
The Funds may buy and sell options, future contracts and options on
futures contracts with respect to interest rates, securities and securities
indices and use other instruments and techniques as described below under
circumstances in which such instruments and techniques are expected by a Fund's
Sub-Adviser to aid in achieving the investment objectives of such Fund.
2
<PAGE>
Repurchase Agreements
- ---------------------
Each Fund may enter into repurchase agreements with banks, broker-dealers
or other financial institutions in order to generate additional current income.
A repurchase agreement is an agreement under which a Fund acquires a security
from a seller subject to resale to the seller at an agreed upon price and date.
The resale price reflects an agreed upon interest rate effective for the time
period the security is held by the Fund and is unrelated to the interest rate on
the security. Repurchase agreements usually are for short periods, such as one
week or less, but may be for longer periods. However, as a matter of investment
policy, the Funds will not enter into repurchase agreements of more than one
week's duration if, as a result, such agreements (together with any other
securities which are not readily marketable) would exceed 10% of the Fund's net
assets.
Under the Investment Company Act, repurchase agreements are considered to
be loans by the purchaser collateralized by the underlying securities. Each
Fund's Sub-Adviser monitors the value of the underlying securities at the time
the repurchase agreement is entered into and at all times during the term of the
agreement to ensure that their market value always equals or exceeds the agreed-
upon repurchase price to be paid to the Fund. In addition, not more than one-
third of the current market value of a Fund's total assets shall constitute
secured "loans" by such Fund under repurchase agreements. Each Fund will
maintain a segregated account with its Custodian for the securities and other
collateral, if any, acquired under a repurchase agreement with a broker-dealer
for the term of the agreement.
In addition to the risk of the seller's default or a decline in value of
the underlying security (see "Investment Objective and Policies -- Repurchase
Agreements" in each Fund's Prospectus), a Fund also might incur disposition
costs in connection with liquidating the securities. If the seller becomes
insolvent and subject to liquidation or reorganization under the Bankruptcy Code
or other laws, a court may determine that the underlying security is collateral
for a loan by the Fund not within the control of the Fund and therefore subject
to sale by the trustee in bankruptcy. Finally, it is possible that the Fund may
not be able to substantiate its interest in the underlying security and may be
deemed an unsecured creditor of the other party to the agreement. While the
Funds acknowledge these risks, it is expected that they can be controlled
through careful monitoring procedures, including the monitoring by the Sub-
Advisers of the credit-worthiness of broker-dealers or other financial
institutions engaging in repurchase agreements with a Fund.
Borrowing
- ---------
Each Fund may borrow for temporary purposes in an aggregate amount up to
10% of its total assets. Such borrowings may be made by obtaining a loan from a
bank or by entering into a reverse repurchase agreement with a bank or broker
dealer. Reverse repurchase agreements involve the sale of a security held by a
Fund and its agreement to repurchase the instrument at a stated price, date and
interest payment. A Fund may use the proceeds of a reverse repurchase agreement
to purchase other securities which either mature at a date simultaneous with or
prior to
3
<PAGE>
the expiration of the reverse repurchase agreement or which are held
under an agreement to resell maturing as of that time.
In connection with entering into reverse repurchase agreements, a Fund
will create and maintain a segregated account with the Custodian consisting of
U.S. Government Securities or cash or cash equivalents of an aggregate current
value sufficient to repurchase the securities or equal to the proceeds received
upon the sale plus accrued interest. A Fund may not enter into reverse
repurchase agreements with broker-dealers if its obligations under such
agreements would exceed 5% of the market value of its total assets.
Firm Commitment Agreements
- --------------------------
Each Fund may enter into firm commitment agreements ("when-issued"
purchases) for the purchase of securities at an agreed upon price on a specified
future date. A Fund will not enter into such agreements for the purpose of
investment leverage.
Liability for the purchase price and all the rights and risks of
ownership of the securities accrue to a Fund at the time it becomes obligated to
purchase the securities, although delivery and payment occur at a later date,
generally within 45 days of the date of the commitment to purchase.
Accordingly, if the market price of the security should decline, the effect of
the agreement would be to obligate the Fund to purchase the security at a price
above the current market price on the date of delivery and payment. During the
time the Fund is obligated to purchase such securities, it will maintain with
the Custodian a segregated account with U.S. Government Securities or cash or
cash equivalents of an aggregate current value sufficient to make payment for
the securities.
Loans of Portfolio Securities
- -----------------------------
Each Fund may lend its portfolio securities to qualified brokers, dealers
or other financial institutions as long as the terms, the structure and the
aggregate amount of such loans are not inconsistent with the Investment Company
Act, or the rules and regulations or interpretations of the Securities and
Exchange Commission (the "SEC") thereunder. Loan arrangements made by a Fund
will comply with all other applicable regulatory requirements, including the
rules of the New York Stock Exchange (the "NYSE") which presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of five (5) business days.
4
<PAGE>
At the present time the staff of the SEC does not object if an investment
company pays reasonable negotiated fees to its custodian in connection with
loaned securities as long as such fees are pursuant to a contract approved by
the investment company's trustees. In addition, voting rights may pass with the
loaned securities, but if a material event will occur affecting a security on
loan, the loan must be called and the security voted. Should a Fund wish to
commence any such activities, such Fund may seek to enter into an agreement with
the Custodian which complies with the position of the staff of the SEC.
Rule 144A Securities
- --------------------
Subject to the limitations on illiquid and restricted securities noted
below, a Fund may buy or sell restricted securities in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities"). Securities may be
resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing.
Options
- -------
Each Fund may engage, at such time and from time to time as such Fund's
Sub-Adviser shall determine to be appropriate, in the writing of covered call
option contracts ("calls"). A covered call is an option to purchase securities
which the Fund owns or has the right to acquire or for which the Fund maintains
a segregated account with the Custodian of cash, cash equivalents or U.S.
Government Securities having a value sufficient to meet its obligations under
the call.
When a Fund writes a call, it receives a premium and gives the purchaser
the right to buy the underlying security at any time during the call period
(usually less than nine months) or at the end of the call period at a fixed
exercise price regardless of market price changes during the call period. If
the call is exercised, the Fund forgoes any gain from an increase in the market
price of the underlying security over the exercise price.
When a covered call is written by a Fund, the Fund will make arrangements
with the Custodian to segregate the underlying securities or an equivalent value
in cash, cash equivalents or U.S. Government Securities until the option is
either exercised or has lapsed or the Fund closes out the option as described
below.
A Fund may purchase a call, for example, to effect a "closing purchase
transaction," which is the purchase of a call on the same security with the same
exercise price and expiration date as the call which it has previously written.
When a security on which the Fund has written a call is to be sold from the
Fund's portfolio, the Fund will first effect a closing purchase transaction so
as to close out the existing call option contract on that security. The Fund
will realize a profit (or loss) from a closing purchase transaction if the
amount paid to purchase a call option contract is less (or more) than the amount
received from the sale thereof.
A Fund also may purchase and write (i.e., sell) put options ("puts") on
securities. A put option is a contract that grants the right to sell at a
specified price a specified number of securities
5
<PAGE>
by a certain date. A Fund may write puts only if they are secured ("secured"). A
put is "secured" if the Fund maintains cash, cash equivalents or securities with
a value equal to the exercise price in a segregated account with the Custodian
or holds a put on the same underlying security at an equal or greater exercise
price.
The purchase and sale of option contracts is a highly specialized
activity which involves investment techniques and risks different from those
ordinarily associated with investment companies. It should be noted that
transaction costs relating to options transactions may tend to be higher than
the transaction costs with respect to transactions in securities. In addition,
if a Fund were to write a substantial number of option contracts which are
exercised, the portfolio turnover rate of such Fund could increase.
Securities for a Fund's portfolio will continue to be bought and sold
solely on the basis of appropriateness to fulfill the Fund's investment
objective. Option transactions can be used, among other things, to increase the
return on portfolio positions.
A Fund will not write option contracts in an amount such that the income
derived from such activity would, in the opinion of the Trust's counsel,
disqualify the Trust as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") if such qualification is
in the best interests of the Trust's shareholders.
Futures Contracts and Options Thereon
- -------------------------------------
Each Fund may purchase and sell futures contracts ("futures contracts").
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities or an index of securities, at a future time
at a specified price. A contract to buy establishes a "long" position while a
contract to sell establishes a "short" position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. This characteristic makes futures useful for hedging purposes.
Futures contracts can also be used as a hedge against changes in interest
rates. Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). If, for example, a Fund holds long-
term U.S. Government Securities and such Fund's Sub-Adviser anticipates a rise
in long-term interest rates, it could, in lieu of disposing of its portfolio
securities, enter into futures contracts for the sale of similar long-term
securities. If rates increased and the value of the Fund's portfolio securities
declined, the value of the Fund's futures contract would increase, thereby
protecting the Fund by preventing net asset value from declining as much as it
otherwise would have. If such Fund's Sub-Adviser expects long-term interest
rates to decline, the Fund might enter into futures contracts for the purchase
of long-term securities, so that it could offset anticipated increases in the
cost of such securities it intends to purchase while continuing to hold higher-
yielding short-term securities or waiting for the long-term market to stabilize.
6
<PAGE>
Each Fund also may purchase and sell listed put and call options on
futures contracts. 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 (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. When an option on a futures contract is exercised, settlement is
effected by the payment of cash representing the difference between the current
market price of the futures contract and the exercise price of the option.
A basic option strategy for protecting a Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by a Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by a Fund, money market instruments equal to the aggregate exercise
price of the options will be identified by that Fund to the Trust's custodian to
insure that the use of such investments is unleveraged.
A Fund may also purchase put options on interest rate futures contracts
in lieu of, and for the same purpose as, its sale of a futures contract: to
hedge a long position in the underlying futures contract. The purchase of call
options on interest rate futures contracts is intended to serve the same purpose
as the actual purchase of the futures contract, and the Fund will make
arrangements with the Custodian to segregate cash, cash equivalents or U.S.
Government Securities sufficient to purchase the amount of portfolio securities
represented by the underlying futures contracts.
A Fund would write a call option on a futures contract in order to hedge
against a decline in the prices of the securities underlying the futures
contracts. If the price of the futures contract at expiration is below the
exercise price, the Fund would retain the option premium, which would offset, in
part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contract, except that, if market price declines, the
Fund would pay more than the market price for the underlying securities. The
net cost to the Fund will be reduced, however, by the premium received on the
sale of the put, less any transaction costs.
7
<PAGE>
"Straddle" Transactions
- -----------------------
Each Fund may engage in "straddle" transactions, which involve the
purchase or sale of combinations of call and put options on the same underlying
securities or futures contracts. A Fund will not purchase calls or puts, in
connection with such straddle transactions, if the aggregate premiums paid for
such options will exceed 5% of its net assets.
Limitations and Risks Related to Options and Futures Transactions
- -----------------------------------------------------------------
The Funds will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which they intend to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. No
Fund will purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Fund's net assets would be
represented by long futures contracts or call options. No Fund will write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of that Fund's net assets. In
addition, no Fund may establish a position in a futures contract or purchase or
sell an option for other than bona fide hedging purposes if immediately
thereafter the sum of the amount of initial margin deposits and premiums on open
positions with respect to futures and options used for such non-hedging purposes
would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. Each Fund's ability to hedge
effectively through transactions in futures or options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options. The prices of the assets being hedged may not move in the
same amount as the hedging instrument, or there may be a negative correlation
which would result in an ineffective hedge and a loss to a Fund.
Positions in futures and options may be closed out only on an exchange
which provides a secondary market therefor. There can be no assurance that a
liquid secondary market will exist for any particular futures contract or option
at any specific time. Thus, it may not be possible to close such an option or
futures position prior to maturity. The inability to close options and futures
positions also could have an adverse impact on a Fund's ability to effectively
hedge its securities and might in some cases require a Fund to deposit cash to
meet applicable margin requirements. Each Fund will enter into an option or
futures position only if it appears to be a liquid investment.
8
<PAGE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in each Fund's Prospectus, a Fund may invest in long-term
and short-term debt securities. A Fund may invest in cash and short-term
securities for temporary, defensive purposes when, in the opinion of such Fund's
Sub-Adviser, such investments are more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Funds,
particularly the Government Fund, the Tax Free Fund and the Adjustable Rate
Fund, may invest are described below.
The Tax Free Fund intends that short-term securities acquired for
temporary or defensive purposes will be tax-exempt. However, if suitable short-
term tax-exempt securities are not available or if such securities are available
only on a when-issued basis, the Tax Free Fund may invest up to 20% of its total
assets in short-term securities the interest on which is not exempt from federal
income taxes.
Tax-Exempt Bonds. As used in the Tax Free Fund's Prospectus and this
Statement of Additional Information, the term "tax-exempt" obligations refers to
debt obligations the interest on which was at the time of issuance, in the
opinion of bond counsel to the issuer, exempt from federal income tax. Tax-
exempt bonds include debt obligations issued by a state, the District of
Columbia or a territory or possession of the United States, or any political
subdivision thereof, in order to obtain funds for various public purposes,
including the construction of such public facilities as airports, bridges,
highways, housing, mass transportation, roads, schools and water and sewer
works. Other public purposes for which tax-exempt bonds may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to other public institutions and
facilities. In addition, certain debt obligations known as industrial
development bonds may be issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
conventions or trade show facilities, airports, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Such obligations are included within the term tax-exempt bonds if the interest
paid thereon is exempt from federal income tax. Interest on industrial
development bonds used to fund the acquisition, construction, equipment, repair
or improvement of privately operated industrial or commercial facilities may
also be exempt from federal income tax, but the size of such issues is limited
under current federal tax law.
The two principal classifications of tax-exempt bonds are general
obligation bonds and limited obligation (or revenue) bonds.
General obligation bonds are obligations involving the credit of an
issuer possessing taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or source. The
characteristics and method of enforcement of general obligation bonds vary
according to the law applicable to the particular issuer, and payment may be
dependent upon appropriation by the issuer's legislative body.
9
<PAGE>
Limited obligation bonds are 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 specific revenue source. Tax-exempt
industrial development bonds generally are revenue bonds and thus not payable
from the unrestricted revenues of the issuer. The credit and quality of
industrial development revenue bonds is usually directly related to the credit
of the corporate user of the facilities. Payment of principal of and interest
on industrial development revenue bonds is the responsibility of the corporate
user (and any guarantor).
Prices and yields on tax-exempt bonds are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and ratings of particular
issues, and are subject to change from time to time. Information about the
financial condition of an issuer of tax-exempt bonds may not be as extensive as
that which is made available by corporations whose securities are publicly
traded.
The ratings of Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P") represent their opinions and are not absolute
standards of quality. Tax-exempt bonds with the same maturity, interest rate
and rating may have different yields while tax-exempt bonds of the same maturity
and interest rate with different ratings may have the same yield.
Obligations of issuers of tax-exempt bonds are subject to the provisions
of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. Congress or state
legislators may seek to extend the time for payment of principal or interest, or
both, or to impose other constraints upon enforcement of such obligations.
There is also the possibility that, as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations to pay
interest on and principal of their tax-exempt bonds may be materially impaired
or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may from time to time have the effect of introducing
uncertainties in the market for tax-exempt bonds or certain segments thereof, or
materially affecting the credit risk with respect to particular bonds. Adverse
economic, business, legal or political developments might affect all or a
substantial portion of the Tax Free Fund's tax-exempt bonds in the same manner.
Refunded Municipal Bonds. Refunded municipal bonds are general
obligation or revenue bonds that have been fully secured or collateralized by an
"escrow fund" consisting of U.S. Government obligations in an amount adequate to
meet all interest and principal payments as such payments become due.
Mortgage-Backed Securities. Generally, mortgage-backed securities are
securities representing interest in a pool of mortgages. Principal and interest
payments made on the mortgages in the underlying mortgage pool are passed
through to holders of securities issued by such pools. Unscheduled prepayments
of principal shorten the securities' weighted average life and may lower their
total return. (When a mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to holders of securities
issued by such
10
<PAGE>
pools. This principal is returned to holders of securities
issued by such pools at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market in
general may be adversely affected by changes in governmental regulation or tax
policies.
U.S. Government Agency Mortgage-Backed Securities. These are obligations
issued or guaranteed by the United States Government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association ("Ginnie
Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie Mae" or
FNMA"), the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC")
and the Federal Housing Administration ("FHA"). FNMA, FHLMC and FHA obligations
are not backed by the full faith and credit of the U.S. Government as GNMA
certificates are, but FNMA, FHLMC and FHA securities are supported by the
instrumentality's right to borrow from the United States Treasury. U.S.
government agency mortgage-backed certificates provide for the pass-through to
investors of their pro-rata share of monthly payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans. Each of GNMA, FNMA and FHLMC guarantees timely
distributions of interest to certificate holders. GNMA and FNMA guarantee
timely distributions of scheduled principal. FHLMC has in the past guaranteed
only the ultimate collection of principal of the underlying mortgage loan;
however, FHLMC now issues Mortgage-Backed Securities (FHLMC Gold PCS) which also
guarantee timely payment of monthly principal reductions. FHA generally
guarantees only the ultimate collection of 99% of the principal of the
underlying mortgage loan.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development ("HUD"). The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal of
and interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veteran Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the United States
Government is pledged to the payment of all amounts that may be required to be
paid under any guaranty. In order to meet its obligations under such guaranty,
Ginnie Mae is authorized to borrow from the United States Treasury with no
limitations as to amount.
The Ginnie Mae Certificates in which the Funds may invest generally will
represent a pro-rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on completed multifamily projects; (vii) fixed rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in
11
<PAGE>
payments based on periodic changes in interest rates or in other payment terms
of the mortgage loans; and (ix) mortgage-backed serial notes. All of these
mortgage loans will be FHA Loans or VA Loans and, except as otherwise specified
above, will be fully-amortizing loans secured by first liens on one- to four-
family housing units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act of 1938. The obligations of FNMA are not
backed by the full faith and credit of the U.S. Government.
Each Fannie Mae Certificate will generally represent a pro-rata interest
in one or more pools of FHA Loans or VA Loans of the following types: (i) fixed
rate level payment mortgage loans; (ii) fixed rate growing equity mortgage
loans; (iii) fixed rate graduated payment mortgage loans; (iv) variable rate
California mortgage loans; (v) other adjustable rate mortgage loans; and (vi)
fixed rate and adjustable mortgage loans secured by multifamily projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. Government.
Freddie Mac Certificates represent a pro-rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac.
The mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one- to four-family residential properties or multifamily projects. Each
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
FHA. FHA was created in 1934 under the Housing Act and incorporated into
HUD in 1965. The obligations of FHA are not backed by the full faith and credit
of the U.S. Government.
Project Loans. Project Loan securities are backed by GNMA or FHA insured
mortgage loans made by HUD-approved public and private lenders for (i) the
construction or substantial rehabilitation of moderate-income multi family
housing and retirement centers, (ii) the construction, substantial
rehabilitation or refinancing of nursing houses, (iii) the purchase or
refinancing of existing multi family projects and (iv) the refinancing of
existing HUD-insured mortgages.
Project loans are generally structured in one of two ways: as
Construction Loan Certificates/Permanent Loan Certificates ("CLC/PLCs") or as
Permanent Loan Certificates ("PLCs"). Project Loan lenders, subject to HUD
guidelines, typically include various prepayment penalties and/or lockout
periods that are applicable during the early years of the permanent phase of
CLC/PLC loans. The majority of newly issued PLC loans also contain provisions
that inhibit
12
<PAGE>
prepayment during the earlier years of the loan. Although amortized over a
period of 30-40 years, Project loans are typically prepaid after a period of
approximately 8 to 12 years.
Certain Project Loans originated before 1985 contain a provision allowing
the investor to "put" the loan to FHA twenty years after origination, Project
Loans which are putable prior to November 1995 are putable at par. Project
Loans which are putable after November 1995 are putable into an equal amount of
"MM Debentures," which are semi-annual pay, interest only, 20-year maturity
securities backed by the full faith and credit of the U.S. Government, callable
every six months at par.
In the event of a default on the underlying mortgage, holders of GNMA
Project Loans will continue to receive scheduled principal and interest payments
until payment of the insurance claim. The final distribution to holders of GNMA
Project Loans will include 100% of the outstanding amount of the Project Loan
certificate plus accrued interest. In the event of a default on the underlying
mortgage, holders of FHA Project Loans will generally receive 99% of the
outstanding amount of the Project Loan certificates paid either in cash or MM
Debentures.
Adjustable Rate Mortgages - Interest Rate Indices. The "One Year
Treasury Index" is the figure derived from the average weekly quoted yield on
U.S. Treasury Securities adjusted to a constant maturity of one year. The "Cost
of Funds Index" reflects the monthly weighted average cost of funds of savings
and loan associations and savings banks whose home offices are located in
Arizona, California and Nevada (the "FHLB Eleventh District") that are member
institutions of the Federal Home Loan Bank of San Francisco (the "FHLB of San
Francisco"), as computed from statistics tabulated and published by the FHLB of
San Francisco. The FHLB of San Francisco normally announces the Cost of Funds
Index on the last working day of the month following the month in which the cost
of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index and
may cause the Cost of Funds Index to move in a manner different from indices
based upon specific interest rates, such as the One Year Treasury Index.
Because of the various origination dates and maturities of the liabilities of
member institutions of the FHLB Eleventh District upon which the Cost of Funds
Index is based, among other things, at any time the Cost of Funds Index may not
reflect the average of prevailing market interest rates on new liabilities of
similar maturities. There can be no assurance that the Cost of Funds Index will
necessarily move in the same direction or at the same rate as prevailing
interest rates because as longer term deposits or borrowings mature and are
renewed at market interest rates, the Cost of Funds Index will rise or fall
depending upon the differential between the prior and the new rates on such
deposits and borrowings. In addition, dislocations in the thrift industry in
recent years have caused and may continue to cause the cost of funds of thrift
institutions to change for reasons unrelated to changes in general interest rate
levels. Furthermore, any movement in the Cost of Funds Index as compared to
other indices based upon specific interest rates may be affected by changes
instituted by the FHLB of San Francisco in the method used to calculate the Cost
of Funds Index. To the extent that the Cost of Funds Index may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest rates
which may result in a higher level of principal
13
<PAGE>
prepayments on mortgage loans which adjust in accordance with the Cost of Funds
Index than mortgage loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the interest rate that the
most creditworthy international banks dealing in U.S. dollar-denominated
deposits and loans charge each other for large dollar-denominated loans. LIBOR
is also usually the base rate for large dollar-denominated loans in the
international market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or 12 month intervals.
Stripped Agency Mortgage-Backed Securities. These are securities
representing interests in a pool of mortgages, the cash flow of which has been
separated into its interest and principal components. "IOs" (interest only
securities) receive the interest portion of the cash flow while "POs" (principal
only securities) receive the principal portion. Stripped Agency Mortgage-Backed
Securities may be issued by U.S. Government Agencies or by private issuers
similar to those described below with respect to CMOs and privately-issued
mortgage-backed certificates. As interest rates rise and fall, the value of IOs
tends to move in the same direction as interest rates. The value of the other
mortgage-backed securities described herein, like other debt instruments, will
tend to move in the opposite direction compared to interest rates. Accordingly,
for example, investing in IOs may offset fluctuations in the value of other
mortgage-backed securities which are owned by the Funds. Under the Internal
Revenue Code of 1986, as amended (the "Code"), POs may generate taxable income
from the current accrual of original issue discount, without a corresponding
distribution of cash to the Fund which owns them.
The cash flows and yields on IO and PO classes are extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets. For example, a rapid or slow rate of principal payments may
have a material adverse effect on the yield to maturity of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa. Conversely, if the underlying mortgage
assets experience slower than anticipated prepayments of principal, the yield on
a PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.
A Fund will generally treat IOs and POs, other than IOs or POs backed by
fixed rate mortgages issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities, as illiquid securities and, accordingly, limit
its investment in such securities, together with all other illiquid securities,
to 15% of the Fund's net assets, except that the Government Fund will limit its
investment in such securities, together with all other illiquid securities, to
10% of the Government Fund's net assets.
Inverse Floating Obligations. The Fund may invest in mortgage
securities and other instruments that are "inverse floating obligations."
One such instrument is an inverse floating rate bond, which pays a rate
of interest that fluctuates inversely with changes in a floating rate index such
as LIBOR. As the index decreases,
14
<PAGE>
the formula used to set the interest rate on such a bond results in an increased
yield. Conversely, as the index increases, the formula used to set the interest
rate on such a bond results in a decreased yield. Although the right of the
holder to a return of principal is not affected by changes in interest rates, in
a rising interest rate environment repayment of principal will usually be slower
than expected due to a decrease in prepayment speeds usually associated with
higher interest rates. Under such circumstances, the market value of such
instruments can be expected to decline.
Another such instrument is an "inverse IO," which is created by dividing
a fixed-rate bond class into floating and inverse floating components based upon
a market interest rate index, such that, at any time, the sum of the interest
payments to the two classes is no greater than the coupon on the fixed-rate
bond. As the index rises, more interest is required for the floating rate
component and therefore less is available to the holder of the inverse floating
rate holder. In a rising interest rate environment, the lower coupon payments
due to the inverse IO holder may be partially offset by the IO structure of the
security. With rising rates, slower prepayments will still enable the inverse IO
holder to recognize a decreased coupon on an outstanding balance for a longer
period. Unlike an inverse floating rate bond, an inverse IO does not entitle the
holder to receive a payment of principal and accordingly may have incremental
risk.
Inverse floating rate obligations generally increase or decrease in value
in response to changes in market interest rates at a rate which is a multiple of
the rate at which fixed-rate securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of conventional securities.
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities. All CMOs purchased
by the Funds will be either issued by a Government agency or rated in the two
highest credit categories by a nationally recognized rating agency.
U.S. Government Agency Multiclass Pass-Through Securities. Unlike CMOs,
U.S. Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include such multiclass pass-through securities.
Privately-Issued Mortgage-Backed Certificates that Represent Interests in
U.S. Government Agency Mortgage-Backed Certificates. These are privately-issued
mortgage pass-through securities which represent interests in GNMA, FNMA and
FHLMC mortgage certificates but are generally divided into several classes in
the same manner as CMOs.
15
<PAGE>
The Government Fund will invest in privately-issued mortgage-backed
securities only if they are rated at the time of investment AAA by S&P. Each of
the other Funds will invest in privately-issued mortgage-backed securities only
if they are rated at the time of investment A or better by S&P or A or better by
Moody's. While U.S. Government Securities and U.S. Government Agency Mortgage-
Backed Securities are guaranteed, as described above, as to the timely payment
of principal and interest, the market value of such obligations is not
guaranteed and may rise and fall in response to changes in interest rates and
other factors.
After purchase by a Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by such Fund. Neither
event will require a sale of such security by the Fund. However, each Fund's
Sub-Adviser will consider such event in its determination of whether such Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or their
rating systems, the Sub-Adviser for each Fund will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in the prospectus.
Highly rated mortgage- and asset-backed securities carry a relatively low
risk of default. Like all investors in interest-bearing securities, however, a
Fund is exposed to the risk that the prices of individual securities held by it
can fluctuate, in some cases significantly, in response to changes in prevailing
levels of interest rates. In addition, a Fund could experience a loss on an
investment in a Stripped Mortgage-Backed Security held by it if the mortgage
loans underlying such security experienced a rapid rate of prepayment.
Adjustable Rate Securities. Certain securities may be issued with
adjustable interest rates that are reset periodically by predetermined formulas
or indexes in order to minimize movements in the principal value of the
investment. Such securities may have long-term maturities, but may be treated
as a short-term investment under certain conditions. Generally, as interest
rates decrease or increase, the potential for capital appreciation or
depreciation on these securities is less than for fixed-rate obligations. These
securities may take the following forms:
Variable Rate Securities. Variable rate instruments are those whose terms
provide for the adjustment of their interest rates on set dates and
which, upon such adjustment, can reasonably be expected to have a market
value that approximates its par value. A variable rate instrument, the
principal amount of which is scheduled to be paid in 397 days or less, is
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest. A variable rate instrument which is subject
to a demand feature entitles the purchaser to receive the principal
amount of the underlying security or securities, either (i) upon notice
of no more than 30 days or (ii) at specified intervals not exceeding 397
days and upon no more than 30 days notice is deemed to have a maturity
equal to the longer of the period remaining until the next readjustment
of the interest rate or the period remaining until the principal amount
can be recovered through demand.
Floating Rate Securities. Floating rate instruments are those whose terms
provide for the adjustment of their interest rates whenever a specified
interest rate changes and which, at any time, can reasonably be expected
to have a market value that approximates its par
16
<PAGE>
value. The maturity of a floating rate instrument is deemed to be the
period remaining until the date (noted on the face of the instrument) on
which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be
made. Floating rate instruments with demand features are deemed to have a
maturity equal to the period remaining until the principal amount can be
recovered through demand.
Put Option Bonds. Long-term obligations with maturities longer than one
year may provide purchasers an optional or mandatory tender of the
security at par value at predetermined intervals, often ranging from one
month to several years (e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a maturity equal to the
period remaining to the put date.
Asset-Backed Securities. A Fund may invest a portion of its assets in
debt obligations known as asset-backed securities. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-backed securities may be classified either as pass-
through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because pass-
through certificates represent an ownership interest in the underlying assets,
the holders thereof bear directly the risk of any defaults by the obligors on
the underlying assets not covered by any credit support. See "Types of Credit
Support".
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets may be credit card or automobile receivables,
home equity loans or other consumer or commercial obligations. The assets
collateralizing such asset-backed securities are pledged to a trustee or
custodian for the benefit of the holders thereof. Such issuers generally hold no
assets other than those underlying the asset-backed securities and any credit
support provided. As a result, although payments on such asset-backed securities
are obligations of the issuers, in the event of defaults on the underlying
assets not covered by any credit support (see "Types of Credit Support"), the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
17
<PAGE>
Methods of Allocating Cash Flows. While many asset-backed securities are
issued with only one class of security, many asset-backed securities are issued
in more than one class, each with different payment terms. Multiple class
asset-backed securities are issued for two main reasons. First, multiple
classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
such payments on the asset-backed security is made subordinate to the right to
such payments of the remaining class or classes. See "Types of Credit Support".
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with a class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark change) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. A Fund may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objective and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: Liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that scheduled payments on the underlying pool are
made in a timely fashion. Protection against ultimate default 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 from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising out of the
structure of the transaction include "senior-subordinated securities" (multiple
class asset-backed securities with certain classes subordinate to other classes
as to the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve funds" (where cash or investments,
sometimes funded from a portion of the initial payments on the underlying
assets, are held in reserve against future losses) or that have been
"overcollateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security.
Automobile Receivable Securities. A Fund may invest in Asset-Backed
Securities which are backed by receivables from motor vehicle installment sales
contracts or installment loans
18
<PAGE>
secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some case, be available to
support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. A Fund may invest in Asset-Backed
Securities backed by receivables from revolving credit card agreements ("Credit
Card Receivable Securities"). Credit balances on revolving credit card
agreements ("Accounts") are generally paid down more rapidly than the Automobile
Contracts. Most of the Credit Card Receivable Securities issued publicly to
date have been Pass-Through Certificates. In order to lengthen the maturity of
Credit Card Receivable Securities, most such securities provide for a fixed
period during which only interest payments on the underlying Accounts are passed
through to the security holder and principal payments received on such Accounts
are used to fund the transfer to the pool of assets supporting the related
Credit Card Receivable Securities of additional credit card charges made on an
Account. The initial fixed period usually may be shortened upon the occurrence
of specified events which signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on interest rates.
The ability of the issuer to extend the life of an issue of Credit Card
Receivables Securities thus depends upon the continued generation of additional
principal amounts in the underlying accounts during the initial period and non-
occurrence of specified events. An acceleration in cardholders' payment rates
or any other event which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets supporting the
related Credit Card Receivable Security could shorten the weighted average life
and yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances
19
<PAGE>
owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other Asset-Backed
Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. The Sub-Advisers anticipate that Asset-Backed Securities
backed by assets other than those described above will be issued in the future.
A Fund may invest in such securities in the future if such investment is
otherwise consistent with its investment objective and policies.
There are, of course, other types of securities that are, or may become,
available, which are similar to the foregoing.
U.S. Government Securities. U.S. Government securities consist of
various types of marketable securities issued by the U.S. Treasury, i.e., bills,
notes and bonds. Such securities are direct obligations of the U.S. Government
and differ mainly in the lengths of their maturities. Treasury bills, the most
frequently issued marketable government security, have a maturity of up to one
year and are issued on a discount basis.
Securities issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Fund in the form of separately traded principal
and interest components of securities issued or guaranteed by the U.S. Treasury.
The principal and interest components of selected securities are currently
traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
principal and interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts independently. The interest and principal
payments on the U.S. Treasury securities underlying STRIPS are direct
obligations of the U.S. Government.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
bankers' acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A bankers' acceptance may be
obtained from a domestic or foreign bank including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. A Fund will not invest in
any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
or a savings bank or savings and loan association that is a member of the FDIC
and which at the date of investment has capital, surplus and undivided profits
(as of the date of its most recently published financial statements) in excess
of $1 billion. A Fund will not invest in time deposits maturing in more than
seven days and will not invest more than 10% of its total assets in time
deposits maturing in two to seven days.
20
<PAGE>
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial paper investments at the time of purchase will be rated A by
S&P or Prime by Moody's, or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least A by S&P or by
Moody's. The money market investments in corporate bonds and debentures (which
must have maturities at the date of settlement of one year or less) must be
rated at the time of purchase at least A by S&P or by Moody's.
Commercial Paper Ratings. Commercial paper rated A (highest quality) by
S&P is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated A or better, although in some
cases BBB credits may be allowed. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an upward
trend with allowance made for unusual circumstances. Typically, the issuer's
industry is well established and the issuer has a strong position within the
industry. The reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. (Those A-1 issues
determined to possess overwhelming safety characteristics are denoted with a
plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet
21
<PAGE>
such obligations. These factors are all considered in determining whether the
commercial paper is rated Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of a Fund's portfolio holdings by
applicable rating agencies results in a material decline in the overall quality
of the Fund's portfolio, the Trustees will review the situation and take such
action as they deem in the best interests of such Fund's shareholders,
including, if necessary, changing the composition of the portfolio.
DEBT SECURITIES RATINGS
Standard & Poor's Corporation
- -----------------------------
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal.
BB indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces 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. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
22
<PAGE>
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is 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, it is not
likely to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. 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 be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The rating 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.
SP-1: Notes rated SP-1 are of the highest quality with very strong or
strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2: Notes rated SP-2 are of high quality with satisfactory capacity to
pay principal and interest.
Moody's Investors Service, Inc.
- ------------------------------
Aaa: Bonds which are rated Aaa are judged 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.
Aa: 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.
23
<PAGE>
A: 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 sometime in the future.
Baa: 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.
Ba: 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 other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance or other terms of the contract over any long period of time may be
small.
Caa: 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.
Ca: 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.
C: 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.
1, 2 or 3: The ratings from Aa through B may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
MIG-1: Notes bearing this designation are the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
MIG-2: Notes bearing this designation are of high quality, with margins
of protection ample although not so large as in the preceding group.
24
<PAGE>
INVESTMENT RESTRICTIONS
Adjustable Rate Fund
- -----------------------
The Trust has adopted the following investment restrictions for the
Adjustable Rate Fund. Restrictions 1, 2, 14, 15 and 18 may not be changed
without approval of the holders of a majority of the Adjustable Rate Fund's
outstanding shares as defined by the Investment Company Act. The other
investment restrictions may be changed by the Trustees without a vote of the
shareholders. So long as these restrictions are in effect, the Adjustable Rate
Fund may not:
1. Purchase more than 10% of any class of securities of any one issuer
(except securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and options thereon) or in securities of issuers
(including predecessors) with less than three years of continuous operations
except in the case of debt securities rated BBB or higher by S&P or Baa or
higher by Moody's, and except that this restriction shall not apply to
investments in securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional Information)
or real estate (other than securities secured by real estate or interests
therein, or issued by entities which invest in real estate or interests
therein), but it may lease office space for its own use and invest up to 5% of
its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as
a temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Fund's current obligations under such agreements would not exceed one-third of
the current market value of its total assets (less its liabilities other than
under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of the
Fund's net assets) and the entry into repurchase agreements (not more than one-
third of the current market value of the Adjustable Rate Fund's total assets
shall constitute secured "loans" by the Adjustable Rate Fund under repurchase
agreements).
6. Engage in the business of underwriting securities of others, except
that the Trust may be deemed to be an underwriter under the Securities Act of
1933, as amended, when it purchases or sells portfolio securities.
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to protect
or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the
open market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary
25
<PAGE>
brokerage commission) and only to the extent of
10% of its assets or as part of a merger, consolidation, reorganization, or
acquisition of assets.
9. Invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and trustees of the Trust who individually
own in excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
10. Invest in securities which are not registered under the Securities
Act of 1933, as amended, or the marketability of which is restricted including
securities restricted as to resale (limited to 5% of total assets), if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which are
not required to be registered under the Securities Act of 1933, as amended, or
to repurchase agreements having less than seven days to maturity, reverse
repurchase agreements, firm commitment agreements, and futures contracts and
options thereon.
11. Purchase securities on margin, except any short-term credits which
may be necessary for the clearance of transactions and the initial or
maintenance margin in connection with options and futures contracts and related
options.
12. Make short sales of securities, unless the Adjustable Rate Fund owns
an equal amount of the securities or securities convertible into or exchangeable
without further consideration for securities of the same issue as the securities
sold short; provided that this restriction shall not prohibit the use of options
and futures contracts for hedging purposes.
13. Invest more than 25% of its total assets in any one industry (except
U.S. Government Securities).
14. Issue senior securities, as defined in the Investment Company Act,
except as permitted by Section 18(f)(2) of that Act and the rules under such
Act, as set forth herein, or as permitted by an SEC exemptive order.
15. Change the nature of its business so as to cease to be an investment
company.
16. Conduct arbitrage transactions (provided that investments in futures
and options for hedging purposes shall not be deemed arbitrage transactions).
17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the Fund may invest in securities issued by
or which are based, directly or indirectly, on the credit of companies which
invest in or sponsor such programs).
18. Invest more than 5% of its total assets in warrants of all types, or
more than 2% of its total assets in warrants other than warrants attached to
other securities.
19. Invest in securities of foreign issuers other than through ADRs.
26
<PAGE>
20. Invest in real estate limited partnership.
21. Purchase any security while borrowings representing more than 5% of
the Fund's net assets (including loans, reverse repurchase agreements, forward
rolls or other borrowings) are outstanding.
Government Fund
- ---------------
The Trust has adopted the following investment restrictions for the
Government Fund. Restrictions 2, 3, 4, 5, 6, 14, 15 and 16 may not be changed
without approval of the holders of a majority of the Government Fund's
outstanding shares as defined by the Investment Company Act. The other
investment restrictions may be changed by the Trustees without a vote of the
shareholders. So long as these restrictions are in effect, the Government Fund
may not:
1. Purchase more than 10% of any class of securities of any one issuer
(except U.S. Government Securities as defined in the Government Fund
Prospectus).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except U.S. Government Securities and options thereon) or in securities
of issuers (other than issuers of U.S. Government Securities) with less than
three years of continuous operations.
3. Purchase or sell commodities (other than the options and interest
rate futures contracts described in the Prospectus and Statement of Additional
Information) or real estate (other than securities secured by real estate or
interests therein, or issued by entities which invest in real estate or
interests therein), but it may lease office space for its own use and invest up
to 5% of its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as
a temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Government Fund's current obligations under such agreements would not exceed
one-third of the current market value of its total assets (less its liabilities
other than under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of the
Fund's net assets) and the entry into repurchase agreements (not more than one-
third of the current market value of the Government Fund's total assets shall
constitute secured "loans" by the Government Fund under repurchase agreements).
6. Engage in the business of underwriting securities of others, except
that the Trust may be deemed to be an underwriter under the Securities Act of
1933, as amended, when it purchases or sells portfolio securities.
27
<PAGE>
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to protect
or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the
open market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary brokerage commission) and only to the extent of
10% of its assets or as part of a merger, consolidation, reorganization, or
acquisition of assets.
9. Participate on a joint or joint and several basis in any securities
trading account; provided, however, that combining or "bunching" of the orders
of other accounts under the investment management of the Adviser or the
Government Fund's Sub-Adviser shall not be considered participation in a joint
securities trading account;
10. Invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and trustees of the Trust who individually
own in excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
11. Invest in securities which are not registered under the Securities
Act of 1933, as amended, or the marketability of which is restricted, if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which are
not required to be registered under the Securities Act of 1933, as amended, or
to repurchase agreements having less than seven days to maturity, reverse
repurchase agreements, firm commitment agreements, and futures contracts and
options thereon.
12. Purchase securities on margin, except any short-term credits which
may be necessary for the clearance of transactions and the initial or
maintenance margin in connection with options and futures contracts and related
options.
13. Make short sales of securities, unless the Fund owns an equal amount
of the securities or securities convertible into or exchangeable without further
consideration for securities of the same issue as the securities sold short.
14. Invest more than 25% of its total assets in any one industry (except
U.S. Government Securities).
15. Issue senior securities, as defined in the Investment Company Act,
except as permitted by Section 18(f)(2) of that Act and the rules under such
Act, as set forth herein, or as permitted by an SEC exemptive order.
16. Change the nature of its business so as to cease to be an investment
company.
17. Invest in real estate limited partnerships.
28
<PAGE>
18. Purchase any security while borrowings representing more than 5% of
the Government Fund's net assets (including loans, reverse repurchase agreements
or other borrowings) are outstanding.
Tax Free Fund
- -------------
The Trust has adopted the following investment restrictions for the Tax
Free Fund. Restrictions 1, 2, 14 and 15 may not be changed without approval of
the holders of a majority of the Tax Free Fund's outstanding shares as defined
by the Investment Company Act. The other investment restrictions may be changed
by the Trustees without a vote of the shareholders. So long as these
restrictions are in effect, the Tax Free Fund may not:
1. Purchase more than 10% of any class of securities of any one issuer
(except securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except U.S. Government Securities and options thereon) or in securities
of issuers (other than the U.S. Government, its agencies and instrumentalities)
with less than three years of continuous operations except in the case of debt
securities rated BBB or higher by S&P or Baa or higher by Moody's, and except
that this restriction shall not apply to investments in securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional Information)
or real estate (other than securities secured by real estate or interests
therein, or issued by entities which invest in real estate or interests
therein), but it may lease office space for its own use and invest up to 5% of
its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as
a temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Fund's current obligations under such agreements would not exceed one-third of
the current market value of its total assets (less its liabilities other than
under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of the
Fund's net assets) and the entry into repurchase agreements (not more than one-
third of the current market value of the Tax Free Fund's total assets shall
constitute secured "loans" by the Tax Free Fund under repurchase agreements).
6. Engage in the business of underwriting securities of others, except
that the Trust may be deemed to be an underwriter under the Securities Act of
1933, as amended, when it purchases or sells portfolio securities.
29
<PAGE>
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to protect
or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the
open market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary brokerage commission) and only to the extent of
10% of its assets or as part of a merger, consolidation, reorganization, or
acquisition of assets.
9. Invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and trustees of the Trust who individually
own in excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
10. Invest in securities which are not registered under the Securities
Act of 1933, as amended, or the marketability of which is restricted, if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which are
not required to be registered under the Securities Act of 1933, as amended, or
to repurchase agreements having less than seven days to maturity, reverse
repurchase agreements, firm commitment agreements, and futures contracts and
options thereon.
11. Purchase securities on margin, except any short-term credits which
may be necessary for the clearance of transactions and the initial or
maintenance margin in connection with options and futures contracts and related
options.
12. Make short sales of securities, unless the Tax Free Fund owns an
equal amount of the securities or securities convertible into or exchangeable
without further consideration for securities of the same issue as the securities
sold short; provided that this restriction shall not prohibit the use of options
and futures contracts for hedging purposes.
13. Invest more than 25% of its total assets in any one industry (except
U.S. Government Securities).
14. Issue senior securities, as defined in the Investment Company Act,
except as permitted by Section 18(f)(2) of that Act and the rules under such
Act, as set forth herein, or as permitted by an SEC exemptive order.
15. Change the nature of its business so as to cease to be an investment
company.
16. Invest in real estate limited partnership.
17. Purchase any security while borrowings representing more than 5% of
the Fund's net assets (including loans, reverse repurchase agreements or other
borrowings) are outstanding.
Value Fund
- ----------
30
<PAGE>
The Trust has adopted the following investment restrictions for the Value
Fund. Restrictions 1, 2, 14, 15 and 18 may not be changed without approval of
the holders of a majority of the Value Fund's outstanding shares as defined by
the Investment Company Act. The other investment restrictions may be changed by
the Trustees without a vote of the shareholders. So long as these restrictions
are in effect, the Value Fund may not:
1. Purchase more than 5% of any class of securities of any one issuer
(except securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and options thereon) or in securities of issuers
(including predecessors) with less than three years of continuous operations
except in the case of debt securities rated BBB or higher by S&P or Baa or
higher by Moody's, and except that this restriction shall not apply to
investments in securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional Information)
or real estate (other than securities secured by real estate or interests
therein, or issued by entities which invest in real estate or interests
therein), but it may lease office space for its own use and invest up to 5% of
its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as
a temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Fund's current obligations under such agreements would not exceed one-third of
the current market value of its total assets (less its liabilities other than
under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of the
Fund's net assets) and the entry into repurchase agreements (not more than one-
third of the current market value of the Value Fund's total assets shall
constitute secured "loans" by the Value Fund under repurchase agreements).
6. Engage in the business of underwriting securities of others, except
that the Trust may be deemed to be an underwriter under the Securities Act of
1933, as amended, when it purchases or sells portfolio securities.
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to protect
or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the
open market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary
31
<PAGE>
brokerage commission) and only to the extent of 10% of its assets or as part of
a merger, consolidation, reorganization, or acquisition of assets.
9. Invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and trustees of the Trust who individually
own in excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
10. Invest in securities which are not registered under the Securities
Act of 1933, as amended, or the marketability of which is restricted including
securities restricted as to resale (limited to 5% of total assets), if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which are
not required to be registered under the Securities Act of 1933, as amended, or
to repurchase agreements having less than seven days to maturity, reverse
repurchase agreements, firm commitment agreements, and futures contracts and
options thereon.
11. Purchase securities on margin, except any short-term credits which
may be necessary for the clearance of transactions and the initial or
maintenance margin in connection with options and futures contracts and related
options.
12. Make short sales of securities, unless the Value Fund owns an equal
amount of the securities or securities convertible into or exchangeable without
further consideration for securities of the same issue as the securities sold
short; provided that this restriction shall not prohibit the use of options and
futures contracts for hedging purposes.
13. Invest more than 20% of its total assets in any one industry (except
U.S. Government Securities).
14. Issue senior securities, as defined in the Investment Company Act,
except as permitted by Section 18(f)(2) of that Act and the rules under such
Act, as set forth herein, or as permitted by an SEC exemptive order.
15. Change the nature of its business so as to cease to be an investment
company.
16. Conduct arbitrage transactions (provided that investments in futures
and options for hedging purposes shall not be deemed arbitrage transactions).
17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the Fund may invest in securities issued by
or which are based, directly or indirectly, on the credit of companies which
invest in or sponsor such programs).
18. Invest more than 5% of its total assets in warrants of all types, or
more than 2% of its total assets in warrants other than warrants attached to
other securities.
19. Invest in securities of foreign issuers other than through
ADRs.
32
<PAGE>
20. Invest in real estate limited partnerships.
21. Purchase any security while borrowings representing more than 5% of
the Fund's net assets (including loans, reverse repurchase agreements or other
borrowings) are outstanding.
Growth Fund
- -----------
The Trust has adopted the following investment restrictions for the
Growth Fund. Restrictions 1, 2, 14, 15 and 18 may not be changed without
approval of the holders of a majority of the Growth Fund's outstanding shares as
defined by the Investment Company Act. The other investment restrictions may be
changed by the Trustees without a vote of the shareholders. So long as these
restrictions are in effect, the Growth Fund may not:
1. Purchase more than 10% of any class of securities of any one issuer
(except securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities).
2. Invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and options thereon) or in securities of issuers
(including predecessors) with less than three years of continuous operations
except in the case of debt securities rated BBB or higher by S&P or Baa or
higher by Moody's, and except that this restriction shall not apply to
investments in securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
3. Purchase or sell commodities (other than the options and futures
contracts described in the Prospectus and Statement of Additional Information)
or real estate (other than securities secured by real estate or interests
therein, or issued by entities which invest in real estate or interests
therein), but it may lease office space for its own use and invest up to 5% of
its assets in publicly held real estate investment trusts.
4. Borrow amounts in excess of 10% of its total assets and then only as
a temporary measure for extraordinary or emergency purposes. This restriction
shall not prohibit entry into reverse repurchase agreements if as a result the
Fund's current obligations under such agreements would not exceed one-third of
the current market value of its total assets (less its liabilities other than
under reverse repurchase agreements).
5. Make loans, except that this restriction shall not prohibit the
purchase and holding of a portion of an issue of publicly distributed debt
securities, the lending of portfolio securities (not more than 5 percent of the
Fund's net assets) and the entry into repurchase agreements (not more than one-
third of the current market value of the Growth Fund's total assets shall
constitute secured "loans" by the Growth Fund under repurchase agreements).
6. Engage in the business of underwriting securities of others, except
that the Trust may be deemed to be an underwriter under the Securities Act of
1933, as amended, when it purchases or sells portfolio securities.
33
<PAGE>
7. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to protect
or enhance the value of an existing investment.
8. Purchase securities of any other investment company, except in the
open market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary brokerage commission) and only to the extent of
10% of its assets or as part of a merger, consolidation, reorganization, or
acquisition of assets.
9. Invest in or retain the securities of any issuer, if, to the
knowledge of the Trust, the officers and trustees of the Trust who individually
own in excess of 1/2 of 1% of the issuer's securities own more than 5% of such
securities in the aggregate.
10. Invest in securities which are not registered under the Securities
Act of 1933, as amended, or the marketability of which is restricted including
securities restricted as to resale (limited to 5% of total assets), if as a
result, more than 10% of its total assets would consist of such securities;
provided, however, that this restriction shall not apply to securities which are
not required to be registered under the Securities Act of 1933, as amended, or
to repurchase agreements having less than seven days to maturity, reverse
repurchase agreements, firm commitment agreements, and futures contracts and
options thereon.
11. Purchase securities on margin, except any short-term credits which
may be necessary for the clearance of transactions and the initial or
maintenance margin in connection with options and futures contracts and related
options.
12. Make short sales of securities, unless the Growth Fund owns an equal
amount of the securities or securities convertible into or exchangeable without
further consideration for securities of the same issue as the securities sold
short; provided that this restriction shall not prohibit the use of options and
futures contracts for hedging purposes.
13. Invest more than 25% of its total assets in any one industry (except
U.S. Government Securities).
14. Issue senior securities, as defined in the Investment Company Act,
except as permitted by Section 18(f)(2) of that Act and the rules under such
Act, as set forth herein, or as permitted by an SEC exemptive order.
15. Change the nature of its business so as to cease to be an investment
company.
16. Conduct arbitrage transactions (provided that investments in futures
and options for hedging purposes shall not be deemed arbitrage transactions).
17. Invest in oil, gas or other mineral leases or exploration or
development programs (provided that the Fund may invest in securities issued by
or which are based, directly or indirectly, on the credit of companies which
invest in or sponsor such programs).
34
<PAGE>
18. Invest more than 5% of its total assets in warrants of all types, or
more than 2% of its total assets in warrants other than warrants attached to
other securities.
19. Invest in securities of foreign issuers other than through U.S.
dollar denominated American Depository Receipts ("ADRs").
20. Invest in real estate limited partnerships.
21. Purchase any security while borrowings representing more than 5% of
the Fund's net assets (including loans, reverse repurchase agreements or other
borrowings) are outstanding.
Percentage Limitations
- ----------------------
In connection with the investment restrictions of each Fund, all
percentage limitations apply only at the time a transaction is entered.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in a Fund's net assets will not be
treated as a violation. Under the Investment Company Act, each Fund will be
required to maintain an asset coverage of at least 300% for borrowings from a
bank. In the event that such asset coverage is below 300%, the Fund will be
required to reduce the amount of its borrowings to obtain 300% asset coverage,
within three days (not including Sundays and holidays) or such longer period as
the rules and regulations of the SEC prescribe.
PORTFOLIO TRANSACTIONS
It is the general policy of the Funds, the Adviser and the Sub-Advisers
not to employ any broker in the purchase or sale of securities for any Fund's
portfolio unless the Adviser or a Sub-Adviser believes that the broker will
obtain the best results for the Fund, taking into consideration such relevant
factors as price, the ability of the broker to effect the transaction and the
broker's facilities, reliability and financial responsibility. Commission
rates, being a component of price, are considered together with such factors.
U.S. Government Securities and municipal securities are traded primarily
in the over-the-counter market. Transactions in the over-the-counter market are
generally principal transactions with dealers and the costs of such transactions
involve dealer spreads rather than brokerage commissions. With respect to any
over-the-counter transactions, the Adviser or relevant Sub-Adviser, where
possible, deals directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere.
Under the Investment Company Act, persons affiliated with the Trust are
prohibited from dealing with the Trust as a principal in the purchase and sale
of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principal for their own account,
affiliated persons of a Fund may not serve as such Fund's dealer in connection
with such transactions. However, affiliated persons of the Trust, including
Value Line Securities, Inc.
35
<PAGE>
("Value Line Securities"), an affiliate of the Growth Fund's Sub-Adviser, may
serve as a broker in transactions for a Fund conducted on an exchange or over-
the-counter transactions conducted on an agency basis. PNC Securities Corp.
("PNC") and BFM Advisory, Inc. ("BFM") are broker-dealer affiliates of BlackRock
Financial Management, Inc., the Sub-Adviser for the Government Fund. However,
BFM does not act as a broker-dealer for customer transactions and it is the
policy of the Government Fund's Sub-Adviser not to employ PNC as a broker-dealer
for the Government Fund. The Adviser is affiliated with the following
broker/dealers; GE Capital Corp., Capital Markets Group, Inc., Polaris
Securities Corp., Kidder Peabody & Company, Inc., GE Investment Services, Inc.,
GNA Securities, Inc., and GNA Distributors, Inc. The Sub-Advisers have been
instructed not to engage in any transactions with the Advisers affiliated
broker/dealers. The Trust is not obligated to deal with any broker or group of
brokers in the execution of transactions in portfolio securities.
The commission rate on all exchange orders is subject to negotiation.
Section 17(e) of the Investment Company Act limits to "the usual and customary
broker's commission" the amount which can be paid by the Trust to an affiliated
person acting as broker in connection with transactions effected on a securities
exchange. The Trustees of the Trust, including a majority of the Trustees who
are not "interested persons" of the Trust, the Adviser, or the Sub-Advisers,
have adopted procedures designed to comply with the requirements of Section
17(e) and Rule 17e-1 of the Investment Company Act if an affiliated person acts
as such a broker, to ensure a broker's commission that is "reasonable and fair
compared to the commission, fee or other remuneration received by other brokers
in connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of
time . . . ."
A transaction will not be placed with any affiliated party if a Fund
would have to pay a commission rate less favorable than such affiliated party's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers except for accounts for which the affiliated party
acts as a clearing broker for another brokerage firm, and any customers of the
affiliated party determined by a majority of the Trustees who are not
"interested persons" of the Trust, the Adviser, or such affiliated party not to
be comparable to the Trust. With regard to comparable customers, in isolated
situations, subject to the approval of a majority of the Trustees who are not
"interested persons" of the Trust, the Adviser or the affiliated party,
exceptions may be made.
Since Value Line, Inc. as an affiliate of Value Line Securities, has, as
Sub-Adviser to the Growth Fund, the obligation to provide investment management
services, which include elements of research and related investment skills, such
research and related investment skills will not be used by Value Line Securities
as a basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria. When appropriate, orders for the account of
the Growth Fund may be combined with orders for the account of other funds with
which Value Line Securities is affiliated in order to obtain a more favorable
commission rate.
In selecting brokers to effect transactions on securities exchanges, each
Fund's Sub-Adviser considers the factors set forth in the first paragraph under
this heading and any investment information provided by such brokers, subject to
the criteria of Section 28(e) of the Securities
36
<PAGE>
Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, if a Fund's
Sub-Adviser determines in good faith that the amount of commissions charged by a
broker is reasonable in relation to the value of the brokerage and research
services provided by such broker, such Sub-Adviser may pay commissions to such
broker in an amount greater than the amount another firm might charge. Research
services provided to a Fund include research reports on particular industries
and companies, economic surveys and analyses, and recommendations as to specific
securities. From time to time brokerage for a Fund may be allocated on the basis
of sales of the shares of such Fund.
Each year, each Fund's Sub-Adviser will consider the amount and nature of
the research services provided by other brokers as well as the extent to which
such services provided by other brokers are relied upon, and attempts to
allocate a portion of the brokerage business of its clients, such as the Funds,
on the basis of that consideration. In addition, brokers sometimes suggest a
level of business they would like to receive in return for the various services
they provide. Actual brokerage business received by any broker may be less than
the suggested allocations, but can (and often does) exceed the suggestions,
because total brokerage is allocated on the basis of all the considerations
described above. In no instance is a broker excluded from receiving business
because it has not been identified as providing research services. As permitted
by Section 28(e), the investment information received from other brokers may be
used by the relevant Sub-Adviser (and its subsidiaries) in servicing all its
accounts and not all such information may be used by the relevant Sub-Adviser in
connection with the applicable Fund. Nonetheless, the Funds believes that such
investment information provides the Funds with benefits by supplementing the
research otherwise available to the Trust.
The Growth Fund may employ Value Line Securities, as its principal broker
on exchange transactions. Section 11(a) of the Exchange Act provides that a
member firm of a national securities exchange (such as Value Line Securities)
may not effect transactions on such exchange for the account of an investment
company (such as the Trust) of which the member firm or its affiliate (such as
the Sub-Adviser) is the investment adviser. However, the SEC has adopted a rule,
Rule 11a2-2(T) (the "Rule"), which permits member firms which are subject to
Section 11(a) to effect exchange transactions otherwise prohibited by Section
11(a), provided such transactions are initiated from off the floor of the
exchange and are executed on the floor, or through use of the facilities of the
exchange, by another member which is not an "associated person" (as defined in
the Exchange Act) of the member firm which initiated the transaction. The Rule
also permits the initiating member to retain compensation in connection with
effecting such transactions if expressly so authorized in a written contract
with the investment company. The Growth Fund and Value Line Securities will
enter into such a contract if Value Line Securities is employed as such a
broker. Any such transactions effected by Value Line Securities for the account
of the Growth Fund will be made in the manner prescribed by the Rule. The Trust,
of course, will continue to effect its portfolio transactions in a manner
consistent with the Exchange Act and the rules and regulations thereunder.
Value Line Securities will furnish the Growth Fund, at least annually, a
statement setting forth the total amount of all compensation retained by Value
Line Securities or any associated person of Value Line Securities in connection
with effecting transactions for the account of the
37
<PAGE>
Growth Fund, and the Trustees of the Trust will review and approve all the
Growth Fund's portfolio transactions and the compensation received by Value Line
Securities in connection therewith.
Value Line Securities will not knowingly participate in commissions paid
by the Growth Fund to other brokers or dealers and does not seek or knowingly
receive any reciprocal business as the result of the payment of such
commissions. In the event Value Line Securities at any time learns that it has
knowingly received reciprocal business, it will so inform the Trustees of the
Trust.
Brokerage commissions paid by each Fund for the fiscal years ended October
31, 1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
Adjustable Government Tax Free Value Growth
Rate Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Fiscal year ended October 31, 1993 N/A 277,996 N/A N/A N/A
September 8, 1993 (commencement of operations)
through October 31, 1993 None N/A None $ 3,760 $ 3,331
Fiscal year ended October 31, 1994 None 145,036 None 12,468 18,174
Fiscal year ended October 31, 1995 None 64,512 None 13,026 26,331
</TABLE>
There were no brokerage commissions paid to affiliates of the Funds.
Subject to general supervision by the Trustees and the Adviser, all
investment decisions of each Fund are made by such Fund's Sub-Adviser, which
places orders for all purchases and sales of portfolio securities for such Fund
with brokers and dealers.
PORTFOLIO TURNOVER
In determining a Fund's portfolio turnover, securities (including
options) which have maturities at the time of acquisition of one year or less
("short-term securities") are excluded. The annual portfolio turnover rate is
calculated by dividing the lesser of the purchase or sales of portfolio
securities for the year by the monthly average of the value of the portfolio
securities owned by the Fund during the year. The monthly average is calculated
by totaling the values of the portfolio securities as of the beginning and end
of the first month of the year and as of the end of the succeeding 11 months and
dividing the sum by 13. A turnover rate of 100% would occur if all of a Fund's
portfolio securities (other than short-term securities) were replaced once in a
period of one year. It should be noted that if a Fund were to write a
substantial number of option contracts which are exercised, the portfolio
turnover rate of such Fund would increase.
The Government Fund anticipates that its annual portfolio turnover rate
will not exceed 200%. The Government Fund will trade its portfolio securities
without regard to the length of time for which they have been held. The Growth
Fund may trade in securities for short-term profits in order to achieve its
objective. The Growth Fund anticipates that its annual portfolio turnover rate
may exceed 100% but generally will not exceed 200%. It is the policy of each of
the Value Fund, the Tax Free Fund and the Adjustable Rate Fund not to trade in
securities with a view
38
<PAGE>
toward obtaining short term profits. However, when circumstances warrant, such
Funds may sell securities without regard to the length of time held. The Value
Fund anticipates that its annual portfolio turnover rate may exceed 100% but
generally will not exceed 175%. The Tax Free Fund anticipates that its annual
portfolio turnover rate may exceed 50% but generally will not exceed 100%. The
Adjustable Rate Fund anticipates that it annual portfolio turnover rate may
exceed 100% but generally will not exceed 150%. A high portfolio turnover rate
in any year will increase brokerage commissions paid by a fund and could result
in higher expenses.
To the extent that its portfolio is traded for short-term market
considerations and turnover exceeds 100%, the annual portfolio turnover rate of
a Fund could be higher than most mutual funds.
No fund will engage in short-term trading to an extent which would in the
opinion of the Trust's counsel disqualify the Trust as a regulated investment
company under Subchapter M of the Code.
HOW TO PURCHASE SHARES
Shares of the Funds are distributed by GNA Distributors, Inc. (the
"Distributor") through its affiliate GNA Securities, Inc. ("GNA Securities"),
and other authorized broker/dealers and financial institutions ("Authorized
Firms") which have entered into sales agreements with the Distributor on a best
efforts basis. The Funds currently offer two classes of shares which may be
purchased at the next determined net asset value per share plus a sales charge
which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B shares).
General information on how to buy shares of the Funds, as well as sales charges
involved, are set forth under "How to Purchase Shares" in the applicable Fund
Prospectus. The following supplements that information.
Reduced Sales Charges - For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an individual combining with his or her spouse and their
children under age 21 and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Funds at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$50,000 of a Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent
39
<PAGE>
may be included therein; in such case the date of the earliest of such purchases
marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Funds and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Funds or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation.
The applicable sales charge under the Right of Accumulation is determined on the
amount arrived at by combining the dollar amount of the purchase with the value
(at the current public offering price) of all Class A and Class B shares of the
other Eligible Funds owned as of the purchase date by the investor plus the
value (at the current public offering price) of all such shares owned as of such
date by any "person" described herein as eligible to join with the investor in a
single purchase. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, as amended, a Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
HOW TO REDEEM SHARES
The Funds may not suspend redemption privileges or postpone the date of
payment on shares of the Funds for more than seven days except during any period
(1) when the New York Stock Exchange is closed or trading on the Exchange is
restricted as determined by the Securities and Exchange Commission ("SEC"); (2)
when an emergency exists, as defined by the SEC, which makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets; or (3) as the SEC may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.
40
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge on Class B shares will be waived in
the case of a redemption made due to the death or subsequent disability (caused
by injury or the sudden onset of a life threatening illness) of a sole
individual shareholder (but not for "family," "living" or other trusts) and for
redemptions representing a minimum required distribution from an IRA processed
under a systematic withdrawal plan. The shareholder or his/her beneficiary must
notify the Funds' transfer agent either directly or through the Distributor, at
the time of redemption, that the redemption is entitled to a waiver of the
contingent deferred sales charge. The waiver will be granted subject to
confirmation of the shareholder's death or disability or the status of the
redemption as a required distribution, as the case may be.
NET ASSET VALUE
The net asset value per share of each Fund is determined as of 4:00 p.m.
Eastern time, Monday through Friday, exclusive of national business holidays on
which the New York Stock Exchange is closed. The NYSE will be closed on the
following national business holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Net asset value is determined separately for each class of
shares.
The following is a description of the procedures used by each Fund to
value assets. Net asset value per share is computed by taking the market value
of all assets of a Fund (including interest accrued but not collected), less
liabilities (including accrued expenses but excluding capital and surplus), and
dividing by the total number of shares of the Fund outstanding. Portfolio
securities for which market quotations are readily available are stated at
market value. A security (including an option) listed or traded on an exchange
or quoted on NASDAQ is valued at its last sale price prior to the time when
assets are valued. Lacking any sales on that day, the security is valued at the
mean between the current closing bid and asked prices. Other securities are, in
general, valued at the last bid quoted prior to the time when assets are valued
if there are market quotations readily available, or in the absence of such
market quotations, then at the fair value thereof as determined by or under
authority of the Trustees of the Trust utilizing such pricing services as may be
deemed appropriate. Investments in certain long-term debt securities not traded
in an organized market are valued on the basis of valuations furnished by
independent pricing services or broker/dealers which utilize information with
respect to market transactions and other information in such securities or
comparable securities. Securities deemed restricted as to resale are valued at
the fair value thereof as determined by or in accordance with methods adopted by
the Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
a Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method.
41
<PAGE>
The amortized cost method is used when the value obtained is fair value.
Under the amortized cost method of valuation, the security is initially valued
at cost on the date of purchase (or in the case of short-term debt instruments
purchased with more than 60 days remaining to maturity, the market value on the
61st day prior to maturity), and thereafter a constant amortization to maturity
of any discount or premium is assumed regardless of the impact of fluctuating
interest rates on the market value of the security.
Generally, trading in mortgage-backed or other securities issued or
guaranteed by U.S. Government agencies or instrumentalities is substantially
completed each day at various times prior to 4:15 P.M., Eastern time. The value
of such securities used in computing the net asset value of a Fund's shares are
determined as of such times. Occasionally, events affecting the values of such
securities may occur between the times at which they are determined and the time
the Fund determines its net asset value which will not be reflected in the
computation of the Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by the Trustees.
CERTAIN TAX MATTERS
Federal Taxation of the Funds -- In General
- -------------------------------------------
Each Fund intends to qualify and elect to be treated each taxable year as
a "regulated investment company" under Subchapter M of the Code. To so qualify,
a Fund must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% test"); (b) derive less than 30% of its gross income from
the sale or other disposition of any of the following which was held less than
three months (the "30% test"): (i) stock or securities; (ii) options, futures or
forward contracts (other than on foreign currencies); or (iii) foreign
currencies (or options, futures or forward contracts on foreign currencies) but
only if such currencies (or options, futures or forward contracts) are not
directly related to a Fund's principal business of investing in stock or
securities; and (c) satisfy certain diversification requirements.
As a regulated investment company, the Funds will not be subject to
federal income tax on its net investment income (including net short-term
capital gains) and net capital gain that it distributes to shareholders if at
least 90% of its net investment income and net short-term capital gains and net
tax-exempt income for the taxable year are distributed. However, if for any
taxable year any Fund does not satisfy the requirements of Subchapter M of the
Code, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and such
distributions will be taxable to shareholders as ordinary income to the extent
of such Fund's current or accumulated earnings or profits.
A Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year a Fund must distribute
(i) at least 98% of its ordinary income (not taking into
42
<PAGE>
account any net tax-exempt income or capital gains or losses) for the calendar
year, (ii) at least 98% of its capital gain net income for the twelve month
period ending on October 31 (or December 31, if a Fund so elects), and (iii) any
portion (not taxed to a Fund) of the respective 2% undistributed balances from
the prior year. Each Fund intends to make sufficient distributions to avoid this
4% excise tax.
A Fund's ability to make certain investments may be limited by provisions
of the Code that require inclusion of certain unrealized gains or losses in a
Fund's income for purposes of the 90% test, the 30% test, the excise tax and the
distribution requirements of the Code, and by provisions of the Code that
characterize certain income or loss as ordinary income or loss rather than
capital gain or loss. Such recognition, characterization and timing rules
generally apply to investments in certain options, futures contracts and debt
securities with original issue or market discount.
Taxation of the Funds' Investments
- ----------------------------------
Original Issue Discount. For federal income tax purposes, debt securities
purchased by a Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by a Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under Section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by a Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time a Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless a Fund elects to include such accrued market discount in income in the
tax year to which it is attributable). Generally, market discount is accrued on
a daily basis. A Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred or continued to
purchase or carry any debt security having market discount, unless a Fund makes
the election to include market discount currently. Because each Fund must
include original issue discount in income, it will be more difficult for such
Fund to make the distributions required for such Fund to maintain its status as
a regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of a Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in a Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss.
43
<PAGE>
Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Taxation of the Shareholders
Distributions generally are taxable to shareholders as ordinary income at
the time made. However, dividends declared in October, November and December and
made payable to shareholders of record in such a month are treated as received
by such shareholder, and paid by a Fund as of December 31st, provided that such
Fund actually pays the dividend during January of the following calendar year.
Distributions by a Fund result in a reduction in the fair market value of
such Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless would be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of any forthcoming distribution. Those investors
purchasing shares just prior to a distribution will then receive a return of
investment upon distribution which will nevertheless be taxable to them.
To the extent that a Fund's dividends are derived from interest income
exempt from federal income tax and are designated as "exempt-interest dividends"
by a Fund, they will be excludable from a shareholder's gross income for federal
income tax purposes. "Exempt-interest dividends," however, must be taken into
account by shareholders in determining whether their total incomes are large
enough to result in taxation of up to one-half of their social security benefit.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of a Fund is not deductible.
A shareholder should be aware that a redemption of shares is a taxable
event and, accordingly, capital gain or loss may be recognized. A loss realized
by a shareholder on the redemption or exchange of shares of a Fund with respect
to which exempt-interest dividends have been paid will be disallowed to the
extent of such dividends if the shares have not been held by the shareholder for
more than six months. Similarly, if a shareholder receives a distribution
taxable as long-term capital gain and redeems or exchanges shares before he has
held them for more than six months, any loss on the redemption or exchange (not
otherwise disallowed as attributable to an exempt-interest dividend) will be
treated as long-term capital loss to the extent of such capital gains
distribution.
Opinions relating to the validity of tax-exempt securities and the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the issuers. Neither the Sub-Advisers nor the Trust's counsel makes
any review of proceedings relating to the issuance of tax-exempt securities or
the bases of such opinions.
Interest on "private activity" bonds issued after August 7, 1986 is
subject to the federal alternative minimum tax, although the interest continues
to be excludable from gross income for
44
<PAGE>
other purposes. The alternative minimum tax, or AMT, is supplemental tax
designed to ensure that taxpayers pay at least a minimum amount of tax on their
income, even if they make substantial use of certain tax deductions and
exclusions. Interest from private activity bonds is a "tax preference" item that
is added into income from other sources for the purpose of determining whether a
taxpayer is subject to the AMT and the amount of any tax to be paid. Corporate
investors should note that for purposes of the corporate AMT there is an upward
adjustment equal to 75% of the amount by which adjusted current earnings exceeds
alternative minimum taxable income. Prospective investors should consult their
own tax advisers with respect to the possible application of the AMT to their
tax situation.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Shareholders of a Fund may be exempt from state and
local taxes on distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in which they are
resident, but taxable generally on income derived from obligations of other
jurisdictions. Shareholders should consult their tax advisers about the status
of distributions from a Fund in their own states and localities.
MANAGEMENT OF THE FUNDS
The Trustees and executive officers of the Trust and their principal
occupations during the past five years are set forth below. Unless otherwise
indicated, the business address of each is Suite 5600, Two Union Square, 601
Union Street, Seattle, Washington 98101.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Title During Past 5 Years
- -----------------------------------------------------------------------------
<S> <C> <C>
Patrick E. Welch* Trustee, President, CEO and
Chairman of Director of
the Board, GNA Corporation and its
President and subsidiaries. Formerly,
CEO Executive V.P. and COO
of GNA Corporation and its
subsidiaries.
Pierce T. Lindberg Trustee Mr. Lindberg was Assistant
4501 Grandview Dr., W #307T Treasurer and Director of
Tacoma, WA 98466 Money Management for Weyerhaeuser
Company until his retirement in
1984.
Edward R. McMillan Trustee Investment consultant to
1600 Crista Shores Lane, several private concerns
#302
</TABLE>
45
<PAGE>
Principal Occupation(s)
Name Title During Past 5 Years
- -----------------------------------------------------------------------------
[S] [C] [C]
Silverdale, WA 98383 and is presently Vice Chairman of
the Seattle Pacific University
Foundation and Member of the
Investment Committee, Blue Cross of
Washington and Alaska. Senior Vice
President and Chief Economist for
Rainier National Bank until his
retirement in 1983 and formerly a
Member of the Government Securities
Committee, Public Securities
Association.
Douglas H. Pedersen Trustee Mr. Pedersen is a Seattle-based
business economist and principal of
Pedersen & Associates, a consulting
firm. Mr. Pedersen is also co-
publisher of "The Puget Sound
Economic Forecaster," a quarterly
newsletter. Formerly, Vice
President and Economist for
Security Pacific Bank. Mr. Pedersen
is a member of the Governor's
Council of Economic Advisors for
Washington State, a participant on
the Western Blue Chip Economic
Panel and past President of the
Seattle Chapter of the National
Association of Business Economists.
He also serves as a Director of the
Washington Research Council.
Victor C. Moses Senior Vice Senior Vice President and
President Chief Actuary of GNA
Corporation and its
subsidiaries.
Geoffrey S. Stiff Senior Vice SVP, CFO and Treasurer
President and of GNA Corporation and
Treasurer its subsidiaries. Formerly,
- ---------------------
*Trustees who are interested persons as defined by the Investment Company Act
of 1940.
46
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Title During Past 5 Years
- -----------------------------------------------------------------------------
<S> <C> <C>
Director, VP and CFO of Employers
Reinsurance Corp.
Edward J. Wiles, Jr. Vice President Vice President and Counsel
and Secretary of GNA Corporation and its
subsidiaries.
Charles A. Kaminski Senior Vice Senior Vice President
President of GNA Corporation and
subsidiaries. Member of the
Washington Investment Board. Former
Director and Senior Fixed Income
Portfolio Manager, Baring America
Asset Management Company.
Thomas W. Casey Vice President Vice President and Controller,
and Controller GNA Corporation and its
subsidiaries. Formerly Technical
Adviser, General Electric Capital
Corporation; Assistant Vice
President, Citibank; Supervisor,
Coopers & Lybrand L.L.P.
</TABLE>
Messrs. Casey, Kaminski, Moses, Stiff, Welch and Wiles are all directors
or officers of the Adviser as well as the Trust.
No remuneration will be paid by the Trust to any Trustee or officer of
the Trust who is affiliated with the Adviser. The Trust maintains a policy of
paying all Trustees who are not "interested persons" of the Trust an annual fee
of $4,000 and a fee of $500 for attendance at each meeting of the Board of
Trustees plus reasonable expenses associated with their attendance at such
meetings. The Board of Trustees generally meets quarterly. The following table
summarizes the compensation paid to Trustees of the Trust for the fiscal year
ended in 1994.
47
<PAGE>
COMPENSATION OF TRUSTEES
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Total
Compensation Benefits Estimated Compensation
Aggregate from Accrued as Annual from Registrant
Name of Compensation GNA Variable Part of Fund Benefits Upon and GNA Variable
Trustee from Registrant Series Trust Expenses Retirement Series Trust
- ------------------- --------------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Patrick E. Welch none none none none none
Edward R. McMillan $6,500 $3,000 none none $9,500
Pierce T. Lindberg $6,500 $3,000 none none $9,500
Douglas H. Pedersen $6,500 $3,000 none none $9,500
</TABLE>
As of December 31, 1995, the Adviser beneficially owned .01% of the
outstanding Class B shares of the Government Fund. The officers and Trustees of
the Trust as a group, own less than 4% of the outstanding Class A Shares of each
of the Growth Fund and the Value Fund and less then 1% of the outstanding Class
A Shares of each of the Government Fund, the Adjustable Rate Fund and the Tax
Free Fund. The officers and Trustees of the Trust as a group did not own any B
shares of the Funds.
To the best knowledge of the Trust, as of December 31, 1995, there were
no persons owning 5% or more of the outstanding shares of any Fund, except as
described in the chart below:
<TABLE>
<CAPTION>
FUND SHAREHOLDER ADDRESS % OWNERSHIP
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADJUSTABLE RATE FUND
Class A GNA Corporation Two Union Square 98.44%
Seattle, WA 98101
Class B Augustinean 10 Austin Place 18.99%
Endowment Fund Staten Island, NY 10304
Augustinean School Fund 10 Austin Place 8.06%
Staten Island, NY 10304
Patty R. Lodge 6690 Palmyra 7.69%
Las Vegas, NV 89102
BA Investment Services, 555 California Avenue 6.96%
Inc. Fourth Floor
San Francisco, CA 94104
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
FUND SHAREHOLDER ADDRESS % OWNERSHIP
- --------------------------- ------------------------ ------------------- ------------------------------
<S> <C> <C> <C>
GOVERNMENT FUND
Class A Sisters of Mercy 5301 E. Huron River Dr. 14.45%
Health Corp. P.O. Box 992
Ann Arbor, MI 48106-0992
Class B None
TAX FREE FUND
Class A Employers Reinsurance 5200 Metcalf 91.52%
Corp. Overland Park, KS 66201
Class B None
VALUE FUND
Class A GNA Corporation Two Union Square 57.84%
Seattle, WA 98101
Class B None
GROWTH FUND
Class A GNA Corporation Two Union Square 64.60%
Seattle, WA 98101
Class B None
</TABLE>
THE INVESTMENT ADVISER AND SUB-ADVISERS
Investment Adviser
- ------------------
The investment adviser for each Fund is GNA Capital Management, Inc., a
Washington corporation (the "Adviser"), with offices at Two Union Square, 601
Union Street, Suite 5600, Seattle, Washington 98101-2336. The Adviser is a
registered investment advisory firm which maintains a securities research
department, the efforts of which will be made available to the Fund.
49
<PAGE>
The Adviser is a wholly-owned subsidiary of GNA Corporation. GNA
Corporation also is the parent company of GNA Securities, Inc. and GNA
Distributors, Inc. which acts as the Trust's Distributor. GNA Corporation is a
subsidiary of General Electric Capital Corporation. The officers of the Adviser
also manage the investments of seven affiliated companies which had combined
assets of approximately $21.8 billion as of December 31, 1995.
The services provided to the Funds by the Adviser are described in the
Prospectus of each Fund.
The advisory fee, payable monthly by the Government Fund to the Adviser,
is based upon the Government Fund's average daily net assets, and is equal to an
annual rate of .65% of the first $500 million of average daily net assets, .60%
of the next $250 million of average daily net assets, .55% of the next $500
million of average daily net assets, .50% of the next $250 million of average
daily net assets and .45% of average daily net assets over $1.5 billion.
The advisory fee, payable monthly by the Growth Fund to the Adviser, is
based upon the Growth Fund's average daily net assets, and is equal to an annual
rate of .60% of the first $100 million of average daily net assets and .50% of
average daily net assets in excess of $100 million.
The advisory fee, payable monthly by the Value Fund to the Adviser, is
based upon the Value Fund's average daily net assets, and is equal to an annual
rate of .60% of the first $100 million of average daily net assets and .50% of
average daily net assets in excess of $100 million.
The advisory fee, payable monthly by the Tax Free Fund to the Adviser, is
based upon the Tax Free Fund's average daily net assets, and is equal to an
annual rate of .60% of the first $20 million of average daily net assets, .50%
of the next $80 million of average daily net assets and .45% of average daily
net assets in excess of $100 million.
The advisory fee, payable monthly by the Adjustable Rate Fund to the
Adviser, is based upon the Adjustable Rate Fund's average daily net assets, and
is equal to an annual rate of .40% of average daily net assets.
50
<PAGE>
Advisory fees incurred by each Fund were as follows:
<TABLE>
<CAPTION>
Adjustable Government Tax Free Value Growth
Rate Fund Fund Fund Fund Fund
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fiscal year ended October 31, 1993 N/A 6,498,861 N/A N/A N/A
September 8, 1993 (commencement of
operations) through October 31, 1993 $ 2,950 N/A $ 13,494 $ 2,660 $ 3,765
Fiscal year ended October 31, 1994 26,464 8,104,213 112,215 57,266 55,328
Fiscal year ended October 31, 1995 29,643 7,200,544 125,333 117,557 114,802
</TABLE>
BlackRock Financial Management, Inc. ("BlackRock"), 345 Park Avenue, New
York, New York, 10154, a registered investment adviser, has been retained by the
Adviser to act as Sub-Adviser of the Government Fund under a sub-advisory
contact with the Adviser dated April 1, 1995. BlackRock is a wholly-owned
subsidiary of PNC Asset Management Group, Inc., an indirect subsidiary of PNC
Bank Corp., a bank holding company organized under the laws of the Commonwealth
of Pennsylvania. BlackRock acted as investment adviser for total assets in
excess of $36 billion as of December 31, 1995. As portfolio manager, BlackRock
is responsible for the actual investment management of the Government Fund's
assets including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security, under the general supervision of the
Adviser and the Board of Trustees. Prior to April 1, 1995, Weiss, Peck & Greer
Advisers, Inc. Served as the Government Fund's sub-adviser.
Overall portfolio management strategy for the Government Fund is
determined by a team composed of individuals who are officers of BlackRock.
Keith Anderson, a Managing Director of BlackRock, and E.G. Fisher, a Principal
of BlackRock, are the members of this team who have primary responsibility for
the day-to-day management of the Government Fund. Mr. Anderson and Mr. Fisher
have served as the Government Fund's portfolio managers since April 1, 1995.
Mr. Anderson is co-head of BlackRock's Portfolio Management Group and is
a member of its Management Committee. Mr. Anderson previously served as a Vice
President in Fixed Income Research at The First Boston Corporation. Mr. Anderson
holds a B.S. degree in Economics and Finance from Nichols College and an M.B.A.
degree from Rice University. Mr. Fisher is a member of BlackRock's Investment
Strategy Committee. Mr. Fisher joined BlackRock in 1990 after receiving a B.A.
degree in Economics from Dartmouth College.
For its services under its Sub-Advisory Agreement BlackRock receives from
the Adviser a fee, payable monthly, based upon the Government Fund's average
daily net assets, equal to an annual rate of .15% of the first $500 million,
.10% of the next $250 million, .05% of the next $500 million and .04% of average
daily net assets over $1.25 billion.
51
<PAGE>
Value Line, Inc. ("Value Line"), 220 East 42nd Street, New York, New York
10017, a registered investment adviser, has been retained by the Adviser to act
as portfolio manager of the Growth Fund under a sub-advisory contract with
Adviser dated August 20, 1993. Value Line acted as investment adviser for total
assets of approximately $5.3 billion as of December 31, 1995. As portfolio
manager, Value Line is responsible for the actual investment management of the
Growth Fund's assets including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security, under the general
supervision of the Adviser and the Board of Trustees. Pursuant to the sub-
advisory contract, the Adviser will periodically review the investment
activities of Value Line, and the Adviser will have the right to terminate the
sub-advisory contract upon 60 days written notice to Value Line.
Overall portfolio management strategy for the Growth Fund is determined
by committee. No person is primarily responsible for making recommendations to
the committee.
For its services under its Sub-Advisory Agreement, Value Line receives
from the Adviser a fee, payable monthly, based upon the Growth Fund's average
daily net assets equal to an annual rate of .30% of the first $100 million of
average daily net assets, and .20% of average daily net assets in excess of $100
million.
Duff & Phelps Investment Management Co. ("Duff & Phelps"), Suite 3800, 55
East Monroe Street, Chicago, Illinois 60603, a registered investment adviser,
has been retained by the Adviser to act as portfolio manager of the Value Fund
under a sub-advisory contract with Adviser dated November 1, 1995. Duff & Phelps
acted as investment adviser for total assets in excess of $42 billion as of
December 31, 1995. As portfolio manager, Duff & Phelps is responsible for the
actual investment management of the Value Fund's assets including the
responsibility for making decisions and placing orders to buy, sell or hold a
particular security, under the general supervision of the Adviser and the Board
of Trustees. Pursuant to the sub-advisory contract, the Adviser will
periodically review the investment activities of Duff & Phelps, and the Adviser
will have the right to terminate the sub-advisory contract upon 60 days written
notice to Duff & Phelps.
Overall portfolio management strategy for the Value Fund is determined by
Duff & Phelps under the supervision and direction of Carl F. Faust, an Executive
Vice President of Duff & Phelps and a member of its Equity Strategy Policy
Committee. Mr. Faust has been employed by Duff & Phelps since 1988. Mr. Faust
previously worked as an investment analyst with Harris Bank, followed by three
years as the Director of the Illinois State Board of Investment before joining
First National Bank of Chicago as Vice President and Director of Equity
Research. He then served as Vice President and Senior Account Manager for First
Chicago Investment Advisors just prior to joining Duff & Phelps. Mr. Faust holds
a B.S. degree from the University of Illinois and an M.B.A. degree from the
Harvard Graduate School of Business and is a Chartered Financial Analyst. He is
a member and past Director of the Investment Analysts Society of Chicago.
52
<PAGE>
For its services under its Sub-Advisory Agreement, Duff & Phelps receives
from the Adviser a fee, payable monthly, based upon the Value Fund's average
daily net assets equal to an annual rate of .30% of the first $100 million of
average daily net assets, and .20% of average daily net assets in excess of $100
million.
Brown Brothers Harriman & Co. ("Brown Brothers"), 59 Wall Street, New
York, New York 10005, has been retained by the Adviser to act as portfolio
manager of the Tax Free Fund under a sub-advisory contract with the Adviser
dated July 15, 1993. Brown Brothers acted as investment adviser for total assets
in excess of $22.8 billion as of December 31, 1995. As portfolio manager, Brown
Brothers is responsible for the actual investment management of the Tax Free
Fund's assets including the responsibility for making decisions and placing
orders to buy, sell or hold a particular security, under the general supervision
of the Adviser and the Board of Trustees. Pursuant to the sub-advisory contract,
the Adviser will periodically review the investment activities of Brown
Brothers, and the Adviser will have the right to terminate the sub-advisory
contract upon 60 days written notice to Brown Brothers.
Overall portfolio management strategy for the Tax Free Fund is determined
by Brown Brothers under the supervision and direction of Barbara A. Brinkley, a
Manager of Brown Brothers and a member of its US Bond Policy Group and its Fixed
Income Credit Committee. Ms. Brinkley has been employed by Brown Brothers since
1976. Ms. Brinkley previously worked for American Re-Insurance Company. Ms.
Brinkley has specialized as a municipal bond credit analyst, trader and
portfolio manager. Ms. Brinkley holds a B.A. degree from Smith College. Ms.
Brinkley is a member and former chairman of the Municipal Analysis Group of New
York, and is a member of the Fixed Income Analysts Society, Inc.
For its services under its Sub-Advisory Agreement, Brown Brothers
receives from the Adviser a fee, payable monthly, based upon the Tax Free Fund's
average daily net assets equal to an annual rate of .30% of the first $20
million, .20% of the next $80 million and .15% of average daily net assets in
excess of $100 million.
Standish, Ayer & Wood, Inc. ("Standish"), One Financial Center, Boston,
Massachusetts 02111, a registered investment adviser, has been retained by the
Adviser to act as portfolio manager of the Adjustable Rate Fund under a sub-
advisory contract with the Adviser dated July 15, 1993. Standish acted as
investment adviser for total assets in excess of $29 billion as of December 31,
1995. As portfolio manager, Standish is responsible for the actual investment
management of the Adjustable Rate Fund's assets including the responsibility for
making decisions and placing orders to buy, sell or hold a particular security,
under the general supervision of the Adviser and the Board of Trustees. Pursuant
to the sub-advisory contract, the Adviser will periodically review the
investment activities of Standish, and the Adviser will have the right to
terminate the sub-advisory contract upon 60 days written notice to the
Standish.
Overall portfolio management strategy for the Adjustable Rate Fund is
determined by Standish under the supervision and direction of Dolores S.
Driscoll, a Managing Director of Standish. Ms. Driscoll had been employed by
Standish since 1974. Ms. Driscoll previously
53
<PAGE>
worked as a bond manager for Davis L. Babson, Inc. Ms. Driscoll holds a B.A.
degree in Mathematics from Indiana University and an M.B.A degree in Finance
from Boston University and is a Chartered Financial Analyst.
For its services under its Sub-Advisory Agreement, Standish receives from
the Adviser a fee, payable monthly, based upon the Adjustable Rate Fund's
average daily net assets equal to an annual rate of .20% of average daily net
assets.
From time to time certain of the states in which the shares of the Fund
are qualified for sale may impose limitations on the expenses of the Funds. The
Advisory Agreement provides that if, in any fiscal year, the total expenses of
any Fund (excluding taxes, distribution expenses, interest, brokerage
commissions and extraordinary items, but including the management fee) exceed
the expense limitations applicable to the Funds imposed by the securities
regulations of any state in which it is then registered to sell shares, the
Adviser will waive all or a portion of its annual investment advisory fee equal
to such excess. The Adviser is only required to reimburse the Funds for any
expenses which exceed state expense limitations up to the amount of advisory
fees paid or payable by such Fund during such fiscal year. Although there is no
certainty that these limitations will be in effect in the future, the most
restrictive of these limitations, in the states in which the Fund are to be
sold, on an annual basis currently is 2.5% of the first $30,000,000 of average
net assets of the Fund, 2.0% of the next $70,000,000 of average net assets, and
1.5% of average net assets over $100,000,000.
The Advisory Agreement for the Trust was approved by all of the Trustees,
including all of the Trustees who are not parties to the Advisory Agreement or
such Sub-Advisory Agreement or "interested persons" (as defined in the
Investment Company Act of 1940) of any such party on April 15, 1993, and was
last approved by all of the Trustees, including all of the Trustees who are not
parties to the Advisory Agreement or such Sub-Advisory Agreement or "interested
persons" of any such party, on March 17, 1995. The shareholders of the
Government Fund last approved the Advisory Agreement and Sub-Advisory agreement
on March 26, 1993 and June 16, 1995 respectively. The shareholders of the Value
Fund approved the Sub-Advisory Agreement on September 8, 1995. The Advisory
Agreement for the Value Fund and the Advisory Agreement and Sub-Advisory
Agreement for each of the Growth Fund, Tax-Free Fund and Adjustable Rate Fund
were approved by the sole shareholder of each such Fund on September 7, 1993,
and were last approved by all of the Trustees, including all of the Trustees who
are not parties to the Advisory Agreement or such Sub-Advisory Agreement or
"interested persons" of any such party, on March 17, 1995. The Advisory
Agreement and Sub-Advisory Agreement will continue in effect for two years
following the date of their approval, and thereafter from year to year, provided
that their continuance is approved annually both (i) by the holders of a
majority of the outstanding voting securities of the applicable Fund or by the
Board of Trustees, and (ii) by a majority of the Trustees who are not parties to
the Advisory Agreement or "interested persons" of any such party. The Advisory
Agreement and Sub-Advisory Agreements may be terminated on sixty (60) days
written notice by any party and will terminate automatically if they are
assigned.
54
<PAGE>
PERFORMANCE INFORMATION
General
- -------
As described in the Prospectus, the Fund's historical performance or
return may be shown in the form of "average annual total return," "aggregate
total return" and "yield." Both average total return and yield are computed
separately for each class of shares of each Fund. These various measures of
performance are described below.
Average annual total return and aggregate total return measure both the
net investment income generated by, and the effect of any realized and
unrealized appreciation or depreciation of, the underlying investments of a
Fund. Yield is a measure of the net investment income per share earned over a
specific one month or thirty (30) day period expressed as a percentage of the
net asset value.
Calculation of a Fund's aggregate total return is not subject to a
standardized formula. Aggregate total return performance for a specific period
is calculated by first taking an investment in a Fund's shares on the first day
of the period at the offering price, which is the net asset value per share less
any applicable initial sales charge ("initial investment") and computing the
"ending value" of that investment at the end of the period. The ending value may
or may not include the effect of the applicable contingent deferred sales charge
that may be imposed at the end of the period. The aggregate total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes that all income and capital
gains dividends by a Fund have been reinvested at net asset value on the
reinvestment dates during the period. Aggregate total return may also be shown
as the increased dollar value of the hypothetical investment over the period.
A Fund's performance quotations are based upon historical results and are
not necessarily representative of future performance. A Fund's shares are sold
at net asset value plus a sales charge. Returns and net asset value will
fluctuate. Factors affecting a Fund's performance include general market
conditions, operating expenses and investment management. Any additional fees
charged by a dealer or other financial services firm would reduce the returns
described in this section. Shares of a Fund are redeemable at net asset value,
which may be more or less than original cost. Yield figures do not include the
effect of any applicable contingent deferred sales charge. Average annual total
return does not include, and aggregate total return may or may not include, the
effect of any applicable contingent deferred sales charge that may be imposed at
the end of the period in question. Performance figures not including the effect
of the contingent deferred sales charge would be reduced if the charge were
included.
Yield
- -----
Each Fund's 30-day yield figure described and shown below is calculated
according to a formula prescribed by the Securities and Exchange Commission. The
formula can be expressed as follows:
55
<PAGE>
YIELD = 2[(a-b+1)/6/-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the net asset value per share on the last day of the period.
In computing the foregoing yield, each Fund follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that a Fund uses to
prepare its interim and annual financial statements in accordance with generally
accepted accounting principles.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in a Fund's portfolio,
portfolio maturity, operating expenses and market conditions.
The annualized yield for the Class A shares and Class B shares of each of
the Adjustable Rate Fund, Government Fund, and Tax Free Fund for the thirty
(30) days ended October 31, 1995 were 4.75% and 4.22%; 5.26% and 4.76% and
5.46% and 5.71%, respectively.
Average Annual Total Return
A Fund's "average annual total return" figures described and shown below
are computed according to a formula prescribed by the Securities and Exchange
Commission. The formula can be expressed as follows:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
56
<PAGE>
ERV = Ending Redeemable Value of a hypothetical $1000
payment made at the beginning of the 1, 5, or 10 years
(or other) periods at the end of the 1, 5, or 10 years
(or other) periods (or fractional portion thereof);
The calculation is based on the further assumption that all dividends and
distributions by a Fund are reinvested at net asset value on the reinvestment
dates during the periods.
<TABLE>
<CAPTION>
The average annual total returns for the Adjustable Rate Fund were as follows:
September 8, 1993* Five One
through years ended year ended
October 31, 1995 October 31, 1995 October 31, 1995
------------------ ---------------- ----------------
<S> <C> <C> <C>
Class A 1.39% N/A 4.29%
Class B 1.47% N/A 3.39%
The average annual total returns for the Government Fund were as follows:
April 27, 1987* Five One
through years ended year ended
October 31, 1995 October 31, 1995 October 31, 1995
------------------ ---------------- ----------------
Class A -1.71%/+/ N/A 6.74%
Class B 7.02% 5.97% 6.19%
The average total returns for the Tax Free Fund were as follows:
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
September 8, 1993* Five One
through years ended year ended
October 31, October 31, October 31,
1995 1995 1995
------------------ ------------- ------------
<S> <C> <C> <C>
Class A 2.09% N/A 7.19%
Class B 2.72% N/A 7.33%
The average annual total returns for the Value Fund were as follows:
September 8, 1993* Five One
through years ended year ended
October 31, October 31, October 31,
1995 1995 1995
------------------ ------------- ------------
Class A 7.59% N/A 15.98%
Class B 8.19% N/A 15.50%
The average annual total returns for the Growth Fund were as follows:
September 8, 1993* Five One
through years ended year ended
October 31, October 31, October 31,
1995 1995 1995
------------------ ------------- ------------
Class A 12.64% N/A 23.36%
Class B 13.08% N/A 23.26%
</TABLE>
* Commencement of operations
/+/September 8, 1993 Commencement of operations for Class A shares
The yield and average annual total return calculations include all
recurring expenses that are charged to all shareholder accounts, including sales
charges. The yield and average annual total return results do not take into
account recurring and non-recurring charges for optional services which only
certain shareholders elect and which involve nominal fees, such as the $10 fee
for wire orders.
DISTRIBUTION OF SHARES OF THE FUNDS
The Trust has entered into a Distribution Agreement dated September 8,
1993, with GNA Distributors, Inc., Suite 5600, Two Union Square, 601 Union
Street, Seattle, Washington 98101, an affiliate of the Adviser, whereby the
Distributor acts as exclusive selling agent of the Funds. Shares of the Funds
are sold by Authorized Firms who have entered into sales agreements with the
Distributor. Soliciting Authorized Firms may be deemed to be statutory
underwriters.
The Trust has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Plan") under which the Trust may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A and
Class B shares, including, but not limited to, (1) the payment of commissions
and/or reimbursement to underwriters, securities dealers and others engaged in
the sale of shares, including payments to the Distributor to be used to pay
commissions and/or reimbursement to securities dealers (which securities dealers
may be affiliates of the Distributor) engaged in the distribution and marketing
of shares and furnishing ongoing assistance to investors,
58
<PAGE>
(2) reimbursement of direct out-of-pocket expenditures incurred by the
Distributor in connection with the distribution and marketing of shares and the
servicing of investor accounts including expenses relating to the formulation
and implementation of marketing strategies and promotional activities such as
direct mail promotions and television, radio, newspaper, magazine and other mass
media advertising, the preparation, printing and distribution of Prospectuses of
the Funds and reports for recipients other than existing shareholders of the
Funds, and obtaining such information, analyses and reports with respect to
marketing and promotional activities and investor accounts as the Funds may,
from time to time, deem advisable, and (3) reimbursement of expenses incurred by
the Distributor in connection with the servicing of shareholder accounts
including payments to securities dealers and others in consideration of the
provision of personal service to investors and/or the maintenance of shareholder
accounts and expenses associated with the provision of personal service by the
Distributor directly to investors.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of up to 0.25% of the
average daily value of net assets represented by such Class A shares to make
payments for personal service and/or the maintenance of shareholder accounts,
and (ii) with respect to Class B shares, an annual rate of 0.75% of the average
daily value of the net assets represented by such Class B shares (as the case
may be) to finance sales or promotion expenses and an annual rate of up to 0.25%
of the average daily value of the net assets represented by such Class B shares
to make payments for personal service and/or the maintenance of shareholder
accounts. Proceeds from the service fees will be used by the Distributor to
compensate securities dealers and others selling shares of the Funds for
rendering service to shareholders on an ongoing basis. Such amounts are based on
the net asset value of shares of the Funds held by such dealers as nominee for
their customers or which are owned directly by such customers for so long as
such shares are outstanding and the Distribution Plan remains in effect with
respect to the Funds. Any amounts received by the Distributor and not so
allocated may be applied by the Distributor as reimbursement for expenses
incurred in connection with the servicing of investor accounts. The distribution
and servicing expenses of a particular class will be borne solely by that class.
59
<PAGE>
12b-1 fees paid to the Distributor for Class A shares in each Fund were as
follows:
<TABLE>
<CAPTION>
Adjustable Rate Government Tax Free Value Growth
Rate Fund Fund Fund Fund Fund
--------------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
September 8, 1993 (commencement of $ 1,719 $ 141 $ 5,155 $ 724 $ 1,080
operations) through October 31, 1993
Fiscal year ended October 31, 1994 2,952 34,314 3,935 4,955 4,447
Fiscal year ended October 31, 1995 10,725 44,509 36,748 7,512 10,686
12b-1 fees paid to the Distributor for Class B shares in each Fund were as follows:
Adjustable Rate Government Tax Free Value Growth
Rate Fund Fund Fund Fund Fund
--------------- ----------- -------- -------- -------
Fiscal year ended October 31, 1993 N/A $ 9,966,711 N/A N/A N/A
September 8, 1993 (commencement of
operations) through October 31, 1993 $ 55 N/A $ 536 $ 230 $ 88
Fiscal year ended October 31, 1994 12,290 13,435,991 30,304 40,111 27,569
Fiscal year ended October 31, 1995 20,202 11,013,968 61,348 106,311 93,407
</TABLE>
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing audit services
including (1) an audit of the annual financial statements, (2) assistance and
consultation in connection with Securities and Exchange Commission filings and
(3) review of certain tax matters filed on behalf of the Trust.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Funds' cash and securities and handling the receipt and delivery
of securities and investments. State Street Bank and Trust Company is not an
affiliate of the Adviser or its affiliates.
FINANCIAL STATEMENTS
The financial statements for each of the five Funds of the Trust for the
fiscal year ended October 31, 1995, are contained in each Fund's Annual
Report which accompanies this Statement of Additional Information. The
financial statements, financial highlights, related notes, and reports of
independent accountants are incorporated by reference into this Statement.
60
<PAGE>
1933 Act File No. 33-10976
1940 Act File No. 811-4945
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. ______ [_]
Post-Effective Amendment No. 14 [X]
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 15 [X]
------
____________________
INVESTORS TRUST
__________________________________________________________
(Exact Name of Registrant as Specified in Charter)
____________________
EXHIBITS
================================================================================
<PAGE>
Index to Exhibits
-----------------
Sequential Page
Number
---------------
5(c) Sub-Advisory Agreement for Government Fund
5(e) Sub-Advisory Agreement for Value Fund
10(c) Consent of Counsel
11 Auditors Consent
256780.c2
2/23/96
<PAGE>
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 31st day of March, 1995, between GNA CAPITAL
MANAGEMENT, INC., a corporation organized under the laws of the state of
Washington and having its principal place of business in Seattle, Washington
(the "Adviser") and BlackRock Financial Management, Inc., a corporation
organized under the laws of the state of Delaware and having its principal place
of business in New York, New York ("Sub-Adviser").
WHEREAS, the Adviser is engaged principally in the business of
rendering investment management services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"); and
WHEREAS, the Sub-Adviser is engaged principally in the business of
rendering investment management services and is registered as an investment
adviser under the Advisers Act; and
WHEREAS, INVESTORS TRUST, a Massachusetts business trust (the
"Trust"), proposes to engage in business as an open-end management investment
company and is so registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate series, with each such series representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Trust currently offers shares in a series, the Government
Fund, such series together with all other series currently or subsequently
established by the Trust with respect to which the Sub-Adviser renders
management and investment advisory services pursuant to the terms of this
Agreement, being herein collectively referred to as the "Funds" and individually
as a "Fund"; and
WHEREAS, pursuant to the Investment Advisory Agreement, as of even
date herewith, between the Trust and the Adviser (the "Advisory Agreement"), the
Adviser is required to perform investment advisory services for the Funds.
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the
parties hereto as follows:
1. APPOINTMENT OF SUB-ADVISER.
1. (a) Government Fund. The Adviser hereby employs the Sub-
Adviser to provide investment advisory services to the Government Fund for
the period and on the terms herein set forth. The Sub-Adviser accepts such
appointment and agrees to render the services herein set forth, for the
compensation herein provided.
(b) Additional Funds. In the event that the Trust establishes
one or more series of shares other than the Government Fund with respect to
which the Adviser desires to retain the Sub-Adviser to render investment
advisory services hereunder, the Adviser shall so notify the Sub-Adviser in
writing, indicating the advisory fee to be payable with respect to the
additional series of shares. If the Sub-Adviser is willing to render such
services on the terms provided for herein, it shall so notify the Adviser
in writing, whereupon such series shall become a Fund hereunder.
2. DUTIES OF ADVISER AND SUB-ADVISER.
(i) Delivery of Documents. The Adviser has furnished the Sub-Adviser
with true copies of each of the following:
(a) The Trust's Declaration of Trust, as filed with the Secretary
of State of the Commonwealth of Massachusetts and all amendments
thereto (such Declaration of Trust, as presently in effect and as it
shall from time to time be amended, is herein called the
"Declaration");
1
<PAGE>
(b) The Trust's By-Laws and amendments thereto (such By-Laws, as
presently in effect and as it shall from time to time be amended, is
herein called the "By-Laws");
(c) Resolutions of the Trust's Board of Trustees authorizing the
appointment of the Adviser and Sub-Adviser and approving the Advisory
Agreement and this Agreement and copies of the minutes of the initial
meeting of shareholders of the Government Fund;
(d) The Trust's Notification of Registration on Form N-8A under
the 1940 Act as filed with the Securities and Exchange Commission on
December 19, 1986 and all amendments thereto;
(e) The Fund's most recent Registration Statement on Form N-1A
under the Securities Act of 1933 as amended ("1933 Act") and the 1940
Act (File No. 10976) as filed with the Securities and Exchange
Commission (the "Registration Statement");
(f) All resolutions of the Board of Trustees of the Trust
pertaining to the management of the assets of the Funds; and
The Adviser will furnish the Sub-Adviser from time to time with
copies of all amendments of or supplements to the foregoing, but, with
respect to items (a), (b) or (h), only if such amendments or
supplements relate to or affect the obligations of the Sub-Adviser
hereunder.
(ii) The Sub-Adviser, at its own expense, shall furnish the following
services to the Trust:
(a) Investment Program. The Sub-Adviser is hereby authorized and
directed and hereby agrees, subject to the stated investment objective
and policies of the Funds as set forth in the Trust's current
Registration Statement and subject to the supervision of the Adviser
and the Board of Trustees of the Trust, to (i) develop and furnish an
investment program and strategy for each Fund as may from time to time
in the circumstances appear most appropriate to the achievement of the
investment objective of each Fund as stated in the aforesaid
Registration Statement, (ii) provide research and analysis relative to
the investment program and investments of each Fund, (iii) determine
from time to time what securities and other investments will be
purchased, held, sold or exchanged by each Fund and what portion, if
any, of the assets of each Fund shall be held in cash or cash
equivalents, and (iv) make changes on behalf of the Trust in the
investments of each Fund. In accordance with paragraph 2(ii)(b), the
Sub-Adviser shall arrange for the placing of all orders for the
purchase and sale of securities and other investments for each Fund's
account. The Sub-Adviser will make its officers and employees
available to meet with the Adviser's officers and directors on due
notice at reasonable times to review the investments and investment
program of each Fund in the light of current and prospective economic
and market conditions.
In the performance of its duties hereunder, the Sub-Adviser is
and shall be an independent contractor and unless otherwise expressly
provided or authorized shall have no authority to act for or represent
any Fund or the Trust in any way or otherwise be deemed to be an agent
of any Fund, the Trust or of the Adviser.
(b) Portfolio Transactions. In connection with the management of
the investment and reinvestment of each Fund, the Sub-Adviser, acting
by its own officers, directors or employees or by a duly authorized
subcontractor, is authorized to select the broker or dealers that will
execute purchase and sale transactions for the Trust.
In executing portfolio transactions and selecting brokers or
dealers, if any, the Sub-Adviser will use its best efforts to seek on
behalf of a Fund the best overall terms available. In assessing the
best overall terms available for any transaction, the Sub-Adviser
shall consider all factors it deems relevant, including the breadth of
the market and the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness
of the commission, if any (for the specific transaction and on a
continuing basis). In evaluating the best overall terms available,
and in selecting the broker or dealer, if any, to execute a particular
transaction, the Sub-Adviser may also consider the
2
<PAGE>
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) provided to the Sub-
Adviser with respect to the Government Fund and/or other accounts over
which the Sub-Adviser exercises investment discretion. With the prior
approval of the Trustees, the Sub-Adviser may pay to a broker or
dealer who provides such brokerage and research services a commission
for executing a portfolio transaction which is in excess of the amount
of commission another broker or dealer would have charged for
effecting that transaction if, but only if, the Sub-Adviser determines
in good faith that such commission was reasonable in relating to the
value of the brokerage and research services provided. Such prior
approval may be obtained from the Trustees with respect to the Sub-
Adviser's investment program and need not be obtained on a
transaction-by-transaction basis.
The Sub-Adviser will advise the Funds' custodian and the Adviser
promptly of each purchase and sale of a portfolio security, specifying
the name of the issuer, the description and amount or number of shares
of the security purchased, the market price, the commission and gross
or net price, the trade date and settlement date and the identity of
the effecting broker or dealer.
The Sub-Adviser shall, upon due notice from the Adviser, provide
such periodic and special reports describing any such research, advice
or other services received and the incremental commissions, net price
or other consideration to which they relate.
Notwithstanding the foregoing, the Sub-Adviser agrees that the
Adviser shall have the right by written notice to identify securities
that may not be purchased on behalf of any Fund and/or brokers and
dealers through which portfolio transaction on behalf of the Funds may
not be effected, including, without limitation, brokers or dealers
affiliated with the Adviser. The Sub-Adviser shall refrain from
purchasing such securities for the Fund or directing any portfolio
transaction to any such broker or dealer on behalf of the Fund, unless
and until the written approval of the Adviser to do so is obtained,
but the Sub-Adviser shall not be liable to the Government Fund for so
acting. In addition, the Sub-Adviser agrees that it shall not direct
portfolio transactions for the Fund through any broker or dealer that
is an "affiliated person" of the Sub-Adviser (as that term is defined
in the Act or interpreted under applicable rules and regulations of
the Securities and Exchange Commission) without the prior written
approval of the Adviser and in no event shall the Sub-Adviser direct
portfolio transactions on behalf of the Fund to any broker/dealer in
recognition of sales of shares of any investment company or receipt of
research or other service without prior written approval of the
Adviser.
(c) Reports. The Sub-Adviser shall render to the Board of
Trustees of the Trust such periodic and special reports as the Board
of Trustees may request with respect to matters relating to the duties
of the Sub-Adviser set forth herein.
3. SUB-ADVISORY FEE.
For the services to be provided by the Sub-Adviser as provided in Paragraph
2 hereof, the Adviser shall pay to the Sub-Adviser an annual gross sub-advisory
fee based upon the Fund's average daily net assets equal to .15% of the first
$500 million of average daily net assets; .10% of the next $250 million; .05% of
average daily net assets over $750 million; and .04% of average daily net assets
over $1.25 billion. Such fee shall be accrued daily and paid as soon as
practicable after the last day of each calendar month.
The Sub-Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation hereunder to the extent the Sub-Adviser may,
by notice to the Adviser, voluntarily declare.
In the case of commencement or termination of this Agreement with respect
to any Fund during any calendar month, the fee with respect to such Fund for
that month shall be reduced proportionately based upon the number of calendar
days during which it is in effect, and the fee shall be computed during the
average daily net assets of such Fund for the days during which it is in effect.
4. EXPENSES.
During the term of this Agreement, the Sub-Adviser will bear all expenses
incurred by it in the performance of its duties hereunder.
3
<PAGE>
5. COMPLIANCE WITH APPLICABLE REGULATIONS.
In performing its duties hereunder, the Sub-Adviser
(i) shall establish compliance procedures (copies of which shall be
provided to the Adviser, and shall be subject to review and approval
by the Adviser) reasonably calculated to ensure compliance at all
times with: all applicable provisions of the 1940 Act and the
Advisers Act, and any rules and regulations adopted thereunder;
Subchapter M of the Internal Revenue Code of 1986, as amended; the
provisions of the Registration Statement; the provisions of the
Declaration and the By-Laws of the Trust, as the same may be amended
from time to time; and any other applicable provisions of state,
federal or foreign law.
(ii) acknowledges that the Trust has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the Act and that
the Sub-Adviser and certain of its employees, officers and directors
may be subject to reporting requirements thereunder and, accordingly,
agrees that it shall, on a timely basis, furnish, and shall cause its
employees, officers and directors to furnish, to the Adviser and/or to
the Trust, all reports and information required to be provided under
such code of ethics with respect to such persons.
(iii) agrees that all records it maintains for the Trust are the
property of the Trust and further agrees to surrender promptly to the
Trust any such records upon the Trust's request all in accordance with
Rule 31a-3 under the 1940 Act.
6. LIABILITY OF SUB-ADVISER.
Neither the Sub-Adviser nor the officers, directors, employees, agents,
legal representatives or controlling persons (collectively, "Related Persons")
of the Sub-Adviser shall be liable for any error of judgment or mistake of law,
or for any loss suffered by any Fund or its shareholders in connection with the
matters to which this Agreement relates; provided that, except as set forth in
the succeeding paragraph, no provision of this Agreement shall be deemed to
protect the Sub-Adviser or its Related Persons against any liability to which it
might otherwise be subject by reason of any willful misfeasance, bad faith or
gross negligence or the reckless disregard of the Sub-Adviser's obligations and
duties under this Agreement (each of which is hereby referred to as a "Culpable
Act").
Neither the Sub-Adviser nor its Related Persons shall be liable for any
error of judgment or mistake of law, or for any loss suffered by the Adviser or
its Related Persons in connection with the matters to which this Agreement
relates; provided that this provision shall not be deemed to protect the Sub-
Adviser or its Related Persons against any liability to which it might otherwise
be subject by reason of any Culpable Act by the Sub-Adviser or its Related
Persons.
The Sub-Adviser and its Related Persons shall incur no liability arising
from the failure of any service provider to provide complete and accurate
information to the Sub-Adviser, it being the intention that, in performing
hereunder, the Sub-Adviser and its Related Persons may rely on the accuracy of
all information received from the Trust, the Adviser or from any service
provider and on all instructions and directions received from the Adviser or the
Trust.
In any event, Sub-Adviser shall have no liability and shall be fully
reimbursed for any loss, costs or expenses (including reasonable attorney's
fees) arising entirely from facts and circumstances existing at or prior to the
date of this Agreement.
7. DURATION AND TERMINATION OF THIS AGREEMENT.
(a) Duration. This Agreement shall become effective with respect to the
Government Fund on the date hereof and, with respect to any additional Fund, on
the date of receipt by the Adviser of notice from the Sub-Adviser in accordance
with Paragraph 1(b) hereof that the Sub-Adviser is willing to serve as Sub-
Adviser with respect to such Fund. Unless terminated as herein provided, this
Agreement shall remain in full force and effect for two years from the date
hereof with respect to the Government Fund and, with respect to each additional
Fund, for two years from the date on which such Fund becomes a Fund hereunder.
Subsequent to such initial periods of effectiveness, this Agreement shall
continue in full force and effect for periods of one year thereafter with
respect to each Fund so long as such continuance
4
<PAGE>
with respect to any such Fund is approved at least annually (a) by either the
Trustees of the Trust or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of such Fund, and (b), in either event,
by the vote of a majority of the Trustees of the Trust who are not parties to
this Agreement or "interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval.
(b) Amendment. This Agreement may be amended by agreement of the parties,
provided that the amendment shall be approved both by the vote of a majority of
the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or interested persons of any such party to this
Agreement cast in person at a meeting called for that purpose, and by the
holders of a majority of the outstanding voting securities of the Trust.
(c) Termination. This Agreement may be terminated with respect to any
Fund at any time, without payment of any penalty, by vote of the Trustees of the
Trust or by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of that Fund, or by the Sub-Adviser, in each case on sixty (60)
days' prior written notice to the other party. Upon the effective date of
termination of this Agreement, the Sub-Adviser shall deliver all books and
records of the Trust or any Fund held by it (i) to such entity as the Trust may
designate as a successor sub-adviser, or (ii) to the Adviser.
(d) Automatic Termination. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
(e) Approval, Amendment or Termination by Individual Fund. Any approval,
amendment or termination of this Agreement by the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act) of any Fund shall be
effective to continue, amend or terminate this Agreement with respect to any
such Fund notwithstanding (i) that such action has not been approved by the
holders of a majority of the outstanding voting securities of any other Fund
affected thereby, and (ii) that such action has not been approved by the vote of
a majority of the outstanding voting securities of the Trust, unless such action
shall be required by any applicable law or otherwise.
8. SERVICES NOT EXCLUSIVE.
The services of the Sub-Adviser to the Adviser in connection with the Funds
hereunder are not to be deemed exclusive, and the Sub-Adviser shall be free to
render similar services to others so long as its services hereunder are not
impaired thereby. It is understood that the persons employed by the Sub-Adviser
to assist in the performance of its duties hereunder will not devote their full
time to such services and nothing hereunder contained shall be deemed to limit
or restrict the right of the Sub-Adviser to engage in or devote time and
attention to other businesses or to render services of whatever kind or nature.
9. MISCELLANEOUS.
(a) Notices. All notices or other communications given under this
Agreement shall be made by guaranteed overnight delivery, telecopy or certified
mail; notice is effective when received. Notice shall be given to the parties
at the following addresses:
The Adviser: Patrick E. Welch, President and CEO
GNA Capital Management, Inc.
Investors Trust
601 Union Street, Suite 5600
Seattle, WA 98101-2336
Sub-Adviser: BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
Attn: Henry Gabbay, Chief Operating Officer
5
<PAGE>
(b) Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
shall not be thereby affected.
(c) Applicable Law. This Agreement shall be construed in accordance with
and governed by the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed as of the date first set forth above.
ATTEST: GNA CAPITAL MANAGEMENT, INC.
/s/ Edward Plales, Jr. /s/ Patrick E. Welch
By:___________________________ By:___________________________
Patrick E. Welch
VP & Counsel President and CEO
Its:__________________________ Its:__________________________
ATTEST: BLACKROCK FINANCIAL MANAGEMENT, INC.
/s/ Larry Fink
By:___________________________ By:___________________________
Its:__________________________ Its:__________________________
6
<PAGE>
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of November, 1995, between GNA CAPITAL
MANAGEMENT, INC., a corporation organized under the laws of the state of
Washington and having its principal place of business in Seattle, Washington
(the "Adviser") and DUFF & PHELPS INVESTMENT MANAGEMENT CO., a corporation
organized under the laws of the state of Illinois and having its principal place
of business at 55 East Monroe Street, Chicago, IL 60603 ("Sub-Adviser").
WHEREAS, the Adviser is engaged principally in the business of rendering
investment management services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Sub-Adviser is engaged principally in the business of
rendering investment management services and is registered as an investment
adviser under the Advisers Act; and
WHEREAS, GNA VARIABLE SERIES TRUST, a Delaware business trust (the
"Trust"), proposes to engage in business as an open-end, diversified, management
investment company and is so registered under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial interest in
separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust intends to initially offer four series of shares, each
of which represents a segregated, separately managed portfolio of securities
with its own investment objective, and shares of each portfolio are offered only
to insurance company separate accounts that fund certain annuity or life
insurance contracts; and
WHEREAS, one of the series of shares initially offered by the Trust is the
GNA Value Portfolio (the "Value Portfolio"), such series together with all other
series subsequently established by the Trust with respect to which the Sub-
Adviser renders management and investment advisory services pursuant to the
terms of this Agreement being herein collectively referred to as the
"Portfolios" and individually as a "Portfolio"; and
WHEREAS, pursuant to the Investment Advisory Agreement, as of even date
herewith, between the Trust and the Adviser (the "Advisory Agreement"), the
Adviser is required to perform investment advisory services for the Portfolios.
NOW, THEREFORE, WITNESSETH: That it is hereby agreed between the parties
hereto as follows:
1. APPOINTMENT OF SUB-ADVISER.
1
<PAGE>
(i) Value Portfolio. The Adviser hereby employs the Sub-Adviser to
provide investment advisory services to the Value Portfolio for the period and
on the terms herein set forth. The Sub-Adviser accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
(ii) Additional Portfolios. In the event that the Trust establishes one or
more series of shares other than the Value Portfolio with respect to which the
Adviser desires to retain the Sub-Adviser to render investment advisory services
hereunder, the Adviser shall so notify the Sub-Adviser in writing, indicating
the advisory fee to be payable with respect to the additional series of shares.
If the Sub-Adviser is willing to render such services on the terms provided for
herein, it shall so notify the Adviser in writing, whereupon such series shall
become a Portfolio hereunder.
2. DUTIES OF ADVISER AND SUB-ADVISER.
(i) Delivery of Documents. The Adviser has furnished the Sub-Adviser with
true copies of each of the following:
(a) The Trust's Declaration of Trust, as filed with the Delaware
Secretary of State and all amendments thereto (such Declaration of Trust,
as presently in effect and as it shall from time to time be amended, is
herein called the "Declaration");
(b) The Trust's By-Laws and amendments thereto (such By-Laws, as
presently in effect and as it shall from time to time be amended, is herein
called the "By-Laws");
(c) Resolutions of the Trust's Board of Trustees authorizing the
appointment of the Adviser and Sub-Adviser and approving the Advisory
Agreement and this Agreement;
(d) The Trust's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission on March
29, 1994, and all amendments thereto;
(e) The Value Portfolio's Registration Statement on Form N-1A under
the Securities Act of 1933 as amended ("1933 Act") and the 1940 Act (File
Nos. 33-77138 and 811-8456, respectively) as filed with the Securities and
Exchange Commission on September 20, 1994, and all amendments thereto (the
"Registration Statement");
(f) The Portfolio's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are herein
called the "Prospectus");
(g) All resolutions of the Board of Trustees of the Trust pertaining
to the management of the assets of the Portfolios; and
2
<PAGE>
(h) The Advisory Agreement between the Trust and the Adviser
relating to the Portfolios; and
(i) The Custodian Contract between the Trust and State Street Bank
and Trust Company (the "Custodian") relating to the Portfolios.
The Adviser will furnish the Sub-Adviser from time to time with copies
of all amendments of or supplements to the foregoing, but, with respect to
items (a), (b) or (h), only if such amendments or supplements relate to or
affect the obligations of the Sub-Adviser hereunder.
(ii) The Sub-Adviser, at its own expense, shall furnish the following
services to the Trust:
(a) Investment Program. The Sub-Adviser is hereby authorized and
directed and hereby agrees, subject to the stated investment objective and
policies of the Portfolios as set forth in the Trust's current Registration
Statement and subject to the supervision of the Adviser and the Board of
Trustees of the Trust, to (i) develop and furnish an investment program and
strategy for each Portfolio as may from time to time in the circumstances
appear most appropriate to the achievement of the investment objective of
each Portfolio as stated in the aforesaid Registration Statement, (ii)
provide research and analysis relative to the investment program and
investments of each Portfolio, (iii) determine from time to time what
securities and other investments will be purchased, held, sold or exchanged
by each Portfolio and what portion, if any, of the assets of each Portfolio
shall be held in cash or cash equivalents, and (iv) make changes on behalf
of the Trust in the investments of each Portfolio. In accordance with
paragraph 2(ii)(b), the Sub-Adviser shall arrange for the placing of all
orders for the purchase and sale of securities and other investments for
each Portfolio's account. The Sub-Adviser will make its officers and
employees available to meet with the Adviser's officers and directors on
due notice at reasonable times to review the investments and investment
program of each Portfolio in the light of current and prospective economic
and market conditions.
In the performance of its duties hereunder, the Sub-Adviser is and
shall be an independent contractor and unless otherwise expressly provided
or authorized shall have no authority to act for or represent any Portfolio
or the Trust in any way or otherwise be deemed to be an agent of any
Portfolio, the Trust or of the Adviser.
(b) Portfolio Transactions. In connection with the management of the
investment and reinvestment of each Portfolio, the Sub-Adviser, acting by
its own officers, directors or employees or by a duly authorized
subcontractor, is authorized to select the broker or dealers that will
execute purchase and sale transactions for the Trust.
In executing portfolio transactions and selecting brokers or dealers,
if any, the Sub-Adviser will use its best efforts to seek on behalf of a
Portfolio the best overall terms available. In assessing the best overall
terms available for any transaction, the Sub-Adviser
3
<PAGE>
shall consider all factors it deems relevant, including the breadth of the
market and the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the
commission, if any (for the specific transaction and on a continuing
basis). In evaluating the best overall terms available, and in selecting
the broker or dealer, if any, to execute a particular transaction, the Sub-
Adviser may also consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Sub-Adviser with respect to the Value Portfolio and/or
other accounts over which the Sub-Adviser exercises investment discretion.
With the prior approval of the Trustees, the Sub-Adviser may pay to a
broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction which is in excess of the
amount of commission another broker or dealer would have charged for
effecting that transaction if, but only if, the Sub-Adviser determines in
good faith that such commission was reasonable in relating to the value of
the brokerage and research services provided. Such prior approval may be
obtained from the Trustees with respect to the Sub-Adviser's investment
program and need not be obtained on a transaction-by-transaction basis.
The Sub-Adviser will advise the Portfolios' custodian and the Adviser
promptly of each purchase and sale of a portfolio security, specifying the
name of the issuer, the description and amount or number of shares of the
security purchased, the market price, the commission and gross or net
price, the trade date and settlement date and the identity of the effecting
broker or dealer.
The Sub-Adviser shall, upon due notice from the Adviser, provide such
periodic and special reports describing any such research, advice or other
services received and the incremental commissions, net price or other
consideration to which they relate.
Notwithstanding the foregoing, the Sub-Adviser agrees that the
Adviser shall have the right by written notice to identify securities that
may not be purchased on behalf of any Portfolio and/or brokers and dealers
through which portfolio transaction on behalf of the Portfolios may not be
effected, including, without limitation, brokers or dealers affiliated with
the Adviser. The Sub-Adviser shall refrain from purchasing such securities
for the Portfolio or directing any portfolio transaction to any such broker
or dealer on behalf of the Portfolio, unless and until the written approval
of the Adviser to do so is obtained, but the Sub-Adviser shall not be
liable to the Portfolio for so acting. In addition, the Sub-Adviser agrees
that it shall not direct portfolio transactions for the Portfolio through
any broker or dealer that is an "affiliated person" of the Sub-Adviser (as
that term is defined in the Act or interpreted under applicable rules and
regulations of the Securities and Exchange Commission) without the prior
written approval of the Adviser and in no event shall the Sub-Adviser
direct portfolio transactions on behalf of the Portfolio to any
broker/dealer in recognition of sales of shares of any investment company
or receipt of research or other service without prior written approval of
the Adviser.
4
<PAGE>
(c) Reports. The Sub-Adviser shall render to the Board of Trustees
of the Trust such periodic and special reports as the Board of Trustees may
request with respect to matters relating to the duties of the Sub-Adviser
set forth herein.
3. SUB-ADVISORY FEE.
For the services to be provided by the Sub-Adviser as provided in Paragraph
2 hereof, the Adviser shall pay to the Sub-Adviser an annual gross sub-advisory
fee based on the average daily net assets of the Value Portfolio at a rate of
.30% of the combined average daily net assets of the Value Portfolio and the
Investors Trust Value Fund of $100 million or less; and .20% of the combined
average daily net assets of the Value Portfolio and the Investors Trust Value
Fund in excess of $100 million. Such fee shall be accrued daily and paid as soon
as practicable after the last day of each calendar month.
The Sub-Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation hereunder to the extent the Sub-Adviser may,
by notice to the Adviser, voluntarily declare.
In the case of commencement or termination of this Agreement with respect
to any Portfolio during any calendar month, the fee with respect to such
Portfolio for that month shall be reduced proportionately based upon the number
of calendar days during which it is in effect, and the fee shall be computed
during the average daily net assets of such Portfolio for the days during which
it is in effect.
4. EXPENSES.
During the term of this Agreement, the Sub-Adviser will bear all expenses
incurred by it in the performance of its duties hereunder.
5. COMPLIANCE WITH APPLICABLE REGULATIONS.
In performing its duties hereunder, the Sub-Adviser
(i) shall establish compliance procedures (copies of which shall be
provided to the Adviser, and shall be subject to review and approval by the
Adviser) reasonably calculated to ensure compliance at all times with all
applicable provisions of the 1940 Act and the Advisers Act, and any rules and
regulations adopted thereunder; Subchapter M of the Internal Revenue Code of
1986, as amended; the provisions of the Registration Statement; the provisions
of the Declaration and the By-Laws of the Trust, as the same may be amended from
time to time; and any other applicable provisions of state, federal or foreign
law.
(ii) acknowledges that the Trust has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the Act and that the Sub-
Adviser and certain of its employees, officers and directors may be subject to
reporting requirements thereunder and, accordingly, agrees that it shall, on a
timely basis, furnish, and shall cause its employees, officers and directors to
5
<PAGE>
furnish, to the Adviser and/or to the Trust, all reports and information
required to be provided under such code of ethics with respect to such persons.
(iii) agrees that all records it maintains for the Trust are the property
of the Trust and further agrees to surrender promptly to the Trust any such
records upon the Trust's request all in accordance with Rule 31a-3 under the
1940 Act.
6. LIABILITY OF SUB-ADVISER.
Neither the Sub-Adviser nor the officers, directors, employees, agents,
legal representatives or controlling persons (collectively, "Related Persons")
of the Sub-Adviser shall be liable for any error of judgment or mistake of law,
or for any loss suffered by any Portfolio or its shareholders in connection with
the matters to which this Agreement relates; provided that, except as set forth
in the succeeding paragraph, no provision of this Agreement shall be deemed to
protect the Sub-Adviser or its Related Persons against any liability to which it
might otherwise be subject by reason of any willful misfeasance, bad faith or
gross negligence or the reckless disregard of the Sub-Adviser's obligations and
duties under this Agreement (each of which is hereby referred to as a "Culpable
Act").
Neither the Sub-Adviser nor its Related Persons shall be liable for any
error of judgment or mistake of law, or for any loss suffered by the Adviser or
its Related Persons in connection with the matters to which this Agreement
relates; provided that this provision shall not be deemed to protect the Sub-
Adviser or its Related Persons against any liability to which it might otherwise
be subject by reason of any Culpable Act by the Sub-Adviser or its Related
Persons. The Sub-Adviser and its Related Persons shall have no liability to any
person acting on behalf of, or providing services to, the Trust or any Portfolio
(hereinafter referred to as a "Service Provider") except as set forth above.
The Sub-Adviser and its Related Persons shall incur no liability arising
from the failure of any Service Provider to provide complete and accurate
information to the Sub-Adviser, it being the intention that, in performing
hereunder, the Sub-Adviser and its Related Persons may rely on the accuracy of
all information received from the Trust, the Adviser or from any Service
Provider and on all instructions and directions received from the Adviser or the
Trust.
The Sub-Adviser assumes hereunder the usual duties and obligations normally
performed by sub-investment advisers of mutual funds. The Sub-Adviser
specifically assumes no responsibility for the custody of the Trust assets or
for any accounting services or other recordkeeping services except to the extent
that the Sub-Adviser specifically agrees to provide such services hereunder.
7. DURATION AND TERMINATION OF THIS AGREEMENT.
(i) Duration. This Agreement shall become effective with respect to the
Value Portfolio on the date hereof and, with respect to any additional
Portfolio, on the date of receipt by the Adviser of notice from the Sub-Adviser
in accordance with Paragraph 1(ii) hereof that the Sub-Adviser is willing to
serve as Sub-Adviser with respect to such Portfolio. Unless terminated as herein
6
<PAGE>
provided, this Agreement shall remain in full force and effect for two years
from the date hereof with respect to the Value Portfolio and, with respect to
each additional Portfolio, for two years from the date on which such Portfolio
becomes a Portfolio hereunder. Subsequent to such initial periods of
effectiveness, this Agreement shall continue in full force and effect for
periods of one year thereafter with respect to each Portfolio so long as such
continuance with respect to any such Portfolio is approved at least annually (a)
by either the Trustees of the Trust or by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of such Portfolio, and (b), in
either event, by the vote of a majority of the Trustees of the Trust who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval.
(ii) Amendment. This Agreement may be amended by agreement of the parties,
provided that the amendment shall be approved both by the vote of a majority of
the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or interested persons of any such party to this
Agreement cast in person at a meeting called for that purpose, and by the
holders of a majority of the outstanding voting securities of the Trust.
(iii) Termination. This Agreement may be terminated with respect to any
Portfolio at any time, without payment of any penalty, by vote of the Trustees
of the Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of that Portfolio, or by the Sub-Adviser, in each case
on sixty (60) days' prior written notice to the other party. Upon the effective
date of termination of this Agreement, the Sub-Adviser shall deliver all books
and records of the Trust or any Portfolio held by it (a) to such entity as the
Trust may designate as a successor sub-adviser, or (b) to the Adviser.
(iv) Automatic Termination. This Agreement shall automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
(v) Approval, Amendment or Termination by Individual Portfolio. Any
approval, amendment or termination of this Agreement by the holders of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
any Portfolio shall be effective to continue, amend or terminate this Agreement
with respect to any such Portfolio notwithstanding (a) that such action has not
been approved by the holders of a majority of the outstanding voting securities
of any other Portfolio affected thereby, and (b) that such action has not been
approved by the vote of a majority of the outstanding voting securities of the
Trust, unless such action shall be required by any applicable law or otherwise.
8. SERVICES NOT EXCLUSIVE.
The services of the Sub-Adviser to the Adviser in connection with the
Portfolios hereunder are not to be deemed exclusive, and the Sub-Adviser shall
be free to render similar services to others so long as its services hereunder
are not impaired thereby. It is understood that the persons employed by the Sub-
Adviser to assist in the performance of its duties hereunder will not devote
their full time to such services and nothing hereunder contained shall be deemed
to limit or restrict
7
<PAGE>
the right of the Sub-Adviser to engage in or devote time and attention to other
businesses or to render services of whatever kind or nature.
9. MISCELLANEOUS.
(i) Notices. All notices or other communications given under this
Agreement shall be made by guaranteed overnight delivery, telecopy or certified
mail; notice is effective when received. Notice shall be given to the parties at
the following addresses:
The Adviser: Patrick E. Welch, President and CEO
GNA Capital Management, Inc.
GNA Variable Series Trust
601 Union Street, Suite 5600
Seattle, WA 98101-2336
Sub-Adviser: Duff & Phelps Investment Management Co.
55 East Monroe Street
Chicago, IL 60603
ATTN: Carl Faust
(ii) Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall not
be thereby affected.
(iii) Applicable Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware.
IN WITNESS WHEREOF, the Adviser and the Sub-Adviser have caused this
Agreement to be executed as of the date first set forth above.
ATTEST: GNA CAPITAL MANAGEMENT, INC.
/s/ Edward J. Weeles, Jr.
- ----------------------------- By: /s/ Patrick E. Welch
Secretary -------------------------------
Patrick E. Welch
Its: President and CEO
------------------------------
ATTEST: DUFF & PHELPS INVESTMENT
MANAGEMENT COMPANY
/s/ Lorrie P. Zagy
- ----------------------------- By: /s/ Carl F. Faust
Secretary -------------------------------
Its:
------------------------------
Executive Vice President
8
<PAGE>
[LETTERHEAD OF GOODWIN, PROCTER & HOAR]
CONSENT OF COUNSEL
February 27, 1996
To the Trustees of Investors Trust:
We consent to the incorporation in Post-Effective Amendment No. 14 to the
Registration Statement of Investors Trust (the "Trust") on Form N-1A of (i) our
opinion dated March 17, 1987 regarding Class B shares of the Investors Trust
Government Fund series of the Trust, by reference to Pre-Effective Amendment No.
1 to Securities Act of 1933 filing No. 33-10976 filed March 19, 1987, and (ii)
our opinion dated August 3, 1993 regarding Class A shares of the Investors Trust
Government Fund series and both Class A shares and Class B shares of the
Investors Trust Growth Fund series, Investors Trust Value Fund series, Investors
Trust Tax Free Fund series and Investors Trust Adjustable Rate Fund series of
the Trust, by reference to Post-Effective Amendment No. 8 to Securities Act of
1933 filing No. 33-10976 filed June 4, 1993. We also consent to being named in
each of the Prospectuses and the Statement of Additional Information of the
Trust.
Very truly yours,
/s/ Goodwin, Procter & Hoar
GOODWIN, PROCTER & HOAR
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTNTS
To the Trustees of Investors Trust:
We consent to the incorporation by reference in Post-Effective Amendment
No. 14 under the Securities Act of 1933 to the Registration Statement of
Investors Trust on Form N-1A of our reports dated December 18, 1995, on our
audits of the financial statements and financial highlights of Investors Trust-
Government Fund, Growth Fund, Adjustable Rate Fund, Value Fund, and Tax Free
Fund, which reports are included in the Annual Reports to Shareholders for the
fiscal year ended October 31, 1995 which are incorporated by reference in the
Registration Statement. We also consent to the references to our Firm under the
captions "Financial Highlights" and "Additional Information" in the
Prospectuses and the caption "Independent Accountants" in the Registration
Statement.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1996
